Norwegian The outlook is bright, valuations are attractive

Thomas Svendsen, +47 24 01 50 03 31 January 2019 Banks outlook - Agenda

• Stocks performance and changes in earnings expectations

• Selected key value drivers outlook – Interest margins – Costs

• Why are (international) investors getting scared from time to time?

• Valuation and conclusion

2 Stocks performance and changes in expectations

3 International banks performance (-1Y) – Savings banks and DNB have kept up very well

Equity certificates

DNB

US banks

Nordic banks

European banks

4 SOURCE: THOMPSON REUTERS Nordic and Norwegian banks relative share price performance -1Y

NORDIC BANKS RELATIVE SHARE PRICE PERFORMANCE -1Y

120.00

110.00 100.00 DNB 90.00

80.00

70.00

60.00 Danske

50.00

Mar-18 Apr-18 Jun-18 Jul-18 Sep-18 Nov-18 Jan-19 Jan-18 Feb-18 Mar-18 May-18 May-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18

DNB ASA (Rebased) Skandinaviska Enskilda Banken AB (Rebased) Swedbank AB (Rebased) Bank Abp (Rebased) Svenska AB (Rebased) A/S (Rebased)

NORWEGIAN BANKS RELATIVE SHARE PRICE PERFORMANCE -1Y

130.00

120.00

110.00 Møre, Sandnes 100.00

90.00

80.00 Bank Norwegian 70.00 Helgeland

60.00

Feb-18 Feb-18 Mar-18 Apr-18 Apr-18 May-18 Jun-18 Jun-18 Jul-18 Aug-18 Aug-18 Sep-18 Oct-18 Oct-18 Jan-18 Feb-18 Mar-18 Mar-18 Apr-18 May-18 May-18 Jun-18 Jul-18 Jul-18 Aug-18 Sep-18 Sep-18 Oct-18 Nov-18 Nov-18 Nov-18 Dec-18 Dec-18 Dec-18 Jan-19 Jan-19

DNB ASA (Rebased) 1 SR Bank ASA (Rebased) Sparebank 1 SMN (Rebased) Sparebanken Vest (Rebased) Sparebanken More (Rebased) Sparebanken Ost (Rebased) Sparebank 1 Nord-Norge (Rebased) Sandnes Sparebank (Rebased) Helgeland Sparebank (Rebased) Sparebanken Sor (Rebased) Norwegian Finans Holding ASA (Rebased) Sbanken ASA (Rebased) SOURCE: THOMPSON REUTERS 5 • Nordic banks Consensus EPS revisions – A mixed picture

Danske Bank, DKK DNB, NOK

20.0 27.0 18.0 25.0 16.0 23.0 14.0 21.0 12.0 19.0 10.0

17.0 8.0 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 2018E 2019E 2020E 2018E 2019E 2020E

Nordea, EUR SEB, SEK

1.2 10.5 10.0 1.1 9.5 9.0 1.0 8.5 8.0 0.9 7.5 0.8 7.0 6.5 0.7 6.0 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 2018E 2019E 2020E 2018E 2019E 2020E

Svenska Handelsbanken, SEK Swedbank, SEK

10.0 19.5 9.5 19.0 18.5 9.0 18.0 8.5 17.5 8.0 17.0 16.5 7.5 16.0 7.0 15.5 15.0 6.5 14.5 6.0 14.0 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 2018E 2019E 2020E 2018E 2019E 2020E

6 SOURCE: THOMPSON REUTERS Norwegian banks Consensus EPS revisions – A positive picture

Sparebank 1 SR-bank, NOK Sparebank 1 Nord-Norge, NOK

11.0 8.0

10.0 7.5

7.0 9.0 6.5 8.0 6.0 7.0 5.5

6.0 5.0

5.0 4.5 4.0 4.0 3.5 3.0 31/01/2016 31/07/2016 31/01/2017 31/07/2017 31/01/2018 31/07/2018 3.0 31/01/2016 31/07/2016 31/01/2017 31/07/2017 31/01/2018 31/07/2018 2018E 2019E 2020E 2018E 2019E 2020E

Sparebank 1 SMN, NOK Sparebanken Vest, NOK

11.0 7.0

10.0 6.5

9.0 6.0 8.0 5.5 7.0

5.0 6.0

5.0 4.5

4.0 4.0 31/01/2016 31/07/2016 31/01/2017 31/07/2017 31/01/2018 31/07/2018 31/01/2016 31/07/2016 31/01/2017 31/07/2017 31/01/2018 31/07/2018 2018E 2019E 2020E 2018E 2019E 2020E

Sparebanken Møre, NOK Sparebanken Sør, NOK

35.0 12.0

30.0 11.0

25.0 10.0

9.0 20.0

8.0 15.0 7.0 10.0 6.0 5.0 5.0 0.0 31/01/2016 31/07/2016 31/01/2017 31/07/2017 31/01/2018 31/07/2018 4.0 31/01/2016 31/07/2016 31/01/2017 31/07/2017 31/01/2018 31/07/2018 2018E 2019E 2020E 2018E 2019E 2020E

7 SOURCE: THOMPSON REUTERS Shares performance and estimates revisions in summary: P/E multiples in mid-point of historical range

• Forward looking P/E in the mid of the historical range • 6-7% dividend yield and 4% earnings growth should bode for 10-11% return • Plus, could get 10-15% multiple expansion over time on top of this

8 SOURCE: COMPANY DATA AND NORDEA ESTIMATES Key value driver outlook: Interest margins look overall stable

9 Norwegian banks long-term net interest margin picture: Has stabilised - Mortgage spreads tighter than in

5.00% - Net interest margin 4.50% 4.00% 3.50% 3.00% 2.50%

2.00% Net interest margin interest Net 1.50% 1.00%

Nord-Norge SMN SR-Bank Møre

2.5% Norwegian banks - household and corporate margins 2.00 Swedish gross mortgage margin - FSA definition (%) 1.80 2.0% 1.60

1.40 1.5% 1.20

1.00

Axis Axis Title 1.0% 0.80

0.5% 0.60 0.40

0.0% 0.20

0.00

Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Oct-14 Oct-15 Oct-16 Oct-17

Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Feb-14 Feb-15 Feb-16 Feb-17 Feb-18

Dec-13 Aug-14 Dec-14 Aug-15 Dec-15 Aug-16 Dec-16 Aug-17 Dec-17 Aug-18 Household margin

SOURCE: COMPANY DATA AND NORDEA ESTIMATES 10 • More banks set to become SIFI: could create some capital uncertainty and support margins throughout 2019

Q3 2018 (proforma) capitalisation DNB Nord-Norge SMN Sør SR-Bank Vest CET 1 requirement ex.mngmnt buffer (adj. new Pillar 2) 15.3% 13.5% 13.9% 14.0% 13.7% 13.8% New SIFI buffer n.m. 2.0% 2.0% 2.0% 2.0% 2.0% Increased counter cyclical 0.35% 0.5% 0.5% 0.5% 0.5% 0.5% New (proforma) CET1 requirement 15.65% 16.0% 16.4% 16.5% 16.2% 16.3% CET1 ratio Q3 2018 16.5% 14.7% 14.9% 14.8% 14.7% 15.0% Q3 2018 - new requirement bef. mngmnt buffer (- is shortfall) 0.85% -1.3% -1.5% -1.7% -1.5% -1.3%

• Hope that removal of special Norwegian RWA floor will mitigate CET1 ratio requirement increase • Timing somewhat uncertain – What tangible equity ratio to run operations at meanwhile

11 SOURCE: COMPANY DATA, NORWEGIAN FSA AND NORDEA ESTIMATES Key value driver outlook: Costs in 2019 - A reason for concern?

12 Costs could disappoint amid optimistic forecasts – Example DNB

• DNB’s management has done an excellent job to improve the bank’s operational efficiency

• Optimism has reached new heights: Consensus foresees a 2019 cost/income ratio of 39% and an all-time-low 38% in 2020, down from 41% in 2018E

• Meanwhile, the essential staff reductions have come to a halt

13 SOURCE: NORDEA ESTIMATES DNB: Low-hanging fruit likely taken out

250 15,000 FTEs, Baltics and Vipps added back Branches in Norway

14,000 200 13,000 150 12,000

11,000 100

10,000 50 9,000

8,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E FTEs, Baltics and Vipps added back Branches in Norway

2% FTEs y/y growth, Baltics and Vipps adde back 70.0 % Cost / income ratio 65.0 % 0% 60.0 % Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 13 13 13 13 14 14 14 14 15 15 15 15 16 16 16 16 17 17 17 17 18 18 18 55.0 % -2% 50.0 % 45.0 % -4% 40.0 %

-6% 35.0 % 30.0 % -8% 25.0 % 20.0 % -10% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E Nord-Norge SMN SR-Bank Møre

-12% Vest Sparebanken Øst DNB FTEs y/y growth, Baltics and Vipps added back

14 SOURCE: COMPANY DATA AND NORDEA ESTIMATES DNB: Optimistic assumptions for costs

28,000 55% DNB - Cost /inome ratio expectations DNB - costs and revenues expectations 50% 60,000 48% 48% 50% 47% 26,000 43% 45% 42% 42% 42% 41% 55,000 24,000 40% 40% 40% 40% 41% 39% 22,000

38% 50,000 NOKm

35% NOKm C/I ratio

20,000 30% 45,000 25% 18,000

20% 40,000 16,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2016 2017 2018E 2019E 2020E Cost / income ratio consensus Cost / income ratio adj, Nordea estimate Revenues, consensus Costs, consensus

Costs and revenues expectations inflation adjusted 26,000 60,000 25,000

24,000 55,000 23,000

22,000

50,000

NOKm NOKm 21,000

45,000 20,000 19,000

40,000 18,000 2016 2017 2018E 2019E 2020E Revenues, consensus Costs, consensus Costs inflation adj., 2018E as base Costs, assuming constant C/I ratio amid business expansion

15 SOURCE: COMPANY DATA AND NORDEA ESTIMATES DNB and Norwegian banks: Severe staff inflationary pressure

9.0% Wage growth Norway 1,400 DNB - Adj saff cost per employee 11% 8.0% 1,200 9%

7.0% 1,000 7% 6.0% 800 5% 5.0%

600 y/y growth

4.0% NOK thousand 3% 400 3.0% 200 1% Wage growth, annual growth, Wage 2.0% 0 -1% 1.0% 2011 2012 2013 2014 2015 2016 2017 H118

0.0% Adj. avg. staff cost per FTE (Baltics/Vipps added back) y/y growth (right) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Bank and Industry sector

Costs distribution Q2 2018 Staff costs 55%

Depreciations 9%

Other expenses 17%

Fees and IT expenses 19%

16 SOURCE: COMPANY DATA AND NORDEA ESTIMATES Fintech – necessary investments but difficult to see profit accretive effects

Mobile Payments • Norway: Vipps used by largely all banks – Banks also using Apple Pay and Google Pay • Sweden: Swish • : MobilePay • Generic strategies PSD2 (payment and information services) • Opens up for third party players on payments/information • Set to be implemented in Norwegian legislation during 2019 • Generic strategies expected Mobile phone sole distribution platform for country-wide growth • Sparebanken Vest

17 SOURCE: COMPANY DATA AND NORDEA ESTIMATES Whey are investors getting scared from time to time?

18 Nordic banks longer-term picture: It’s all about a fantastic lending growth…

20% Total lending growth

15%

10%

y/y growth y/y 5%

0%

Jul-06 Jul-13

Oct-04 Apr-08 Oct-11 Apr-15

Jan-03 Jun-09 Jan-10 Jun-16 Jan-17

Mar-04 Feb-07 Mar-11 Feb-14 Mar-18

Nov-08 Aug-03 Dec-05 Sep-07 Aug-10 Dec-12 Sep-14 Nov-15 Aug-17

May-05 May-12 -5% Sweden Norway Denmark

25% Corporate lending growth 20% Household lending growth

20% 15% 15%

10% 10%

5%

y/y growth y/y 5% y7y growth y7y

0%

0%

Jul-06 Jul-13

Oct-04 Apr-08 Oct-11 Apr-15

Jun-09 Jan-10 Jun-16 Jan-17

-5% Jan-03

Mar-04 Feb-07 Mar-11 Feb-14 Mar-18

Aug-03 Dec-05 Sep-07 Nov-08 Aug-10 Dec-12 Sep-14 Nov-15 Aug-17

May-12 May-05

Jul-06 Jul-13

Oct-04 Apr-08 Oct-11 Apr-15

Jan-03 Jun-09 Jan-10 Jun-16 Jan-17

Mar-04 Feb-07 Mar-11 Feb-14 Mar-18

Aug-03 Dec-05 Sep-07 Nov-08 Aug-10 Dec-12 Sep-14 Nov-15 Aug-17

May-05 May-12 -10% -5% Sweden Norway Finland Denmark Sweden Norway Finland Denmark

SOURCE: STATISTICS NORWAY, SWEDEN, DENMARK FINLAND 19 • Nordic banks longer-term picture: …and increasing housing prices

260 Housing prices Norway

240

220

200

180

160

140

120

100

Jul/07 Jul/12 Jul/17

Apr/06 Oct/08 Apr/11 Oct/13 Apr/16

Jun/05 Jan/10 Jun/10 Jan/15 Jun/15

Feb/07 Mar/09 Feb/12 Mar/14 Feb/17

Sep/16 Nov/05 Sep/06 Dec/07 Aug/09 Nov/10 Sep/11 Dec/12 Aug/14 Nov/15 Dec/17

May/08 May/13 May/18 Norway Total Norway Flats Norway Houses Total

Housing prices Sweden (Indexed) 800 Housing prices Denmark

300 700 600 250 500

400 200 300

150 200

100 100

0

Jul/05 Jul/06 Jul/07 Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14 Jul/15 Jul/16 Jul/17 Jul/18

Jan/15 Jan/05 Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/16 Jan/17 Jan/18

Jul/00 Jul/95 Jul/05 Jul/10 Jul/15

Jan/93 Jan/98 Jan/03 Jan/08 Jan/13 Jan/18

Mar/92 Mar/97 Mar/02 Mar/07 Mar/12 Mar/17

Nov/93 Nov/98 Nov/03 Nov/08 Nov/13

Sep/94 Sep/99 Sep/04 Sep/09 Sep/14

May/11 May/96 May/01 May/06 May/16 Total Sweden Flats Sweden Flats Stockholm Houses Total Houses Houses Sweden Houses Stockholm Source: HOX

SOURCE: HOX, NEF 20 • DNB, Danske Bank and Handelsbanken lending exposures

Households DNB lending, NOK 1,534bn SEB lending, SEK 1,498bn 38% Personal customers 53%

Other 5% Other 7% Trade Electricity, gas and Housing cooperative Technology, media 3% water supply associations and telecom 3% 4% 2% Shipping Mining, oil and gas 4% Argiculture,extraction forestry Services and2% fishing 3% Public sector 1% Manufacturing Real estate 2% 6% Oil, gas and offshore Residential property Business and management Manufacturing Wholesale and retail 3% 6% Constructionhousehold services 17% 3% 6% Fishing, fish farming Power and Commercial real 1% 9% Healthcare Transportation and farming renewables estate Shipping 1% 3% 2% 2% 11% 3%

Swedbank lending, SEK 1,560bn Nordea lending, EUR 280bn Other, public and Household Private mortgage 58% 59% organisations Other corporate 2% 2% Health care Information and Professional IT software, 0% Shipping and communication Utilities services hardware and offshore 1% 2% 2% services 2% Transportation Food, agriculture 1% 1% 4% Retail Public sector and Media and leisure Retail trade Construction 2% utilities 1% 3% 1% 1% Consumer durables Shipping and 1% offshore ManufacturingAgriculture, forestry, 3% Construction and 3% fishing Real estate TransportationengineeringIndustrial services 4% management and 1% 2% 4% investment Property Tenant owner Energy (oil, gas etc) 16% management associations 1% 15% 7%

21 SOURCE: COMPANY DATA AND NORDEA ESTIMATES Norwegian banks lending exposure

22 • SOURCE: COMPANY DATA AND NORDEA ESTIMATES Source: Company data and Nordea Markets Norwegian banks outlook summary and conclusion

23 Norwegian banks’ outlook is bright in strong economy

• Volumes keeping up for household mortgages and SMEs – Single digit NII increase • Set for healthy interest margins – Pressure due to competition, but strong intentions to increase Household lending prices and some capital uncertainty set to keep discipline up • Costs could start to creep up and challenge EPS forecasts • Loan losses set to be supported by benign mainland Norwegian economy – Possible second round restructuring in offshore • Sale of part of Sp. 1 non-life insurance (newco) to DNB could give e.o. divdends • Real estate markets essential for risk on / risk off in sector

1.60% Norwegian banks - Loan loss ratio since 1994 1.40% 1.20% 1.00% 0.95% 0.80% 0.62% 0.69% 0.60% 0.40% 0.20% 0.24% 0.23% 0.00% 0.02% -0.20% -0.40% -0.60% Nord-Norge SMN SR-Bank Møre Vest DNB Sparebanken Øst

24 SOURCE: COMPANY DATA AND NORDEA ESTIMATES Norwegian banks: attractive valuation points to 10-11% 12-month return plus potential multiple expansion

NORWEGIAN BANKS: PEER GROUP VALUATION EPS P/E adj. P/TBV ROTBV Yield Company MC (NOKm)Price Rating 2017 2018E 2019E 2017 2018E 2019E 2017 2018E 2019E 2017 2018E 2019E 2018E 2019E Sparebank 1 SR-Bank 22,250 92 HOLD 8.2 8.9 11.0 10.7 10.5 9.9 1.12 1.11 1.03 10.9% 10.9% 10.8% 5.0% 6.5% Sparebank 1 SMN 10,679 87 BUY 8.8 10.3 11.9 9.3 9.2 8.9 1.03 1.01 0.91 11.7% 11.3% 10.8% 6.1% 8.1% Sparebank 1 Nord-Norge 6,244 66 BUY 6.7 6.9 9.0 9.4 9.7 9.6 1.15 1.16 1.03 12.7% 12.2% 11.4% 5.5% 7.6% Sparebanken Vest 3,261 54 BUY 5.5 6.2 6.2 9.9 8.7 8.6 1.10 1.02 0.92 11.6% 12.4% 11.2% 4.6% 5.2% Sparebanken Møre 2,798 285 BUY 27.6 30.2 32.5 9.5 9.4 8.8 0.92 0.94 0.89 9.9% 10.3% 10.5% 5.5% 5.6% Sparebanken Sør 1,629 96 HOLD 11.2 10.5 10.4 9.9 9.7 9.2 0.93 0.88 0.82 9.8% 9.1% 9.3% 5.6% 5.6% Sparebanken Øst 1,145 57 HOLD 5.8 7.0 5.8 9.5 10.3 9.8 0.93 0.90 0.84 10.1% 9.0% 8.8% 7.5% 7.5% DNB 247,202 152 SELL 12.8 14.1 14.2 11.7 10.7 10.7 1.27 1.22 1.16 11.1% 11.6% 11.2% 5.0% 5.3% Average ex. DNB 9.7x 9.6x 9.3x 1.0x 1.0x 0.9x 11.0% 10.8% 10.4% 5.7% 6.6%

NORWEGIAN BANKS: P/TBV VERSUS ROTBV

1.3x y = 7.3891x + 0.2267 R² = 0.5647 DNB 1.2x N-Nord 1.1x SR

1.0x SMN Vest Møre 0.9x ØstSør

P/TBV 2018E P/TBV 0.8x

0.7x

0.6x

0.5x 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5% 13.0% ROTBV 2018E

25 • Source: Nordea estimates Thank you! Thomas Svendsen, Director, Financials +47 24015003

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