| "The bulk of our lending is outside of Iceland. So it is natural that the bulk of our borrowing should be outside Iceland." Sigurdur Einarsson |
Kaupthing is generally characterized as Iceland's most aggressive bank. Its strategy can be traced to 1996, when it decided that it would no longer simply be an Icelandic bank and redefined its market as the Nordic region, the UK and Benelux. "This year less than 20% of total revenues will be Icelandic related so we have fulfilled our original strategy," says Sigurdur Einarsson, chairman of the bank.
Along the way it acquired Sofi in Finland in 2001, Aragon and JP Nordiska in Sweden and Audlind in Iceland the following year, Tyren in Norway and Norvestia in Finland in 2003, Sundvall in Norway and, importantly, FIH in Denmark last year and Singer & Friedlander in the UK earlier this year. Even by recent Icelandic standards it is an impressive record of growth.
Necessarily, such a rate of growth has prompted concerns, which Einarsson dismisses as misconceptions prompted by envy. "We have gone from being the smallest financial institution in Iceland to the largest," he says. "We have grown out of nothing in Sweden to become a serious competitor to other Swedish banks. We have grown out of nothing in Denmark and become the third-largest bank there."
Kaupthing has focused mainly on increasing fee income and net interest income and Einarsson concedes that the deposit base of the bank is relatively small. "After the acquisition of Singer & Friedlander the deposit base will be 26% of the total funding of the bank," he says. The rest is funded through the international capital markets, primarily through EMTNs.
One persistent concern among analysts has been that as Kaupthing and the other large Icelandic banks have expanded, their reliance on the debt capital markets has increased disproportionately.
This makes the banks vulnerable for two reasons. First, should the capital markets become difficult to access, it will be tough for the banks to refinance their substantial debt.
Second, more generally, as many investors have fixed limits for how much they can buy of an individual credit or from a particular country, there is a risk that money will simply cease to be available to them.
Einarsson says suggestions that Kaupthing has too much foreign currency debt amount to a misunderstanding of the bank's activities. "The bulk of our assets are outside of Iceland," he says. "The bulk of our lending is outside of Iceland. So it is natural that the bulk of our borrowing should be outside Iceland." He points out that Kaupthing's biggest debtors are Danish corporates as a result of its acquisition of FIH in Denmark last year.
Indeed, analysts concur that acquiring FIH was a masterstroke in terms of funding. "It has enabled Kaupthing to diversify its sources of funding," notes Christoffer Mollenbach, head of the financial institutions group at Nomura in London. "FIH is fully regulated by the Danish authorities and from an investors' perspective it is Danish risk. It could give Kaupthing the ability to direct its future growth through a less constrained entity."
Is there a danger of the Icelandic banking market overheating?