Time to reap synergies

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1 Time to reap synergies Fondsfinans Research Sparebank 1 Østfold-Akershus - 4Q14 Update Recommendation: BUY Target NOK February 2015 Prepared by Analyst: Geir Kristiansen, Fondsfinans AS, tel: , gk@fondsfinans.no This report was prepared by an analyst engaged by Fondsfinans AS, the Norwegian affiliate of Fondsfinans Inc., who is not registered as a research analyst with FINRA or subject to FINRA rules governing research. See page 8 of this report for Important Disclosure Information. 1

2 Deep value and earning growth INVESTMENT CASE SpareBank 1 Østfold-Akershus (SOAG) reported in line with expectations and our estimates are marginally increased. We recommend BUY with an unchanged NOK 180 target price. This values the ECC at P/B 1.0x Q14 in line - NII and net commissions in line - Marginally lower opex and loan losses - One-off (NOK -4m) and net financials (NOK -3m) Increased estimates - We have increased estimates by 2% in 2015 and 4% in Lower funding costs - Somewhat lower loan losses. Value case - Valued at 0.7x last reported book equity - Cost cutting will increase RoE 1,0 x book is fair - We expect dividend to increase in 2016; dividend yield up from 4% to 10% 2

3 Estimates marginally up due to higher NIM in 2016 and lower loan loss estimates ESTIMATES Deviation table Key figures (NOKm) Actual FF est. Cons. Dev. Net interest income % Other op.revenues % Total revenues % Total OPEX % Personnel expense % Pre-provision profit (PPP) % Loan losses % Pre-tax profit (PTP) % Tax expense % Net profit % EPS % Dividend % Source: Fondsfinans research, Bloomberg, company data Changes in estimates Estimate changes Curr. Prev. Curr. Prev. Change (%) NOKm 2015E 2015E 2016E 2016E 2015E 2016E Net interest income % 3.8 % Non-interest income % -0.9 % Total revenues % 1.4 % OPEX % 1.2 % Personnel expense % 1.1 % Pre-provision profit % 1.6 % Loan losses % -9.1 % Pre-tax profit (PTP) % 3.7 % Tax expense % 3.7 % Net profit % 3.7 % EPS (NOK) % 0.5 % Dividende % 0.6 % 3

4 A future yield case valued 30% below book VALUATION SHARE PRICE NOK Key figures Key figures (NOKm) E 2016E 3Q14 4Q14 Net interest income (NII) Other op.revenues Total operating revenues Operating costs Pre-provision profit (PPP) Loan losses Pre-tax profit (PTP) Taxes Net profit EPEC BPS DPS Net interest income 1.44 % 1.60 % 1.61 % 1.69 % 1.88 % 1.61 % 1.71 % Loan losses (%) 0.22 % 0.34 % 0.28 % 0.31 % 0.39 % 0.22 % 0.26 % Core equity capital ratio (CET 1) 12.5 % 13.1 % 15.6 % 1.6 % 2.7 % 16.2 % 15.6 % Yield 5.6 % 4.3 % 3.4 % 3.8 % 9.6 % P/E P/B ROE 9.4 % 10.1 % 11.4 % 10.6 % 12.3 % 17.5 % 9.3 % Source: Fondsfinans research 4

5 Full year and quarterly estimates ESTIMATES INCOME STATEMENT E 2016E 4Q14 1Q15E 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E Net interest income Net commission income Other income Total core income Total expenses Pre-provision profit (core items) Loan loss provision Pre-tax profit (core items) Total financial income Pre-tax profit Net profit (reported) Adjusted net profit EPEC (rep.) BALANCE SHEET E 2016E 4Q14 1Q15E 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E Net lending to customers Total assets Total equity KEY FIGURES E 2016E 4Q14 1Q15E 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E ROE % % % % 9.27 % % % % 9.50 % % % ROE (core banking) 6.85 % 5.97 % 6.04 % 7.84 % 9.86 % 8.70 % % 9.98 % 8.19 % 9.87 % % ROA 0.92 % 1.11 % 1.11 % 1.33 % 0.93 % 1.04 % 1.24 % 1.16 % 0.99 % 1.19 % 1.43 % RORWA 1.68 % 2.13 % 2.07 % 2.47 % 1.77 % 1.98 % 2.33 % 2.18 % 1.89 % 2.22 % 2.70 % RORWA (core banking) 1.54 % 1.47 % 1.69 % 2.15 % 1.86 % 1.69 % 2.09 % 1.96 % 1.64 % 1.98 % 2.46 % C/I 48 % 47 % 54 % 47 % 57 % 53 % 48 % 47 % 54 % 47 % 42 % C/I adj. 61 % 65 % 59 % 50 % 56 % 56 % 50 % 49 % 56 % 49 % 44 % Costs in % of total assets 1.84 % 1.94 % 1.78 % 1.64 % 1.88 % 1.82 % 1.78 % 1.65 % 1.87 % 1.69 % 1.63 % Loan loss ratio (gross loans) 0.34 % 0.28 % 0.31 % 0.39 % 0.26 % 0.28 % 0.30 % 0.32 % 0.34 % 0.36 % 0.38 % Net interest margin (normalised) 1.60 % 1.61 % 1.69 % 1.88 % 1.71 % 1.67 % 1.70 % 1.68 % 1.71 % 1.79 % 1.86 % Deposit-to-loan ratio Net Loans/Equity CET 1 ratio (transition rule) 13.1 % 15.6 % 1.6 % 2.7 % 15.6 % 0.4 % 0.8 % 1.2 % 1.6 % 1.8 % 2.1 % Tier 1 ratio (transition rule) 16.7 % 16.5 % 4.7 % 5.7 % 16.5 % 3.6 % 4.0 % 4.3 % 4.7 % 4.9 % 5.1 % Tier 2 ratio (transition rule) 16.7 % 16.5 % 4.7 % 5.7 % 16.5 % 3.6 % 4.0 % 4.3 % 4.7 % 4.9 % 5.1 % Source: Fondsfinans research 5

6 We rate SpareBank 1 Østfold-Akershus MEDIUM risk RISK ASSESSMENT Low oil price may trigger a recession and higher loan losses SpareBank 1 Østfold-Akershus has substantial exposure to real estate activities. Higher interest rates and/or lower activity level may trigger loan losses in this sector The ECC has low liquidity. A position may be difficult to liquidate in rough market conditions 6

7 Share information SPAREBANK 1 ØSTFOLD-AKERSHUS Share data Shareholders Share data Sector Banks Bloomberg SOAG NO Equity Risk rating Low Outstanding shares (million) 9.3 Market cap (NOK billion) 1.2 Total assets (NOK billion) 18.0 Net lending (NOK billion) 13.9 Free float 16 % Average volume (1000s last 12m) 1.4 High/low 52w 128.0/ 90.0 Weight PCC index 1.16 % Rel. Perf 3/6/12 4/ 22/ 18 Abs. Perf. 3/6/12 7/ 25/ 33 Source: Bloomberg, Fondsfinans research Major shareholders as of Ostfold Akersh Spare % 4,896 Halden Sparebank % 2,919 Ovidia Invest As 1.40 % 130 Broch Joergen Cato 1.40 % 130 Terra Fondsforvaltni 1.20 % 113 Pareto As 0.70 % 69 Harald Espedal As 0.50 % 47 Mp Pension 0.50 % 42 Wimoh Invest As 0.40 % 35 Merrill Lynch Prof C 0.30 % 31 Sole Invest As 0.30 % 30 Wikborg Tord Geir 0.30 % 28 Total number of EC shares % 9,288 7

8 Definitions of ratings Buy Low risk: with a potential of min 5%. Medium risk: with a potential of min 10%. High risk: with a potential of min 20%. Neutral Low risk: -5% to +5%. Medium risk: -10% to +10%. High risk: -20% to +20%. Sell Low risk: min 5%. Medium risk: min 10%. High risk: min 20%. Risk ratings are based on price volatility, fundamental criteria and perceived risk. Ratings are: Low (L), Medium (M) and High (H). Target: Our valuation as of today. Time frame of target: Target is what we value the share as of today. Recommendation distribution as of : Companies in each recommendation category that have been investment banking clients over the past 12 months: Recommendation No Percent Recommendation No Percent Buy % Buy 2 6 % Neutral % Neutral 1 8 % Sell 1 2 % Sell 0 0 % Total % Total 3 Our intention is to issue preview and update research on a quarterly basis. Our investment recommendation is elaborated in accordance with The Norwegian Securities Dealers Associations standards. This report has not been sent to the company for correction of any factual errors. Fondsfinans is organized with Chinese walls between the Corporate Department and the Research/Broking Department. In addition, Fondsfinans has internal instructions and guidelines for handling sensitive information. The analyst receives compensation that is impacted by overall firm profitability, including investment banking activities. Fondsfinans is under supervision of The Financial Supervisory Authority of Norway. The recommendation has not been changed from BUY. The previous recommendation was issued Ownership per in Sparebank 1 Østfold-Akershus: Analyst (including his/her closely related persons or companies): 0, corresponding to 0% of the company share capital Employees (including their respective closely related persons or companies): 1.000, corresponding to 0% of the company share capital Group Fondsfinans (including the holdings of its Chairman, his spouse and their closely related companies, Erik Must AS and its 100% controlled subsidiaries): 0, corresponding to 0.0% of the company share capital Fondsfinans may hold shares in Sparebank 1 Østefold-Akershus as result of daily trading/market making. Information on such holdings is not given when of non-significant value. Fondsfinans do not act as market maker in Sparebank 1 Østfold-Akerhus. Fondsfinans has not acted as corporate adviser, lead manager in IPO etc. during the past 12 months. 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