2019 Annual and Sustainability Report Moving Iceland forward by empowering our customers to succeed Annual and Sustainability Report 2019 Table of contents Highlights of 2019 3 To our stakeholders 6 Chairman's statement CEO's address Economic review 13 Positive force in society 17 through collaboration we are #1 for service Personal banking Business banking Corporate and investment banking Iceland Funds Digital champions Íslandsbanki as a role model 30 with passion and professionalism to guide you Strategy Positive force in society UN Sustainable Development Goals Sustainability report Governance Financials and funding 56 This annual and sustainability report may include typos, discrepancies or other errors. If such errors are found the Bank reserves the right to correct them. 2 This annual and sustainability report is published for information purposes only and should not be considered to include any investment advice, whether it be for the sale or purchase of securities. Annual and Sustainability Report 2019 Highlights of 2019 3 Annual and Sustainability Report 2019 Highlights of 2019 This is Íslandsbanki Moving Iceland forward by empowering our customers to succeed Vision and values The Bank Market share1 Sustainability (ESG) FTEs Environment 1.62 CO tne Vision to be Personal banking 2 32% Carbon emission per employee #1 for service 749 at Íslandsbanki 14 branches year-end Business banking Social 1.14% 35% Equal wages for jobs of equal value Corporate and Passion Professionalism Collaboration Governance 67% 34% investment banking of women chairing committees at board level Key figures 2019 Ratings and certifications Digital milestones in 2019 97% of all customer visits ROE (Regular operations)2 6.6% BBB+/A-2 Digital onboarding in Negative outlook are digital personal banking Automated credit scoring Cost / Income 62.4% New unified banking app for individuals Total capital ratio 22.4% 25m customers visits via app Simplified customers experience 12m visits to updated Total assets ISK 1,199bn 2018 - 2021 Open banking foundation in place Íslandsbanki web 1Based on Gallup survey regarding primary bank. 2Return from regular operations and corresponding ratios on normalised CET1 of 16%, adjusted for risk free interest on excess capital. 4 Annual and Sustainability Report 2019 Highlights of 2019 2020 2019 December Try clicking on the pictograms Q3 Íslandsbanki approves new Q1 sustainability policy June July Íslandsbanki closes out the year with the Thirteen students largest share of total Payments via January receive scholarships trading on Nasdaq ApplePay now from Íslandsbanki Iceland available to Íslandsbanki Íslandsbanki launches new, user- Íslandsbanki customers Research issues friendly website Íslandsbanki issues report on Icelandic SEK 500m S&P Global Ratings fishing sector subordinated bond Íslandsbanki leads affirms Íslandsbanki's November Icelandic Customer credit ratings at Satisfaction Index for BBB+/A-2 sixth consecutive 350 guests attend year Íslandsbanki meeting May August on equal rights at Íslandsbanki rolls Hilton Nordica hotel out Onboarding, New digital mortgage a new digital Íslandsbanki and Íslandsbanki Research loan solution rolled out solution issues report on Iceland Funds Icelandic hold meeting tourism sector on responsible Íslandsbanki corporate investment financeadvises Brim on Asian sales companies Íslandsbanki issues ISK bond February April CEOs from 14 large Nordic firms meet New Íslandsbanki Íslandsbanki with Nordic prime app launched offers Íslandsbanki ministers in Iceland to contactless recognised for discuss climate action October payments with excellence in and equality Garmin and Fitbit corporate governance smart watches The Íslandsbanki Íslandsbanki and Íslandsbanki issues Reykjavík Marathon takes Reykjavík Economics EUR 300m bond place. Single largest issue report on charity event in Iceland innovation September Íslandsbanki stops ISK 30.5m in giving plastic gifts Íslandsbanki Íslandsbanki to children and Research issues Entrepreneurship macroeconomic Fund grants allocated March youth and rolls out Krakkabankinn forecast to nine projects Íslandsbanki AGM Nearly 600 guests Íslandsbanki approves ISK 5.3bn attend Íslandsbanki's Research issues dividend payment to seminar on finance housing market shareholders at retirement, held report in Harpa Q2 Q4 Annual and Sustainability Report 2019 To our stakeholders 6 Annual and Sustainability Report 2019 To our stakeholders Chairman's statement The Icelandic economy shows its resilience After several years of growth, the Icelandic economy was on the defensive in 2019. But it can be said to have won a defensive victory, as it now appears, contrary to most forecasts, that GDP growth was positive for the year. In addition, inflation remained low, and the króna was stable. Clearly, the economy is more resilient than many had feared. This is due not least to overall success in corporate operations and fiscal policy, as household balance sheets have remained stable. More investment needed to drive GDP In recent years, the pension funds have been growth virtually the only investors in the domestic Iceland is home to a host of opportunities market. The White Paper on a Future Vision for the future, and we can be proud of the for the Financial System points out the value creation that has taken place here in necessity of bringing more players to the the energy, tourism, fishing, and innovation table in order to boost the effectiveness sectors. But we need to do more. Weaker of our financial market. The White Paper economic growth and a cloudy global advances a number of intriguing proposals outlook make it even more important on how to do this, including expanding that we maintain a thriving and diverse individuals' freedom to invest their supple- economy fuelled by innovation and Icelandic mental pension savings, as is done widely brainpower. In order for this to happen, in other countries. It is important that the we must ensure that sufficient capital is authorities and the business community available for profitable investments. follow up on the proposals in the White 7 Annual and Sustainability Report 2019 To our stakeholders Paper in order to strengthen the Icelandic Investment is also needed to customers and the general public have financial market. ensure further development of faith and confidence in the Bank. Indeed, fostering such confidence has been one of Investment is also needed to ensure further our social infrastructure. our primary objectives in recent years. development of our social infrastructure. In particular, we need to meet the needs Regulatory environment and taxation of the vast influx of tourists who visit the onerous for Icelandic financial institutions country. Although Iceland's fiscal position banking operations focus on the domestic In a welcome move in 2019, Parliament is sound, the Government should not stand market. All of the risk within the banks is approved a gradual reduction of the bank alone in financing the many infrastructure much better managed than before, and tax to 0.145% over a period of several years. projects that need to be undertaken. Chief the cooperation between the Financial But this is nowhere near enough: even with among these are repairs to our road system Supervisory Authority and the Central Bank the reduction, taxes on Icelandic banks and airports, and ensuring that everyone has been very fruitful. This cooperation has remain about five times higher than those in Iceland has ready and reliable access strengthened Íslandsbanki's risk framework in neighbouring countries — as opposed to electrical power, even in the face of and shored up its defences against money to seven times higher before the tax cut catastrophic weather. In this vein, it would be laundering, for instance. In addition, the was approved. The aforementioned White interesting to explore further opportunities Bank has made major investments in Paper also notes that proposed statutory for public-private partnerships, as we did modern digital technology over this period. amendments and the establishment for the construction and operation of the These investments have led to increased of a special resolution fund provide an Hvalfjarðargöng tunnel. Such partnerships automation and simpler processes, thereby opportunity for the authorities to conduct have been very successful in neighbouring helping to improve operations and enhance a comprehensive review of the special countries. security. taxes and public levies in the financial market. It is important to look to the Reconstruction of the banking system On the other hand, the competitive future and emphasise fair and appropriate and stiffening competition in the financial environment has changed dramatically taxation designed to build up funds so market with the arrival of fintech companies and as to strengthen the foundations of the In the decade since I took over as Chairman other market participants. It is vital that the financial system and cushion against future of the Board at Íslandsbanki, Iceland's banks respond swiftly to these changed shocks — through channels such as the financial system has undergone radical external conditions so as not to end up at the Depositors' and Investors' Guarantee Fund change. First of all, the system is much bottom of the heap competitively. And we and the resolution fund. It would be ill- smaller than it was before the financial crisis, must not forget that one of the foundations advised to increase the already high levies as nearly all of Iceland's