Saturday, 20 April 2013

Islandsbanki's incredible profits has a story that appears today, 20 April, saying that Islandsbanki, the bank which was founded on the ashes of the old and bankrupt Glitnir bank, has written of 475 billion ISK of customers' loans since it was founded, i.e. in October 2008.

Now, no matter how you look at this, 475 billion ISK is a lot! The GDP of Iceland is around 1,700 billion ISK. So this bank alone has written of debt amounting to 28% of GDP. If we look at the balance sheet of Islandsbanki we learn that its total assets were, at year end 2012, worth 823 billion ISK. That compares to 658 billion ISK in total assets at year end 2008. If we simply assume that the bank has written off just over 100 billion ISK per full year it has been running since 2008, we come to the conclusion that it has written off customers' debt (which are, of course, the bank's assets) worth roughly 1/8 - 1/6 of its balance sheet every year.

What further adds awe to those debt write-off figures is the fact that while the bank has written off 475 billion ISK its net profit after taxes amounts to 93 billion ISK since 4Q2008 until year end 2012.

This is truly amazing! A bank which, every year, writes off debt equal to maybe 12-17% of its total assets but profits at the same time. The figures for the other two major banks - Arion bank and Landsbanki - are similar.

The reason for those amazing figures is the endowment which the banks got at their births. When the Icelandic banks were re-established on the ashes of the old ones in October 2008, their domestic debts (customers' deposits were probably the most important ones) were transferred, intact, from the balance sheet of the bankrupt banks onto the balance sheet of the new ones. In the case of Islandsbanki, it took over the domestic liabilities of Glitnir.

To meet those liabilities, the new banks got domestic assets - consumers' loans, mortgages, corporate loans, etc. - transferred as well. However, knowing that there would be a massive hit on the ability of the debtors to repay those loans, they were transferred with a discount off their face value: a corporate loan of 10,000,000 ISK (face value, i.e. what was written on the debt contract behind the loan) became 6,000,000 ISK on the balance sheet of the bank.

I do not think that anybody truly knows what the discount truly was, the 40% discount here is only an example. But whatever the discount was, it is blatantly obvious on the aggregated balance sheet of the financial system. The figures here below are based on data coming from the Central Bank of Iceland.

Total book-value of loans to domestic parties, all deposit-institutions (mainly banks), ISK, millions.

Notice the drop. It is in October 2008. Somehow, magically, the debt of Icelandic households and companies decreased from 4,891 billion ISK in September 2008 down to 2,177 billion ISK in October 2008. The reason, of course, is that those figures show the book-value of loans and not the nominal value, i.e. the face value of the debt. This easily shows that when the new banks were established in October 2008, they received a huge book-value discount compared to the face value of loans.

This discount has not only been used to write off debt but to show an accounting profit as well. In the case of Islandsbanki, that debt write off is 475 billion ISK since its foundation. This is as expected, nobody ever expected that firms and households would be able to repay the whole face value of their debts. But in the case of its profits, the bank has been able to revalue the book-value of its loans back up towards the face value, showing an increase in assets which is booked as positive revaluation of its asset portfolio, consequently showing a profit. This is why the bank has been able to write off 475 billion ISK since October 2008 while showing a 93 billion ISK profit at the same time.

One would think that writing off debt would ease the debt burden for the debtor. That is of course true. The bad news however is that only a handful of debtors have received too-large majority of the debt write offs, thereby skewing the positive economic effects of debt write offs. The BBC equivalent in Iceland, Ríkisútvarpið, explained already more than a year ago that although, back then, 750 billion ISK had been written off of loans, only five companies got 208 billion ISK written off while all the households got, total, 196 billion ISK written off. Not to mention that the owners of those five companies were familiar faces which many had political and bank-related connections. It's good to have friends!

In the case of Islandsbanki, the bank has now written off 103 billion ISK of households' debt while corporations have gotten away from 372 billion ISK. Much of those write offs have been due to the fact that exchange-rate-indexed loans, which were made looking like they were loans in foreign currencies, were deemed illegal by the supreme court. Consequently, those loans, which amounted to billions, had to be written off or corrected. Of those 372 billion ISK, only 32 billion are due to illegal loans. Most of the rest (319 billion ISK) have been reached through "agreements with Islandsbanki". Of course, we can expect some of those contracts to include e.g. debt-for-equity swaps.

Understandably, the inequality in how write offs took place - only a few (in)famous individuals got most of them - made a spark which is now turning into a flame engulfing the whole blogosphere and the news. The result is that one of the hottest promises before the general elections, which will take place on 27 April, is debt write offs to the households. Majority of parties have promised debt write offs to households and those which do not have been rejected by voters, polls show.

We'll see how that ends. When I was young I learned that the word "politican" is a nine letter word describing an individual who says one thing but does the other.


  1. Have faith my friend.
    And keep up the good work.
    It will maka a big differance in the end.

  2. You aren't factoring in the drop in Icelandic currency. This is arguably the largest factor to consider here.

    Versus the USD, you could buy twice as many ISK at the end of 2008 than you could in January.

    When you have things like this happen, you have to revalue what a loan is worth. If you don't understand this concept let me know and I will explain further.

    Regarding your article, the most interesting information is the accusations that certain parties were given favored write-offs.

    I would be interested in links to sources or more information on the subject.


  3. Hey Anonymous

    The best list of write offs to firms that I've seen is the Wiki list (references included):

    (I hope you're Icelandic as the list is only in Icelandic. Sorry! But if not, hopefully Google Translate can make a decent translation of it.)

    Regarding the devalution of the ISK, I cannot see why it is relevant in this context. Please explain further.