The Icelandic economic instability and currency volatility conjugated with the international financial turmoil may raise concerns about the northern country and the sustainability of its national banks.

“People have to understand that we are not an Icelandic bank but a northern European bank. Some 70 % of our profits are earned outside of -Iceland and this has diversified our activities,” says Magnus Gudmundsson, the CEO of Kaupthing Bank Luxembourg.

The businesses that Kaupthing Bank started to develop in Switzerland last January are part of this diversification strategy and may legitimatise those concerns.

Established as a subsidiary in 2001, the Geneva branch of Kaupthing Bank Luxembourg first operated as an asset management company, before applying for the Swiss banking licence. Since last January, the Icelandic institution in Geneva has been specialised in private banking and asset management for private and institutional clients. It also provides services in the selection of hedge fund managers and the construction of multi-manager hedge fund portfolios. “The new banking licence will allow Kaupthing’s customers to receive advice on tax matters or the administration of offshore companies and trusts combined with the services provided by Luxembourg,” explains Lars Schroeder, the newly appointed managing director. Born in Sweden, Mr Schroeder first joined Swedbank Stockholm, before taking over the CEO position of Swedbank Luxembourg in 2002. In September 2007, he joined Kaupthing Bank Luxembourg as head of business development.

Unlike its Belgian branch, the Icelandic group follows a global two-step strategy in Switzerland; first, by developing via a local company a private banking and/or asset management business, which addresses specific clientele. Then with the implementation of a retail activity, which targets the general public. Last 6 June, the bank launched Kaupthing Edge Switzerland, a local Internet savings service, which has already been implemented in nine other European continental countries. Here also, the proposed rates are above the one provided by the local competitors.

Swiss reactions

How will Kaupthing’s competitors react to this dual offensive strategy, in both the private banking sector and, more importantly, through the new Internet service? “I do not think that the Swiss private banking industry will react to the implementation of our new private banking structure. They will be more likely to react to the launch of Kaupthing Edge,” he predicts.

Concretely, until 1 September 2008, -Kaupthing Edge will serve savings accounts with an introductory 4 % annual interest on Swiss francs and 5 % on the euro, provided that customers permanently leave at least 1,000 Swiss francs, or 1,000 euros, respectively, in their accounts. This fee will then, from September to late December, become 3 % on the Swiss franc and 4.25 % on the euro. Beyond January 2009 until the end of 2011, the bank undertakes to paying savings at a rate equal to or greater than those offered by the Swiss National Bank or the European Central Bank.

The new entry of the Icelandic institution into the Swiss retail banking sector will certainly increase competition among banks to attract cash, local observers estimate.

Magnus Gudmundsson explains that the lack of competition in the segment might help the bank to develop the niche. “It is surprising how low the interest rates are in the sector. Switzerland has an enormous number of banks and you would have assumed that there would be much more competition in the market, but there is less than in any other one,” he told.

Will Kaupthing Bank – in general and in -Switzerland more particularly – be able to sustain such business and to serve these high interest rates? Lars Schroeder is confident: “During the past two years, we diversified our sources of funding. Previously, we were primarily focusing on the professional market. Today, we believe that our customers are sufficiently warned and master the Internet tool. The use of the Internet is not a problem any more. And therefore Kaupthing Bank opened in nine countries in Europe a network of Internet banks, which want to offer simple and competitive products,” he declares.

On Kaupthing’s new private banking activities in Switzerland, and on the new entity, which will count 14 people by the summer, he adds: “We are building private banking services dedicated to companies and entrepreneurs in a family office way. We bring a holistic approach to serve people who wish to sell off their company. It will take about ten years to achieve our growth goals, but a brand like Kaupthing Bank has the capacity to attract these people,” he says.