carnegie securities research please see disclosures on the back of this document. sparebank 1...

Carnegie Securities Research

Please see disclosures on the back of this document.

Sparebank 1 Midt-Norge (NEUTRAL (Kjøp))Above-average sector ROE at a discount valuation

Set for a revaluation up to NOK79 per share

6 September 2006

By Thomas Svendsen +47 22 00 93 54

Carnegie Securities Research 2

Sparebank 1 Midt-Norge (MING): company profile• Sparebank 1 Midt-Norge is the third-largest savings bank in Norway.

– The bank has around 900 employees.

• It is a typical Norwegian regional bank and the largest in Trøndelag (in the middle of Norway) and today has around 70 branches and some 190,000 customers.

– Through the acquisition of Romsdal Fellesbank it gained access to a distribution network of 10 branches in a new geographical area with a client base of 20,000.

• The bank has a 37-40% share of lending in Trøndelag and Romsdal.

• MING owns 19.5% of Sparebank 1 Group, which was established to secure the efficient production of financial services for regional member banks.

• Competitors include smaller savings banks, Fokus Bank (Danske Bank), DnB NOR and Nordea.


Sp. 1 Midt-Norge: lending distribution

Commercial real estate has grown recently

Sparebank 1 Midt-Norge - Lending distribution

Transport/Service4%

Households66%

Industry2%Other

1%

Commerce/Hotel4%

Primary Industries8%

Real Estate15%

Source: Carnegie Research

Large household portion gives balanced risks


Investment summary: attractive return at a discount• We have upgraded Sparebank 1 Midt-Norge to NEUTRAL (Kjøp)

after having rated it Underperform for quite some time.

• Sparebank 1 Midt-Norge is now trading at an 10-12% discount to the other PCCs, and should be set for a relative rebound

– Target price of NOK79 per share means you should buy into the stock

• We expect the bank to report above sector average profitability and earnings growth ahead

• This will be facilitated by what we consider to be a successful acquisition of Romsdal Fellesbank, utilisation of the Sparebank 1 alliance as well as firm cost control


MING has been a laggard recently …5 /9 /0 6

5 1 2 1 9 2 6 3 1 0 1 7 2 4 3 1 7 1 4 2 1 2 8 4JU N JU L A U G

8 8

9 0

9 2

9 4

9 6

9 8

1 00

1 02

1 04

1 06

1 08

D N B N O RSP A REBA N K E N MID T -N O RG ESP A REBA N K E N N O RD -N O RG E

SP A REBA N K E N RO G A LA N DSP A REBA N K E N MO RE

So u r ce: D A T A ST RE A M

DnB NORMORG

MING


… and is now priced at a solid discount to other PCCs

Priced at a 10-12% P/E discount to the PCCs in our universe

Should be set for a repricing up to NOK79

Dividend yield in line with sector at solid 6.1%

Relative valuation - Norwegian Banks

05-Sep-06 Adj. EPS P/E P/NAV RoNAV DPS DPS Yield MCap

Company Rating Price 2006e2007e2008e 2005 2006e 2007e 2008e 2005 2006e 2005 2006e 2005 2006 2006EURm

Sparebank 1 Midt-Norge Neutral 72.0 7.2 6.8 6.8 8.5 10.0 10.6 10.6 1.76 1.68 23.7% 16.8% 5.5 4.4 6.1% 3,636

Sparebank 1 Nord-Norge Neutral 131.0 11.2 10.6 10.3 9.5 11.7 12.2 12.6 1.80 1.77 20.1% 16.1% 10.0 8.0 6.1% 2,074

Sparebank 1 SR-Bank Underperform 180.0 16.4 14.9 14.8 8.4 11.0 12.1 12.2 1.98 1.94 24.5% 17.7% 14.0 10.0 5.6% 4,071

Sparebanken Møre Underperform 270.0 22.6 20.7 20.6 11.3 12.0 13.0 13.1 1.62 1.60 13.3% 12.1% 20.0 18.0 6.7% 1,492

Unweigthed average 9.5 11.2 12.0 12.1 1.79 1.75 20.4% 15.7% 6.1%



Has been yielding above-average ROE since 2004

Selected Norwegian Savings Banks - ROE

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1998 1999 2000 2001 2002 2003 2004 2005 2006e 2007e 2008e

Sparebank 1 SR-Bank Sparebank 1 Midt-Norge Sparebank 1 Nord-Norge

Sparebanken Møre Unweighted average


Selected Norwegian Savings Banks - ROE

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

21.0%

23.0%

25.0%

1998 1999 2000 2001 2002 2003 2004 2005 2006e 2007e 2008e

Sparebank 1 Midt-Norge Unweighted average


We expect it to compare relatively well also in the future


Commissions stabilised at upper end of sector range

Selected Banks - Net Commission Income of Net Interest Income

0%

10%

20%

30%

40%

50%

60%

1998 1999 2000 2001 2002 2003 2004 2005 2006e 2007e 2008e

DnB NOR Sparebank 1 SR-Bank Sparebank 1 Midt-Norge

Sparebank 1 Nord-Norge Sparebanken Møre Unweighted average


Selected Banks - Net Commission Income of Net Interest Income

0%

10%

20%

30%

40%

50%

60%

1998 1999 2000 2001 2002 2003 2004 2005 2006e 2007e 2008e



Has outpaced all peers in terms of commission ratio

Is very good at distributing savings products on its customer base

Romsdal Fellesbank had a corresponding ratio of 13% in 2004. Penetrating this customer base further represents upside potential for MING


Balanced risk on net interest margin

Selected Norwegian Banks - Net Interest Margins

1.50

1.70

1.90

2.10

2.30

2.50

2.70

2002

Q1(

03)

Q2(

03)

Q3(

03)

Q4(

03)

Q1(

04)

Q2(

04)

Q3(

04)

Q4(

04)

Q1(

05)

Q2(

05)

Q3(

05)

Q4(

05)

Q1(

06)

Q2(

06)

2006

e

2007

e

2008

e

%

Sparebank 1 Midt-Norge Sparebank 1 Nord-Norge Sparebank 1 SR-Bank

Sparebanken Møre Unweighted average DnB NOR*

Source: Carnegie Research*Estimated avg. assets banking group from Q1(06)

Selected Norwegian Banks - Net Interest Margins

1.50

1.70

1.90

2.10

2.30

2.50

2.70

2002

Q1(

03)

Q2(

03)

Q3(

03)

Q4(

03)

Q1(

04)

Q2(

04)

Q3(

04)

Q4(

04)

Q1(

05)

Q2(

05)

Q3(

05)

Q4(

05)

Q1(

06)

Q2(

06)

2006

e

2007

e

2008

e

%


Source: Carnegie Research*Estimated avg. assets banking group from Q1(06)

Margin squeeze in line with sector average

Competitive environment in region appears to be stable


Period of cost problems left behind a long time ago

Selected Norwegian Banks - Cost Income Ratio

40%

45%

50%

55%

60%

65%

70%

75%

1998 1999 2000 2001 2002 2003 2004 2005 2006e 2007e 2008e


Sparebank 1 Nord-Norge Sparebanken Møre Unweighted Average


Selected Norwegian Banks - Cost Income Ratio

40%

45%

50%

55%

60%

65%

70%

75%

1998 1999 2000 2001 2002 2003 2004 2005 2006e 2007e 2008e

Sparebank 1 Midt-Norge Unweighted Average


We expect a slight increase in productivity in line with the sector average.

Possible cost synergies in connection with Romsdal Fellesbank could represent further upside

Cost problem addressed long time ago


In total: will report above-average profit growth

Selected Banks - Pre-loss profit growth

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2004 2005 2006e 2007e 2008e


Sparebank 1 Nord-Norge Sparebanken Møre Unweighted average


Selected Banks - Pre loss profith growth

-4%

-2%

0%

2%

4%

6%

8%

2004 2005 2006e 2007e 2008e




Sparebank 1 Midt-Norge: key figures

Profit & loss 2004 2005 2006e 2007e 2008e

Net interest income 864 961 1,011 1,051 1,087

Net commission income 375 486 507 535 548

Total income 1,396 1,787 1,849 1,923 1,982

Total operating costs -729 -906 -993 -1,016 -1,032

Loan losses, net -81 38 -10 -55 -75

Operating profit 574 919 846 853 874

Net profit to shareholders 430 717 650 622 638

Key figures 2004 2005 2006e 2007e 2008e

Cost / Inc. bef. loan loss. 52.2% 50.7% 53.7% 52.8% 52.1%

Loan losses / lending. 0.25% -0.11% 0.02% 0.11% 0.14%

Balance sheet 2004 2005 2006e 2007e 2008e

Lending to the public 34,226 45,280 50,127 54,808 58,003

Total assets 38,612 54,326 56,950 61,497 65,171

Shareholders' equity 2,387 3,671 4,063 4,463 4,899

Capital adequacy 2004 2005 2006e 2007e 2008e

Risk weighted assets 25,562 35,152 37,017 39,973 42,361

Core capital (tier 1) 2,773 3,234 3,663 4,063 4,499

Per share data 2004 2005 2006e 2007e 2008e

EPS 5.7 8.4 7.2 6.8 6.8

EPS adj. 5.5 7.8 6.8 6.7 6.7

EPS adj. growth 83.9% 41.0% -13.2% -1.2% 0.5%

BVPS 34.7 40.8 42.9 45.2 47.9

BVPS ex. GW 34.7 40.8 42.9 45.2 47.9

NAVPS 34.7 40.8 42.9 45.2 47.9

DPS 4.00 5.5 4.40 4.00 4.00

Ratios 2004 2005 2006e 2007e 2008e

P/ E 12.5 8.5 10.0 10.6 10.6

P/ E adj. 13.0 9.2 10.6 10.8 10.7

P/ BV 2.08 1.76 1.68 1.59 1.50

P/ NAV 2.08 1.76 1.68 1.59 1.50

Dividend yield 5.6% 7.6% 6.1% 5.6% 5.6%

Profitability 2004 2005 2006e 2007e 2008e

ROE 18.7% 23.7% 16.8% 14.6% 13.6%

ROE adj. 18.7% 23.7% 16.8% 14.6% 13.6%

RONAV 18.0% 21.8% 15.7% 14.4% 13.4%

ROA 1.52% 1.98% 1.52% 1.44% 1.38%

RORWA 1.7% 2.4% 1.8% 1.6% 1.6%


But why own a PCC at all when you get so diluted?MING - PCC ratio at different ROE assuming pay-out ratio 60% (Illustrative)

0%

10%

20%

30%

40%

50%

60%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

10.0 % 12.5 % 15.0 % 17.5 % 20.0 %

22.5 % 25.0 %


Adjusted relative valuation - Nordic Banks

04-Sep-06 P/NAV RoNAV Yield

Company Currency Price 2006e 2007e 2008e 2006e 2007e 2008e 2006e 2006e 2006e Rating

Danske Bank DKK 222.5 20.48 21.71 22.34 10.9 10.2 10.0 1.92 18.5% 3.6% Neutral

DnB NOR NOK 81.0 7.85 7.96 8.01 10.3 10.2 10.1 1.83 18.7% 4.6% Neutral

FöreningsSparbanken SEK 208.5 19.48 20.23 20.86 10.7 10.3 10.0 2.43 24.5% 3.7% Neutral

Handelsbanken SEK 189.0 19.77 17.97 18.38 9.6 10.5 10.3 2.23 23.8% 4.0% Underperform

Nordea EUR 9.88 0.93 0.94 0.98 10.6 10.5 10.1 2.03 19.7% 4.4% Outperform

SEB SEK 187.5 15.49 16.17 17.06 12.1 11.6 11.0 2.43 21.4% 3.1% Outperform

Weighted average 10.7 10.5 10.2 2.11 20.7% 3.9%

*Nordea's share price in SEK is 91.5

* Adjusted for depreciation of immaterial assets (DB, FSPA and SHB) and extraordinary items Source: Carnegie Research

Adj. P/E Adjusted EPS*

Why pay up for a PCC when you can get Nordic large-cap banks with the right to all cash flow to infinity at a P/E of around 10x?

Declining ratio of ownership

No full ownership control


MING: main investment case risk factors

• Higher than expected margin squeeze

• Lower than expected lending volume growth

• Personnel costs getting out of control

• Higher than expected central bank interest rate hikes

• Higher than expected loan losses


The Carnegie GroupCarnegie is an independent Nordic investment bank operating in Securities, Investment Banking and Asset Management & Private Banking. Carnegie provides a wide array of financial products and services to Nordic and international clients from offices in eight countries: Sweden, Denmark, Norway, Finland, Luxembourg, Switzerland, the UK and the US. Carnegie Investment Banking is the leading independent corporate finance advisor in the Nordic countries. Carnegie Asset Management and Private Banking provide financial services including asset management for selected institutions and private investors. The Carnegie Group was listed on the Stockholm Bourse on 1 June 2001.

Rating and risk assessment structureCurrent rating system (as of 10 June 2003)Stock ratings: Carnegie stock ratings are relative to Carnegie´s coverage universe on a Nordic sector basis. Outperform (OP), the stock is expected to outperform the return on the Carnegie coverage universe of the Nordic Sector over the next six months.Neutral(N), the stock is expected to perform in line with the return on the Carnegie coverage universe of the Nordic Sector over the next six months.Underperform (U), the stock is expected to underperform the return on the Carnegie coverage universe of the Nordic Sector over the next six months.

Other ratings:Not rated (NR), the investment rating , if any, has been suspended temporarily.Under review (UR), the investment rating , if any, has been suspended temporarily.Under bid (UB), the investment rating , if any, has been suspended temporarily.

Sector view: Carnegie’s coverage universe on a Nordic sector basis is rated relative to the total Nordic market. Carnegie’s strategists in co-operation with the sector heads set the sector recommendation.

Positive, The sector is expected to outperform the return on the total Nordic market over the next 6 months.Neutral The sector is expected to perform in line the return on the total Nordic market over the next 6 months.Negative: The sector is expected to underperform the return on the total Nordic market over the next 6 months.

Risk assessment: The risk assessment is based on the analyst’s evaluation of the company’s equity beta based on the business risk (asset beta) and financial risk (gearing).Low risk: estimated equity beta <0.75; Medium risk: estimated equity beta 0.75 to 1.25; High risk: estimated equity beta >1.25.

Previous rating system: Strong Buy (SB), the stock is expected to provide a return of greater than 20% over the next 6 months. Buy(B), the stock is expected to provide a return of between 10% and 20% over the next 6 months. Accumulate(ACC), the stock is expected to provide a return of between 5% and 10% over the next six month. Reduce(R), the stock is expected to provide a return of between 0% and 5% over the next 6 months. Sell(S), the stock is expected to provide a return of less than 0% over the next 6 months.

Analyst CertificationThe research analyst or analysts responsible for the content of this report certify that, not withstanding the existence of any such potential conflicts of interests referred to herein, the views expressed in this report accurately reflect our personal views about the companies and securities covered. We further certify that we have not been, nor are or will be, receiving direct or indirect compensation related to the specific ratings or views contained in this report.


Potential conflict of interest:As of 1 February 2003, Carnegie analysts and any connected persons are not ordinarily permitted to hold securities in the companies they cover.

Other Carnegie ASA employees own 5000 shares in Acta Holding, 2500 in Aktiv Kapital, 250 shares in Imarex, 250 shares in Sparebank 1 Midt-Norge, 1,000 shares in Sparebanken Rogaland, 360 shares in Storebrand, and 0 shares in the other companies mentioned in this report. Carnegie ASA may also own shares in connection with

trading. This disclosure is made to meet Norwegian best practice.

As an integrated Nordic investment bank and asset management firm, Carnegie is a leading broker of Nordic stocks and has investment banking and other business relationships with a large number of the companies covered by its research department. Carnegie is constantly soliciting investment banking assignments. Therefore, any reader of this research report should assume that Carnegie is seeking or will seek investment banking or other business from the company or companies to which it refers. Thus, investors should assume that Carnegie expects to receive or intends to seek compensation from any company mentioned in this report within the next 3 months.

Disclaimer:Carnegie offers stockbroking, investment banking and asset management services through companies based in the Nordic territories (Sweden, Denmark, Finland and Norway), Luxembourg, Switzerland and New York. Each company is regulated by the appropriate authority in the relevant territory and details of each company are available on request. Carnegie UK is the UK Branch of Carnegie Investment Bank AB, a company incorporated in Sweden with limited liability. Carnegie UK is regulated by the UK Financial Services Authority for the conduct of designated investment business in the UK. This report has been approved for the purposes of Section 21 of the Financial Services and Markets Act 2000 by Carnegie UK and issued by it in the UK. This report is issued in the US by Carnegie, Inc., a US registered broker-dealer. This report is provided for informational purposes only and under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy any securities. The information in this report was obtained from various sources while all reasonable care has been taken to ensure that the information is true and not misleading, Carnegie does not guarantee its accuracy or completeness. Carnegie, its associated companies and any of their officers or directors may have a position, or otherwise be interested in, transactions in securities which are directly or indirectly the subject of this report. Carnegie, or its associated companies, may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any company mentioned in this report. This research report is prepared for general circulation and general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Past performance is not necessarily a guide to future performance. Carnegie and its associated companies accept no liability whatsoever for any direct or consequential loss arising from the use of this report or its contents. Investors in the US should be aware that investing in non US securities entails certain risks. The securities of non US issuers may not be registered with, nor be subject to, the current informational reporting and audit standards of the US Securities and Exchange Commission. This report may not be reproduced, distributed or published by any recipient for any purpose. Copyright© 2004 Carnegie.

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