SALE OF EQUITY

•• After the collapse of the Icelandic banking system in late 2008 the Icelandic FSA split up each of the failed banks into a good bank / bad bank or a new bank / old bank.

•• Capital controls were introduced in Iceland in November 2008 as a result of the banking crisis and have applied since.

•• The Icelandic government recently adopted measures to facilitate the liberation of the capital controls.

•• As part of these measures the old banks completed a composition agreement in 2015.

•• The old banks were required to pay a “Stability Contribution” to the Icelandic state, the amount of which is different for each old bank.

•• The “Stability Contribution” paid to the Icelandic state, includes the transfer of a majority of the ISK cash and ISK assets of the old banks, as well as the issue of a debt instrument in ISK. •• Glitnir transferred the total equity in Íslandsbanki (new bank) to the Icelandic state as a Stability Contribution.

•• The state now holds 2 out of the 3 major financial institutions.

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•• The banking crisis and the subsequent composition arrangement of the old banks has greatly affected the shareholder structure of the three largest Icelandic banks (new banks), being currently as follows;

Icelandic Treasury (13%)

Kaupthing hf.

(87%)

Icelandic Treasury (98.2%)

Others (0.89%)

Landsbankinn hf.

Arion banki hf.

Icelandic Treasury (100%)

Íslandsbanki hf.

•• The Iceland State Financial Investments (“ISFI”) was established by the Icelandic government to act as shareholder in the banks on behalf of the Treasury.

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REGULATORY ENVIRONMENT

Applicable EU/EEA Legislation •• Iceland is a member of the EEA and has for the most part adopted EU regulations in the field of banking and financial markets.

•• Due to EEA limitations certain EU Regulations falling under the authority of ESMA have not been implemented yet.

•• The EEA limitations have precluded the possibility of delegating authority to pan-European authorities, such as ESMA. •• The EEA/EFTA countries have been working on establishing an equivalent institution.

•• Following is a summary of European directives and regulations that have recently been implemented or have yet to be implemented and which apply to all of the banks.

Prudential requirements •• CRD IV and CRR implemented in 2015 •• Capital buffer requirements came into force on 1 January 2016.

•• Capital Conservation buffer comes into force in steps until 1 January 2017.

•• All the banks are categorised as Systemically Important Institutions and subject to increased capital requirements.

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Securities regulations •• EMIR has not been adopted/implemented and timing is uncertain.

•• The Short Selling regulation has not been adopted/implemented and timing is uncertain.

•• MiFID II has not been adopted/implemented and timing is uncertain.

•• EU postponed deadline to January 2018.

Investment Fund Regulation •• UCITS IV reform has been adopted/implemented to a limited extent (KIID implemented).

•• UCITS V has not been adopted/implemented.

•• AIFMD has not been adopted/implemented but is pending, exact timing is uncertain.

•• The Icelandic FSA is adhering to the EU passport provisions.

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THE ICELANDIC BANKS

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•• The three largest Icelandic banks provide a wide range of services such as: ••

Retail banking

•• Corporate finance and Investment banking ••

Investment services

•• Capital markets services ••

Leasing services

•• Investment fund operations •• Wealth management / private banking •• The banks have a relatively equal split of market share in retail banking (around 30% each).

•• Market share in other operating fields varies.

•• The balance sheets of the banks are similar in size.

•• Landsbankinn has the largest, around 1,118 billion ISK. •• Íslandsbanki has the smallest, around 1,045 billion ISK.

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ARION BANKI HF.

••As part of the measures for liberating the capital controls Kaupthing will issue a promissory note in the amount of approximately ISK 84 billion (subject to max ISK 5 billion reduction).

••Two fixed repayment dates on the second and third anniversary.

•• 39.5 – 42 billion ISK on each date.

•• Kaupthing will need to liquidate or transfer assets (may include the equity of Arion banki in part or totally) to meet the repayments.

•• Should Kaupthing divest its ownership in Arion banki, the following part of the proceeds will be paid to the Icelandic state:

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Sales proceeds:

% to Icelandic state

ISK 100 billion - ISK 140.00 billion

33⅓% to Icelandic state

ISK 140.01 billion and ISK 160.00 billion

50% to Icelandic state

Above ISK 160 billion

75% to Icelandic state

•• Key figures from Arion banki 2015 financial results Balance sheet

ISK (in millions)

Total assets

1,011,043

Total liabilities

809,149

Total equity

201,894

Income statement

ISK (in millions)

Net interest income

26,992

Operating income

86,555

Profit for the year

49,679

Ratios

(%)

Return on equity

28.1%

ROE (continuing operations)

10.4%

Net interest margin (total assets)

3%

Liquidity coverage ratio

134.0%

Tier I capital

23.4%

Cost/income ratio

32.6%

Non-performing loans

2.5% 15

•• Key figures from Arion banki 2015 financial results (cont.)

Funding profile

6%

Equity

20%

Subordinated debt

1%

Covered Bonds Other borrowings

13%

48%

Deposits Other debt

12%

••Notable changes/events: •• ROE up from 18.6% to 28.1% •• Equity increased by 20% •• Improved credit rating (S&P) BB+ to BBB- (with positive outlook) •• Foreign capital market issuances: •• 300m EUR; and •• 800m NOK. •• Further financial information can be found here: https://www.arionbanki.is/english/about-us/investor-relations/

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ÍSLANDSBANKI HF.

•• As part of the measures for liberating the capital controls Glitnir delivered its 95% stake in Íslandsbanki to the state. The state now holds 100% of the equity in Íslandsbanki.

•• The Minister of Finance has made several statements on the disposal, stating on one hand that the ownership is not intended to be long term but on the other hand that disposal will not occur quickly.

•• Timeframe of disposal uncertain.

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•• Key figures from Íslandsbanki 2015 financial results Balance sheet

ISK (in millions)

Total assets

1,045,769

Total liabilities

843,542

Total equity

202,227

Income statement

ISK (in millions)

Net interest income

28,010

Operating income

44,673

Profit for the year

20,578

Ratios

(%)

Return on equity (continuing operations) 13.2% Net interest margin (total assets)

2.9%

Liquidity coverage ratio

143%

Tier I capital ratio

28.3%

Cost/income ratio

56.2%

Non-performing loans

2.2% 19

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•• Key figures from Íslandsbanki 2015 financial results (cont.)

Funding profile Deposits

20% 3% 2%

Debt issued and other borrowings

60%

15%

Subordinated loans Other Liabilities Total Equity

•• Notable changes/events: •• Balance sheet increased by 14.8% from 2014 •• Equity increased by 16.7 billion.

•• Capital market issuances: •• Covered Bond issuances

16.4 billion

•• GMTN program increased by

39.7 billion

•• Further financial information can be found here: https://www.islandsbanki.is/english/investor-relations/

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LANDSBANKINN HF.

•• The Minister of Finance was authorised in the annual budget of the Icelandic Treasury to dispose of up to 28,2% in Landsbankinn hf.

•• The government intends to complete the sale in 2016 if prices are favourable.

•• In January 2016 ISFI issued a report on the possible means of disposal.

•• ISFI proposes four disposal scenarios.

•• A public offering coupled with a listing in Iceland; •• A public offering coupled with a bilateral listing in Iceland and abroad; •• A direct sale to professional investors (domestic and/or foreign); and •• A direct sale to a foreign financial institution(s).

•• ISFI prefers a public offering followed by a listing in Iceland.

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•• Key figures from Landsbankinn 2015 financial results Balance sheet

ISK (in millions)

Total assets

1,118,658

Total liabilities

854,127

Total equity

264,531

Income statement

ISK (in millions)

Net interest income

32,324

Operating income

72,363

Profit for the year

36,460

Ratios

(%)

Return on equity

14.8%

Net interest margin (total assets)

2.2%

Liquidity coverage ratio

113%

Tier I capital ratio

30.4%

Cost/income ratio

43.8%

Non-performing loans

1.8% 23

•• Key figures from Landsbankinn 2015 financial results (cont.)

Funding profile Deposits

24%

Borrowings Other debt

2%

55%

Equity

19%

•• Notable changes/events: •• Loans to customers increased by 13% from 2014.

•• Net interest income increased by 15% from 2014.

•• Cost/income ratio reduced from 56% to 43.8%.

•• Further financial information can be found here: http://corporate. landsbankinn.com/investor-relations/

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