(SADG) BUY Initial Coverage Share Price: NOK 77.0 25 September 2013 Target Price: NOK 106.0 Share data Sector Banks Bloomberg SADG NO Equity Risk rating Low Outstanding shares (million) 7.1 Market cap (NOK billion) 0.5 Total assets (NOK billion) 29.1 Net lending (NOK billion) 23.1 Free float 86 % Average volume (1000s last 12m) 0.0 High/low 52w 86.7 / 60.0 Weight PCC index 3.24 % Rel. Perf 3/6/12-8/ -14/ 13 Abs. Perf. 3/6/12-1/ -7/ 27 P/B ratio of SADG compared to DNB 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 P/B ratio of SADG versus DNB 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13E 2Q14E SADG DNB Peer comparison of return versus pricing P/B actual 1.20 1.00 0.80 0.60 0.40 0.20 Peer comparison of ROE, P/B and dividend yield 0.00 0.0 % 5.0 % 10.0 % 15.0 % 20.0 % ROE by end 2Q13 (ann.) SADG HELG PLUG RING SBVG SOAG SPOG TOTG Attractive bank with high EPS growth and dividend yield and low probability of new equity issue We initiate coverage and set our target price at NOK 106. Our Dividend Discount Model (DDM) gives a fair value of NOK 106 per EC share, the same fair value we get from our P/B perpetual growth model. Earnings per Equity Certificate (EPEC) are expected to grow by 8.4% in 2013 and 8.4% next year. Main driver is re-pricing of lending rates, cost focus capping OPEX growth and low loan losses. Net interest margin is expected at 1.56% current year, 1.57% next year and 1.61% in 2015. Main driver for the increase is the communicated re-price of mortgage rates by 25bps and corporate portfolio by around 30bps. Negative deposit margins are expected to improve, although at a marginal pace ahead. OPEX has shown a positive trend for several quarters, mainly due to cost focus and reduction of employees. Number of full time positions is reduced from 190 in 2Q11 to 176 by 2Q13. Current CEO, Svein Ivar Førland, started back in 2010 and the bank changed course in 2011 towards more cost efficient operations and focus on profitability instead of growth. Loan loss impairment in 2Q13 was 0.08% (ann.) of gross lending portfolio, which is low both in relative and absolute terms. We expect loan losses higher ahead for the sector, mainly due to normalising growth for the Norwegian economy. The CET 1 ratio was 11.0% including 50% of accumulated YTD profit by end 2Q13. Given our assumptions and a cc-buffer introduced below 2% (consensus), the bank will be compliant with expected regulatory requirements every quarter up to 4Q15 (our modelling period). Hence they will not need external equity capital, and they could if needed adjust lending growth lower and also reduce dividend if regulatory requirements are introduced at a higher than expected level. Prepared by analyst: Christian Berner Fondsfinans ASA TEL: +47 23 11 30 11 cb@fondsfinans.no Key figures (NOKm) 2011 2012 2013E 2014E 2015E 2Q13 3Q13E Net interest income (NII) 344 359 441 472 505 111 116 Other op.revenues 115 163 103 117 120 22 29 Pre-provision profit (PPP) 115 199 237 286 317 58 68 Loan losses -4-6 -19-22 -28-5 -4 Pre-tax profit (PTP) 111 193 218 264 289 53 64 EPEC 6.3 12.0 12.9 15.5 17.0 3.2 3.8 DPS 2.5 3.0 4.9 5.9 6.5 Net interest income 1.28 % 1.32 % 1.55 % 1.57 % 1.61 % 1.55 % 1.57 % Loan losses (%) 0.02 % 0.02 % 0.08 % 0.09 % 0.11 % 0.08 % 0.07 % Core equity capital ratio (CET 1) 9.9 % 11.0 % 11.7 % 11.9 % 12.3 % 11.0 % 11.1 % Yield 3.0 % 5.0 % 6.0 % 7.9 % 8.6 % P/E 8.5 5.0 6.4 4.9 4.5 P/B 0.60 0.39 0.51 0.43 0.41 ROE 4.5 % 8.1 % 8.1 % 9.1 % 9.3 % Source: / FF research FONDSFINANS ASA, HAAKON VII S GATE 2, P.O.BOX 1782 VIKA, NO-0122 OSLO, TEL: +47 23 11 30 00, FAX: +47 23 11 30 03, mail@fondsfinans.no This report was prepared by an analyst employed by Fondsfinans ASA, 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 4 of this report for Important Disclosure Information.
(SADG) - Initial Coverage Higher net interest margin on re-pricing of loan portfolio NOKm Expected net interest margin and net interest income % 140 1.80% 1.55 % 1.57 %1.57 %1.56 %1.56 % 1.45 % 1.60% 120 1.42 % 1.34 %1.33 % 1.35 % 1.30 % 1.32 % 1.40% 1.21 % 100 1.20% 80 60 40 20 0 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Still some upside potential to peers on margin level NIM 2.5 % 2.0 % 1.5 % 1.0 % 0.5 % 1.55% 1.73% 1.38% Net interest margin - peers 1.62% 1.38% 1.54% 2.30% 1.88% Net interest income Net interest margin 0.0 % 2Q12 2Q13 Cost level trending down on management profitability focus Still potential for cost improvement C/I (%) - peers C/I NOKm Long term trend cost level % 70% 120 100 80 89 83 84 86 73 78 86 81 75 80% 70% 60% 50% 60% 50% 40% 56.1 % 44.7 % 37.4 % 50.1 % 52.7 % 55.4 % 35.8 % 47.3 % 60 40% 30% 40 20 0 30% 20% 10% 0% 20% 10% 0% OPEX C/I (12m rolling average) 2Q12 2Q13 Loan losses low both in relative and absolute terms Loan loss provision in % of average gross loans - peers LLP 0.50% 0.46% 0.40% 0.30% 0.30% 0.26% 0.19% 0.20% 0.14% 0.12% 0.08% 0.10% 0.03% 0.00% -0.10% -0.20% -0.30% CET 1 ratio in lower peer range, but expected to be compliant due to moderate lending growth CET 1 ratio - peers CET 1 ratio 18.0 % 16.0 % 15.4 % 14.0 % 12.1 % 11.9 % 12.3 % 12.0 % 11.0 % 11.3 % 11.2 % 11.1 % 10.0 % 8.0 % 6.0 % 4.0 % 2.0 % 0.0 % 2Q12 2Q13 2Q13 Page 2 25 September 2013 Fondsfinans Research
(SADG) - Initial Coverage Risk assessment Retail share in lending portfolio of 66.5% could result in higher losses if mortgage prices fell sharply. The bank is situated in a region in Norway characterized by high growth driven by oil and oil related companies, and with a major drop in the oil price the companies situated in Stavanger/Sandnes could impose large losses on the bank. Low international interest rate environment pushes the Norwegian currency higher and could impose losses on exporters struggling to sell goods/services. Fondsfinans Research 25 September 2013 Page 3
(SADG) - Initial Coverage 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 15%. Neutral Low risk: -5% to +5%. Medium risk: -10% to +10%. High risk: -15% to +15%. Sell Low risk: min 5%. Medium risk: min 10%. High risk: min 15%. 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 02.09.13: Companies in each recommendation category that have been investment banking clients over the past 12 months: Recommendation No Percent Recommendation No Percent Buy 33 65 % Buy 3 9 % Neutral 17 33 % Neutral 1 6 % Sell 1 2 % Sell 0 0 % Total 51 100 % Total 4 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. 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. Ownership per 25.09.13 in : 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): 0, 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% of the company share capital Fondsfinans may hold shares in as a result of daily trading/market making. Information on such holdings is not given when of non-significant value. Fondsfinans acts as market maker in. This report was issued and distributed 25.09.13. DISCLAIMER This report is provided for information purposes only. It should not be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Any opinions expressed are subject to change without prior notice. 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The research reports are intended for distribution in the United States solely to major U.S. institutional investors as defined in Rule 15a-6 under the United States Securities Exchange Act of 1934, as amended and may not be furnished to any other person in the United States. Each major U.S. institutional investor that receives a copy of a Fondsfinans ASA research report by its acceptance thereof represents and agrees that it shall not distribute or provide copies to any other person. Reports are prepared by Fondsfinans ASA and distributed to major U.S. institutional investors under Rule 15a-6(a)(2). These research reports are prepared by Fondsfinans ASA and distributed in the United States by Fondsfinans Inc. under Rule 15a-6(a)(2). Any U.S. Person receiving these reports that desires to effect transactions in any securities discussed within the report should call or write Fondsfinans Inc., a member of FINRA. Page 4 25 September 2013 Fondsfinans Research
(SADG) - Initial Coverage Change YoY (%) Key figures 2011 2012 2013E 2014E 2015E 2012-13 2013-14 ROE 4.5 % 8.1 % 8.1 % 9.1 % 9.3 % 0.1 % 12.2 % ROE (core banking) 2.8 % 4.4 % 7.1 % 7.6 % 8.0 % 62.4 % 7.4 % ROA 0.29 % 0.55 % 0.56 % 0.64 % 0.68 % 2.2 % 14.0 % RORWA 0.46 % 0.90 % 0.93 % 1.08 % 1.14 % 3.8 % 15.9 % RORWA (core banking) 0.35 % 0.57 % 0.91 % 1.03 % 1.11 % 60.4 % 12.9 % C/I 50.3 % 53.0 % 47.6 % 48.9 % 47.6 % -10.3 % 2.8 % C/I adj. 80.2 % 71.2 % 58.5 % 54.3 % 51.8 % -17.7 % -7.2 % Costs in % of total assets 1.28 % 1.19 % 1.08 % 1.01 % 0.98 % -9.9 % -6.4 % Loan loss ratio (gross loans) 0.02 % 0.02 % 0.08 % 0.09 % 0.11 % 222.9 % 13.5 % Net interest margin (norm.) 1.28 % 1.32 % 1.55 % 1.57 % 1.61 % 17.0 % 1.2 % Change QoQ (%) Key figures 4Q12 1Q13 2Q13 3Q13E 4Q13E 1Q - 2Q13 2Q - 3Q13 ROE 14.0 % 5.4 % 8.2 % 9.4 % 9.2 % 50.4 % 15.4 % ROE (core banking) 9.9 % 4.6 % 8.5 % 8.0 % 7.8 % 85.7 % -5.7 % ROA 0.95 % 0.38 % 0.56 % 0.64 % 0.63 % 47.1 % 14.8 % RORWA 1.57 % 0.62 % 0.94 % 1.08 % 1.08 % 51.7 % 15.3 % RORWA (core banking) 1.13 % 0.52 % 0.97 % 0.93 % 0.92 % 86.1 % -4.4 % C/I 52.3 % 66.4 % 56.1 % 52.6 % 52.2 % -15.4 % -6.2 % C/I adj. 59.2 % 68.7 % 55.5 % 55.4 % 55.0 % -19.2 % -0.2 % Costs in % of total assets 1.25 % 1.16 % 1.03 % 1.04 % 1.03 % -10.6 % 0.6 % Loan loss ratio (gross loans) 0.03 % 0.08 % 0.08 % 0.07 % 0.08 % -1.5 % -16.3 % Net interest margin (norm.) 1.45 % 1.42 % 1.55 % 1.57 % 1.57 % 9.3 % 1.6 % Fondsfinans Research 25 September 2013 Page 5
(SADG) - Initial Coverage Change YoY (%) P&L (NOKm) 2011 2012 2013E 2014E 2015E 2012-13 2013-14 Net interest income 344 359 441 472 505 23.1 % 7.0 % Net commission income 55 55 58 59 60 5.4 % 2.3 % Other income 29 41 26 28 28-36.8 % 9.1 % Core net income 428 454 525 559 593 15.6 % 6.6 % Personnel expense -158-143 -139-139 -141-3.4 % 0.2 % Administrative expense -80-73 -77-78 -79 5.9 % 1.0 % Depreciation -17-18 -16-12 -13-10.4 % -24.1 % Other operating expense -88-89 -76-75 -75-15.0 % -0.7 % Total operating expense -344-323 -307-304 -308-4.9 % -1.1 % Core income pre LLP 85 131 218 256 286 66.2 % 17.4 % Loan loss provision -4-6 -19-22 -28 237.9 % 17.9 % Core operating profit 81 125 199 233 258 58.6 % 17.4 % Dividends 1 1 1 1 1 8.3 % 0.0 % Income from ass. comp. 18 18 1 0 0-92.3 % -100.0 % Capital gains/loss. on fin. ass. 12 49 17 30 31-65.2 % 73.5 % Net financial income 31 68 19 30 32-71.7 % 58.3 % Pre-tax operating profit 111 193 218 264 289 12.7 % 21.0 % Tax expense -32-45 -58-71 -78 30.0 % 22.2 % Net profit 79 149 160 193 211 7.5 % 20.6 % EPS rep. (NOK) 6.33 11.96 12.85 15.50 16.99 7.5 % 20.6 % EPS adj. (NOK) 1.58 7.57 14.41 15.50 17.00 90.4 % 7.6 % BS (NOKm) 2011 2012 2013E 2014E 2015E ASSETS Cash & due from centr. banks 94 579 612 634 656 Loans to credit institutions 1 132 631 890 988 1 034 Gross loans to customers 22 309 22 913 23 979 24 925 25 776 Individual impairment 200 183 183 191 197 Collective impairment 66 66 73 76 78 Net loans to customers 22 042 22 663 23 722 24 659 25 500 Equity securities 141 104 117 121 125 Debt securities 2 589 3 003 3 420 3 555 3 676 Financial derivatives 117 191 161 167 173 Associated companies 49 47 0 0 0 Fixed assets 221 73 55 57 59 Intangible assets 68 53 54 54 54 TOTAL ASSETS 26 612 27 490 29 593 30 761 31 810 LIABILITIES AND EQUITY LIABILITIES Debt to credit institutions 4 675 2 626 1 896 1 970 2 038 Deposits from customers 11 585 12 681 14 964 16 012 16 972 Issued bonds 7 121 9 132 9 367 9 737 10 069 Issued subordinated capital 1 063 752 967 1 005 1 039 TOTAL LIABILITIES 24 826 25 596 27 533 28 570 29 482 EQUITY EC capital 976 1 006 1 119 1 194 1 272 Primary capital 732 754 839 895 954 Other equity 78 137 102 102 102 TOTAL EQUITY 1 786 1 897 2 060 2 191 2 328 Page 6 25 September 2013 Fondsfinans Research
(SADG) - Initial Coverage Change QoQ (%) P&L (NOKm) 4Q12 1Q13 2Q13 3Q13E 4Q13E 1Q - 2Q13 2Q - 3Q13 Net interest income 101 98 111 116 116 13.7 % 3.9 % Net commission income 14 15 15 14 14 0.3 % -2.5 % Other income 24 4 8 7 7 105.6 % -10.9 % Core net income 138 116 134 137 137 15.0 % 2.3 % Personnel expense -32-36 -33-38 -32-9.0 % 17.9 % Administrative expense -16-18 -23-20 -16 25.0 % -12.8 % Depreciation -5-5 -5-3 -3 2.4 % -42.2 % Other operating expense -33-22 -14-15 -25-36.1 % 3.8 % Total operating expense -86-81 -75-76 -76-8.0 % 1.7 % Core income pre LLP 52 35 59 61 62 68.0 % 3.0 % Loan loss provision -2-5 -5-4 -5 0.0 % -15.6 % Core operating profit 50 30 54 57 57 78.9 % 4.7 % Dividends 0 0 0 0 0 117.5 % -99.3 % Income from ass. comp. 7 1 0 0 0-100.0 % na Capital gains/loss. on fin. ass. 19 4-1 7 7-134.6 % -596.1 % Net financial income 26 6-1 7 7-117.1 % -827.6 % Pre-tax operating profit 77 36 53 64 64 47.6 % 20.1 % Tax expense -11-10 -14-17 -17 33.3 % 28.3 % Net profit 66 26 40 47 47 53.1 % 17.3 % EPS rep. (NOK) 5.29 2.10 3.21 3.77 3.78 53.1 % 17.3 % EPS adj. (NOK) 3.58 2.55 3.90 4.00 3.96 52.7 % 2.6 % BS (NOKm) 4Q12 1Q13 2Q13 3Q13E 4Q13E ASSETS Cash & due from centr. banks 579 597 583 609 612 Lending to credit institutions 631 587 1 281 942 890 Gross loans to customers 22 913 23 248 23 596 23 680 23 979 Individual impairment 183 188 179 181 183 Collective impairment 66 66 71 72 73 Net loans to customers 22 663 22 994 23 346 23 427 23 722 Equity securities 104 97 115 115 117 Debt securities 3 003 3 801 3 365 3 377 3 420 Financial derivatives 191 176 158 159 161 Associated companies 47 48-1 0 0 Fixed assets 73 67 54 54 55 Intangible assets 53 53 54 54 54 TOTAL ASSETS 27 490 28 589 29 120 29 224 29 593 LIABILITIES AND EQUITY LIABILITIES Debt to credit institutions 2 626 2 379 1 865 1 872 1 896 Deposits from customers 12 681 13 958 14 516 14 735 14 964 Issued bonds 9 132 9 094 9 217 9 250 9 367 Issued subordinated capital 752 752 951 955 967 TOTAL LIABILITIES 25 596 26 640 27 156 27 211 27 533 EQUITY EC capital 1 006 1 020 1 027 1 027 1 119 Primary capital 754 765 770 770 839 Other equity 137 164 167 215 102 TOTAL EQUITY 1 897 1 948 1 965 2 013 2 060 Fondsfinans Research 25 September 2013 Page 7
Analyst: Christian Berner tel. +47 23 11 30 11 Sector: Banks Price 77.0 EC outstanding (mill.) 7.1 Date: 24.sep.13 Book equity per PCC: 156.4 Market capitalisation (NOKb): 0.55 Next result: Price/Book: 0.49 Total assets (NOKb): 29.1 Target 106 Deposit/loan ratio (%): 0.6 Recommendation: BUY 12 month high/low:86.7 / 60.0 CET1 ratio (excl. profit): 0.1 INCOME STATEMEN (NOK million) 2 011 2 012 2013E 2014E 2015E 4Q12 1Q13 2Q13 3Q13E 4Q13E Net interest income 344 359 441 472 505 101 98 111 116 116 Non-interest income 115 163 103 117 120 64 24 22 29 28 Net Commission income 55 55 58 59 60 14 15 15 14 14 Dividends 1 1 1 1 1 0 0 0 0 0 Income from ass. companies 18 18 1 0 0 7 1 0 0 0 Gains/losses on fin. assets 12 49 17 30 31 19 4-1 7 7 Other operating income 29 41 26 28 28 24 4 8 7 7 Total operating income 459 522 544 590 625 165 122 133 144 145 Total operating expense -344-323 -307-304 -308-86 -81-75 -76-76 Personnel expense -158-143 -139-139 -141-32 -36-33 -38-32 Administrative expense -80-73 -77-78 -79-16 -18-23 -20-16 Depreciation/amortisation -17-18 -16-12 -13-5 -5-5 -3-3 Other expense -88-89 -76-75 -75-33 -22-14 -15-25 Pre-provision profit (PPP) 115 199 237 286 317 79 41 58 68 69 Loan loss provision -4-6 -19-22 -28-2 -5-5 -4-5 Pre tax profit (PTP) 111 193 218 264 289 77 36 53 64 64 Tax -32-45 -58-71 -78-11 -10-14 -17-17 Net profit 79 149 160 193 211 66 26 40 47 47 BALANCE SHEET (NOK billion) Gross loans to customers 22.1 22.7 15.4 16.1 16.6 22.7 23.0 23.3 23.7 24.0 Specified provisions -0.2-0.2-0.2-0.2-0.2-0.2-0.2-0.2-0.2-0.2 Group provisions -0.1-0.1-0.1-0.1-0.1-0.1-0.1-0.1-0.1-0.1 Net Loans to customers 21.8 22.5 15.2 15.8 16.4 22.5 22.7 23.1 23.4 23.7 Interest bearing assets 26.0 26.5 28.3 29.5 30.5 26.5 27.6 28.2 28.0 28.3 Total assets 26.6 27.5 29.6 30.8 31.8 27.5 28.6 29.1 29.2 29.6 Deposits from customers 11.6 12.7 15.0 16.0 17.0 12.7 14.0 14.5 14.7 15.0 Interest bearing debt 24.6 24.8 26.2 28.0 29.4 25.2 25.7 26.4 26.7 27.0 Equity 1.8 1.9 2.1 2.2 2.3 1.9 1.9 2.0 2.0 2.1 KEY FIGURES Net interest income (norm.) 1.28 % 1.32 % 1.55 % 1.57 % 1.61 % 1.45 % 1.42 % 1.55 % 1.57 % 1.57 % Commission income in % of ATA 0.21 % 0.20 % 0.20 % 0.20 % 0.19 % 0.19 % 0.21 % 0.20 % 0.20 % 0.19 % Cost/income 50.3 % 53.0 % 47.6 % 48.9 % 47.6 % 52.3 % 66.4 % 56.1 % 52.6 % 52.2 % Cost/income adj. for fin. items 80.2 % 71.2 % 58.5 % 54.3 % 51.8 % 59.2 % 68.7 % 55.5 % 55.4 % 55.0 % LLP in % of gross aver. lending 0.02 % 0.02 % 0.08 % 0.09 % 0.11 % 0.03 % 0.08 % 0.08 % 0.07 % 0.08 % EPS 10.0 12.0 12.9 15.5 17.0 5.3 2.1 3.2 3.8 3.8 EPS adj 1.6 7.6 14.4 15.5 17.0 3.6 2.6 3.9 4.0 4.0 Dividend 2.5 3.0 4.9 5.9 6.5 Major shareholders as of 24.09.2013 Dividend yield 3.0 % 5.0 % 6.0 % 7.9 % 8.6 % Sr Bank 10.8 % 765 Frank Mohn As 3.4 % 245 P/E 8.5 5.0 6.4 4.9 4.5 Clipper As 2.9 % 203 P/E adj 53.7 7.9 5.8 4.9 4.5 Aka As 2.8 % 200 Madland Kjell 2.5 % 178 ROE 4.5 % 8.1 % 8.1 % 9.1 % 9.3 % Mp Pension 2.3 % 164 Bergen Kommunale Pensjon 2.3 % 160 P/B 0.60 0.39 0.51 0.43 0.41 Skagenkaien Holding As 1.3 % 95 Book value 141.7 151.1 164.1 174.7 185.7 Terra Fondsforvaltning As 1.3 % 92 Nordhaug Invest As 1.1 % 81 CET 1 ratio (transition rule) 9.9 % 11.0 % 11.7 % 11.9 % 12.3 % Venadis As 1.1 % 80 Tier 1 ratio (transition rule) 13.7 % 14.9 % 14.6 % 14.9 % 15.3 % Aske Investering As 1.0 % 74 Capital adequacy ratio (trans rule) 16.1 % 15.5 % 17.3 % 17.5 % 17.9 % Total number of EC shares 32.9 % 7 106