Today, S&P Global Ratings (S&P) has affirmed Íslandsbanki's rating at BBB/A-2 with a stable outlook.
In its report, S&P views economic risks facing Icelandic financial institutions as elevated as property prices have risen higher than fundamental determinants, which could occasion a risk of a disorderly correction with a heavy impact on the banks. However, S&P notes that the tourism sector recovery continues which will improve corporate sector performance.
S&P goes on to state that bank capitalisation will remain very strong, alongside healthy and improving earnings capacity. This factor will provide a buffer to absorb higher losses in the event of a correction in the housing market. S&P also notes that competition from the pension funds in the mortgage market has abated with their market share shrinking from 30% to 20% in the space of two years, while rising interest rates might marginally increase their mortgage-market presence in the coming two years.
S&P states that they could lower the ratings of Icelandic banks if they see a rapid and severe correction in the housing market. They could also lower the rating if they expect capitalisation to fall below the level they consider to be very strong. S&P could raise their ratings if they see housing market correction risk ease markedly, paired with stable and robust sector earnings. Likewise, the agency will look favourably on plans to build significant additional buffers of loss absorbing capital.
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