KAUPTHING BANK ANNUAL REPORT 2005 KEY fiGures EUR millions* 2005 2004 Change Net operating income 1,400 EUR millions Income Statement 1,200 Net interest income 438 219 100% 1,000 Net fee and commission income 300 159 88% 800 Net financial income 499 195 155% 600 Other income 120 25 389% 400 Operating income 1,357 598 127% 200 Operating expenses (465) (283) 64% 0 Impairment (59) (46) 28% 1999 2000 2001 2002 2003 2004 2005 Taxes (150) (51) 196% Minority interest (24) (7) 264% Net earnings Net earnings 659 212 211% 700 EUR millions 600 31.12.2005 01.01.2005 Change 500 Balance Sheet 400 Assets 300 Cash and cash balances with central banks 467 75 520% 200 Loans and advances 23,284 13,824 68% 100 Financial assets measured at fair value 8,198 3,646 125% 0 Financial assets available-for-sale 2 18 -88% 1999 2000 2001 2002 2003 2004 2005 Investments in associates 186 44 325% Other assets 1,877 1,008 86% Total assets Total assets 34,014 18,614 83% 35,000 EUR millions 30,000 Liabilities and equity 25,000 Deposits from credit institutions and central banks 932 389 140% 20,000 Other deposits 6,508 2,421 169% 15,000 Borrowings 20,838 11,598 80% 10,000 Subordinated loans 1,375 690 99% 5,000 Other liabilities and minority interest 1,761 1,728 2% 0 Shareholders' equity 2,600 1,789 45% 1999 2000 2001 2002 2003 2004 2005 Total liabilities and equity 34,014 18,614 83% Shareholders’ equity 3,000 Key Ratios EUR millions 2,500 Cost/income ratio 34.1% 50.2% Return on shareholders' equity 34.0% 22.6% 2,000 Impairment on loans and advances for the year 0.2% 0.5% 1,500 Impairment on loans and advances at year-end 0.8% 1.5% 1,000 CAD ratio 12.2% 14.2% Earnings per share ISK 75.2 35.6 500 Earnings per share diluted ISK 73.9 35.1 0 P/E ratio 9.9 12.4 1999 2000 2001 2002 2003 2004 2005 *All amounts in the annual report are in ISK except on this page and where otherwise stated. 2005 Annual Results 26 January Q1 2006 Results 27 April Q3 2006 Results 27 October Financial Calendar 2006 2006 Annual General Meeting 17 March Q2 2006 Results 26 July 2006 Annual Results 30 January TABLE OF CONTENTS Operations & Organization 2 Key Business Objectives 3 Year in Review 4 A Passion for Building Business - Executive Chairman’s Address 8 Strength and Profitability - CEO’s Address 10 Corporate Responsibility 12 Shares in the Bank 13 Risk Management 20 Corporate Governance 32 Compliance 38 Credit Rating 39 Market Overview 42 Kaupthing Bank’s Results 46 Five-year Summary 50 Operating Results of Profit Centres 54 Banking 55 Investment Banking 59 Capital Markets 63 Treasury 66 Asset Management & Private Banking 70 Employees & Information Technology 74 Acquisition of Singer & Friedlander 76 Main Subsidiaries 79 New Bond Street Asset Management 82 History 83 Annual Accounts 2005 86 The Board of Directors 154 Senior Management 156 For further information please contact: Jónas Sigurgeirsson, Chief Communications Officer 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.com All amounts are in ISK millions unless otherwise stated. I KAUpthing bank I annUal report 2005 I OPERATIONS & ORGANIZATION Kaupthing Bank is a northern European bank operating in ten countries, including all the Nordic countries, the UK, Luxembourg, Switzerland and the US. Kaupthing Bank offers integrated financial services to companies, institutional investors and individuals. These services include corporate banking, investment banking, capital markets ser- vices, asset management and comprehensive wealth management for private banking clients. In addition the Bank operates a retail franchise in Iceland, where it is headquartered. The Bank employed around 2,400 people in ten countries at the end of 2005. The diagram below illustrates the services offered in each country: Investment Capital Asset Mgmt & Banking Banking Markets Treasury Private Banking UK Denmark Iceland Sweden Finland Luxembourg Norway Faroe Islands US Switzerland In recent years, Kaupthing Bank has been one of the fastest growing financial groups in Europe. The Bank’s expansion has been achieved through sound organic growth and a number of strate- gic acquisitions. The most recent acquisitions are those of FIH Erhvervsbank in Denmark in 2004 and the UK bank Singer & Friedlander in 2005. The aim of this growth is to further enhance the Bank’s ability to provide outstanding services to its client base in the UK, the Nordic countries and elsewhere in northern Europe. Kaupthing Bank is listed on the stock exchanges in Stockholm and Reykjavik. The Bank focuses on shareholder value, meaning the expansion of the group has not been achieved at the expense of profitability. The year 2005 has proven to be another successful period of solid growth and record earnings. From its strong cross-border platform, Kaupthing Bank is in an excellent position to meet clients’ local as well as international needs for financial services. I 2 I I KAUpthing bank I annUal report 2005 I KEY BUSINESS OBJECTIVES In order for Kaupthing Bank to fulfil its potential as a prime corporate and investment bank in northern Europe the Bank maintains a number of key business objectives that it believes are necessary stepping stones towards achieving its long-term goals. In recent years these objectives have been demonstrated by Kaupthing Bank’s determined strategy of international expansion, both through organic and acquisitive means. • Maximize the Bank’s value and long-term shareholder value • Achieve at least 15% long-term return on equity • Sustain solid growth without compromising profitability • Develop and maintain dependable, long-term relationships with clients • Continue to incorporate the latest information technology into present systems, thereby improving the Bank’s competitiveness • 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 I 3 I I KAUpthing bank I annUal report 2005 I YEAR IN REVIEW Results 2005 • Another record year for Kaupthing Bank, with all of the main offices posting record profits. • Net shareholders’ earnings increased by 178%, amounting to ISK 49 billion (€659 million). • Earnings per share amounted to ISK 75.2, compared with ISK 35.6 in 2004. • Return on equity was 34%, well above the group’s target of 15%. • Equity grew by 30%, amounting to ISK 194.2 billion at year end (€2.6 billion). • The CAD ratio was 12.2% and the Tier-1 ratio was 9.4% at year end, which is above the group’s target of 11% and 8%, respectively. , • Total assets amounted to ISK 2,541 billion (€34.0 billion) at year end 2005, growing by 64% during the year. One third of this can be attributed to the inclusion of Singer & Friedlander in the group. Acquisition in the UK • In April Kaupthing Bank announced an offer to acquire Singer & Friedlander Group plc in the UK. The board of directors of the British bank recommended the offer to shareholders and the acquisition was completed in July 2005. The acquisition price was £547 million (ISK 64.6 billion). • The inclusion of Singer & Friedlander in the group represents a significant move in Kaupthing Bank’s strategy to further establish its presence in the British financial market. • The acquisition approximately doubled the deposit base of the group, as well as nearly doubling assets under management. • An integration procedure started immediately after the acquisition, aimed at simplifying and sharpening the focus of the entire organization and aligning it with the structure already in place across the Kaupthing Bank group. I 4 I I KAUpthing bank I annUal report 2005 I Solid credit ratings • In November 2005 Fitch Ratings assigned credit ratings to Kaupthing Bank for the first time. The long-term rating is A and the short-term rating is F1. • Moody’s Investors Service affirmed its long-term rating of A1 and short-term rating of P-1 in 2005. Strengthening operations • Kaupthing Bank’s growth strategy has aimed at increasing income diversi- fication, enhancing asset quality and broadening the services offered. • While assets increased by 64% during the year, impairment has dropped from 0.4% of loans and advances in 2004 down to 0.1% in 2005. • The diversification of income is constantly increasing, with the UK, Denmark and Iceland currently the most important markets, but there is strong growth in other countries, particularly in Luxembourg and Sweden. Growing Bank • At the end of 2005, Kaupthing Bank operated in ten countries, including all the Nordic countries, the UK, Luxembourg, the US and Switzerland. During 2005 many important steps were taken towards strengthening the local presence in each market area and, at the same time, establishing the Bank as a leading northern European corporate and investment bank. • Kaupthing Bank has banking licences in six countries: The UK, Denmark, Iceland, Sweden, Finland and Luxembourg. The Bank and its subsidiaries are members of seven stock exchanges in Europe and the United States. Assets under man- agement at the Bank doubled during the year, totalling ISK 1,074 billion at year end 2005, while assets in custody amounted to ISK 1,426 billion. I 5 I I KAUpthing bank I annUal report 2005 I A Passion for BUilding BUsiness The year 2005 proved to be yet another period of high profitabil- ity, brisk growth and improved asset quality for Kaupthing Bank. The Bank’s continuous strong performance has clearly not gone unnoticed.