The world has a lot to learn from Iceland’s economic recovery

Iceland’s asset management and banking sector has been forced to concede a raft of reform measures to secure its longevity

 
Interview with: Sigurdur Hannesson, Managing Director of Kvika Asset Management
July 11, 2016

To this day, Iceland’s crash and subsequent recovery carries vital lessons for any economy struggling to come to terms with a crisis. While the world watched and waited for the bubble to burst, the country’s casualty-ridden banking overhaul was instrumental in not only rescuing it from the abyss, but in spearheading a return to growth. Today, Iceland’s economy is larger than it was prior to the crash – proof that even the most unconventional of responses can sometimes have extraordinary results.

Sigurdur Hannesson, Managing Director of Kvika Asset Management, spoke to World Finance about the ways in which the banking sector has evolved recently, and about how Kvika has responded to the reforms.

How has the Icelandic banking sector improved since 2008?
The Icelandic economy and banking sector has recovered dramatically in recent years. After the financial crisis the Icelandic financial system dissipated. However, in the last couple of years, activity has started to increase again.

The economic recovery has been strong, not least last year when the government announced a plan to lift the capital controls that have been in place since 2008. Foreign investments picked up last year with an inflow of around four percent of GDP, the Icelandic króna strengthened, credit rating of the sovereign went up two notches, and pension funds got some allowance to invest abroad. Consumption and investments are improving, and lending has increased.

Capital markets are getting stronger with more companies listing on the exchange, and the size of the bond market is increasing with new issuance. Economic indicators are also showing positive signs with the GDP close to four percent; the unemployment rate is below four percent and inflation at less than two percent. We are optimistic about the economy in Iceland, and expect the banking industry to benefit from it.

Merging two such strong companies into one is a formidable task that makes demands of all concerned

What steps still need to be made to secure the longevity of Iceland’s banking sector?
Going forward, we see both opportunities and tentative threats. The opportunity to lift capital controls is now in place with a clear plan, whereas the biggest threats to the balance of payments have been moved out of the way with a stronger economy, currency, increased capital inflow and larger reserves.

The lifting of controls will be a vital sign for the strength of the economy. As a result, we expect ratings on Iceland to improve further, and the Icelandic banking industry to benefit with access to international capital markets, more diverse funding and more favourable funding rates. That is vital to secure the longevity of Iceland’s banking sector.

Two out of three systemically important banks are state owned, and a newly restructured bank owns the third. We expect one bank to be sold to long-term investors this year. And clarity with long-term ownership is necessary to secure the longevity of the banking sector.

The outlook for the coming years is promising, and there is every reason to be optimistic. Actually, the outlook is always good for those who have a strategic plan and understand that the purpose of such plans is to take advantage of opportunities. The Icelandic economy is well positioned, and the liberalisation of capital controls is well under way. The opening of the economy is positive for Icelandic society. With asset transfers in the form of stability contributions from the failed estates of banks – and with the liberalisation of the capital controls – Iceland will once again have an active, focused participant in global financial markets. There is a strong correlation between an economy’s openness and the standard of living among its people.

How has reform in Iceland’s financial sector impacted Kvika?
Kvika was established in 2015 with the merger of Straumur Investment Bank and MP banki. The merger had a clear benefit to the shareholders of both banks. The operational objectives of the merger have already been achieved and monthly operating expenses are lower than pre-merger comparables. The financial strength of the merged companies is much greater than that of each separately, as can be seen in Kvika’s high capital adequacy and liquidity ratios. The company already meets capital buffer requirements that are to be implemented in Iceland over the next three years.

Kvika is a privately owned bank, and creates opportunities with a clear strategy and objectives going forward. Financial conditions have improved substantially in recent years, and we believe the company is very well positioned to benefit from these conditions.

How has the company dealt with recent instability in the global equity market?
Being a well known asset management house in Iceland, our main objective is to serve clients to our utmost and maintain a strong relationship built on mutual trust. The most important frame of reference for our clients is decent returns with respect to their risk appetite.

A great deal of effort has been put forward in recent years to maintain and develop our risk management systems. Daily internal monitoring ensures that fund managers know immediately if limits are reached.

The company offers advisory service in foreign markets over a variety of asset classes, along with a managed accounts service. This includes asset allocation in line with client risk profiles and fund selection. As a result of the recent instability we have been advising our clients to reduce the weight of risky assets due to the mixed outlook on the equity markets, directing them to lower risk blend portfolios.

There is particular emphasis on the ability of your staff to be adaptive and responsive to change – why is this important?
The Kvika Asset Management team has more than 100 years of combined experience in asset management for clients. We focus on active management and believe it is crucial to be adaptive and responsive to changes. To do so you need an experienced team that is receptive to different market conditions, and with the know-how to act accordingly to any sudden changes.

We also benefit from having flexible investment strategies, which make the decision process easier and more flexible. Our investment committee meetings are also important to our strategic decision-making and the implementation of any changes. All team members have an input in the strategy. Continuous work is being done to further develop more efficient and transparent IT and risk management systems, which entails that our time is better spent serving our clients and giving more detailed information.

As the largest trader on the NASDAQ Iceland exchange in 2015, how and why was Kvika able to stand out from the competition?
Kvika’s total turnover amounted to ISK 1.2trn ($9.6bn), or about 27 percent of total trading on the market for the year. The company builds on a strong background in capital market activities, which supports our corporate vision of being a specialised investment bank. We are proud of our role in leading the transformation and development of the financial market, and our strong performance in stock and bond brokerage in 2015 is consistent with that role.

We are extremely proud of this milestone reached by our capital markets team, which reflects successful synergy and cooperation with our clients. Kvika has also had an extensive share in foreign capital inflow to Iceland after the announcement of the liberalisation of capital controls last year.

Kvika recently saw the merger of Straumur and MP banki – how was this achieved?
Merging two such strong companies into one is a formidable task that makes demands of all concerned, and Kvika’s employees came through with flying colours. This was a true team effort.

We were led by a strong vision and a clear strategy, with organisational objectives helping to motivate the team. We also managed to keep a clear focus on our core business and clients throughout the process.

What benefits should this merger bring?
The merger created a stronger position for Kvika as a specialised investment bank. In the wake of the merger, the company undertook broad-based streamlining measures that will strengthen its operations even further in the years to come.

Asset management is the backbone of Kvika’s operations, and we have seen a steady growth in assets under management in recent years. We look towards further growth with a stronger platform and an expansion of our product range.