Sparebanken Møre (UNDERPERFORM (Selg)) Too early to account for an improvement Set for a drop to NOK 255 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
Sparebanken Møre (MORG): company profile • Sparebanken Møre is the fifth-largest savings bank in Norway – The bank has around 400 employees • It is a typical Norwegian regional bank. It has 32 branches, 125, 000 customers and a strong position in northwestern Norway (Møre og Romsdal) – The bank has around a 35% share of lending and is the primary bank for 55% of the area’s population • Until 2001, Sparebanken Møre was allied to Gjensidige NOR Sparebank UBN (now part of Dn. B NOR). It distributed NOR’s savings products and had access to an international payment transaction and brokerage services – In 2001, it left the alliance, and is now running its business as an independent unit • Sparebanken Møre’s competitors include Nordea, Dn. B NOR, Sparebank 1 Midt-Norge (Romsdal Fellesbank), Fokus Bank and minor banks in the region Carnegie Securities Research 2
Sparebanken Møre: lending distribution Relatively high exposure to fishing Large household portion gives balanced risks Carnegie Securities Research 3
Summary: too early to account for an improvement • Although Sparebanken Møre has underperformed its peers significantly for a long time, it is still the most expensive PCC company in our universe, and we maintain our UNDERPERFORM rating • Sparebanken Møre is now trading at a 9 -10% premium to the other PCCs, and is set for a negative share price reaction – Target price of NOK 255 per share means investors should sell the stock • We expect the bank to report below-sector-average profitability and earnings growth in the future • In particular, this will be driven by vulnerability from declining interest margins – We believe it will take time before the bank can adapt to a much more competitive environment – A challenge to stay outside an alliance Carnegie Securities Research 4
MORG has been a long-term underperformer … MING Dn. B NOR MORG Carnegie Securities Research 5
… but is still priced at a solid premium to other PCCs Priced at an 8 -9% P/E premium to the PCCs in our universe Most solid dividend yield at 6. 7%, but is it sustainable? Should be set for a share price drop to NOK 255 Carnegie Securities Research 6
Has been yielding below-average ROE since 2003 MORG is in its own lower league also partly driven by a high tier 1 ratio Carnegie Securities Research We see no signs that the relative weakness will improve 7
Absolute and relative downside risk on margins Benefit from a stable competitive situation apparently up until 2003, with very high interest margins as a result Looking forward, a further closing of the margin gap represents a huge risk … … particularly as MING’s entrance represents an unstable competitive factor Carnegie Securities Research 8
Most vulnerable as has low ratio of other income When interest margins started to decline, commissions ratio began to increase … Carnegie Securities Research … but gap to other banks has actually increased We have not seen any credible plan to improve this situation 9
What happened to the C/I ratio? Has gone from best in class to average after interest margins started to fall significantly Carnegie Securities Research We expect a slight increase in productivity, in line with the sector average. However, the risk is that geographical and product expansion could hurt productivity in the short/medium term 10
Will report somewhat below-average profit growth Carnegie Securities Research 11
Sparebanken Møre: key figures Carnegie Securities Research 12
Why own a PCC at all when you become so diluted? Declining ratio of ownership No full ownership control 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 10 x? Carnegie Securities Research 13
Sparebanken Møre: SELL case risk factors • Lower than expected margin squeeze • Higher than expected lending volume growth • Lower than expected costs • Lower than expected loan losses Carnegie Securities Research 14
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