The main role of Markets is to provide service linked to the sale and brokerage of securities and foreign currency, market making, advice to corporates and asset management.

Landsbankinn's Markets achieved good results in 2016. This success is due mostly to an increased transaction volume, more or less across the board. There was a considerable increase in foreign currency trading and market transactions. The scope of the activities of Landsbankinn Asset Management continued to grow in 2016. Total assets under management by the Group at year-end 2016 amounted to ISK 406 bn, as compared with ISK 340 bn at year-end 2015.

Landsbankinn’s market share in pension savings grew from 17% to 19%

Landsbankinn offers both mandatory and supplementary pension savings. The number of persons who choose to entrust their pension savings to Landsbankinn continues to increase. Over the past four years, over 18,000 individuals have signed an agreement for supplementary pension savings with Landsbankinn. Agreements for mandatory pension savings have also increased by a significant number, or by eightfold in the past three years. In 2016, around 1500 individuals signed an agreement for mandatory pension savings. Surveys show that the market share of supplementary pension savings with Landsbankinn increased from 17% to 19% in 2016.

Landsbankinn manages pension fund Íslenski lífeyrissjóðurinn, which has achieved good returns in recent years.

In 2016, the return of Íslenski lífeyrissjóðurinn was good, having regard for market conditions. Returns on private insurance schemes were good, with the average nominal returns of the fund's private pension divisions amounting to 3.0%, or a 0.9% real return.

Landsbankinn also offers the Lífeyrisbók pension savings account, inflation-indexed and non-indexed deposit accounts, and custody accounts which are a portfolio of non-Icelandic securities. Landsbankinn also manages the Pension Fund of the Icelandic Dental Association.

Pension savings under management by Landsbankinn amounted to a total of ISK 114 bn at year-end 2016. Premiums toward pension savings plans with Landsbankinn have increased by leaps and bounds in recent years and amounted to ISK 11 bn in 2016.

Landsbankinn places great emphasis on professional advice and good service across all departments. Based on that strategy, the Bank's employees handle all sales and advice related to pension services in-house.

Landsbankinn is the main broker for Landsbréf's UCITS and investment funds. There was substantial growth in sales in the funds in 2016. The funds' market share grew from just under 18% at the beginning of the year to just over 25% at year-end 2016.

Pension savings with Landsbankinn

114ISK billion

Assets under management by the Group

406ISK billion

Market share in the Stock Exchange

21%of total turnover

The Bank has emphasised maintaining good relations with foreign fund management companies and represents many of the world's leading asset management companies in Iceland.

A leader in capital markets

Landsbankinn held the largest market share in equities on the Stock Exchange and the second largest share in securities in 2016. The Bank competes with eight different parties on this market and competition is fierce. Landsbankinn leads in the field, holding 21% of total turnover on the Stock Exchange.

Robust service and extensive experience of non-Icelandic securities trading

Considerable effort has been expanded on preparing for the liberalisation of capital controls. Landsbankinn has, ever since capital controls were introduced in 2008, continued to offer service in overseas securities trading, despite a paucity of customers. The Bank has emphasised maintaining good relations with foreign fund management companies and represents many of the world's leading asset management companies in Iceland.

Landsbankinn has also maintained solid relations with overseas securities brokers and has through these relationships managed to assist customers in foreign securities trading. The Bank's employees have continued to amass knowledge of international markets and the Bank employs experts dedicated to advice and service linked to overseas securities trading. Landsbréf, Landsbankinn's subsidiary, has managed funds who invest overseas. In 2016, Landsbankinn strengthened this service even further and made it more accessible to customers. Among other things, the Bank established a new fund, Landsbréf Global Portfolio. The fund is intended for individuals, companies and institutional investors who wish to invest in a diversified portfolio of foreign unit shares and deposits. The fund primarily invests in foreign equity funds.

A comprehensive publication on asset management and investment

In 2016, the Bank sponsored the publication of Reading the Market: Asset Management and the Search for Best Returns (Ice. Lesið í markaðinn: Eignastýring og leitin að bestu ávöxtun). The book outlines the history of investment on global securities markets and dedicates a special chapter to the Icelandic securities market. The book is one of the most exhaustive publications on asset management and investment in Icelandic. Through this publication, the Bank wishes to encourage increased professional expertise and better investment decisions.

The activities of Markets were reviewed in-depth in the November edition of Investor Review. The magazine selected Landsbankinn as recipient of the Excellence in Equities award for the strong service the Bank provides for investors through both brokerage and asset management.

Price changes adjusted for dividend

Having regard for dividend payments, shares in N1 increased most, or by 8%. The greatest decrease was in the shares of Icelandair, or 32.8%.

Lower returns on the domestic equity market

2016 was rather less favourable for the domestic equity market than previous years. The selected shares index, having regard for dividend payments (OMXI8GI), fell by 6.7% after having climbed by 49% in 2015. Having regard for dividend payments, shares in N1 increased most, or by 8%. The greatest decrease was in the shares of Icelandair, or 32.8%. Shares in Skeljungur were admitted for trading on the Stock Exchange, the only listing on the equity market in 2016.

The performance of companies listed on the Stock Exchange was generally good during the first three quarters of 2016. The Icelandic equity market can be split in two; on the one hand companies dependent on local economic developments (real estate companies, telecoms companies and retailers) and, on the other hand, companies with a significant portion of their income overseas (Icelandair, Marel and Össur). The Icelandic króna appreciated considerably against main trading partner currencies in 2016, with the exchange rate index falling by 15.5%. A stronger ISK has a considerable impact on companies that keep foreign currency accounts yet have significant expenditure in ISK.

The year was rather eventful on the global stage. The presidential election in the US, uncertainty about the Chinese economy, terrorism and BREXIT - these are all major events which impact the companies who sell goods and services to the markets in question.

Domestic equity market - OMXI8 including dividend

A stronger ISK impacts returns on foreign securities

The MSCI global index fell by 6.4% during the year in ISK and the appreciation of the ISK was the single most influential factor impacting return.

Return of foreign equities in local currencies was fair. Return of the global index in USD was 7.3%. These positive developments were driven by good returns on US equities - the S&P 500 index gained 10.9% during the year. European equities increased by a mere 1.0% and Japanese equities by 2.4% during the same period.

Developments on international markets followed world events closely. 2016 commenced with a report of lacklustre economic growth in China and expectations of diminishing growth in the country. Market participants worried that this would impact the global economic outlook.

Oil prices rose at the beginning of the year and fluctuated considerably over the year following severe decreases in the previous two years. The main factor effecting oil prices were OPEC's attempts to influence global production and supply of oil. Following oil price hikes, stock prices in emerging markets rose, as emerging markets are dependent on producing commodities. The emerging markets index rose by 11.6% during the year.

Developments on international markets followed world events closely. 2016 commenced with a report of lacklustre economic growth in China and expectations of diminishing growth in the country.
The most sensational and unexpected events of 2016 were no doubt BREXIT and Donald Trump's election to the office of president of the United States. Both events led to major fluctuations on stock markets.

Lower interest rates and inflation influenced the domestic securities market

The largest influencing factors on the domestic securities market were the 0.75 percentage point decrease in the Central Bank's policy rates, the fact that inflation has remained below the inflation-control target for over two years and a lower break-even inflation rate on the market.

The market break-even inflation rate fell below the CB's inflation target for the first time towards the end of the year. This occurred when yields on non-indexed bonds dropped considerably due to an unexpected 0.5 percentage point decrease in policy rates at the end of August. Another 0.25 point decrease in policy rates followed in December. The rate cut can be traced to extremely low inflation which is in turn caused by considerable appreciation of the ISK. The ISK has appreciated due to a great currency inflow driven by the growth in tourism and the increase in foreign investment in Iceland.

Long, non-indexed Treasury notes performed best in 2016, with RIKB 31 returning 13.7% and RIKB 25 11.9%.

Conversely, short, indexed Treasury notes yielded the worst results, with RIKS 21 returning 3.6% in 2016.

Bond issuance in 2016 totalled around ISK 180 bn. The State issued ISK 60 bn thereof and financial institutions around ISK 90 bn in covered bonds and bills.

Bond market

The FX market

The FX market saw a great inflow of foreign currency in 2016. The ISK appreciated against all major trading partner currencies, with the EUR falling by 16%, the USD by 13% and the GBP by 28%. The exchange rate index fell by 15.5%. The real exchange rate of the ISK based on relative price levels in December was 20% higher than in December 2015. Turnover in the FX market in 2016 totalled ISK 701 bn. Turnover increased considerably between years, up from ISK 492 bn in 2015.

The Central Bank made handsome currency purchases in 2016 to the total amount of ISK 386 bn, which represents 55% of turnover on the FX market. With these purchases, the Central Bank's gross foreign currency reserve had increased to ISK 806 bn at the end of November 2016. Less all foreign currency liabilities of the National Treasury and the Central Bank, non-leveraged foreign currency reserves amounted to ISK 559 bn.