Kvika banki hf: Earnings higher than expected

Preliminary results for the Kvika banki hf. („Kvika“ or „the bank“) group for the fourth quarter of 2021 are now available and indicate that net earnings before tax for the quarter will amount to ISK 2.6 – 2.7 billion (ISK 10.45 – 10.55 billion for the year 2021), which corresponds to 25.3% - 26.3% annual return on weighted tangible equity (34.5% - 34.9% for the year 2021). The results are higher than estimated for the group for the quarter, as the earnings forecast for the year was last updated on 10 November 2021 and amounted to ISK 9.8 – 10.3 billion in profit before tax.

The group performed well during the quarter and its core operations were solid. Net interest income and insurance operations were considerably above expectations and, in addition to that, net investment income was good. TM’s combined ratio is estimated to be around 89% for the year 2021. Net impairment of loans was also below expectations. Operating expenses for the quarter are somewhat impacted by irregular – and one-off items, such as expenses related to the anticipated relocation to Katrínartún and depreciation of intangible assets in relation to the purchase price allocation.

Impact of recognition of separable intangible assets in relation to purchase price allocation

Concurrent with the preparation of the 2021 financial statements, the purchase price allocations related to acquisitions from 2021 have been performed. In line with financial reporting standards, a part of the purchase price allocation process involves measuring and recognising separable intangible assets. The purchase price allocations resulted in the recognition of ISK 5.7 billion of separable intangible assets which will be depreciated throughout their estimated useful lifespan, as well as the recognition of a tax liability amounting to ISK 515 million. The estimated useful lifespan varies somewhat between the assets and ranges from five to twenty years. Moreover, a fair value estimate was performed on the acquired borrowings which resulted in an increase of ISK 234 million. Additionally, the acquired tax loss carry forward was remeasured which resulted in a recognition of a deferred tax asset amounting to ISK 971 million. Therefore, the purchase price allocations resulted in an ISK 5.9 billion reduction in the group’s goodwill.

The results of the purchase price allocations will impact the group’s consolidated income statement for the coming years. During the year 2021, the impact is a net charge of ISK 135 million, of which ISK 319 million relate to operating expenses. The group’s earnings estimate for the year did not include these charges while they are included in the preliminary results for 2021.

For the year 2022, it is expected that the impact will be a net charge of ISK 376 million, ISK 397 million for the year 2023 and ISK 411 million for the years 2024 and 2025. After that, it is expected that the net yearly charge will begin to decrease, coinciding with the estimated useful lifespan of the assets coming to an end.

The financial statements are still being finalised and are subject to change until they are published.