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Eik Banki DKK 82 28 May 2009 a Bank Refreshingly Free from Major Problems – Initiation of Coverage

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Eik Banki DKK 82 28 May 2009 a Bank Refreshingly Free from Major Problems – Initiation of Coverage Leaders in Corporate Research Eik Banki DKK 82 28 May 2009 A Bank Refreshingly Free From Major Problems – Initiation of Coverage Share Price: DKK 82 350 FO-EIK-C SE.C O Eik Banki P/F Eik is a small bank by international standards, but it accounts for .UKX rebased to FO-EIK-CSE.CO 300 50% of the Faroese market and it is a full service bank, taking deposits and advancing commercial and domestic loans and 250 mortgages. It has avoided most of the problems that have plagued 200 its larger competitors. Its loans to deposits ratio is conservative. Both its full year 2008 and its Q1 2009 results statements have 150 been refreshingly free from major problems. It is one of the few 100 banks not to have had to raise fresh equity capital during the past 50 year. Q2-2008 Q3-2008 Q4-2008 Q1-2009 Source: Fidessa 12m High: DKK 328 Eik Banki will take advantage of the Danish Government’s Credit 12m Low: DKK 78 Package II for the banking community. This will boost its solvency Market Cap: DKK 667m (€90m) and core capital ratios, at a short term cost to profits and dividends Shares in Issue: 8.13m but without requiring any equity dilution. Post the Package, Eik Banki has solvency and Core Capital ratios that should give Core Capital: 7% (group) 13.1% Eik Banki P/F comfort to depositors and shareholders alike. both before Credit Package II. Solvency: 10% (13.4% after Government Because of Eik’s market position in the Faroe Islands its shares Credit Package II). 17.4% pre-package for Eik give exposure to the Faroese economy in general. In Denmark Banki P/F the bank is exposed to the interbank market and lending against Nav/share: DKK 203 residential property and corporate real estate. The Faroe Islands is EPIC Code: FO-EIK CSE, Copenhagen a self-Governing territory within Denmark. The country has been FO-EIK, Iceland SEDOL No.: B28ZYK8 sensibly run, experiencing none of the difficulties of its neighbour ISIN No.: FO 0005702340 Iceland. Sector: Regional Banks Market: Nasdaq OMX Copenhagen & Iceland We believe that future asset write downs and fair value Investor Relations: Finn Danberg, Director, adjustments will be modest, and that the company will return to CFO +298 548 610 profit in 2010 after a decent result in full year 2009. Websites: www.eikbank.com, www.eik.fo Description: Eik Banki is the largest bank in The current share price is less than 20% of its peak, and Eik Banki the Faroe Islands. It provides loans to Faroese Group is trading on less than 2X peak earnings, 6X the earnings businesses, mortgages on Faroese housing and consistently produced in the earlier years of the decade. The has an important internet banking activity in shares are also trading at only 40% of their net asset value. Denmark. Analyst: Thomas Dam, Spf. DamCo, Torshavn Eik Banki tends to be overlooked by buyside sector specialists Tel: +298 59111, +44 020 7929 3399 because of its remote physical location, the fact that it has not Email: [email protected]; previously attracted any investment research, and has no ratings [email protected] on Moody’s or Standard & Poors. Yet it makes a very interesting and, in our opinion, a relatively safe addition to the investment choice in this sector. Declared Adjusted Adjusted Adjusted Total Divi Yield Y/E Pre-Tax After-Tax After-Tax P/E Income* Profit Profit** EPS** ratio December DKKm DKKm DKKm DKK DKK % 2007A 676 465 310 31.2 2.6 10.67 13.0 2008A 796 -416 384 36.8 2.2 0 - 2009E 661 69 249 23.8 3.4 0 - 2010E 743 313 323 31.0 2.6 0 - * Net interest income + fees etc ** Before impairments and market value adjustments Hardman & Co. Leaders in Corporate Research 1 Tel: +44(0)20 7929 3399 www.hardmanandco.com Leaders in Corporate Research Eik Banki 28 May 2009 The Faroese and Danish Economy Economic Conditions In common with every other country in Europe, economic growth slowed in Denmark in 2008 because of the financial crisis, a decline in activity in the housing market and lower consumer spending. This followed several years of strong growth. The Faroe Islands are one of the three constituents of the Kingdom of Denmark, the others being Greenland and the Danish mainland. The global economic slowdown also affected the Faroe Islands. There has been a reduction of activity in the housing market, and consumers have been holding back on spending due to the uncertain economic outlook. The largest single industry in the Faroe Islands – fishing – has also experienced challenging conditions. There has been a reduction in the stock of fish in Faroese waters, especially cod and haddock, combined with lower market prices. The high oil prices in 2008 also caused difficulties for the Faroes as a whole and for the fishing industry in particular. While there has been a significant correction in the price of crude, the market price of cod and haddock remains at the bare minimum necessary for parts of the fishing industry to operate. Unemployment Increases in unemployment have been reported both in Denmark and the Faroe Islands – Unemployment see figure 1. The rate of unemployment has increased in the Faroe Islands from an will increase but average of 1.4% in 2008 up to 3.4% at the end of April 2009. In Denmark the rate has levels are not increased from an average of 2.3% in 2008 up to 3.2% in March 2009. Unemployment is extreme estimated to increase by up to 4% by end 2009 in the Faroe Islands, and the Danish Central Bank has estimated that unemployment in Denmark will likewise be almost 4% in 2009. However, these levels of unemployment are not extreme when compared to 2003-4. Figure 1 The Housing Market House price trends in Denmark and the Faroe Islands have exhibited similar trends. Prices in both countries have followed the general European (and North American) trend over the past eighteen months and have been weaker. From their peak in mid 2007 the prices of one-family homes and holiday cottages in Denmark have dropped by 13% and 15% respectively. The prices of apartments started to fall in mid 2006, and have fallen about 24%. These figures are shown in figure 2 and are up to and including 2008. The statistics also show that the number of housing market transactions has fallen by more then 40% compared to one year ago. Hardman & Co. Leaders in Corporate Research 2 Tel: +44(0)20 7929 3399 www.hardmanandco.com Leaders in Corporate Research Eik Banki 28 May 2009 Figure 2 The statistics for the Faroese housing market are reported differently to those on the mainland. Faroese house statistics are grouped by province, towns and the capital. The trends are shown in figure 3. The average Faroese house owner is much less indebted than the average Danish house owner Figure 3 The Faroe Islands experienced an economic crisis in the early ‘nineties, and the effects of this can be seen clearly in the house price graph, Figure 3. One consequence of this was that Faroese house prices started the current decade at a low level compared to those in Denmark, and were therefore probably less vulnerable when they peaked in 2007. When housing prices from Q1 2009 are compared with the corresponding prices from mid 2007, prices in the province and the capital Torshavn have dropped by 10% but prices in the towns have dropped by 25%. The number of transactions in the Faroese housing market has not fallen by as much as in Denmark – only by 12%. The drop in the number of transactions in the housing market has been a feature common to every European country, and reflects uncertainty in the direction of the market. Buyers hope that prices will go further down and sellers wait because they hope prices will increase. We believe that the economy will need to worsen considerably for there to be a further major drop in house prices. When comparing the housing market in Denmark and the Faroe Islands it is necessary to bear in mind that the Faroese house owner is much less indebted than the Danish house owner. Comparing the debt of house owners and organisations to GDP is one indicator of this difference. Hardman & Co. Leaders in Corporate Research 3 Tel: +44(0)20 7929 3399 www.hardmanandco.com Leaders in Corporate Research Eik Banki 28 May 2009 Debt in houses compared to GDP Faroe Islands 72% Denmark 121% Sweden 71% Germany 67% Figure 4 It is therefore not possible to compare directly the asset quality of banks who are mainly exposed to the Danish house market and banks that are also exposed to other markets. Figure 4 shows that the Faroese housing market is in some respects more comparable to the housing markets in Sweden and Germany than it is to that of Denmark. The Gross Domestic Product The GDP of the Faroe Islands is estimated to fall 3-5% in 2009 and 1-6% in 2010. In Denmark the Central Bank has estimated the GDP of Denmark to fall 1.1% in 2009 and increase by 1.0% in 2010. The Faroese economy tends to be more volatile than that of Denmark, and also less predictable, which is why the range of forecasts for the Faroes in both years is so wide, while the Danish Central Bank feels confident enough to be able to predict Danish trends to within one decimal point.
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