London/Frankfurt (IFN) Fitch Ratings has today affirmed Iceland-based Landsbanki Islands ("Landsbanki") ratings at Issuer Default of A, Short-term F1, Individual B/C, and Support 2. The Outlook on the Issuer Default rating is Stable.

The ratings reflect Landsbankis strong franchise in its domestic market and its greaterearnings diversification, to a large extent a result of the banks expansion overseas. Theyalso take into account the banks prudent provisioning policies and high capitalisation, aswell as its still large, although decreasing, equity portfolio, its exposure to the volatile

Icelandic market and its high reliance on capital markets funding. Landsbanki remains relatively dominated by its domestic market, which accounts for around 55%-60% of the groups staff, income and lending. Iceland, given its small size, is vulnerable to shocks. In addition, in early 2006, the significant macro-economic imbalances in Iceland caused some concerns; the Icelandic banks experienced turbulences in the international capital markets, resulting in higher funding costs for the banks.

However, through its London branch and various acquisitions made since 2000, Landsbanki has increased its presence in the UK and in continental Europe generally. Landsbanki has been building up a European lending platform as well as a pan-European investment banking services platform for mid-caps.

Its recent acquisitions of several brokerage and corporate advisory companies have significantly enhanced Landsbankis product range in corporate and investment banking, including M&A advisory, debt financing and placement capabilities, now offered in most of Europes major financial centres. As a result, Landsbankis income-generating capacity and quality of earnings have improved significantly. Revenues have become increasingly diversified in terms of geography and product mix, although a large part of its fee income is now reliant on capital markets developments.

Fitch expects Landsbanki to be able to leverage its foreign platform to achieve further growth; this should offset the volatility of its domestic market and higher funding costs if the negative market sentiment experienced since early 2006 were to persist. One of the banks focuses is to reduce its high reliance on wholesale funding, as reflected by the recent acquisition of an offshore customer deposit base in Guernsey.

In addition, the bank has actively reduced and diversified its historically large equity portfolio following the sale of most of Landsbankis stake in Straumur-Burdaras Investment Bank in October 2006 (at that time its largest equity holding): taking this into account, its equity portfolio still represents a high 30% of Landsbankis end-September 2006 equity. In Fitchs view, the banks high capitalisation and prudent provisioning policies provide some buffer and comfort were the Icelandic economy to deteriorate.

Landsbanki is Icelands second-largest bank by total assets but has the largest franchise in its domestic market, with strong market shares. Overseas, it is developing its UK and European corporate and investment banking franchise (mostly through acquisitions) and now provides research coverage of 800 small and medium-sized companies in Europe.

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