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.
Carnegie Securities Research 3
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
Carnegie Securities Research 4
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
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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
Carnegie Securities Research 6
… 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%
Source: Carnegie Research
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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
Source: Carnegie Research
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
Source: Carnegie Research
We expect it to compare relatively well also in the future
Carnegie Securities Research 8
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
Source: Carnegie Research
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
Sparebank 1 Midt-Norge Unweighted average
Source: Carnegie Research
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
Carnegie Securities Research 9
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
%
Sparebank 1 Midt-Norge Unweighted average
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
Carnegie Securities Research 10
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
DnB NOR Sparebank 1 SR-Bank Sparebank 1 Midt-Norge
Sparebank 1 Nord-Norge Sparebanken Møre Unweighted Average
Source: Carnegie Research
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
Source: Carnegie Research
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
Carnegie Securities Research 11
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
DnB NOR Sparebank 1 SR-Bank Sparebank 1 Midt-Norge
Sparebank 1 Nord-Norge Sparebanken Møre Unweighted average
Source: Carnegie Research
Selected Banks - Pre loss profith growth
-4%
-2%
0%
2%
4%
6%
8%
2004 2005 2006e 2007e 2008e
Sparebank 1 Midt-Norge Unweighted average
Source: Carnegie Research
Carnegie Securities Research 12
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%
Carnegie Securities Research 13
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 %
Source: Carnegie Research
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
Carnegie Securities Research 14
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
Carnegie Securities Research 15
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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.
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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.
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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.
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Carnegie Securities Research 16
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.
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