GLB Q1 Results 2006 3 May 2006 Marketweight

Glitnir Record Q1 Profit

Glitnir’s Q1 profit amounted to over ISK 9.1 billion (bn), its best quarterly outcome ever. This Latest closing price 16.7 is an increase of 140% over Q4 2005, and triple the profit of Q1 2005, although performance Market cap ISK 238.2 bn in those quarters was, admittedly, on the low side, falling short of our expectations in both cases. Date of latest valuation 20.1.2006 In making comparisons with Q1 2005 it must also be borne in mind that the Norwegian Updated valuation ISK 254.8 bn Updated valuation 18.0 BNbank was not included in group accounts at that time, while today it comprises around 28% of the group’s total balance sheet. On the other hand, the insurance company Sjóvá was fully owned by Glitnir until 31 March 2005. Operating assumptions are those used in the Glitnir’s Q1 performance this year far surpassed our forecast ISK 6.1 bn profit, with most of latest valuation, while the discount rate, exchange the excess due to higher income from Corporate advisory and slightly higher trading gains on rates and securities holdings have been updated. In addition, assumptions on balance sheet growth equities, while interest income and operating expenses were similar to our forecast. have been lowered and Q1 2006 results have been Annualised after-tax ROE for the year was 42%. According to the Bank, after-tax ROE was taken into consideration. Operating assumptions 32% on its core operations, which it defines as profits excluding fair value changes on equity are unchanged from the latest valuation. assets (ISK 2,420 million (m)). It should be pointed out that the Icelandic have defined their “core earnings” differently, with the result that these figures are not comparable between banks.

Landsbanki’s holding in Glitnir is under the 60% of profit originates outside of flagging limits of the Iceland Stock Capital Markets fuelled the profits of Icelandic banking activities, contributing 40% of the Exchange (ICEX) Bank’s total profit. The division handles both financing and brokerage for institutional Analysts: investors and larger corporations, and includes brokerage, FX, derivatives and currency Hermann Már Þórisson +354 410-7388 overlay. Corporate and Investment Banking provided 30% of profit and the remaining 30% hermann.m.thorisson@.is came from operations in . Corporate and Investment Banking includes Corporate Ingi Sturla Þórisson +354 410-7389 Advisory, Private Banking in , Glitnir Investments, International Corporate [email protected] Lending, Leveraged Finance, Asset Financing in Luxembourg, Project Finance, London Branch, office and a newly established bank in Luxembourg. Head of Research: Q1 05 Q1 06 Q1 06 2005 2006 Edda Rós Karlsdóttir +354 410-7381 Actual Actual Change Forecast Actual Change Forecast Change [email protected] mISK 05/06 04/05 05/06 Net interest income 4,465 7,830 75% 7,790 23,390 83.1% 34,925 49.3% English text: Other operating income 3,813 9,461 148% 6,290 17,608 -6.4% 33,544 90.5% Net income from operations 8,278 17,291 109% 14,080 40,998 29.8% 68,469 67.0% Keneva Kunz +354 410 4011 Other operating expenses 4,219 5,873 39% 5,750 15,731 9.6% 25,952 65.0% Provision for credit losses 501 1,424 184% 1,150 1,900 -39.4% 4,861 155.8% Profit 3,038 9,098 199% 6,030 19,099 59.7% 27,515 44.1%

Int. rate margin/avg. balance sheet position 2.5% 2.0% 2.1% 2.2% 2.0% Impairment of loans/avg. balance sheet position 0.3% 0.4% 0.3% 0.2% 0.3% Cost-income ratio 51.0% 34.0% 40.8% 38.4% 37.9% Key ratios 12M Price/Earnings ratio (P/E) 15.9 9.6 11.0 11.7 8.8 Price-to-book ratio (P/B) 2.7 2.1 2.9 3.1 1.8 Return on equity (ROE) 26.4% 41.8% 31.6% 26.5% 26.6% Capital adequacy (CAD) 15.5% 12.1% - 12.6% - Earnings per share ISK 0.3 ISK 0.7 ISK 0.4 ISK 1.5 ISK 1.9

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Proprietary equity trading, which was previously under Treasury, is now part of this division (since the beginning of 2006). Proprietary Trading’s total exposures in listed and unlisted equities amounted to ISK 5.6 bn at the end of Q1. Trading gains on its equity assets returned the Bank ISK 1.4 bn before tax in Q1.

Breakdown of income, profit and economic value added (EVA) by income division

6.000 Retail Banking (Icel.) Retail Banking (Nor) 5.000 Corporate and Inv. Banking 4.000 Capital Markets Treasury 3.000 Other activities

2.000 *EVA is the adjusted after- 1.000 tax profit less the cost of equity tied up in 0 operations. The Bank Net. inc. from PBT EVA* assumes the market operations required rate of return on its equity to be 12.5%

Income is comprised of around 40% net interest income, close to one-third fee and commission income and just over a one-quarter trading gains and other income. At the investors’ meeting, Glitnir’s CEO stated that the Bank’s target is to have interest income make up two-thirds of total income, fees and commissions comprise one-quarter and the remainder trading gains and other income.

Substantial increase in fees and commissions Corporate advisory’s income for the Fees and commissions amounted to ISK 5.6 bn in Q1, almost doubling from Q4 2005. Income quarter exceeds that of the entire from Corporate advisory rose sharply, comprising one-third of the quarter’s commissions. previous year Corporate Finance’s income of ISK 2.1 bn exceeds that of the entire previous year. This is definitely moving in the right direction, as Corporate Finance’s income in the first three quarters of 2005 was unimpressive and fell well short of management forecasts and our expectations at the time. Commissions on FX and equity brokerage were also high, totalling ISK 2.3 bn in Q1. By comparison, the combined income from Corporate advisory and brokerage in 2005 was ISK 2.6 bn.

Profit breakdown Breakdown of net income from operations

7% Net. int. income 9% Iceland

21% Fees and 21% 40% Corp. And Investm. 42% commissions Banking Trading gains, NOR Trading gains

30% 30% Retail banking, Other income NOR

Net interest spread and trading gains Net interest spread will widen in the Net interest income grew considerably, amounting to ISK 7.8 bn in Q1 as compared to ISK 6.6 short term due to higher inflation in Q4 2005. The impact of major balance sheet growth last year is clearly evident. Net interest spread as a ratio of balance sheet position was 2.0%, and has changed little in recent

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quarters. According to our calculations, if BNbank is excluded, the net interest spread would be 2.24%, as BNbank’s interest spread is considerably lower or 1.03%. In the short term, the net interest spread can be expected to widen somewhat, since the Bank’s indexation balance is positive by over ISK 108 bn and inflation will be high in Iceland this year. At the investors’ meeting, however, the CEO stated that in the longer term net interest spread could be expected to shrink. This is in line with the long-term forecast we made in our valuation of Glitnir in January this year. We assumed that net interest spread would decrease and amount to 1.8% in the long-term. Trading gains during the period were ISK 3.8 bn, of which ISK 2.3 bn came from Norway, where according to Glitnir equities rose by 19% during the quarter. Data from the investors’ meeting shows that trading gains on equities amounted to ISK 3 bn while there was a loss on the Bank’s bond portfolio, as expected.

Net interest margin as a ratio of average capital position

3,00%

2,00%

valuation assumption

1,00% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2004 2005 06 06 07 08 09

BNbank in line with expectations Net interest spread still shrinking BNbank’s profit in Q1 was NOK 52 m. Net interest income was NOK 121 m and its loan portfolio now amounts to NOK 44,872 m. This is a slightly lower profit than in recent quarters, reflecting the bank’s shrinking net interest spread which has dropped from last year as a ratio of average balance sheet position from 1.13% to 1.03%. At its investors’ meeting, Glitnir’s management reported on new Norwegian legislation on issuing covered bonds, which is to take effect this coming summer or autumn. Covered bonds are bonds secured by a loan portfolio, and this type of bond issue has generally received a high rating, ensuring it good terms on bond markets. It will provide new avenues of financing for BNbank and could help it to maintain a better net interest spread than otherwise.

ISK weakening boosts balance sheet growth Balance sheet growth for the Glitnir’s total assets grew by 25% in Q1 and totalled ISK 1,836 bn as of the end of March. quarter was 25%, or 11% allowing Due to the large portion of its assets and liabilities in foreign currencies, the ISK weakening for the ISK weakening has a substantial effect on its balance sheet. If we allow for the 13% ISK depreciation during Q1, this growth is 11%, or equivalent to 50% on an annualised basis. The Bank’s loan portfolio grew practically in tandem with its balance sheet, comprising ISK 1,456 bn at the end of the period. ISK 1,328 bn of this is loans to customers and the remainder to other credit institutions. Glitnir has reduced the market risk of its equity exposures from ISK 14 bn at the beginning of the year to ISK 12 bn at the end of March. Market risk on bonds is ISK 7 bn.

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Major equity increase in Q1 If Q1 profit is included, the capital Shareholders’ equity at the beginning of this year was ISK 84,750 m and ISK 111,370 m at the ratio is 13.2% end of Q1. Just under 1,130 million new shares were issued during the quarter, at a share price of ISK 18.6 per share. This issuance strengthened the Bank’s equity by ISK 21 bn. At the end of Q1, Glitnir’s foreign currency position was positive by ISK 27 bn, an increase from its positive balance of ISK 12 bn at the beginning of the year. This figure includes, for instance, goodwill from BNbank in Norway. Glitnir regards this as a hedge, crediting the profit on it not to its income statement but directly to shareholders’ equity. Profit on the Bank’s hedges in Q1 was close to ISK 4 bn. Its operating profit and hedging therefore have increased shareholders’ equity by a total of ISK 13 bn during the quarter. The bank’s capital ratio (CAD rules), excluding Q1 profit, was 12.1% at the end of Q1 compared to 12.6% at the end of last year. Since the Q1 results were neither examined nor audited by external auditors, the Bank may not recognise the profit for the quarter or on its hedges to increase its capital ratio. If profit for the quarter is added to the risk weighted equity, however, our calculations give a capital ratio of 13.2%. According to the Iceland Stock Exchange rules, listed companies need only have their annual financial statements audited and their six-month interim statements examined; neither is required for the 3M and 9M results. In recent years all the Icelandic banks have gone one step further and had their quarterly statements audited as well, enabling them to publish an updated capital ratio each quarter.

Higher provisions for credit losses Impairment as a ratio of total assets Impairment on loans, receivables and goodwill was ISK 1.4 bn in Q1 as compared to over ISK was 0.4% and the Bank expects it to 400 m in the previous quarter. Loan impairment as a ratio of total assets therefore grew remain around this figure substantially during the quarter and amounted to 0.4% of average balance sheet position. in the long term This ratio has been falling since 2004, reaching a low of 0.1% in Q4 2005, which can be explained by a positive contribution from BNbank of ISK 51 m (negative impairment). Since under IFRS loans cannot be impaired unless the Bank considers there to be an overwhelming probability that they will result in losses, impairment provisions will clearly fluctuate in phase with the business cycle. It was explained that ISK 900 m of the ISK 1.4 bn impairment resulted from new loans. Provisions on these loans can be made according to the depreciation ratio of recent years, which is considerably higher than that of the past quarters. In the opinion of the CEO, impairment can be expected to be around 0.4% in the long term.

Refinancing and credit rating Glitnir’s refinancing needs this year are EUR 600 m and EUR 2,700 m next year. So far this year, the Bank has issued bonds amounting to EUR 1,400 m. In Q1, Glitnir became the first Icelandic bank to be awarded a rating from Standard & Poor's. The S&P rating is especially important for the US bond market.

Remainder of Sjóvá sold Concurrent to the publication of its results, Glitnir announced the sale of its holding in Sjóvá, one-third of the insurance company's total share capital. The buyer was Milestone, which already owned two-thirds of Sjóvá. The selling price of this stake was ISK 9.5 bn, on which Glitnir realises capital gains of ISK 2.4 which will be recognised in Q2. This makes Glitnir’s total profit on the sale of Sjóvá around ISK 11.5 bn. The announcement on the sale stated that the two companies would continue close co-operation in offering banking and insurance services. Milestone will pay cash for Sjóvá According to statements at the meeting, the sale of Sjóvá was partly the result of negative views expressed by foreign analysts on ownership links in Iceland. In our estimation the sale addresses those criticisms, assuming that Glitnir is not loaning Milestone for the purchase. One of the factors regarded as negative by S&P in its valuation of Glitnir was in fact that one of the Bank’s owners was also one of its largest debtors. At a telephone conference held with

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analysts yesterday, it was stated that Milestone would pay for the holding in cash, indicating that Glitnir is not financing this acquisition. In February, Glitnir, Sjóvá and Milestone established the investment company Máttur hf. At the same time as it sold its shares in Sjóvá, Glitnir acquired Milestone’s share of Máttur. After the transaction, Sjóvá and Glitnir each hold one-half of Máttur, and have expressed interest in acquiring additional partners in this undertaking.

Recommend market weighting of Íslandsbanki’s shares We recommend buying Glitnir’s Landsbanki Research's most recent valuation of Glitnir was published on 20 January this year, shares and marketweighting them in with a valuation share price outcome of ISK 17.1 per share. Following the publication of the well-diversified portfolios. Bank’s Q1 results, we have updated exchange rates and security assets with closing prices as of 2 May 2006, as well as taking into consideration the Q1 outcome. Our operating assumptions remain unchanged, apart from the fact that we have lowered the expected balance sheet growth this year, reflecting the turbulent situation on international funding markets. Our conclusion is a value of ISK 254.8 bn for Glitnir, which translates to a valuation share price of 18.0. We therefore recommend that investors buy shares in the Bank and marketweight them in well-diversified portfolios reflecting the Icelandic market.

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The contents and form of this document were produced by employees of Landsbanki Research and are based on information available to the public when the valuation was compiled. Assessment of this information reflects the views of Research’s employees on the valuation date, which may change without notice. Neither Landsbanki Íslands hf. nor its personnel can be held responsible for transactions based on the information and opinions expressed here. Attention should be drawn to the fact that Landsbanki Íslands hf. may, at any time, have direct or indirect interests at stake in individual companies, either on its own behalf or through its subsidiaries or customers, for instance as an investor, creditor or service provider. Nonetheless, all valuations are prepared independently by Landsbanki Research and in accordance with the Bank’s rules on separation of activities accessible on the Landsbanki website. Landsbanki Research reiterates that investment in securities or foreign currency naturally involves risk and potential investors are advised to seek the advice of more than one party before making any decisions.

Insight: 1. Glitnir – Q1 of 2006 Tel: +354 410-4000 Landsbanki Research Hafnarstræti 5, 101 Reykjavík Fax: +354 410-3006 Use of this material is unrestricted, but we request that the source be quoted. [email protected] www.landsbanki.is