Q4/2009 Sector report
Nordic Financials
The Middle Kingdom to the rescue Nordic Financials 03.02.2010
We find it likely that economic gravitation in the Middle Kingdom will pull us all further out of the recession. Basel III draft proposal is less of a concern than we feared earlier but we still view the regulatory / political risk as high for financials.
Nordic Financials vs (12m) 110 105 100 95 90 85 80 75 70 65 Feb
Apr
Jun
Aug
Oct
Dec
Feb
Company Top Danmark No rdea Bank DnB NOR Dansk e Bank Handelsbanken Sampo Oyj SEB Swedbank Try gvesta
Please see the last page for important information.
Rec BUY BUY NO REC HOLD HOLD BUY BUY BUY BUY
Target 731.0 85.0 138.0 193.0 2.6 54.0 72.0 400.0
Price 672.5 70.8 67.6 133.4 196.0 18.0 46.2 66.9 334.9
P/E 10E 10.2 10.7 9.4 16.0 12.2 10.2 49.9 28.0 11.7
P/E 11E 10.2 8.5 7.4 11.3 10.1 8.5 21.1 9.5 9.4
P/E 12E 10.4 6.7 6.2 6.9 8.1 7.0 10.8 6.2 8.2
•
The face of the ‘new normal’ is still the, by far, largest risk factor for banks going forward. Recently exemplified by president Obama’s proposed new regulations "The Volkner rule". The rules would, if approved, prohibit banks from investing in hedge funds, private equity, and more importantly limit proprietary trading. We believe US banks has failed to address the political signals, but see limited impact on the Nordic banks. However the new Basel III landscape will put pressure on RoE but, in our analysis, we find the likely effects to be: (i) sustained high margins (ii) banks must lower cost/income ratios and (iii) this is another catalyst for change. Given these measures we find in our analysis that banks should be able to deliver investor friendly return even in this brave new world.
•
… and a prolonged stimuli scenario is still our base case although the fear financial bubbles is more tangible now.
•
We initiate coverage of the Nordic Non-life companies Sampo, TopDanmark and TrygVesta. Solvency II leads to less price competition and significant headroom for the strong balance sheet players. We believe that bancassurance and internet sales are becoming increasingly important, and therein companies that have these cost-efficient channels are likely to gain market shares and improve their combined ratios. o Sampo The 20% share in Nordea is now consolidated and therein greatly stabilizing Sampo’s income. Conglomerate discount to high. o Topdanmark The cost leader in the Nordic non-life insurance business has more upside in trustworthy ROE and combined ratios. o TrygVesta appears to be over-capitalized and set for a solid increase in dividends going forward. Based on their long-term capitalization target we estimate the dividend yield to trend above 10% in the next years. Great risk/reward prospects.
•
Valuation Nordic banks There is still some 30% upside potential compared to 12 year average P/B (1.7), and we are still semi-bullish as we believe the following factors are not adequately discounted; (i) decreased competition and (ii) the new financial landscape (too negative market perception). Non-life insurance is trading ~25 % below average trading levels. Solvency II as premium increase catalyst.
Nordic Financials
Analysts: Odd Weidel +47 22 94 89 49
[email protected] Håkon Fure +47 22 94 89 12
[email protected] Geir Grønseth +47 22 94 89 92
[email protected]
DKK SEK NOK DKK SEK EUR SEK SEK DKK
03.02.2010
Sector report > Nordic Financials
The investment cases Danske Bank We would accredit the Markets division with a higher earnings quality grader than earlier. Potential hybrid conversion is problematic timing vise. We find the equity ratio in the low end though (~3.1%) and, as such, unsure of the impact on Basel III. Recommend HOLD, PT = 138 DKK.
Sum-of-the-parts valuation 160 138
140 Last= 133.4 120 100 80 60 40 20 0 BA
DnB NOR 'Too good to be true' Norwegian macroeconomics is highly supportive for DnB NOR. Moderate hikes in interest rates in 2010 should only increase deposit margins and, we assess, only impact asset quality insignificantly. DnB NORD evaluation process has been initiated and is an uncertainty going forward, although minor.
Markets
Pension
C apital
Other
Group
Sum-of-the-parts valuation 100
82 80 Last= 67.55 60
40
No recommendation. 20
0 Corporate
Handelsbanken A good example of the power of perception, and of course we like the consistency in Handelsbanken's strategy. Priced in the high brackets compared to its Nordic peers we still see a 15% potential in Handelsbanken placing our recommendation at BUY, PT = 193 SEK.
Retail
Markets
Life & AM
DnB NORD
Other
Group
Sum-of-the-parts valuation 250
193
200 Last= 196
150
100
50
0 Sw edish
Non-Sw edish
Markets
AM
Overhead
Group
DnB NOR Markets - 2
Sector report > Nordic Financials
03.02.2010
Nordea Nordea has weathered the crisis in a very good manner and experiences customer growth at acceptable risk levels. Truly diversified and with a scalable platform, we like Nordea although it is already priced in the high brackets. Recommendation is BUY, PT = 85 SEK.
Sum-of-the-parts valuation 100 85 80 Last= 70.8 60
40
20
0 Nordic
SEB Nordic reach in the corporate market but costs in Germany and Swedish macro still of some concern. The high exposure towards the Baltic States is still the key issue though. Recommendation is BUY, PT= 54 SEK.
New Markets
Financial
S, O & I *
Other IIB
Other
Group
Sum-of-the-parts valuation 60 50
54
Last= 46.19
40 30 20 10 0 Merchant
Swedbank We see the Swedish Banking Division, operating at a cost-income ratio well below 50%, as a counterweight to the high risk international divisions. Our concern is that the bank has lost customers throughout the crisis. Recommendation HOLD, PT = 72 SEK.
Retail
Baltic
WM
Life
Other
Group
Sum-of-the-parts valuation 80
72 Last= 66.95
60
40
20
0 Sw edish
Baltic
International
Markets
AM&Insurance
Other
Group
DnB NOR Markets - 3
03.02.2010
Sector report > Nordic Financials
Contents NORDIC BANKS - SUMMARY AND VALUATION
5
MORE JUICE IN THE MIDDLE KINGDOM …
7
… AND FURTHER POTENTIAL IN THE EQUITY MARKETS BASEL III RESILIENT NON-LIFE SECTOR DRIVERS ANYONE?
9 11 14 15
NORDIC BANKS
17
DANSKE BANK DNB NOR HANDELSBANKEN NORDEA SEB SWEDBANK
18 24 30 36 42 48
NON-LIFE SUMMARY AND VALUATION
54
KEY INDUSTRY POINTS MARKET DYNAMICS MARKET SHARES ARE PERSISTENT REINSURANCE – A RISK REDUCTION AND CAPITALISATION TOOL DISTRIBUTION CHANNELS BIG IS BEAUTIFUL? MARKET DESCRIPTION KEY PRODUCT CATEGORY TRENDS REGULATORY CHALLENGES (AND OPPORTUNITIES) AHEAD
56 58 59 60 61 63 65 72 75
CORPORATE GOVERNANCE AND STRATEGIC OWNERSHIP IN NORDIC FINANCIAL INSTITUTIONS 77 NON-LIFE INSURERS
83
SAMPO – UNWARRANTED DISCOUNT TOPDANMARK – TRUSTWORTHY ROE TRYGVESTA – THE SAFE BET
84 94 107
APPENDIX 1 – NON-LIFE INSURANCE INDUSTRY RISK ASSESSMENT
123
DnB NOR Markets - 4
03.02.2010
Sector report > Nordic Financials
Nordic Banks - Summary and valuation There is still some 30% upside potential compared to 12 year average P/B (1.7), and we are still semi-bullish as we believe the following factors are not adequately discounted; (i) decreased competition and (ii) the new financial landscape (too negative market perception). 9
Basel III suggestions tolerable Regulatory risk is the unknown variable for banks going forward. There is widespread fear in the markets that RoE will not return to the levels seen earlier. In our analysis we find it likely that this brave new world will not erode RoE significantly if appropriate measures are taken.
9
… and a prolonged stimuli scenario is still our base case although the fear financial bubbles is more tangible now.
Target DnM Q409E 1.34 1.27 (0.03) 3.87 0.09
Rec No Rec Buy Hold Buy Hold Hold
Potential 21% 20% 8% 17% -2% 3%
DnB NOR Nordea Swedbank SEB Handelsbanken Danske Bank
P/E 9.36 10.72 27.96 49.88 12.22 16.01
DnB NOR 2010 estimates P/B RoE 0.95 10.16% 1.15 11.21% 0.89 3.25% 1.00 2.03% 1.49 12.16% 0.88 5.65%
D-yield 1.48% 2.86% 0.00% 2.16% 2.55% 0.19%
DnB NOR Nordea Swedbank SEB Handelsbanken Danske Bank
P/E 9.15 11.05 11.15 11.62 11.42 10.45
10-year historical average P/B RoE 1.34 15.53% 1.81 17.28% 1.88 15.65% 1.67 14.64% 1.93 16.89% 1.53 14.82%
D-yield 3.79% 2.87% 4.82% 3.48% 3.42% 3.59%
DnB NOR Nordea Swedbank SEB Handelsbanken Danske Bank
Q409 calendar 11-Feb-10 10-Feb-10 09-Feb-10 10-Feb-10 18-Feb-10 04-Feb-10
PT 85.00 72.00 54.00 193.00 138.00
Nordic valuations
Source: DnB NOR Markets, Factset
THE BASE CASES We find it likely that Nordea will continue its organic growth and recommendation reiterated with BUY (pt=85 SEK). SEB with its Nordic reach in the corporate market are also attractive. As the Swedish election approaches we believe a Nordea-Swedbank solution is too "costly" for Swedish politicians. Therein only one structural candidate left, in the short term, for Nordea? SEB recommendation reiterated, BUY (pt=54 SEK).
"The changes recommended are profound, and the banking system of the future will be different from that of the last decade."
THE HARD LANDING CASES Handelsbanken and Nordea are the clear defensive picks going forward. Diversified portfolios and healthy organic growth is generally hard to dislike. More importantly, in our scenarios, both banks show considerable resilience in a "double dip" scenario.
"The Turner Review", Chairman UK FSA Lord Turner
DnB NOR Markets - 5
03.02.2010
The regression lines represent the best fitting straight line through the respective divisional datasets. Please view appendix 3 for further information.
Sector report > Nordic Financials
Historical RoE and P/B relationship 2.8 2.6 2.4
A s s e t M a na ge m e nt
P/B
2.2 C o rpo ra t e
2.0 1.8
R e t a il
1.6
Ins ura nc e
1.4
Inv e s t m e nt B a nk ing
1.2 0%
2%
4%
6% RoE 8%
10%
12%
14%
Present RoE and P/B relationship Present ROE and P/B relationships fairly unchanged since last Q3
3.5 3.0 A s s e t M a na ge m e nt
P/B
2.5 2.0 1.5
Inv e s t m e nt B a nk ing C o rpo ra t e
1.0
Ins ura nc e R e t a il
0.5 0.0 0%
5%
RoE
10%
15%
Estimated 2009 RoE and P/B Arrows indicate development in our scenarios. Green=high case, black=base case and red=low case.
1.6 SHB
1.4
P/B
Please view Valuation methodology chapter for further information.
1.8
1.2 1.0
NDA SEB SWED
0.8
DANSKE
DnB NOR
0.6 0.4 0%
5%
10%
RoE
15%
20%
Source: DnB NOR Markets, Factset
DnB NOR Markets - 6
03.02.2010
Sector report > Nordic Financials
More juice in the Middle Kingdom … Macroeconomic outlook The expansionary fiscal and monetary policy set in effect to counter the financial tsunami has yielded state budget deficits and rising asset prices – the policy dilemma is getting closer
The recovery has gained momentum supported by the governmental packages, and arguably China in particular. Looking ahead we believe economic policymakers increasingly face a policy dilemma; being the duality in ensuring a continued recovery-momentum versus balancing asset prices. The worldwide "pedal to the metal" policy from politicians has been successful, but the short-term artificial stimuli must now be replaced by long-term fundamentals. There is no doubt in our minds that demand from Asia, and especially so China, has contributed positively to the economic recovery. Improvement in intra-Asian trade has further helped the turnaround process (as export based countries in Asia has gained by the Chinese stimuli programs). The impact of the large Chinese stimuli package (~14% of GDP) now fades and the key question is then: Can China pull the world economy any further? Chinas economic significance Population (m) Workforce (m) Unemployment (m) GDP (US bn) - per capita GDP (US bn) (PPP) - per capita Export (US bn) Import (US bn) Current account balance (US bn)
China 1,328 770 78 4,416 3,325 8,161 6,146 1,429 1,133 426
2008 USA 312 145 9 14,441 46,336 14,441 46,336 1,287 2,104 (706)
Japan 128 64 3 4,909 38,444 4,333 33,937 782 762 157
France 62 26 2 2,864 46,187 2,135 34,435 603 704 (53)
Source: IMF, DnB NOR Markets
Will a possible Chinese currency appreciation be a joker?
As seen in the table above GDP per capital in China is still only ~16%, of the somewhat arbitrarily chosen peers above, clearly showing the potential. More importantly the current account balance shows China has the capability to do something about it as well. As GDP per capita in the economy moves from 5000 to 15000, the demand for infrastructure rises and therein metal. The rapid urbanization reinforces this demand. According to China Metals Magazine these metal maturing processes has historically been like this: Historical demand for metal
Country UK US Franc e Germany Japan Taiwan South Korea China (estimate)
Nr. of years moving from 5'-15' USD/cap 130 85 85 82 25 27 27 25
Steel top 509 671 515 674 886 1161 988 650
Max kg/cap consumption of Steel no w Copper top 250 7 420 12 325 11 450 13 610 13 1050 30 975 19 ~450
Aluminium top 11 24 13 15 20 26 25
Source: China Metal The maturing process has speeded up. UK, as the first industrialized country, used ~130 year to reach 15.000 USD/cap, but the Asian Tigers managed to do the same in ~25 year. According to China Metals the same process will take some 25 year in China. China Metals estimate China will top metals consumption at around 650 kg/cap.
DnB NOR Markets - 7
03.02.2010
One of the main policy errors from the 1930-ies was a too early tightening which again created a second dip. We believe this lesson is now incorporated into policymaker's memory and mindset. You could argue now that there is a real possibility that new bobbles are in the making, but we would argue that the following two examples will prevent policymaker from withdrawing packages too early.
Sector report > Nordic Financials
Policy experience from the 1930ies – economic stimuli likely to continue in worldwide … also in China Monetary contraction
Financial thightening
New downturn
New downturn
New downturn
Source: BCA Research The recent comments from Prime Minister Gordon Brown conforms the continuity of the stimuli packages as he said the Government will continue to invest "willingly and whole heartedly" in Britain's future. He also said the return to strong, sustainable growth would take time. We find these comments as confirmation that our U-shaped recovery estimate is still the base case.
DnB NOR Markets - 8
03.02.2010
Sector report > Nordic Financials
… and further potential in the equity markets Continued good equity markets will benefit banks in a number of ways. E.g. most noticeably companies will get easier excess to capital through issues. One of the key risky sectors for the Nordic banks, Private Equity funds, should experience increased liquidity and obtain better prices for their assets, therein lowering risks for the banks as well. Looking at consensus S&P 500 figures we see that analysts estimate EPS growth from 2009 to 2010 to formidable ~26%. S&P 500 EPS Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 12m FWD
EPS Growth Y/Y 49.53 55.87 13% 67.49 21% 76.80 14% 88.87 16% 83.92 -6% 56.67 -32% 60.14 6% 77.30 26% 92.93 20% 78.24
1m chg 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.1% 0.7% 0.1% 1.9%
Source: Factset, DnB NOR Markets Can this EPS growth be attainable? (a) Average EPS in 2009 was 15.2 compared to an estimated EPS in 2010 of 19.24. YoY growth equals 26%, but 8 percentage points of the growth is due to the very low Q109. Assuming this quarter was the same as the average of the other quarters, the growth would fall from 26% to 18%! S&P 500 quarterly earnings 30
25
24.7 23.2 21.9 20.2
20
20.1
20.9
18.7 17.4
17.7 16.3
15
16.3
17.2 16.3
13.8 12.1
10
5 2.2
0 Q107
Q307
Q108
Q308
Q109
Q309
Q110
Q310
Source: Factset, DnB NOR Markets
DnB NOR Markets - 9
03.02.2010
Sector report > Nordic Financials (b) Our main assumption is that the cycle will become self-sustaining and that we will have a period of maintained economic growth, helping to normalize activity levels, capacity utilization and company margins. If we calculate a regression between US corporate profits after tax for non-financial firm and the difference between nominal GDP-growth and the growth of unit labor coast, we get the following equation:
Profits = - 5.7 + 3.5
(GDP
growth
- ULCgrowth
)
It can be readily seen that earnings are leveraged on both top line and the big bulk of labor cost. In the current state of the cycle we expect low compensation growth. Assuming unit labor costs fall by 2% - i.e. 3% productivity growth and 1% wage growth – and nominal GDP grow by 5%, the model tell us non-financial earnings can grow by 20% according to historical data. The expected bottom up earnings growth for the SP500 non financial is in this range and absolutely attainable! With a continued cyclical upswing in front of us, earnings growth should be very encouraging and an important driver of continued strong equity market. GDP-ULC and profits after tax (percentage) 50 40 30 20 10 0 -10 -20 -30 1952
1961
1970 1979 GDP-ULC
1988 Profits
1997
2006
Source: DnB NOR Markets, Ecowin
Since 8% +13% equals almost 26% the conclusion would then be that adjusted for the somewhat abnormal Q108 and using, we believe, fairly normalized estimates for labor costs and GDP growth the 26% increase in EPS from 2009 to 2010 forecast does not seem far fetched, but rather a base case.
DnB NOR Markets - 10
Sector report > Nordic Financials
03.02.2010
Basel III The Basel committee proposed new regulations for capital and liquidity in December last year. The purpose was to improve Basel II shortcomings and therein specifically improve the quantity and quality of capital in banks. A key element is also to regulate the amount of short funding a bank can have at any time. The new Basel regulations are just suggestions but we find it likely that the final document will be fairly unchanged. The Basel III documents list three demands: 1. A common equity ratio 2. A leverage ratio 3. A net stable funding ratio An accurate analysis of the consequences of the Basel II regulations is difficult, but we would like to focus on the likely shareholder consequences.
Tolerable effect of tighter regulation The group of 20 finance ministers and central bank governors has agreed that banks should raise capital in the months to come in able to make the entire financial system more stable and also maintain an adequate lending capacity. The two questions that immediately pops into our mind is (i) what level of capital will be needed and (ii) will banks ever get back to a "normalized" return on equity? (i) The level of capital demanded seems to be settling around 4% in equity ratio (or leverage ratio) and 10% in core capital from a market point of view, although we believe the actual regulatory demands will be lower than this. Capital adequacy ratios Core capital ratio
Equity ratio
14.0%
6.0%
13.0%
5.5% 5.0%
12.0%
4.5%
11.0%
4.0%
10.0%
3.5%
9.0%
3.0%
8.0%
2.5% 2.0%
7.0% Q108 Q208 Q308 Danske Bank Nordea
Q408 Q109 DnB NOR SEB
Q209
Q309 Q409 Handelsbanken Swedbank
Including the recent DnB NOR and Swedbank rights issues (NOK 14 bn and SEK 15.1 bn respectively).
Q108
Q208
Q308
Danske Bank Nordea
Q408
Q109
DnB NOR SEB
Q209
Q309
Q409
Handelsbanken Swedbank
The equity ratio, or leverage ratio, is increasingly viewed upon as a better way of assessing banks capital need. Especially so since risk-weighted assets (RWA) vary substantially calculation-vice making it difficult to do any cross-border analysis.
DnB NOR Markets - 11
Sector report > Nordic Financials
03.02.2010 RWA / lending ratio
Theoretical capitalization need at Q409E
80.0% 70.0%
Bank Danske DnB NOR SHB Nordea SEB Sw ed
60.0% 50.0% 40.0%
Equity ratio 3.0% 5.8% 3.5% 4.4% 4.1% 4.9%
Lim it Difference 4.0% 1.0% 4.0% -1.8% 4.0% 0.5% 4.0% -0.4% 4.0% -0.1% 4.0% -0.9%
Potential cap. need 33,726 (32,667) 10,823 (2,170) (2,778) (16,222)
30.0% Q108
Q208
Q308
Q408
Danske Bank Nordea
Q109
Q209
DnB NOR SEB
Q309
Q409
Handelsbanken Swedbank
Surprisingly large differences in the ratios and no sign of any convergence.
In general Nordic banks are slightly overcapitalized also compared to the prevailing market demand. (ii)
The multiple capital injections and withhold dividend have certainly yielded higher capital ratios and improved overall sector confidence, but the flipside could be lower RoEs going forward. Should investors fear this brave new world? We find it relevant to see RoE in relation to the prevailing interest rate level. Extracting the rather extraordinary years from 2005 until 2007 we get an average of ~9.5% (RoE - 10Y gov. bond spread). Return on Equity (RoE) Historical RoE Bank Danske Bank DnB NOR Handelsbanken Nordea SEB Swedbank Average
1995 15.7% 21.8% 13.8% 25.7% 10.7% 16.3% 17.3%
1996 14.1% 19.8% 18.7% 27.0% 22.3% 18.7% 20.1%
1997 15.3% 17.0% 19.0% 20.1% 12.6% 3.7% 14.6%
1998 13.0% 6.8% 17.6% 14.3% 14.3% 16.0% 13.7%
1999 16.3% 14.4% 17.3% 18.9% 14.3% 14.8% 16.0%
2000 12.5% 16.8% 21.0% 15.6% 16.0% 18.3% 16.7%
2001 15.3% 15.7% 17.3% 13.2% 11.4% 13.9% 14.5%
2002 13.5% 8.9% 14.6% 8.4% 11.7% 12.2% 11.6%
2003 14.8% 12.9% 14.5% 11.9% 12.0% 15.1% 13.5%
2004 13.8% 15.7% 15.9% 14.3% 14.0% 18.8% 15.4%
2005 17.2% 16.4% 17.0% 16.7% 14.9% 20.4% 17.1%
2006 15.9% 17.6% 18.7% 19.5% 18.3% 18.2% 18.0%
2007 15.2% 17.3% 14.6% 17.8% 16.8% 17.7% 16.5%
2008 4.8% 12.5% 15.2% 12.0% 11.9% 16.0% 12.1%
1996 8.1% 6.8% 7.2%
1997 6.6% 5.9% 6.2%
1998 5.0% 5.4% 4.9%
1999 5.0% 5.5% 4.9%
2000 5.4% 6.2% 5.6%
2001 5.1% 6.2% 5.1%
2002 5.3% 6.4% 5.1%
2003 4.6% 5.1% 4.3%
2004 4.4% 4.4% 4.3%
2005 3.4% 3.8% 3.4%
2006 3.7% 4.1% 3.8%
2007 4.2% 4.8% 4.3%
2008 3.9% 4.5% 4.3%
2005 13.8% 12.7% 13.6% 13.3% 11.5% 17.0% 13.6%
2006 12.0% 13.5% 15.0% 15.8% 14.6% 14.5% 14.2%
10Y gov. bond yield* Bank Sweden Norway Denmark
1995 10.3% 7.4% 8.3%
* average RoE - 10Y gov. bond spread Bank Danske Bank DnB NOR Handelsbanken Nordea SEB Swedbank Average
1995 7.5% 14.4% 3.5% 15.4% 0.4% 6.0% 7.9%
1996 1997 1998 1999 2000 2001 6.9% 9.0% 8.1% 11.4% 6.8% 10.2% 13.0% 11.1% 1.4% 8.9% 10.6% 9.4% 10.6% 12.3% 12.5% 12.3% 15.7% 12.2% 18.9% 13.4% 9.3% 13.9% 10.3% 8.1% 14.2% 6.0% 9.3% 9.4% 10.6% 6.3% 10.6% -3.0% 11.0% 9.8% 12.9% 8.8% 12.4% 8.1% 8.6% 11.0% 11.1% 9.2%
2002 2003 8.4% 10.5% 2.5% 7.9% 9.3% 9.9% 3.1% 7.2% 6.4% 7.4% 6.9% 10.5% 6.1% 8.9%
2004 9.5% 11.3% 11.4% 9.9% 9.6% 14.4% 11.0%
2007 2008 10.9% 0.5% 12.5% 8.0% 10.4% 11.4% 13.6% 8.1% 12.6% 8.0% 13.5% 12.1% 12.3% 8.0%
DnB NOR Markets - 12
Sector report > Nordic Financials
03.02.2010 RoE
RoE - 10Y gov. bond spread
30.0%
20.0%
25.0%
15.0%
20.0%
10.0%
15.0% 5.0% 10.0% 0.0%
5.0%
-5.0%
0.0% Bank 1996 1998 Danske Bank Nordea
2000 2002 DnB NOR SEB
2004 2006 Handelsbanken Swedbank
Bank 1996 1998 Danske Bank Nordea
2000 2002 DnB NOR SEB
2004
2006 2008 Handelsbanken Swedbank
Source: Factset, DnB NOR Markets
Nordic 10Y governmental bond interest rate is now ~3.5%. If we add that interest rate to the ~9.5% average from above we get a RoE target of ~13%. The Nordic banks are now, on average, slightly overcapitalized (post recent issues), and we adjust income somewhat upwards to adjust for the growth potential. With these assumptions we should be able to calculate RoE in a different loan loss and cost-income scenarios. In our analysis we have aggregated the banks. Income sheet aggregated bank Total income Total expens es Profit before loan losses Net loan losses Gains/losses other Operating profit Taxes Pension settlement Minorities Profit for the period Equity RoE C/I
2009E 34,746 16,956 16,135 3,988 0 12,148 3,037 0 -307 9,418
2010E 33,308 16,544 15,178 4,199 0 10,979 2,745 0 -202 8,436
2011E 34,884 16,860 16,363 4,523 0 11,840 2,960 0 -85 8,965
2012E 37,442 17,317 18,342 5,020 0 13,322 3,330 0 -18 10,009
73,657 13% 49%
79,472 11% 50%
88,853 10% 48%
100,569 10% 46%
In the above example we have utilized a normalized loan loss ratio of 33 bps. Source: DnB NOR Markets RoE scenario analysis
Normalized bps loan loss level
10 20 33 40 50
44% 14.7% 13.5% 12.0% 11.2% 10.0%
C/I ratio 48% 14.2% 13.1% 11.5% 10.7% 9.5%
52% 13.8% 12.6% 11.0% 10.2% 9.0%
56% 13.3% 12.1% 10.6% 9.7% 8.6%
In this, simplified, analysis we see that the new regulatory framework will put pressure on banks RoE. With cost cutting efforts and sustained high interest margins however banks should be able to deliver investor friendly return even in a brave new world. Source: DnB NOR Markets
DnB NOR Markets - 13
Sector report > Nordic Financials
03.02.2010
The new landscape will put pressure on RoE but, in our analysis, we find the likely effects to be: 1. sustained high margins 2. further cost cutting initiatives in banks (lower cost/income ratios is paramount) 3. … another catalyst for change With these measures, we find in our analysis, that banks should deliver investor friendly return even in this brave new world.
Resilient non-life sector Historical data
Swedish economic crisis 1991-1995 26,500 26,000
72.00%
5%
70.00%
4%
68.00% 25,500
66.00%
25,000
64.00%
24,500
62.00% 60.00%
24,000 23,500 23,000 1991
1993 GWP
3% 2% 1% 0%
58.00%
-1%
56.00%
-2%
54.00%
-3%
1995
1991
1992
Risk ratio development
1993
1994
1995
GDP development
Steadily decreasing annual GDP in 1991-1993 and still gross premium written (GWP) rose those years. Internet bobble 1999-2001 (EU27 countries)
Internet bobble Norway
450,000
4.50%
400,000
4.00%
350,000
3.50%
300,000
3.00%
250,000
2.50%
200,000
2.00%
150,000
1.50%
100,000
1.00%
50,000
0.50% 0.00%
0 1998
2000
2002
Non-life premiums
2004
2006
GDP growth
4.5%
60,000
4.0%
50,000
3.5% 3.0%
40,000
2.5%
30,000
2.0% 1.5%
20,000
1.0%
10,000
0.5% 0.0%
0 1998
2000
2002
Non-life premiums
2004
2006
GDP growth
Aftermath of the financial tsunami is of course difficult to estimate yet but history seems to tell a unanimous story – non-life is a non-cyclical industry. A well-run company can as such be very resistant should for instance a "double dip" recovery occur.
Source: Swedish central bank, Swedish insurance federation, CEA, IMF, OECD, DnB NOR Markets
DnB NOR Markets - 14
Sector report > Nordic Financials
03.02.2010
Drivers anyone? Tightening standards again Change in banks' credit standards for approving loans
Net percentage which is defined as the difference between the sum of banks responding credit tightening (considerable and somewhat) and the sum of banks responding eased (considerable and somewhat). US – corporate sector
US – private sector 80
100
70
80
60 50
60
40
40
30 20
20
10
0
0 -10
-20
-20
-40 Q290 Q292 Q294 Q296 Q298 Q200 Q202 Q204 Q206 Q208 Enterprises
-30 Q290 Q292 Q294 Q296 Q298 Q200 Q202 Q204 Q206 Q208
C ommercial real estate
Residential
Other household
C redit cards
Still tight …
…but light at the end of the tunnel in residential lending?
EU
UK 40
80 70 60 50 40 30 20 10 0 -10 -20 -30
30 20 10 0 -10 -20 -30 -40 -50
Q103 Q403 Q304 Q205 Q106 Q406 Q307 Q208 Q109 Households Actual Enterprises Actual
-60 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Households Actual Households Expected Enterprises Actual Enterprises Expected
Households Expected Enterprises Expected
Please notice that negative figures show tightening for Norway, UK and Denmark and opposite so for EU/US.
Apositive credit stance in the UK.
Norway – tightening standard again?
Denmark 0
30
-10
20 10
-20
0 -10
-30
-20
-40
-30
-50
-40 -50
-60
-60
-70
-70 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Households Actual Enterprises Actual
Households Expected Enterprises Expected
-80 Q408
Q109 Households Actual Enterprises Actual
Q209 Q309 Households Expected Enterprises Expected
Central Bank surveys show a distinct improvement Source: Respective Central Banks, DnB NOR Markets DnB NOR Markets - 15
03.02.2010
Sector report > Nordic Financials Scenarios applied throughout the report
In able to stress test the banks, we have applied three different scenarios for global economic growth. The optimistic scenario entails relatively quick improvements in credit conditions and economic growth. The base case scenario assumes that thanks to the broad scope of this economic downturn - coupled with the challenging credit conditions - the recession will drag on at least into the first half of 2010. In the pessimistic scenario, the recession becomes deeper and lingers on into 2010, resulting in major loan losses for most banks. High case: V shaped recovery 9 The financial sector shores up its balance sheets. Credit markets continue to improve. 9 Powerful effects from monetary and fiscal stimulus once optimism returns and credit channel heals. US recession ends in October, still the longest recession on record in the postwar period. The Euro zone recession lasts an additional quarter. In sum, a V-shaped recovery and a virtuous cycle marked by a rapid normalization of confidence. 9 Markets will continue to rise rapidly (40% up). Base case: U shaped recovery 9 Markets improve but de-leveraging takes time slowing the recovery 9 The US and Euro zone recessions ends in November. 9 Markets will continue to rise though still volatile. Up ~20% 12 months ahead. Low case: W shaped recovery / double dip scenario 9 The macro indicators have turned, but are still consistent with negative economic growth. 9 The credit markets worsen again under the weight of the debt burden, weighing on economic growth. The US recession lasts until the end of the year, and the recovery will be feeble. 9 The latest rise in equity markets turns out to be nothing but a bear market rally. Sell in October! Scenario loan losses High case: V-shaped recovery Bank DnB NOR Nordea Sw edbank SEB Handelsbanken Danske Bank
2009E 0.62% 0.49% 1.70% 0.82% 0.21% 1.30%
2010E 0.27% 0.13% 0.30% 0.27% 0.10% 0.29%
2011E 0.12% 0.07% 0.15% 0.16% 0.06% 0.17%
2012E 0.06% 0.04% 0.06% 0.06% 0.03% 0.08%
Base case: U-shaped recovery Bank DnB NOR Nordea Sw edbank SEB Handelsbanken Danske Bank
2009E 0.74% 0.61% 1.94% 1.02% 0.26% 1.54%
2010E 0.63% 0.40% 0.88% 0.81% 0.29% 0.82%
2011E 0.31% 0.23% 0.42% 0.49% 0.19% 0.49%
2012E 0.16% 0.12% 0.16% 0.18% 0.09% 0.24%
Low case: W-shaped "recovery" / double dip Bank 2009E DnB NOR 0.90% Nordea 0.76% Sw edbank 2.25% SEB 1.28% Handelsbanken 0.33% Danske Bank 1.85%
2010E 1.08% 0.74% 1.59% 1.50% 0.54% 1.49%
2011E 0.55% 0.43% 0.74% 0.90% 0.36% 0.89%
2012E 0.30% 0.22% 0.27% 0.34% 0.17% 0.43%
Source: DnB NOR Markets
DnB NOR Markets - 16
Sector report > Nordic Financials
High case: Strong recovery 1.8 1.6
SHB
1.4
P/B
1.2
NDA SEB SWED DANSKE
1.0 0.8
DnB NOR
0.6 0.4 0.2 0.0 -15%
-10%
-5%
0%
RoE 5%
10%
15%
20%
Base case: Moderate recovery 1.8 1.6
SHB
1.4
P/B
1.2
NDA SEB SWED DANSKE
1.0 0.8
DnB NOR
0.6 0.4 0.2 0.0 -15%
-10%
-5%
0%
RoE 5%
10%
15%
20%
Low case: No recovery yet 1.8 1.6
SHB
1.4 1.2
P/B
03.02.2010
NDA SEB SWED DANSKE
1.0 0.8
DnB NOR
0.6 0.4 0.2 0.0 -15%
-10%
-5%
0%
RoE 5%
10%
15%
20%
Source: DnB NOR Markets
Nordic Banks
DnB NOR Markets - 17
Sector report > Nordic Financials
03.02.2010
Danske Bank Geographical distribution of lending portfolio
Sum Ireland, 7% Denmark, 58%
Sweden No rway Finland,
Late cycle acquisitions are expensive and integration costs are high First bank and credit package too costly … and cost of hybrid is 625 DKKm per quarter.
Measured by size of the balance sheet Danske Bank is ranked second among its Nordic peers with EUR 435 bn in total assets (Q309). In addition to its Danish presence, it’s also represented with large branches in Sweden and Norway (representing 9.7 and 7.9% of total lending respectively). Further international expansion was initiated when Danske Bank bought Northern Bank and National Irish Bank in Ireland from National Australia Bank in December 2004 at a cost of DKK bn 10.4. The acquisition was part of an increased strategic focus on the retail business in the bank. “Part 2” of expansion was buying Sampo bank in 2006 (effect as of 01-February 2007) for DKK bn 30.20 (P/B=3.6). Therein the bank also gained a presence in Finland and the Baltic area as well. Danske Bank is now the third largest bank in the Baltic area, and until recently also the second largest financial institution in the Nordic area in market cap terms. The costs of integrating the international businesses are challenging. Danske Bank communicated continued work on creating a common technological platform as well as improving the overall cost-income ratio. Among the measures taken is a reduction in head office staff functions of 350 full-time employees. The second package (solidity) is more favorable both with regards to overall size and indicated prices. Danske Bank injected DKK 26 bn in state hybrid capital offered in Bank package 2, and although it might be converted into shares (at the prevailing market price -5% discount) we would prefer permanent market based capital. In the case of a W-shaped double dip recovery the probability for an equity issue and/or state involvement would increase. So our objection toward the hybrid capital has been primarily related to the potential unfortunate timing of such a conversion. After the Basel III regulations (suggested) One of the key questions in Q3 will be if the declining loan impairment charges seen the last quarters continue.
… but impairment charges has receded. Denmark was one of the first European countries to enter the crisis. will it be one of the first out as well?
Quarterly loan impairment charges 200 180 160 64
140
31 11
3
125
120
122
Q109
Q209
Q309
120 100 80 60
109
40 20 0
11 Q208
33 Q308
Q408 Individual
C ollective
Source: Company reports
DnB NOR Markets - 18
03.02.2010
Sector report > Nordic Financials
Q409 preview DKKm
Q408 Q409E Q409E Reported DnB NOR Market* Net interest income 7,365 6,716 6,783 Net fee income 1,944 1,913 1,875 Net trading income 2,190 3,778 3,474 Other income 537 1,011 Total income 12,036 13,417 13,177 Integration expenses 257 190 Staff costs 2,928 3,187 Other costs 6,779 3,144 Operating expenses 9,964 6,520 -6,692 2,072 6,897 6,485 Profit before credit loss e Credit loss expenses 9,199 6,821 5,748 Profit before tax -7,127 76 737 Tax -1,242 17 Minorities 9 0 Profit -5,894 59 474 EPS reported ROE Dividend
-8.54 -24.0% n.a.
0.09 0.2% n.a.
0.68 1.9% n.a.
Chg YoY Abs. % -649 -9% -31 -2% 1,588 73% 474 88% 1,381 11% -67 -26% 259 9% -3,635 -54% -3,444 -35% 4,825 233% -2,378 -26% 7,203 -101% 1,259 -101% -9 -100% 5,953 -101% 8.63 0 n.a.
DnB NOR Markets 2009E 2010E 2011E 27,475 27,113 27,923 7,514 7,609 7,606 20,061 10,378 6,859 4,253 4,081 4,375 59,302 49,181 46,763 787 738 726 13,410 12,904 13,241 14,047 12,977 12,846 28,243 26,619 26,813 31,059 22,562 19,950 27,516 15,192 9,535 3,543 7,370 10,416 2,176 1,621 2,291 -14 0 0 1,381 5,749 8,124
n.m n.m n.a.
2.00 1.4% 0.00
8.33 5.7% 0.25
11.78 7.5% 2.00
Estimate changes New 2009E Net interest income 27,475 Net fee income 7,514 Net trading income 20,061 Other income 4,253 Total income 59,302 Integration expenses 787 Staff costs 13,410 Other costs 14,047 Operating expenses 28,243 Profit before credit loss ex 31,059 Credit loss expenses 27,516 Profit before tax 3,543 Tax 2,176 Minorities -14 Profit 1,381 EPS reported ROE Dividend
2.00 1.4% 0.00
estim ates 2010E 2011E 27,113 27,923 7,609 7,606 10,378 6,859 4,081 4,375 49,181 46,763 738 726 12,904 13,241 12,977 12,846 26,619 26,813 22,562 19,950 15,192 9,535 7,370 10,416 1,621 2,291 0 0 5,749 8,124 8.33 5.7% 0.25
11.78 7.5% 2.00
Old 2009E 27,472 7,514 20,061 4,253 59,300 787 13,410 14,047 28,243 31,056 28,241 2,816 2,016 -14 814 1.18 0.8% 0.00
estim ates 2010E 2011E 27,059 27,765 7,609 7,606 10,378 6,859 4,081 4,375 49,127 46,605 738 726 12,904 13,241 12,977 12,846 26,619 26,813 22,508 19,793 16,781 10,483 5,727 9,309 1,260 2,048 0 0 4,467 7,261 6.48 4.4% 0.25
10.53 6.9% 2.00
2009E 3 0 0 0 3 0 0 0 0 3 -724 727 160 0 567
Change 2010E 54 0 0 0 54 0 0 0 0 54 -1,590 1,643 362 0 1,282
2011E 158 0 0 0 158 0 0 0 0 158 -948 1,106 243 0 863
0.82 0.6% 0.00
1.86 1.2% 0.00
1.25 0.7% 0.00
Source: DnB NOR Markets
DnB NOR Markets - 19
03.02.2010
Sector report > Nordic Financials
Valuation Danske Bank Divisional 2010 estimates DKKm Net interest income Net fee income Net trading income Other income Total income Integration expenses Staff costs Other costs Operating expenses Profit before w -ds Credit loss expenses Profit before tax
Banking activities 26,802 6,448 1,014 2,792 37,056 738 7,828 14,177 22,743 14,313 14,812 -499
Markets 0 0 9,015 0 9,015 0 1,459 1,107 2,566 6,449 300 6,149
Capital 307 1,188 41 84 1,619 36 572 362 971 648 80 568
Pension 0 0 0 1,102 1,102 0 0 0 0 1,102 0 1,102
Other 4 -26 308 103 389 0 3,044 -2,705 339 50 0 50
Group 27,113 7,609 10,378 4,081 49,181 774 12,904 12,941 26,619 22,562 15,192 7,370
75% 85% 63%
18% 10% 29%
3% 4% 3%
2% 0% 5%
1% 1% 0%
100% 100% 100%
1,029 0 0 -1,527
463 0 0 5,685
47 0 0 521
79 0 0 1,023
4 0 0 47
1,621 0 0 5,749
Markets 15,898 23.05 8.24 36%
Capital 4,239 6.15 0.76 12%
Pension 6,359 9.22 1.48 16%
Other 15,898 23.05 0.07 0%
Group 105,983 153.64 8.33 5% 0.87 16.01
2.48 15,764 22.85
0.49 7,864 11.40
0.90 95,253 138.09
2.48 15,764 22.85
1.69 26,788 38.83
1.80 190,971 276.85
Share of - total income - operating expenses - profit before w -d Tax Minorities State guarantee scheme Profit
Key divisional data Allocated equity BVPS EPS RoE P/B P/E
Banking activities 63,590 92.19 2.21 -2%
Valuation using present multiples Benchmark P/B Value Value pr share
0.70 44,661 64.74
1.10 17,532 25.42
2.22 9,432 13.67
Valuation using historical multiples Historical P/B Value Value pr share
1.55 98,830 143.27
2.53 40,158 58.22
2.22 9,432 13.67
Source: DnB NOR Markets
DnB NOR Markets - 20
Sector report > Nordic Financials
Nordic financials share development 350% 300% One year performance
03.02.2010
250% 200% 150%
Danske Bank
100% 50% 0% -50% -100% -5%
0%
5% 10% 15% One-month performance
20%
25%
Blue lines show OMXC20 index return in same period.
Sum-of-the-parts 160 138
140 Last= 133.4 120 100 80 60 40 20 0 BA
Markets
Pension
C apital
Other
Group
Source: DnB NOR Markets Danske Bank Risk assessment Key risk factor loan loss development in Denmark 9 Downside risk o Loan losses in Denmark and Ireland o Lending towards real estate/financial sector o Sampo Bank integration costs o Danish bank and credit package 9 Upside risk o Pro-active loan loss provision early in the cycle could make Danske a relative winner going forward. o Further cost-cutting initiatives Fair price In our SOTP we see little value in the large Banking Activities division and with the uncertainty surrounding a potential equity issue we recommend HOLD with a fair price of 138 DKK.
DnB NOR Markets - 21
DANSKE BANK (DANSKE.CS) PROFIT & LOSS DKKm Net Interest Income Tot. o ther operating income Operating income Personell expenses Administra tion expenses Depr. and write-downs Other operating expenses Operating expenses Profit before loan losses Lo an losses & guarantees Net gain/loss long-term inv. Pre tax pro fit Taxes Net p rofit
BALANCE SHEET Total Assets Gross loa ns Deposits Equity
2006 19,501 17,985 37,486 10,693
2007 24,493 20,731 45,224 13,084
2008 27,005 16,038 43,043 13,035
2009e 27,475 31,828 59,302 13,410
2010e 27,113 22,068 49,181 12,904
2011e 27,923 18,840 46,763 13,241
Q2 09 6,907 8,169 15,076 3,451
Q3 09 6,625 6,977 13,602 3,164
Q4 09 6,716 6,702 13,417 3,187
Q1 10e 6,709 6,303 13,012 3,196
Q2 10e 6,765 6,028 12,792 3,218
8,792 19,485 18,001 -496
11,986 25,070 20,154 693
15,691 28,726 14,317 12,088
14,834 28,243 31,059 27,516
13,715 26,619 22,562 15,192
13,572 26,813 19,950 9,535
5,038 8,489 6,587 6,550
3,174 6,338 7,264 6,164
3,334 6,520 6,897 6,821
3,298 6,494 6,518 5,341
3,480 6,698 6,094 4,044
18,497 4,952 13,557
19,461 4,436 14,968
2,229 1,193 1,011
3,543 2,176 1,381
7,370 1,621 5,749
10,416 2,291 8,124
37 865 -828
1,100 517 583
76 17 59
1,177 259 918
2,051 451 1,599
0 0 0 95
3,350 1,701 798 104
3,544 1,785 800 98
3,555 1,796 880 99
3,610 1,851 907 104
3,698 1,940 950 111
nm 48.0 nm 52.0 nm 7.4 nm nm
nm 45.8 0.0 55.4 46.9 20.6 nm nm
nm 37.3 0.7 66.7 44.8 -4.8 5.0 0.3
nm 53.7 1.5 47.6 49.0 37.8 0.6 10.0
nm 44.9 0.8 54.1 49.0 -17.1 3.1 3.1
nm 40.3 0.5 57.3 49.0 -4.9 4.8 4.8
2006 19.81 7.75 139.1 684.3 251.00 12.7 3.1 1.8
2007 21.90 8.50 152.7 683.6 199.75 9.1 4.3 1.3
2008 1.47 0.00 142.4 689.8 52.00 35.5 0.0 0.4
2009e 2.00 0.00 143.4 689.8 118.00 58.9 0.0 0.8
2010e 8.33 0.25 151.4 689.8 133.40 16.0 0.2 0.9
2011e 11.78 2.00 161.2 689.8 133.40 11.3 1.5 0.8
DKKbn
MARGINS, RATIOS Net Interest marg. Other inc./tot. inc. Loan loss ratio Cost/Income ratio Deposit/loans ratio Revenue growth Le nding growth Deposit growth
% % % % % % % %
VALUATION EPS Div idend ps Book per share Year end shares Price P/E Div idend yield P/Book
DKK DKK DKK million DKK X % X
Share price and target Price DKK Price target 12m DKK Recommendation
133.40 138.00 HOLD
Financial structure 92,020 Market cap. DKKm 689.8 Shares outst. million 454.7 Free floa t million Share price performance 13/9/131 Abs. 1/3/12m 7/-1/92 Rel. 1/3/12m 141/34 High/Low 12m DKK 358.2 OMXC20 index 30 30days volatility % Company attributes DANSKE.CS Reuters ticker Financials Banks Denmark
Reporting Q1 2010 Q2 2010
04.05.2010 10.08.2010
Manag ement Peter Straarup CEO Tonny Thierry Andersen CFO Address Dansk e Bank Holmens kanal 2-12 1092 Copenhagen, Denmark H.p.: www.danskebank.com Tel +45 3344 0000
Analyst: Odd Weidel +47 22 94 89 49
[email protected]
Sector report > Nordic Financials
03.02.2010
Rebased price (12m, DKK) 260 240 220 200 180 160 140 120 100 80 60 40 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
Rebased consensus average forward EPS (12m, DKK) 100 90 80 70 60 50 40 30 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Danske Bank
Danske Bank
Interest inc. (DKKm) 30,000
Interest inc. growth 30% 25%
25,000
15%
15,000
10%
10,000
5%
5,000
0% 2005
2006
2007
2008 2009e 2010e 2011e
Interest inc. (DKKm)
Costs (DKKm) 35,000
10
20
-5%
6 10
0
10,000
20,000
20%
5,000 2008 2009e 2010e 2011e
0%
100% 80% 60%
20,000
40%
15,000
20%
10,000
0%
5,000
-20%
0
-40%
2005
2006
2007
2008 2009e 2010e 2011e
Other income (DKKm)
Other income growth
2009e
2010e
2011e
0
DPS (DKK)
Loan losses (%) 1.8% 1.4% 1.2% 1.0%
10,000
0.8% 0.6%
5,000
0.4%
0 -5,000
0.2% 2005
2006
2007
2008 2009e 2010e 2011e
Loan losses (DKKm)
Other income growth 120%
25,000
2008
1.6%
Cost/income
30,000
2007
15,000
10%
Other income (DKKm) 35,000
2006
Loan losses (DKKm) 30,000
60%
30%
Costs (DKKm)
2005
25,000
40%
15,000
2007
2
70%
50%
20,000
2006
4
5
EPS (DKK)
Cost/income 80%
25,000
2005
8
15
Interest inc. growth
30,000
0
DPS (DKK) 12
20%
20,000
0
EPS (DKK) 25
0.0%
Loan losses (%)
Price/Book 2.0 1.8
ROE 20% 18%
1.6 1.4
16% 14%
1.2 1.0 0.8
12% 10% 8%
0.6 0.4
6% 4%
0.2 0.0
2% 0%
2005
2006
2007
Price/Book
2008
2009e 2010e 2011e ROE
DnB NOR Markets - 23
Sector report > Nordic Financials
03.02.2010
DnB NOR Main risk factor is concentration … Geographical distribution of lending portfolio
All banks are a bet on macroeconomic conditions, and DnB NOR have been almost uniquely placed among its Nordic peers as the leading bank in a high growth, industrialized economy. DnB NOR has, due to this fact, historically been viewed upon as a defensive bank. The downturn in Norway has been very modest to say the least. Unemployment is surprisingly benign and interest rate hikes are now highly likely before year end. Any rate hikes at these levels should only ease pressure on the deposit margins if anything and, as such, should only be interpreted positively for DnB NOR.
America 6% Sweden 5%
No rway 73%
… towards Norway in general and the shipping sector in particular Sector distribution of lending portfolio
Retail total 42%
DnB NOR is Norway’s largest financial services group and operates under several brands. DnB NOR is also among the leading international banks within the shipping and fisheries industries. DnB NOR owns 51% of DnB NORD, with NORD/LB (German Landesbank NORD) owning the remaining 49%.
Shipping 10% Real estate 15%
Other 34%
DnB NORD evaluation process initiated. Energy sector initiative We assess the concentration risk in the lending portfolio to be large due primarily to the 10% exposure towards the shipping sector but also due to the large exposure towards a single nation, Norway (77% of lending). Since many sectors are interlinked through the commodities market and the oil price in particular this creates a definitive concentration of risk. Commodity prices have fallen steeply and Brent oil prices are down almost 70% since peak in July 2008. Lagging effects dampen the immediate feed-back though and in the short term Norway has limited vulnerability shielding DnB NOR. DnB NOR has an “internal” 10% limit towards the shipping sector and this constraint could limit upside potential should the markets improve. DnB NOR initiated the evaluation process of DnB NORD joint venture late December. Although we expect DnB NORD to continue to burden the DnB NOR share losses will be split with NORD/LB, and this is underlined in our SOTP-analysis which shows only a minor negative value contribution. "Too good to be true" Norwegian macroeconomic should provide downside protection, although a slight "dutch disease" worry has popped into our minds lately.
Nordic GDP per capita 80,000
Brent oil 80.00
GDP pr capita
75.00
70,000 70.00
60,000 65.00
50,000 60.00
40,000
55.00
30,000
50.00
20,000
45.00
10,000
40.00
0 Sweden 2007
Finland 2008
2009
Norway 2010
Denmark
High GDP per capita in Norway offer significant down-side protection.
35.00 Jan-09
Feb-09 Mar-09
Apr-09 May-09 Jun-09
Jul-09
Aug-09
Sep-09
An oil price, at or above, 80 $/b, would be positive
Source: IMF, Reuters, DnB NOR Markets
DnB NOR Markets - 24
03.02.2010
Sector report > Nordic Financials
Estimates Q409 preview NOKm
Q408 Reported
Q409E Q409E Chg YoY DNM Market* Abs.
Net interest income Net other income Total income Operating expences Profit before loan losses Loss/gain l.t investm. Loan losses Pre-tax op PL Taxes Minorities Period PL
6,195 4,705 10,900 5,619 5,281 6 2,314 2,973 1,321 -402 2,054
5,933 4,040 9,973 4,686 5,288 0 2,654 2,633 948 -498 2,184
5,643 3,102 8,745 4,545 4,200 0 2,569 1,631
EPS reported ROE Dividend
1.5 10.3% n.a.
1.3 9.1% n.a.
1.1
1,086
DnB NOR Markets 2009E 2010E 2011E
%
-262 -665 -927 -933 7 -6 340 -340 -373 -96 130
-4% -14% -9% -17% 0% -100% 15% -11% -28% 24% 6%
23,340 15,833 39,173 18,907 20,267 7 8,848 11,425 4,033 -1,625 9,018
24,881 16,361 41,242 19,238 22,004 0 7,717 14,286 3,711 -1,181 11,757
27,294 16,146 43,440 20,222 23,219 0 4,242 18,977 4,549 -506 14,934
-0.2 -1.2% n.a.
-0.1 -11.4% n.a.
5.5 8.6% 0.0
7.2 10.2% 1.0
9.2 11.7% 2.0
2009E
Change 2010E
2011E
Estimate changes NOKm
Net interest income Net other income Total income Operating expences Profit before loan losses Loss/gain l.t investm. Loan losses Pre-tax op PL Taxes Minorities Period PL
EPS reported ROE Dividend
New estim ates 2009E 2010E 2011E
Old estim ates 2009E 2010E 2011E
23,340 15,833 39,173 18,907 20,267 7 8,848 11,425 4,033 -1,625 9,018
24,881 16,361 41,242 19,238 22,004 0 7,717 14,286 3,711 -1,181 11,757
27,294 16,146 43,440 20,222 23,219 0 4,242 18,977 4,549 -506 14,934
23,338 15,833 39,171 18,907 20,264 7 8,848 11,423 4,032 -1,625 9,016
24,818 16,364 41,181 19,238 21,943 0 7,717 14,226 3,695 -1,182 11,713
27,087 16,156 43,243 20,222 23,021 0 4,242 18,779 4,502 -511 14,788
2 0 2 0 2 0 0 2 1 0 1
64 -3 61 0 61 0 0 61 15 2 44
207 -10 198 0 198 0 0 198 47 5 145
5.5 8.6% 0.0
7.2 10.2% 1.0
9.2 11.7% 2.0
5.4 7.7% 0.0
7.0 9.2% 1.0
8.9 10.6% 2.0
0.1 0.9% 0.0
0.2 1.0% 0.0
0.3 1.1% 0.0
Source: DnB NOR Markets
DnB NOR Markets - 25
03.02.2010
Sector report > Nordic Financials
Valuation DnB NOR NOKm Net interest income Net other income Total income Total expenses Profit before w -d Net PL on l.t investm. Loan losses Operating profit Share of - total income - operating expenses - profit before w -d Tax Minorities Net Profit
Corporate 6,331 2,427 8,758 1,718 7,040 0 1,595 5,445
Retail 16,193 3,917 20,110 10,914 9,196 0 1,759 7,437
Markets Life & AM DnB NORD 1,301 8 1,580 4,928 3,939 617 6,229 3,947 2,197 1,879 2,301 1,809 4,350 1,646 388 0 0 0 0 0 3,143 4,350 1,646 -2,755
21% 9% 32%
49% 57% 42%
15% 10% 20%
10% 12% 7%
1,187 0 4,257
1,551 0 5,886
734 0 3,617
278 0 1,369
Other -531 534 2 618 -616 0 1,220 -1,836
Group 24,881 16,361 41,242 19,238 22,004 0 7,717 14,286
5% 9% 2%
0% 3% -3%
100% 100% 100%
65 -1,181 -1,640
-104 0 -1,732
3,711 -1,181 11,757
Other 5,788 3.55 1.06 0.30
Group 115,768 71.08 7.22 0.10 0.95 9.36
Source: DnB NOR Markets
Key divisional data Allocated equity BVPS EPS RoE P/B P/E
Corporate 46,307 28.43 2.61 0.09
Retail 28,942 17.77 3.61 0.20
Markets Life & AM DnB NORD 15,050 13,892 5,788 9.24 8.53 3.55 2.22 0.84 1.01 0.24 0.10 0.28 -
Valuation using present multiples Benchmark P/B Value Value pr share
1.30 60,248 36.99
1.34 38,682 23.75
0.79 11,918 7.32
1.24 17,218 10.57
0.34 1,993 1.22
0.72 4,181 2.57
1.16 134,239 82.42
1.69 23,502 14.43
0.94 5,451 3.35
1.55 8,945 5.49
1.78 206,173 126.58
Valuation using historical multiples Historical P/B Value Value pr share
1.83 84,653 51.97
1.78 51,451 31.59
2.14 32,171 19.75
Source: DnB NOR Markets
DnB NOR Markets - 26
Sector report > Nordic Financials
Nordic financials share development 350% 300% One year performance
03.02.2010
DnB NOR
250% 200% 150% 100% 50% 0% -50% -100% -5%
0%
5% 10% 15% One-month performance
20%
25%
Blue lines show OBX index return in same period.
Sum-of-the-parts 100
82 80 Last= 67.55 60
40
20
0 Corporate
Retail
Markets
Life & AM
DnB NORD
Other
Group
Source: DnB NOR Markets Risk assessment Concentration risk is our main concern, although that’s a long term issue presently. Exposure towards the Baltic area is approximately the same as for Nordea but the latter has been trading at an average P/B of 0.8 in 2008 (46% above DnB NOR) clearly showing the desirable effects of Nordic diversification. 9 Downside risk o Shipping sector development o Life insurance operations. Solvency 2, potentially, putting more pressure on capital adequacy. o 51% owned DnB NORD, Baltic exposure (~NOK 50 after adjusting for LB/Nord ownership). o 'To good to be true Norwegian macroeconomic' tilting into a case of Dutch disease 9 Upside risk o Energy sector initiative Increasing oil price (at or above 80 $/b) o Shipping, China pulling rates and the world economy o Significant and sustained increases in lending margins. Fair price No recommendation
DnB NOR Markets - 27
DNB NOR (DnBNOR.OL) PROFIT & LOSS NOKm Net Interest Income Tot. other operating income Operating income Personell expenses Administra tion expenses Depr. and write-downs Other operating expenses Operating expenses Profit before loan losses Loan losses & guarantees Net gain/loss long-term inv. Pre tax profit Taxes Net p rofit
BALANCE SHEET Total Assets Gross loa ns Deposits Equity
2006 15,289 13,224 28,513
2007 17,853 13,710 31,563
2008 21,911 12,836 34,747
2009e 23,340 15,833 39,173
2010e 24,881 16,361 41,242
2011e 27,294 16,146 43,440
Q2 09 5,877 2,695 8,572
Q3 09 5,743 3,951 9,694
Q4 09 5,933 4,040 9,973
Q1 10e 6,049 4,120 10,169
Q2 10e 6,147 4,098 10,246
14,428 14,085 -243 364 14,692 2,882 11,668
16,452 15,111 220 2,480 17,371 2,387 14,743
18,722 16,025 3,510 53 12,568 3,333 9,528
18,907 20,267 8,848 7 11,425 4,033 9,018
19,238 22,004 7,717 0 14,286 3,711 11,757
20,222 23,219 4,242 0 18,977 4,549 14,934
4,877 3,695 2,318 6 1,383 503 1,438
4,651 5,043 2,277 -4 2,762 1,002 2,168
4,686 5,288 2,654 0 2,633 948 2,184
4,729 5,441 2,660 0 2,781 834 2,372
4,781 5,465 2,065 0 3,400 850 2,862
1,320 828 475 66
1,474 973 538 76
1,716 1,194 617 82
1,860 1,143 606 105
1,951 1,226 650 116
2,090 1,354 718 128
nm 46.4 0.0 50.6 57.3 12.6 18.7 15.5
nm 43.4 0.0 52.1 55.3 10.7 17.5 13.4
nm 36.9 0.3 53.9 51.7 10.1 22.6 14.6
nm 40.4 0.8 48.3 53.0 12.7 -4.2 -1.8
nm 39.7 0.6 46.6 53.0 5.3 7.3 7.3
nm 37.2 0.3 46.6 53.0 5.3 10.4 10.4
2006 8.73 4.00 48.1 1335.8 84.04 9.6 4.8 1.7
2007 11.08 4.50 56.9 1334.1 78.82 7.1 5.7 1.4
2008 7.40 0.00 61.4 1334.1 25.64 3.5 0.0 0.4
2009e 5.54 0.00 64.7 1628.8 62.75 11.3 0.0 1.0
2010e 7.22 1.00 71.1 1628.8 67.55 9.4 1.5 1.0
2011e 9.17 2.00 78.5 1628.8 67.55 7.4 3.0 0.9
NOKb n
MARGINS, RATIOS Net Interest marg. Other inc./tot. inc. Loan loss ratio Cost/Income ratio Deposit/loans ratio Revenue growth Le nding growth Deposit growth
% % % % % % % %
VALUATION EPS Div idend ps Book per share Year end shares Price P/E Div idend yield P/Book
NOK NOK NOK million NOK X % X
Share price and target Price NOK Recommendation
67.55 NO REC
Financial structure 110,025 Market cap. NOKm 1,628.8 Shares outst. million 1,023.9 Free floa t million Share price performance 8/9/218 Abs. 1/3/12m 9/-2/148 Rel. 1/3/12m 70/20 High/Low 12m NOK 369.6 OSEBX index 34 30days volatility % Company attributes DnBNOR.OL Reuters ticker Financials Banks Norway
Reporting Q1 2010 Q2 2010 Management CEO CFO Address DnB NOR Stranden 21 0021 Oslo, Norway H.p.: www.dnbnor.no Tel +47 915 03000
Analyst: Odd Weidel +47 22 94 89 49
[email protected]
29.04.2010 09.07.2010
Rune Bjerke Bjørn Erik Næss
Sector report > Nordic Financials
03.02.2010
Rebased consensus average forward EPS (12m, NOK) 135
Rebased price (12m, NOK) 350
130
300
125 120
250
115
200
110 105
150
100
100
95
50 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
90 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb DnB NOR
DnB NOR
Interest inc. (NOKm) 30,000
Interest inc. growth 25%
25,000
20%
20,000
15% 10%
10,000 5,000 2005
2006
2007
2008 2009e 2010e 2011e
Interest inc. (NOKm)
Costs (NOKm) 25,000
4.0 3.5
8.0
3.0 2.5 2.0
4.0
5%
2.0
0%
0.0
Cost/income 56.0% 54.0%
15,000
50.0% 48.0%
10,000
46.0% 5,000
2006
2007
2008 2009e 2010e 2011e
Costs (NOKm)
42.0%
20%
14,000
15%
12,000
10%
10,000 8,000
5%
6,000
0%
4,000
-5%
2,000 2007
2008 2009e 2010e 2011e
Other income (NOKm)
Other income growth
2007
2008
-10%
2009e
2010e 2011e
Loan losses (%) 0.90% 0.80% 0.70% 0.60%
6,000
0.50% 0.40% 0.30%
4,000 2,000
0.20% 0.10%
0 -2,000
0.5 0.0
DPS (NOK)
2005
2006
2007
2008 2009e 2010e 2011e
Loan losses (NOKm)
Other income growth 25%
16,000
2006
2006
8,000
Cost/income
Other income (NOKm) 18,000
2005
2005
Loan losses (NOKm) 10,000
44.0% 2005
1.5 1.0
EPS (NOK)
52.0%
0
10.0
Interest inc. growth
20,000
0
DPS (NOK) 5.0 4.5
6.0
15,000
0
EPS (NOK) 12.0
0.00% -0.10%
Loan losses (%)
Price/Book 2.0 1.8
ROE 25%
1.6 1.4
20%
1.2 1.0 0.8
15% 10%
0.6 0.4 0.2 0.0
5%
2005
2006
2007
Price/Book
2008
2009e 2010e 2011e
0%
ROE
DnB NOR Markets - 29
Sector report > Nordic Financials
03.02.2010
Handelsbanken Geographical distribution of lending portfolio
Sweden, 69%
No rway 10%
Any potential equity issue speculations should be viewed in relation to the risk level. We believe Handelsbanken has no liquidity or solidity issues and, as a consequence, no risk of equity issues.
Handelsbanken is the third largest financial institution in the Nordic area in market cap terms (EUR 8.3 bn). The banks full name Svenske Handelsbanken should not fool anyone as it is diversified and represented in all the Nordic countries. International growth has been pursued for a number of years but on a steady organic growth basis. Handelsbanken is generally looked upon as being conservative and with a distinct decentralized organization. We basically share this view. 4% of its lending exposure to both UK and Denmark should be well within the comfort zone. The banks combined non-Nordic operations sums up to around 10% of total lending and overall exposure to Eastern-Europe is very limited. Although the growth strategy might be slow, it has paid off during this “perfect financial storm”. The share has performed well relative to other Nordic banks and has traded at an average P/B in 2008 at 1.2, which was a staggering 90% above Nordic peer group average. 5-year senior bank CDS development clearly shows that Handelsbanken has no liquidity issues and with regards to the general equity issue speculations (concerning all banks) we would argue these matters are a relative issue and not an absolute one. IMFs recent GFSR pinpointed UK as an area of tension and where there is a mismatch between lending capacity and demand. We believe Handelsbanken will be able to tap into this market successfully and that the trend seen in Q2 will continue. EPSI Rating is a customer satisfaction measurement company and their recent rating in UK shows an astonishing result for Handelsbanken.
Customer survey UK 93
88
83
78
73
68 Image
Expect
Barclays RBS
ProdQ
ServQ
Value
Lloyds TSB Handelsbanken
EPSI
Loyal
HSBC Midland
Source: EPSI UK, DnB NOR Markets
DnB NOR Markets - 30
03.02.2010
Sector report > Nordic Financials
Estimates Q409 preview SEKm
Q408 Q409E Q409E Chg YoY Reported DnB NOR Market* Abs.
DnB NOR Markets 2009E 2010E 2011E
%
Net interest income Net fee and commission i Net financial income Other income Total income Staff costs Total expenses Profit before loan losses Net loan losses Loss/gain l.t investm. Operating profit Taxes Pension settlement Minorities Profit for the period
5,474 1,694 2,229 115 9,512 -3,600 -3,600 5,912 -696 0 5,216 -705 0 0 4,511
5,604 1,845 649 128 8,226 -3,743 -3,743 4,484 -1,182 0 3,302 -825 0 0 2,476
130 151 -1,580 13 -1,286 -143 -143 -1,428 -486 0 -1,914 -120 0 0 -2,035
2% 9% -71% 11% -14% 4% 4% -24% 70% 0% -37% 17% 0% 0% -45%
22,244 7,252 2,617 493 32,606 -15,012 -15,012 17,595 -3,891 1 13,705 -3,583 0 0 10,121
22,842 7,494 2,239 1,290 33,865 -15,387 -15,387 18,478 -4,805 0 13,673 -3,418 0 0 10,254
24,977 7,743 2,165 1,465 36,351 -16,269 -16,269 20,082 -3,514 0 16,568 -4,142 0 0 12,426
EPS reported ROE Dividend
7.1 24.1% n.a.
3.9 11.6% n.a.
-3.2 -12.4% n.a.
-0.5 -51.6% n.a.
15.8 13.6% 5.0
16.0 12.2% 5.0
19.4 12.9% 7.0
Estimate changes Old estim ates 2009E 2010E 2011E
2009E
Change 2010E
2011E
Net interest income 22,244 22,842 24,977 22,240 22,728 24,606 Net fee and commission in 7,252 7,494 7,743 7,252 7,494 7,743 Net financial income 2,617 2,239 2,165 2,617 2,239 2,165 Other income 493 1,290 1,465 493 1,290 1,465 Total income 32,606 33,865 36,351 32,602 33,751 35,980 Staff costs -15,012 -15,387 -16,269 -15,012 -15,387 -16,269 Total expenses -15,012 -15,387 -16,269 -15,012 -15,387 -16,269 Profit before loan losses 17,595 18,478 20,082 17,590 18,364 19,711 Net loan losses -3,891 -4,805 -3,514 -3,884 -4,768 -3,452 Loss/gain l.t investm. 1 0 0 1 0 0 Operating profit 13,705 13,673 16,568 13,708 13,596 16,259 Taxes -3,583 -3,418 -4,142 -3,584 -3,399 -4,065 Pension settlement 0 0 0 0 0 0 Minorities 0 0 0 0 0 0 Profit for the period 10,121 10,254 12,426 10,123 10,197 12,194
5 0 0 0 5 0 0 5 -8 0 -3 1 0 0 -2
114 0 0 0 114 0 0 114 -37 0 77 -19 0 0 58
371 0 0 0 371 0 0 371 -62 0 309 -77 0 0 232
(0.0) 0.0% -
0.1 0.1% -
0.4 0.2% -
SEKm
EPS reported ROE Dividend
New estim ates 2009E 2010E 2011E
15.8 13.6% 5.0
16.0 12.2% 5.0
19.4 12.9% 7.0
15.8 13.6% 5.0
15.9 12.1% 5.0
19.1 12.7% 7.0
Source: DnB NOR Markets
DnB NOR Markets - 31
03.02.2010
Sector report > Nordic Financials
Valuation Handelsbanken Divisional 2010 estimates Handelsbanken SEK m Net interest income Net fee and com. income Net financial income Other income Total income Total expenses Profit before loan losses Net loan losses Net PL on l.t investm. Operating profit Taxes Pension settlement Minorities Profit for the period
Banking Sw edish Foreign 14,054 7,902 3,543 1,658 557 126 133 -12 18,286 9,674 -6,695 -4,803 11,591 4,871 -3,608 -1,197 0 0 7,983 3,674 -2,144 -901 0 0 0 0 5,839 2,773
Share of - total income - operating expenses - profit before w -d
54% 44% 63%
Markets 476 1,273 1,180 -16 2,913 -2,226 686 0 0 686 -127 0 0 559
29% 31% 26%
9% 14% 4%
Banking Sw edish Foreign 56,498 11,806 90.62 18.94 9.36 4.45 10% 23%
Markets 6,746 10.82 0.90 8%
Asset Overhead Mgm t & other 152 259 1,009 11 233 143 193 992 1,587 1,405 -929 -733 658 672 0 0 0 0 658 672 -122 -124 0 0 0 0 536 547
5% 6% 4%
4% 5% 4%
Group 22,842 7,494 2,239 1,290 33,865 -15,387 18,478 -4,805 0 13,673 -3,418 0 0 10,254
100% 100% 100%
Source: DnB NOR Markets
Key divisional data Allocated equity BVPS EPS RoE P/B P/E
Asset Overhead Mgm t & other 4,216 5,060 6.76 8.12 0.86 0.88 13% 11%
Group 84,325 135.25 16.45 12% 1.45 11.92
Valuation using present multiples Benchmark P/B Value Value pr share
1.35 76,445 122.61
1.45 17,137 27.49
1.44 9,731 15.61
2.39 10,091 16.19
1.36 6,864 11.01
1.43 120,267 192.90
2.25 9,499 15.24
1.73 8,772 14.07
1.76 148,159 237.64
Valuation using historical multiples Historical P/B Value Value pr share
1.73 97,825 156.90
1.79 21,159 33.94
1.62 10,905 17.49
Source: DnB NOR Markets
DnB NOR Markets - 32
Sector report > Nordic Financials
Nordic financials share development 350% 300% One year performance
03.02.2010
250% 200% 150% 100%
Handelsbanken A
50% 0% -50% -100% -5%
0%
5% 10% 15% One-month performance
20%
25%
Blue lines show OMXS30 index return in same period.
Sum-of-the-parts 250
200
193
Last= 196
150
100
50
0 Sw edish
Non-Sw edish
Markets
AM
Overhead
Group
Source: DnB NOR Markets Risk assessment We believe Handelsbanken’s strategy and track record will lead to substantial lower loan losses than its Nordic peers. It can, and should, be regarded as defensive and retail oriented. 9 Downside risk o Investment property/real estate exposure o Contracting Swedish economy 9 Upside risk o Ability to grow during crisis generating higher than expected earnings Growth in UK operations o Further cost cutting measures Fair price Excellent strategic track record and history of “lower-than-peers” loan losses, but priced in the high brackets compared to its Nordic peers we see a limited potential in Handelsbanken in the short term placing our recommendation at HOLD, 193 SEK.
DnB NOR Markets - 33
HANDELSBANKEN (SHB__A.SS) PROFIT & LOSS SEKm 2006 2007 2008 2009e 2010e 2011e Net Interest Income 14,679 15,608 19,223 22,244 22,842 24,977 11,549 11,518 10,667 10,362 11,022 11,374 Tot. other operating income Operating income 26,228 27,126 29,890 32,606 33,865 36,351 Personell expenses Administra tion expenses Depr. and write-downs Other operating expenses -11,416 -12,368 -13,229 -15,012 -15,387 -16,269 Operating expenses Profit before loan losses 14,812 14,758 16,661 17,595 18,478 20,082 55 -27 -1,605 -3,891 -4,805 -3,514 Loan losses & guarantees Net gain/loss long-term inv. Pre tax profit 14,867 14,731 15,056 13,704 13,673 16,568 -4,036 -3,707 -3,382 -3,583 -3,418 -4,142 Taxes Net p rofit 10,830 11,023 11,404 10,119 10,254 12,426
BALANCE SHEET Total Assets Gross loa ns Deposits Equity
SEKb n
MARGINS, RATIOS Net Interest marg. Other inc./tot. inc. Loan loss ratio Cost/Income ratio Deposit/loans ratio Revenue growth Le nding growth Deposit growth
% % % % % % % %
VALUATION EPS Div idend ps Book per share Year end shares Price P/E Div idend yield P/Book
SEK SEK SEK million SEK X % X
1,772 1,278 534 66
1,859 1,478 513 70
2,159 1,481 544 75
2,210 1,490 628 74
2,337 1,601 756 84
2,533 1,773 955 96
nm 44.0 0.0 nm 41.8 -0.4 nm 31.0
nm 42.5 0.0 nm 34.7 3.4 15.6 -3.9
nm 35.7 -0.1 nm 36.7 10.2 0.2 6.0
nm 31.8 -0.3 nm 42.2 9.1 0.6 15.5
nm 32.5 -0.3 nm 47.2 3.9 7.5 20.3
nm 31.3 -0.2 nm 53.9 7.3 10.7 26.4
2006 16.84 8.00 102.5 643.3 207.00 12.3 3.9 2.0
2007 17.66 14.50 112.7 624.2 207.00 11.7 7.0 1.8
2008 17.83 7.00 117.2 639.6 126.00 7.1 5.6 1.1
2009e 15.82 5.00 116.4 639.6 204.20 12.9 2.4 1.8
2010e 16.03 5.00 131.8 639.6 196.00 12.2 2.6 1.5
2011e 19.43 7.00 150.6 639.6 196.00 10.1 3.6 1.3
Q2 09 5,638 2,582 8,220
Q3 09 5,609 2,165 7,774
Q4 09 5,604 2,622 8,226
Q1 10e 5,556 2,676 8,232
Q2 10e 5,649 2,768 8,417
-3,836 4,384 -947
-3,749 4,025 -866
-3,743 4,484 -1,182
-3,784 4,448 -1,396
-3,820 4,597 -1,437
3,437 -916 2,521
3,159 -790 2,369
3,302 -825 2,476
3,052 -763 2,289
3,161 -790 2,371
Share price and target Price SEK Price target 12m SEK Recommendation
196.00 193.00 HOLD
Financial structure 122,200 Market cap. SEKm 623.5 Shares outst. million 489.4 Free floa t million Share price performance -4/7/129 Abs. 1/3/12m -6/3/68 Rel. 1/3/12m 211/93 High/Low 12m SEK 971.8 OMXS30 index 20 30days volatility % Company attributes SHB__A.SS Reuters ticker Financials Banks Sweden
Reporting Q1 2010 Q2 2010
28.04.2010 20.07.2010
Management Per Boman CEO Ulf Riese CFO Address Handelsbanken Kungsträdgårdsgatan 2 SE-106 70 Stockholm, Sweden H.p.: www.handelsbanken.se Tel +46 8701 1000
Analyst: Odd Weidel +47 22 94 89 49
[email protected]
Sector report > Nordic Financials
03.02.2010
Rebased price (12m, SEK) 260
Rebased consensus average forward EPS (12m, SEK) 120
240
115
220
110
200
105
180
100
160
95
140
90
120
85
100 80 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
80 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Handelsbanken
Handelsbanken
Interest inc. (SEKm) 30,000
Interest inc. growth 25%
25,000
20%
20,000
15%
15,000
10%
10,000
5%
5,000
0%
0
2005
2006
2007
2008 2009e 2010e 2011e
Interest inc. (SEKm)
Costs (SEKm) 0
-5%
EPS (SEK) 25.0
14.0
20.0
12.0 10.0
15.0
8.0 10.0
6.0 4.0
5.0
2.0
0.0
2005
Cost/income -39.0%
0
-41.0%
-1,000
-42.0%
-8,000
-43.0%
-10,000
-44.0%
-12,000 -16,000
-46.0% -47.0%
-6,000
2008 2009e 2010e 2011e
Costs (SEKm)
Other income (SEKm) 11,800 11,600 11,400 11,200 11,000 10,800 10,600 10,400 10,200 10,000 9,800 9,600 2005 2006 2007
Loan losses (%) 0.05% 0.00% -0.05% -0.10% -0.15% -0.20%
-4,000 -5,000
-0.25% -0.30% 2005
2006
2007
2008 2009e 2010e 2011e
Loan losses (SEKm)
Cost/income
Other income growth 8%
2% 0% -2% -4% -6%
Price/Book 2.50
ROE 20.0% 18.0%
2.00
16.0% 14.0%
1.50 1.00
12.0% 10.0% 8.0%
0.50
6.0% 4.0%
0.00
2.0% 0.0%
-8% 2008 2009e 2010e 2011e
Other income (SEKm)
Other income growth
-10%
-0.35%
Loan losses (%)
6% 4%
0.0
DPS (SEK)
-3,000
-45.0%
2007
2009e 2010e 2011e
-2,000
-14,000
2006
2008
Loan losses (SEKm) 1,000
-40.0%
-6,000
2007
EPS (SEK)
-4,000
2005
2006
Interest inc. growth
-2,000
-18,000
DPS (SEK) 16.0
2005
2006
2007
Price/Book
2008
2009e 2010e 2011e ROE
DnB NOR Markets - 35
Sector report > Nordic Financials
03.02.2010
Nordea Geographical distribution of lending portfolio
Finland, 20%
Denmark, 26%
No rway, 13% Sweden, 22%
We find comfort in the “forward looking “ attitude to both CEO Christian Calusen and deputy chairman Wahlroos. We see Nordea both cherry picking customers and potentially buying distressed banks.
Nordea was formed during 1997-2000 in a four-way merger between Unibank in Denmark, Meritabank in Finland, Nordbanken in Sweden and Christiania Bank og Kreditkasse in Norway. The combined entity is the leading financial services group in the Nordic and Baltic area, and the Nordea share is listed on all of the OMX Nordic exchanges (except Iceland) with primary listing in Stockholm. Nordea has pursued an organic growth strategy where the primary focus has been on Sweden. Growth has also been sought in the Baltic area but the region is still of minor importance to the bank (~3% of lending). Nordea has a sizeable operation in Russia after acquiring the remaining shares in Russian JSB Orgresbank. Although the bank is small we believe it exemplifies an increasing risk appetite in Nordea. We find the success of this strategy to be only partially voluntarily as the integration between the four banks has been time-consuming. This complex point of departure has not allowed any e.g. costly M&A activity. Due to the prevailing market conditions there have been some inevitable adjustments to the organic growth strategy. Nordea aims towards a "middle of the road" short term strategy in able to balance risk/reward. For banks in general we firmly believe in the logic behind scalability and the positive effects of diversification. In our view Nordea has the best Nordic platform for continued growth and believe that it will be able to utilize it in a cost prudent manner going forward. It therefore our assessment that Nordea will continue to experience strong organic growth and better customer inflow compared to its Nordic peers. In particular we see movement in market shares in Denmark and Sweden. Organization This is our Nordea “hiccup”. Although a matrix organization has several advantages we believe the current organization is too complex and this could hamper growth going forward.
Source: Nordea internet page
In brief Nordea is organized in three different customer areas and two product areas. In our sum-of-the-parts analysis we utilize the customer areas as a divisional basis. If we use the product area Investment Banking as an example you would typically see the income from this division being split into several of the customer areas.
DnB NOR Markets - 36
03.02.2010
Sector report > Nordic Financials
Estimates Q409 preview EURm
Q408 Q409E Q409E Chg YoY Reported DnB NOR Market* Abs.
%
DnB NOR Markets 2009E 2010E 2011E
Net interest income Net fee and commission i Net gains/losses on items Equity method Net other income Total operating income Staff costs Other expenses Depreciation of assets Total operating expenses Profit before credit losse Net loan losses Net gains tangible and int Operating profit Tax Minorities Profit
1,384 391 327 45 105 2,252 -656 -461 -34 -1,152 1,099 -320 0 780 -144 -1 635
1,336 448 389 7 45 2,225 -645 -401 -31 -1,077 1,148 -475 -1 672 -168 0 504
-48 57 63 -38 -60 -27 12 60 4 75 49 -156 -1 -107 -24 1 -131
-3% 15% 19% -84% -57% -1% -2% -13% -10% -7% 4% 49% 5715% -14% 17% -100% -21%
5,318 1,678 1,982 41 121 9,140 -2,668 -1,579 -127 -4,374 4,766 -1,614 -1 3,151 -780 0 2,371
5,438 1,796 1,703 46 186 9,169 -2,656 -1,651 -125 -4,432 4,737 -1,237 0 3,500 -875 0 2,625
5,962 1,870 1,763 43 178 9,815 -2,776 -1,700 -129 -4,605 5,210 -811 -1 4,398 -1,100 0 3,299
EPS reported ROE Dividend
0.2 14.3% n.a.
0.1 9.1% n.a.
-0.1 -5.2% n.a.
-0.5 -36.5% n.a.
0.6 11.8% 0
0.7 11.2% 0
0.8 12.6% 0
Estimate changes New estim ates 2009E 2010E 2011E
Old estim ates 2009E 2010E 2011E
Net interest income Net fee and commission in Net gains/losses on items Equity method Net other income Total operating income Staff costs Other expenses Depreciation of assets Total operating expenses Profit before credit losses Net loan losses Net gains tangible and inta Operating profit Tax Minorities Profit
5,318 1,678 1,982 41 121 9,140 -2,668 -1,579 -127 -4,374 4,766 -1,614 -1 3,151 -780 0 2,371
5,438 1,796 1,703 46 186 9,169 -2,656 -1,651 -125 -4,432 4,737 -1,237 0 3,500 -875 0 2,625
5,962 1,870 1,763 43 178 9,815 -2,776 -1,700 -129 -4,605 5,210 -811 -1 4,398 -1,100 0 3,299
5,317 1,678 1,982 41 121 9,139 -2,668 -1,579 -127 -4,374 4,764 -1,614 -1 3,150 -780 0 2,370
5,412 1,796 1,703 46 186 9,143 -2,656 -1,651 -125 -4,432 4,711 -1,232 0 3,479 -870 0 2,609
EPS reported ROE Dividend
0.6 11.8% 0.2
0.7 11.2% 0.2
0.8 12.6% 0.2
0.6 11.8% 0.2
0.6 11.2% 0.2
EURm
2009E
Change 2010E
2011E
5,874 1,870 1,763 43 178 9,727 -2,776 -1,700 -129 -4,605 5,122 -799 -1 4,323 -1,081 0 3,242
1 0 0 0 0 1 0 0 0 0 1 0 0 1 0 0 1
26 0 0 0 0 26 0 0 0 0 26 -6 0 21 -5 0 16
88 0 0 0 0 88 0 0 0 0 88 -12 0 76 -19 0 57
0.8 12.5% 0.2
0.0 0.0% 0.0
0.0 0.1% 0.0
0.0 0.2% 0.0
Source: DnB NOR Markets
DnB NOR Markets - 37
03.02.2010
Sector report > Nordic Financials
Valuation Nordea Divisional 2010 estimates Nordea EURm Net interest income Net fee and com. income Net financial income Net life insurance income Net other income Total operating income Staff costs Other expenses Depreciation of assets Total operating expenses Profit before loan losses Net loan losses Net PL on l.t investm. Operating profit
Banking Nordic 4,188 1,549 473 16 12 6,239 -1,194 -1,880 -54 -3,128 3,111 -903 0 2,208
Share of - total income - operating expenses - profit before w rite-dow ns
I&I Banking N.M. Financial S, O & I Other IIB 435 56 299 13 57 130 61 -8 68 155 16 0 0 0 0 10 12 69 0 0 572 410 376 14 -119 -29 -41 -3 -122 -151 -8 -12 0 0 -2 -1 -242 -180 -51 -15 331 230 325 -1 -237 -12 -92 -19 0 0 0 0 94 218 232 -20
Other 447 6 992 19 93 1,558 -1,270 523 -69 -816 742 26 0 767
Group 5,438 1,796 1,703 46 186 9,169 -2,656 -1,651 -125 -4,432 4,737 -1,237 0 3,500
68% 71% 66%
6% 5% 7%
4% 4% 5%
4% 1% 7%
0% 0% 0%
17% 18% 16%
100% 100% 100%
-717 0 1,491
-35 0 59
-44 0 174
-35 0 197
-17 0 -37
-26 0 741
-875 0 2,625
Banking I&I Banking Nordic N.M. Financial S, O & I Other IIB 203,995 9,951 12,439 9,951 4,975 50.66 2.47 3.09 2.47 1.24 3.75 0.15 0.44 0.50 0.09 7.4% 6.0% 14.2% 20.1% -7.6%
Other 7,463 1.85 1.87 100.7%
Group 248,774 61.78 6.61 10.7% 1.15 10.72
Tax Minorities Profit
Source: DnB NOR Markets
Key divisional data Allocated equity BVPS EPS RoE P/B P/E
Valuation using present multiples Benchmark P/B Value Value pr share
1.39 283,058 70.29
0.36 3,618 0.90
1.47 18,333 4.55
1.55 15,416 3.83
1.20 5,954 1.48
2.03 15,149 3.76
1.37 341,527 84.81
2.09 20,757 5.15
1.43 7,123 1.77
2.15 16,039 3.98
1.74 433,832 111.71
Valuation using historical multiples Historical P/B Value Value pr share
1.79 364,310 90.47
1.75 17,438 4.33
1.95 24,206 6.01
Source: DnB NOR Markets Divisional abbreviations: N.M. = New Markets (Baltic’s, Poland and Russia) I & I = Institutional and International Division (IIB) S, O & I = Shipping, Offshore and International Division
DnB NOR Markets - 38
Sector report > Nordic Financials
Nordic financials share development 350% 300% One year performance
03.02.2010
250% 200% 150% Nordea
100% 50% 0% -50%
-100% -5%
0%
5% 10% 15% One-month performance
20%
25%
Blue lines show OMXS30 index return in same period.
Sum-of-the-parts 100 85 80 Last= 70.8 60
40
20
0 Nordic
New Markets
Financial
S, O & I *
Other IIB
Other
Group
Source: DnB NOR Markets Risk assessment With a diversified portfolio overall concentration risk is low. We are most concerned with its Danish exposure (26%) and the costs of participating in the Danish guarantee scheme. 9 Downside risk o Loan losses in Denmark and new markets Late cycle lending growth in the Baltic’s o Private Equity lending exposure o Costs of Danish bank and credit package o M&A 9 Upside risk o Continued increased customer inflow o M&A Fair price We expect Nordea to show high growth characteristics at acceptable risk levels. We like Nordea and although it is already priced in the higher brackets our recommendation is BUY, 85 SEK.
DnB NOR Markets - 39
NORDEA BANK (NDA__SEK.SS) PROFIT & LOSS EURm Net Interest Income Tot. other operating income Operating income Personell expenses Administra tion expenses Depr. and write-downs Other operating expenses Operating expenses Profit before loan losses Loan losses & guarantees Net gain/loss long-term inv. Pre tax profit Taxes Net p rofit
BALANCE SHEET Total Assets Gross loa ns Deposits Equity
2006 3,869 3,297 7,166 2,251
2007 4,282 3,601 7,883 2,388
2008 5,090 3,120 8,210 2,569
2009e 5,318 3,822 9,140 2,668
2010e 5,438 3,731 9,169 2,656
2011e 5,962 3,853 9,815 2,776
Q2 09 1,305 1,054 2,359 687
Q3 09 1,321 956 2,277 671
Q4 09 1,336 889 2,225 645
Q1 10e 1,346 902 2,249 651
Q2 10e 1,362 920 2,282 658
86 1,485 3,822 3,344 257 8 3,609 655 2,954
103 1,575 4,066 3,817 62 1 3,880 753 3,147
125 1,647 4,340 3,870 -461 -4 3,405 724 2,695
127 1,579 4,374 4,766 -1,614 -1 3,151 780 2,371
125 1,651 4,432 4,737 -1,237 0 3,500 875 2,625
129 1,700 4,605 5,210 -811 -1 4,398 1,100 3,299
37 392 1,116 1,243 -425 0 818 200 618
29 392 1,091 1,186 -358 0 828 206 622
31 401 1,077 1,148 -475 -1 672 168 504
31 408 1,090 1,159 -440 0 719 180 539
31 412 1,101 1,181 -334 0 847 212 635
347 214 126 15
389 245 142 17
474 265 149 18
492 286 160 22
520 313 175 25
565 355 199 28
EURbn
Share price and target Price SEK Price EUR Price target 12m SEK Recommendation
70.80 7.00 85.00 BUY
Financial structure
MARGINS, RATIOS Net Interest marg. Other inc./tot. inc. Loan loss ratio Cost/Income ratio Deposit/loans ratio Revenue growth Le nding growth Deposit growth
% % % % % % % %
VALUATION EPS Div idend ps Book per share Year end shares Price Price
EUR EUR EUR million SEK EUR
P/E Div idend yield P/Book
X % X
nm 46.0 0.1 53.3 59.1 9.0 13.5 9.4
nm 45.7 0.0 51.6 58.2 10.0 14.3 12.6
nm 38.0 -0.2 52.9 56.1 4.2 8.3 4.4
nm 41.8 -0.6 47.9 56.0 11.3 7.9 7.8
nm 40.7 -0.4 48.3 56.0 0.3 9.4 9.4
nm 39.3 -0.2 46.9 56.0 7.0 13.4 13.4
2006 1.14 0.49 5.9 2591.0 92.18 9.12
2007 1.21 0.50 6.6 2593.0 90.11 8.91
2008 1.04 0.20 6.9 2596.0 39.23 3.88
2009e 0.59 0.20 5.5 4027.0 71.96 7.12
2010e 0.65 0.20 6.1 4027.0 70.80 7.00
2011e 0.82 0.20 6.9 4027.0 70.80 7.00
8.0 5.4 1.5
7.3 5.6 1.3
3.7 5.2 0.6
12.1 2.8 1.3
10.7 2.9 1.1
8.5 2.9 1.0
285,112 Market cap. SEKm 28,196 EURm Market cap. 4,027.0 Shares outst. million 3,990.4 Free floa t million Share price performance -2/-4/127 Abs. 1/3/12m -5/-11/56 Rel. 1/3/12m High/Low 12m SEK 79/32 96.1 OMXS30 index 25 30days volatility % Company attributes Reuters ticker NDA__SEK.SS Financials Banks Sweden
Reporting Q1 2010 Q2 2010
28.04.2010 27.10.2010
Manag ement Per Boman CEO Ulf Riese CFO Address Nordea Bank Småla ndsgatan 17 SE-105 71 Stockholm, Sweden H.p.: www.nordea.com Tel +46 8614 7000
Analyst: Odd Weidel +47 22 94 89 49
[email protected]
Sector report > Nordic Financials
03.02.2010
Rebased consensus average forward EPS (12m, EUR) 100
Rebased price (12m, SEK) 240 220
95
200
90
180
85
160
80
140
75
120
70
100
65
80 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
60 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Nordea Bank
Nordea Bank
Interest inc. (EURm) 7,000
Interest inc. growth 20% 18%
6,000
16% 14%
5,000 4,000 3,000 2,000 1,000 0
2005
2006
2007
2008
Interest inc. (EURm)
Costs (EURm) 5,000 4,500
2009e 2010e 2011e
1.20
0.80
6% 4%
0.40
0.40 0.30
0.60
0.20 0.10
0.20 0.00
2005
2006
2007
2008
EPS (EUR)
Cost/income 58.0%
0.10% 0.00% -0.10%
-500
-0.20%
50.0% 48.0%
1,500 1,000
46.0%
-1,000
-0.30% -0.40%
-1,500
-0.50%
44.0% 2005
2006
2007
2008 2009e 2010e 2011e
Costs (EURm)
42.0%
-2,000
Other income growth 25% 20%
1.60
15%
1.40
3,000
10%
1.20
2,500
5%
1.00
2,000
0%
0.80
1,500
-5%
0.60
1,000
-10%
0.40
500
-15%
0.20
-20%
0.00
2007
2008
Other income (EURm)
2009e 2010e 2011e Other income growth
2007
2008 2009e 2010e 2011e
-0.60%
Loan losses (%)
Price/Book 1.80
3,500
2006
2006
Loan losses (EURm)
4,000
2005
2005
Cost/income
Other income (EURm) 4,500
0.00
Loan losses (%) 0.20%
0
54.0% 52.0%
2009e 2010e 2011e DPS (EUR)
Loan losses (EURm) 500
56.0%
3,000 2,500 2,000
0
0.50
1.00
12% 10% 8%
2% 0%
DPS (EUR) 0.60
Interest inc. growth
4,000 3,500
500 0
EPS (EUR) 1.40
ROE 25.0% 20.0% 15.0% 10.0% 5.0%
2005
2006
2007
Price/Book
2008
2009e 2010e 2011e
0.0%
ROE
DnB NOR Markets - 41
Sector report > Nordic Financials
03.02.2010
SEB Geographical distribution of credit portfolio
Germany, 25%
Sweden, 50%
B altic's, 11%
The high cost/income ratio in Germany are of concern, and the operations lack sufficient scale.
SEB offers banking services in Sweden, Germany and the Baltic countries. The group also operates in the other Nordic countries, as well as in Poland, Ukraine and Russia. SEB is primarily a merchant bank, and therein more exposed to investment banking, large corporate customers and more reliant on commission income than the other Nordic peer banks. This high share of income from market related activities is suffering from the current turmoil in the financial markets. Like Swedbank, SEB has large exposure towards the Baltic’s with some 15% of its lending portfolio. We are also still concerned with the general economic development in Sweden, and SEB’s exposure towards Private Equity funds.
SEB wrote down all goodwill (SEK 2.4 bn) related to the Baltic's and Russia in Q209. Remaining goodwill is now primarily related to the Life insurance operations totaling SEK ~7.7 bn. We believe SEB should be accredited with a high earnings quality grade for their investment banking operations due to the high market share, Nordic reach and earnings consistency.
German operations 45% 43% 41% 39% 37% 35% 33% 31% 29% 27% 25% Q101
Q102
Q103
Q104
Q105
Q106
Q107
Q108
Q109
Source: Company reports, DnB NOR Markets
DnB NOR Markets - 42
03.02.2010
Sector report > Nordic Financials
Estimates Q409 preview SEKm
Q408 Q409E Q409E Chg YoY Reported DnB NOR Market* Abs. Net interest income 5,511 4,764 -747 Net fee income 3,788 3,612 -176 Net financial income 1,725 876 -849 516 580 64 Net life insurance income Net other income 1,176 154 -1,022 Total operating income 12,716 9,986 -2,730 Staff costs -4,597 -3,797 800 Other expenses -1,971 -1,902 69 Depreciation of assets -397 -382 15 -6,082 883 Total operating expenses -6,965 Profit before credit losse 5,751 3,905 -1,846 PL on assets 1 2 1 Net credit losses -1,723 -3,971 -2,248 Operating profit 4,029 -65 -4,094 Tax -519 16 535 Discontinued operations -2 0 2 Minorities 1 15 14 Profit 3,507 -63 -3,570 EPS reported ROE Dividend
5.1 16.8% n.a.
0.0 -0.3% n.a.
% -14% -5% -49% 12% -87% -21% -17% -3% -4% -13% -32% 100% 130% -102% -103% -100% 1400% -102%
-5.1 -17.0% n.a.
DnB NOR Markets 2009E 2010E 2011E 20,558 17,660 18,293 14,180 14,665 14,870 4,424 2,527 2,008 3,246 2,317 2,335 1,920 611 615 44,328 37,781 38,120 -16,184 -15,254 -15,411 -7,561 -7,651 -7,748 -4,608 -1,537 -1,554 -28,354 -24,442 -24,713 15,975 13,340 13,407 30 8 8 -13,260 -10,561 -6,929 2,744 2,787 6,487 -1,907 -697 -1,622 9 0 0 55 60 60 792 2,030 4,805
n.m. n.m. n.a.
0.4 0.9% 0.0
0.9 2.0% 1.0
2.2 4.6% 2.0
2009E 0 1 0 0 0 2 0 0 0 0 2 0 0 2 0 0 0 1
Change 2010E 0 34 6 0 0 40 0 0 0 0 40 0 0 40 -10 0 0 30
2011E 0 104 15 0 0 119 0 0 0 0 119 0 0 119 -30 0 0 89
0.0 0.0% 0.0
0.0 0.0% 0.0
0.0 0.1% 0.0
Estimate changes New estim ates 2009E 2010E 2011E Net interest income 20,558 17,660 18,293 Net fee income 14,180 14,665 14,870 Net financial income 4,424 2,527 2,008 Net life insurance income 3,246 2,317 2,335 Net other income 1,920 611 615 Total operating income 44,328 37,781 38,120 Staff costs -16,184 -15,254 -15,411 Other expenses -7,561 -7,651 -7,748 Depreciation of assets -4,608 -1,537 -1,554 Total operating expenses -28,354 -24,442 -24,713 Profit before credit losses 15,975 13,340 13,407 PL on assets 30 8 8 Net credit losses -13,260 -10,561 -6,929 Operating profit 2,744 2,787 6,487 Tax -1,907 -697 -1,622 Discontinued operations 9 0 0 Minorities 55 60 60 Profit 792 2,030 4,805 SEKm
EPS reported ROE Dividend
0.4 0.9% 0.0
0.9 2.0% 1.0
2.2 4.6% 2.0
Old 2009E 20,558 14,179 4,424 3,246 1,920 44,326 -16,184 -7,561 -4,608 -28,354 15,973 30 -13,260 2,743 -1,906 9 55 790 0.4 0.9% 0.0
estim ates 2010E 2011E 17,660 18,293 14,631 14,766 2,522 1,992 2,317 2,335 611 615 37,741 38,001 -15,254 -15,411 -7,651 -7,748 -1,537 -1,554 -24,442 -24,713 13,300 13,288 8 8 -10,561 -6,929 2,747 6,368 -687 -1,592 0 0 60 60 2,000 4,716 0.9 2.0% 1.0
2.2 4.6% 2.0
Source: DnB NOR Markets
DnB NOR Markets - 43
03.02.2010
Sector report > Nordic Financials
Valuation SEB Divisional 2010 estimates SEKm Net interest income Net fee and com. income Net financial income Net life insurance income Net other income Total operating income Staff costs Other expenses Depreciation of assets Total operating expenses Profit before loan losses Net PL on l.t investm. Net loan losses Operating profit
Merchant 7,795 5,403 2,676 0 228 16,101 -3,353 -3,789 -141 -7,283 8,818 0 -1,837 6,981
Banking Retail 6,922 4,417 220 0 124 11,683 -4,113 -4,365 -169 -8,647 3,036 -4 -1,235 1,797
Baltic 2,631 909 136 0 -20 3,656 -704 -1,240 -68 -2,012 1,644 12 -7,430 -5,774
WM 561 3,327 64 0 8 3,961 -1,214 -1,115 -117 -2,446 1,514 0 -41 1,473
Life -8 0 0 3,316 0 3,307 -1,090 -483 -636 -2,208 1,099 0 0 1,099
Other -241 609 -569 -998 272 -928 -4,780 3,342 -406 -1,844 -2,772 0 -17 -2,789
Group 17,660 14,665 2,527 2,317 611 37,781 -15,254 -7,651 -1,537 -24,442 13,340 8 -10,561 2,787
43% 30% 66%
31% 35% 23%
10% 8% 12%
10% 10% 11%
9% 9% 8%
-2% 8% -21%
100% 100% 100%
-461 0 40 6,481
-159 0 14 1,625
-86 0 7 -5,868
-79 0 7 1,387
-57 0 5 1,037
145 0 -12 -2,632
-697 0 60 2,030
Baltic 16,151 7.37 2.68 -36%
WM 6,057 2.76 0.63 23%
Life Other Group 6,057 7,066 100,944 2.76 3.22 46.05 0.47 - 1.20 0.93 17% -37% 2% 1.00 49.88
0.34 5,488 2.50
1.68 10,183 4.65
1.51 9,128 4.16
0.88 1.17 6,202 117,981 2.83 53.82
2.10 12,721 5.80
1.79 10,847 4.95
1.51 1.81 10,680 182,395 4.87 83.21
Share of - total income - operating expenses - profit before w rite-dow n Tax Discontinued operations Minorities Profit
Key divisional data Allocated equity BVPS EPS RoE P/B P/E
Merchant 39,368 17.96 2.96 16%
Banking Retail 26,245 11.97 0.74 6%
Valuation using present multiples Benchmark P/B Value Value pr share
1.39 54,647 24.93
1.23 32,333 14.75
Valuation using historical multiples Historical P/B Value Value pr share
2.00 78,726 35.92
1.71 44,940 20.50
1.52 24,481 11.17
Source: DnB NOR Markets
DnB NOR Markets - 44
Sector report > Nordic Financials
Nordic financials share development 350% 300% 250%
One year performance
03.02.2010
200% 150% SEB A
100% 50% 0% -50% -100% -5%
0%
5% 10% 15% One-month performance
20%
25%
Blue lines show OMXS30 index return in same period.
Sum-of-the-parts 60
50
54
Last= 46.19
40
30 20
10 0 Merchant
Retail
Baltic
WM
Life
Other
Group
Source: DnB NOR Markets Risk assessment The two key risk factors for SEB going forward is the general macroeconomic development in both the Baltic’s and Sweden. 9 Downside risk o Further contraction in Sweden and the Baltic’s o Concentration risk (LBO and Swedish large cap. companies) o German operations (costs, lack of scale) o "Two-front" war scenario 9 Upside risk o Capital markets boosting trading income o Swedish export sectors should benefit from a V-shaped recovery o Structural focus o Further cost cutting initiatives Fair price The high exposure towards the Baltic States is the key issue with the German operations on a second place. However we like the Nordic reach in the corporate market and recommendation is BUY, PT=54 SEK.
DnB NOR Markets - 45
SEB (SEB__A.SS) PROFIT & LOSS SEKm Net Interest Income Tot. other operating income Operating income Personell expenses Administra tion expenses Depr. and write-downs Other operating expenses Operating expenses Profit before loan losses Loan losses & guarantees Net gain/loss long-term inv. Pre tax profit Taxes Net p rofit
BALANCE SHEET Total Assets Gross loa ns Deposits Equity
2006 14,281 24,466 38,747 14,363
2007 15,998 24,433 40,431 14,920
2008 18,709 22,437 41,146 16,242
2009e 20,558 23,770 44,328 16,184
2010e 17,660 20,121 37,781 15,254
2011e 18,293 19,828 38,120 15,411
Q2 09 5,371 7,806 13,177 4,262
Q3 09 4,521 5,216 9,737 3,736
Q4 09 4,764 5,222 9,986 3,797
Q1 10e 4,827 5,233 10,060 3,802
Q2 10e 4,208 5,063 9,271 3,809
1,398 6,887 22,648 16,099 718 -70 15,451 2,939 12,494
1,355 6,911 23,186 17,245 1,015 -788 17,018 3,376 13,618
1,523 7,646 25,411 15,735 3,269 -5 12,471 2,421 10,041
4,608 7,561 28,354 15,975 13,260 -30 2,744 1,907 783
1,537 7,651 24,442 13,340 10,561 -8 2,787 697 2,030
1,554 7,748 24,713 13,407 6,929 -8 6,487 1,622 4,805
2,832 1,920 9,014 4,163 3,569 -24 618 792 -197
379 1,900 6,015 3,722 3,335 -2 389 350 24
382 1,902 6,082 3,905 3,971 -2 -65 -16 -63
383 1,906 6,091 3,969 3,601 -2 370 92 262
384 1,910 6,103 3,168 2,820 -2 349 87 247
1,934 1,126 1,008 67
2,344 1,330 1,172 77
2,511 1,563 1,270 84
2,245 1,451 1,158 99
2,342 1,547 1,212 101
2,489 1,694 1,295 106
nm 63.1 0.1 58.5 89.5 13.2 4.4 3.9
nm 60.4 0.1 57.3 88.1 4.3 18.2 16.3
nm 54.5 0.2 61.8 81.3 1.8 17.5 8.4
nm 53.6 0.9 64.0 79.8 7.7 -7.2 -8.9
nm 53.3 0.7 64.7 78.4 -14.8 6.6 4.7
nm 52.0 0.4 64.8 76.4 0.9 9.5 6.8
2006 18.52 6.00 99.7 674.8 112.21 6.1 5.3 1.1
2007 19.94 6.50 112.3 683.0 85.38 4.3 7.6 0.8
2008 14.66 0.00 122.2 685.0 31.34 2.1 0.0 0.3
2009e 0.36 0.00 45.1 2192.0 44.34 nm 0.0 1.0
2010e 0.93 1.00 46.1 2192.0 46.19 49.9 2.2 1.0
2011e 2.19 2.00 48.2 2192.0 46.19 21.1 4.3 1.0
SEKb n
MARGINS, RATIOS Net Interest marg. Other inc./tot. inc. Loan loss ratio Cost/Income ratio Deposit/loans ratio Revenue growth Le nding growth Deposit growth
% % % % % % % %
VALUATION EPS Div idend ps Book per share Year end shares Price P/E Div idend yield P/Book
SEK SEK SEK million SEK X % X
Share price and target Price SEK Price target 12m SEK Recommendation
46.19 54.00 BUY
Financial structure 101,248 SEKm Market cap. 2,192.0 Shares outst. million 1,527.8 Free floa t million Share price performance 4/5/154 Abs. 1/3/12m 2/1/93 Rel. 1/3/12m 52/16 High/Low 12m SEK 971.8 OMXS30 index 27 30days volatility % Company attributes SEB__A.SS Reuters ticker Financials Banks Sweden
Reporting Q1 2010 Q2 2010
28.04.2010 13.07.2010
Management Annika Falkengren CEO Jan Erik Back CFO Address SEB Kungsträdgårdsgatan 8 SE-106 40 Stockholm, Sweden H.p.: www.seb.se Tel +46 8763 8000
Analyst: Odd Weidel +47 22 94 89 49
[email protected]
Sector report > Nordic Financials
03.02.2010
Rebased price (12m, SEK) 300 280 260 240 220 200 180 160 140 120 100 80 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
Rebased consensus average forward EPS (12m, SEK) 110 100 90 80 70 60 50 40 30 20 10 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb SEB
SEB
Interest inc. (SEKm) 25,000
Interest inc. growth 20% 15%
20,000
10% 5%
15,000
EPS (SEK) 25
DPS (SEK) 7.0 6.0
20
5.0 15
4.0
10
3.0
0% 10,000
-5% -10%
5,000 0
2005
2006
2007
2008 2009e 2010e 2011e
Costs (SEKm) 30,000
-20%
12,000
64.0%
10,000
60.0% 58.0%
10,000
56.0% 5,000 2007
2008 2009e 2010e 2011e
Costs (SEKm)
0
5%
15,000
0%
10,000
-5% -10%
5,000
-15% 2005
2006
2007
2008 2009e 2010e 2011e
Other income (SEKm)
Other income growth
-20%
2011e
Loan losses (%) 1.00% 0.90%
0.60% 0.50% 0.40% 0.30% 0.20%
2005
2006
2007
2008 2009e 2010e 2011e
0.10% 0.00%
Loan losses (%)
Price/Book 1.20
ROE 20% 18%
1.00
16% 14%
0.80
12% 10% 8%
0.60 0.40
6% 4%
0.20 0.00
0.0
DPS (SEK)
Loan losses (SEKm)
10%
2010e
4,000
52.0%
15%
2009e
6,000
2,000
20%
20,000
2008
8,000
54.0%
Other income growth 25%
25,000
2007
0.80% 0.70%
Cost/income
Other income (SEKm) 30,000
2006
Loan losses (SEKm) 14,000
66.0%
62.0%
15,000
2006
2005
EPS (SEK)
Cost/income 68.0%
20,000
2005
0
Interest inc. growth
25,000
0
1.0
-15%
Interest inc. (SEKm)
0
2.0 5
2005
2006
2007
Price/Book
2008
2009e 2010e 2011e
2% 0%
ROE
DnB NOR Markets - 47
Sector report > Nordic Financials
03.02.2010
Swedbank The Swedish activities can be view upon as a large savings bank with the accompanying low risk … but we fear loss of market shares in Sweden
Geographical distribution of lending portfolio
Sweden 75%
B altics 18% Other 7%
Bonus reversal will raise Q409 with some 400 SEKm
Swedbank started as Sweden’s first savings bank in 1820, and has been acting as central bank for the various savings banks in Sweden. In the aftermath of the financial crisis in the 1990-ies there were several mergers which culminated with the merger between Föreningsbanken and Sparbanken Sweden in 1997. The new entity called FöreningsSparbanken later changed name to Swedbank. In addition to operating large and, what we believe is, a low risk retail business in Sweden, Swedbank has also pursued growth in the Baltic area. Earlier with huge success as the Baltic division delivered 25% of group income and operated at cost-income ratios well below 50% in 2006-2008. This picture has definitely changed in conjuncture with the global financial set backs as annualized loan losses in the Baltic’s soar above ~8%. However, both SEB and Swedbank decreased lending growth early and we assess this fact to be an important factor in estimating the loan losses going forward, although you could argue that this monetary contraction could be part of the problem as well. Swedbank has been the only Swedish bank to utilize the Swedish state guarantee scheme resulting in substantially lower CDS margins and, more importantly, improving the overall preparedness in the event of increased financial turbulence. In October 2008, Swedbank announced an equity issue of preference shares (257 million new shares) adding SEK 12.4 bn in equity. Swedbank’s second issue was announced 17th of august. SEK 15.1 bn in fully underwritten new equity will increase the number of shares with another ~387 million. The largest unknown variable for Swedbank is still, by far, the loan loss level in the Baltic’s. We estimate earnings capacity to remain high, enabling Swedbank to manage throughout this crisis adequately without any further equity issues (three times and then your out?). SEK 13.1 bn in Baltic goodwill is also a disruptive factor and a clear joker going forward. Level of impaired loans 30% 25% 20% 15% 10% 5% 0% Swedish banking
Estonia
Latvia
Lithuania
Russia
Ukraine
With unemployment in Sweden heading towards 11% our worries are also related to loan loss development in Sweden. Source: Company report
DnB NOR Markets - 48
03.02.2010
Sector report > Nordic Financials
Estimates Q409 preview SEKm
Q408 Q409E Q409E Chg YoY Reported DnB NOR Market* Abs.
Net interest income Net commission income Net financial income Net other income Total income Staff costs Other expenses Depreciation of assets Total expenses Profit before loan losses Net loan losses Operating profit Tax expenses Minorities Profit for the period EPS reported ROE Dividend
DnB NOR Markets 2009E 2010E 2011E
%
5,742 2,011 1,379 1,213 10,345 2,602 2,004 1,699 6,305 4,040 1,633 0 2,407 509 -7
5,115 2,216 687 781 8,800 2,047 1,974 195 4,216 4,584 5,307 77 -800 167 18
-627 205 -692 -432 -1,545 -555 -30 -1,504 -2,089 544 3,674 77 -3,207 -342 25
-11% 10% -50% -36% -15% -21% -2% -89% -33% 13% 225% #DIV/0! -133% -67% -362%
21,202 7,864 4,055 2,686 35,808 9,351 7,598 2,211 19,160 16,648 24,993 -8,504 941 75 -9,519
21,085 8,718 2,230 3,080 35,113 9,933 7,927 783 18,644 16,469 11,669 4,492 1,645 71 2,777
22,382 8,770 2,318 3,027 36,497 10,210 8,101 808 19,119 17,378 6,093 10,977 2,726 75 8,176
0.0 246.4% n.a.
0.0 -85.0% n.a.
0.0 -331.4% n.a.
#DIV/0! n.m. n.a.
-8.2 -11.2% 0.0
2.4 3.2% 0.0
7.1 9.0% 1.0
2009E
Change 2010E
2011E
Estimate changes SEKm
New estim ates 2009E 2010E 2011E
Net interest income Net commission income Net financial income Net other income Total income Staff costs Other expenses Depreciation of assets Total expenses Profit before loan losses Net loan losses Operating profit Tax expenses Minorities Profit for the period
21,202 7,864 4,055 2,686 35,808 9,351 7,598 2,211 19,160 16,648 24,993 -8,504 941 75 -9,519
21,085 8,718 2,230 3,080 35,113 9,933 7,927 783 18,644 16,469 11,669 4,492 1,645 71 2,777
EPS reported ROE Dividend
-8.2 -11.2% 0.0
2.4 3.2% 0.0
22,382 8,770 2,318 3,027 36,497 10,210 8,101 808 19,119 17,378 6,093 10,977 2,726 75 8,176
Old estim ates 2009E 2010E 2011E 21,204 7,864 4,055 2,686 35,810 9,751 7,598 2,211 19,560 16,250 24,995 -8,745 841 75 -9,660
21,131 8,718 2,230 3,080 35,158 9,935 7,927 783 18,645 16,513 11,694 4,820 1,650 71 3,099
22,523 8,770 2,318 3,027 36,638 10,211 8,101 808 19,120 17,518 6,139 11,379 2,749 75 8,555
-2 0 0 0 -2 -400 0 0 -400 398 -2 241 100 0 141
-46 0 0 0 -46 -1 0 0 -1 -44 -25 -328 -5 0 -322
-141 0 0 0 -141 -1 0 0 -1 -140 -46 -402 -22 0 -380
7.1 -8.3 9.0% -11.3% 1.0 0.0
2.7 3.6% 0.0
7.4 9.5% 1.0
0.1 0.2% 0.0
-0.3 -0.4% 0.0
-0.3 -0.4% 0.0
Source: DnB NOR Markets
DnB NOR Markets - 49
03.02.2010
Sector report > Nordic Financials
Valuation Swedbank Divisional 2010 estimates Sw edbank SEKm Net interest income Net commission income Net financial income Net other income Total income Staff costs Other expenses Depreciation of assets Total operating expences Profit before loan losses Net PL on l.t investm. Loan losses Pre-tax operating profit Taxes Minorities Net profit
Sw edish 12,656 4,360 865 1,013 18,894 4,339 4,821 112 9,272 9,622 0 1,668 7,954 1,989 10 5,955
Banking Baltic 3,985 1,870 693 1,041 7,589 1,313 2,276 200 3,789 3,800 204 7,411 -3,816 -572 0 -3,243
54% 50% 58%
22% 20% 23%
Share of - total income - operating expenses - profit before w rite-dow ns
Int. Markets 2,178 2,337 272 961 208 513 24 104 2,682 3,915 608 1,522 743 933 88 24 1,438 2,479 1,244 1,436 104 0 2,540 30 -1,400 1,406 -210 351 0 60 -1,190 994
8% 8% 8%
AM & I -29 1,249 56 200 1,476 421 402 52 875 601 0 0 601 150 0 451
Other -41 5 -104 697 557 1,731 -1,248 308 790 -233 0 20 -253 -63 0 -190
Group 21,085 8,718 2,230 3,080 35,113 9,933 7,927 783 18,644 16,469 308 11,669 4,492 1,645 71 2,777
4% 5% 4%
2% 4% -1%
100% 100% 100%
AM & I 2,172 1.87 0.39 21%
Other 8,687 7.49 0.16 -2%
Group 86,872 74.92 2.39 3% 0.89 27.96
1.38 8,986 7.75
2.49 5,409 4.66
0.38 3,272 2.82
0.97 83,834 72.30
1.85 12,034 10.38
2.13 4,630 3.99
1.56 13,514 11.65
1.70 147,894 127.54
11% 13% 9%
Key divisional data Allocated equity BVPS EPS RoE P/B P/E
Banking Sw edish Baltic 39,092 21,718 33.71 18.73 5.14 2.80 15% -15%
Int. Markets 8,687 6,515 7.49 5.62 1.03 0.86 -14% 15%
Valuation using present multiples Benchmark P/B Value Value pr share
1.08 42,277 36.46
0.78 16,988 14.65
0.79 6,901 5.95
Valuation using historical multiples Historical P/B Value Value pr share
1.75 68,573 59.14
1.61 35,067 30.24
1.62 14,076 12.14
Source: DnB NOR Markets
Divisional abbreviations: Int. = International Division (Russia and Ukraine) AM & I = Asset Management and Insurance
DnB NOR Markets - 50
Sector report > Nordic Financials
Nordic financials share development 350% 300% 250%
One year performance
03.02.2010
200% Swedbank
150% 100% 50% 0% -50% -100% -5%
0%
5% 10% 15% One-month performance
20%
25%
Blue lines show OMXS30 index return in same period.
Sum-of-the-parts 80
72 Last= 66.95
60
40
20
0 Sw edish
Baltic
International
Markets
AM&Insurance
Other
Group
Source: DnB NOR Markets Risk assessment Development in the Baltic area is the key risk factor for Swedbank going forward. 9 Downside risk o Prolonged economic downturn in the Baltic area o "Two-front" war scenario (both Sweden and Baltic contraction) 9 Upside risk o Sweden's export industry gaining from V-shaped recovery o Cost cutting o Further ownership changes and increased structural focus Fair price The large expected losses in the international divisions Baltic Banking and International Banking clearly burdens Swedbank. Even though, we see considerable value in the Swedish Banking Division counterweighing, to some degree, the high risk in the international divisions. Overall losses are too high tough and recommendation SELL, PT = 54 SEK.
DnB NOR Markets - 51
Sector report > Nordic Financials
03.02.2010
SWEDBANK (SWED_A.SS) PROFIT & LOSS SEKm Net Interest Income Tot. other operating income Operating income Personell expenses Administra tion expenses Depr. and write-downs Other operating expenses Operating expenses Profit before loan losses Loan losses & guarantees Net gain/loss long-term inv. Pre tax profit Taxes Net p rofit
BALANCE SHEET Total Assets Gross loa ns Deposits Equity
2006 16,304 13,398 29,702 8,716
2007 19,429 13,846 33,275 9,902
2008 21,702 14,760 36,462 10,092
2009e 21,202 14,606 35,808 9,351
2010e 21,085 14,028 35,113 9,933
2011e 22,382 14,115 36,497 10,210
Q2 09 5,241 4,036 9,277 2,297
Q3 09 5,017 3,125 8,142 2,448
Q4 09 5,115 3,685 8,800 2,047
Q1 10e 5,162 3,541 8,703 2,456
Q2 10e 5,236 3,495 8,732 2,479
686 6,022 15,424 14,278 -96
726 6,303 16,931 16,344 729
2,402 6,994 19,488 16,974 3,156
2,211 7,598 19,160 16,648 24,993
783 7,927 18,644 16,469 11,669
808 8,101 19,119 17,378 6,093
239 1,930 4,466 4,811 6,684
221 1,857 4,526 3,616 6,133
195 1,974 4,216 4,584 5,307
194 1,967 4,617 4,086 4,712
195 1,976 4,650 4,081 3,063
14,374 3,211 10,991
15,615 3,450 12,025
13,818 2,880 10,886
-8,345 941 -9,519
4,800 1,645 2,777
11,285 2,726 8,176
-1,873 109 -2,001
-2,517 723 -3,261
-723 167 -908
-626 119 -763
1,019 378 624
1,353 1,107 400 60
1,608 1,309 458 68
1,812 1,416 508 86
1,834 1,404 527 84
1,951 1,488 559 87
2,112 1,617 607 94
nm 45.1 0.0 51.9 36.1 0.8 13.6 18.0
nm 41.6 0.1 50.9 35.0 12.0 18.2 14.6
nm 40.5 0.2 53.4 35.9 9.6 8.1 10.9
nm 40.8 1.8 53.5 37.5 -1.8 -0.9 3.6
nm 40.0 0.8 53.1 37.5 -1.9 6.0 6.0
nm 38.7 0.4 52.4 37.5 3.9 8.6 8.6
2006 21.33 7.75 117.0 515.4 205.55 9.6 3.8 1.8
2007 23.33 8.50 132.6 515.4 151.37 6.5 5.6 1.1
2008 14.08 0.00 111.8 773.1 36.73 2.6 0.0 0.3
2009e -8.21 0.00 72.5 1159.6 71.00 nm 0.0 1.0
2010e 2.39 0.00 74.9 1159.6 66.95 28.0 0.0 0.9
2011e 7.05 1.00 81.0 1159.6 66.95 9.5 1.5 0.8
SEKb n
MARGINS, RATIOS Net Interest marg. Other inc./tot. inc. Loan loss ratio Cost/Income ratio Deposit/loans ratio Revenue growth Le nding growth Deposit growth
% % % % % % % %
VALUATION EPS Div idend ps Book per share Year end shares Price P/E Div idend yield P/Book
SEK SEK SEK million SEK X % X
Share price and target Price SEK Price target 12m SEK Recommendation
66.95 72.00 BUY
Financial structure 77,635 SEKm Market cap. 1,159.6 Shares outst. million 929.5 Free floa t million Share price performance -6/9/195 Abs. 1/3/12m -8/5/134 Rel. 1/3/12m 76/15 High/Low 12m SEK 971.8 OMXS30 index 25 30days volatility % Company attributes SWED_A.SS Reuters ticker Financials Banks Sweden
Reporting Q1 2010 Q2 2010
27.04.2010 15.07.2010
Management CEO CFO Address Swedbank Brunkebergstorg 8 SE-105 34, Swe den H.p.: www.swe dbank.com Tel +46 8585 9000
Michael Wolf Erkki Raasuke
Analyst: Odd Weidel +47 22 94 89 49
[email protected]
DnB NOR Markets - 52
Sector report > Nordic Financials
03.02.2010
Rebased price (12m, SEK) 350 300 250 200 150 100 50 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
Rebased consensus average forward EPS (12m, SEK) 100 80 60 40 20 0 -20 -40 -60 -80 -100 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Swedbank
Swedbank
Interest inc. (SEKm) 25,000
Interest inc. growth 25% 20%
20,000
15%
15,000
10% 10,000
5%
5,000 0
0% 2005
2006
2007
2008 2009e 2010e 2011e
Interest inc. (SEKm)
-5%
EPS (SEK) 25 20
53.0% 52.0% 51.0%
15,000 10,000
2008 2009e 2010e 2011e
Costs (SEKm)
-10
45.0%
14,000
2%
13,500
0% -2% -4% 2008
Other income (SEKm)
2009e 2010e 2011e
Other income growth
2008
20,000
5,000 0 -5,000
2005
2006
2007
-6%
2009e
2010e
2011e
Loan losses (%) 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% 2008 2009e 2010e 2011e Loan losses (%)
Price/Book 2.0 1.8
ROE 25% 20%
1.6 1.4
15% 10%
1.2 1.0 0.8
5% 0%
0.6 0.4 0.2 0.0
0
DPS (SEK)
Loan losses (SEKm)
4%
13,000
2007
25,000
10,000
6%
2007
2006
Loan losses (SEKm) 30,000
49.0%
Other income growth 8%
14,500
2006
2005
Cost/income
Other income (SEKm) 15,000
2005
2
-5
46.0%
12,500
4
0
15,000
47.0%
5,000
2007
6
5
50.0% 48.0%
2006
8
10
EPS (SEK)
Cost/income 54.0%
20,000
2005
10
15
Interest inc. growth
Costs (SEKm) 25,000
0
DPS (SEK) 12
-5% -10% 2005
2006
2007
Price/Book
2008
2009e 2010e 2011e
-15%
ROE
DnB NOR Markets - 53
03.02.2010
Sector report > Nordic Financials
Non-life summary and valuation "Sees Nordic super bank" According to unnamed sources/Dagens Nyheter; Bjørn Wahlroos
We initiate coverage of Sampo, TrygVesta and Topdanmark. Lagging Nordic financials lately we believe non-life insurers have further potential. 9
9
9
We initiate coverage of Sampo with Buy (pt=21 EUR). An estimated EURm 101 booked by Sampo in the quarter. Our positive stance on Nordea greatly benefits Sampo in our analysis and by 2012 over 50% of Sampo income derives from this ~20% position. Sampo currently trades at 12M FWD P/B 1.2x and P/E 11.1x versus 2004-08 historical averages of 1.6x and 12.3x. DNM recommendation at BUY, pt=22 EUR We initiate coverage of Topdanmark with Buy (pt=750 DKK). Topdanmark is the cost leader in the Nordic non-life insurance business. Coupled with announced price increases in Denmark, further strong growth in Life premiums and the unwinding of the CDO portfolio we expect further upside in trustworthy ROE and combined ratios going forward. We initiate coverage with a price target of DKK 750, implying a P/B 2010 of 2.6, below the historical 2004-08 average of 3.1. We initiate coverage of TrygVesta with Buy (pt=400 DKK). TrygVesta has been hoarding capital through the financial crisis, this coupled with profitable operations has led to a strong overcapitalization. We estimate dividend yields north of 10% in the next few years and a dividend of at least DKK 1.5 bn for 2009. This leaves ~ DKK 0.5 bn in unutilized dividend capacity and hence provides potential for even higher dividends both in 2009 and coming years. We initiate coverage with a price target of DKK 400, implying a P/B 2011 of 2.4, below the historical average of 2.5.
Target DnM Q409E EPS 1.23 83.53 30.52
Re c BUY BUY BUY
Pote ntial 19 % 12 % -100 %
Sampo TopDanmark TrygVesta
P/E 9.68 10.02 11.51
DnB NOR 2010 e s tim ate s P/B RoE 1.16 11.95 % 2.27 22.70 % 2.10 18.24 %
D-yie ld* 5.88 % 5.59 % 7.82 %
Sampo TopDanmark TrygVesta
P/E 8.05 9.33 9.26
DnB NOR 2011 e s tim ate s P/B RoE 1.08 13.36 % 2.06 22.10 % 1.98 21.35 %
D-yie ld* 5.88 % 6.18 % 9.72 %
Sampo TopDanmark TrygVesta
P/E 9.96 11.24 n.a.
10-ye ar his torical ave rage P/B RoE 1.54 17.12 % 2.48 17.96 % n.a n.a
D-yie ld* 8.24 % 9.23 % n.a.
Sampo TopDanmark TrygVesta
P/E 11.71 9.95 14.20
4-ye ar his torical ave rage P/B RoE 1.78 15.92 % 3.50 24.13 % 2.69 22.49 %
D-yie ld* 5.67 % 8.40 % 6.49 %
Sampo TopDanmark TrygVesta
Q409 cale ndar 11.Feb.10 09.Mar.10 25.Feb.10
PT 21.00 750.00 0.00
Nordic valuations
*) For Tryg Vesta and Topdanmark share buy backs are included Source: DnB NOR Markets, Factset
DnB NOR Markets - 54
Sector report > Nordic Financials
03.02.2010
2010E RoE, P/B relationship European non-life insurance companies 3.0
2.5
R 2 = 0.7658
2.0
P/B
1.5
1.0
0.5
0.0
-0.5 -10 %
-5 %
0%
5%
10 % RoE 15 %
20 %
25 %
30 %
35 %
Historical RoE, P/B relationship European non-life insurance companies 7.0
6.0
5.0
P/B
4.0 R 2 = 0.2076
3.0
2.0
1.0
0.0
-1.0 -100 %
-80 %
-60 %
-40 %
-20 %
0%
20 %
40 %
60 %
80 %
100 %
RoE
DnB NOR Markets - 55
03.02.2010
Sector report > Nordic Financials
Key industry points Probable consequences of solvency II: (i) Increased premiums, (ii) sector consolidation and (iii) Organic growth potential for strong balance sheet companies
Solvency II The key point in implementing Solvency II is increased capital requirements. When this is coupled with the recent claims inflation and investment losses in 2008, it is obvious that the industry response is and will be higher premiums. The weaker balance sheets in the industry necessitate higher margins in order to adhere to the solvency requirements implemented in October 2012. The second consequence of Solvency II will be, we believe, increased consolidation, leaving significant headroom for the incumbents with strong balance sheets. Topdanmark is singled out as a potential take-over target, with players like Sampo and, probably, Gjensidige eager to enter the Danish market. Even TrygVesta could be interested in solidifying their Danish market presence. Thirdly, for TrygVesta and Sampo this further entails a potential for significant organic growth by using their strong balance sheets to enter into aggressive pricing. Big is Beautiful - Economies of Scale When we look at the benefits of scale we find an ambiguous picture. It appears that the economies of scale are perceived to be great. But when we analyze the cost ratios the findings give a different picture. Albeit we see some geographical diversification where the group average combined ratios and standard deviations are lower on a group-wise comparison than on a country-by-country comparison, but size does not imply lower cost ratios. One of the main issues pointed at when referring to economies of scale is the lack of data in order to price correctly. To us this looks more like a benefit of experience and market participation than economies of scale. Bancassurance Bancassurance is common in the life-insurance industry and have in recent years become an increasingly important distribution channel. It provides an efficient entry point for new market players and makes sense from a customer's view. This should lead to less persistent market shares, but remember that the range of Nordic banks is limited. TrygVesta's strategic partnership with Nordea, where Sampo is the majority owner, looks fragile. The question is whether Sampo intends to oust TrygVesta and insert If as its non-life insurance purveyor or if the Nordea holding is a stand alone strategic investment. Bear in mind that TrygVesta has strong historical ties to Nordea and is Nordea Asset Management's largest client. If TrygVesta were to be ousted in 2013 when the current deal expires, will they try to target Topdanmark's bancassurance arrangement with Danske Bank, or potentially initiate cooperation with Handelsbanken?
Below we look more closely at these, and other, issues.
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03.02.2010
Sector report > Nordic Financials
Non-life industry overview
The Nordic general insurance market is relatively mature but we see growth potential in new products, increased asset prices and generally higher premium prices announced across the Nordic markets. Imperative drivers of growth in the industry are population growth, unemployment, motorization rates and the general business sentiment. On the cost side the industry is characterized by stable operating costs, mainly related to sales, and volatile claim's costs. Claims costs are impacted by the development in average claims and claims frequency. Although these parameters are rather stable, there is also the potential of extreme events leading to major claims expenses. This volatility can be dealt with through reinsurance. The Nordic market has shown an average growth of 4.2% since 2000, slightly higher than the average 2.5% GDP growth.
Overview - general insurance Country Denmark Norway Sweden Finland
2005 5,572 4,422 6,680 2,817
Premium (mEUR) 2006 2007 6,131 5,952 4,502 4,594 7,696 7,575 3,136 3,129
2008 5,988 4,755 7,999 3,248
Growth 05-08 7.5% 7.5% 19.7% 15.3%
Market concentration (EoY 2008) 65.0% 86.1% 81.4% 82.7%
Sources: CEA, FNH, company reports, Federation of Finnish Financial Services, Swedish insurance Federation Sector performance since 2008 120
The Non-life sector dropped substantially during the financial turmoil, but less than the general Nordic Financial Sector. Current prices are 30% below 2007 range.
110 100 90 80 70 60 50 40 30 20 01-012007
26-032007
18-062007
10-092007
03-122007
25-022008
19-052008
11-082008
Nordic Banks
03-112008 Non-life
26-012009
20-042009
13-072009
05-102009
28-122009
Life
Sources: Factset, DnB NOR Markets
Non-life insurance products are mainly motor, transport, building, worker's compensation and personal accident insurance. The market has been dominated by direct sales to private and commercial customers, while industrial customers are typically approached by independent insurance brokers. Due to perceived economies of scale, price competition is a common approach for smaller players to try and gain market shares. As we shall see the evidence of actual economies of scale is ambiguous. The larger players are to a greater extent competing on services, by increasing the services including sales and marketing provided for a particular product or moving into new product markets. Due to entry barriers as data availability and capital requirement the smaller and medium sized players are typically confined to short tail niche segments, with very little room for moving into new markets. For longer tail products reserves has to be build, claims historic and statistics obtained, which further increase the entrance barriers. As the Solvency II directive will impact the smaller players the most, we expect less aggressive price competition and find a general premium price increase probable. The pricing of insurance products is based on estimated claims expenses, operational costs and desired level of profitability. Where DnB NOR Markets - 57
Sector report > Nordic Financials
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the main ingredient relates to the claims expenses, obviously correct pricing is highly dependent on risk estimates; the more data the better risk estimation. This is reflected in the market share persistence apparent in the Nordic area.
Market dynamics The general insurance industry participants are diverse as the industry in the Nordic countries are comprised of both publicly listed companies, privately owned companies, banks and mutual companies. The Nordic insurance markets have historically been characterized by the customer’s direct contact to the insurance company and large market players. Thus a variety of distribution channels and scale is important in attaining and retaining customers. Denmark
Norway
50 %
45 %
45 %
40 %
40 %
35 %
35 %
30 %
30 %
25 %
25 %
20 %
20 %
15 %
15 % 10 %
10 %
5%
5%
0%
0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 TrygVesta Alm Brand
TopDanmark If
If SpareBank1
C odan Other
'Other' decreasing and further sector consolidation ahead? Sweden
Gjensidige Other
Trygvesta
The Norwegian market has also seen some competition from smaller firms that have led to a loss in market shares for the incumbents since 1997. Finland
35 %
30 %
30 %
25 %
25 %
20 %
20 %
15 %
15 %
10 %
5%
10 % 2004
2005 2006 Länsförsäkringer Trygg-Hansa Other
2007
If Folksam
2008
Opposite picture in Sweden as other show significant increase in the relatively short timeframe seen above.
2005 2006 OH Pohjola Group Tapiola Group Local Insurance Group
2007 If Fennia Other
2008
Rigid Finish regulations regarding the transfer rights are probably an explanatory factor of the tranquil market
Source: FNH, company reports, Federation of Finnish Financial Services, Swedish insurance Federation
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The market is generally driven by price competition offset by premium hikes to recoup equity. At this point we are seeing premium hikes and with Solvency II upcoming this appears to be the general theme for the next years
Sector report > Nordic Financials Competition – Mainly price The four largest players in each Nordic country control 65%-86% of the market with Denmark and Norway in the low/high end. In general increased market shares are gained through (a) Price competition or (b) Service competition. 9
Price competition is the main competitive tool in the industry. But is most aggressively utilised by smaller niche players as a means of increasing their market shares in order to attain critical size. As economies of scale are perceived important in non-life insurance cost efficiency, the smaller players are incentivised to price their services at levels which the larger players are unwilling to compete at.
9
Service competition relates to increasing the depth of the services provided or increasing the product span. E.g. increasing your services provided in relation to auto-insurance or moving into new markets as private health-care coverage, life insurance, assets management and banking.
Market shares are persistent But if the smaller players operate with lower prices for a rather similar product, how come the markets shares display such persistence? This could be due to customers valuing track record and financial stability when choosing insurance provider. We find it likely that a rational client will avoid paying premiums to a company which might not be there to pay the claim when an accident occurs, and, more importantly, we believe non-insurance products to be a low-interest product where the main issue for the client is attainability. It is simply easier to choose a well known service provider than spending time (search costs) collecting different price quotes from the known and unknown firms.
Another important aspect explaining the high market concentrations are the barriers to enter the market. Non-life insurance is characterised by high capital requirements, strict regulative requirements and maybe most importantly a lack of data and personnel. As input data is the most important variable in risk-assessments and hence pricing the services correctly, this data is not easily attainable. The typical procedure of a startup is to hire seasoned personnel with pricing know-how.
Non-life insurance market players in the Nordic and Baltic region Company If Pohjola Tapiola Fennia Local Insurance Group TrygVesta TopDanmark Codan Alm Brand Gjensidige SpareBank1 Länsförsäkringer Trygg-Hansa Folksam
Country (HQ) Finland Finland Finland Finland Finland Denmark Denmark Denmark Denmark Norway Norway Sweden Sweden Sweden
Norway 29%
Sweden 20%
18%
x
30% 10%
0%
Market share / presence Denmark Finland Latvia 5% 26% x 28% 19% 11% 9% 21% 20% 14% x 10% x x
Estonia x x
Lithuania x
x x
x
30% 17% 14%
Source: FNH, company reports, Federation of Finnish Financial Services, Swedish insurance Federation
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Sector report > Nordic Financials According to the European Insurance and Reinsurance Federation (CEA) the premiums in the Nordic market has grown with a CAGR of 4.6% from 19962007 totaling a market growth of 65%. This is higher than the GDP growth of 3% during the period. The main market players are If, TrygVesta, Gjensidige and Codan, which between them have a Nordic market share of 46%. Even though a recession affects the growth drivers adversely, all the Nordic markets still experienced growth in 2008. And still the longer term impact is likely to be increased prices. This is a common event in the insurance market known as the "claims shock theory", where a sudden increase in claims or loss on investment portfolio leads to increased prices across the market in order to recoup the equity lost. The upcoming Solvency II directive and the claims inflation experienced in 2006-2008 further strengthen this assumption. Finland differs from the other markets with a much lower premium per capita with USD 1,005 relative to a Nordic average of USD 1,604. Also the typical Finnish client is the most loyal (perhaps due to rigid Finnish transfer regulation) in the region, where an average client stays with the same insurer for more than 10 years. Reinsurance – a risk reduction and capitalisation tool Reinsurance implies a transfer of risk from the insurer to the reinsurer. We will here briefly look at common reinsurance methods and why insurance companies should reinsure.
There are generally two types of reinsurance: a) Proportional – reinsurer takes x% of each premium and pays x% of each loss. Reinsurer also pays ceding commission to cover a part of the insurer's sales costs. Surplus share: every claim above a certain level is reinsured (less used today). b) Non-proportional – typically reducing the extreme left-tail risk by reinsuring losses exceeding certain critical levels or specific risks (increased popularity recent years). The rationale for insurers is: a) Risk transfer - reducing the extreme tail risk b) Income smoothing – reducing volatility in claims paid c)
Lowers capital requirements and increase solvency
d) Arbitrage – which can arise due to lower MCR for the insurer, economies of scale, more diversified reinsurers or simply different risk attitude. The lesser capital needed per premium written when tail risk is reduced/ removed implies that if the cost of reinsurance is less than cost of capital relative to the capital needed, it generates economic value to reinsure. Cost of reinsurance < Cost of Capital = Economic Value
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We believe internet solutions and bancassurance is the future with regards to sales distribution for Non-life insurers
Sector report > Nordic Financials Distribution Channels The market can be segmented into private and corporate clients, possibly also dividing corporations into several sub-segments. The two dominant segments have rather different characteristics as to how sales are made. Example of different distribution channels utilized
Source: TrygVesta Distribution channels Topdanmark Non-life Life Danske Bank/BG Bank 9%
Assurer 33 %
Telephone etc. 24 %
Telephone etc. 4%
Auto dealers 18 % Danica Pension 5 % Brokers 4% Stores 7%
Brokers 31 %
Assurer 32 %
Main office 33 %
Source: Topdanmark
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Sector report > Nordic Financials In the retail markets physical presence is the key, this property is clearly depicted in the table above. P&C private sales are dominated by local service centres, affinity groups and bancassurance. In our view bancassurance will be the main driver of growth in the next years. Bancassurance implies a strategic partnership between an insurance provider and a bank. The banks agree to sell the products through their already established network of bank affiliates and are paid a commission of each premium written. In some cases the products are even marketed under the banks' own brand. Bancassurance economics
Source: DnB NOR Markets Equity Research
For the banks this entails an immediate increase of services offered to their clients and additional revenues at low costs. For the insurance companies this represents a cost-efficient and rapid way of increasing their geographical presence while also keeping the fixed costs of sales low. And as non-life insurance is a low-interest product it certainly represents the path of least resistance to choose your already established financial service provider as your insurance provider. It is thus apparent that bancassurance is an efficient mean for growth in the retail market, especially for entering new markets where your brand may be less familiar than in your home market. Bancassurance can be an attractive, cost efficient way of entering new markets, but ultimately we view this as a question of long-term branding. That is, under which name should the non-life products be sold? And how should one look at the market position sustainability relative to the partnership risks?
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Sector report > Nordic Financials
03.02.2010
Big is beautiful? A rather ambiguous picture emerges In this section we aim to check whether we can see any apparent trends that indicate strong economies of scale, or whether there are other benefits related to size. We look at Sampo and If and their corresponding spreads of combined ratios. First we look at the quarterly combined ratios by each separate country and then we look at the quarterly combined ratios on a groupbasis. Our findings indicate a geographical diversification, the group combined ratios have a lower average and standard deviation than the country-wise combined ratios. Thus increased geographical presence indicates lower costs and less earnings volatility. Sampo / IF
Combined ratio statistics: Average = 92% and standard deviation = 6%
140%
137%
133%
130%
126%
123%
119%
116%
112%
109%
105%
98%
102%
94%
91%
88%
84%
81%
70%
140%
137%
133%
130%
126%
123%
0
119%
0
116%
2
112%
2
109%
4
105%
4
98%
6
102%
6
94%
8
91%
8
88%
10
84%
10
81%
12
77%
12
74%
14
70%
14
77%
Group wise volatility
74%
Country wise volatility
Combined ratio statistics: Average = 92% and standard deviation = 5%, which is slightly below the country-wise figures. In our opinion showing a positive diversification effect. Too big to fail gets another meaning in this context.
TrygVesta
Combined ratio statistics: Average = 131% and standard deviation = 9% as high establishment costs in Sweden and Finland pull the average upwards.
110%
108%
106%
104%
102%
100%
98%
96%
94%
92%
90%
88%
86%
84%
82%
80%
78%
76%
70%
110%
108%
106%
104%
102%
100%
0
98%
0
96%
1
94%
1
92%
2
90%
2
88%
3
86%
3
84%
4
82%
4
80%
5
78%
5
76%
6
74%
6
72%
7
70%
7
74%
Group wise volatility
72%
Country wise volatility
Group figures considerably more comfortable though and combined ratio statistics: Average = 92% and a standard deviation of 5%
Source: DnB NOR Markets, company reports
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We also looked at the cost ratios of Sampo, TrygVesta and Topdanmark. Although all are large players in their markets, Topdanmark is significantly smaller than the others. The graph indicates that scale's effect on costs is rather limited, but the volatility is higher in Topdanmark, further strengthening the geographical diversification assumption made above.
Nordic combined ratio overview (2004-Q309) Frequency distribution
Combined ratio development
14
1.05
12
1.00
10
0.95 0.90
8
0.85
6
0.80
4
0.75
2
TopDanmark
Sampo
TrygVesta
Combined ratio statistics: Average = 89% and standard deviation = 3%. The different companies' guidance actually seems credible.
Slight downward pattern
Cost ratios show Topdanmark as sector leader with regards to costs, while IF has remarkable stability
Acquisition premium in P/B multiples likely … distorting any likely scale effects on pricing
0.30
Q209
Q408
Q208
Q407
Q207
Q406
Q206
Q405
Q205
110%
108%
106%
104%
102%
98%
100%
96%
94%
92%
90%
88%
86%
84%
82%
80%
78%
76%
74%
72%
70%
Q404
Q204
0.70 0
5.0 4.5
0.25
4.0 0.20
3.5
0.15
3.0 2.5
0.10
2.0 0.05
1.5
If Group
TrygVesta Group
TopDanmark
Not any visible scale effect in costs, but rather the opposite seems true…
Q309
Q109
Q308
Q108
Q307
Q107
Q306
Q106
Q305
Q105
Q304
Q104
Q303
Q103
Q302
0.00
1.0 0.5 Oct05
Apr06
Oct06
Apr07
Oct07
Apr08
Oct08
Apr09
Oct09
… and equally so with regards to pricing. No such thing as big is beautiful here. It must be stated though that the volatility is lower in Sampo compared to Topdanmark and TrygVesta.
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03.02.2010
Market description Denmark – sustainable high profitability? The profitability seen in recent years have attracted new entrants and led to an increased price competition in many products, although the severity of the price competition has decreased, there is still strong competition especially within the corporate segment and worker's compensation.
The Danish market has experienced a sound growth in recent years, with an average growth from 2003-2007 of 2.1%. In 2008 the premium growth slowed down primarily due to price competition from new entrants and smaller players. The financial turmoil in the same year has led to price hike announcements across the board in 2009. These will be implemented fully within the next 18-24 months according to TrygVesta and Topdanmark. Market size, growth and trends 1997 Gross Premium growth Claim Ratio Cost Ratio Combin ed Ratio * Solvency Ratio * The figures are industry averages P&L Gross Written Premium Premiums Earned Total Claims Net Financial Income Net Operating Expenses Profit/loss from normal activity
1997
1998
1998
1999
1999
2000
2000
2001
2001
2002
2002
2003 71.0 % 21.7 % 97.6 %
2004 6.4 % 75.2 % 17.5 % 94.7 %
2005 5.1 % 81.1 % 17.3 % 93.5 %
2006 3.9 % 65.8 % 17.5 % 87.1 %
2007 18.5 % 70.7 % 17.5 % 90.3 %
2008 0.6 % 74.6 % 17.6 % 92.7 %
2003 38,384 32,642 24,106 3,777
2004 40,839 35,950 26,178 3,868
2005 42,911 37,674 27,935 6,390
2006 44,565 40,777 27,401 7,839
2007 52,819 48,505 34,239 5,754
2008 53,130 49,119 36,058 (1,834)
4,370
5,314
6,897
10,122
7,103
(1,089)
The largest competitors in the Danish general insurance market are TrygVesta, Topdanmark, Codan and Alm Brand, which in 2008 held market shares of 20.9%, 19.6%, 14.1% and 10.4%, respectively. In total there are 202 insurance companies with a total of 15,808 employees active in the market. Worker's compensation represents 9% of the market while the motor segment is the largest product with a 28% market share. Seasonality The third quarter is generally a slow quarter sales-wise, which corresponds to low sales costs and thus Q3 typically represent the most profitable quarter in a normal year. If we look at Sampo, TrygVesta and Topdanmark the average combined ratio in Q3 is 87.28% which is 3.8%p lower than the average for the rest of the year. Price Increases The claims inflation seen recently coupled with the loss of equity in 2008 has led to widespread premium increase announcements. Below we have provided a summary of Topdanmark and TrygVesta's announcements.
Topdanmark's premium increases: • House and contents policies: average increase 12 % • SME: average increase of 9 %. TrygVesta's premium increases: • • • • •
Health care: 15% in january 2009 and another 10% in July Accident: 10% in April 2009 Travel: 20% in April 2009 Agriculture: 10% in July 2009 House Content: 14% in October 2009
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Norway – Highly seasonal
As of September 2009, the Norwegian non-life insurance industry portfolio was NOK 39.75 billion, according to figures from FNH. Motor was by far the largest segment, representing 40% of the total market. The non-life insurance market in Norway is served by an oligopolistic industry where the four largest companies in Norway had an aggregate market share of 86% as of September 2009, the highest in the Nordic region. All four players offer insurance in practically all segments of the general insurance market, excluding marine insurance. Market size, growth and trends 1997 Gross Premium growth Claim Ratio Cost Ratio Combin ed Ratio Solvency Ratio P&L Gross Written Premium Premiums Earned Total Claims Net Financial Income Net Operating Expenses Profit/loss from normal activity
78.5 % 27.0 % 105.5 % 144.3 %
1998 7.9 % 80.7 % 28.0 % 108.7 % 155.6 %
1999 10.2 % 93.2 % 25.8 % 119.0 % 199.9 %
2000 21.0 % 89.1 % 26.2 % 115.4 % 158.9 %
2001 2.4 % 88.0 % 24.8 % 112.8 % 141.2 %
2002 13.3 % 78.2 % 23.8 % 102.0 % 116.3 %
2003 6.9 % 74.1 % 24.6 % 98.7 % 111.6 %
2004 5.7 % 67.4 % 22.8 % 90.2 % 137.7 %
2005 3.8 % 68.2 % 23.1 % 91.3 % 145.4 %
2006 4.0 % 68.2 % 22.7 % 90.9 % 146.7 %
2007 2.7 % 71.7 % 21.7 % 93.4 % 149.5 %
2008 3.5 % 71.2 % 22.6 % 93.8 % 132.6 %
1997 25,349 20,637 16,208 5,337 5,577 2,875
1998 27,356 21,728 17,536 3,940 6,092 344
1999 30,135 23,816 22,188 9,338 6,138 5,019
2000 36,465 26,196 23,349 4,089 6,872 418
2001 37,341 29,223 25,725 775 7,243 (3,481)
2002 42,292 33,045 25,851 723 7,860 (1,173)
2003 45,194 36,156 26,794 7,891 8,902 6,141
2004 47,760 37,994 25,622 3,674 8,655 2,546
2005 49,566 40,145 27,382 7,415 9,267 7,708
2006 51,561 43,170 29,453 6,792 9,779 9,035
2007 52,955 44,665 32,035 5,484 9,708 4,035
2008 54,815 47,861 34,080 (1,555) 10,829 908
Source: FNH, SSB From 1998 to 2004 the industry grew more than the Norwegian economy, but has since then cooled off and is currently growing in line with the economy. As the exhibit above indicates, the profitability in the industry has been strong since 2004. The main reasons are a low incidence of large weather-related claims and more stringent underwriting with more adequate pricing. From 1997 to 2008 the gross premiums have displayed a CAGR of 7.3% compared to a claims cost CAGR of 7.0%. The cost ratio has shown the same positive trend with a 4.4%p drop from 1997 to 2008. This is driven by increased automatisation and economies of scale. Overall the Norwegian industry has experienced a decreasing combined ratio. Recently the combined ratio has trended upwards due to claims inflation (9% inflation p.a.). This has been met by increased prices which are currently being implemented. In the same period the Nordic P&C Insurance market appears to have matured, with the major players focusing on cost efficiency and customer satisfaction rather than increased market shares. Gjensidige and If are the market leaders with market shares of 28.8% and 28.1% respectively. Both competitors have a roughly equal market position in the motor segment as seen in the table below. Gjensidige has a strong position in all segments and especially within the fire insurance, small businesses and private, while If has a market share of 58% in the industrial fire insurance market. Motor insurance is the biggest business line totaling a gross written premium of NOK 16bn as of Q3 2009. The segment has shown a healthy 4.4% CAGR since 2001, but the recent growth rates has seen the same trend as the overall market; slowed down in recent years and stood at 3.3% in 2008.
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Segment market shares Non-life Insurance Total Gjensidige If TrygVesta SpareBank 1 Non-life Storebrand Total
Q1 31.60% 30.20% 17.80% 10.10% 0.10% 89.80%
2007 Q2 31.40% 30.00% 18.00% 10.10% 0.20% 89.70%
Q3 30.50% 29.90% 18.20% 10.00% 0.30% 88.90%
Q4 31.00% 29.80% 18.10% 10.00% 0.30% 89.20%
Q1 30.60% 29.30% 17.80% 9.90% 0.60% 88.20%
2008 Q2 30.40% 29.20% 17.80% 9.90% 0.70% 88.00%
Q3 30.10% 29.10% 17.80% 9.80% 0.80% 87.60%
Q4 29.60% 28.90% 17.80% 9.80% 0.80% 86.90%
Q1 29.30% 28.90% 18.00% 9.90% 0.90% 87.00%
2009 Q2 29.10% 28.50% 18.20% 10.00% 1.00% 86.80%
Q3 28.80% 28.10% 18.10% 10.00% 1.10% 86.10%
Auto insurance If Gjensidige TrygVesta SpareBank 1 Non-life Storebrand Total
31.00% 31.20% 17.70% 10.20% 0.20% 90.30%
30.80% 31.40% 17.50% 10.10% 0.30% 90.10%
30.50% 31.40% 17.50% 10.10% 0.40% 89.90%
30.60% 31.70% 17.40% 10.00% 0.50% 90.20%
30.30% 31.20% 17.10% 9.90% 0.60% 89.10%
30.20% 30.80% 17.00% 9.80% 0.70% 88.50%
30.00% 30.70% 17.00% 9.70% 0.80% 88.20%
29.90% 30.10% 17.10% 9.60% 0.90% 87.60%
29.80% 29.40% 17.20% 9.70% 1.00% 87.10%
29.50% 29.10% 17.20% 9.70% 1.10% 86.60%
29.00% 28.70% 17.10% 9.80% 1.20% 85.80%
Fire insurance, private If Gjensidige SpareBank 1 Skadeforsikring TrygVesta Storebrand Total
29.10% 24.80% 20.30% 16.80% 0.20% 91.20%
29.00% 24.80% 20.30% 16.70% 0.20% 91.00%
28.90% 24.60% 20.30% 16.70% 0.30% 90.80%
28.90% 25.00% 20.20% 16.60% 0.40% 91.10%
28.80% 24.60% 19.80% 16.60% 0.50% 90.30%
28.60% 24.20% 19.70% 16.60% 0.60% 89.70%
28.50% 24.00% 19.60% 16.70% 0.70% 89.50%
28.30% 23.50% 19.40% 16.80% 0.80% 88.80%
27.90% 23.10% 19.40% 16.70% 0.90% 88.00%
27.60% 22.80% 19.30% 16.70% 0.90% 87.30%
27.30% 22.90% 19.30% 16.50% 1.00% 87.00%
47.90% 27.30% 9.00% 5.00%
48.00% 27.00% 9.10% 5.10%
47.90% 26.80% 9.00% 5.10%
48.70% 26.60% 9.00% 5.10%
48.40% 26.20% 9.20% 5.40% 0.00% 89.20%
48.50% 26.10% 9.70% 5.50% 0.00% 89.80%
48.00% 26.10% 9.80% 5.60% 0.00% 89.50%
47.70% 26.00% 10.00% 5.70% 0.00% 89.40%
47.70% 25.50% 10.00% 5.80% 0.00% 89.00%
47.50% 25.30% 10.10% 5.90% 0.00% 88.80%
Fire insurance, small businesses Gjensidige If TrygVesta SpareBank 1 Non-life Storebrand Total
89.20%
88.80%
89.40%
55.50% 34.40% 6.90% 0.60%
55.50% 34.80% 6.40% 0.60%
55.40% 33.50% 6.20% 0.60%
57.30% 32.50% 6.40% 0.60%
57.70% 30.90% 5.30% 0.70%
57.60% 30.80% 5.20% 0.60%
58.10% 30.00% 5.10% 0.70%
56.90% 29.80% 4.80% 0.70%
60.20% 31.90% 4.90% 0.70%
59.80% 32.30% 4.90% 0.70%
58.00% 33.10% 4.80% 0.70%
97.40%
97.30%
95.70%
96.80%
94.60%
94.20%
93.90%
92.20%
97.70%
97.70%
96.60%
40.50% 19.90% 21.80% 3.90%
39.50% 20.80% 22.00% 3.90%
35.10% 23.00% 22.00% 3.90%
34.80% 22.40% 21.60% 3.80%
35.20% 21.90% 19.90% 3.60% 2.20% 82.80%
35.70% 21.10% 19.30% 3.60% 2.40% 82.10%
34.70% 21.10% 19.70% 3.70% 2.50% 81.70%
34.20% 20.50% 19.40% 3.60% 2.40% 80.10%
33.80% 21.50% 19.00% 3.70% 2.40% 80.40%
34.90% 22.30% 19.00% 3.70% 2.60% 82.50%
34.40% 22.20% 18.80% 3.80% 2.60% 81.80%
-
Fire insurance, Industrial If TrygVesta Gjensidige SpareBank 1 Non-life Storebrand Total Worker's co mpensation Gjensidige TrygVesta If SpareBank 1 Non-life Storebrand Total
89.20%
48.40% 26.50% 9.30% 5.30% 0.00% 89.50%
-
-
-
86.10%
-
86.20%
84.00%
82.60%
The following table illustrates the trend in the number of claims in selected segments for the period 1997 - 2008. Norway has been impacted by significant claim inflation in recent years, leading to an 18% increase in claims paid from 2006 till 2008. As the average claim size has decreased by 1.3% in the period this is solely related to an increase in claims frequency. The overall claim inflation have been 5%/9%/9% from 2006-2008. This again is mostly related to an adverse development within the motor segment.
DnB NOR Markets - 67
Sector report > Nordic Financials
03.02.2010
Claims development in Norway Breakdown of claims (NOK mn) Motor Private Motor Commerc ial Fire & Special Perils Fire & Special Perils Commercial Fire & Special Perils Industry Workmens Compensation Safety Accident Leisure travel Leisure boat Liability Fish farming Industry Other Total
1997 5,084 1,133 2,685 1,767 1,094 1,347 -
451 405 167 395 136 587 15,249
Breakdown of claims (%) Motor Private Motor Commerc ial Fire & Special Perils Fire & Special Perils Commercial Fire & Special Perils Industry Workmens Compensation Safety Accident Leisure travel Leisure boat Liability Fish farming Industry Other Total Breakdown of claims (Volumes) Motor Private Motor Commerc ial Fire & Special Perils Fire & Special Perils Commercial Fire & Special Perils Industry Workmens Compensation Safety Accident Leisure travel Leisure boat Liability Fish farming Industry Other Total
1998 5,666 1,279 2,681 1,875 691 1,519
1999 6,372 1,481 3,374 2,242 1,101 1,393 -
460 484 148 445 167 688 16,105
556 580 232 461 92 769 18,652
2000 6,439 1,393 3,382 2,213 1,422 1,461 770 454 595 235 518 124 944 19,951
2001 6,639 1,375 4,081 2,619 1,330 1,615 969 464 647 225 511 168 1,037 21,680
2002 6,882 1,350 3,909 2,494 993 1,830 1,049 480 691 262 550 123 675 21,288
2003 7,077 1,414 4,021 2,709 825 1,931 1,085 592 702 276 739 129 689 22,189
2004 7,429 1,418 3,621 2,294 614 2,100 1,019 584 841 243 568 119 387 21,235
2005 7,346 1,281 3,733 2,158 876 2,039 961 640 902 282 600 88 383 21,287
2006 8,133 1,582 4,163 2,624 954 2,095 997 770 1,032 326 720 168 490 24,054
2007 8,484 1,795 4,359 3,057 822 2,294 1,003 604 1,149 371 722 166 476 25,302
2008 9,235 1,883 5,226 3,773 1,094 2,390 929 544 1,264 414 839 240 554 28,385
1997 33% 7% 18% 12% 7% 9% 3% 3% 1% 3% 1% 4% 100%
1998 35% 8% 17% 12% 4% 9% 3% 3% 1% 3% 1% 4% 100%
1999 34% 8% 18% 12% 6% 7% 3% 3% 1% 2% 0% 4% 100%
2000 32% 7% 17% 11% 7% 7% 4% 2% 3% 1% 3% 1% 5% 100%
2001 31% 6% 19% 12% 6% 7% 4% 2% 3% 1% 2% 1% 5% 100%
2002 32% 6% 18% 12% 5% 9% 5% 2% 3% 1% 3% 1% 3% 100%
2003 32% 6% 18% 12% 4% 9% 5% 3% 3% 1% 3% 1% 3% 100%
2004 35% 7% 17% 11% 3% 10% 5% 3% 4% 1% 3% 1% 2% 100%
2005 35% 6% 18% 10% 4% 10% 5% 3% 4% 1% 3% 0% 2% 100%
2006 34% 7% 17% 11% 4% 9% 4% 3% 4% 1% 3% 1% 2% 100%
2007 34% 7% 17% 12% 3% 9% 4% 2% 5% 1% 3% 1% 2% 100%
2008 33% 7% 18% 13% 4% 8% 3% 2% 4% 1% 3% 1% 2% 100%
1997 483,914 66,522 183,212 49,804 5,540 7,439
1998 498,477 61,199 168,473 63,219 5,244 9,020
1999 541,643 60,100 188,208 63,013 5,616 9,385
2000 541,231 56,506 191,933 62,628 6,043 7,634
2002 537,436 49,119 188,285 55,035 6,557 6,509 3,886 11,797 128,623 8,783 6,359 158 31,512 1,034,059
2003 528,162 48,662 177,289 40,616 5,257 8,026 4,034 14,685 139,657 8,979 6,075 191 32,483 1,014,116
2004 537,148 46,882 161,985 38,226 4,360 6,566 4,604 14,806 160,104 8,397 5,219 168 33,189 1,021,654
2005 517,370 45,611 150,705 37,355 3,449 6,132 3,666 15,093 175,602 8,381 4,767 127 33,950 1,002,208
2006 535,897 58,772 161,100 36,066 11,775 6,086 3,345 12,570 190,664 8,371 5,431 207 27,014 1,057,298
2007 565,666 60,756 172,279 37,186 16,681 7,483 4,073 12,629 225,904 9,438 5,750 239 31,940 1,150,024
2008 628,340 63,363 187,575 38,859 17,977 8,068 4,527 15,788 242,586 10,242 6,380 276 33,471 1,257,452
14,201 84,380 7,542 5,301 252 25,003 933,110
16,337 95,031 6,193 5,838 243 25,137 954,411
18,110 115,717 8,660 6,934 168 25,409 1,042,963
14,820 114,999 9,304 6,441 136 27,845 1,039,520
2001 521,384 49,311 175,253 58,634 6,115 6,510 2,296 13,095 118,887 7,663 5,766 155 31,817 996,886
Average Claim Motor Private Motor Commerc ial Fire & Special Perils Fire & Special Perils Commercial Fire & Special Perils Industry Workmens Compensation Safety Accident Leisure travel Leisure boat Liability Fish farming Industry Other Total
1997 10,505 17,036 14,656 35,473 197,437 181,019 31,758 4,801 22,076 74,458 540,079 23,465 16,343
1998 11,366 20,899 15,916 29,665 131,770 168,392 28,175 5,097 23,914 76,276 686,420 27,374 16,874
1999 11,765 24,639 17,925 35,578 195,958 148,396 30,718 5,014 26,790 66,455 544,643 30,281 17,884
2000 11,897 24,658 17,623 35,340 235,256 191,372 30,634 5,171 25,290 80,450 913,500 33,909 19,193
2001 12,734 27,886 23,287 44,661 217,436 248,095 422,213 35,452 5,439 29,417 88,542 1,085,313 32,580 21,748
2002 12,804 27,486 20,762 45,320 151,448 281,134 269,995 40,666 5,374 29,879 86,429 780,745 21,406 20,587
2003 13,399 29,056 22,683 66,700 157,010 240,556 268,939 40,306 5,026 30,783 121,597 675,393 21,223 21,880
2004 13,830 30,250 22,352 60,004 140,711 319,784 221,308 39,464 5,252 28,963 108,756 705,357 11,654 20,785
2005 14,199 28,077 24,770 57,767 253,900 332,567 262,111 42,377 5,135 33,636 125,886 691,339 11,272 21,240
2006 15,175 26,911 25,842 72,767 80,994 344,151 298,146 61,273 5,412 38,896 132,554 813,527 18,154 22,750
2007 14,999 29,539 25,301 82,206 49,302 306,521 246,329 47,850 5,086 39,299 125,530 694,561 14,912 22,002
2008 14,698 29,719 27,861 97,097 60,828 296,220 205,279 34,476 5,212 40,432 131,489 869,203 16,537 22,574
Claim frequency development Motor Private Motor Commerc ial Fire & Special Perils Fire & Special Perils Commercial Fire & Special Perils Industry Workmens Compensation Safety Accident Leisure travel Leisure boat Liability Fish farming Industry Other Total
1997
1998 3% -8% -8% 27% -5% 21% 0% 15% 13% -18% 10% -4% 1% 2%
1999 9% -2% 12% 0% 7% 4% 0% 11% 22% 40% 19% -31% 1% 9%
2000 0% -6% 2% -1% 8% -19% 0% -18% -1% 7% -7% -19% 10% 0%
2001 -4% -13% -9% -6% 1% -15% 0% -12% 3% -18% -10% 14% 14% -4%
2002 3% 0% 7% -6% 7% 0% 69% -10% 8% 15% 10% 2% -1% 4%
2003 -2% -1% -6% -26% -20% 23% 4% 24% 9% 2% -4% 21% 3% -2%
2004 2% -4% -9% -6% -17% -18% 14% 1% 15% -6% -14% -12% 2% 1%
2005 -4% -3% -7% -2% -21% -7% -20% 2% 10% 0% -9% -24% 2% -2%
2006 4% 29% 7% -3% 241% -1% -9% -17% 9% 0% 14% 63% -20% 5%
2007 6% 3% 7% 3% 42% 23% 22% 0% 18% 13% 6% 15% 18% 9%
2008 11% 4% 9% 4% 8% 8% 11% 25% 7% 9% 11% 15% 5% 9%
-
-
-
-
DnB NOR Markets - 68
03.02.2010
Sector report > Nordic Financials Seasonality The Norwegian winter typically impact the claim frequency, leading to a spike in combined ratios in Q1. In 2009 the combined ratios for TrygVesta, If and Gjensidige were 107.4%, 99.5% and 99.1% respectively relative to annual figures of 95.3%, 95% and 93.4%. Thus they experienced 4.5%p12%p higher combined ratio in the first quarter relative to the annual average. With the exceptionally cold winter we are currently seeing we expect weak figures in Norway for the first quarter. Combined Ratios, Q1 Sampo Average FY TrygVesta Average FY Gjensidige Average FY
Q103 94.90 % 93.10 %
Difference Q1 vs Average FY, %p Sampo 1.80 % TrygVesta Gjensidige
Q104 92.70 % 85.63 % 91.25 % 83.67 %
Q105 93.00 % 86.83 % 93.35 % 83.31 %
Q106 93.00 % 87.00 % 93.35 % 85.74 %
Q107 95.10 % 89.85 % 99.67 % 88.86 % 102.14 % 93.21 %
Q108 95.40 % 93.35 % 97.29 % 95.85 % 92.43 % 90.27 %
Q109 99.50 % 94.97 % 107.36 % 95.32 % 99.14 % 93.41 %
7.08 % 7.58 %
6.18 % 10.05 %
6.00 % 7.62 %
5.25 % 10.81 % 8.93 %
2.05 % 1.45 % 2.16 %
4.53 % 12.04 % 5.73 %
Premium Increases The claims inflation seen in 2006-2008 coupled with the loss of equity in 2008 has led to widespread premium increase announcements. Below we have provided a summary of TrygVesta's announcements for the Norwegian market.
TrygVesta's premium increases: • House Building: 2% in July 2007, 6% in January 2008, 1.8% in July 2008, 7.4% in January 2009 and an additional 4.5% in July 2009 • Holiday House: 7% in January 2009 and a further 5% in July 2009 • Motor: 4.8% in July 2007, 1.6% in January 2008, 1% in July 2008, 5% in January 2009 and 6.6% in July 2009 • This implies increased House Building premiums of 24%, increased Holiday House premiums of 12.4% and increased Motor premiums of 20%. These increases typically take 1-2 years to implement and we will not see the full extent of the premium hikes until 2011
DnB NOR Markets - 69
Sector report > Nordic Financials
03.02.2010
Sweden – Highly profitable, too profitable?
Recently the Swedish market has been characterized by increased price competition, especially within motor and health-care insurance. With Solvency II upcoming we expect the same development as in the rest of the Nordic area: 9 9
less price competition smaller players must specialize or go out of business.
Albeit, we do not expect combined ratios in the low 80's to be sustainable. The Swedish market totaled SEK 57.3bn as of Q2 2009. The average annual growth in terms of premium generated was 3.1% from 2005 to 2008. Motor is by far the largest product market representing 26% of total GPW and with a CAGR of 1.5% from 2001-2008. January 2010 motor sales came in at a whopping +31% YoY. A great relief compared to new auto sales in 2008 and 2009, which was down 18% and 17% respectively. This naturally, put a significant dampening on the market growth in 2008-2009. Although the volumes in auto have picked up, the premium growth is hampered by intense price competition. As in most of the Nordic area the claims trend is positive in the motor segment, this could be due to increased safety requirements or, equally likely, just due to less miles driven on the back of the economic downturn. The Swedish market is dominated by domestic players as Folksam and Länsförsäkringer, combined representing 47% of the market, while If represents an additional ~20% market share. If we look at the market leaders' profitability a diverging picture emerges. Folksam's combined ratio has steadily decreased from 100% in 2004 to 89% in 2008. This is driven by a 17%p decrease in claims ratio, while the expense ratio increased by 6%p in the period. Länsförsäkringer and If on the other hand has experienced only slight combined ratio decreases, by 2008 standing at 93% and 92% respectively. Market size, growth and trends 1997
1998
1999
2000
2001
2002
2003
Gross Premium growth Claim Ratio Cost Ratio Combined Ratio Solvency Ratio P&L Gross Written Premium Premiums Earned Total Claims Net Financial Income Net Operating Expenses Profit/loss from normal activity
1997
1998
1999
2000
2001
2002
2003
2004 86.6 % 16.8 % 103.4 %
2005 3.1 % 86.6 % 17.0 % 103.5 %
2006 5.0 % 77.0 % 16.9 % 94.0 %
2007 -1.2 % 81.6 % 17.9 % 99.4 %
2008 5.6 % 65.6 % 17.7 % 83.4 %
2004 92,681 79,780 69,125 7,007 13,368 12,280
2005 95,510 84,743 73,365 6,559 14,374 21,492
2006 100,300 89,305 68,773 7,671 15,134 11,304
2007 99,080 87,980 71,748 10,316 15,731 (25)
2008 104,636 92,336 60,586 11,424 16,385 (10,114)
The Swedish market is mainly served by call centers and bancassurance is a rather new concept with great growth potential. This is reflected in both TrygVesta's partnership with Nordea and Folksam's partnership with Swedbank. The economies of scale present in the non-life insurance industry are clearly shown through a quick glance at TrygVesta's Moderna acquisition. TrygVesta's Swedish operations went from a combined ratio of 137.9% in Q1 2009 to making a profit in Q3. In this period the premiums written went from 66 to 402 DKKm, a staggering ~600% growth, whilst the corresponding operating expenses increased by 40 DKKm. Thus 340mn in increased sales only required 40mn in increased operating expenses. Seasonality The Swedish market resembles the Norwegian with a combined ratio spike in Q1 followed by a sharp fall in both Q2 and Q3 QoQ before the combined ratio increases again when moving into Q4.
DnB NOR Markets - 70
Sector report > Nordic Financials
03.02.2010
Finland – tranquil market with high customer retention
The Finnish market is highly concentrated with the four largest players comprising 84% of the market. Also the total number of companies in the industry was 63 in 2008, which is 315 less than the Swedish market. The large players are Finnish based companies as Pohjola, If, Tapiola and Fennia. The market appears to be the most mature in the Nordic sector with small changes in market shares and the highest client loyalty, a typical customer stays with the same insurance provider for more than 10 years. Finland has more rigid transfer regulations than the other Nordic countries. Market size, growth and trends 1997
1998
Gross Premium growth Claim Ratio Cost Ratio Combined Ratio Solvency Ratio P&L Gross Written Premium Premiums Earned Total Claims Net Financial Income Net Operating Expenses Profit/loss from normal activity
1997
1998
1999
2000
2001
2002
2003
2004
88.6 % 21.8 % 110.4 % 488.0 %
85.8 % 23.6 % 109.4 % 454.0 %
88.2 % 22.2 % 110.4 % 190.0 %
87.3 % 23.9 % 111.2 % 134.0 %
92.4 % 21.5 % 113.9 % 131.0 %
81.4 % 20.6 % 102.0 % 130.0 %
1999
2000
2001
2002
2003
2004 2,957
2005 6.1 % 82.9 % 19.1 % 102.0 % 137.0 %
2006 4.7 % 81.9 % 19.7 % 101.6 % 132.0 %
2007 -0.1 % 78.0 % 20.4 % 98.4 % 145.0 %
2008 3.8 % 78.8 % 20.9 % 99.7 % 126.0 %
2005 3,137 2,781 2,305
2006 3,283 2,890 2,367
2007 3,280 2,881 2,240
2008 3,404 2,980 2,347
530 311
570 282
586 290
624 (212)
On the profitability side the Finnish market have not excelled, after more than 8 years of combined ratios above 100%, it is just in the latest years that the industry have been able to attain a combined ratio in the nineties. Although the market is generally struggling with high combined ratios this is not reflected in the results presented by the market leaders; If and Pohjola reported Q3 2009 combined ratios of 78.2% and 83.1%. Economies of scale proved inconclusive in our Nordic comparison below, this is further confirmed by looking at Tapiola. They have close to a 20% market share but still reported combined ratios of 109.3% and 100.7% in 2008 and 2007. Big is beautiful, but not sufficient. Pohjola and If have cost advantages in the Finnish market, Pohjola is utilising this to gain market shares through aggressive pricing
'Pohjola model'
Pohjola is utilising the cost advantage referred to above to practise aggressive pricing in order to gain market shares. This is predominantely done through bundling, where Pohjola bank clients can buy non-life insurance products with bonus points earned as banking clients. Also "loyal Pohjola clients", those with three or more non-life insurance policies, are given 7-10% discounts. A similar pricing approach is exercised by many of the market players, Eg. Tapiola offer up to 17% discounts in its benefit programme for loyal clients. With combined ratios above 100% this would appear unsustainable, unless the non-life insurance products are offered cheaply in order to attract clients into Tapiola's range of financial services. Differing from the other Nordic markets bancassurance is an integral part of the industry in Finland, a sales-vehicle we expect to gain traction in the other Nordic countries as well. Both Tapiola and Pohjola also operate banks and while Sampo no longer owns Sampo bank they own 20% of Nordea, although they currently do not distribute If's non-life insurance products via Nordea(!). Furthermore the development of self-service opportunities via internet has been a targeted area of growth, resulting in a wide range of services offered. If reported that internet sales comprised 15% of new sales. Seasonality The Finnish market resembles the Norwegian market with high claim expenses in the winter and lower combined ratios during the summer.
DnB NOR Markets - 71
Sector report > Nordic Financials
03.02.2010
Key product category trends Motor – Soft sales in 2008/2009, appears to be picking up
The Motor segment is the largest in all the Nordic markets; with new sales down significantly in 2008 and 2009 this adversely affected the industry. But the economic downturn also led to less cars going out of use and thus the overall number of motor policies remained stable. With the economy picking up we expect the sales to gain ground. New registrations, passenger cars Denmark
Sweden
18,000
40,000
16,000
35,000
14,000
30,000
12,000
25,000
10,000
20,000
8,000
15,000
6,000
10,000
4,000
5,000
2,000
0
0 1Q
2Q Spread 2000-2008 2010
1Q
3Q 4Q Avg. 2000-2008 2009
Norway
2Q Spread 2000-2008 2010
3Q 4Q Avg. 2000-2008 2009
Finland 25,000
14,000 12,000
20,000
10,000 15,000
8,000 6,000
10,000
4,000 5,000 2,000 0
0 1Q
2Q Spread 2000-2008 2010
3Q 4Q Avg. 2000-2008 2009
1Q
2Q Spread 2000-2008 2010
3Q 4Q Avg. 2000-2008 2009
Source: SSB, DST, SCB, Statistics Finland, DnB NOR Markets Equity Research Based on DnB NOR Markets and IMF macroeconomic indicators we estimate improved cars sales in 2010, especially so in Norway. Assuming a market normalization (2010E=2008) we get a 28% growth in new registrations. If we look at the December figures we saw a 31% YoY growth in Norway and a 41% YoY growth in Denmark. In January 2010 we saw a whopping 81% YoY growth in Norway and a solid 32% growth in Sweden.
DnB NOR Markets - 72
Sector report > Nordic Financials
03.02.2010
Fire – the great unknown
We are inclined to say that fires are the main cause of or rationale behind the non-life sector. TrygVesta, Sampo, Alm. Brand and Storebrand (which originally was a non-life company) etc. were all established in able to insure people from the effects of these disasters. The insurer covers the economic loss when e.g. a house burns down. Number of building fires
Fire seasonality
12,000
40 35
10,000
30
8,000
25 6,000
20
4,000
15
2,000
10 5
0 1996
1998
2000
Norway
2002
Denmark
2004
2006
Finland
2008
Sweden
0 Q199 Q100 Q101 Q102 Q103 Q104 Q105 Q106 Q107 Q108
Declining pattern in Norway and Denmark.
No. of fires caused by fireworks in Norway shows, naturally, clear seasonality. We believe candlelight and open fire accidents follow the same seasonal fluctuations although dampening the picture somewhat.
Number of fires and fire losses in industries (Norway)
Number of fires and fire losses in private houses (Norway)
4,000
35,000
3,500
30,000
3,000
25,000
2,500
20,000
2,000 15,000
1,500
10,000
1,000
5,000
500 0
0 1999
2001
2003
Number of fires
2005
2007
1999
Losses (NOKm)
47.8% increase in fires and 44% increase in losses which is less impressive compared to …
2001
2003
Number of fires
2005
2007
Losses (NOKm)
… the private market at -22% and 44% respectively is.
Source: FNH, DnB NOR Markets
DnB NOR Markets - 73
Sector report > Nordic Financials
03.02.2010
Fire sources and causes in private houses and industries
There can be a magnitude of underlying causes. Electrical equipment malfunctioning, open fire etc. are typical such causes. Selected fire sources
Selected fire causes
50%
35%
45%
33%
40%
31%
35%
29%
30%
27%
25%
25%
20%
23%
15%
21%
10%
19%
5%
17%
0%
15% 1999
2001
2003
Electric kitchen equipment
2005
2007
Unknown fire source
Most noticeably is the pronounced increase in 'Unknown" sources…
1999
2001
2003
2005
C aused by electrical phenomenon
2007 Unknown cause
… and likewise with causes. Slight decrease in all 'classical' causes and opposite so for the 'unknown's'.
Source: FNH, DnB NOR Markets Worker's compensation – the long-tail non-life product Worker's compensation is an insurance that provides employees with medical care when injured at work, while relinquishing the employees' right to sue the employer for negligence. The system's main objective is to assist the insured with the financial challenges that occur in the wake of an accident, but also to prevent occupational accidents. The insurance can work as a health-insurance when providing medical care, disability insurance when the medical care did not suffice or in some countries even as a life insurance.
Worker's compensation is statutory and part of the social security in the Nordic area, but in Sweden there is no involvement of private insurers. In Denmark and Finland they have had worker's compensation schemes since the 1890'ies while Norway did not introduce it until 1990. This is reflected in the market sizes; the Norwegian market stands at NOK 2,760mn, this is just more than half of the Danish market DKK 4,200mn and less than half of the Finnish market of EUR 590mn. The profitability within the segment is highly variable, in Norway it has never been at acceptable levels, with a high number of new entrants and a lack of consensus as to how the risks should be priced. Certain risks appear to have price differences in the 30-40% range between companies. The premiums vary between industries dependent on line of work and HSE efforts made. Worker's compensation is a long-tailed insurance, where it can take up to 20 years before an incurred claim is actually reported and settled. This explains some of the pricing issues the Norwegian industry is experiencing, as the industry itself is only 20 years old. Worker's compensation comprised 8% of the Norwegian claims in 2008, and stood for 17% of the claims made in Finland.
DnB NOR Markets - 74
03.02.2010
Sector report > Nordic Financials
Regulatory challenges (and opportunities) ahead Future framework - Solvency II
Solvency II is to be implemented at the end of October 2012. The primary objective of the new directive is to align capital requirements to the risk profile of the firm. This is mainly reflected in more sophisticated capital requirement models and the incorporation of a "Total-balance-sheet" risk perspective. Differing from Solvency I the new directive require the insurance companies to take the asset side risks into account as well as the liability side risk. Thus market risk, credit risk and operational risk has to be incorporated into the capital requirement models. Introducing a two-tiered capital requirement regime The firms will be required to conduct their own risk and solvency assessment (ORSA)*. This process will address the new Solvency Capital Required (SCR) and Minimum Capital Required (MCR).
SCR is estimated with VaR-estimation at 99.5% of basic own funds over a twelve month period 9 9
9
Risks included: Underwriting risk, Market risk, Credit risk, Operational risk MCR is estimated with VaR-estimation at 85% of basic own funds over a twelve month period. The MCR will be in the range of 2545% of SCR. Basic own funds comprise the excess of assets over liabilities plus subordinated debt (typically: shareholders equity + subordinate debt)
If the basic own funds falls below the SCR threshold the firm will be required to reduce risk or increase their capital base within 6 months. If this is not adhered to the regulators will intervene. If the basic own funds falls below the MCR threshold the regulators will immediately intervene and likely withdraw their insurance authorisation. A European Standard Model will be designed and proposed in relation to the implementation of the directive. It will still be possible to utilise internal models, but these will have to be approved by the regulators. Furthermore the estimates made by the firms will be publicly disclosed. The MCR will be required to be disclosed at least each quarter. Valuation: Assets and liabilities will be valued at an economic marketconsistent basis, rather than the current prudent technical provisions and prudent asset valuation. This leads to increased transparency of the balance sheet items but also induces increased balance sheet volatility. In general, the firms already applying IFRS accounting principles will not be impacted significantly. Investments: Regarding investments there will be no demands as to which asset classes the insurers are allowed to invest in. Rather a "Prudent Person" principle will be applied. If an insurer wishes to invest in a new product they need to prove that those responsible for the daily management of the investment have sufficiently understood the risks involved in the given product. Derivative investments and securitization will be allowed. Corporate Governance: Solvency II does not merely address capitalisation, a prime objective is "a change of behaviour" 1. The risk management focus will need to be formalised and be implemented throughout the organisation, ensuring 1
Thomas Steffen, Chairman of CEIOPS DnB NOR Markets - 75
03.02.2010
Sector report > Nordic Financials regulators that risk-management operational decision-making.
is
integral
in
their
strategic
and
Expected Timetable
Source: European Commission, PWC How will this impact the industry? In general, we believe, this will reduce the riskiness of the insurance industry through a more sophisticated relation between capital requirements and risk profile. For some companies e.g. TrygVesta this will have little or no impact on their business model, but for other, typically smaller, more aggressive insurers the directive may have severe consequences. The directive might require capital infusions, 11% of the participants in the QIS4 were below the SCR, and the implementation will certainly require investments in personnel. Although the directive is designed to be "proportional", hence demand placed on different firms will depend on the size of the business, it still might be too extensive for several of the smaller players to adhere to. Thus leading to increased consolidation activity over the next few years. As it is the smaller players that typically drive the price competition we see this directive as a potential profit trigger in the underwriting business, while at the same time reducing the riskiness and returns in the investment activities. Overall we expect the solvency II, as it is proposed today, to reduce volatility and increase profitability across the industry.
DnB NOR Markets - 76
03.02.2010
Sector report > Nordic Financials
Corporate Governance and strategic ownership in Nordic financial institutions Even though the shape of the recovery has been v-shaped … so far, we find it likely that the crisis will have significant and permanent consequences for the future relationship between markets and Governments. We foresee a future with not only increasing supervision, but also potentially permanent public ownership in strategic financial institutions and/or increased political pressure. However, we believe the Nordic countries are uniquely positioned as leading mixed economies. Below we try to evaluate possible CG issues and also evaluate owners. Red arrows indicate bancassurance deals. Ownership map
Source: Company reports, DnB NOR Markets
DnB NOR Markets - 77
03.02.2010
Sector report > Nordic Financials Non-life insurance Sampo
Largest shareholder in Sampo is Solidium Oy with 14%. Solidium is a holding company wholly owned by the State of Finland, and was established in the autumn 2008, when the Finnish State transferred its non-strategic holdings in Kemira, Metso, Outokumpu, Rautaruukki, Sampo, Sponda, Stora Enso, and TeliaSonera to Solidium (and furthermore Elisa Corporation on 11 June 2009). Guiding principles are: o Solidium manages its holdings in a way that ensures the best long-term return to the State. o Solidium’s holdings involve national interests, but its investment decisions are based on financial considerations. Cooperation with other investors is paramount, and the company is an active participant in the Finnish capital market. o Solidium finances its activities with return from its investments and debt. 9 Varma and Ilmarinen Mutual insurance companies are second and third largest owners with 8.5% and 2.85% respectively. 9 On fourth place, rather uniquely, Sampo Chairman Björn Wahlroos with 2.09% We find Solidium a financially solid and well set-up structure. Solidium should lower the overall political risk level, although Heikki Koskenkyla, former Bank of Finland director, was recently quoted in the Finnish newspaper Talouselämä stating that Solidium should buy back Sampo Bank from Danske Bank. We find such a solution unlikely, but we will not rule it out as foreign banks are holding a market share of 50-60 percent in Finland, whereas in other Nordic countries it is between 10-20 percent. TrygVesta 9 TrygVesta's main shareholder is TryghedsGruppen which owns 60% of the shares. o TryghedsGruppen is a holding company that invests in insurance and "peace of mind" related firms. Other companies in Tryghedsgruppens portfolio are SATS (fitness center), Previa (health advisory), Sahva and PreviaSundhed o Their total capital base stands at ~DKK 28bn. TryghedsGruppen recently announced that they are willing to participate in further strengthening of TrygVesta's capitalization in order to facilitate acquisitions. They would prefer a target of approximately the same size as TrygVesta. There has been some noise around the upcoming elections to the committee of representatives; some candidates are criticizing how the operations are run. One group claims that TryghedsGruppen's assets should be disbursed to its owners, who are the policyholders in TrygVesta and Nordea. 21 out of 70 positions are up for election in primo 2010. Topdanmark 9 Sampo owns 11.25% of Topdanmark. Looking at If's low market share in Denmark we, like Bjorn Wahlroos, believe a tie-up with Topdanmark is one of the paths IF could take to grow its insurance market share in Denmark. However Topdanmark CEO Poul Almlund has on several occasions stated that he does not see any possibility for a friendly takeover and that a hostile bid is unrealistic. 9 The Capital Group Companies owns 5.03% (EoY 2009). The group, headquartered in Atlanta US, manages investments of individuals and large institutions through funds. 9 The combined holding of ATP, DMP and SP (different Danish pension funds) equals 8.43% 9
DnB NOR Markets - 78
03.02.2010
Sector report > Nordic Financials Nordic Banks DnB NOR 9 The Norwegian Government is the largest shareholder with a 34% position in DnB NOR. The position is originally a remnant from the last banking crisis in the early 90-ies. The Norwegian public finances are almost unique as the annual surplus the latest couple years have been around 300-400 NOK bn. The Governmental Pension Fund – Foreign (commonly known by its old name, The Oil Fund) is even after record losses still at NOK ~2000 bn. We believe the Governmental ownership combined with the excellent public finances should support the DnB NOR share in general and also more specifically in a potential rights issue, which could arise should strategic opportunities emerge. 9 The Savings Banks Foundation is the second largest owner with 10% of the shares. The new Norwegian Bank Law implemented recently suggested changes which, if approved by the Parliament, will allow the Foundation to deviate from this 10% lower bound increasing the strategic flexibility.
The good public finances in Norway should keep the political risk level low, but as seen in the Aker Holding case not without challenges. Danske Bank The ownership structure of Danske is not fully transparent and we believe this lack of transparency is an additional risk factor for investors. According to Danish law (Danish Companies Act section 28a) only shareholders above 5% must disclose their holdings, and in the annual report two shareholders have reported: 9 The fund ‘A.P. Møller og Hustru Chastine Mc-Kinney Møllers Fond til almene Formaal’ and the A.P. Møller-Mærsk group are the largest owner in Danske Bank with 22.27% (combined share, apr-09). 9 The Realdania fund is the seconds largest with 11.81%.
Historically the owners in Danske Bank have been regarded as financially solid and with a long-term view. However, the ongoing challenges in the shipping and energy markets will put pressure on the earnings of A.P. Møller-Mærsk which combined with a rigorous capex program should force the group to put more leverage on their balance sheet. Handelsbanken Handelsbanken has a diversified shareholder structure with two long term investors in the lead: 9 The Oktogonen foundation is the largest owner with 10.7%. The foundation is an employee fund established in 1973. 9 Industrivärden is a holding company founded in 1944 as Handelsbanken demerged its shareholdings in several Swedish industrial companies. Industrivärden defines themselves as a long-term active investor and is currently the second largest owner in Handelsbanken with 10.6% of the shares (which weighs approximately 23% of the total equity portfolio in Industrivärden).
Ownership structure is diversified, fairly solid and long-term.
DnB NOR Markets - 79
03.02.2010
Sector report > Nordic Financials Nordea After completing the recent rights issue (raising EUR 2.5 bn) we do not believe Nordea have any further capital need. The main owners are: 9 Sampo at 20.01%. Sampo is cash rich after selling Sampo Bank to Danske Bank in 2006 (DKK 30.2 bn) and should, as such, have no problems participating in any further equity issues. Indeed Sampo agreed to guarantee above pro-rate share in the issue. 9 The Swedish parliament has empowered the Government to reduce, or phase out completely, its 19.9% ownership share in Nordea. Due to market conditions we expect the Swedish government to de-facto postpone this privatization process. Political risk is judged to be low in Sweden and we find no reason to apply any system-critical discount to any of the Swedish banks currently.
Our assessment is that the ownership structure is diversified, solid, competent and long-term. Swedbank Ownership structure has changed considerably in Swedbank after two equity issues. The Savings Banks Foundations, which was the largest owner in 2008, was forced to loan from Swedish insurer Folksam, Austrian Erste Bank and Swedish Export Credit (SEK) to be able to subscribe to their pro-rate share in the first rights issue. Unfortunately, in the aftermath the share continued to fall in line with the turbulence in the markets, and reached a low in February 2009. This made the Savings Banks Foundations break their covenants and Folksam subsequently increased its share in Swedbank. 9 Folksam is now the largest owner with 15.8% (and the Savings Bank Foundation 13%). This is a short term good solution as Folksam is financially solid and better able to support Swedbank. 9 SEK (Swedish Export Credit Corporation) took a 3.3% share. 9 At the same time Austrian Erste Bank emerged as a new owner taking over 2.7% from the Foundation.
Other Savings Banks (besides the foundation) owns another 10.5%. Overall we assess the Swedbank owners to be among the weakest, in financial terms, with regards to ability to support Swedbank going forward. SEB Historically closely linked to Investor AB and both could be defined as cornerstones in the Wallenberg family’s financial empire. With a history going back almost 100 years we have no problem defining the Wallenberg sphere a long-term investor. 9
Investor AB currently holds 21%
9
The Trygg Foundation is the second largest owner with 9.6%. The foundation was formed when the mutual insurance company Trygg-Hansa Life-insurance transformed into a mutually operated limited company.
Our assessment is that the ownership structure is diversified, solid and long-term. Investor AB is probably the most renowned industrial environment on the Nordic arena and we would define their ownership quality as “top notch”.
DnB NOR Markets - 80
Sector report > Nordic Financials
03.02.2010
Historical pricing data show diverse pattern P/B Company Sampo TrygVesta TopDanmark Alm. Brand Pohjola Average Median Baloise-Holding Mapfre SA RSA Storebrand Vienna Insurance Group Fondiaria Unipol Old Mutual Prudential Standard Life Zurich Financial Serv Irish Life & Permanent Legal & General AXA Allianz Assicurazioni Generali Aegon SCOR Cattolic a Assic urazioni Swiss Life Holding Muenchener Rueck Aviva Hannover Rueck BRIT Insurance Holdings CNP Assurances Average Median
1995 0.5
1996 0.7
1997 1.0
1998 1.0
1999 0.7
2000 1.6
2001 1.7
2002 1.4
2003 1.3
2004 1.7 2.7 1.2 1.3 1.7 1.5
2005 1.9 2.6 2.9 1.3 1.4 2.0 1.9
2006 2.2 2.9 4.2 1.7 1.4 2.5 2.2
2007 1.3 2.6 3.2 1.1 1.4 1.9 1.4
2008 1.6 2.6 3.7 0.3 1.0 1.8 1.6
1.0 0.3 0.3 0.5 0.4
0.9 0.5 0.5 0.6 0.6
1.5 0.5 0.6 0.9 0.8
1.2 0.4 0.7 0.8 0.9
1.5 0.5 1.0 0.9 0.9
1.3 0.5 1.1 1.1 1.2
1.6 0.6 1.1 1.2 1.3
1.6 0.6 1.1 1.2 1.2
2.2 0.9 1.2 1.4 1.2
0.9 1.7 0.9 1.4
0.8 1.9 1.0 1.4
1.2 1.8 1.2 1.6
1.6 1.6 1.1 1.8
1.1 1.1 1.2 1.6
1.4 1.1 1.5 1.6
1.6 1.0 1.5 1.5
1.0 1.3 0.6 0.8
0.9 1.9 0.8 1.3 1.1 1.2 1.2 2.7
0.8 1.5 1.0 1.5 2.5 1.2 1.2 1.1 2.1
1.0 1.6 1.4 1.6 2.6 1.4 1.0 1.4 2.5
1.1 1.7 2.2 1.3 1.3 3.2 1.3 0.3 1.3 1.0 1.2 1.0 1.4 1.0 1.1 1.4 1.2
1.1 1.6 1.5 1.3 1.2 3.4 1.1 0.9 1.8 0.8 1.0 2.2 1.4 1.2 1.2 1.4 1.2
1.4 1.7 1.9 1.6 1.3 2.7 1.3 1.0 1.8 1.0 1.1 1.7 1.4 1.2 1.1 1.5 1.4
1.3 1.7 1.9 1.9 2.5 1.6 1.2 1.3 3.1 2.4 1.5 1.8 1.9 1.4 1.3 2.5 1.3 1.2 1.9 1.3 1.1 1.8 1.5 1.3 1.2 1.7 1.5
1.2 1.6 1.6 1.3 2.5 1.2 1.0 0.9 2.8 1.8 1.5 1.0 1.5 1.2 1.4 2.8 1.4 0.9 1.2 1.3 1.1 1.3 1.0 86.0 1.2 4.8 1.3
1.0 1.3 1.2 0.5 0.7 0.7 0.8 0.4 2.1 1.3 1.3 0.2 1.3 0.9 1.0 2.3 1.1 0.9 1.1 0.3 1.1 0.9 1.0 0.8 0.8 1.0 1.0
1.9 1.3
1.5 1.2
2.1 1.3
2.1 1.7
1.1
1.1
1.6
2.0
2.1 1.7 1.6 3.4
1.9 1.2 1.3 2.8
1.0 1.6 0.9 2.5
1.2 1.7 1.3 2.4
1.5 1.5 1.0 1.5 1.2 3.2 2.1 0.8
1.3 1.6 1.1 1.5 1.3 2.3 2.6 0.8
1.8 2.5 1.6 2.0 1.8 3.4 2.9 1.2
2.7 2.2 2.2 3.2 3.6 5.4 7.7 1.6
2.3 1.4 1.6 3.0 3.0 4.7 4.6 1.2
1.0 1.1
1.9 1.3 0.6
1.1 0.9 1.4 1.7
1.1 1.3 1.4 2.1
1.4 1.3
1.4 1.3
1.7 1.6
1.4 2.4 1.9
0.8 2.4 1.5 1.8 0.8 1.7 2.0 1.7
2.4 1.9 1.8 2.7 2.9 5.8 4.5 1.4 1.7 1.3 2.9 1.9 1.8 0.9 1.8 2.1 1.8
1.1 1.8 1.6 1.6 2.0 4.1 2.7 1.0 1.2 1.1 2.8 1.6 1.3 1.2 1.1 1.6 1.5
0.8 1.6 2.1 1.0 1.0 3.1 1.2 0.3 1.2 0.6 1.4 1.2 1.4 1.3 1.0 1.3 1.2
Over the cycle Avg Med 1.3 1.4 2.7 2.6 2.1 1.6 0.7 0.6 1.0 1.1 1.3 1.2 1.2 1.2 1.1 1.5 1.2 1.4 2.2 1.5 1.3 1.1 2.3 1.8 1.6 1.6 1.7 1.7 1.7 3.5 2.6 1.0 1.5 1.0 1.5 1.4 1.4 9.6 1.2 1.8 1.4
1.1 1.6 1.2 1.5 2.5 1.5 1.2 1.3 2.4 1.8 1.4 1.6 1.6 1.5 1.3 3.2 1.7 0.9 1.3 1.0 1.2 1.4 1.4 1.2 1.2 1.6 1.4
Over the cycle P/B has been between 1.2 and 1.3. Source: Factset, DnB NOR Markets P/B, RoE relationship 2.5 x
R2 = 0.7591 2.0 x
1.5 x
1.0 x
0.5 x
0.0 x -5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
High correlation between RoE and P/B. Trust owned insurance companies do not trades at a discount (TrygVesta, Wienener, Mapfre, Alm. Brand). Source: CEA, DnB NOR Markets Equity Research DnB NOR Markets - 81
Sector report > Nordic Financials
03.02.2010
P/E Company Sampo TrygVesta TopDanmark Alm. Brand Pohjola Average Median Baloise-Holding Mapfre SA RSA Storebrand Vienna Insurance Group Fondiaria Unipol Old Mutual Prudential Standard Life Zurich Financial Serv Irish Life & Permanent Legal & General AXA Allianz Assicurazioni Generali Aegon SCOR Cattolic a Assic urazioni Swiss Life Holding Muenchener Rueck Aviva Hannover Rueck BRIT Insurance Holdings CNP Assurances Average Median
1995 19.8
1996 19.4
1997 19.6
1998 15.3
1999 9.2
2000 6.3
2001 5.9
2002 11.5
2003 12.8
2004 7.1
16.1 2.8
13.2 4.4 9.2 11.6 11.2
5.5 8.3 6.4 8.9 7.4
16.1 13.2 12.8 13.2
5.4 5.1 5.4 5.6 5.4
12.7
12.9 16.1
9.8 3.7 6.5 9.8 8.1
18.6 17.5 10.8 14.6 14.5
11.2 10.2 6.9 10.3 10.7
12.0 10.7 11.1 10.2 10.9
16.3 18.0 7.3 7.1 11.1 33.5 15.0
15.4 22.9 14.5 9.3 14.8 26.5 19.6
20.9 23.6 17.8 14.3 28.3 35.7 30.5
23.5 21.5 20.1 17.2 14.5 29.4 31.3
15.9 13.4 31.5 31.4
20.9 12.3
12.4 18.7
31.0 13.8 35.3 13.6
13.5 12.3
14.5
14.4
22.0
26.9
14.5 14.1 18.6 14.5 22.6 27.2 33.7 13.9 41.9
23.5 33.8 10.7 29.5
11.5 37.3 7.1 19.0
47.8 19.0 7.8 10.3
18.0 13.6 16.9 19.3 32.0 46.4 12.9 8.3
15.3 12.2 22.4 17.5 31.8 26.9 18.3 9.0
18.3 17.8 26.7 19.6 48.0 37.1 22.8 11.6
21.3 16.9 37.1 28.5 44.4 50.4 48.4 13.4
15.9 10.8 25.9 25.8 39.5 41.1 37.5 15.4
21.1 13.3 27.9 25.5 41.6 37.9 28.1 16.4 32.4 11.1 38.7 27.3 8.3 304.4 12.4 36.3 27.3
17.0 14.9 34.5 42.3 35.5 17.3
9.0 12.5 16.4
21.2 43.5 216.2 15.1 187.2
20.3
21.5 11.9 8.7
17.5 15.0
24.5 15.7 11.3 29.5 18.6 16.6
59.0 34.9 16.6 25.0 63.2 28.3 23.6
29.3 53.4 23.4 23.7
18.8 39.3 22.0 11.2
12.9 28.0 23.7
14.4 23.6 20.4
8.3 9.0 8.3
9.0 42.3 20.0
11.3
17.9 9.2 8.8 21.2 8.2 15.7 12.4
15.2 21.4 9.2 17.9 8.9 11.5 12.1 20.7 11.2 26.2 10.2 11.9 17.2 99.5 9.2 7.7 9.8 9.4 19.2 12.9
2005 8.9 10.3 9.3 8.6 9.3 9.3 9.3
2006 12.0 9.3 10.6 10.8 13.4 11.2 10.8
2007 14.7 11.6 10.0 8.2 12.6 11.4 11.6
2008 11.2 25.6
9.9 9.3 16.0 11.7 17.1 19.1 9.1 15.4 18.1 8.4 9.5 11.4 11.2 1.9 11.3 12.1 11.4
9.7 12.9 8.9 12.3 12.4 19.5 8.4 12.3 17.9 8.9 9.8 9.7 73.0 3.8 9.6 14.5 10.7
9.4 12.2 10.3 11.0 21.4 10.0 22.7 11.5 19.3 23.7 8.7 15.5 6.6 12.0 9.1 17.6 8.9 7.1 16.7 10.6 8.6 9.5 9.9 7.7 10.6 12.4 10.6
7.2 9.4 8.0 7.1 18.5 7.8 12.4 9.2 9.5 7.9 7.6 6.1 18.3 12.1 8.4 14.7 8.2 6.3 51.8 6.8 7.4 13.7 5.4 5.3 10.9 11.2 8.2
10.7 7.2 8.1
6.9 17.3 7.7 14.2 8.1 18.6
10.5 13.3 6.7 10.8 23.6 8.2 21.1 6.8 17.4
22.2 19.7 22.2
7.1 5.7 27.1 4.5 9.8 7.1 9.9 1.4 7.2 8.7 8.7 30.5 9.3 44.9 14.8 6.3 10.2 10.5 11.9 8.7
Over the cycle Avg Med 12.4 11.8 14.2 10.9 11.2 10.9 8.9 8.5 10.4 9.3 11.2 10.7 11.4 10.9 16.1 14.7 16.4 13.0 17.9 20.7 24.2 8.9 19.4 12.9 13.7 11.9 18.1 18.9 26.6 31.0 18.6 11.3 26.1 21.4 42.6 14.3 30.1 45.7 10.8 20.8 15.8
15.4 13.3 16.2 11.0 17.9 19.4 22.1 8.6 18.2 7.9 12.6 12.6 16.4 18.4 31.8 30.5 12.9 11.6 20.3 14.1 23.0 12.8 11.2 10.0 10.6 18.0 13.9
Median, over the cycle, P/E has been between 10.9 for the Nordic's compared to 13.9 for tier 2 peers. Importantly tier 2 peers have been considerably more volatile. Changes in accounting principles during the period have affected the ratios.
DnB NOR Markets - 82
Sector report > Nordic Financials
03.02.2010
RoE Company Sampo TrygVesta TopDanmark Alm. Brand Pohjola Average Median Baloise-Holding Mapfre SA RSA Storebrand Vienna Insurance Group Fondiaria Unipol Old Mutual Prudential Standard Life Zurich Financial Serv Irish Life & Permanent Legal & General AXA Allianz Assicurazioni Generali Aegon SCOR Cattolic a Assic urazioni Swiss Life Holding Muenchener Rueck Aviva Hannover Rueck BRIT Insurance Holdings CNP Assurances Average Median
1995 2.8%
1996 3.6%
1997 5.3%
1998 6.5%
1999 7.5%
6.1% 9.4% -1.9% 4.1% 4.5%
9.4% 13.4% 7.3% 8.4% 8.3%
11.7% 10.6% 6.7% 8.5% 8.6%
21.3% 4.9% 11.5% 11.0% 9.0%
-3.1% 2.8% 7.7% 3.8% 5.2%
5.4% 9.7% 11.7% 19.6%
5.5% 8.2% 7.1% 14.9%
5.6% 7.5% 6.8% 11.3%
6.8% 7.5% 5.3% 10.2%
7.5% 7.8% 6.6% 11.1%
8.8% 8.3% 4.9% 5.2%
5.6% 8.7%
5.6% 6.3%
6.0% 4.4% 206.2% 7.7% 7.5%
7.1% 5.5% 12.7% 7.3%
7.6% 5.2% 11.4% 8.1%
7.9% 3.5% 11.9% 9.6%
14.6% 13.1% 6.3% 11.5% 7.7% 11.4% 12.2% 8.0% 3.5% 4.3% 6.1% 6.7% 16.3% -0.1% 11.7% 8.6% 7.8%
7.9% 8.2% 10.7% 5.9% 7.6% 3.7% 7.0% 16.3% 9.2%
8.5% 13.1% 4.9% 8.8% 3.9% 8.7% 14.0% 9.4%
10.1% 14.2% 6.1% 10.1% 3.7% 9.2% 12.7% 10.8%
12.6% 13.0% 6.0% 11.2% 8.2% 10.7% 15.8% 12.0%
1.4% 4.4% 9.1%
2.2% 7.6% 8.0% 5.4%
1.8% 2.7% 8.2% 6.7%
3.8% 2.4% 5.9% 8.8%
12.7% 8.7% 8.2%
12.3% 8.1% 7.8%
11.7% 17.3% 7.5%
10.7% 8.7% 8.2%
2000 24.9%
2001 29.2%
2002 12.0%
2003 9.9%
2004 24.0% 22.0% 22.4% 11.5% 11.8% 18.3% 22.0%
2005 21.7% 25.7% 31.6% 15.0% 14.6% 21.7% 21.7%
2006 18.5% 31.6% 39.9% 15.8% 10.5% 23.3% 18.5%
2007 9.1% 22.6% 31.6% 13.5% 11.3% 17.6% 13.5%
2008 14.3% 10.0% -6.5% -0.8% 4.4% 4.3% 4.4%
23.4% 12.3% 9.9% -42.9% 20.2% 12.8% 19.6% 2.8% 21.8% 12.5%
8.7% 3.4% 9.9% 8.5% 9.3%
19.4% 9.2% 17.7% 14.1% 13.8%
7.5% 8.3% -1.5% -12.0%
-20.6% 10.5% 3.4% -12.0%
2.8% 13.5% 2.4% 9.4% 7.1% 5.7% 13.4% 14.9%
6.2% 12.6% -6.6% 22.4% 14.3% 15.8% 8.6% 13.3% 11.4%
12.6% 14.6% 18.1% 6.2% 12.0% 12.0% 12.3% -50.8% 10.9% 5.6% 1.2% 10.6% 18.1% 10.3% 11.9% 7.6% 10.9%
11.4% 17.2% 9.2% 11.0% 7.0% 17.8% 11.9% 5.6% 9.7% 9.6% 10.8% 19.1% 12.1% 60.1% 10.9% 13.4% 11.4%
9.3% 12.1% 20.3% 14.9% 11.1% 17.6% 4.8% 21.2% 14.4% 24.0% 14.6% 13.2% 20.9% 12.8% 10.4% 13.8% 15.0% 7.9% 9.9% 11.0% 11.1% 17.9% 1.9% 32.0% 11.8% 14.1% 13.2%
14.1% 14.3% 18.0% 16.8% 11.8% 15.7% 5.2% 11.5% 16.1% 10.0% 17.3% 11.6% 28.8% 12.0% 14.6% 14.4% 15.0% 16.3% 11.2% 12.0% 13.3% 19.0% 14.8% 16.6% 11.3% 14.5% 14.4%
16.8% 16.9% 20.4% 18.5% 13.4% 15.9% 7.8% 10.1% 29.8% 22.7% 19.3% 15.8% 8.2% 10.3% 16.7% 19.2% 16.9% 14.0% 2.4% 18.5% 15.1% 9.3% 18.4%
9.7% 18.5% 15.2% -13.7% 9.9% 13.1% 2.8% 8.0% 20.9% 18.7% 13.6% 11.0% 17.4% 10.1% 11.5% 7.6% -23.0% 9.3% 2.5% -17.2% 7.2% 15.0% -4.5% 7.8% 7.3% 7.1% 9.7%
8.9% 4.2% 12.9% 12.9%
2.5% 8.8% 16.7% 23.3%
11.2% -2.2% 14.0% 10.5% 6.4% 11.0% 10.4% 4.8% 7.0% 4.8% 15.3% 11.4% 16.2% 15.8% 8.7% -28.1% 5.1% 5.6% 12.1% 2.6% 7.4% 1.3% 6.9% 10.8% 21.1% 0.7% 0.3% -21.7% 14.2% 12.4% 9.4% 3.5% 8.7% 5.6%
-19.3% 17.8% 16.6% 5.8% -4.9% -9.4% 10.7% -42.5% 5.7% -65.0% 7.8% 12.9% 15.4% 6.0% 12.7% 0.1% 6.0%
10.7% 15.3% 16.3%
Over the cycle Avg Med 13.5% 11.0% 22.4% 22.6% 16.3% 15.9% 5.4% 9.7% 10.3% 10.9% 11.9% 9.8% 12.4% 10.9% 6.1% 11.1% 8.1% 8.3% 12.1% 9.7% 5.8% 29.1% 13.7% 18.9% 9.5% 13.6% 11.8% 9.5% 7.6% 10.7% 11.6% -0.7% 6.7% 0.2% 7.0% 11.4% 10.4% 12.4% 11.6% 9.8% 9.7%
RoE have been higher for the Nordic companies, compared to European peers (11.9% vs. 9.8%). Main rationale is capitalization.
Non-life insurers
DnB NOR Markets - 83
7.2% 10.1% 6.7% 11.2% 11.8% 7.7% 5.4% 12.8% 12.2% 20.7% 12.0% 13.2% 8.7% 10.2% 7.4% 11.4% 14.5% 9.0% 5.7% 4.0% 7.3% 10.0% 12.1% 7.8% 11.7% 8.7% 8.4%
03.02.2010
Sector report > Nordic Financials
Sampo – unwarranted discount History In connection with Sampo's Annual General Meeting in 2009, Björn Wahlroos, Group CEO and President since 2001, is elected as Chairman of the Sampo Board. Long-time deputy CEO Kari Stadigh succeeds Wahlroos.
Excellent M&A track record …
Like most financial conglomerates Sampo is the result of a number of mergers and acquisitions. In 2000 Sampo Insurance Company and Leonia, the successor of Postipankki, merged into Sampo-Leonia Financial Group. Furthermore Mandatum Bank was merged into the Group in February 2001, and thereafter Björn Wahlroos enters the scene as group CEO and President of Sampo-Leonia Group. IF P&C Insurance was formed in 1999 through the merger of the non-life insurance operations of Storebrand in Norway and Skandia in Sweden. In 2001, If and Sampo’s property and casualty insurance operations merged, and in the spring of 2004, Sampo acquired Storebrand’s, Skandia’s and Skandia Liv’s holdings of If shares. If, now a fully owned subsidiary of Sampo, has a market share in the Nordic countries of ~20 percent. If operates in Finland, Sweden, Norway, Denmark and the Baltic countries. Following the transaction, Sampo had three main business areas: property and casualty insurance, banking, life and long-term savings. Sampo's banking operations are transferred to a Danish ownership in early 2007 when Sampo divests the entire share capital of Sampo Bank to Danske Bank. Sold at P/B=3.6 Sampo realizes a sales gain of ~2.8 bn EUR. After the divestment, Sampo's main business areas are: 1. If - Non-life insurance operations in the Nordic area 2. Mandatum - Life insurance operations in Finland, Estonia, Latvia and Lithuania. Mandatum Life focuses on unit-linked insurance. It has a significant market share in corporate pension policies. The company works in close cooperation with Mutual Insurance Company Kaleva and If. Strategy
… and, depending on point of view, insurance operations or Nordea exposure at discount
Sampo plc, the parent company of the Group, manages a significant investment portfolio following the divestment of Sampo Bank Group. Sampo plc has increased its ownership in Nordea, the largest Nordic banking group since 2006. In 2009 Sampo's holding in Nordea exceeds 20 per cent. As a result, Nordea becomes Sampo's associated company (effective as of 31-dec-09). Insurance operations at a discount 12,000 10,000 8,000
6,000 4,000 2,000 0 Sampo (M. cap)
Nordea (20% at MV)
Debt
Implied value of operating business
Valuing Nordea at market price you get Sampo's insurance operations at a ~30% discount versus present Nordic peers. Source: DnB NOR Markets
DnB NOR Markets - 84
03.02.2010
Sector report > Nordic Financials Sampo discount when using current P/B Nordea Mandatum If Equity
Book Values 5,893 243
Share of Book 0.76 0.12
1,578 7,714
0.33 1.21
P/B 1 0.75 1.62 1.21
Share of Book 0.71 0.09 0.70 1.5
P/B 1 0.75 2.73 1.5
Sampo discount when using historical P/B Nordea Mandatum If Equity
Book Values 5,893 243 2,124 8,259
Source: DnB NOR Markets
Note that Mandatum and If figures are as of Q408 while rest are Q309 distorting the picture somewhat. "Buy Sampo and get IF to ~30% discount vs Nordic peers."
Financial Targets
Sampo Group efficiency is measured by Return on Equity (RoE). RoE measures accurately the efficiency of capital employed the different business areas. RoE is calculated at market values after tax and the equity used is the average for the period. Both the life- and non-life insurance businesses target a RoE in excess of 17.5%, which is roughly in line with the 2004-2008 historical average of 18.2%. Underwriting Business Although the macroeconomic picture has been rough Sampo is guiding on a rather unchanged combined ratio (92-93%). Well below the 95% target and as such unaffected the recession. Risk areas are claims inflation in Norway and a possibly return to normalization of combined ratios in Finland (from low levels)?
In our analysis we see the combined ratio falling to 88% by 2015 as we believe price increases in a key consequence of the Solvency II framework. The uncertainties are plentiful though both on the up and downside. Most noticeably we find a potential bancassurance deal with Nordea attractive. Investment Activities We have provided a sensitivity analysis of investment return impact on earnings and price target below. In our base scenario we have assumed returns of 8% for equities and an aggregated 3% for the bond portfolio.
DnB NOR Markets - 85
03.02.2010
Sector report > Nordic Financials
2010E P/B-RoE relationship 2.5 x
R2 = 0.7658 2.0 x
1.5 x
1.0 x
0.5 x
0.0 x 0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
A RoE target of 17.5 implies a P/B of 1.46. Using theoretical P/B with CoC=8% and 2.5% growth we get a P/B of 2.17. Source: DnB NOR Markets, Factset Sampo targets a dividend yield of 4-6% and share buy-back are used to complement the dividends. With Sampo's track record and mgnt statements we would argue that the conglomerate discount should be close to zero. What could be a catalyst in that regard?
Is bancassurance Sampo rationale for buying shares in Nordea?
TopDanmark complementing IF perfectly?
Strategic case 1: Possible bancassurance deal with Nordea? Could IF be a purveyor of Non-life insurance products to Nordea?
One of the reasons Sampo has bought over 20% of the shares in Nordea could be that Sampo mgnt views IF as a good purveyor of Non-life insurance products to Nordea. The geographical match is certainly very good, but the problem is that Nordea already has one purveyor – TrygVesta. The current Nordea TrygVesta bancassurance deal lasts until 2013, with renegotiations for an extension until 2016 in primo 2011. Nordea and TrygVesta have strong historical connections so such a deal is not straight forward. Currently our base case is that Sampo will drive Nordea into consolidations with another large Nordic / European bank, but we view the bancassurance plan as an interesting long term option. Strategic case 2: TopDanmark acquisition Sampo is already the largest owner in TopDanmark with 11.25% and we share Bjørn Wahlroos view that TopDanmark is a natural partner for IF. Both as a way for IF to grow market share in Denmark and as a measure to cutting cost in IF's Danish operations. Geographical good match is clearly not enough as former Topdanmark CEO Paul Almlund said he sees "no chance of friendly Sampo deal". Strategic case 3: IF IPO? Divesting IF at P/B = 2 and buying more Nordea shares at lower P/B multiples?
The latter being a more radical solution, but we believe mgnt have both the will and ability to lower/remove the discount.
DnB NOR Markets - 86
Sector report > Nordic Financials
03.02.2010
Sampo combined ratios
Risk ratio
Claims inflation in Norway problematic
… but Finland excels
Denmark
Sweden
160%
140%
140%
120%
120%
C ost ratio
100%
100%
80%
80% 60%
60%
Risk ratio
Risk ratio
C ost ratio
Q209
Q408
Q208
Q407
Q207
Q406
Q206
Q405
Q205
Q404
Q204
Q403
Q203
Q402
Q309
Q109
Q308
Q108
Q307
Q107
Q306
Q106
Q305
Q105
Q304
Q104
0% Q303
0% Q103
20%
Q302
20%
Q202
40%
40%
C ost ratio
Group 120% 100% 80% 60% 40% 20%
Risk ratio
2015E
2014E
2013E
2012E
2011E
2010E
2009E
2008
2007
2006
2005
2004
2003
2002
2001
2000
0%
C ost ratio
DnB NOR Markets - 87
Q309
Q109
Q308
Q108
Q307
Q107
Q306
Q106
Q305
Q105
Q304
C ost ratio
Q104
Q309
Q109
Q308
Q302
Risk ratio
Q108
0%
Q307
0%
Q107
20%
Q306
20%
Q106
40%
Q305
40%
Q105
60%
Q304
60%
Q104
80%
Q303
80%
Q103
100%
Q302
100%
Q102
120%
Q301
120%
Q101
140%
Q300
140%
Q303
Finland below 80%!
Q103
Norway – problematic claims inflation
03.02.2010
Sector report > Nordic Financials
Estimates Nordea holding above 20% and Sampo starts accounting the holding with the equity method as of 31st of December 2009. PL effect in Q4=EURm 101 …
Q409 preview EURm
Q308 Q409E Q409E Chg YoY Reported DnB NOR Market* Abs. 212 144 0 -68 22 36 0 14 6 -17 0 -23 0 101 0 101 0 0 0 0 240 264 0 24 -67 -41 0 26 0 0 0 0 173 223 0 50
P&C insurance Life insurance Holding Bank Elim Pre-tax profit Tax Minorities Profit EPS RoE
0.3 11.1%
0.4 11.4%
Dividend Combined ratio
n.a. 90.6%
n.a. 89.8%
0 0
% -32% 64% -382%
10% -39% 29%
0 0
29% 3%
DnB NOR Markets 2009E 2010E 2011 620 523 58 119 157 18 23 -67 -6 101 528 66 0 0 863 1,141 1,36 -173 -153 -17 0 0 690 987 1,18 1.2 8.8%
1.8 12.0%
2 13.4
0.8 91%
1.0 90%
1 89
Source: DnB NOR Markets
Boosting income stability and overall level, but …
Consolidating Nordea both greatly stabilizes and increases Sampo profit. Bank share of Sampo income 60%
50%
40%
30% 46%
49%
2010E
2011E
52%
20%
10% 12% 0% 2009E
2012E
Source: DnB NOR Markets
We accredit Nordea with a high earnings quality grade in our analysis of the Nordic Banks, and Sampo now gains valuable stability in the company income statement.
DnB NOR Markets - 88
03.02.2010
Sector report > Nordic Financials
Valuation Sustainable Return on Equity Risk-free interest rate Required return Sustainable ROE
8.4% 14.0%
5.0% 8.4% 15.0%
8.4% 16.0%
9.4% 14.0%
5.0% 9.4% 15.0%
9.4% 16.0%
10.4% 14.0%
5.0% 10.4% 15.0%
10.4 16.0
Long-term grow th rate Price/book Im plied value
1.5 % 1.8x 14,963
1.5 % 2.0x 16,160
1.5 % 2.1x 17,357
1.5 % 1.6x 13,069
1.5 % 1.7x 14,114
1.5 % 1.8x 15,160
1.5 % 1.4x 11,600
1.5 % 1.5x 12,528
1.5 1. 13,4
Long-term grow th rate Price/book Im plied value
2.5 % 1.9x 16,099
2.5 % 2.1x 17,499
2.5 % 2.3x 18,899
2.5 % 1.7x 13,766
2.5 % 1.8x 14,963
2.5 % 2.0x 16,160
2.5 % 1.5x 12,023
2.5 % 1.6x 13,069
2.5 1. 14,1
Long-term grow th rate Price/book Im plied value
3.5 % 2.1x 17,699
3.5 % 2.3x 19,385
3.5 % 2.6x 21,070
3.5 % 1.8x 14,699
3.5 % 1.9x 16,099
3.5 % 2.1x 17,499
3.5 % 1.5x 12,569
3.5 % 1.7x 13,766
3.5 1. 14,9
11,600 9,280 16.53
23.00
21,070 16,856 30.03
Valuation range - all - w ith discount to theoretical P/B - per share - per share (avg)
Dividend discount model Risk discount rate Revenue risk discount rate, exit value PV of dividends 2009E-2013E P/B m ultiples Exit-multiple on book value 2013E PV exit value Value of equity - per share Im plied m ultiples -Value of equity / 2009E equity -Value of equity / 2010E equity -Value of equity / 2009E net profit -Value of equity / 2010E net profit P/E m ultiples Exit-multiple on 2013E net profit PV exit value Value of equity - per share Im plied m ultiples -Value of equity / 2009E equity -Value of equity / 2010E equity -Value of equity / 2009E net profit -Value of equity / 2010E net profit
2,084
8.4% 8.4% 2,084
2,028
9.4% 9.4% 2,028
2,084
1.4x 10,139 12,223 21.8
1.5x 10,863 12,947 23.1
1.6x 1.5x 17.71 12.38
2,028
1.6x 11,587 13,671 24.4
1.4x 9,684 11,712 20.9
1.5x 10,375 12,404 22.1
1.7x 1.6x 18.75 13.11
1.7x 1.7x 19.80 13.85
1.5x 1.4x 16.97 11.86
9.5 10,308 12,392 22.07
10.0 10,850 12,934 23.04
10.5 11,393 13,477 24.01
1.6x 1.5x 17.95 12.55
1.7x 1.6x 18.74 13.10
1.7x 1.6x 19.52 13.65
DDM valuation range, all - all - selected range - per share - per share (avg)
1,975
10.4% 10.4% 1,975
1,975
1.6x 11,067 13,095 23.3
1.4x 9,253 11,228 20.0
1.5x 9,914 11,889 21.2
1.6x 10,57 12,55 22.4
1.6x 1.5x 17.97 12.56
1.7x 1.6x 18.97 13.26
1.4x 1.4x 16.26 11.37
1.5x 1.4x 17.22 12.04
1.6x 1.5x 18.18 12.71
9.5 9,845 11,873 21.15
10.0 10,363 12,392 22.07
10.5 10,881 12,910 23.00
9.5 9,407 11,382 20.28
10.0 9,902 11,877 21.16
10.5 10,39 12,37 22.0
1.5x 1.4x 17.20 12.03
1.6x 1.5x 17.95 12.55
1.6x 1.6x 18.70 13.08
1.5x 1.4x 16.49 11.53
1.5x 1.4x 17.20 12.03
1.6x 1.5x 17.92 12.53
11,228 11,877 21.16
22.00
13,671 12,947 23.06
Source: Factset, DnB NOR Markets
DnB NOR Markets - 89
03.02.2010
Sector report > Nordic Financials Valuation background P/B development
5.0 4.5 4.0 3.5 3.0 2.5 2.0
+2 SD
1.5 Average 1.0 -2 SD 0.5 Oct05
Apr06
Oct06
Apr07
Oct07
Apr08
Oct08
Apr09
Oct09
P/E development
16
14 +2 SD 12 Average 10
-2 SD
8
6
4 Oct-05
Dec-05
Feb-06
Apr-06
Jun-06
Aug-06
Oct-06
Source: Factset, DnB NOR Markets
DnB NOR Markets - 90
Sector report > Nordic Financials Sensitivity analysis
Financial return
Com bined ratio (2010E)
-3% -1% 0% 1% 3%
-3% 91.2% 91.2% 91.2% 91.2% 91.2%
-1% 90.3% 90.3% 90.3% 90.3% 90.3%
Premium grow th base 2010E =
Prem ium grow th 0% 89.8% 89.8% 89.8% 89.8% 89.8%
1% 89.4% 89.4% 89.4% 89.4% 89.4%
3% 88.5% 88.5% 88.5% 88.5% 88.5%
1% 23.00 23.00 23.00 23.00 23.00
3% 26.00 26.00 26.00 26.00 25.00
1% 22.00 23.00 23.00 23.00 24.00
3% 24.00 24.00 24.00 25.00 25.00
1% 1.80 1.85 1.88 1.90 1.96
3% 2.04 2.10 2.12 2.14 2.20
5.0%
Financial return
Per share valuation (Sustainable RoE) Prem ium grow th -3% -1% 0% -3% 19.00 21.00 22.00 -1% 19.00 21.00 22.00 0% 19.00 21.00 22.00 1% 19.00 21.00 22.00 3% 19.00 21.00 22.00
Equity returns
Per share investm ent return sensitivity Bond returns -3% -1% 0% -10% 20.00 21.00 22.00 -3% 20.00 21.00 22.00 0% 20.00 21.00 22.00 3% 20.00 22.00 22.00 10% 21.00 22.00 23.00 Equity return base = 8.0% Bond return base = 3.0% EPS investm ent return sensitivity (2010E) Bond returns -3% -1% 0% -10% 1.33 1.56 1.68 -3% 1.38 1.62 1.74 0% 1.41 1.64 1.76 3% 1.43 1.66 1.78 10% 1.49 1.72 1.84 Equity returns
03.02.2010
Sensitivity tested by varying premium growth and financial return Source: DnB NOR Markets Our positive attitude towards Nordea (BUY, pt=85 SEK) is "contagious", and viewed against this backdrop, we find Sampo attractive as well. Excellent management track record and well placed to participate in both possible consolidation processes and organic growth makes us positive. We believe the conglomerate discount in Sampo should be zero. Risk assessment Upside risk 9 Structural changes in the Nordic area were Sampo seems to one of the catalysts. Nordea on an acquisition raid? 9 Reduced Nordea / Sampo discount. 9 Nordea as bancassurance platform Down side risk 9 Customers are slow to adapt to the new internet platform and no bancassurance could hamper IF going forward. 9 Solvency II impact on life insurance companies more severe than for Non-life. 9 Unfortunate combined ratio development in 2009 continues Fair price We recommend BUY, pt=21 EUR. DnB NOR Markets - 91
Sector report > Nordic Financials
03.02.2010
SAMPO OYJ (SAMAS.HE) PROFIT & LOSS EURm Gross premium written Earned premium, net of re. Claims, net of reinsurance Net operating expenses Und erwriting result Net financial income Life pre-tax Bank pre-tax Other income Associates Pre-tax profit Tax Minority interest Net p rofit
2006 4,019 3,765 -2,750 -649 366 358 295 355 -33 0 1,341 -361 -15 965
2007 4,085 3,797 -2,541 -934 322 212 341 0 2,952 0 3,827 -254 0 3,573
2008 4,057 3,807 -2,592 -932 283 269 139 0 269 0 960 -196 0 764
2009e 3,837 3,638 -2,478 -912 249 371 119 101 23 0 863 -173 0 690
2010e 3,890 3,823 -2,587 -966 270 253 157 528 -67 0 1,141 -153 0 987
2011e 4,031 3,968 -2,659 -988 321 264 181 663 -67 0 1,362 -175 0 1,187
BALANCE SHEET EURm Financial assets Other assets Total assets Equity Other liabilities Total liabilities & equity
15,921 31,699 47,620 5,189 42,432 47,621
19,575 5,849 25,424 7,733 17,691 25,424
16,139 5,067 21,206 4,631 16,572 21,203
21,168 5,757 26,925 7,832 19,089 26,921
21,595 5,757 27,352 8,259 19,089 27,348
22,223 5,757 27,980 8,887 19,089 27,976
MARGINS, GROWTH & GEAR ROE pre-tax % ROE % DPS EUR Div idend yield % Payout ratio % Claims ratio % Cost ratio % Combine d ratio % Ceded reins. %
2006 18.8 18.6 1.2 5.9 69.1 73.9 17.4 91.3 0.0
2007 45.9 46.2 1.2 6.6 19.4 74.9 17.2 92.1 0.0
2008 14.5 16.5 0.8 6.0 66.8 74.4 17.4 91.8 0.0
2009e 8.8 8.8 0.8 4.4 61.0 74.2 17.2 91.4 0.0
2010e 12.0 12.0 1.0 5.6 56.9 73.0 16.8 89.8 0.0
2011e 13.4 13.4 1.0 5.6 47.3 72.6 16.6 89.2 0.0
VALUATION EPS EPS adj Year end shares Price P/E P/E adj Book per share P/Book
2006 1.74 1.74 562.8 20.28 11.7 11.7 9.2 2.2
2007 6.18 6.18 574.2 18.08 2.9 2.9 13.5 1.3
2008 1.20 1.20 561.4 13.24 11.1 11.1 8.2 1.6
2009e 1.23 1.23 561.4 17.02 13.8 13.8 14.0 1.2
2010e 1.76 1.76 561.4 18.00 10.2 10.2 14.7 1.2
2011e 2.12 2.12 561.4 18.00 8.5 8.5 15.8 1.1
EUR EUR million EUR X X EUR X
Q1 09 1,422 891 -630 -216 45 102 27 0 102 4 280 -42
Q2 09 916 906 -604 -224 78 90 24 0 90 5 287 -46
Q3 09 745 915 -613 -227 75 93 32 0 93 6 299 -44
Q4 09e 754 926 -631 -227 68 86 36 101 86 7 385 -41
Q1 10e 1,375 938 -637 -230 71 62 37 108 62 8 350 -27
238
241
255
344
323
Share price and target 18.00 Price EUR Price target 12m EUR 22.00 BUY Recommendation 20.9% EPS gr08-11e %ca gr 0.7 PE09e/EPS gr X Financial structure 10,105 Market cap. EURm 561.4 Shares outst. million 29.1 % Equity/tot assets Share price performance 6/10/49 Abs. 1/3/12m 6/10/49 Rel. 1/3/12m 18/9 High/Low 12m EUR 16 % 30days volatility Company attributes SAMAS.HE Reuters ticker Financials Insurance Finland
Reporting Q4 2009 Q1 2010
11.02.2010 05.05.2010
Manag ement CEO CFO Address Sampo Oyj Fabianinka tu 27 00100 Helsinki, Finland H.p.: www.sampo.com Tel +358 10 516 0100
Kari Stadigh Peter J ohansson
Analyst: Odd Weidel +47 22 94 89 49
[email protected]
DnB NOR Markets - 92
Sector report > Nordic Financials
03.02.2010
Rebased price (12m, EUR) 150
Rebased consensus average forward EPS (12m, EUR) 120
140
115
130
110
120
105
110
100
100
95
90
90
80 70
85
feb mar apr mai jun
jul
aug sep okt nov des jan
feb
feb mar apr mai jun
jul
Premium growth 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% 2008 2009e 2010e 2011e
4,100 4,050 4,000 3,950 3,900 3,850 3,800 3,750 3,700
2005
2006
2007
Premium (EURm)
Costs (EURm) 1,200
800 600 400 200 0
2005
2006
2007
Costs (EURm)
300 250 200 150 100 50 2005
2006
2007
1.20
5.0
1.00
4.0
0.80
3.0
0.60
2.0
0.40
1.0
0.20
0.0
2005
2008
2009e 2010e 2011e
Underwriting result (EURm)
Combined ratio
2006
2007
2008
EPS (EUR)
2009e
2010e 2011e
Claims (EURm) 2,800 2,750
Claims ratio 75.5% 75.0%
2,700 2,650
74.5% 74.0%
2,600 2,550 2,500
73.5% 73.0%
2,450 2,400 2,350 2,300
0.00
DPS (EUR)
72.5% 72.0% 2005
2006
2007
2008 2009e 2010e 2011e
Claims (EURm)
71.5%
Claims ratio
Price/Book 2.5
ROE 50% 45%
91.5% 91.0%
2.0
40% 35%
90.5% 90.0% 89.5%
1.5
Combined ratio 92.5% 92.0%
350
DPS (EUR) 1.40
6.0
Cost ratio
Underwriting result (EURm) 400
0
EPS (EUR) 7.0
Premium growth
Cost ratio 18.0% 17.8% 17.6% 17.4% 17.2% 17.0% 16.8% 16.6% 16.4% 16.2% 16.0% 15.8% 2008 2009e 2010e 2011e
1,000
feb
Sampo Oyj
Sampo Oyj
Premium (EURm) 4,150
aug sep okt nov des jan
1.0
30% 25% 20%
89.0% 88.5%
0.5
15% 10%
88.0% 87.5%
0.0
5% 0%
2005
2006
2007
Price/Book
2008
2009e 2010e 2011e ROE
DnB NOR Markets - 93
03.02.2010
Sector report > Nordic Financials
Topdanmark – trustworthy ROE History
Topdanmark was initially founded in 1898. In 1995, after the Nordic bank crisis the firm reconstructed and refinanced as Topdanmark we know today. Topdanmark is the third-largest listed non-life insurer in the Nordic region and second largest in Denmark with 2567 full-time employees. The life insurance division, which was founded in 1972, has emerged as the 7th largest in Denmark. Topdanmark was listed on the Copenhagen stock exchange in 1985.
Main strategy, goals, and corporate governance
Topdanmark has a growth strategy primarily based on organic growth and close corporation with alliance-partners, but they say take-overs will be considered if the right opportunity shows up. Topdanmark underlying belief is value creation true synergies (cross-sale) between non-life and life rather than expansion outside Denmark. It is Topdanmark's belief that value creation should be from accepting insurance risk rather than investment risk. The underlying goal of Topdanmark's capital structure is s capital base where shareholders equity and hybrid capital is exactly sufficient to support current operations. Equity in excess is distributed to shareholders by share buy-backs. Topdanmark has removed all relevant limitation in the articles of associations, but has stated that no shareholder should hold more than 10 %. Topdanmark believes a share price reflecting the future earnings potential is the only real protection against an uninvited take-over.
Overview Topdanmark
Source:www.Topdanmark.dk
Value creation and sales strategy
Topdanmark's view of value creation is trough distribution efficiency, declining expenses ratios and proper risk management. They want to attract profitable customers through high customer support. Topdanmark is cost leading in the Nordic non-life market and they also have a goal being market leader in claims solutions. The sales strategy is based on multi-distribution by supplementing own sales channels with distribution agreements with a number of alliance partners where they want to be a sub-supplier of both life and non-life.
DnB NOR Markets - 94
Sector report > Nordic Financials
03.02.2010
Topdanmark products are among others sold in 354 Danske Bank branches, 172 Home (estate agency chain) and 2216 car- and motorcycle dealers.
Some Topdanmark's partners
Distribution channels Non-life Danske Bank/BG Bank 9%
Assurer 33%
Telephone etc. 24%
Life Telephone etc. 4%
Auto dealers 18% Danica Pension 5% Brokers 4% Stores 7%
Brokers 31%
Assurer 32%
Main office 33%
Source: DnBNOR & Topdanmark annual reports
Markets and segments
Topdanmark was in 2008 the second largest Danish insurance company and they operate in both the non-life and life insurance market. Non-life is approximately 91 % of profit before tax, while life is approximately 8 %. In 2008 their market share in the non-life insurance was 19.6 % and the second largest after TrygVesta which had 20.9 %. The life business market share is 4.4 % and is ranked numbers seven among the Danish commercial companies in 2008. Topdanmark has no operations outside Denmark.
Non-life
Premiums by segment
1) Personal insurance The personal insurance market (mass market) is served by two business sectors; personal and partners. Personal is responsible for sales under the Topdanmark brand while Partners distributes through a number of alliance partners' sales channels, principally the Danske Forsikring brand. Main premium sources are; motor, fire and property and illness and accident insurance.
Personal insurance 45 % SME insuranse 46 %
Industiral 9%
The non-life business is divided in 3 segments:
2) SME insurance The SME insurance market is served by two business sectors; SME and Agricultura. SME lines serve businesses with 5 to 50 employees and customers with policies written by Industriens Arbejdsskadeforsikring (workers' compensation). Danish farms are served by Agricultural. Main premium sources are; fire and property, and worker's compensation. 3) Industrial insurance Industrial serves a significant proportion of the largest Danish businesses that have an excess of 50 employees. Main premium sources are; marine, aviation and transport, and fire and property.
DnB NOR Markets - 95
Sector report > Nordic Financials
03.02.2010 Sources of premiums non-life
Combined ratio by products non-life
DKKm
1800
140%
1600
120%
1400
100%
1200 80%
1000 60%
800 40%
600 400
20%
2005
2006
Ilness and accident Motor own damage
2007
2005
2008
Workers' compensation Fire and property Personal
Motor third-party liability Fire and property Commercial
Others
2006
2007
2008
Ilness and accident
Workers' compensation
Motor third-party liability
Motor own damage
Fire and property Personal
Fire and property Commercial
Others
Total
Total premiums growth has have been approximately flat the two recent years. The main reason is lower premium growth in motor third party liability, but the drop is dampened some by increase in others.
In the period 2005-08 workers compensation had a deep decrease, while fire and property had a decrease. In total the combined ratio has dropped in the same period, but we expect in total an increase to about 92 % for 2009.
Premiums growth Topdanmark vs. market
Market share Danish non-life market
20%
25%
15%
20%
10%
15%
5%
10%
0%
5% 0%
-5% 2001
2002
2003
2004
2005
2006
2007
2005
2008
2006
Tryg
TopDanmark
2007
Topdanmark
Codan
2008 Alm. Brand
If
Denmark
Topdanmark's non-life premium growth varies relative to the general growth in Denmark. The two latest years the growth has been lower, while the two previous years before that was higher. Average growth Topdanmark the Danish market 200108 was 5.8 % and 6 %, respectively. We expect growth in line with the general growth going forward.
Topdanmark's market share has dropped slightly the last two years. We don't regard this as a permanent trend. We believe Topdanmark's sales power, claims management and low costs role is sufficient to defend their market shares going forward.
Non-life asset portfolio Q3 09 (DKK 16.6 bn)
Return on non-life asset portfolio 9.0 % 7.0 %
Bonds & interest bearing debt 46%
5.0 % 3.0 % 1.0 % -1.0 %
Shares 7%
-3.0 % Money market etc. 25%
Buildings 8%
-5.0 % -7.0 %
Ohters 9%
2001 CDOs 5%
2002
2003
2004
2005
2006
2007
2008
Investment return
Equities was reduced from 10.8 % in 2007 to 6.7 % end Q3 Average return 2001-08 was 4.61 %. Return end Q3 09 was 6 09. We expect shares to be at this level and less going %. We expect some lower return going forward due to forward due to Solvency II. The CDOs exposure was reduced solvency II and increased weighting of equities. from 10.8 % in 2007 to 5.4 % end Q3 09. The CDO portfolio book value was end Q3 09 DKKm 879, which of DKKm 433 was of AA grad and lower. The CDO exposure is to be winded out and we regard the risk of further major CDO write downs limited. Source: DnBNOR Markets, Topdanmark annual reports and Danish FSA
DnB NOR Markets - 96
Sector report > Nordic Financials
03.02.2010
Life
Premiums by segment
The life insurance business is divided in 4 main areas: 1) Individual schemes 2) Corporate schemes 3) Group life schemes
Singel premiums 35 % Regular premiums corporate 45 % Group life 9%
Regular premiums personal 11 %
4) Unit-linked schemes
Offering full product range of life insurance and pension fund schemes to both the individual and corporate pension scheme market, and are among the largest suppliers of illness and accident policies. Expect Unit linked schemes the customers' capital is managed in two separated portfolios; one with schemas before 1994 called Topdanmark I and the other called Topdanmark V. Guaranteed pension benefits are 4.5 % and 2.5 %, respectively. Topdanmark's life insurance business has an investment policy with relatively limited risk and consequently a less volatile return. As a result of the chosen policy the financial return has been below markets in years with high share price appreciation, but above in years with less favorable equity market conditions. Defined benefit has historically been most used, but defined contribution is more and more common. In Denmark the elderly population will increase, and the Danish government has give tax incentives for individual and company pension savings. For example can each Dane save DKK 100 000 with tax deduction each year. End Q3 09 Topdanmark had shadow account of DKKm 192, which we expect written back during Q3 2009 and 2010 and boost the earnings. In life the conditional profit elements are transferred to shareholders' equity to the extent to which they can be covered by sufficient insurance technical profit before bonus contribution. If the insurance technical loss before bonus contribution exceeds the collective potential bonus reserves (bonus equalization); the excess will be partly debited to shareholders' equity. If the insurance technical result before bonus contribution is insufficient to allow for the allowance for risk to be included, the difference will be disclosed in a shadow account, and will be brought into income (including accrued interest) as soon as there are available insurance technical profits before bonus contribution. Solvency II Solvency II is to be implemented at the end of October 2012. The lasted version requires a further DKKm 450-500 equity to fulfill the new requirements. AS a consequence buy-backs will be reduced with DKKm 225-250 in 2010 and 2011, respectively. Financial Targets Topdanmark's non-life normalized return target implies an after tax ROE of 24 % (26 % before tax) and a combined ratio of 91.5 %.
Topdanmark has as a financial target for the non-life insurance of a premium growth higher than the average of the market. For life insurance Topdanmark has a yearly growth target of 10 %. Announced goal for buy-back and in a normal year is 80 %. Except from the growth rate of above market for non-life, where we expect growth in line with market growth we find the financial targets healthy.
DnB NOR Markets - 97
Sector report > Nordic Financials
03.02.2010 Sources of premiums life
Markets shares Danish life
DKKm
1600
25%
1400
20%
1200 1000
15%
800
10%
600 400
5%
200
0%
0 2004
2005
2006
2007
Individual, regular
Corporate, regular
Group life
Individual, single
Corporate, single
Unit-linked, single
2003
2008
Unit-linked, regular
2004
2005
2006
2007
2008
Danica
PFA
Nordea
PensionDanmark
Sampension
Industriens Pension
SEB Pension
Topdanmark
PenSam Liv
Average gross premium growth life 2004-08 was 14.6 %, while 2008 growth was 11.9 %.
From 2003 to 2008 Topdanmark's market share has increased from 3.4 % to 4.4 %, and to seventh largest in Denmark.
Premiums growth Topdanmark vs. market
Profit distribution DKKm
35%
200
30%
150
25%
100
20% 50
15% 0
10% -50
5%
-100
0% -5%
-150
2001
2002
2003
2004
2005
TopDanmark
2006
2007
2003
2008
Investment return
Denmark
Topdanmark's life premium growth varies some relative to the general growth in Denmark, but has been higher the latest 8 years. Average growth 2001-08 was 19 % and 9.9 % for Topdanmark and the Danish market, respectively. We expect Topdanmark's growth to converge towards the general growth in the coming years. We expect two digit growths in the general market going forward.
Life asset portfolio Q3 09 ( DKK 35.2 bn)
2004
2005
Risk allowance
2006
2007
Transferd to/from shadow account
2008
Profit life insurance
Profit 2007-08 was destroyed by the financial crises, but the main underlying value creation item; the risk allowance, showed a stable development. A mismatch above 3 % between assets value and provisions must be transferred to shadow accounts, but written back when assets and liabilities are in balance again. In Q3 09 DKKm 42 was written back, and we expect the remaining DKKm 192 to be written back within 2010, boosting the life result. Accumulated return Danish life portfolios 2000-08
80.0 % 70.0 % 60.0 %
Bonds 56%
50.0 % 40.0 %
Shares 12%
30.0 % 20.0 % 10.0 % SEB Pension/Codan
PFA Pension
Nordea Liv & Pension
Danica
AP Pension
Alm. Brand
TopDanmark V
0.0 %
Ohters 21%
TopDanmark I
Loans & buildings 11%
Shares were reduced from 18.9 % in 2007 to 11.7 % end Q3 Return Topdanmark II and V before pension tax was -12.7 % 09. The CDOs exposure was reduced from 8.7 % in 2007 to and- 0.7 %, respectively. 2009 looks better and the 4.8 % end Q3 09. The CDO portfolio book value (included in accumulated return for Topdanmark Liv I and V are others) was end Q3 09 DKKm 1.56 bn, which of DKKm 689 competitive in the Danish market. was of AA grad and lower. The CDO exposure is to be winded out and we regard the risk of further major CDO write downs to be limited. Source: DnBNOR Markets, Topdanmark annual reports and Danish FSA
DnB NOR Markets - 98
03.02.2010
Sector report > Nordic Financials Investment Activities
The investment activities will of course be volatile and we leave significant headroom for discretionary views on this matter. But due to solvency II and tougher requirement for shares and property we expect more invested in bonds and less volatility. Investment risks
We see 3 minor idiosyncratic investment risks: 1) Solvency II requirement is not yet finalized, and more than the already DKKm 500 identified extra equity may be required. 2) CDOs. Topdanmark had huge write-downs on CDOs during 2008. Topdanmark's is unwinding its CDO exposure and about half of the exposure is taken, but a second dip can cause further write downs, but not at demolishing levels. 3) The strategic partnership with Danske Bank has yearly renegotiations, and changes here may be done. Danske Bank sold their non-life insurance to Topdanmark in 1999 and the ties still seems strong.
Overview Topdanmark • • • • • • • •
Premium growth non-life in the middle bracket Premium growth life in the better bracket Claims ratio in the middle/better bracket Cost ratio in the better bracket ROE in the better bracket Equity and withhold surplus in the lower bracket Buyback yield in the better bracket Solvency II in the lower bracket
Topdanmark has done much right the last decade. For non-life we believe Topdanmark sales power coupled with their costs leadership will defend their market shares and generate trustworthy earnings. With the announced price non-life price increases in Denmark by the main insurance companies we expect a nice 5 % growth in non-life premiums. Due to strong tax incentives for pension savings we believe in a continuance of the strong growth in life premiums and two digit-growth rates going forward. The unwinding of the CDO portfolio is expected to bring more stable financial returns. The solvency II will dampen buy-back 2010-11 from 8.2 % to 5.9 % Topdanmark is the only major listed Nordic insurance company which is available and we believe various international and Nordic market players may consider takeovers or partnership, which may give a touch of acquisition premium in the Topdanmark share. We regard a 12m FWD P/B 2.3x versus 2004-08 historical values of 3.1x to be low. We see more a upside in trustworthy ROE and combined ratio and we have a 12 m FWD price target of DKK 750, equalizing a implicit P/B of 2.7.
DnB NOR Markets - 99
Sector report > Nordic Financials
03.02.2010 Premium growth non-life
Premium growth life
40%
50%
35%
40%
30%
30%
25%
20%
20%
10%
15%
0%
10%
-10%
5%
-20%
0%
-30%
-5% 1999
2000
2001
2002
2003
2004
Premium growth non-life
2005
2006
2007
2008
Average 1999-08
2009E
2010E
2011E
-40% 1999
Average 2004-08
2000
2001
2002
2003
2004
Premium growth life
2005
2006
2007
2008
Average 1999-08
2009E
2010E
2011E
Average 2004-08
Average growth rate 1999-08 and 2004-08 of 9.6 % and 4.8 %, respectively. We have a growth rate estimate trending against 3 % in the longer run. We believe the Danish life market is more mature and we believe Topdanmark will is able to defend their position going forward due to their cost ratio in the better bracket and their acceptable claims ratio.
Average growth rate 1999-08 and 2004-08 of 14.5 % and 14.6 %, respectively. We have a 10 % growth rate in our estimates going forward. Increasing growth of elderly in the population and strong tax incentives for pension savings make us believe in a strong growth.
Non-life claims and cost ratio
Non-life combined ratio
50%
100%
45%
90%
40%
80%
35%
70%
30%
60%
25%
50%
20%
40%
15%
30%
10%
20%
5%
10%
0%
0%
120% 115% 110% 105% 100% 95% 90% 85% 80% 75% 70% 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009E
2010E
2011E
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E Cost ratio (LS) Avg. claims 1999-08 (RS)
Combined ratio
Avg. claims 2004-08 (RS) Claims ratio (RS)
Average 1999-08
Average 2004-08
Average growth claims rate 1999-08 and 2004-08 of 77 % and 72.4 %, respectively. We regard the development in claim ratio to be approximately stable and without any down or upward tending trends. But we expect claims slightly below 75 % going forward due to claims automatisation. Cost ratio has showed a downward shift since 2004 which we believe will continue going forward. Topdanmark is best in the Nordic region and we believe their cost focus will continue.
Average Combined ratio 1999-08 and 2004-08 of 95.1 % and 87.2 %, respectively. We consider 2006 and 2007 as outliers and the combined ratio until 2004 influenced by higher costs. Going forward we expect combined ratio to converge against 90-91 %. The Nordic region is the most cost-efficient insurance market in Europe, with combined ratios currently at ~90%.
P/B
ROE
P/B
ROE
4.0
40%
3.5
35% 30%
3.0
25% 2.5
20%
2.0
15%
1.5
10% 5%
1.0
0% 0.5
-5%
0.0
-10% 1999
2000
2001 P/B
2002
2003
2004
Average 2004-08
2005
2006
2007
2008
Average 1999-08
Average P/B 1999-08 and 2004-08 of 2.4 % and 3.1 %, respectively. In line with the downward shift in the cost ratio after 2004 and thereby also the combined ratio P/B increased. In the 2004-08 period we regard 2006 as outliers but regard ad P/B of the 2.7 to be a fair price target for Topdanmark. Source: DnBNOR Markets, Topdanmark annual reports
1999
2000
2001 ROE
2002
2003
2004
2005
2006
Average 2004-08
2007
2008 2009E 2010E 2011E Average 1999-08
Average ROE 1999-08 and 2004-08 of 18.9 % and 24.0 %, respectively. With some higher equity capital due to solvency II our estimates support an average ROE of around 23 % going forward.
DnB NOR Markets - 100
03.02.2010
Sector report > Nordic Financials
Estimates Q409 preview DKKm Non-life: Premium income, gross Claims incurred, gross Expenses Net reinsurance Underw riting result Technical interest Technical profit Net investment return Other non-life Operating profit non-life Profit life insurance Parent company Pre-tax profit Tax Profit EPS RoE Combined ratio
Q408 Q409E Q409E Chg YoY Reported DnB NOR Market* Abs.
%
2,261 -1,413 -346 -77 365 52 417 -375 0 42
2,155 -1,655 -357 -64 79 20 99 54 0 153
0 0 0 0 0 0 0 0 0 0
-106 -242 -11 13 -286 -32 -318 429 0 111
-5% 17% 3% -16% -78% -61% -76% -114%
13 -8 47 -73 -26
106 -9 250 -55 195
0 0 0 0 0
-2 -3.6 % 83.4 %
12 18.9 % 96.3 %
0 0.0 % 0.0 %
DnB NOR Markets 2009E 2010E 2011E
265%
8,649 -6,442 -1,314 -239 654 110 764 643 15 1,422
8,975 -6,554 -1,302 -265 854 81 934 222 20 1,176
9,374 -6,785 -1,355 -277 957 82 1,039 233 21 1,293
93 -1 203 18 221
713% 9% 432% -25% -851%
280 -46 1,656 -352 1,304
260 -48 1,389 -347 1,042
244 -45 1,492 -373 1,119
14 22.5 % 12.9 %
-853% -626% 15%
84 37.1 % 92.4 %
67 23.9 % 90.5 %
72 23.2 % 89.8 %
DnB NOR Markets - 101
03.02.2010
Sector report > Nordic Financials Valuation background P/B development 5.0 4.5
+2 SD
4.0 3.5
Average
3.0 2.5 2.0
-2 SD
1.5 1.0 0.5 Oct05
Apr06
Oct06
Apr07
Oct07
Apr08
Oct08
Apr09
Oct09
P/E development 18 16 14 12
+2 SD Average -2 SD
10 8 6 4 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09
Source: Factset, DnB NOR Markets
DnB NOR Markets - 102
03.02.2010
Sector report > Nordic Financials
Valuation Sustainable Return on Equity Risk-free interest rate Required return Sustainable ROE
7.6% 20.0%
5.0% 7.6% 21.0%
7.6% 22.0%
8.6% 20.0%
5.0% 8.6% 21.0%
8.6% 22.0%
9.6% 20.0%
5.0% 9.6% 21.0%
9.6 22.0
Long-term grow th rate Price/book Im plied value
1.5 % 3.0x 13,223
1.5 % 3.2x 13,938
1.5 % 3.4x 14,653
1.5 % 2.6x 11,361
1.5 % 2.7x 11,975
1.5 % 2.9x 12,589
1.5 % 2.3x 9,958
1.5 % 2.4x 10,497
1.5 2. 11,0
Long-term grow th rate Price/book Im plied value
2.5 % 3.4x 14,961
2.5 % 3.6x 15,816
2.5 % 3.8x 16,671
2.5 % 2.9x 12,509
2.5 % 3.0x 13,223
2.5 % 3.2x 13,938
2.5 % 2.5x 10,747
2.5 % 2.6x 11,361
2.5 2. 11,9
Long-term grow th rate Price/book Im plied value
3.5 % 4.0x 17,547
3.5 % 4.3x 18,610
3.5 % 4.5x 19,674
3.5 % 3.2x 14,106
3.5 % 3.4x 14,961
3.5 % 3.6x 15,816
3.5 % 2.7x 11,794
3.5 % 2.9x 12,509
3.5 3. 13,2
2,607
Valuation range - all - w ith discount to theoretical P/B - per share - per share (avg)
9,958 7,967 510.26
759.00
19,674 15,739 1,008.08
Dividend discount model Risk discount rate Revenue risk discount rate, exit value PV of dividends 2009E-2013E P/B m ultiples Exit-multiple on book value 2013E PV exit value Value of equity - per share Im plied m ultiples -Value of equity / 2009E equity -Value of equity / 2010E equity -Value of equity / 2009E net profit -Value of equity / 2010E net profit P/E m ultiples Exit-multiple on 2013E net profit PV exit value Value of equity - per share Im plied m ultiples -Value of equity / 2009E equity -Value of equity / 2010E equity -Value of equity / 2009E net profit -Value of equity / 2010E net profit DDM valuation range, all - all - selected range - per share - per share (avg)
2,768
7.6% 7.6% 2,768
2,686
8.6% 8.6% 2,686
2,686
2,607
9.6% 9.6% 2,607
2,768
2.4x 9,200 11,968 766.6
2.5x 9,584 12,352 791.1
2.6x 9,967 12,735 815.7
2.4x 8,784 11,470 734.6
2.5x 9,150 11,836 758.1
2.6x 9,516 12,202 781.5
2.4x 8,391 10,998 704.4
2.5x 8,740 11,347 726.8
2.6x 9,090 11,69 749.2
3.4x 2.7x 9.18 11.49
3.5x 2.8x 9.47 11.86
3.6x 2.9x 9.76 12.23
3.3x 2.6x 8.79 11.01
3.4x 2.7x 9.08 11.36
3.5x 2.8x 9.36 11.72
3.1x 2.5x 8.43 10.56
3.2x 2.6x 8.70 10.89
3.3x 2.7x 8.97 11.23
9.5 8,659 11,427 731.88
10.0 9,115 11,883 761.07
10.5 9,570 12,338 790.26
9.5 8,267 10,953 701.53
10.0 8,703 11,388 729.40
10.5 9,138 11,823 757.27
9.5 7,897 10,504 672.76
10.0 8,313 10,920 699.39
10.5 8,728 11,33 726.0
3.3x 2.6x 8.76 10.97
3.4x 2.7x 9.11 11.41
3.5x 2.8x 9.46 11.85
3.1x 2.5x 8.40 10.52
3.2x 2.6x 8.73 10.93
3.4x 2.7x 9.07 11.35
3.0x 2.4x 8.05 10.08
3.1x 2.5x 8.37 10.48
3.2x 2.6x 8.69 10.88
10,504 10,920 699.39
745.00
12,735 12,352 791.11
DnB NOR Markets - 103
Sector report > Nordic Financials
Sensitivity analysis
Financial return
Combined ratio (2010E)
-3% -1% 0% 1% 3%
-3% 92.9% 92.9% 92.9% 92.9% 92.9%
-1% 91.3% 91.3% 91.3% 91.3% 91.3%
Premium growth base 2010E =
Premium growth 0% 90.5% 90.5% 90.5% 90.5% 90.5%
1% 89.7% 89.7% 89.7% 89.7% 89.7%
3% 88.2% 88.2% 88.2% 88.2% 88.2%
0.0%
Financial return
Per share valuation (Sustainable RoE)
-3% -1% 0% 1% 3%
-3%
-1%
Premium growth 0%
1%
3%
468.00 479.00 485.00 491.00 502.00
639.00 650.00 656.00 661.00 672.00
729.00 740.00 745.00 751.00 762.00
824.00 836.00 842.00 848.00 859.00
1,029.00 1,041.00 1,047.00 1,053.00 1,065.00
1% 746.00 779.00 794.00 809.00 844.00
3% 845.00 880.00 895.00 910.00 944.00
1% 66.55 71.20 73.19 75.18 79.82
3% 79.51 84.16 86.15 88.14 92.78
Equity returns
Per share investment return sensitivity -3% -10% 553.00 -3% 586.00 0% 601.00 3% 615.00 10% 648.00 Equity return base = Bond return base =
-1% 649.00 683.00 697.00 711.00 745.00
Bond returns 0% 698.00 731.00 745.00 760.00 794.00 8.0% 3.0%
EPS investment return sensitivity (2010E)
Equity returns
03.02.2010
-10% -3% 0% 3% 10%
-3% 40.64 45.29 47.28 49.27 53.91
-1% 53.60 58.24 60.23 62.22 66.87
Bond returns 0% 60.08 64.72 66.71 68.70 73.35
Sensitivity tested by varying premium growth and financial return Don’t Copy text after this point
DnB NOR Markets - 104
TOP DANMARK (TOP.CO) PROFIT & LOSS DKKm Gross premium written Earned premium, net of re. Claims, net of reinsurance Net operating expenses Und erwriting result Net financial income Life pre-tax Bank pre-tax Other income Associates Pre-tax profit Tax Minority interest Net p rofit
2006 8,863 8,124 -5,613 -1,145 1,233 676 118 0 196 0 2,223 -531 0 1,692
2007 9,022 8,233 -5,555 -1,186 1,391 -9 50 0 225 0 1,657 -386 0 1,271
2008 9,010 8,350 -5,443 -1,228 1,574 -1,717 -56 0 176 0 -23 -165 0 -188
2009e 9,312 8,149 -5,880 -1,177 654 643 280 0 79 0 1,656 -352 0 1,304
2010e 8,487 8,086 -5,553 -1,201 854 222 260 0 53 0 1,389 -347 0 1,042
2011e 8,509 8,197 -5,818 -1,250 957 233 244 0 58 0 1,492 -373 0 1,119
BALANCE SHEET DKKm Financial assets Other assets Total assets Equity Other liabilities Total liabilities & equity
40,040 3,600 43,640 3,977 39,663 43,640
40,858 3,787 44,645 3,368 41,277 44,645
47,490 4,545 52,035 2,895 49,140 52,035
50,009 4,184 54,193 4,131 50,062 54,193
54,228 4,184 58,412 4,589 53,823 58,412
58,880 4,184 63,064 5,063 58,001 63,064
MARGINS, GROWTH & GEAR ROE pre-tax % ROE % DPS DKK Div idend yield % Payout ratio % Claims ratio % Cost ratio % Combine d ratio % Ceded reins. %
VALUATION EPS EPS adj Year end shares Price P/E P/E adj Book per share P/Book
DKK DKK million DKK X X DKK X
2006 55.9 42.5 0.0 0.0 0.0 -67.4 -14.6 -86.0 -4.0
2007 49.2 37.7 0.0 0.0 0.0 -65.9 -14.5 -84.3 -3.9
2008 -0.8 nm 0.0 0.0 0.0 -64.6 -14.7 -82.4 -3.0
2009e 40.1 31.6 0.0 0.0 0.0 -74.5 -15.2 -92.4 -2.8
2010e 30.3 22.7 0.0 0.0 0.0 -73.0 -14.5 -90.5 -3.0
2011e 29.5 22.1 0.0 0.0 0.0 -72.4 -14.5 -89.8 -3.0
2006 94.55 94.55 17.9 934.00 9.9 9.9 222.2 4.2
2007 79.46 79.46 16.0 734.00 9.2 9.2 210.6 3.5
2008 -12.00 -12.00 15.7 687.00 nm nm 184.8 3.7
2009e 83.53 83.53 15.6 703.00 8.4 8.4 264.6 2.7
2010e 66.71 66.71 15.6 672.50 10.1 10.1 293.9 2.3
2011e 71.67 71.67 15.6 672.50 9.4 9.4 324.3 2.1
Q1 09 4,014 2,017 -1,505 -305 187 -158 13 0 30 0 72 -37 0 35
Q2 09 1,545 2,024 -1,513 -289 192 432 43 0 19 0 686 -131 0 555
Q3 09 1,568 2,021 -1,498 -290 196 315 118 0 19 0 648 -129 0 519
Q4 09e 2,185 2,087 -1,364 -293 79 54 106 0 11 0 250 -55 0 195
Share price and target Price DKK Price target 12m DKK Recommendation EPS gr08-11e %ca gr PE09e/EPS gr X Financial structure Market cap. DKKm Shares outst. million % Equity/tot assets Share price performance Abs. 1/3/12m Rel. 1/3/12m High/Low 12m DKK % 30days volatility Company attributes Reuters ticker Financials Insurance Denmark
Reporting Q1 2010 Q1 2010
Q1 10e 2,357 2,201 -1,366 -296 150 59 66 0 12 0 287 -72 0 215
672.50 750.00 BUY R+ 0.0 ######## 15,613.0 7.6 -4/-8/-3 -4/-8/-3 803/478 18 TOP.CO
09.03.2010 20.05.2010
Manag ement Christian Saglid CEO Lars Thykier CFO Address Top Danmark Borupvang 4 2750 Ballerup H.p.: http://www.topdanmark.dk Tel (0045) 44 68 33 11
Analyst: Geir Grønseth +47 22 94 89 92
[email protected]
Sector report > Nordic Financials
03.02.2010
Rebased price (12m, DKK) 120 115 110 105 100 95 90 85 80 75 70 65 feb mar apr mai jun jul
Rebased consensus average forward EPS (12m, DKK) 102 100 98 96 94 92 90 88 86
aug sep okt nov des jan
feb
feb mar apr mai jun
Premium growth 4%
9,200
2%
9,000
0%
8,800
-2%
8,600
-4%
8,400
-6%
8,200
-8%
8,000
-10%
2005
2006
2007
2008
Premium (DKKm)
aug sep okt nov des jan
feb
Top Danmark
Top Danmark
Premium (DKKm) 9,400
jul
2009e 2010e 2011e
EPS (DKK) 100 80
0.8 0.7
60
0.6 0.5 0.4
40 20
0.3 0.2
0 -20
2005
2006
2007
2008
EPS (DKK)
Premium growth
Costs (DKKm) 1,260
DPS (DKK) 1.0 0.9
Cost ratio -14.00%
1,240
-14.20%
1,220
-14.40%
1,200 1,180
-14.60%
1,160
-14.80%
1,140
2009e
2010e
2011e
0.1 0.0
DPS (DKK)
Claims (DKKm) 6,000
Claims ratio 0%
5,900
-10%
5,800
-20% -30%
5,700
-40%
5,600
-50%
5,500
-60%
-15.00%
5,400
-70%
1,100
-15.20%
5,300
-80%
1,080
-15.40%
5,200
1,120
2005
2006
2007
2008 2009e 2010e 2011e
Costs (DKKm)
Combined ratio -76% -78%
4.0
1,400
-80%
3.5
1,200
-82%
3.0
1,000
-84%
2.5
800
-86%
2.0
600
-88%
1.5
400
-90%
1.0
200
-92%
0.5
-94%
0.0
2006
2007
2008
2009e 2010e 2011e
Underwriting result (DKKm)
Combined ratio
2007
2008
2009e 2010e 2011e
-90%
Claims ratio
Price/Book 4.5
1,600
2005
2006
Claims (DKKm)
Cost ratio
Underwriting result (DKKm) 1,800
0
2005
ROE 50% 40% 30% 20% 10% 0%
2005
2006
2007
Price/Book
2008
2009e 2010e 2011e
-10%
ROE
DnB NOR Markets - 106
03.02.2010
Sector report > Nordic Financials
Trygvesta – The safe bet History
Initially founded in 1731 TrygVesta has emerged as the second largest nonlife insurer in the Nordic region. Based in Denmark the firm was listed on the Copenhagen stock exchange in 2005 and has a solid market position in Denmark and Norway with 20.9% and 18.1% market share. Recently TrygVesta has increased its market presence in the Nordic region by divesting its UK business, Chevanstell ltd, and entering into the Swedish (2006) market. The entry is mainly driven by a strategic partnership with Nordea and the acquisition of Moderna in 2008. Furthermore TrygVesta strengthened its international reach through a partnership with AXA, thereby enabling insurance coverage in 94 countries worldwide. Strategy
TrygVesta has a strategy of profitable growth in the Nordic Region. There will be no growth for the sake of growth and they will not enter into fierce price competition, but rather grow through increased coverage, widening the current services and maintaining a conservative risk profile. This is reflected in the recent entry into private health-care coverage and the new "TrygVæjhjelp" service offering prime services to auto-insurance clients. Their profitability focus is reflected in their low combined ratio and efficient handling of claims, in an analysis from 2008 2 TrygVesta was ranked as the 4th most cost-efficient non-life insurer in Europe with a Net Expense Ratio of 17% relative to a market average Net Expense ratio of 25%. An integral part of TrygVesta's strategy is the increased focus on selfservice products to their clients. When clients report claims or add on additional services via internet this is done with close to no costs for TrygVesta. Thus increasing the client traffic via internet may have a significant impact on TrygVesta's cost efficiency going forward. TrygVesta is aiming for 100,000 new sales via internet in 2010, relative to their target of 10,000 in 2009. Bancassurance through their Nordea partnership is TrygVesta's preferred sales vehicle in the Swedish and Finnish markets. Bancassurance implies low fixed sales costs, immediate geographical coverage and increased customer loyalty. TrygVesta aims to be the top provider of "peace of mind" for insurance clients, this is reflected in the latest customer loyalty rating done by EPSI. "Among Nordic Insurance groups measured in three or more countries TrygVesta is scored highest by their customers also in 2009." Segments Property & Casualty Insurance
The core business with revenues of DKK 17,827mn and a technical result of DKK 2,384mn in 2008 a.
Private & Commercial i. Strong market presence in Norway and Denmark with 18.1% and 20.9% market share. ii. The Swedish and Finnish markets are targeted growth markets with market shares of 2.6% and 1.4% as of Q3 2009, whereas the long-term targets are 6-8% in both countries.
b.
Corporate i. One segment covering the entire Nordic region. A corporate client has more than 50 employees or more than DKK 900,000 in annual premiums.
2
Arthur D. Little Consultancy DnB NOR Markets - 107
03.02.2010
Sector report > Nordic Financials
Investment Activities
The investment activities relate to the management of the premiums collected. The main purpose of the division is risk management in order to ensure adequate capital to cover all future claims and regulatory requirements. Furthermore TrygVesta utilise the surplus capital to attain financial market returns by taking on higher risk. In 2010 the portfolio will be divided in two; a.
Matching portfolio of ~DKK 30bn solely purported of ensuring compliance with regulatory demands, covering policyholders' claims and hedging the interest rate exposure in the insurance provisions.
b.
Free portfolio of excess capital, ~DKK 10bn, which will be put to work in order to gain risky returns.
The strategic asset allocation is made internally by TrygVesta while the actual asset management is outsourced to Nordea.
New organization of the investment activities
Source: TrygVesta
Financial Targets
TrygVesta target a ROE of 23-24% versus a historical (2004-2008) ROE after tax of 22.4%. A 23% ROE implies a theoretical P/B of 3.73 given 2.5% growth and 8% CoC. Based on the average historical ROE the theoretical P/B is 3.62 which compared to the average 2005-2009 P/B of 2.7 implies a 35% discount to theoretical P/B. Also if we look at historical ROE vs. historical P/B year by year the average discount is 35%. TrygVesta has a 50% payout policy and will also consider share buy-backs when the capital exceeds the required capital. This was done in 2007 when the buffer of surplus capital was fully utilised and led to a 10% share buyback program and a 9.7% dividend yield. In 2009 TrygVesta have indicated a total distribution of 83%, whereof buy-backs comprise 33%p. Average payout ratio (2004-2008) has been 57.3%. DnB NOR Markets - 108
03.02.2010
Sector report > Nordic Financials
Estimates Q409 preview EURm Gross Written Premiums Claims incurred, net Operating Expenses Technical Result Pre-tax profit Profit
Q408 Q409E Q409E Chg YoY Reported DnB NOR Market* Abs. 3,409 3,861 -2,871 -3,458 -813 -862 517 366 348 499 80 369
EPS RoE Dividend Combined ratio PBT breakdown Denmark Norway Finland Sweden Corporate Investment activities Other PBT
1.2 1.0 %
5.8 3.8 %
90.4 %
253 54 -5 -18 237 -157 -16 348
%
DnB NOR Markets 2009E 2010E 2011E 18,528 20,234 21,205 -12,989 -13,869 -14,215 -3,075 -3,123 -3,191 1,566 2,072 2,599 2,537 2,448 3,044 1,929 1,811 2,252
93.1 %
30.5 20.1 % 23.7 92.5 %
28.7 18.8 % 25.8 90.5 %
35.6 23.4 % 32.1 88.6 %
181 -3 -28 38 179 144 -12 499
669 188 -121 37 820 1,021 -77 2,537
772 261 -82 198 924 424 -48 2,448
936 362 -34 274 1,061 492 -48 3,044
One of the best dividend cases in the Nordic region TrygVesta's dividend capacity appears to be substantial with estimated dividend yields north of 10%. To give an indication as to the dividend capacity we have looked at three scenarios. 1. Scenario 1 assumes that TrygVesta will fully utilise its capital buffer for dividends and share-buybacks (according to stated policy) 2. Scenario 2 is our base case with 90% payout ratio 3. Scenario 3 assumes that TrygVesta will retain capital in order to adhere to their 54% TAC/NEP target 3, and that all excess capital is distributed to shareholders. In our full buffer utilisation case we see dividend yields at ~10% in 2010 and 2011 before moving north in the succeeding years. Case 1 (full buffer utilisation) Dividend Capacity DPS Dividend Yield
2010 2,020 32.0 9.5 %
2011 2,044 32.3 9.6 %
2012 2,403 38.0 11.3 %
2013 2,616 41.4 12.3 %
2014 2,802 44.3 13.2 %
In our base case we have assumed a 90% payout ratio. In the last line we have provided the estimated buffer capital still remaining. Case 2 (Base Case) PAT Payout ratio Dividend DPS Dividend Yield Buffer
2010
2011
2012
2013
2014
1,811 90 % 1,630.1 25.8 7.7 % 390
2,252 90 % 2,027.2 32.1 9.5 % 407
2,572 90 % 2,314.4 36.6 10.9 % 495
2,771 90 % 2,493.6 39.5 11.7 % 618
2,951 90 % 2,656.0 42.0 12.5 % 764
Although 90% payout ratios may appear optimistic it is in line with the company's history; 71% in 2006 followed by 113% in 2007. Furthermore the company has stated that they will disburse all excess capital, given our left-over buffer our estimate may actually be too conservative. 3
TAC: Total Adjusted Capital, based on S&P Capital Adequacy model for insurance companies NEP: Net Earned Premiums
DnB NOR Markets - 109
03.02.2010
Sector report > Nordic Financials
If we assume that QIS5 will not include further strengthening of capital requirements over QIS4 and use the 54% TAC/NEP target TrygVesta has announced we see potential for a significant increase in dividends. From estimated 6.3% in 2010 to 8.3% in 2011 and trending above 10% in 2012. Case 3 (TAC/NEP target) NEP TAC at 54% TAC (estimate) Excess capital PAT ROE Additional dividend Additional dividend yield Regular Dividend Regular Dividend Yield Net Dividend Yield
2010 19,111 10,320 10,025 -295 1,811 17.6 % -4.7 -1.4 % 25.8 7.7 % 6.3 %
2011 20,054 10,829 10,545 -284 2,252 20.8 % -4.5 -1.3 % 32.1 9.5 % 8.2 %
2012 20,807 11,236 11,086 -150 2,572 22.9 % -2.4 -0.7 % 36.6 10.9 % 10.2 %
2013 21,505 11,612 11,513 -100 2,771 23.9 % -1.6 -0.5 % 39.5 11.7 % 11.3 %
2014 22,174 11,974 11,908 -66 2,951 24.6 % -1.1 -0.3 % 42.0 12.5 % 12.2 %
2013 11.3 % 11.7 % 12.3 %
2014 12.2 % 12.5 % 13.2 %
Source: DnB NOR Markets Equity Research
Below we have summarised the different scenarios and their corresponding dividend yields. Dividend Yield TAC/NEP target case Base Case Full buffer utilisation case
2010 6.3 % 7.7 % 9.5 %
2011 8.2 % 9.5 % 9.6 %
2012 10.2 % 10.9 % 11.3 %
In general these dividend yields look to good to be true, and we expect that they will be. We initiate coverage of TrygVesta with a price target of DKK 400 which still yields enticing dividend yields. The impact is shown below. Case 2 (Base Case) PAT Payout ratio Dividend DPS Dividend Yield Buffer
2010 1,811 90 % 1,630.1 25.8 6.4 % 390
2011 2,252 90 % 2,027.2 32.1 8.0 % 407
2012 2,572 90 % 2,314.4 36.6 9.2 % 495
2013 2,771 90 % 2,493.6 39.5 9.9 % 618
For 2009 we expect regular dividends of DKK 900mn and a buy-back program of DKK 600mn, implying a dividend yield of 7.2% on current share price. This leaves a buffer of ~DKK 500 mn, if they were to disburse their entire buffer capital in 2009 the dividend yield would increase to 9.6%. The apparent downside risks are That the company hoards capital to get set for M&A activity, they have stated that this is not an option and we deem this unlikely. Solvency II and QIS5 have more stringent capital requirements than QIS4 and thus reduces dividend capacity, the industry appear to expect the opposite event. That our earnings estimates are too optimistic Note that the above estimates are based on the share price as of February 1st and that the buffer we refer to is the excess capital available relative to the required capital for an S&P A- rating + 5%. Below we have provided our complete capitalisation estimates for 20082010. DnB NOR Markets - 110
2014 2,951 90 % 2,656.0 42.0 10.5 % 764
03.02.2010
Sector report > Nordic Financials
Capitalization Estimates Capitalisation DKKm Net Premiums Net reserves (inc annuities) Annuities Total Assets
2008 Q108 16,135 19,671 1645 44,383
2008 Q208 16,384 19,304 1615 42,854
2008 Q308 16,573 19,872 1700 42,079
2008 Q408 16,635 18,855 1,822 38,445
2009 Q109 16,583 19,685 1712 44,131
2009 Q209 17,446 20,180 1,672 45,133
2009 Q309 17,595 21,234 1772 45,996
2009 Q409 17,632 21,234 1772 46,365
2010 Q110 18,217 21,234 1772 46,835
2010 Q210 18,548 21,234 1772 45,788
2010 Q310 18,828 21,234 1772 46,248
2010 Q410 19,111 21,234 1772 46,676
Asset Risk (D * Asset Charge) Liability Risk Diversification Required Capital Available Capital (Total Adjusted Capital) Buffer (to A range)
2,086 6,776 -762 8,100 9,187 13.4 %
2,228 6,765 -774 8,219 9,475 15.3 %
2,114 6,849 -771 8,192 9,675 18.1 %
1,769 6,710 -755 7,724 8,951 15.9 %
1,944 6,908 -779 8,073 9,407 16.5 %
2,192 7,169 -815 8,546 10,306 20.6 %
2,295 7,428 -848 8,875 10,987 23.8 %
2,314 7,431 -850 8,895 9,844 10.7 %
2,337 7,547 -862 9,022 11,214 24.3 %
2,285 7,612 -863 9,034 10,767 19.2 %
2,308 7,668 -870 9,106 11,227 23.3 %
2,329 7,724 -877 9,176 10,025 9.3 %
4.7 % 2,086
5.2 % 2,228
5.0 % 2,114
4.6 % 1,769
4.4 % 1,944
4.9 % 2,192
5.0 % 2,295
5.0 % 2,314
5.0 % 2,337
5.0 % 2,285
5.0 % 2,308
5.0 % 2,329
20.0 % 18.0 % 0.9 %
20.0 % 18.0 % 0.9 %
19.7 % 18.0 % 0.9 %
19.6 % 18.4 % 0.9 %
19.6 % 18.4 % 0.9 %
19.7 % 18.5 % 0.9 %
19.8 % 18.6 % 0.9 %
19.8 % 18.6 % 0.9 %
19.8 % 18.6 % 0.9 %
19.8 % 18.6 % 0.9 %
19.8 % 18.6 % 0.9 %
19.8 % 18.6 % 0.9 %
Premium Risk (A*E) Reserve Risk ( (B-C)*F) Life Reserve Risk (C*G) Catastrophe Bond Insurance Liability Risk
3,227 3,245 15 174 115 6,776
3,277 3,184 15 174 115 6,765
3,265 3,271 15 174 124 6,849
3,260 3,134 16 174 126 6,710
3,250 3,343 15 174 126 6,908
3,438 3,413 15 174 129 7,169
3,481 3,628 15 174 130 7,428
3,491 3,620 16 174 130 7,431
3,607 3,620 16 174 130 7,547
3,672 3,620 16 174 130 7,612
3,728 3,620 16 174 130 7,668
3,784 3,620 16 174 130 7,724
Required Capital Diversification (%) Diversification (H*I) Diversified required capital Diversified required capital + 5% buffer
8,862 8.6 % -762 8,100 8,505
8,993 8.6 % -774 8,219 8,630
8,963 8.6 % -771 8,192 8,602
8,479 8.9 % -755 7,724 8,111
8,852 8.8 % -779 8,073 8,477
9,361 8.7 % -815 8,546 8,974
9,723 8.7 % -848 8,875 9,319
9,745 8.7 % -850 8,895 9,340
9,884 8.7 % -862 9,022 9,473
9,897 8.7 % -863 9,034 9,486
9,976 8.7 % -870 9,106 9,561
10,053 8.7 % -877 9,176 9,635
10,057 1,101 -2,561 969 -379 9,187 11,158
8,846 1,102 -981 948 -440 9,475 9,948
8,623 1,103 -608 1,010 -453 9,675 9,726
8,244 1,102 -788 843 -450 8,951 9,346
8,256 1,102 -423 935 -463 9,407 9,358
8,622 1,586 0 1,023 -925 10,306 10,208
9,249 1,586 0 1,094 -942 10,987 10,835
9,618 1,586 -1,500 1,082 -942 9,844 11,204
10,088 1,586 -600 1,082 -942 11,214 11,674
9,041 1,586 0 1,082 -942 10,767 10,627
9,501 1,586 0 1,082 -942 11,227 11,087
9,929 1,586 -1,630 1,082 -942 10,025 11,515
1,087 682 2,653
1,256 845 1,318
1,483 1,073 1,124
1,227 840 1,235
1,334 930 881
1,760 1,332 1,234
2,112 1,668 1,516
949 504 1,864
2,192 1,741 2,201
1,733 1,281 1,141
2,122 1,667 1,527
849 390 1,880
56.9 % 70.5 %
57.8 % 64.2 %
58.4 % 61.7 %
53.8 % 58.5 %
56.7 % 57.3 %
59.1 % 61.3 %
62.4 % 64.3 %
55.8 % 64.3 %
61.6 % 64.9 %
58.1 % 58.1 %
59.6 % 59.6 %
52.5 % 61.0 %
Asset Charge (of total assets) Asset risk Premium Risk Reserve Risk Life Reserve Risk
Equity Hybrid Capital Expected Pay-Out Deferred Tax Intangibles Total Available Capital (TAC) Basic Own Funds Buffer (to A range) Buffer
TAC/NEP (target 54%) Solvency Ratio
Source: DnB NOR Markets Equity Research, TrygVesta
In our base case we have not assumed complete utilisation of the buffer due to the upcoming Solvency II and potential M&A activity. We have also looked at different scenarios for 2010. Low scenario: Decreased equity returns by 3%p and bond returns by 1% and reduced premium growth by 3% High scenario: Increased equity returns by 3%p, bond returns by 1%p and increased premium growth by 3% 2010 PAT Dividend DPS Dividend Yield Net payout ratio
Low 933 840 13.3 4.0 % 90 %
Base 1,811 1,630 25.8 7.8 % 90 %
High 2,673 2,406 38.1 11.5 % 90 %
Even in the rather gloomy low scenario TrygVesta has a 4% dividend yield, in the high scenario the dividend yield moves north of 10% already in 2010.
DnB NOR Markets - 111
Sector report > Nordic Financials
03.02.2010
Divisional estimates Non-life insurance divisions Denmark Denmark 2000 Premiums, gross Net income from investments Other operating income Claims incurred Change in insurance liabilities Staff costs Other expenses Profit /loss on ceded business Profit before taxes
Claims ratio (%) Ceded Business (%) Expense ratio (%) Combined ratio (%) Premium Growth
2001 4666 233
2002 5191 219
2003 5660 147
2004 5,971 180
2005 6,275 113
2006 6,390 145
2007 6,490 164
2008 6,605 180
2009E 6,847 73
2010E 7,196 55
2011E 7,488 58
2012E 7,715 61
-3843 14
-4070 19
-4194 -39
-4,340
-4,987
-4,232
-4,041
-4,443
-4,981
-5,184
-5,288
-5,395
-1183 -10 -123
-1194 -180 -15
-1287 -167 120
-1,099 -99 613
-1,114 468 755
-1,109 -201 993
-1,086 -87 1,440
-1,155 -89 1,098
-1,170 -100 669
-1,193 -102 772
-1,217 -104 936
-1,242 -106 1,033
82.4% 0.2% 25.4% 108 %
78.4% 3.5% 23.0% 105 % 11.3%
74.1% 3.0% 22.7% 100 % 9.0%
72.7% 1.7% 18.4% 93 % 5.5%
79.5% -7.5% 17.8% 90 % 5.1%
66.2% 3.1% 17.4% 87 % 1.8%
62.3% 1.3% 16.7% 80 % 1.6%
67.3% 1.3% 17.5% 86 % 1.8%
72.8% 1.5% 17.1% 91 % 3.7%
72.0% 1.4% 16.6% 90 % 5.1%
70.6% 1.4% 16.3% 88 % 4.1%
69.9% 1.4% 16.1% 87 % 3.0%
The Danish operations is expected to show a negative trend in 2010 due to adverse weather in Q1 and continued high theft and fire claims. This is offset by higher prices implemented during 2010 and 2011… Norway Norway 2000 Premiums, gross Net income from investments Other operating income Claims incurred Change in insurance liabilities Staff costs Other expenses Profit /loss on ceded business Profit before taxes
Claims ratio (%) Ceded Business (%) Expense ratio (%) Combined ratio (%) Premium Growth
2001 3103 197
2002 4211 263
2003 4553 204
2004 4,373 72
2005 4,632 93
2006 4,509 121
2007 4,490 183
2008 4,636 123
2009E 4,436 34
2010E 4,662 34
2011E 4,852 36
2012E 4,999 38
-2465 -55
-3032 -140
-3275 -57
-2,640
-2,845
-2,867
-2,962
-3,372
-3,292
-3,426
-3,495
-3,566
-810 240 210
-1136 -228 -62
-1123 -93 209
-1,000 -85 720
-953 -60 867
-922 -77 764
-936 -83 692
-1,004 -67 316
-936 -54 188
-954 -55 261
-974 -56 362
-993 -58 420
79.4% -7.7% 26.1% 98 %
72.0% 5.4% 27.0% 104 % 35.7%
71.9% 2.0% 24.7% 99 % 8.1%
60.4% 1.9% 22.9% 85 % -4.0%
61.4% 1.3% 20.6% 83 % 5.9%
63.6% 1.7% 20.4% 86 % -2.7%
66.0% 1.8% 20.8% 89 % -0.4%
72.7% 1.4% 21.7% 96 % 3.3%
74.2% 1.2% 21.1% 97 % -4.3%
73.5% 1.2% 20.5% 95 % 5.1%
72.0% 1.2% 20.1% 93 % 4.1%
71.3% 1.2% 19.9% 92 % 3.0%
2004 0 0
2005 0 0
2006 4 0
2007 90 3
2008 221 7
2009E 1,207 9
2010E 1,775 13
2011E 1,935 13
2012E 2,082 14
0
0
-6
-80
-214
-924
-1,288
-1,364
-1,433
0 0 0
0 0 0
-39 0 -41
-95 0 -82
-104 0 -90
-231 -24 37
-257 -45 198
-265 -46 274
-273 -47 343
150.0% 88.9% 96.8% 0.0% 0.0% 0.0% 975.0% 105.6% 47.1% 1125 % 194 % 144 % 0.0% 0.0% 2150.0% 145.6%
76.6% 2.0% 19.2% 98 % 446.2%
72.6% 2.5% 14.5% 90 % 47.1%
70.5% 2.4% 13.7% 87 % 9.0%
68.8% 2.2% 13.1% 84 % 7.6%
.. much the same picture expected in Norway. Sweden Sweden 2000 Premiums, gross Net income from investments Other operating income Claims incurred Change in insurance liabilities Staff costs Other expenses Profit /loss on ceded business Profit before taxes
Claims ratio (%) Ceded Business (%) Expense ratio (%) Combined ratio (%) Premium Growth
2001
2002
2003
The Swedish operations are expected to continue its strong growth and become an increasingly important part of the group's profits.
DnB NOR Markets - 112
Sector report > Nordic Financials
03.02.2010
Finland Finland 2000 Premiums, gross Net income from investments Other operating income Claims incurred Change in insurance liabilities Staff costs Other expenses Profit /loss on ceded business Profit before taxes
Claims ratio (%) Ceded Business (%) Expense ratio (%) Combined ratio (%) Premium Growth
2001 2 0
2002 21 1
2003 61 1
2004 97 3
2005 140 3
2006 198 6
2007 252 14
2008 354 17
2009E 480 -8
2010E 583 -17
2011E 663 -18
2012E 728 -19
-1
-18
-47
-70
-113
-155
-188
-258
-412
-469
-494
-511
-29 -1 -29
-66 -4 -66
-63 0 -48
-73 0 -43
-70 -1 -41
-83 0 -34
-125 -2 -49
-154 -1 -42
-180 -1 -121
-180 0 -82
-185 0 -34
-191 0 7
50.0% 85.7% 77.0% 50.0% 19.0% 0.0% 1450.0% 314.3% 103.3% 1550 % 419 % 180 % 950.0% 190.5%
72.2% 0.0% 75.3% 147 % 59.0%
80.7% 0.7% 50.0% 131 % 44.3%
78.3% 0.0% 41.9% 120 % 41.4%
74.6% 0.8% 49.6% 125 % 27.3%
72.9% 0.3% 43.5% 117 % 40.5%
85.8% 0.2% 37.5% 124 % 35.5%
80.4% 0.0% 30.8% 111 % 21.5%
74.5% 0.0% 27.9% 102 % 13.7%
70.2% 0.0% 26.2% 96 % 9.8%
We exercise caution on the Finnish operations due to lack of size and potential downside related to the Nordea bancassurance partnership. Corporate Corporate 2000 Premiums, gross Net income from investments Other operating income Claims incurred Change in insurance liabilities Staff costs Other expenses Profit /loss on ceded business Profit before taxes
Claims ratio (%) Ceded Business (%) Expense ratio (%) Combined ratio (%) Premium Growth
2001 3832 251
2002 5120 314
2003 5190 209
2004 4,862 128
2005 4,667 113
2006 4,921 128
2007 5,285 137
2008 5,512 172
2009E 5,492 37
2010E 5,772 30
2011E 6,006 31
2012E 6,188 33
-2810 -31
-4368 -119
-3555 -15
-3,417
-3,360
-3,344
-3,904
-3,489
-3,594
-3,740
-3,815
-3,892
-681 -495 66
-846 -363 -262
-873 -801 155
-603 -576 394
-535 -424 461
-539 -318 848
-504 -172 842
-588 -516 1,091
-608 -508 820
-620 -518 924
-632 -528 1,061
-645 -539 1,145
73.3% 12.9% 17.8% 104 %
85.3% 7.1% 16.5% 109 % 33.6%
68.5% 15.4% 16.8% 101 % 1.4%
70.3% 11.8% 12.4% 95 % -6.3%
72.0% 9.1% 11.5% 93 % -4.0%
68.0% 6.5% 11.0% 85 % 5.4%
73.9% 3.3% 9.5% 87 % 7.4%
63.3% 9.4% 10.7% 83 % 4.3%
65.4% 9.2% 11.1% 86 % -0.4%
64.8% 9.0% 10.7% 85 % 5.1%
63.5% 8.8% 10.5% 83 % 4.1%
62.9% 8.7% 10.4% 82 % 3.0%
2011E 20,944 613
2012E 21,712 702
We expect continued strong performance in the Corporate segment with growth corresponding to the market growth Group Profits Group 2000 Premiums, gross Net income from investments Other operating income Claims incurred Change in insurance liabilities Staff costs Other expenses Profit /loss on ceded business Profit before taxes
Claims ratio (%) Ceded Business (%) Expense ratio (%) Combined ratio (%) Premium Growth
2001 12,620 663
2002 15,792 417
2003 16,702 1,179
2004 15,303 761
2005 15,714 1,210
2006 16,022 1,628
2007 16,607 841
2008 17,328 -489
-9,782 -12,334 -11,940 -10,467 -11,305 -10,604 -11,175 -11,776
-3,063 -329 109
-3,778 -871 -774
2009E 18,462 1,167
2010E 19,987 539
-13,204 -14,106 -14,456 -14,797
-3,761 -1,135 1,045
-2,805 -760 2,032
-2,700 -16 2,903
-2,691 -596 3,759
-2,822 -345 3,106
-3,043 -672 1,348
-3,201 -687 2,537
-3,253 -720 2,448
-3,322 -735 3,044
-3,392 -749 3,475
77.5% 78.1% 71.5% 2.6% 5.5% 6.8% 24.3% 23.9% 22.5% 104.4 % 107.5 % 100.8 % 0.0% 25.1% 5.8%
68.4% 5.0% 18.3% 91.7 % -8.4%
71.9% 0.1% 17.2% 89.2 % 2.7%
66.2% 3.7% 16.8% 86.7 % 2.0%
67.3% 2.1% 17.0% 86.4 % 3.7%
68.0% 3.9% 17.6% 89.4 % 4.3%
71.5% 3.7% 17.3% 92.6 % 6.5%
70.6% 3.6% 16.3% 90.5 % 8.3%
69.0% 3.5% 15.9% 88.4 % 4.8%
68.2% 3.5% 15.6% 87.2 % 3.7%
In general we expect the core underwriting business to continue it's strong performance while we see lower returns on the investment activities due to further reduction of risk exposure Source: DnB NOR Markets Equity Research, TrygVesta
DnB NOR Markets - 113
Sector report > Nordic Financials
Underwriting Business We expect the underwriting results to increasingly improve going forward due to the increased prices and emphasis on cost-efficiency. The Finnish operations will still be impacted by the lack of size and experience combined ratios above 110% while we see the Swedish operations becoming an increasingly important part of TrygVesta's profit generation, representing ~7% of 2010 technical result. The Danish and Norwegian operations on the other hand are expected to be stable, with price increases offset by adverse claims development, particularly in Q1.
The corporate segment is expected to be tranquil with a premium growth equal to the market growth, increased auto sales offsetting the adverse development in worker's compensation sales. Increased automatisation steadily improves the profitability within the segment. Overall we see the combined ratio trending towards 88% over the next few years. An important aspect will be the formerly mentioned strategic partnership issues with Nordea, with the renegotiations coming up in primo 2011. Investment Activities The investment activities will of course be volatile and we leave significant headroom for discretionary views on this matter. In the sensitivity section we have provided a sensitivity analysis of investment return impact on earnings and price target. In our base scenario we have assumed returns of 8% for equities and an aggregated 3% for the bond portfolio.
In general we expect investment returns from the free-portfolio to generate annual sustainable earnings of ~DKK 400mn after asset management expenses and hybrid capital interests. Thus contributing ~4% to the ROE estimate.
Quarterly Investment Returns 600
100.0 % 499
500 400
50.0 %
332
322
300
DKKm
200
152
0.0 %
144 100
100
104
108
112
46 -50.0 %
0 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 -44
-100
-90 -135
-200
-100.0 %
-157
-300
-150.0 %
-400
-331
-365
-500
-200.0 %
Annual Investment Returns 1,500
60.0 % 1,228 1,021
500
40.0 %
888
1,000
DKKm
03.02.2010
378
424
340
492
20.0 %
0.0 %
0 2004
2005
2006
2007
2008
2009E
2010E
2011E
-20.0 %
-500 -40.0 %
-1,000
-60.0 %
-988
-1,500
-80.0 %
DnB NOR Markets - 114
Sector report > Nordic Financials
03.02.2010
Combined ratios Combined Ratios by Segment Denmark
Norway 120.0%
120.0%
100.0%
25.4%
100.0% 23.0%
22.7%
80.0%
26.1%
17.8% 18.4%
17.1% 17.5%
17.4%
16.6%
27.0% 16.3%
16.1%
16.7%
60.0%
40.0%
24.7%
80.0%
22.9%
20.6%
20.4%
20.8%
60.4%
61.4%
63.6%
66.0%
2004
2005
2006
2007
21.7%
21.1%
20.5%
20.1%
19.9%
72.7%
74.2%
73.5%
72.0%
71.3%
2008
2009E
2010E
2011E
2012E
60.0%
82.4%
78.4%
74.1%
72.7%
79.5% 66.2%
67.3%
62.3%
72.8%
72.0%
70.6%
69.9%
20.0%
40.0%
79.4%
72.0%
71.9%
20.0%
0.0%
0.0% 2001
2002
2003
2004
2005
2006
Claims rat io
2007
Expense ratio
2008
2009E
2010E
2011E
2012E
2001
2002
2003
Ceded Business
Claims ratio
Expense ratio
Ceded Business
The Danish market has been highly profitable recent years, expect 2009 profitability to be sustainable..
..while there is more headroom for further efficiency gains in the Norwegian segment
Sweden
Finland 160.0%
150.0% 105.6%
140.0%
130.0% 47.1%
120.0%
110.0%
75.3% 100.0%
90.0% 70.0%
50.0%
49.6%
41.9%
19.2% 14.5%
150.0%
13.7%
13.1%
37.5% 30.8%
43.5%
27.9%
80.0%
26.2%
60.0%
50.0%
96.8%
88.9%
76.6%
72.6%
70.5%
30.0%
68.8%
40.0%
72.2%
85.8%
80.7%
78.3%
74.6%
72.9%
2005
2006
2007
2008
80.4%
74.5%
70.2%
2010E
2011E
2012E
20.0% 10.0%
0.0% -10.0%
2004
2005
2006
2007
Claims rat io
2008
Expense rat io
2009E
2010E
2004
Ceded Business
Claims ratio
Expense ratio
2009E
Ceded Business
The Moderna acquisition set Sweden up for profitability..
..while Finland still struggles with lack of size
Corporate
Segments overview
120.0%
100.0% 16.5% 80.0%
17.8%
16.8%
12.4%
11.5%
9.5% 11.0%
10.7%
11.1%
10.7%
10.5%
10.4%
60.0%
40.0%
85.3% 73.3%
68.5%
70.3%
72.0%
68.0%
73.9% 63.3%
65.4%
64.8%
63.5%
62.9%
20.0%
0.0% 2001
2002
2003
2004
2005
Claims rat io
2006
2007
Expense rat io
2008
2009E
2010E
2011E
Ceded Business
The corporate segment uses reinsurance heavily, reflected in the high ceded business ratio
2012E
120 %
120 %
115 %
115 %
110 %
110 %
105 %
105 %
100 %
100 %
95 %
95 %
90 %
90 %
85 %
85 %
80 %
80 %
75 %
75 %
70 %
70 % 2001
2003 Sweden
2005 Finland
2007 Denmark
2009E
2011E
Norway
Corporate
With the new markets becoming profitable we see group combined ratio trending towards 88%
Source: DnB NOR Markets Equity Research, TrygVesta
DnB NOR Markets - 115
03.02.2010
Sector report > Nordic Financials
The Nordic region is the most cost-efficient insurance market in Europe and TrygVesta is one of the most cost-efficient firms in the Nordic region with combined ratios as seen below. In Q3 2009 the net combined ratio stood at 92.3%. 120 % 100 % 80 % 60 % 40 % 20 % 0% 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009E 2010E
-20 % Claims ratio
Expense ratio
Ceded Business
Source: TrygVesta, DnB NOR Markets Equity Research
For 2010 we expect a combined ratio of 90.5%. An increase of 1.3%p from 2008 and decrease of 2%p from our 2009 estimates, which can be broken down to a 0.9%p decrease in the claims ratio and 1.1%p in the expense ratio. This is attributable to the (i) price increases announced and (ii) increased automatisation and self-services reducing operating expenses. TrygVesta – Nordea Bancassurance risks Sampo has become the majority shareholder of Nordea with a ~20% stake which may have an adverse effect on TrygVesta's bancassurance agreements. The current deal lasts until 2013 with renegotiations for an extension until 2016 in primo 2011. TrygVesta state that they find the likelihood of Sampo ousting TrygVesta and replacing them with IF equal to 0. Basing this on Sampo's divestment of Sampo Bank in 2007 and that Sampo appears to be nonbelievers when it comes to bancassurance. They find it more likely that Sampo will drive Nordea into consolidations with a large European bank which already has bancassurance partnerships in place, thereby ousting TrygVesta and a new European non-life player enters the market.
Although this was likely the case a year ago we believe Nordea has gone from being a potential Nordic entry point for European firms to becoming a Nordic based firm that will expand towards continental Europe itself. Thereby reducing the potential for a takeover and increasing the probability of IF replacing TrygVesta as their insurance provider. Furthermore it should be mentioned that TrygVesta have strong historical ties to Nordea; (i) TrygVesta is currently Nordea Asset Management's largest client with close to DKK 40bn under management and (ii) on the 26th of January TrygVesta CEO, Stine Bosse, was proposed re-elected as a board member of Nordea Without the Nordea partnership we think TrygVesta will have to rethink their entry into Sweden and Finland and either acquire other domestic players or divest their current operations, the remaining scale of the business will not allow for profitable business in these markets. This is especially relevant for the Finnish operations.
DnB NOR Markets - 116
Sector report > Nordic Financials
03.02.2010
Valuation Sustainable Return on Equity Risk-free interest rate Required return Sustainable ROE
7.0% 20.0%
5.0% 7.0% 21.0%
7.0% 22.0%
8.0% 20.0%
5.0% 8.0% 21.0%
8.0% 22.0%
9.0% 20.0%
5.0% 9.0% 21.0%
9.0% 22.0%
Long-term grow th rate Price/book Im plied value
1.5 % 3.4x 33,398
1.5 % 3.5x 35,203
1.5 % 3.7x 37,009
1.5 % 2.8x 28,260
1.5 % 3.0x 29,788
1.5 % 3.2x 31,315
1.5 % 2.5x 24,492
1.5 % 2.6x 25,816
1.5 % 2.7x 27,140
Long-term grow th rate Price/book Im plied value
2.5 % 3.9x 38,613
2.5 % 4.1x 40,820
2.5 % 4.3x 43,026
2.5 % 3.2x 31,593
2.5 % 3.4x 33,398
2.5 % 3.5x 35,203
2.5 % 2.7x 26,732
2.5 % 2.8x 28,260
2.5 % 3.0x 29,788
Long-term grow th rate Price/book Im plied value
3.5 % 4.7x 46,809
3.5 % 5.0x 49,646
3.5 % 5.3x 52,483
3.5 % 3.7x 36,407
3.5 % 3.9x 38,613
3.5 % 4.1x 40,820
3.5 % 3.0x 29,788
3.5 % 3.2x 31,593
3.5 % 3.4x 33,398
7,574
Valuation range - all - w ith discount to theoretical P/B - per share - per share (avg)
24,492 15,920 251.92
396.00
52,483 34,114 539.84
Dividend discount model Risk discount rate Revenue risk discount rate, exit value PV of dividends 2009E-2013E P/B m ultiples Exit-multiple on book value 2013E PV exit value Value of equity - per share Im plied m ultiples -Value of equity / 2009E equity -Value of equity / 2010E equity -Value of equity / 2009E net profit -Value of equity / 2010E net profit P/E m ultiples Exit-multiple on 2013E net profit PV exit value Value of equity - per share Im plied m ultiples -Value of equity / 2009E equity -Value of equity / 2010E equity -Value of equity / 2009E net profit -Value of equity / 2010E net profit
8,024
7.0% 7.0% 8,024
7,794
8.0% 8.0% 7,794
7,794
7,574
9.0% 9.0% 7,574
8,024
1.9x 15,649 23,673 374.6
2.0x 16,473 24,497 387.7
2.1x 17,297 25,321 400.7
1.9x 14,938 22,732 359.7
2.0x 15,724 23,518 372.2
2.1x 16,511 24,305 384.6
1.9x 14,265 21,839 345.6
2.0x 15,016 22,590 357.5
2.1x 15,767 23,341 369.4
2.5x 2.4x 12.28 13.07
2.5x 2.5x 12.71 13.52
2.6x 2.6x 13.13 13.98
2.4x 2.3x 11.79 12.55
2.4x 2.4x 12.20 12.98
2.5x 2.4x 12.61 13.42
2.3x 2.2x 11.33 12.06
2.3x 2.3x 11.72 12.47
2.4x 2.4x 12.11 12.89
9.5 18,767 26,791 423.96
10.0 19,755 27,779 439.59
10.5 20,742 28,766 455.22
9.5 17,914 25,708 406.82
10.0 18,857 26,651 421.74
10.5 19,800 27,594 436.66
9.5 17,107 24,681 390.57
10.0 18,008 25,581 404.81
10.5 18,908 26,482 419.06
2.8x 2.7x 13.90 14.79
2.9x 2.8x 14.41 15.34
3.0x 2.9x 14.92 15.88
2.7x 2.6x 13.33 14.19
2.8x 2.7x 13.82 14.71
2.9x 2.8x 14.31 15.23
2.6x 2.5x 12.80 13.63
2.7x 2.6x 13.27 14.12
2.8x 2.7x 13.74 14.62
21,839 22,590 357.48
399.00
28,766 27,779 439.59
DDM valuation range, all - all - selected range - per share - per share (avg)
Our long term ROE estimate of 21%, 2.5% growth and 8% cost of capital implies a share price of DKK 399. In our dividend discount model we exercise some caution and do not include the full dividend potential depicted earlier, this leads to a share price of DKK 396. We also looked at a target dividend yield approach, where we set the dividend yield = cost of capital in our base case. The share price targets are discounted to end 2010. Dividend Target div yield Mcap Target (implied, discounted to 2010) Current Upside
1,811 7% 25,875 409 336 22 %
2010 1,811 8% 24,150 382 336 14 %
1,811 9% 20,125 292 336 -13 %
2,252 7% 32,178 476 336 42 %
2011 2,572 8% 34,288 505 336 50 %
When we combine these estimates we land at a price target of DKK 400.
DnB NOR Markets - 117
2,572 9% 28,573 415 336 23 %
03.02.2010
Sector report > Nordic Financials
Valuation background P/B development 5.0 4.5 4.0 3.5
+2 SD
3.0 2.5 2.0
Average -2 SD
1.5 1.0 0.5 Oct.05 Apr.06 Oct.06 Apr.07 Oct.07 Apr.08 Oct.08 Apr.09 Oct.09
P/E development 16 +2 SD 14
12
Average
10 -2 SD 8
6
4 Oct.05
Dec.05
Feb.06
Apr.06
Jun.06
Aug.06
Oct.06
Source: Factset, DnB NOR Markets
Our 400DKK price target implies a P/B 2011 of 2.4 and P/E 2011 of 11.2, which are both below the historical averages of 2.5 and 11.7.
DnB NOR Markets - 118
Sector report > Nordic Financials
Sensitivity analysis
Financial return
Com bined ratio
-3 % -1 % 0% 1% 3%
-3 % 93.4% 93.4% 93.4% 93.4% 93.4%
-1 % 91.5% 91.5% 91.5% 91.5% 91.5%
Premium grow th base 2010E =
Prem ium grow th 0% 90.5% 90.5% 90.5% 90.5% 90.5%
1% 89.6% 89.6% 89.6% 89.6% 89.6%
3% 87.7% 87.7% 87.7% 87.7% 87.7%
1% 338.00 418.00 460.00 504.00 598.00
3% 463.00 546.00 590.00 636.00 733.00
1% 419.00 430.00 435.00 440.00 451.00
3% 495.00 507.00 512.00 517.00 529.00
1% 31.04 32.32 32.87 33.42 34.71
3% 39.50 40.79 41.35 41.90 43.20
5.0%
Financial return
Per share valuation (Sustainable RoE) Prem ium grow th -3 % -1 % 0% -3 % 121.00 225.00 280.00 -1 % 193.00 300.00 357.00 0% 231.00 339.00 399.00 1% 271.00 382.00 442.00 3% 355.00 472.00 534.00
Equity returns
Per share investm ent return sensitivity Bond returns -3 % -1 % 0% -10 % 283.00 348.00 383.00 -3 % 293.00 359.00 394.00 0% 297.00 363.00 399.00 3% 301.00 368.00 403.00 10 % 311.00 378.00 414.00 Equity return base = 8.0% Bond grow th base = 3.0% EPS investm ent return sensitivity
Equity returns
03.02.2010
-10 % -3 % 0% 3% 10 %
-3 % 14.36 15.62 16.16 16.70 17.96
-1 % 22.66 23.93 24.47 25.02 26.29
Bond returns 0% 26.84 28.12 28.66 29.21 30.49
DnB NOR Markets - 119
Sector report > Nordic Financials
03.02.2010
TRYGVESTA (TRYG.CO) PROFIT & LOSS DKKm 2007 2008 2009e 2010e 2011e 2012e Gross premium written 16,959 17,629 18,528 20,234 21,205 21,987 15,890 16,635 17,632 19,111 20,054 20,807 Earned premium, net of re. -10,674 -11,647 -12,989 -13,869 -14,215 -14,550 Claims, net of reinsurance -2,674 -2,931 -3,075 -3,123 -3,191 -3,260 Net operating expenses Und erwriting result 2,820 2,384 1,566 2,072 2,599 2,948 340 -988 1,020 424 492 575 Net financial income Life pre-tax Bank pre-tax -49 -50 -48 -48 -48 -51 Other income Associates 3,109 1,347 2,537 2,448 3,044 3,475 Pre-tax profit Tax -842 -501 -609 -636 -791 -904 Minority interest Net p rofit 2,265 846 1,929 1,811 2,252 2,572
BALANCE SHEET DKKm Financial assets Other assets Total assets Equity Other liabilities Total liabilities & equity
MARGINS, GROWTH & GEAR ROE pre-tax % ROE % DPS DKK Div idend yield % Payout ratio % Claims ratio % Cost ratio % Combine d ratio % Ceded reins. %
VALUATION EPS EPS adj Year end shares Price P/E P/E adj Book per share P/Book
DKK DKK million DKK X X DKK X
37,847 5,983 43,830 10,010 33,820 43,830
32,745 14,478 47,223 10,476 36,747 47,223
39,502 6,863 46,365 9,618 36,747 46,365
39,813 6,863 46,676 9,929 36,747 46,676
40,435 6,863 47,298 10,551 36,747 47,298
40,980 6,863 47,843 10,887 36,747 47,634
2007 31.1 22.6 37.8 9.7 112.8 69.4 16.7 86.1 2.1
2008 12.9 8.1 6.5 2.0 49.5 71.9 17.3 89.2 3.9
2009e 26.4 20.1 23.7 6.9 77.8 75.4 17.1 92.5 3.9
2010e 24.7 18.2 25.8 7.7 90.0 74.5 16.0 90.5 3.9
2011e 28.8 21.3 32.1 9.6 90.0 72.9 15.6 88.6 3.9
2012e 31.9 23.6 36.6 10.9 90.0 72.1 15.4 87.5 3.9
2007 33.49 33.52 67.6 388.00 11.6 11.6 148.0 2.6
2008 13.14 13.14 64.4 328.00 25.0 25.0 162.7 2.0
2009e 30.52 30.51 63.2 342.75 11.2 11.2 152.2 2.3
2010e 28.66 28.66 63.2 334.90 11.7 11.7 157.1 2.1
2011e 35.64 35.64 63.2 334.90 9.4 9.4 167.0 2.0
2012e 40.69 40.69 63.2 334.90 8.2 8.2 172.3 1.9
Q1 09 6,496 4,037 -2,923 -702 427 46
Q2 09 4,154 4,383 -3,220 -778 376 498
Q3 09 4,017 4,527 -3,388 -733 397 332
Q4 09e 3,861 4,685 -3,458 -862 366 144
Q1 10e 7,418 4,621 -3,299 -748 547 100
-13
-13
-12
-12
-12
460 -140
861 -152
717 -187
499 -130
635 -165
320
710
530
369
470
Share price and target Price DKK Price target 12m DKK Recommendation EPS gr08-11e %ca gr PE09e/EPS gr X Financial structure Market cap. DKKm Shares outst. million Equity/tot assets % Share price performance Abs. 1/3/12m Rel. 1/3/12m High/Low 12m DKK 30days volatility % Company attributes Reuters ticker Financials Insurance Denmark
Reporting Q4 2009 Q1 2010
334.90 400.00 BUY 39.5% 0.3 21,163 63.2 20.7 -2/-9/-3 -2/-9/-3 393/272 18 TRYG.CO
25.02.2010 21.05.2010
Manag ement Stine Bosse CEO Morten Hübbe CFO Address Try gvesta Klausdalsbrovej 601 2750 Ballerup H.p.: http://www.trygvesta.com/ Tel +45 40 30 00 04
Analyst: Håkon Fure +47 22 94 89 12
[email protected]
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03.02.2010
Rebased consensus average forward EPS (12m, DKK) 105
Rebased price (12m, DKK) 115 110
100
105
95
100 95
90
90
85
85
80
80 75 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
75 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Trygvesta
Trygvesta
Premium (DKKm) 25,000
Premium growth 10.0% 9.0%
EPS (DKK) 50 45
8.0% 7.0%
40 35
10,000
6.0% 5.0% 4.0%
30 25 20
5,000
3.0% 2.0%
15 10
0
1.0% 0.0%
5 0
20,000 15,000
2006
2007
2008 2009e 2010e 2011e 2012e
Premium (DKKm)
30 25 20 15 10 5 2006
Cost ratio 17.5%
16.5%
2,000
16.0%
1,500
15.5%
1,000
15.0%
4,000
500
14.5%
2,000
0
14.0%
0
2009e 2010e 2011e 2012e
500 0
2006
2007
2008
74.0% 73.0%
10,000
72.0% 71.0% 70.0%
8,000 6,000
69.0% 68.0%
2006
2009e 2010e 2011e 2012e
Underwriting result (DKKm)
Combined ratio
2007
2008 2009e 2010e 2011e 2012e
67.0% 66.0%
Claims ratio
30%
2.50
25%
2.00
20%
1.50
15%
1.00
10%
84.0%
0.50
5%
82.0%
0.00
86.0%
1,000
DPS (DKK)
3.00
88.0%
1,500
0
ROE 35%
90.0%
2,000
2012e
Price/Book 3.50
92.0%
2,500
2011e
Claims ratio 76.0% 75.0%
Claims (DKKm)
Combined ratio 94.0%
3,000
2010e
12,000
Cost ratio
Underwriting result (DKKm) 3,500
2009e
14,000
2,500
Costs (DKKm)
2008
Claims (DKKm) 16,000
17.0%
2008
2007
EPS (DKK)
3,000
2007
35
Premium growth
Costs (DKKm) 3,500
2006
DPS (DKK) 40
2006
2007
2008
Price/Book
2009e 2010e 2011e 2012e
0%
ROE
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IMPORTANT/DISCLAIMER This report must be seen as marketing material unless the criteria for preparing investment research, according to the Norwegian Securities Trading Regulation 2007/06/29 no. 876, are met. This report has been prepared by DnB NOR Markets, a division of DnB NOR Bank ASA. The report is based on information obtained from public sources that DnB NOR Markets believes to be reliable but which DnB NOR Markets has not independently verified, and DnB NOR Markets makes no guarantee, representation or warranty as to its accuracy or completeness. Any opinions expressed herein reflect DnB NOR Markets’ judgment at the time the report was prepared and are subject to change without notice. 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Appendix 1 – Non-life insurance industry risk assessment New entrants The general insurance market in Norway has seen low combined ratios in the last three years and companies have announced that they will (re) enter the Norwegian market. Incumbents face competition from domestic insurers in each of its markets, but also from global insurance and selfinsurance. Additionally, the industry is facing increasing competition from banks and life insurers distributing general insurance products. Market fluctuations The companies operate in the Nordic area and its growth prospect and success is closely tied to general economic development in these markets.
Natural catastrophes A general insurer frequently experience losses from unpredictable events that affect multiple covered risks. Such events include both natural disasters and man-made disasters. The extent of the losses from catastrophes is a function of the frequency of catastrophic events, the severity of these and the reinsurance arrangements in place.
Changes in regulation The EU-initiated Solvency II project gives benefit for companies with diversification. Domestic companies currently are geographically concentrated and have concentrated business mixes. This may trigger strategic moves by less diversified companies in new business areas.
The industry also faces competition from the implementation of selfinsurance in the commercial insurance segments. Enabling corporations to access the reinsurance market without requiring direct insurance from a general insurer may change the situation in the industry significantly.
Technology Internet is increasingly preferred as purchase and payment channel for policyholders. New technology opens up for new entrants that operate at lower costs than traditional operated companies. The incumbents have made large investments in IT and are, as its competitors, dependent on stable operations of these.
Key Personnel The players are dependent on being able to attract and retain qualified individuals and in a tight labor market this can increase cost.
Market risk in financial portfolio Investment returns are an important part of insurers overall profitability. E.g. a proportion of these assets are placed in equities, which are generally subject to higher return volatility than fixed income securities. Fluctuations in long- or short-term interest rates and other market factors such as a decline in economic activity in equity markets and misjudgment by appointed asset managers may adversely affect the value of the investment portfolios.
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