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ANNUAL REPORT 2007 KEY FIGURES Total assets Operating income 66,000 2,400 EUR millions EUR millions 55,000 2,000 40,000 1,600 33,000 1,200 22,000 800 11,000 400 0 0 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Net earnings Return on equity (%) 1,200 45 EUR millions 1,000 38 800 30 600 23 400 15 200 8 0 0 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Equity Earnings per share 4,500 150 EUR millions ISK 3,750 125 3,000 100 2,250 75 1,500 50 750 25 0 0 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 KEY FIGURES EUR millions* 2007 2006 Change Income Statement Net interest income 913 595 53% Net fee and commission income 627 426 47% Net financial income 166 687 -76% Other income 186 194 -5% Operating income 1,891 1,902 -1% Operating expenses -897 -683 31% Impairment -70 -68 3% Income tax -112 -165 -32% Net earnings 812 986 -18% Attributable to: Shareholders of Kaupthing Bank 799 972 -18% Minority interest 13 14 -4% Net earnings 812 986 -18% Balance Sheet Assets Cash and cash balances with central banks 1,069 1,131 -5% Loans to credit institutions 6,420 5,130 25% Loans to customers 36,051 26,832 34% Financial assets 9,224 7,030 31% Intangible assets 729 722 1% Other assets 4,847 2,019 140% Total assets 58,339 42,864 36% Liabilities and equity Credit institutions and central banks 3,699 1,167 217% Deposits 15,072 7,934 90% Borrowings 28,540 25,367 13% Subordinated loans 2,916 2,283 28% Other liabilities and minority interest 4,342 2,693 61% Shareholders' equity 3,771 3,419 10% Total liabilities and equity 58,339 42,864 36% Key ratios 2007 2006 Cost / Income ratio 47.5% 35.9% Return on shareholders' equity 23.5% 42.4% Loan-loss ratio 0.2% 0.2% NPL / Loans to customers 0.98% 1.00% Total credit reserves 0.6% 0.6% CAD ratio 11.8% 15.0% Tier 1 ratio 9.6% 10.5% Earnings per share, ISK 95.2 127.1 *All amounts in the Annual Report are in ISK except on this page and where otherwise stated. OPERATIONS & ORGANISATION Kaupthing Bank is a Northern European bank operating in thirteen countries, including all the Nordic countries, Luxembourg, Belgium, Switzerland, the UK, Isle of Man, the US, United Arab Emirates (Dubai) and Qatar. Kaupthing Bank offers integrated financial services to companies, institutional investors and individuals. These services include Corporate Banking, Investment Banking, Capital Markets, Asset Management and comprehensive wealth management for Private Banking clients. In addition, the Bank operates a retail franchise in Iceland, where it is headquartered, and to a lesser extent in Norway and Sweden. The Bank employed 3,334 people at the end of 2007. The diagram below illustrates the services offered in each of the countries Kaupthing Bank operates in: Investment Capital Asset Mgmt & Banking Markets Treasury Banking Private Banking Iceland UK* Sweden Denmark Finland Luxembourg** Norway US Middle East * Operations in the Isle of Man report to the office in the UK ** Operations in Belgium and Switzerland report to the office in Luxembourg Through sound organic growth and a number of strategic acquisitions, such as the UK bank Singer & Friedlander in 2005 and FIH Erhvervsbank in Denmark in 2004, Kaupthing Bank has fortified its position to provide outstanding services to its clients. Even though the Bank’s focus remains on Northern Europe, Kaupthing recognises the need to be present in key markets such as the Middle East, Asia and the US to enable the Bank to better service its Northern European clients. Thanks to its strong cross-border platform, Kaupthing Bank is in an excellent position to meet clients’ local and international needs in financial services. Kaupthing Bank is listed on the OMX Nordic Exchange in Stockholm and Iceland and is currently among the seven largest banks in the Nordic region in terms of market capitalisation. The Bank focuses on shareholder value, meaning the expansion of the Group has not been achieved at the expense of profitability. The year 2007 has proven to be another successful period of solid organic growth and strong earnings. GLOBAL OPERATIONS Iceland Finland Norway Sweden Isle of Man Denmark UK Belgium Luxembourg Switzerland US Qatar UAE (Dubai) FINANCIAL CALENDAR 2008 2008 Annual General Meeting – 7 March Q1 2008 Results – 30 April Q2 2008 Results – 31 July Q3 2008 Results – 30 October 2008 Annual Results – 29 January 2009 Table of COntents The Times They Are A-Changin’ - Executive Chairman´s Address 2 Another Solid Year For Kaupthing Bank - CEO´s Address 5 Year in Review 8 Strategy & Strengths 10 Key Business Objectives 11 Risk Management 14 Credit Ratings 31 Corporate Governance 34 Shares in the Bank 42 Funding & Liquidity 48 Kaupthing Bank’s Results 54 Five-Year Summary 58 Operating Results of Business Segments 62 Banking 63 Capital Markets 68 Investment Banking 73 Treasury 80 Asset Management & Private Banking 83 Kaupthing Singer & Friedlander 90 FIH Erhvervsbank 92 Other Subsidiaries 94 Corporate Social Responsibility 100 Corporate Culture 102 Employees 104 Annual Accounts 112 Board of Directors 196 Senior Management 199 KAupthinG banK Annual report 2007 The Times They Are A-Changin’ Sigurdur Einarsson, Executive Chairman Kaupthing Bank delivered a strong performance in 2007. Our return on equity was 23.5% and all our core businesses gave solid returns. Our CAD ratio was 11.8% and our Tier 1 capital ratio was 9.6% and compare favour- ably with our peers. Our liquidity is strong; at the end of 2007 the Bank had secured liquidity for more than 440 days and our funding profile has never been longer. now when the global outlook in financial markets looks uncertain, Kaupthing occupies a strong position and is ready to take advantage of new opportunities arising from market disruptions. Flexible business model Kaupthing offers comprehensive investment and corporate banking services to small and medium-sized companies and entrepreneurs in northern Europe. Our focus is on providing our customers with a wide and ever-broadening range of services, through cross-selling rather than competing solely on execution or price. We aim to establish long-term relationships with our customers, and in fact many of our largest transac- tions are made on behalf of our increasing roster of repeat customers. A testament to this success is that our net fee and commission income rose by 47.6% in 2007 from the previous year. Sigurdur Einarsson, Our business model is robust and one of its key strengths is its flexibility. Even though Executive Chairman our principles remain the same, we have the flexibility to adapt our tactics and execution to changes in the environment. John Maynard Keynes was once reproached for chang- ing his mind. His reply was “When the facts change, I change my mind. What do you do, sir?” This year we see Kaupthing adapting its strategy in numerous ways. It was regrettable that we could not finalise the acquisition of nIBC, but both we and the seller acknowledged that circumstances had changed and agreed not to finalise the deal. I would like to say that all our negotiations with the sellers, led by JC Flowers, were cordial and enjoyable. In 2006 we changed our goals for secured liquidity from 180 days to at least 360 days and by the end of 2007 our secured liquidity was for more than 440 days. At the end of 2007 we had funded our acquisition of nIBC. When we decided not to complete that acquisition, our liquidity position became extremely strong. Kaupthing Capital Partners II We decided to decrease our limit for equity positions to no more than 35% of the Bank’s risk capital and at the end of 2007 our equity positions were 30.3% of risk capital. Another step we took to adapt our business model was establishing Kaupthing Capital Partners II, a private equity fund of approximately GBP 500 million. Kaupthing Capital Partners 2 3 ExecutivE Chairman´S Address II will have the first right of refusal on all private equity proposals offered to the Bank. This new structure enables us to continue to co-invest with our clients, who have invested in the fund, even though the Bank is reducing its exposure to equity. It also enables the Bank to lever its expertise and excellent track record in private equity and share in its returns through our GBP 200 million investment in the fund. Changed funding profile On the funding side, we have increased the share of Deposits to customer loans. In 2007 we set the goal of increasing Deposits from 29% of customer loans to 40%. By the end of the year we had reached 42%, a commendable effort from our dedicated team. This year we raised the bar yet again, and our goal is to increase the ratio of Deposits to customer loans to 50% by the end of the year. We also continued to diversify our funding last year. Kaupthing was the first nordic bank to issue public bonds in Mexico and we entered the Canadian market with an inaugural issue. We enhanced our northern European profile last year by launching our first global retail prod- uct - Kaupthing Edge. This is a part of the Bank’s long-term funding strategy, which has been in preparation since 2006 and is already beginning to bear fruit. The strategy is expected to change the profile of the Bank by catapulting its brand from a niche market into a retail brand.
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