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Kaupthing Bank Kaupthing Bank - COMPANY UPDATE - HOLD Rating Summary and Conclusions Equity value 223,7 bn.ISK Kaupthing Bank acquires FIH Price 407,9 Kaupthing Bank (KB banki) has reached an agreement with Forenings Sparbanken (Swedbank) to Closing price 23.06.2004 429,5 purchase FI Holding, the holding company of the Danish corporate bank FIH. The purchase price amounts to ISK 84 billion (EUR 1,000 million), in addition to which Swedbank will retain part of Contents FIH's own equity. The acquisition will be financed with the issue of new share capital to holders of pre-emptive rights, as well as through subordinated debt. The price-to-book ratio for the Summary and Conclusions.........................................................1 transaction is 1.6. Kaupthing Bank acquires FIH....................................................2 Payment..................................................................................2 FIH is the third-largest bank in Danmark, with total assets close to ISK 800 bn at the end of Q1. It Financing.........................................................................2 was established in 1954 by the Danish state to encourage growth and development of Danish FIH...............................................................................................2 industry. FIH's activities are almost exclusively corporate lending. It holds a 17% share of the Danish Effect on group operations and value...................................3 corporate market and has around 5,000 customers, half of whom have been dealing with the bank Improved credit rating......................................................3 for 6 years or longer. FIH is a very well managed bank. Its cost ratio is low, loan losses at an absolute Changed capital adequacy objective...........................4 minimum and its loan-loss provision very healthy. Hidden asset in loan-loss provisions............................4 Possibilities for growth.....................................................4 The FIH aquisition strengthens Kaupthings income base What lies ahaid for Kaupthing Bank.......................................4 Although a comparison of key indicators does not suggest that FIH was purchased below its value, Required return on equity..........................................................5 the acquisition clearly opens up opportunities for Kaupthing Bank which increase the group's value. Valuation assumptions...............................................................6 Up until now, FIH has directed its efforts almost exclusively at traditional long-term corporate Conclusions of the value assessment....................................7 lending, with the result that it has extensive opportunities to offer these customers additional Appendix - assumptions and other data...............................8 products, such as various forms of short-term financing, currency transactions and advisory services. Appendix - sensitivity analysis................................................9 Furthermore, Kaupthing Bank has gotten considerable attention in connection to the acquisition, which quite possibly could mean increased activity in other areas. In our estimation, there are SWOT considerable synergies to be gained on the income side and it should not be long before these Strength become visible. Solid image and successful branding development Improved credit rating Advanced product innovation It has already been announced that Moody's is reviewing Kaupthing Bank's credit rating with an Well coordinated and strong management team eye to raising it in the wake of the FIH acquisition. Last December, Moody's assessed the outlook Weakness for Kaupthing Bank as positive, so some improvement in the group's credit rating must be expected. Limited growth potential in the Icelandic market Íslandsbanki has the same credit rating as FIH, with the exception of the assessment of financial Cross ownership between the bank and it´s major strength and it is practically certain that Kaupthing Bank's rating will be at least as good. A higher shareholders rating will lower the cost of financing. The group's interest rate margin should therefor drop relatively Opportunities less in the coming years than that of the other Icelandic banks. Growth potential abroad Changed capital adequacy objective Increased overseas operations allow for greater scope and gives the bank a better position Up until now Kaupthing Bank has aimed at keeping its capital ratio above 12.0% and Tier 1 capital regarding larger investment and financing projects above 9.0%. Following the FIH acquisition, the bank's capital objective has been revised; from now Financial strength allows for larger corporate on the capital ratio will be over 11.0% and Tier 1 capital above 8.0%. This allows for increased projects than other Icelandic banks can undertake dividents or further expansion of the group. FIH's loan-loss provisions is considerably higher than Rationalization possibilities, in particular in Iceland those of Icelandic commercial banks'. FIH's loan-loss provisions could thus be described as a hidden Threats asset. Dispersed operations and recent fast growth could Valuation compromise overall coordination of operations Kaupthing Bank is assessed using discounted cash-flow analysis (DCF) based on Kaupthing Bank's Narrow margins on corporate lending. Should operations, on the one hand, and that of FIH on the other. In addition, estimated hidden assets in there be an increase in loan losses, the income from corporate lending could be wiped out the holding companies Meiður and Baugur Group are added to the cash flow, together with funding tied up on account of Singer & Friedlander. Based on our assumptions, the value of Kaupthing Bank is ISK 223.7 bn, which means a valuation share price of 407.9. It should be borne in mind that this includes the issuing of 110 million new shares at a share price of 364. The price-to-book ratio is 2.0, based on the changes in its capital structure and equity which we anticipate. Analyst: The final valuation price is especially sensitive to assumptions on interest rate margin. Should the long-term interest rate margin drop by 0.1%, the resulting valuation price would be 381.1, while Katrín Friðriksdóttir S: +354 410 7386 if the margin were to rise by 0.1% the outcome would be 440.6. Sensitivity analyses is shown on [email protected] p. 10. The closing price for Kaupthing Bank's shares yesterday, 24 June, was 429.5, which is a rise of 22.4% from the announcement of the acquisition of FIH. Landsbanki Research thus advises Head of Research investors to hold their shares in Kaupthing Bank. Edda Rós Karlsdóttir S: + 354 410 7381 [email protected] Landsbanki Research - Hafnarstræti 5 - 155 Reykjavík - s. + 354 410 7300 - www.landsbanki.is LANDSBANKI RESEARCH JUNE 24th 2004 Page 2 Kaupthing Bank HOLD Kaupthing Bank acquires FIH Kaupthing Bank (KB banki) has reached an agreement with Forenings Sparbanken (Swedbank) to purchase FI Holding, the holding company of the Danish corporate bank FIH. The purchase price amounts to ISK 84 billion (EUR 1,000 million), in addition to which Swedbank will retain part of FIH's own equity. The acquisition will be financed with the issue of new capital to holders of pre-emptive rights, as well as through subordinated debt. Payments FI Holding's assets are comprised of 99.93% of the capital of FIH, plus around ISK 8 bn in cash or cash equivalents, which has accumulated in part as a result of dividends paid by FIH. Since FIH's equity was ISK 73 bn at the end of Q1, this makes the total assets of FI Holding around ISK 81 bn. Before the contract between Kaupthing Bank and Swedbank is finally settled, ISK The price-to-book ratio for the 20 bn of FIH's equity will be paid out to Swedbank, in addition to which Swedbank will retain transaction is 1.6 FI Holding's cash assets. For the remaining ISK 53 billion of FIH's equity, Kaupthing Bank will pay ISK 84 billion. The price-to-book ratio for the transaction is thus 1.6. Financing The acquisition will be financed with the issue of new capital to holders of pre-emptive rights, as well as through subordinated loans. The issue of a subordinated bond in the amount of ISK 39.3 bn (EUR 450 million) has already been arranged. Some ISK 13 bn of the total amount (EUR 150 million) is considered Tier 1 capital. According to Kaupthing Bank's own presentation of 14 June 2004, its intent is to issue a subordinated bond in the amount of ISK 33 bn (EUR 381 million) plus ISK 40 bn of new capital. The difference between this and the purchase price (ISK 11 bn) would have had to be made up out of profits earned prior to the final settlement of the contract (scheduled for September). Since the amount of subordinated debt is higher than previously indicated, the balance to be made up is less. A motion will be made to a shareholders' meeting on 5 July this year to approve increasing Kaupthing Bank's share capital by 220 million shares, or by a nominal value of ISK 2.2 bn. Shareholders will have pre-emptive rights to purchase half of these shares, but will waive their rights to the other half. The authorisation will be valid until 10 January 2006. Landsbanki Research expects 110 million new shares to be issued due to the purchase of FIH, with the rest of the amount left unutilised for the present. The capital increase is assumed to amount to a market value by ISK 40 bn, which will mean an issue share price of 364. FIH FIH is a corporate bank with roots going back to 1958. It was established by the Danish state to encourage the growth and development of Danish industry. FIH's activities are almost exclusively corporate lending, especially medium and long-term credit. It holds a 17% share of the Danish corporate market, making it the third-largest operator in this market. The Bank's head office is in Copenhagen, in addition to which it has four local offices in Jutland. Of its 174 employees, 135 are located in Copenhagen. FIH has around 4,850 customers The Bank has around 4,850 customers, falling into one of two groups Core Customer Segment: approx.
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