Ræðismannaráðstefna: Bjarni Ármannsson

Ráðstefna fyrir kjörræðismenn Íslands erlendis
Reykjavík, 2.-5. September 2001

Ræður og erindi

Bjarni Ármannsson, Bankastjóri Íslandsbanka
"New opportunities in the financial market in Iceland"

3. september 2001


Dear honorary council members, ladies and gentlemen

Let me fist express my gratitude for being with you here today. I was actually worried when I read the program that you would get bored of us Icelanders expressing how great we are throughout several days, but when I saw the number of questions to Guðfinna it gave me the brightness and positive attitude to come here.

Sverrir Haukur gave you the task of talking about the financial markets and the opportunities there and in essence I will talk about three things: the economy as such because that interlinks very much with the financial markets, describe the financial market as it is and what were the main drivers to why it is as it is, and then finally talk a little bit about the future.

Let me start a little bit with the economy. As you can see from this picture the Icelandic nation is very young. The demographics are very favourable for Iceland, so as you can see on this picture 24% percent of the nation is younger than 15, and actually about one third is younger than 25. Whereas you can see a totally different picture in the EU, specially in countries like Japan, so the aging problem is really a long way from Iceland.

Actually I thought that I was a part of more or less the younger generation but when I went to the barber earlier today he gave me another impression when he started cutting my eyebrows and putting the machine into my ear, so I guess I am going more into the gray area as the years go by.

If you look at the GDP growth like the last ten years it has been very similar to the OECD, so Iceland is more of a developed economy rather than emerging although there are some sectors that are still emerging, and I'll come onto that later on. But we have not been growing like the economies such as Ireland and Luxembourg, the European ones to mention which have been growing tremendously in the last ten years. But on the other hand we've been growing more than the big economies in the EU as you can see at the bottom of this chart.

At the same time the economy has been changing; more going away from the raw material economy to a more developed one. And you can see the proportion of marine products is actually going down throughout the last decade, going from 55% to close to 40%, and services are growing more, and you can see that also on dr. Bjarnadottir's slides. And then we have been investing more in aluminum and ferrosilicon in revent years.

The financial sector has been changing quite rapidly in the last 20 years but primarily in the last 10 years, and I think the major change roots back to the year '93, it is not long way back, when we joined the European Economic Area. Before that time, as an example, Icelanders were not allowed to invest internationally, so investment knowledge was very limited and isolated in the country, so foreign exchange was prohibited for individuals, except if they were travelling abroad etc. and the largest division in the central bank was a foreign exchange regulatory unit.

Since that we have had a number of changes in our legislation, moving it more towards the European directives so the legislation framework here is very much or almost in every manner in line with the European directives. So in '97 and onwards that has led to a very much of a deregulated market and a privatised market which is in the process of being privatised and we're far from being to the end of that.

The market itself has grown tremendously and if you look at this composition you see that the securities market has been growing relatively more than the traditional deposits in banks. Actually that has doubled since 1997 or in the last four years. But you can see still if you look at the numbers and the deposits that that market also has been growing but only like a single digit numer.

So that development has been very interesting and the market has basically flourished in the last four years and the economic upswing that has been in the same period has also helped towards that.

If you think back to the demography and how young the nation is it's also very curious to see that assets of Icelandic funds, and especially pension funds, are quite large, especially compared with the EU countries, so assets under management equal about 110% of GBP and pension funds about 85% of GDP, and we estimate that in the year 2020 pension funds will be around double the GDP, so then we will be prepared for going to the barber and getting old.

You can see this story, the change in savings pattern in the equity market, and this slide describes the listed equity on the Icelandic stock exchange, so you can see the exponential growth in the last 4-5 years and that's actually as you can see, levelling off which is the picture today as we are going into a bit of an economic downturn that the number of companies that go into the market are actually, for the first time, since this stock market started, and the first company was listed in 1990 so it's probably one of the youngest stock markets in the world, it is starting to level off and my vision is that it will continue so we will have fewer companies on the market, but larger.

If you look at the players in the financial market there are basically four players, it's us and along with us Búnaðarbanki and Landsbanki which are majority state owned banks working in the commercial side, and then Kaupþing working in the investment side. So it's a market with relatively few players, and we have seen some consolidation and my belief is we will continue to see that.

So if we look at the future development, there are some clouds on the horizon so to speak, that we will see a totally different market here, let's say after 10 years or even 5 years, than what we have today. We are seeing that the barriers to entry into the market are lowering and the name of the game is changing how the game is played.

As an example, accounting standards here. We have had inflationary accounting for a number of years but in the last 10 years this inflation has been coming down. The necessity for such accounting standards has diminished and I believe we are more moving towards international accounting standards from last years.

Then we have a barrier to entry which is the krona. It is difficult for foreign banks to compete in this market given that they have relatively low or hardly any krona exposure. So that has been a barrier to entry towards the market. But as a ramification of the deregulation and the privatisation and all these changes and the question whether we will have a krona here in 5-10 years' time, all drives us towards the path of more globalisation in the political and horizontal integration. Both cross borders and in Iceland. So I believe that we will take more part in what has been happening elsewhere in the world where the players have become bigger and bigger and integrating in more financial sectors, so to speak. I was trying to picture how that might look, because we know basically that it's coming forward, but we do'nt know how it's going to come forward. And what came into my mind was a picture like that.

We don't know whether it is realistic or not but the frontiers are going down, and whether they will be by more foreign competition, I don't know, but the isolation of the country is becoming less and less. Although I don't think the biggest barrier to entry, which is probably the language barrier, is coming down, and probably the only one that will be reserved for some years to come, at least. But the picture will be that we will have more consolidation, and more foreigners coming into the picture here which I believe all of us will welcome. So you'll see more mergers across borders which we basically haven't seen here in Iceland before in the financial sector.

So if you look at the horizontal integration that we foresee, we actually see it with more privatisation, the entities will become even larger than they are today. And with changes in the savings banks system we believe that they will either conglomorate into one or two or be amalgamated with the banks.

And then we have the special entity here which is called the Housing Fund which basically all houses of individuals are funded by, or most of it, and I believe as well that we will see a privatisation in that sector, which has a lot to do with the marketising of the property market there in Iceland. So you'll see a further consolidation on that front.

Similarly, between the different segments in the market, let's say banks and insurance companies, which is a fairly segregated market today, we will see more consolidation. Similarly, we have seen fairly segregated market among the commercial banks themselves and then the securities houses, and we'll see, and have been seeing, more of a consolidation on that front.

With respect to not only changes happening here in Iceland and foreign companies coming to Iceland we have seen domestic players going abroad and competing in other economies. So Icelandic banks have increased presence in various economies, especially in Europe and in the US.

What our strategy is at Íslandsbanki, where I work, is that we selectively are developing investment opportunities and brought for example the returns that are on the operations of international levels. The banks are in itself interesting investment opportunity as they reflect the economy as such, because the banks have exposure to various industries and reflect what is happening in general in the economy.

So, as a conclusion, I believe that generally I'm fairly optimistic on the developoment although we are going through a bit of a dip for the moment and as we see the fundamentals in the economy, the production, the education, the demographic, the assets that we are building up for the future to come, that we have a bright future and that will be reflected in the financial market.

Thank you very much.