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Kaupthing Bank Annual Report 2004 Table of Contents

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Kaupthing Bank Annual Report 2004 Table of Contents KAUPTHING BANK ANNUAL REPORT 2004 TABLE OF CONTENTS Key Business Objectives of Kaupthing Bank 2 Highlights of 2004 4 Delivering Value From Growth - Address of the Executive Chairman 8 Year of Growth and Profitability - Address of the CEO 11 Shares in the Bank 14 Risk Management 22 Corporate Governance 33 Compliance 38 Credit Rating 39 Market overview in 2004 42 Kaupthing Bank’s results 46 Five-year summary 50 Operating results of profit centres 54 Asset Management and Private Banking 55 Capital Markets 58 Treasury 60 Investment Banking 62 Corporate Banking 66 Retail Banking 68 Quarterly overview 71 Employees 74 Acquisition of FIH Erhvervsbank 76 A. Sundvall ASA / PFA Pension / NBSAM 79 History of Kaupthing Bank 80 Main subsidiaries 81 Annual Accounts 2004 86 Icelandic and Swedish accounting principles 118 International Financial Reporting Standards (IFRS) 120 The Board of Directors 128 Senior Management 129 For further information please contact: Jonas Sigurgeirsson, Head of Investor Relations Tel: + 354-444-6112. e-mail: [email protected] The annual report and further information on Kaupthing Bank can also be found on the Bank’s website at www.kaupthing.net. All amounts are in ISK millions unless otherwise stated. I KAUPTHING BANK I ANNUAL REPORT 2004 I KEY BUSINESS OBJECTIVES Kaupthing Bank has a number of key business objectives that it believes are necessary stepping stones towards achieving its long-term goal of creating a leading investment bank in the Nordic region. During recent years, these objectives have been visible through Kaupthing Bank’s determined international expansion, both through organic and acquisitive means. • Maximise the Bank’s value and long-term shareholder value • Achieve 15% long-term return on equity • Be a leading bank in Iceland and one of the prime investment banks in the Nordic region • Sustain rapid growth without compromising profitability • Develop and sustain dependable, long-term relationships with its customers • Employ motivated, well-educated and enterprising staff who are experts in their respective fields • Continue to develop the Bank’s workforce as its most valuable resource • Utilise the most up-to-date information technology in order to improve the Bank’s competitiveness I 2 I I KAUPTHING BANK I ANNUAL REPORT 2004 I COMPREHENSIVE FINANCIAL SERVICES Kaupthing Bank focuses on building our clients’ business through compre- hensive financial services including private banking and asset manage- ment, pension services, brokerage, investment banking, corporate and retail banking. Kaupthing Bank aims to create long-term business relationships by fulfilling the clients’ ever-changing needs and finding new ways to support their business most effectively. Profitable business units Kaupthing Bank seeks to build both independent and profitable business units in each geo- graphic location, as well as to leverage each unit as a component within the group. Rapid growth calls for constant innovation from employees, and to do this we consistently seek to recruit the best people. Having built a strong ethical and professional culture, Kaupthing Bank values its people’s international, multi-cultural background and recognises these differences as a strength. Cooperation between our international offices combined with staff innovation creates a solid foundation on which each office can operate profitably. Strong client relationships Our reputation as a trusted adviser and partner is highly dependent on the delivery of quality services. Customer-driven, Kaupthing Bank offers high quality products and services provided by creative, dedicated professionals. Management emphasises close, responsive relationships with clients, which evolve to match changing customer needs and market forces. New business opportunities Kaupthing Bank vigorously pursue business opportunities, actively promoting and selling our products and client services. The Bank continually seeks ways to build a customer base where it can add substantial value and create mutually beneficial relationships across all service areas. Further strengthening of the Bank’s activities In recent years Kaupthing Bank has focused on strengthening activities outside Iceland, and has placed special emphasis on its home market, the Nordic countries. We will continue to pursue growth opportunities that support the Bank’s long-term goals. I 3 I I KAUPTHING BANK I ANNUAL REPORT 2004 I HIGHLIGHTS OF 2004 Results • Kaupthing Bank posted net earnings of ISK 15,760 million, compared with ISK 7,520 million combined net earnings in 2003. Return on equity was 22.6%, considerably higher than the Bank’s target on return on equity of 15%. • Kaupthing Bank increased its equity from ISK 45.9 billion to ISK 149.4 billion during 2004 and had a strong CAD ratio, 14.2%, at year end. • The Bank’s total assets amounted to ISK 1,534 billion at year end 2004, com- pared with total assets of ISK 559 billion at the beginning of the year. The acquisition of the Danish bank FIH Erhvervsbank explains the majority of this significant increase. FIH Erhvervsbank • In June Kaupthing Bank entered into an agreement with FöreningsSparbanken (Swedbank) on the purchase of FI-Holding, the owner of the Danish corporate bank FIH Erhvervsbank. The acquisition was completed in September. It was a transforming acquisition for Kaupthing Bank, and it doubled the size of the Bank and placed it in a leading position in the Danish corporate banking sector. • The acquisition of FIH Erhvervsbank was funded by an increase in the Bank’s share capital and by a subordinated bond issue. In a rights issue in August, shareholders representing 96.4% of share capital in the Bank exercised their pre-emptive rights. The acquisition price was DKK 7,292 million. Upgrade • In November Moody’s Investors Service announced the upgrading of Kaupthing Bank’s credit rating. The Bank’s long term deposit and senior debt ratings were upgraded from A2 to A1. The subordinated debt rating was upgraded to A2 from A3. Moody’s affirmed the C+ in financial strength rating. The short term rating of P-1 was also affirmed, which is the highest rating given. According to Moody’s the rating upgrade reflected the Bank’s healthy financial fundamen- tals and the opinion that, with the addition of FIH Erhvervsbank, Kaupthing Bank should be able to gain access to the Danish small and medium-sized business market and complement its own product palette in the future. I 4 I I HIGHLIGHTS OF 2004 I Strengthening operations • In February 2004, Kaupthing Bank acquired the Norwegian securities company A. Sundvall ASA. The purpose of the acquisition was to strengthen the Bank’s activities in Norway. The company operates within securities brokerage, investment banking and research. • In May 2004, Kaupthing Bank entered into a Limited Liability Partnership with eight individual partners in the United Kingdom to form a specialised credit management business called New Bond Street Asset Management. Its objec- tive is to act as a fund manager for diversified credit asset classes using fun- damental credit analysis, portfolio management theory and credit structuring techniques to maximise return to investors. • In November Kaupthing Bank Luxembourg S.A., a subsidiary of Kaupthing Bank, acquired all shares in PFA Pension Luxembourg. The aquisition is effec- tive from the beginning of January 2005. The purpose of the acquisition is to increase Kaupthing Bank Luxembourg’s client base in Private Banking as well as to expand the business by offering insurance products to its existing clients. • In December the Finnish financial supervisory authority granted Kaupthing Bank’s Finnish subsidiary, Kaupthing Sofi Oyj, a banking licence. The company changed its name to Kaupthing Bank Oyj at the beginning of 2005. Kaupthing Bank and its subsidiaries now have banking licences in five countries: Iceland, Denmark, Sweden, Luxembourg and Finland. Growing bank • At the end of 2004 Kaupthing Bank operated in ten countries. The Bank has operations in all the Nordic countries, as well as Luxembourg, New York, Geneva and London. The Bank’s increased financial strength and its more extensive network of operating centres creates numerous opportunities. • The Bank’s share of the equities volume on the Nordic stock exchanges was 4.10% in Stockholm, 6.77% in Helsinki, 1.16% in Copenhagen, 0.93% in Oslo and 32.66% in Reykjavík. Kaupthing Bank had a combined total of 4.28% of the equities turnover in the Nordic stock exchanges. • Kaupthing Bank and its subsidiaries are members of seven stock exchanges in Europe and the United States. Assets under management at the Bank totalled ISK 508 billion at year end 2004, and assets in custody amounted to ISK 910 billion. I 5 I I KAUPTHING BANK I ANNUAL REPORT 2004 I DELIVERING VALUE FROM GROWTH Sigurdur Einarsson, Kaupthing Bank performed strongly in 2004, and it was yet another Executive Chairman record year characterized by both organic and external growth. One of the highlights was the acquisition of Danish bank FIH Erhvervsbank, which doubled the size of the Bank. The Bank’s operating results were most satisfactory, and I believe we are well positioned to meet the chal- lenges which lie ahead. Acquisition of FIH Erhvervsbank The acquisition of the Danish bank FIH Erhvervsbank is by far the largest takeover in which Kaupthing Bank has been involved. I believe that FIH Erhvervsbank is an exceptional com- pany and this acquisition will be prove to be a first-rate investment. It has balanced the income distribution of the Bank and increased its geographic diversification. Having FIH Erhvervsbank on board presents a broad range of growth opportunities in Norway, Sweden and Denmark. Interest income will become an increasingly important source of revenue, whilst commission income and trading gains will gradually represent a smaller part of income generation. Sigurdur Einarsson A fast growing bank In recent years we have grown extensively by way of mergers and acquisitions. In all major aspects these transactions have gone according to schedule and created a larger, stronger bank with formidable staff resources.
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