Transcript 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
Please see disclosures on the back of this document.
Carnegie Securities Research
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.
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Sp. 1 Midt-Norge: lending distribution
Commercial real estate
has grown recently
Sparebank 1 Midt-N orge - Lending distribution
Real Estate
15%
Primary Industries
8%
Large household portion
gives balanced risks
Households
66%
Transport/Service
4%
Commerce/Hotel
4%
Industry
2%
Other
1%
Source: Carnegie Research
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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 …
5/9/06
108
106
104
MORG
DnB NOR
102
100
98
MING
96
94
92
90
88
5
12
19
JUN
26
3
DNB NOR
SPAREBANKEN MIDT-NO RGE
SPAREBANKEN NORD-NO RGE
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17
JUL
24
31
7
14
21
AUG
28
4
SPAREBANKEN RO GALAND
SPAREBANKEN MORE
Sour ce: DATASTREAM
5
… and is now priced at a solid discount to other
PCCs
Relative valuation - N orwegian Banks
05-Sep-06
Adj. EPS
Company
Rating Price 2006e 2007e 2008e
P/E
P/N AV
2005 2006e 2007e 2008e
2005
RoN AV
2006e 2005 2006e
DPS DPS Yield MCap
2005 2006 2006 EURm
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
9.5
11.2
12.0
12.1
U nweigthed average
1.79
1.75
20.4% 15.7%
6.1%
Source: Carnegie Research
Priced at a 10-12% P/E
discount to the PCCs in
our universe
Dividend yield in line with
sector at solid 6.1%
Should be set for a
repricing up to NOK79
Carnegie Securities Research
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Has been yielding above-average ROE since 2004
Selected N orwegian Savings Banks - ROE
Selected N orwegian Savings Banks - ROE
25.0%
25.0%
23.0%
20.0%
21.0%
19.0%
15.0%
17.0%
15.0%
10.0%
13.0%
11.0%
5.0%
9.0%
0.0%
7.0%
1998
1999
2000
2001
2002
2003
2004
2005
2006e
2007e
2008e
-5.0%
5.0%
1998
Sparebank 1 SR-Bank
Sparebank 1 Midt-Norge
Sparebanken Møre
Unweighted average
Sparebank 1 Nord-Norge
Source: Carnegie Research
1999
2000
2001
Sparebank 1 Midt-Norge
2002
2003
2004
2005
2006e
2007e
2008e
Unweighted average
Source: Carnegie Research
We expect it to
compare relatively well
also in the future
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Commissions stabilised at upper end of sector range
Has outpaced all peers in
terms of commission ratio
Selected Banks - N et Commission Income of N et Interest Income
Selected Banks - N et Commission Income of N et Interest Income
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
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
1998
Source: Carnegie Research
Is very good at
distributing savings
products on its
customer base
Carnegie Securities Research
1999
2000
2001
Sparebank 1 Midt-Norge
2002
2003
2004
2005
2006e
2007e
2008e
Unweighted average
Source: Carnegie Research
Romsdal Fellesbank had a
corresponding ratio of 13% in
2004. Penetrating this
customer base further
represents upside potential
for MING
8
Balanced risk on net interest margin
Selected N orwegian Banks - N et Interest Margins
2.70
2.50
2.50
2.30
2.30
Sparebank 1 Midt-Norge
Sparebank 1 Nord-Norge
Sparebank 1 SR-Bank
Sparebanken Møre
Unweighted average
DnB NOR*
*Estimated avg. assets banking group from Q1(06)
Source: Carnegie Research
Sparebank 1 Midt-Norge
2008e
2007e
2006e
Q2(06)
Q1(06)
Q4(05)
Q3(05)
Q2(05)
Q1(05)
Q4(04)
Q3(04)
Q2(04)
Q1(04)
Q4(03)
2002
2008e
2007e
2006e
Q2(06)
Q1(06)
Q4(05)
Q3(05)
Q2(05)
Q1(05)
Q4(04)
Q3(04)
Q2(04)
1.50
Q1(04)
1.50
Q4(03)
1.70
Q3(03)
1.70
Q2(03)
1.90
Q1(03)
1.90
Q3(03)
2.10
Q2(03)
2.10
Q1(03)
%
2.70
2002
%
Selected N orwegian Banks - N et Interest Margins
Unweighted average
*Estimated avg. assets banking group from Q1(06)
Source: Carnegie Research
Margin squeeze in line with
sector average
Competitive environment in
region appears to be stable
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Period of cost problems left behind a long time ago
Cost problem addressed long
time ago
Selected N orwegian Banks - Cost Income Ratio
Selected N orwegian Banks - Cost Income Ratio
75%
75%
70%
70%
65%
65%
60%
60%
55%
55%
50%
50%
45%
45%
40%
40%
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
1998
1999
2000
2001
Sparebank 1 Midt-Norge
2002
2003
2004
2005
2006e
2007e
2008e
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
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In total: will report above-average profit growth
Selected Banks - Pre loss profith growth
Selected Banks - Pre-loss profit growth
8%
35%
30%
6%
25%
20%
4%
15%
10%
2%
5%
0%
0%
-5%
2004
2005
2006e
2007e
2004
2008e
2005
2006e
2007e
2008e
-2%
-10%
-15%
-4%
DnB NOR
Sparebank 1 SR-Bank
Sparebank 1 Midt-Norge
Sparebank 1 Nord-Norge
Sparebanken Møre
Unweighted average
Source: Carnegie Research
Carnegie Securities Research
Sparebank 1 Midt-Norge
Unweighted average
Source: Carnegie Research
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Sparebank 1 Midt-Norge: key figures
2004
2005
2006e
2007e
2008e
Net interest income
864
961
1,011
1,051
1,087
Net commission income
375
486
507
535
548
Profit & loss
Per share data
EPS
2004
2005
2006e
2007e
2008e
5.7
8.4
7.2
6.8
6.8
5.5
7.8
6.8
6.7
6.7
83.9%
41.0%
-13.2%
-1.2%
0.5%
BVPS
34.7
40.8
42.9
45.2
47.9
EPS adj.
EPS adj. growth
1,396
1,787
1,849
1,923
1,982
-729
-906
-993
-1,016
-1,032
Loan losses, net
-81
38
-10
-55
-75
BVPS ex. GW
34.7
40.8
42.9
45.2
47.9
Operating profit
574
919
846
853
874
NAVPS
34.7
40.8
42.9
45.2
47.9
Net profit to shareholders
430
717
650
622
638
DPS
4.00
5.5
4.40
4.00
4.00
Key figures
2004
2005
2006e
2007e
2008e
2004
2005
2006e
2007e
2008e
Cost / Inc. bef. loan loss.
52.2%
50.7%
53.7%
52.8%
52.1%
P/ E
12.5
8.5
10.0
10.6
10.6
Loan losses / lending.
0.25%
-0.11%
0.02%
0.11%
0.14%
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%
1.7%
2.4%
1.8%
1.6%
1.6%
Total income
Total operating costs
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
2,387
3,671
4,063
4,463
4,899
Balance sheet
Shareholders' equity
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
Carnegie Securities Research
Ratios
RORWA
12
But why own a PCC at all when you get so diluted?
MIN G - PCC ratio at different ROE assuming pay-out ratio 60% (Illustrative)
60%
50%
40%
Declining ratio of ownership
30%
No full ownership control
20%
10%
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?
0%
2006
2007
2008
2009
2010
2011
10.0 %
12.5 %
22.5 %
25.0 %
2012
2013
2014
2015
2016
15.0 %
2017
2018
17.5 %
2019
2020
20.0 %
Source: Carnegie Research
Adjusted relative valuation - N ordic Banks
04-Sep-06
P/N AV
RoN AV
Yield
Price
2006e
Adjusted EPS*
2007e
2008e
2006e
2007e
2008e
2006e
2006e
2006e
Rating
222.5
20.48
21.71
22.34
10.9
10.2
10.0
1.92
18.5%
3.6%
Neutral
7.96
8.01
10.3
10.2
10.1
1.83
18.7%
4.6%
Neutral
20.23
20.86
10.7
10.3
10.0
2.43
24.5%
3.7%
Neutral
18.38
9.6
10.5
10.3
2.23
23.8%
4.0% Underperform
0.98
10.6
10.5
10.1
2.03
19.7%
4.4%
Outperform
17.06
12.1
11.6
11.0
2.43
21.4%
3.1%
Outperform
10.7
10.5
10.2
2.11
20.7%
3.9%
Company
Currency
Danske Bank
DKK
DnB NOR
NOK
81.0
7.85
SEK
208.5
19.48
Handelsbanken
SEK
189.0
19.77
17.97
Nordea
EUR
9.88
0.93
0.94
SEB
SEK
187.5
15.49
16.17
FöreningsSparbanken
Adj. P/E
W eighted average
*Nordea's share price in SEK is
91.5
* Adjusted for depreciation of immaterial assets (DB, FSPA and SHB) and extraordinary items
Carnegie Securities Research
Source: Carnegie Research
13
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
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Rating and risk assessment structure
Current 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.
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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 Certification
The 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.
Carnegie Securities Research
15
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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