Landsbankinn to Test Market with A+ Rated Covered Bond Offering

REYKJAVIK, ICELAND – January 13, 2026 – Landsbankinn, one of Iceland's leading financial institutions, is poised to tap the domestic capital market with an auction of non-indexed covered bonds scheduled for Wednesday, January 14. The offering of the LBANK CB 29 series comes at a pivotal moment for the Icelandic economy, serving as a barometer for investor sentiment in a landscape of shifting interest rates and persistent inflation.

The bonds, part of the bank's established EUR 2,500 million covered bond programme, carry a formidable A+ rating with a stable outlook from S&P Global Ratings. This high-grade assessment underscores the perceived security of the instruments and the underlying strength of the bank's financial position, offering a compelling proposition for investors seeking stable, low-risk assets.

The Bedrock of Investor Security: Understanding Covered Bonds

For investors navigating the complexities of fixed-income markets, covered bonds represent a unique and highly secured asset class. Unlike other forms of debt, they offer a "dual recourse" structure, a feature that provides two distinct layers of protection. Investors have a claim not only against the issuing bank itself but also a preferential claim on a specific, high-quality pool of collateral assets—typically residential mortgages—that remains on the bank's balance sheet.

This structure is governed by a robust legal framework, which in Iceland's case is overseen by the Financial Supervisory Authority (FME). The regulations ensure the collateral pool is dynamic; if any loans within the pool become non-performing, the issuer is obligated to replace them with performing assets, maintaining the quality and integrity of the security. This mechanism insulates bondholders from deteriorations in the underlying asset pool.

S&P Global Ratings has cited Iceland’s effective resolution regime as a key factor in its strong ratings for the country's covered bonds. The framework is designed to protect covered bondholders from being "bailed-in" during a potential bank resolution, meaning the bonds would likely continue to be serviced even if the bank faced severe financial distress. This preferential treatment and robust legal backing are primary reasons why covered bonds, like those offered by Landsbankinn, can achieve a credit rating several notches above the issuer's own corporate rating.

A Pillar of Landsbankinn's Strategic Funding

The upcoming auction is not an isolated event but a core component of Landsbankinn's deliberate and diversified funding strategy. The bank's funding model rests on three pillars: a substantial base of customer deposits, equity, and market funding. Covered bonds have been a consistent and reliable source of market funding for the institution since 2013, primarily used to finance its extensive mortgage portfolio and manage interest rate risk.

This consistent access to capital markets supports the bank's solid financial performance. In the first nine months of 2025, Landsbankinn reported an after-tax profit of ISK 29.5 billion, with its return on equity (ROE) rising to 12.2%. This built on a strong 2024, in which the bank posted profits of ISK 37.5 billion. By regularly issuing these highly-rated bonds, the bank secures long-term, cost-effective financing that fuels its lending capacity and contributes to its overall stability and growth within the Icelandic economy.

The LBANK CB 29 series, which is the subject of tomorrow's auction, already has a substantial ISK 49,340 million in circulation, indicating a deep and established market for the paper. The upcoming tap issuance will add to this total, with settlement expected on January 21, 2026.

A Test of Confidence in a Shifting Economic Climate

While the structural security of the bonds is clear, the auction's timing places it directly at the intersection of evolving macroeconomic trends in Iceland. The Central Bank of Iceland has been navigating a delicate balancing act, attempting to curb inflation while responding to signs of a slowing economy. In November 2025, its Monetary Policy Committee delivered a 25-basis-point cut to its key interest rate, lowering it to 7.25%—the fourth reduction of the year.

However, inflation, last measured near 4% in late 2025, remains stubbornly above the central bank's 2.5% target. This tension between moderating growth and persistent inflation creates a complex environment for fixed-income investors. The yield achieved in tomorrow's auction will provide a crucial data point, revealing the market's appetite for fixed-rate Icelandic debt and its expectations for future interest rate movements.

The A+ rating from S&P Global Ratings provides a significant anchor of confidence. This rating is two notches higher than Landsbankinn's issuer credit rating of BBB, an uplift made possible by the strength of Iceland's sovereign rating and its robust legal protections for covered bondholders. This premium rating signals to the market that even amid economic uncertainty, these specific instruments are considered exceptionally creditworthy.

Landsbankinn Capital Markets, which is managing the sale, will oversee the process. With established market makers including Arion banki, Islandsbanki, and Kvika ensuring secondary market liquidity, the outcome of the auction will be watched closely by analysts and investors alike as a signal of confidence not just in Landsbankinn, but in the broader Icelandic financial sector.