In S&P’s view the economic risks facing Iceland’s banks are receding in tandem with a stabilizing housing market and unwinding private sector leverage, leading S&P to see the economic risk trend as positive. Although S&P expects persistent inflation and higher interest rates to result in moderately deteriorating asset quality for the banking sector, they consider unlikely the risk of credit losses materially above S&P’s base case from a sharper devaluation of property prices.

S&P expects Iceland to continue to post solid growth following an already substantial recovery from the pandemic-induced recession, with GDP growth of 3.8% in 2023 and averaging 2.5% in 2024-2026. Industry risks affecting the banking sector are viewed by S&P as broadly stable, with incumbent banks remaining profitable and well-capitalized, leaving them in a good position to fend off bank and nonbank competition.

S&P states that they could raise the ratings on Íslandsbanki in the next 12-24 months if they see a sustained improvement of economic risk indicators from abating housing market imbalances and private sector leverage or if Íslandsbanki were to build significant additional buffers of loss-absorbing capital. S&P could revise the outlook to stable if the positive economic trajectory halted, particularly if they saw a material correction in the housing market or a weakening of key economic sectors. An outlook revision to stable could also follow a weakening of Íslandsbanki’s RAC ratio below the threshold for the very strong capital and earnings assessment.