Iceland's biggest listed company, Islandsbanki, is broadening its horizons. The bank is diversifying its asset base and portfolio, and has found in the international bond markets a new pool of investors. Guy Norton reports on the firm's plans to cast its net even further, by issuing in new currencies and finding buyers in sunnier regions.
Whether it involves its business mix, the composition of its shareholder base or its funding strategy, diversification is the name of the game at Islandsbanki.
Formed in 2000 through the merger of commercial bank Islandsbanki with investment bank Fjarfestingarbanki atvinnulifsins, the bank is Iceland's largest financial institution and listed company.
In common with most leading Icelandic businesses, the bank has been looking to add an international dimension to its existing operations in Iceland, where it is the largest corporate lender. "In the last two years we've been working on diversifying our asset base outside Iceland within the scope of our existing expertise," says Islandsbanki's joint chief executive, Bjarni Armannsson.
As part of this strategy, the bank is leveraging its near century of experience of financing the fisheries industry in Iceland. Petur Einarsson, general manager of the bank's fisheries business, says that 80% of the growth in the bank's $500m fisheries portfolio now comes from overseas, where the bank finances operations in Canada, Chile, New Zealand, Scandinavia, South Africa and the US. "Our focus is on investment grade countries where there are big fisheries resources," he says. "We can add value through our specialist knowledge of the industry and so can better appraise the risks and rewards."
With consolidation and globalisation within the fisheries business increasing, Armannsson adds: "Our strategy is to be a global player within the sector."
On the investment side, the bank has also been buying more non-Icelandic assets. "We're making a conscious effort to diversify our portfolio on both a geographical and sector basis, while at the same time retaining a focus on asset with strong investment grade ratings," says Gunnar Sigurdsson, general manager, loan syndication and asset trading. He adds that the bank accomplishes this through the selective purchase of corporate bonds and asset backed securities such as CBOs. Sigurdsson says that these invesments deliver high returns while being well diversified from a risk management perspective. The bank is also looking at suitable investments in the secondary loan and trade finance markets.
On the equity front, meanwhile, the bank is seeking to take advantage of its position as the country's largest and most liquid stock to broaden the ownership of its shares, which is currently almost solely Icelandic. Armannsson says: "The bank's strategy is to seek a portfolio of institutional investors from abroad, just as many of the larger Scandinavian banks have done, with between 25% and 33% of their shares now being held by foreigners."
On the funding side, the emphasis is firmly on broadening the bank's financing options as well its investor base. "The traditional financing route for the bank was the syndicated loan markets, but since the merger we have focused more on the bond markets," says William Symington, senior funding manager. He adds that given the relative limited universe of bank lenders to Iceland, the international bond markets offer the bank greater flexibility and enhanced visibility.
Islandsbanki's self-arranged Eu2.5bn EMTN programme, established in July 2001, is its main funding vehicle, although the bank also has a Eu500m ECP facility and taps the syndicated loan market on a selective basis.
Although the vast majority of its EMTN trades are executed as private placements, the bank has also launched two benchmark public issues in euros. "Investor diversification has been the main angle on both the private and public issuance fronts," says Symington.
Certainly the first of the bank's public issues, a Eu355m two year FRN - launched for Eu250m via Barclays Capital and HypoVereinsbank in October 2000 and then increased by Eu105m via Crédit Lyonnais in November of that year - reaped immediate dividends, in terms of broadening the bank's geographical appeal and heightening its market visibility. "It was a deliberate tactic to do a big deal by Icelandic standards, which historically have been pretty small," says Symington. German Landesbanks, which are the principal lenders to the country, have usually been the major buyers of Islandsbanki paper and Icelandic bonds in general. But on the bank's debut public transaction, more than half was sold into France. The bank's second public issue - a Eu375m 2-1/2 year transaction via Barclays Capital and Credit Suisse First Boston in January this year, the largest ever by an Icelandic borrower - saw further progress, with some 60% of the deal sold to asset managers rather than the bank investors who typically buy floating rate product. "Islandsbanki is a very well respected name in Europe, each time increasing the liquidity of its offerings in the market. The bank has done a lot of work with investors and so its story is much better understood with the result that there are a lot more lines available for it," says Antoine Loudenot, originator, debt capital markets at Barclays Capital in London. The bank also improved its cost of funding with the second transaction, pricing it at 24bp over swaps, versus 27bp on the first. Although Symington believes the bank is unlikely to launch another public issue during the rest of 2002, he adds: "It's very much our intention to issue at least one public deal a year for the foreseeable future."
While the public bond route is not the cheapest funding option for the bank, Symington says: "It's important to have our name in the market with a public deal that offers perceived liquidity benefits which help to bring in incremental demand."
In terms of further investor diversification, Islandsbanki is looking to leverage off the example of its public issuance to help drum up interest among accounts in the so-called "Club Med" countries. "We are looking to repeat the success we have had in France to help increase distribution in Italy, Spain and Portugal," says Ingvar Ragnarsson, senior funding manager.
While Islandsbanki's public issuance has been at the short end of the curve, in the private placement market Symington says: "We are interested in extending the average maturity of our liabilities, focusing on the three to five year area." Although most of the bank's assets are dated longer than five years, Symington says that as most of its loans to Icelandic companies feature coupon refixes every three or five years, its assets and liabilities are effectively matched in maturity terms.
While the majority of Islandsbanki's issuance is in either dollars, euros or yen, over the last year or so the bank has been entering new currency sectors, launching a Czech koruna transaction via Erste Bank and a debut sterling transaction via Barclays Capital and JP Morgan. The bank also tapped the Hong Kong dollar market for the first time this year with a HK$200m five year issue via JP Morgan and Industrial & Commercial Bank of China in January. "Hong Kong dollar investors are interested in buying 20% risk weighted paper like ours, and with Hong Kong banks generally rated in the low single-A area, Hong Kong investors are comfortable buying us with our A2/A rating," says Symington.
Although the bank has completed close to half its Eu1bn funding target for the year, it remains open to funding exercises in other new currencies, with the Polish zloty and Singapore dollar markets potential new funding avenues. *