Nordic Banks - 4Q 2014 Preview Banks1.pdf · Nordic Banks - 4Q 2014 Preview • Interest rates down...

Sustainable dividend yield Nordic Banks - 4Q 2014 Preview

• Interest rates down 17-21bp in Norway and Sweden in 4Q

• CET1 capital target setting in 4Q likely but a non-event as banks are at est. targets

• TP up on all Swedish banks but Nordea and DNB remain our Nordic top picks

16.01.2015

Odd Weidel Nils Christian Øyen

Financial analyst Financial analyst

+47 24 14 74 81 +47 99 500 240

[email protected] [email protected]

mailto:[email protected]

mailto:[email protected]

Interest rates down in 4Q but margins flattish

16/01/2015 2

DNB top pick among Nordic Financials – NDA remain our Swedish favorite

Oil price shock in 4Q We believe investor focus will turn from fully valued Swedish names towards less demanding pricing of Norwegian banks which could double dividends over the next years. In 4Q we have seen (i) a 60% drop in oil price, (ii) Swedish politics in upheaval which have halted the proposed bank tax (iii) a drop in interest rates in Sweden and Norway of ~20bp (iv) SEKNOK parity. Despite all this the Nordics show continued stable development and hence our top pick are unchanged – DNB and NDA.

• Mild NII headwind

A 17-21bps drop in short term rates in 4Q vouch for increased pressure on NII as deposit margins suffer again. With continued subdued credit growth banks have increased attention to costs. We hike EPS as lower costs more than outweigh a slight margin pressure. Soft macro outlook in Finland and the sharp drop in oil price in 4Q are not visible in increased losses yet. We expect the Swedish banks to post an average 13.7% ROE in 4Q.

• New capital target at 4Q – likely a non-event

We believe the Swedish banks will set their CET1 capital targets in connection with the 4Q report. However according to the FSA the Swedish banks are 180bp above FSA requirement avg. However subdued growth and adequate capital make dividend payout ratios 60-75% sustainable. We estimate an average dividend yield in 2014 of 4.6%.

• Valuation fair - NDA is our top-pick among Swedish banks backed by valuation

We conduct small positive changes to our estimates, but reiterate our Neutral recommendations on SEB, Swedbank and Handelsbanken. Nordea has been gaining momentum in the corporate segment and we believe consensus underestimate the earnings potential. Nordea is trading at 14e P/TB 1.24x, and P/E 11.2x – 25% P/B discount vs. Swedish peer average.

Oil price shock in 4Q – EURNOK up 11%

16/01/2015 3

SB1M – Macroeconomic and operational overview

Noticeable macro events in 4Q:

• Drop in oil price from 115 to 45 $ per barrel (-60%) in 4Q - adverse macro in Norway in 2015 likely although GDP forecasts does not reflect so yet

• FX - Oil Shock for NOK and SEK rises to parity

• … but overall stable macro development in Nordics

Nordic banking outlookChange s ince 3Q14

World

Stable

Nordic GDP outlook

Sweden Finland Denmark Norway

Stable Negative Sl ightly pos i tive Sl ightly negative

Regulatory

Sweden Finland Denmark Norway

Stable Stable Stable Stable

NII Nordics

Volume Margins

Sl ightly negative Sl ightly negative

Other Nordics *

income Stable

* Fa irly volati l ie markets should imply above average Markets income.

Costs Sweden *

Sl ightly pos i tive

* No changes - Flat costs out 15. NDA 5% down in 15.

Loan losses Sweden Finland Denmark Norway

Sl ightly pos i tive Sl ightly negative Sl ightly pos i tive Sl ightly negative

Overview - Continued fragi le European recovery

Mac

roO

per

atio

nal

dev

elo

pm

ent

Norway 2015e only marginally down – lag effect?

16/01/2015 4

… and 2016e slightly up – surprising given the drop in oil price 2015 consensus GDP growth

Finnish double whammy – (i) Russian sanctions and (ii) “fall of Nokia”. Russian sanctions will have relatively little direct impact on overall European growth, but the effects on Finland and the Baltic countries are more noticeable.

Source: Bloomberg

2016 consensus GDP growth

… and Finnish 2015e GDP growth also trending down. Estimated 2016 GDP growth in Denmark up last 6 months. Also positive development in consensus GDP growth in Sweden and Norway. The latter is particularly positive given the sharp drop in oil price in 4Q14.

Source: Bloomberg

0,3

0,8

1,3

1,8

2,3

2,8

Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14

Sweden

Norway

Denmark

Finland

1,0

1,5

2,0

2,5

3,0

Jun 14 Aug 14 Oct 14 Dec 14

Sweden

Norway

Denmark

Finland

We still prefer DNB and NDA

16/01/2015 5

Limited potential in Norwegian insurers STB and GJF.

SpareBank1 Markets - Nordic Financials

SHB NDA SEB SWED DNB GJF STB

Share price today 353 87 93 182 102 123 28

Target price 380 105 100 190 130 122 28

Upside potentia l 8 % 21 % 8 % 5 % 27 % -1 % 0 %

Recommendation Neutral Buy Neutral Neutral Buy Neutral Sell

EPS 14E 22,12 0,77 6,82 11,70 7,72 3,16

Div 16,50 0,43 4,00 10,10 2,75 6,18 0,00

CET I (Basel I I) 12,8 %

CET I (Basel I I I) 18,9 % 14,8 % 15,0 % 18,3 %

Valuation

P/E 2014E 14,7x 11,1x 10,9x 11,8x 7,9x 15,9x 9,7x

P/B 2014E 1,84x 1,23x 1,52x 1,77x 1,08x 2,89x 0,68x

P/TB 2014E 1,97x 1,37x 1,74x 2,02x 1,08x 3,48x 0,85x

RoE 2014E 13,6 % 13,2 % 12,4 % 14,8 % 12,7 % 16,2 % 7,3 %

Valuation @ target

P/E 2014E 15,8x 13,4x 11,7x 12,4x 10,1x 15,8x 7,5x

P/B 2014E 2,0x 1,5x 1,6x 1,9x 1,4x 2,9x 0,5x

P/TB 2014E 2,1x 1,7x 1,9x 2,1x 1,4x 2,0x 0,7x

Nordic Banks Norwegian Insurers

16.01.2015 6

Swedish banks with 13.7% average ROE in 4Q (i) Handelsbanken could surprise on top-line growth in 2015 (ii) SEB 4Q boosted by Euroline gain (SEK 1900m)

Nordic BanksP&L (reporting currency) NDA SHB SEB SWED NDA SHB SEB SWED

Net interest income 1 467 7 163 5 264 6 016 5 593 27 524 20 197 22 849

Net commiss ions 695 2 139 3 850 2 844 2 774 8 467 15 603 11 166

Financia l instruments 390 393 2 650 560 1 448 1 906 5 228 2 477

Li fe 0 0 899 0 0 0 3 390 0

Other income 41 96 60 772 489 652 2 478 3 625

Total income 2 593 9 791 12 723 10 192 10 304 38 549 46 896 40 117

Staff costs -729 -3 009 -3 407 -2 493 -3 120 -11 749 -13 753 -10 300

Other costs -486 -1 547 -2 324 -1 712 -2 235 -5 582 -8 330 -7 214

Total costs -1 215 -4 556 -5 731 -4 205 -5 355 -17 331 -22 083 -17 514

Operating profit 1 378 5 234 6 992 5 987 4 949 21 217 24 813 22 603

Loan losses -254 -450 -413 -509 -659 -1 534 -1 427 -674

Net ga ins on long term assets 0 0 2 -19 0 0 -34 -243

Pretax profit 1 123 4 785 6 581 5 460 4 289 19 684 23 352 21 687

Tax -247 -1 015 -1 448 -1 201 -920 -4 201 -4 688 -4 502

Discontinued operations 0 17 0 -5 -39 92 0 -264

Minori ties 0 0 1 6 0 0 2 22

Net profit 876 3 787 5 132 4 247 3 330 15 575 18 662 16 898

Key operational ratios NDA SHB SEB SWED NDA SHB SEB SWED

EPS reported 0,22 5,85 2,34 3,85 0,82 24,06 8,52 15,33

ROE reported 11,7 % 12,4 % 15,6 % 15,2 % 11,4 % 13,5 % 14,9 % 15,2 %

Loan losses , % 0,28 % 0,02 % 0,12 % 0,04 % 0,21 % 0,07 % 0,09 % 0,05 %

CET1 (Basel I I) 15,5 % 20,4 % 16,5 % 21,0 % 15,5 % 20,4 % 16,5 % 21,0 %

CET1 (Basel I I I) 15,1 % 20,4 % 16,5 % 21,0 % 15,1 % 20,4 % 16,5 % 21,0 %

Key valuation ratios NDA SHB SEB SWED NDA SHB SEB SWED

Share price (SEK) 87,40 354,60 93,00 182,30 87,40 354,60 93,00 182,30

P/E 10,63 15,16 9,92 11,83 11,19 14,74 10,92 11,89

P/B 1,24 1,85 1,52 1,78 1,24 1,85 1,52 1,78

Dividend yield 4,1 % 3,6 % 4,8 % 5,8 %

4Q14e 2014e

Nordea first out 28th of January

16/01/2015 7

4Q 2014 - Financial calendar

Nordic Financials - Financial calendarInstitution 4Q14

NDA 28.01.2015

SEB 29.01.2015

Swed 03.02.2015

SHB 04.02.2015

DNB 05.02.2015

Storebrand 11.02.2015

Gjensidige 02.02.2015

Swedish banks at peak multiples

16/01/2015 8

Consensus data

Nordic BanksP/B P/E RoE

2014 2015 2016 2014 2015 2016 2014 2015 2016

DNB 1,19 1,10 1,03 9,07 8,97 8,77 13,1 % 12,2 % 11,7 %

Nordea 1,30 1,25 1,21 11,72 10,51 10,18 11,1 % 11,9 % 11,9 %

Danske 1,08 1,02 0,97 11,78 10,02 9,66 9,1 % 10,2 % 10,0 %

SEB 1,47 1,40 1,33 11,66 11,47 10,85 12,6 % 12,2 % 12,2 %

Swedbank 1,72 1,65 1,59 11,85 11,46 10,96 14,5 % 14,4 % 14,5 %

Handelsbanken 1,70 1,65 1,58 13,77 12,86 12,52 12,4 % 12,8 % 12,6 %

Average 1,41 1,34 1,28 11,64 10,88 10,49 12,1 % 12,3 % 12,2 %

Source: Factset

Nordic banks – 4Q 2014 Preview • Operational development Nordic Banks

• Valuation - DNB remain top pick among Nordics

Interest rates down in Norway and Sweden in 4Q

16/01/2015 10

Short term (3M) interbank rates – Nordic countries 3M interbank rate - Nordic countries

Interbank rates have been trending downwards last 20 years

Source: Reuters Datastream

3M interbank rate change in 4Q 2014

3M CIBOR and 3M HELIBOR have been flattish in 4Q but Norway and Sweden have seen a 17-21bp drop respectively.


0 %

1 %

2 %

3 %

4 %

5 %

6 %

7 %

8 %

9 %

10 %

jan. 95 jan. 98 jan. 01 jan. 04 jan. 07 jan. 10 jan. 13

Norway

Denmark

Sweden

Finland

0,02 %

-0,02 %

-0,17 %

-0,21 %

0%

0%

0%

0%

0%

0%

0%

Denmark Finland Norway Sweden

… but Swedish frontbook margins was flat in 4Q

16/01/2015 11

Avg. gross margin Swedish banks minus STIBOR

The

0,0

0,5

1,0

1,5

2,0

2,5

jun. 05 jun. 06 jun. 07 jun. 08 jun. 09 jun. 10 jun. 11 jun. 12 jun. 13 jun. 14

% Lending rate less STIBOR flat in

4Q


Lending volume – still subdued growth

16/01/2015 12

Corporate lending slightly up in Sweden to ~5% - YoY change in corporate lending

-15 %

-10 %

-5 %

0 %

5 %

10 %

15 %

20 %

25 %

30 %

35 %

Nov-04 May-06 Nov-07 May-09 Nov-10 May-12 Nov-13

%

Norway

Sweden

Finland

Denmark

Uptick in Sweden and

Denmark last couple of

months

Lending - Consensus expect 2.6%-4.3% in 2015

16/01/2015 13

Handelsbanken might surprise as consensus expectations are low given high UK growth Consensus lending growth

Consensus expect low growth in Nordea and high lending growth in Handelbanken. We est. 4% lending growth in Nordea due to (i) corporate exposure and (ii) Denmark and 3-3.5% lending growth in SEB and Swedbank.

Handelsbanken – UK growth likely to continue

Average lending growth in UK has been around 7% per quarter (~31% annualized). Consensus implied SHB growth (ex-UK) is low below 2% which indicate consensus could underestimate top-line growth in Handelsbanken also ahead.

3,4%3,5%

4,3%

2,6%

3,5%3,7%

3,9%

4,3%

2,6%

3,2%

0,0 %

0,5 %

1,0 %

1,5 %

2,0 %

2,5 %

3,0 %

3,5 %

4,0 %

4,5 %

5,0 %

Swed SEB SHB Nordea DNB

2015

2016

Freeform 12

Freeform 13

Freeform 14

Freeform 15

Freeform 16

Freeform 17

Freeform 18

Freeform 19

Freeform 20

Freeform 21

Freeform 22

Freeform 23

Freeform 24

Freeform 25

Freeform 26

Freeform 27

Freeform 28

Bankruptcies flat but Norway up YoY

16/01/2015 14

Remarkable flat development in Finland given the adverse macro

-

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

18 000

1990 1994 1998 2002 2006 2010 2014e

Denmark

Norway

Sweden

Finland

We expect on avg. higher losses than consensus

16/01/2015 15

Consensus loan loss expectations

0,09 %

0,11 %0,10 %

0,16 %

0,14 %

0,20 %

0,00%

0,05%

0,10%

0,15%

0,20%

0,25%

Swed SEB SHB Nordea Danske DNB

2014

2015

2016

SB1M est. vs. consensus

12-13bp in 2015

15-16bp in 2016

Hist. avg. = ~20bp

SB1M est. vs.

consensus

19bp in 2015

16bp in 2016

Hist. avg. = 17

SB1M est. vs.

consensus

11bp in 2015

12bp in 2016

Hist. avg. = 7

SB1M est. vs.

consensus

27bp in 2015

30bp in 2016

Hist. avg. = ~19

Dividend payout ratio sustainable

16/01/2015 16

… if (i) lending growth stays at projected levels (ii) unchanged capital targets

Han

80%

66%70%

75%

53%49%

20%

30%

40%

50%

60%

70%

80%

90%

Swed SEB SHB Nordea Danske DNB

Dividend pay-out ratio

2014

2015

2016

DNB towards normalization in

2016 and more likely to surprise

positively

Valuation • Operational development Nordic Banks

• Valuation - DNB remain top pick among Nordics • … despite oil price shock

16.01.2015 18

Swedish banks - The valuation cycle follows short term profitability …historical P/Tangible Book levels less meaningful as ROE and capital requirements have changed …but relationship between ROTE and P/TB still makes sense going forward

16.01.2015 19

The implied cost of equity is some 6-7% currently for Swedish banks …in-line with pre crisis averages, but risk premium higher as risk free rates are lower

16/01/2015 20

Price/Book: DNB and Norwegian savings banks still at a discount to Swedish …risk/reward skewed to the upside long term for Norwegian banks, but curbed by oil price short term

16/01/2015 21

Repricing of Swedish banks in 2014, oil price takes its toll on DNB …average P/B in DNB trends up long term, though

Nordic Financials - DNB and NDA top picks

16/01/2015 22

Current SB1M 14e vs. historical RoE – P/B relationship

DNB

SWEDSEB

SHB

NDA

0,5

1,0

1,5

2,0

2,5

3,0

9,00 11,00 13,00 15,00 17,00 19,00

P/B

RoE, %

16.01.2015 23

SHB trading at a 30% premium to own historical average P/E of 11.0X …DNB 10% below average ratio

Average P/E*

SHB: 11.0X SWED: 10.0X SEB: 10.3X DNB: 9.3X NDA: 10.3X *1997 - 2013

16.01.2015 24

DNB discount higher last months at some 30% …high by historical standards as well (zero discount pre financial crisis)

DNB trading below last 2 years trading band (P/E 8.5 – 10X) …explained by oil price slump

16/01/2015 25

Swedbank: 5.8% dividend yield

Mortgage re-pricing already over

We expect Swedbank to report another set of solid 4Q figures with EPS from continuing operations of SEK 4.2, and a ROE just above 15%. Swedbank is currently trading at P/TB 2.03 2014e and P/E 11.9x, which is high vs. peers, but we believe fair given strong underlying performance and SEK 16bn in cost target in 2016. We hike 15eEPS 7% and TP up SEK 8 to SEK 190.

• “Best-in-class” 14e ROE at 15.2%

We expect NII at SEK 6 016, up from SEK 5 829m in 3Q. Swedbank expresses a defensive attitude towards mortgage competition in the Swedish market and should benefit from backbook repricing of mortgage book. We believe in a slightly tougher retail competition in Sweden going forward particularly in attractive customer segments. We expect a net profit of SEK 4 247, implying a ROE of 15.2%, and EPS of SEK 3.85.

• CET1 capital target likely set between 19-21%

Swedbank is significantly better capitalized than e.g. Handelsbanken with the highest corporate risk weights among Swedish peers. We believe Swedbank will set a capital target (CET1) of 19-21% in connection with the 4Q report. However all Swedish banks are at their likely targets and we therefore believe the target setting will be a “non-event”.

• Investors focus on dividend yield – we estimate SEK 10.7 in 2014

In spite of an appealing dividend yield at 5.8%, we see the current valuation as rather stretched as the share is trading at 11.9x 2014e P/E and 1.78x BV. Swedbank is trading high versus peers, and at these levels we prefer Handelsbanken. We reiterate our neutral recommendation and but hike our TP to SEK 190 TP on lower costs.

16/01/2015 26

2014 4Q Preview

4Q14e ROE = 15.2%

16/01/2015 27

Swedbank - 4Q14 preview table

• CC SEKm 4Q13 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E

Net interest income 5 626 5 483 5 521 5 829 6 016 5 827 5 888

Net fee and commission income 2 699 2 693 2 813 2 816 2 844 2 873 2 901

Net financial income 461 345 773 799 560 575 600

Net other income 866 799 1 348 706 772 746 736

Total operating income 9 652 9 320 10 455 10 150 10 192 10 021 10 125

Staff costs -2 574 -2 437 -2 901 -2 469 -2 493 -2 481 -2 468

Other expenses -1 910 -1 789 -2 018 -1 695 -1 712 -1 706 -1 700

Total operating expenses -4 484 -4 226 -4 919 -4 164 -4 205 -4 187 -4 168

Profit before credit losses etc 5 168 5 094 5 536 5 986 5 987 5 834 5 957

Loan losses 32 100 -30 -235 -509 -411 -374

Gains/losses PPE and intang. -323 -135 -70 -19 -19 -19 -19

Operating profit 4 877 5 059 5 436 5 732 5 460 5 404 5 564

Income tax expense -1 212 -1 074 -1 063 -1 164 -1 201 -1 189 -1 224

Discontinued operations -48 -27 -230 -2 -5 0 0

Minorities 5 6 4 6 6 6 6

Net profit 3 612 3 952 4 139 4 560 4 247 4 209 4 334

ROE reported 13,4 % 14,9 % 15,8 % 16,7 % 15,2 % 14,9 % 15,2 %

ROE adjusted 12,3 % 13,9 % 15,4 % 15,8 % 14,7 % 14,4 % 14,7 %

EPS reported 3,28 3,59 3,75 4,14 3,85 3,82 3,93

EPS adjusted 3,00 3,34 3,67 3,93 3,74 3,70 3,81

Interest margin (adjusted) 1,20 % 1,15 % 1,12 % 1,15 % 1,18 % 1,13 % 1,13 %

Net loan loss ratio (annualised) 0,00 % -0,01 % 0,00 % 0,02 % 0,04 % 0,03 % 0,03 %

Core Tier 1 capital ratio (Basel III) 18,3 % 18,3 % 20,9 % 20,7 % 21,0 % 21,2 % 21,4 %

Swedbank (Neutral, SEK 190) – SEK16bn in costs in 16

16/01/2015 28

We hike EPS 7%, but find ROE close to a cyclical peak.

Valuation

Recommendation

• Valuation Swedish banks: Investors focus on dividend yield – we estimate SEK 10.7 in 2014 or 5.8%.

• Swedbank is trading high versus peers, at 11.9x 2014e P/E and 1.78x BV. At these levels we prefer Handelsbanken. We reiterate our neutral recommendation and but hike our TP to SEK 190 TP on lower costs.

Risk assessment

Upside risk:

• Retail banking division (Sweden) – track record & solid asset quality

• RoE track record and Baltic revival could hike profitability going forward

• EUR-entry Baltics -> lower risk

• Corporate segment initiatives

Downside risk:

• Exposure to Baltics

• Competitive landscape heating up in Sweden – SEB targets retail market

• Higher risk weights – double edged sword for Swedbank

• EUR-entry Baltics -> lower income (trading etc)

145

155

165

175

185

195

205

215

Theoretical Peers Consensus

Sb1M TP = 190

market = 182,3

Nordea: Adverse macro but few signs of trouble

Finnish macroeconomics and Russian sanctions likely to burden Nordea in 2015

Corporate credit growth in Denmark and Sweden has seen an uptick and we believe competition is less fierce in the corporate segment in Sweden as competitor SEB reports higher segment margin. We reiterate our Buy recommendation but hike target price to SEK 105 as the share trades at a 25% P/B discount vs. Swedish peers.

• Adverse Finnish macro not visible yet

Our NII estimate of EUR 1 418m in 4Q is slightly up from last quarters EUR 1 396m. Our positive stance on NII for Nordea is based on better-than-peers growth in the corporate segment however we expect the NOK depreciation to lower NII with an estimated EUR 13m. We expect few loan losses from the Finnish operations yet (20bp in 15e) and in total we forecast Nordea to post net profit of EUR 839m, which equals EPS of EUR 0.21 and ROE of 11.2%.

• CET1 capital target likely set between 15-16%

The divestment of Nets increased CET1 by 10-12bp in 3Q to 15%. We believe Nordea will set a capital target (CET1) of 15-16% in connection with the 4Q report. However all Swedish banks are at their likely targets and we therefore believe the target setting will be a “non-event”. The Swedish FSA has implemented a 25% floor on household risk weights, but Nordea will be the least of the Swedish banks of such a regulatory change.

• Still BUY

We expect the Markets division to perform above average as there certainly has been some volatility in the financials Markets in 4Q. The share is trading at 1.38x tangible book (2014E), and 11.2 2014E earnings, well below Swedish peers. We find the bank attractively priced, with a 20% upside potential to our SEK 105 target price.

16/01/2015 29

2014 4Q Preview

4Q14e EPS = 0.21 EUR

16/01/2015 30

Nordea - 4Q14 preview table

• CC EURm 4Q13 1Q14 2Q14 3Q14 4Q14E 1Q15E 2Q15E


Net fee and commission income 703 704 708 667 695 712 716


Net other income 43 24 24 400 41 29 38


Staff costs -739 -756 -907 -728 -729 -730 -731

Other expenses -544 -481 -480 -788 -486 -463 -452



Loan losses -180 -158 -135 -112 -254 -138 -125

Gains/losses PPE and intang. 0 0 0 0 0 0 0

Operating profit 1 006 1 106 934 1 126 1 075 1 353 1 410

Income tax expense -246 -266 -219 -188 -237 -298 -310

Net profit from continuing operations 0 0 0 0 0 0 0

Discontinued operations 1 0 0 0 0 0 0

Net profit 759 831 685 938 839 1 055 1 100

ROE reported 10,5 % 11,6 % 9,6 % 12,8 % 11,2 % 14,0 % 14,4 %

EPS reported 0,19 0,21 0,17 0,23 0,21 0,26 0,27


Net loan loss ratio (annualised) 0,21 % 0,18 % 0,16 % 0,13 % 0,28 % 0,15 % 0,13 %

Core Tier 1 capital ratio (Basel III) 14,8 % 14,6 % 15,2 % 15,0 % 15,1 % 15,0 % 15,3 %

Nordea (BUY, SEK 105) – Discount vs. peers

16/01/2015 31

Adverse Finnish macro

Valuation

Recommendation

• Too low consensus lending growth expectations in our view

• We expect the Markets division to perform above average as there certainly has been some volatility in the financials Markets in 4Q. The share is trading at 1.38x tangible book (2014E), and 11.2 2014E earnings, well below Swedish peers. We find the bank attractively priced, with a 20% upside potential to our SEK 105 target price.

Risk assessment

Upside risk:

• Nordea has gained market share in the corporate segment

• Growth in AuM - absolute and in relative terms

• CET1 (B3) - As shown in our recent sector report all Swedish banks will be compliant by 2015 even with 25% mortgage risk weights, but - among the Swedish banks - Nordea will be the least affected.

• Low lending growth expectations

Downside risk:

• Adverse macro in Finland

• Russian sanctions halting growth and loan losses in Baltics/Russia

• Competitive landscape corporate banking - Sweden

• Sampo might be interested in selling their 21.4% stake in NDA

86

96

106

116

126

136

146


Sb1M TP = 105

market = 87,4

Handelsbanken: Expensive growth story

Amazing track record and now growth story as well

We continue to have high hopes for the UK growth story in Handelsbanken, and especially so since the Nordic region face subdued lending growth. We expect low loan losses at a meager 2bp, unchanged vs. 3Q. SHB is trading at 1.80x 2014E tangible book and 13.4x 2014E earnings. Handelsbanken is priced at a justified premium and we believe the bank has limited upside potential. Our Neutral recommendation is reiterated and likewise our SEK 345 target price.

• NII further up

We expect NII at SEK 7 012m, up from SEK 6 704m in 2Q on continued strong NII development in UK and Norway. We also expect a slightly positive margin development in Sweden as mortgages have been re-priced to adjust for the regulatory changes. Other income should be decent as well but are of less importance vs. other peers. We expect an EPS of SEK 5.96 and a ROE of 13%. CET1 (B3) is seen at 20.5%.

• Consensus still underestimate UK potential

We find UK growth story appealing. With 7% quarterly lending growth and ~20bp in average loan losses UK now account for >10% of group NII income. Consensus implied SHB growth (ex-UK) is low at around 1.8% which indicate Handelsbanken might surprise positively on top-line growth in 2015.

• Trading at premium but buy on dips

SHB is trading at 1.80x 2014E tangible book and 13.4x 2014E earnings. Even though Handelsbanken is priced in the high brackets we see a minor upside potential. Neutral reiterated but TP hiked to SEK 380 (350).

16/01/2015 32

2014 4Q Preview

4Q14e EPS = 5.85 on continued UK growth

16/01/2015 33

Handelsbanken - 4Q14 preview table





Net other income 95 110 342 104 96 111 295


Staff costs -2 980 -2 887 -2 910 -2 943 -3 009 -2 908 -2 932

Other expenses -1 527 -1 359 -1 389 -1 287 -1 547 -1 381 -1 401



Loan losses -322 -315 -272 -497 -450 -455 -414

Gains/losses PPE and intang. 9 0 0 0 0 0 0


Income tax expense -966 -1 038 -1 074 -1 074 -1 015 -1 197 -1 273



Net profit 3 527 3 909 4 033 3 846 3 787 4 259 4 529

ROE reported 12,9 % 14,3 % 14,4 % 13,0 % 12,4 % 14,1 % 15,2 %

ROE adjusted 12,5 % 13,6 % 13,7 % 12,6 % 11,9 % 13,7 % 14,8 %

EPS reported 5,45 6,04 6,23 5,94 5,85 6,58 7,00

EPS adjusted 5,25 5,78 5,96 5,76 5,62 6,38 6,79



Core Tier 1 capital ratio (B3) 18,9 % 19,5 % 20,1 % 20,7 % 20,4 % 20,6 % 20,9 %

SHB (Neutral, SEK 380) – Unique track record

16/01/2015 34

… and now growth story. We believe consensus underestimate UK potential

Valuation

Recommendation

Pricey, but we see a minor upside potential due to the (i) track record and (ii) UK growth story.

SHB is trading at 1.80x 2014E tangible book and 13.4x 2014E earnings. Neutral reiterated but TP hiked to SEK 380 (350).

Risk assessment

Upside risk:

• Incredible 42 years track record … » Lower-than-peers funding costs

» Lower-than-peers loan losses – due to better customer selection

» Strategy, credibility & concept – “Branchism” & Oktogonen

• … and now the only bank with a credible growth story as well. Consensus implied SHB growth (ex-UK) low at ~1.8% indicating further potential for top-line growth.

Downside risk:

• Tighter regulatory regime in Sweden with higher corporate risk weights

• Competitive landscape heating up in Sweden

• Real estate exposure

284

304

324

344

364

384

404

424

444

464


Sb1M TP = 380

market = 354,6

SEB: 4Q up on Euroline sale - net gain SEK 1.9bn

Increased corporate lending should hike margin as well

However strong and vibrant Swedish businesses should support SEB overall going forward. We expect a net profit in 4Q of SEK 5 132m and EPS of SEK 2.34. We believe the share is fully valued, and reiterate our Neutral recommendation.

• Euroline stake sold with SEK 1.9bn in net gain - 4Q ROE at 15.6%

We expect NII at SEK 5 264m, up from SEK 5 172m in 3Q on increased corporate lending margins. We continue to expect the result to be driven by other income as SEB traditionally has a higher share of commission income vs. peers. Financial markets have been volatile in the quarter and hence trading related income should be above average. The estimated capital gain of SEK 1.9bn related to the sale of the Euroline position will hike CET1 by another ~25bp to 16.5%. Boosted by the sale we expect an adjusted EPS of SEK 2.34 and a ROE of 15.6% in 4Q.

• Below SEK 22.5bn in 15 cost target

SEB’s below SEK 22.5bn cost target was earlier this year prolonged to 2015. This is in line with other Swedish banks. We are at SEK 22.2bn in 15 implying a C/I ratio of 48.2%, which is in line with peers but well below historical levels seen in SEB. Swedbank’s 3Q report showed Swedish banks have more room to maneuver with regards to cost cutting (down 10% in 2016).

• Neutral recommendation reiterated – TP up SEK 6

Hampered by a less impressive growth in core earnings which is up a meager 30% since 1Q05, we reiterate our Neutral recommendation but hike our TP SEK 6 to SEK 100 on lower costs. We see the current valuation as rather stretched as the share is trading at 10.9x 2014e P/E and 1.52x P/BV with below business cycle loan losses.

16/01/2015 35

2014 4Q Preview

4Q14e EPS = 2.34 on Euroline gain

16/01/2015 36

SEB - 4Q14 preview table




Net financial income 1 186 1 079 845 654 2 650 833 841

Net other income 1 041 818 1 078 3 013 959 888 914


Staff costs -3 386 -3 461 -3 493 -3 392 -3 407 -3 406 -3 404

Other expenses -2 275 -1 877 -2 026 -2 103 -2 324 -1 967 -2 087



Loan losses -341 -258 -283 -473 -413 -416 -377

Gains/losses PPE and intang. -19 8 -24 -20 2 2 2


Income tax expense -793 -971 -1 077 -1 192 -1 448 -1 229 -1 255



Net profit 4 221 3 884 4 174 5 472 5 132 4 358 4 447

ROE reported 14,2 % 12,8 % 13,8 % 17,4 % 15,6 % 13,3 % 13,6 %

ROE adjusted 12,7 % 12,2 % 13,1 % 16,0 % 15,3 % 12,9 % 13,2 %

EPS reported 1,93 1,77 1,91 2,50 2,34 1,99 2,03

EPS adjusted 1,73 1,69 1,81 2,30 2,28 1,94 1,98



Core Tier 1 capital ratio (B3) 16,9 % 15,8 % 16,1 % 16,2 % 16,5 % 16,7 % 16,8 %

SEB (Neutral, SEK 100) – A bet on Swedish corporates

16/01/2015 37

… a segment which is showing resilience but adverse macro in Finland will affect in 15e

Valuation

Recommendation

We see the current valuation as rather stretched as the share is trading at 10.9x 2014e P/E and 1.52x P/BV with below business cycle loan losses. We find positive margin development in the corporate segment (lending up 3.9% qoq) to be out-weighed by a negative sentiment due to Russian uncertainty and Finland. Neutral recommendation and TP SEK 100.

Risk assessment

Upside risk:

• Nordic corporate franchise

• Swedish corporates resilient and now SEB reports higher margins

• “Below SEK 22.5bn” cost target prolonged to 2015

• Strategic initiatives towards retail segment (share of group income up 10% since 2007 to 30%)

Downside risk:

• A tougher regulatory regime in Sweden with higher corporate risk weights our prime concern.

• Competitive landscape heating up in Sweden – Nordea aggressive

• Exposure to Baltics (8% of group income) and negative sentiment in Finland could drag Swedish corporates down also

• Concentration risk (LBO and Swedish large cap.) and geographically towards mid and south-Sweden.

88

93

98

103

108

113

118

123


Sb1M TP = 100

market = 93

16.01.2015 38

DNB (Buy, NOK 130): Loss absorbing capacity high, valuation low Conclusion We find long-term risk/reward in DNB attractive as the share trades at P/B 1.0 on 2015 book values and downside risk in oil price should be more limited after a 60% drop. Loan loss absorption capacity has improved significantly since 2007 both measured on capitalisation and profit pre losses. Lower NIBOR rates and spread widening in the high yield market should reduce lending margin pressure both within household and corporate lending. A weaker NOK has a negative impact on CET 1, though, and reduces dividend capacity short term. Buy reiterated with a revised NOK 130 (137) share price target, which implies P/B 1.3 and P/E 11.5X our 2015E.

Reported EPS of NOK 3.18 expected in 4Q

• A lower oil price and weaker NOK will colour DNB’s 4Q report. Group loan loss provisions are expected to rise on higher credit risk, while a weaker NOK supports NII but acts as a drag on CET 1. The report should confirm that ROE of 11-12 is likely going forward, but dividend capacity is somewhat lower than assumed at the November CMD due to a weaker NOK.

Loss absorption capacity improved since 2007

• DNB’s ability to absorb loan losses through annual profits and capitalisation has increased since 2007 as CET 1 has increased from 6.7% to some 13% and profits pre losses as % of gross lending is improved from 1.3% to 2.1%. We thus believe DNb will weather the lower oil price in 2015.

Normalisation of dividend to support share – Buy/NOK 130 (137)

• A lower oil price has been a drag and DNB has underperformed Swedish peers by 12% last month. A lower oil price creates increases uncertainty for the Norwegian economy, but potentially higher loan losses will also lead to higher lending margins and loss absorption is improved since 2007. Long term risk reward is attractive and we reiterate our Buy recommendation with a NOK 130 (137) target which implies P/B 1.3 and P/E 11.5X our 2015E.

• .

DNB 4Q: Expecting reported EPS NOK 3.18 and adjusted at NOK 2.95 …main focus on credit quality and dividend outlook

16/01/2015 39

DNB, NOK m 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14E

Net interest income 6 857 7 480 7 915 7 940 7 691 7 867 8 228 8 410

Net commiss ions 1 694 1 896 1 899 1 899 2 185 2 241 2 230 2 161

Financia l instruments 1 064 1 363 1 263 1 342 2 089 1 132 1 817 1 753

Li fe insurance 220 231 205 366 105 182 136 141

Profi t from companies 74 70 99 118 107 35 41 112

Other income 630 742 649 594 392 497 336 370

Other operating income 3 682 4 302 4 116 4 319 4 878 4 087 4 560 4 537

Total income 10 539 11 782 12 031 12 259 12 569 11 954 12 788 12 946

Staff costs -2 639 -3 214 -2 776 -2 678 -2 710 -2 789 -2 752 -2 848

Other costs -2 846 -2 446 -2 447 -2 830 -2 482 -2 444 -2 409 -2 485

Total costs -5 485 -5 660 -5 223 -5 508 -5 192 -5 233 -5 161 -5 333

Operating profit 5 054 6 122 6 808 6 752 7 378 6 721 7 627 7 613

Loan losses -737 -937 -475 -36 -80 -554 -183 -793

Net ga ins assets 4 -9 2 153 0 -3 13 0

Pretax profits 4 321 5 176 6 335 6 869 7 298 6 164 7 457 6 820

Tax and minori ties -1 140 -1 386 -1 454 -1 221 -1 777 -1 510 -1 771 -1 636

Net profit 3 181 3 790 4 881 5 648 5 521 4 654 5 686 5 184

EPS reported 1.95 2.33 3.00 3.47 3.39 2.86 3.49 3.18

EPS adjusted 2.23 2.52 2.99 3.08 3.17 2.81 3.23 2.95

ROE reported 9.8 % 11.6 % 14.6 % 16.3 % 15.2 % 12.6 % 15.1 % 13.3 %

ROE adjusted 11.3 % 12.5 % 14.6 % 14.4 % 14.3 % 12.4 % 14.0 % 12.3 %

Interest margin 1.20% 1.31% 1.36% 1.35% 1.30% 1.32% 1.36% 1.39%

Loan losses 0.22% 0.28% 0.14% 0.01% 0.02% 0.16% 0.05% 0.23%

CET I (50% YTD profits) 10.6 % 10.8 % 11.0 % 11.8 % 11.9 % 12.1 % 12.6 % 12.9 %

Loss absorption capacity improved from 1.3% of lending in 2008 to 2.1% …significant loan loss buffer. CET 1 from 6% to 13% as well

16/01/2015 40

-0.5 %

0.0 %

0.5 %

1.0 %

1.5 %

2.0 %

2.5 %

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14E 15E 16E

DNB: Loss absorption capacity* and loan losses as % lending*Operating profit pre loan losses ex Vital

Operatingprofit preloan losses

Loan losses

Pre-loss profit profit 6% of lending in 3yrs

Significant buffer

Disclaimer IMPORTANT DISCLOSURES AND CERTIFICATIONS

This document provides additional disclosures and disclaimers relevant to research reports and other investment recommendations (“Recommendations”) issued by SpareBank 1 Markets AS (“SpareBank 1 Markets”), cf. the Norwegian Securities Trading Act section 3-10 with further regulations.

Standards and supervisory authorities

SpareBank 1 Markets complies with the standards for recommendations issued by the Norwegian Securities Dealers Association (http://vpff.no/) and the Norwegian Society of Financial Analysts. The lead analyst (see front page) is employed by SpareBank 1 Markets, which is legally responsible for this report and is under the supervision of The Financial Supervisory Authority of Norway (Finanstilsynet).

Previous Recommendations

For an overview of SpareBank 1 Markets research reports and other investment recommendations regarding the financial instruments of the issuer the past 12 months, including data on changes in such research reports and other investment recommendations, please see SpareBank 1 Markets’ website, www.sb1markets.no (log-in required)

Planned updates

Unless explicitly stated otherwise in this report, SpareBank 1 Markets expects, but not undertake, to issue updates to this report following the publication of new figures or forecasts by the issuer covered, or upon the occurrence of other events which could potentially have a material effect on it.

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Important sources of information: the issuer, including its quarterly and annual reports, Oslo Stock Exchange, Statistics Norway (Statistisk Sentralbyrå). Sources are cited when referred to in the Recommendation. We use only sources we find reliable and accurate, unless otherwise stated.

The Recommendations has not been presented to the issuer/ the issuers of the financial instrument presented before dissemination.

SpareBank 1 Markets’ interests and disclosure of assignments and mandates

Financial instruments held by the analyst(s) and/or close associate in the issuer/ issuers herein: 0 Other material interest (if any): None

SpareBank 1 Markets does not alone or together with related companies or persons, hold a portion of the shares exceeding 5 % of the total share capital in any companies where a recommendation has been produced or distributed by SpareBank 1 Markets, or holds other interest likely to affect the objectivity of a recommendation, except when disclosed, cf. below.

SpareBank 1 Markets may hold financial instruments in companies where a recommendation has been produced or distributed by SpareBank 1 Markets in connection with rendering investment services, including market making.

For important disclosures, such as an overview of all financial instruments in which SpareBank 1 Markets or related companies are market makers or liquidity providers, all financial instruments where SpareBank 1 Markets or related companies have been lead managers or co-lead managers over the previous 12 months, and all issuers of financial instruments to whom SpareBank 1 Markets or related companies have rendered investment banking services over the previous 12 months, please refer to SpareBank 1 Markets equity research website: www.sb1markets.no (login required) Please note that agreements and services subject to confidentiality are excluded.

16/01/2015 41

http://www.sb1markets.no/

http://www.sb1markets.no/

Disclaimer SpareBank 1 Markets Research Department

Our recommendations are based on a six-month horizon, and on absolute performance. We apply a three-stage recommendation structure where Buy indicates an expected annualized return of greater than +15%; Neutral, from 0% to +10%; Sell, less than 0%.

Current recommendations of the Research Department: (refers to Recommendations published prior to this report and required disclosed in accordance with the Securities Trading Regulations section 3-11 (4)

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SpareBank 1 Markets operates a system of “Chinese Walls” and other organizational procedures in order to control the flow of information within the firm and minimize conflicts of interest within SpareBank1 Markets and between clients. The Research Department is part of this system.

The Research Analysts of SpareBank 1 Markets receive salary and are members of the bonus pool. However no part of the analysts’ salaries or compensations relates to the performance of their recommendations, directly to investment banking services or other services provided by SpareBank 1 Markets or related companies to issuers.

Analyst Certification

The views expressed in this research accurately reflect(s) the personal views of the analyst(s) principally responsible for this report about the subject securities or issuers, and no part of the compensation of such analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. No part of the compensation of the research analyst(s) responsible for the preparation of this report was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst(s) in this report.

Risks

Generally, investments in financial instruments involve risks. For specific risks related to our various recommendations, please see the latest relevant reports. The target prices on companies in the SpareBank 1 Markets Research universe reflect the subjective view of the analyst about the absolute price that financial instruments should trade at, within our six-month recommendation horizon. The target price is based on an absolute valuation approach, which is detailed in our research reports. The target price can differ from the absolute valuation, in accordance with the analyst's subjective view on the trading or cyclical patterns for a particular financial instrument, or a possible discount/premium to reflect factors such as market capitalization, ownership structure and/or changes in the same, and company-specific issues.

This report or summary has been prepared by SpareBank 1 Markets from information obtained from public sources not all of which are controlled by SpareBank 1 Markets. Such information is believed to be reliable and although it has not been independently verified, SpareBank 1 Markets has taken all reasonable care to ensure that the information is true and not misleading. Notwithstanding such reasonable efforts, SpareBank 1 Markets makes no guarantee, representation or warranty as to its accuracy or completeness.

SpareBank 1 Markets assumes no obligation to update the information contained in this report or summary to the extent that it is subsequently determined to be false or inaccurate.

This document contains certain forward-looking statements relating to the business, financial performance and results of the issuer and/or the industry in which it operates. Forward-looking statements concern future circumstances and results and other statements that are not historical facts, sometimes identified by the words “believes”, expects”, “predicts”, “intends”, “projects”, “plans”, “estimates”, “aims”, “foresees”, “anticipates”, “targets”, and similar expressions. The forward-looking statements contained in this document, including assumptions, opinions and views of the issuer or cited from third party sources are solely opinions and forecasts which are subject to risks, uncertainties and other factors that may cause actual events to differ materially from any anticipated development.

16/01/2015 42

Disclaimer No Solicitation

This report or summary 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. This report or summary is prepared for general circulation and general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any person who may receive this report or summary. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report or summary and should understand that statements regarding future prospects may not be realized.

Performance in the past is not a guide to future performance. SpareBank 1 Markets accepts no liability whatsoever for any direct or consequential loss arising from the use of this publication or its contents.

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If this report is being furnished directly to U.S. recipients by a non-U.S. SpareBank 1 Markets entity in reliance on section (a)(2) of Rule 15a-6 under the U.S. Securities Exchange Act of 1934, as amended (each a “direct U.S. recipient”), each such direct U.S. recipient of this report represents and agrees, by virtue of its acceptance thereof, that it is “major U.S. institutional investor” (as such term is defined in section (b)(4) of Rule 15a-6) and that it understands the risks involved in executing transactions in such securities. Any direct U.S. recipient of this report that wishes to discuss or receive additional information regarding any security or issuer mentioned herein, or engage in any transaction to purchase or sell or solicit or offer the purchase or sale of such securities, should contact a registered representative of SpareBank 1 Capital Markets Inc. (“SpareBank 1 Capital Markets”), a registered U.S. broker-dealer and member of FINRA and SIPC.

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16/01/2015 43

Disclaimer Any transaction in the securities discussed in this report by U.S. persons (other than a registered U.S. broker-dealer or bank acting in a broker-dealer capacity) must be effected with or through SpareBank 1 Capital Markets.

The securities referred to in this report may not be registered under the U.S. Securities Act of 1933, as amended, and the issuer of such securities may not be subject to U.S. reporting and/or other requirements. Available information regarding the issuers of such securities may be limited, and such issuers may not be subject to the same auditing and reporting standards as U.S. issuers.

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The information in this publication is based on carefully selected sources believed to be reliable, but SpareBank 1 Capital Markets does not make any representation with respect to its completeness or accuracy. All opinions expressed herein reflect the author’s judgment at the original time of publication, without regard to the date on which you may receive such information, and are subject to change without notice.

The information contained herein may include forward-looking statements as described above within the meaning of U.S. federal securities laws that are subject to risks and uncertainties. Factors that could cause a company’s actual results and financial condition to differ from expectations include, without limitation: political uncertainty, changes in general economic conditions that adversely affect the level of demand for the company’s products or services, changes in foreign exchange markets, changes in international and domestic financial markets and in the competitive environment, and other factors relating to the foregoing. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement.

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