Kaupthing - COMPANY UPDATE - HOLD Rating Summary and Conclusions Equity value 223,7 bn.ISK 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 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 . 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 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 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 katrin.fridriksdottir@.is 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]

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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. 4,600 small and medium-size enterprises (SMEs), with turnover of ISK 50-2,500 million annually. The average maturity of their loans is 4.3 years; Corporate Customer Segment: some 250 companies, which are among Denmark's largest corporations. A wider range of services is offered to these companies, including more complex financial products than traditional loans, advisory service, etc. The average maturity of their loans is 2.0 years. FIH emphasises long-term connections with its customers, half of whom have been dealing with the bank for 6 years or longer. FIH's income comes primarily from its loans. Total loans at year- end 2003 amounted to almost ISK 700 bn, around 65% of which were at fixed interest rates. The total loan portfolio is comprised of 13,000 loans, with some 2,500 new loans granted on Around 67% of FIH´s loans are to average each year. Emphasis has been primarily on manufacturing enterprises and property manufacturing enterprises and administration; around 67% of its loans are to these sectors. About half of the loans are for property administration the equivalent of ISK 1,200 million or less.

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Kaupthing Bank HOLD

FIH is a very well managed bank. Its cost ratio is low, loan losses at an absolute minimum and its loan-loss provision very healthy. The bank's capital adequacy has been very high and its return on equity (ROE) quite satisfactory during the past decade, especially after taking into consideration the fact that the bank has actually been over-capitalised and an authorisation to issue subordinated debt only partly utilised.

Effect on group operations and value Kaupthing Bank's acquisition of FIH will affect various aspects of the operations and the value of the merged bank. Although a comparison of key indicators does not suggest that FIH was purchased below its value, the acquisition clearly opens up opportunities for Kaupthing Bank which increase the group's value. FIH's total assets were close to ISK 800 bn at the end of Q1, as compared to ISK 600 bn for Kaupthing Bank. FIH reduces the group´s overall risk An income base of the type FIH brings reduces the group's overall risk. The acquisition increases, for instance, the proportion of net interest income from one-third to one-half of total income (see Figure below). This in turn reduces fluctuations in performance, reduces the need to tie up equity and can result in a higher credit rating. Income Breakdown Kaupthing Bank 2003 New Group Proforma

Net interest income Net Commission Income Net Trading Income Other Income

Improved credit rating Prior to its merger with Búnaðarbanki Íslands in May 2003, Kaupthing did not have a credit rating. Búnaðarbanki had an A3 rating for long-term obligations and P-1 for short-term obligations from Moody's. Following the merger, Moody's confirmed this rating for the merged company, and subsequently raised it last December. The most recent interim financial statements clearly reflect Kaupthing Bank's improved financing, as its interest expense has dropped considerably. This is the result of both low interest rate levels globally and debt refinancing within the EMTN programme. It has already been announced that Moody's is reviewing Kaupthing Bank's credit rating with an eye to raising it in the wake of the FIH acquisition. This supports our assessment that the merged bank is less risky. FIH has a higher rating than Kaupthing Bank, but here the size and strength of its previous parent company, Swedbank, is also a factor. Last December, Moody's It is practically certain that assessed the outlook for Kaupthing Bank as positive, so some improvement in the group's credit Kaupthing Bank´s rating will be rating must be expected. Íslandsbanki has the same credit rating as FIH, with the exception of raised the assessment of financial strength (see Table) and it is practically certain that Kaupthing Bank's rating will be at least as good. Credit Rating

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Kaupthing Bank HOLD

A higher the rating will lower the cost of financing. An improvement should counteract, to some extent, the impact of rising global interest rates on interest expense. This, together with a growing proportion of loans with high interest-rate margin (such as mezzanine financing) means we can expect the group's interest rate margin to drop relatively less in the coming years than that of the other Icelandic banks. Changed capital adequacy objective Up until now Kaupthing Bank has set itself tighter restrictions on capital adequacy than those applied by the other Icelandic banks. This is only normal in view of its rapid growth and greater Kaupthing Bank has revised fluctuations in income. The bank has aimed at keeping its capital ratio above 12.0% and Tier 1 capital above 9.0%. Following the FIH acquisition, the bank's capital adequacy objective has its capital adequacy objective been revised; from now on the capital ratio will be over 11.0% and Tier 1 capital above 8.0%. down 1%, to 11% Hidden asset in loan-loss provisions FIH's loan-loss provisions are almost three times higher than its non-performing loans, and well above its cumulative loan-losses of the past decade. Such a high balance is the result of both historical and taxation factors, but Danish banks generally have considerably higher loan-loss provisions than their Icelandic counterparts. Figures from Finanstilsynet, the Danish financial supervisory authority, show however that the ratio of loan-loss provisions to non-performing loans dropped substantially from 2000 to year-end 2002. The authority has not yet published its summary for 2003. At year-end 2003, FIH's loan-loss provisions amounted to 260% of its non-performing assets, while for the comparable figure for Kaupthing Bank was around 70%. With a view to the situation of Icelandic commercial banks' loan-loss provisions, the merged bank can be expected to reduce its loan-loss contributions substantially in the next year or two. FIH's loan-loss provisions could thus be described as a hidden asset. Possibilities for growth Up until now, FIH has directed its efforts almost exclusively at traditional long-term corporate lending, as mentioned above, with the result that it has extensive opportunities to offer these customers additional products, such as various forms of short-term financing, currency transactions Considerable synergies on the income and advisory services. Furthermore, the acquisition has focused considerable attention on side likely to materialize soon Kaupthing Bank, which very possibly could mean increased activity in other areas. In our estimation, there are considerable synergies to be gained on the income side and it should not be long before these become visible.

What lies ahead for Kaupthing Bank? Kaupthing Bank has operations in ten countries, including comprehensive commercial and investment banking activities in four countries: Iceland, Denmark, and . and the UK are other important and growing markets. In the autumn of 2003, Kaupthing Bank acquired a 30.35% share in the Finnish investment company Norvestia. Since a large portion of this were A class shares, which entail more voting The group´s position in Finland is rights than common shares, the holding confers 54.4% of voting rights in the company. This considerably strenghtened thus comprises a dominant holding, but in Finland there is no take-over obligation until a party has 67% of voting rights. As a result, Kaupthing Bank may utilise all Norvestia's equity. This has created a basis for the group's further growth, in addition to which Kaupthing Bank's position in Finland is considerably strengthened. Prior to this, the bank owned the Finnish securities firm Sofi and a banking licence has now been sought for Kaupthing Sofi in Finland. Sofi has specialised in asset management, brokering and corporate finance. There are possibilities for co-operation between the companies. Norvestia can direct its business to Sofi, e.g. for securities brokering, while Norvestia's asset portfolio also offers possibilities in connection with advisory services, financing, mergers and take-overs, etc. In the UK, the asset management company NBS has recently been established with its first task to develop a specialised bond and loan portfolio for Kaupthing Bank. In addition, the company aims at managing specialised funds for third parties. NBS aims at having assets under management equivalent to ISK 180 bn (EUR 2,000 million) within two years' time.

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Kaupthing Bank HOLD

The biggest question as far as Kaupthing Bank is concerned is what will happen to its 19.5% stake in the British merchant bank Singer & Friedlander (SFL). Kaupthing Bank began acquiring Uncertainty regarding the 19.5% shares in SFL last autumn, and had accumulated a holding of 9.5% by the beginning of November. stake in Singer & Friedlander At the end of February this year, the bank increased its holding to the present 19.5%, while announcing concurrently that it had no take-over intentions for the moment. According to the rules of the Stock Exchange, Kaupthing Bank is bound by this announcement for the following six months, or until the end of August. Opinions are divided among both Icelandic and foreign traders as to Kaupthing Bank's intentions. In the UK, a take-over obligation arises with a 30% holding, but taking over the bank need not be Kaupthing Bank's intention. It may well plan to sell its holding to a third party. SFL's current market value is around ISK 53 bn (GBP 400 million). The bank's equity is almost Singer & Friedlander´s capital ratio ISK 47 bn (GBP 354 million). It is financially very strong and its capital ratio is 21.1%, despite is 21.1% paying dividends amounting to ISK 10 bn (GBP 75 million) last May. SFL has declared its intention to expand, and to this end the bank took a subordinated loan of almost ISK 7 bn (GBP 50 million) last October. A low price-to-book ratio and high capital ratio makes SFL an attractive investment option for another bank. SFL's share price has dropped in recent months, which is surprising. The decrease could be interpreted to mean that investors do not believe a take-over is on the horizon. Based on SFL's current market share price, Kaupthing Bank could actually finance a take-over of the bank to a large extent with its own funds. It would not need to issue much share capital to finance the acquisition, which would quite likely raise the valuation price of shares in Kaupthing Bank. Since it is not yet clear whether Kaupthing Bank intends to take over SFL, no attempt is made Kaupthing Bank will not hold it´s here to include possible synergies in our assessment of the former. On the other hand, it can current stake in SFL indefinitely be stated fairly certainly that it is not Kaupthing Bank's intention to keep such a holding indefinitely. Since this is a holding of over 10% in a financial institution, the holding, a total of ISK 13 bn, is deducted from calculation of Kaupthing Bank's capital adequacy. If the holding is sold, equity calculated in accordance to the Act on Financial Undertakings would increase by this amount, which in turn would enable Kaupthing Bank to raise its dividend accordingly. The holding in SFL would thus return at least this value to Kaupthing Bank, and the above amount is thus added to the valuation.

Required return on equity In determining a required ROE, Landsbanki Research bases its calculations on the capital asset pricing method (CAPM), plus an additional two items, a company premium (FRT) and small cap premium (SC), as shown in the equation below: E(R) = Rf + ß * (E[Rm] - Rf) + FRT + SC Risk-free interest rates (Rf) are based on yields on 10-year, non-indexed government bonds in the currencies which form the bank's net cash flow. Kaupthing Bank's interest and profit formation by region is available, based on its 2003 results. This is, however, altered to include Bakkavör Group's convertible bond with domestic cash flow, since the GBP/ISK conversion rate of the bond is fixed. According to the above, just over 40% of cash flow is in ISK and almost 50% is in DKK. The reduced weighting of Icelandic interest rates lowers the risk-free rate from 6.86% in the last valuation to 5.90% now. European betas (ß) are used as reference, with a weighting combining commercial banks and investment banks. Commercial banking activities now account for half of the bank's profit. In addition the beta is weighted to reflect the bank's capital structure. The resulting beta for Kaupthing Bank is 0.9, down from the 0.99 of the last valuation. The market premium (Rm) is calculated based on the historical return of US shares in excess of government bond returns. The company premium (FRT) is comprised of currency risk, political risk and special operating risk; in our estimation there is no reason to raise the required rate of return for Kaupthing Bank due to these factors. A small cap premium (SC) of 0.5% is added, which is the smallest size premium we use for companies listed on ICEX. Although Kaupthing Bank is also listed on Stockholmsbörsen, the Swedish stock exchange, by far the greatest share of trading in the company's shares takes

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Kaupthing Bank HOLD

equivalent of 81% of the company's shares has changed hands in a single year. Turnover velocity, calculated on the basis of total number of shares issued, was 0.77 here in Iceland and only 0.04 in Stockholm. Only 4.37% of the company's shares are listed in Stockholm, or a nominal value of ISK 19,261. Based on the total number of shares listed in Sweden, the turnover velocity there Kaupthing Bank´s shares have been this past year is thus 0.92. selected for the Attract40 index of Kaupthing Bank's shares have been selected for the Attract40 index of the Stockholm O List the Stockholm O list from 1 July from 1 July 2004 to 31 December 2004, when the index will be reviewed. The stated intention 2004 of the Attract40 index is to facilitate both foreign and Swedish investors in finding interesting companies listed on the exchange. Selection is made on the basis of turnover statistics for company shares during the past six months. Turnover in Kaupthing Bank's shares can be expected to increase somewhat following their inclusion on the Attract40 list, although the effect is not visible as yet. We do not expect a major impact, since the Attract40 segment appears to be used very little if at all by funds in their selection. Should turnover of Kaupthing Bank's shares on Stockholmsbörsen increase substantially, we would consider reviewing the small cap premium, or even omitting it. The total required return on equity made of Kaupthing Bank is thus 10.72%, decreasing from the 12.01% of our last valuation.

Valuation assumptions Kaupthing Bank is assessed using discounted cash-flow analysis (DCF) based on Kaupthing Hidden assets in Meiður and Baugur Bank's operations, on the one hand, and that of FIH on the other. In addition, estimated hidden assets in the holding company Meiður (Kaupthing Bank's holding is 19.2%) and in Baugur Group (20%) are added to the cash flow, together with funding tied up on account of SFL (see explanation on p. 5). Meiður's assets are comprised of holdings in Kaupthing Bank, Bakkavör Group and Medcare Flaga. These assets are entered at restated cost price, and in the case of Kaupthing Bank and Bakkavör Group there have benn substantial capital gains.

Balance sheet growth and capital structure Kaupthing Bank's total assets amounted to ISK 601 bn at the end of Q1, increasing by over ISK 40 bn since the beginning of 2004. As of this same date, FIH's assets were ISK 765 bn, decreasing by around ISK 12 bn since 1 January. The balance sheet is expected to grow by a total of 9.2% this year, primarily due to lending growth of Kaupthing Bank in Iceland. We assume an average growth of 4% in Denmark for the forecast period, based partly on public forecasts for industrial investment. In the longer term 5.5% annual lending growth is expected outside Denmark. The capital ratio is expected to be 11.0% at year-end, with Tier 1 capital 8%, in accordance to the bank's stated objectives. Since the acquisition of FIH will be partly financed with funding from the bank's operations, a major share of the 2004 profit will be retained by the bank to make up the difference between purchase price and external financing. Balance sheet growth will slow next year to just under 6%, and to 4.7% from 2008 onwards. One of the main assumptions in the valuation model is that the composition of the balance sheet will not change in the future and the risk base is thus a fixed proportion of total assets. The share of Icelandic stocks in The acquisition of FIH changes the bank's capital structure considerably. Issuance of subordinated Kaupthing Bank´s portfolio has debt will, for instance, be at a maximum, in consideration of the limits Kaupthing Bank has set diminished itself, while when the previous valuation was prepared there was still considerable room for subordinated debt issuance. According to that valuation, a dividend of some ISK 15 bn could be paid by increasing the proportion of subordinated debt. In the long term, issuance of subordinated debt is expected to be close to the maximum proposed in the bank's objectives. Net interest income Last year Kaupthing Bank's interest rate margin amounted to 2.0% of its average balance sheet position while for FIH this figure was 1.7%. FIH's interest rate margin was unusually high last year, due to the major impact of pre-payment premiums on refinanced loans. As previously pointed out, a very high proportion of FIH's loans have fixed interest rates. Due to rising interest rate levels, income from loan refinancing can be expected to decrease and FIH's interest rate margin is expected to drop to 1.35% and this level is used for the remainder of the forecast period. This is a considerably lower interest rate margin than that of recent years and is partly due to changes in capital structure. Kaupthing Bank's interest rate margin rose in Q1 mainly

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Kaupthing Bank HOLD

due to lower financing costs, according to bank spokesmen. The interest rate margin is expected to amount to 2.4% this year, and decrease to 1.9% in 2008. This is equivalent to an interest rate margin of 3% on loan exposures, which is in line with Kaupthing Bank's objectives. Other operating income The main items comprising the remainder of Kaupthing Bank's operating income are commissions and capital gains. Each of these items amounted to ISK 10 billion last year, together comprising around 2/3 of the company's income. The market situation was highly favourable; profit from Bakkavör Group's convertible bond alone amounted to around ISK 3 bn. The share of Icelandic equities in Kaupthing Bank's portfolio has been decreasing. For example, almost 20% of its convertible bond in Bakkavör Group has been converted to shares and sold off. The bond currently stands at ISK 2 bn (GBP 12.7 million), based on the fixed conversion rate of 153.4); if accrued interest is included its value is ISK 2.6 bn. It could be converted to 474 million shares in Bakkavör Group, or 23% of total shares after the conversion. Positions taken by Kaupthing Bank returned little profit during Q1, but this has probably changed for the better in Q2. Shares of Bakkavör Group, for example, have risen sharply, in addition to which there are considerable trading rate gains for Meiður, cf. the above discussion. As has been previously pointed out, FIH is practically exclusively a lending bank and other operating income has not been of decisive significance for its performance up until now. Last year other operating income, excluding capital gains, amounted to 5% of the bank's total income. One of the main opportunities resulting from Kaupthing Bank's acquisition of FIH will be the latter's customer base. Kaupthing Bank has offered extensive corporate financing in most of the countries where the bank operates. Its expertise in this field of activity is one of the bank's FIH´s corporate finance division are main strengths. We expect FIH's corporate financing services to be boosted significantly by the expected to account for 15% of merger and that the bank will manage to build up a strong operating unit which, in the course FIH´s total income in the course of of time, will account for some 15% of FIH's total income. time Equity positions are expected to give good returns this year, or around 15% less financing cost. In the longer term, income on equity exposures is expected to amount to 11%, in accordance with the average rate of return on the equity market. Financing cost has not been taken into consideration here, but it is manifest in the interest rate margin. Loan-loss provisions Final write-offs by Kaupthing Bank and its predecessors have not been very extensive for the past five years. Loan-loss provisions have ranged from 0.6% to 1.1% of outstanding loans, and were highest this past year. The bank has set itself very ambitious objectives concerning loan write-offs and aims at reducing these to below 0.5% of loans and guarantees provided. Experience in the Icelandic banking system as a whole during the past decades has shown that loan losses are close to 1%. We are of the opinion that lending procedures and supervision have improved substantially and that Kaupthing Bank's high objectives in this regard will mean lower loan write-offs in the future. The last valuation assumed write-offs of 0.75% in the longer term, while suggesting that this could be lowered if there were reason to do so. As mentioned previously, FIH's bad loans have been exceedingly low, less than 0.2% of its lending during the past decade. We expect Kaupthing Bank to benefit from FIH's expertise here and in the longer term its write-offs will amount to 0.65% of total lending. Hidden assets in loan-loss provisions FIH's loan-loss provisions are high in comparison to its non-performing loans, or 1.6% of total lending, while non-performing loans are 0.62%. The valuation includes provision for a hidden asset in the loan-loss provisions, amounting to a total of 0.5% of lending.

Conclusions of the value assessment Based on the assumptions given above, the value of Kaupthing Bank is ISK 223.7 bn, which means a valuation 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.

In our most recent analysis, Kaupthing Bank was valued at ISK 126.5 bn, or the equivalent of ISK 123.5 bn at current interest rate levels. The main changes made to the bank's operating premises were the lowering of future loan write-offs and increase to the interest rate margin

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Kaupthing Bank HOLD

in line with the latest information on the bank's operations. The performance forecast for 2004 has been revised upwards and hidden assets in unlisted companies (Meiður and Baugur) restated. These factors result in a higher valuation, while on the other hand a major portion of this year's profit will be tied up in financing the FIH acquisition. In addition, there is the holding in Singer & Friedlander (SFL). As discussed here earlier we expect this holding to return to Kaupthing Bank at least as much value as the current equity reduction imposed by the SFL holding. The value of this part of operations has thus been increased to ISK 131.1 bn. FIH is valued at ISK 87.7 bn, of which synergies amount to around ISK 8 bn. The additional impact of the lower capital ratio from 12% to 11% is equivalent to ISK 4.9 bn. In our estimation the value of the merged bank is ISK 223.7 bn, which is ISK 16.2 bn higher than the last valuation of Kaupthing Bank plus the purchase price of FIH. The acquisition of FIH increases the valuation directly by ISK 3.7 bn, the reduced CAD ratio by ISK 4.9 bn and changes in the operating assumptions of Kaupthing Bank by ISK 7.6 bn. Although this increase in the valuation is not especially large in absolute terms, the valuation price increases substantially, by 48%. The reason for this is that the acquisition is financed to a large extent through the issue of subordinated debt and by funds from Kaupthing Bank's operations. The increase in share capital is thus proportionally less than the bank's increased value, resulting in a rise in the valuation price. Attention should be drawn to the sensitivity analyses on p. 10, indicating that 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 if the margin were to rise by 0.1% the outcome would be 440.6. 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 investors to hold their shares in Kaupthing Bank.

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Share Price (m.ISK) Major Shareholders CEO's Meiður Holding 16.83% 12000 600 Hreiðar Már Sigurðsson Sólon R. Sigurðsson Egla Holding 10.78% Turnover, ISK millions 10000 500 Arion, Nominee Account 4.67% Closing price Board Pension Fund of Commerce 4.42% 8000 400 Sigurður Einarsson, Chairman of the Board Arion, Nominee Account/Sweden 4.37% 6000 300 Vátryggingafélag Íslands 4.37% 4000 200 Ásgeir Thoroddsen Bjarnfreður Ólafsson Sveipur Holding 4.19% 2000 100 Finnur Ingólfsson Gunnar Páll Pálsson Pension Fund for State Employees 2.66% 0 0 Hjörleifur Jakobsson Jón Helgi Guðmundsson Eyrir Investments 2.09% Jan-01 Dec-01 Jan-03 Jan-04 Peter Gatti Tommy Christer Persson Framsyn Pension Fund 1.82% 18/06/2004 56.20% Stock turnover In Iceland In Stockholm Required return on equity Last 6 months Last 12 months Last 6 months Last 12 months Number of trades 5,184 8,080 Risk-free return (rf) 5.9% Turnover - nominal value 144.6 m.ISK 339.8 m.ISK 5.5 m.SEK 17.8 m.SEK Market premium (rm) 4.8% Turnover - market value 42,761.2 m.ISK 80,251.1 m.ISK 175.8 m.SEK 458.7 m.SEK Beta (ß) 0.90 Velocity (annualized)* 0.66 0.77 0.03 0.04 Company premium (FRT) 0.0% Small cap premium (SC) 0.5% *nominal turnover/share capital In SEK Average price 295.8 236.2 31.8 25.8 Required rate of return 10.7% High 433.0 433.0 44.8 44.8 Future growth 4.9% Low 208.0 154.0 22.7 15.9 Annual Statements Kaupthing FIH in ISK, millions 1999 2000 2001 2002 2003 1Q 2004 1999 2000 2001 2002 2003 1Q 2004 Income statement Income statement Net interest income 3,361 4,089 5,811 6,998 10,124 3,501 Net interest income 11,138 10,635 12,964 12,648 13,420 2,948 Other operating revenues 5,379 5,112 8,039 14,414 21,656 6,070 Other op. revenues -1,755 -211 -246 82 -1,568 480 Net operating revenues 8,740 9,201 13,850 21,412 31,780 9,571 Net op. revenues 9,383 10,425 12,718 12,730 11,852 3,428 Other operating expenses 5,352 7,030 10,565 12,486 18,493 5,071 Other op.expenses 1,966 2,048 2,036 2,328 2,551 620 Provisions for losses 846 815 1,691 2,794 3,894 1,150 Provisions for losses 819 819 959 1,006 796 211 Income taxes -732 -343 321 -769 -1,486 -558 Income taxes 2,083 2,352 2,808 2,750 2,691 772 After-tax Profits 1,810 1,013 1,915 5,363 7,520 2,650 After-tax Profits 4,586 5,803 6,798 7,336 6,634 2,164 Balance sheet Balance sheet Assets 141,340 207,620 317,563 432,412 558,569 601,273 Assets 649,888 770,036 826,921 787,480 777,617 765,414 Loans 85,846 126,823 204,552 269,333 350,995 371,227 Loans 488,627 605,042 670,632 665,250 652,100 638,188 Equity 9,007 12,616 22,154 33,379 45,929 47,325 Equity 51,445 55,446 60,442 65,965 70,797 72,961 Financial ratios Financial ratios Equity ratio 6.4% 6.1% 7.0% 7.7% 8.2% 7.9% Equity ratio 7.9% 7.2% 7.3% 8.4% 9.1% 9.5% Cost-to-income ratio 68.3% 76.4% 76.3% 58.2% 58.2% 53.0% Cost-to-income ratio 20.9% 19.6% 16.0% 18.3% 21.5% 21.0% Provisions for losses/Loans 0.9% 0.6% 0.8% 1.0% 1.1% 0.3% Prov. for losses/Loans 0.2% 0.1% 0.1% 0.2% 0.1% 0.0% Loan-loss provisions/Loans 2.0% 1.7% 2.0% 2.1% 2.4% 2.5% Loan-loss provisions/Loans 1.5% 1.6% Forecasts - Kaupthing, FIH excluded In ISK millions 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total assets 495,493 601,858 669,340 712,605 751,799 793,148 836,771 882,793 931,347 982,571 1,036,612 1,093,626 annual change ...... 16.5% 11.2% 6.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% Net interest income 10,124 14,445 15,060 15,321 15,036 15,070 15,899 16,773 17,696 18,669 19,696 20,779 annual change ...... 42.7% 4.3% 1.7% -1.9% 0.2% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% as a ratio of total assets ...... 2.0% 2.4% 2.3% 2.2% 2.0% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9% Net operating revenues 31,780 35,464 33,821 35,036 35,835 37,013 39,049 41,196 43,462 45,853 48,374 51,035 annual change ...... 11.6% -4.6% 3.6% 2.3% 3.3% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% Other operating expenses 18,493 19,735 20,640 21,505 22,406 23,345 24,324 25,345 26,410 27,519 28,676 29,882 annual change ...... 6.7% 4.6% 4.2% 4.2% 4.2% 4.2% 4.2% 4.2% 4.2% 4.2% 4.2% Loan-loss provisions 3,894 3,611 3,481 3,349 3,308 3,331 3,389 3,575 3,772 3,979 4,198 4,429 annual change ...... -7.3% -3.6% -3.8% -1.2% 0.7% 1.7% 5.5% 5.5% 5.5% 5.5% 5.5% as a ratio of total assets ...... 0.8% 0.6% 0.5% 0.5% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% as a ratio of loans and issued guarantees ...... 1.1% 0.9% 0.8% 0.7% 0.7% 0.7% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% Net profit 7,520 9,936 7,954 8,349 8,300 8,476 9,295 10,066 10,890 11,770 12,710 13,713 annual change ...... 32.1% -19.9% 5.0% -0.6% 2.1% 9.7% 8.3% 8.2% 8.1% 8.0% 7.9% Cost-to-income ratio ...... 58.2% 55.6% 61.0% 61.4% 62.5% 63.1% 62.3% 61.5% 60.8% 60.0% 59.3% 58.6% Forecasts - FIH In ISK millions 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total assets 782,549 793,169 826,918 864,129 903,015 941,343 978,997 1,018,157 1,058,883 1,101,238 1,145,288 1,191,099 annual change ...... 1.4% 4.3% 4.5% 4.5% 4.2% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Net interest income 13,420 11,501 11,577 11,666 12,191 12,708 13,216 13,745 14,295 14,867 15,461 16,080 annual change ...... -14.3% 0.7% 0.8% 4.5% 4.2% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% as a ratio of total assets ...... 1.7% 1.5% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% Net operating revenues 11,853 13,012 13,838 14,792 15,501 16,182 16,829 17,502 18,202 18,930 19,688 20,475 annual change ...... 9.8% 6.4% 6.9% 4.8% 4.4% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Other operating expenses 2,544 2,645 2,751 2,861 2,976 3,095 3,218 3,347 3,481 3,620 3,765 3,916 annual change ...... 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Loan-loss provisions 796 793 827 864 903 941 979 1,018 1,059 1,101 1,145 1,191 annual change ...... -0.3% 4.3% 4.5% 4.5% 4.2% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% as a ratio of total assets ...... 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% as a ratio of loans and issued guarantees ...... 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Net profit 6,691 6,759 7,244 7,813 8,205 8,575 8,918 9,274 9,645 10,031 10,432 10,850 annual change ...... 1.0% 7.2% 7.9% 5.0% 4.5% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Cost-to-income ratio ...... 21.5% 20.3% 19.9% 19.3% 19.2% 19.1% 19.1% 19.1% 19.1% 19.1% 19.1% 19.1% LANDSBANKI RESEARCH JUNE 24TH Appendix - sensitivity analysis PAGE 10

Sensitivity of Required rate of return and Future growth Required rate of return 9.7% 10.2% 10.7% 11.2% 11.7% 4.0% 434.7 401.6 373.5 349.3 328.3 4.5% 458.9 421.0 389.3 362.3 339.2 5.0% 488.3 444.2 407.9 377.5 351.7 Future growth 5.5% 524.7 472.3 430.1 395.3 366.2 6.0% 571.0 507.2 457.0 416.6 383.3

Sensitivity of Required rate of return and Interest differential Required rate of return 9.7% 10.2% 10.7% 11.2% 11.7% -0.2% 416.1 380.1 352.9 325.7 304.6 -0.1% 451.4 411.4 381.1 350.8 327.4

2008 0.0% 488.3 444.2 407.9 377.5 351.7 0.1% 525.2 477.0 440.6 404.2 376.0 differential as of

Changes in interest 0.2% 562.1 509.8 470.3 430.8 400.3

Sensitivity of Required rate of return and Income on equity exposures Required rate of return 9.7% 10.2% 10.7% 11.2% 11.7% 9.0% 455.6 414.7 381.1 353.0 329.1 10.0% 472.0 429.5 394.5 365.2 340.4 11.0% 488.3 444.2 407.9 377.5 351.7 exposures 12.0% 504.6 458.9 421.3 389.8 363.0 Income on equity 13.0% 521.0 473.6 434.7 402.0 374.3

Sensitivity on Required rate of return and Provisions for loan losses Required rate of return 9.7% 10.2% 10.7% 11.2% 11.7% -0.2% 541.4 491.4 453.7 415.9 386.7 -0.1% 522.5 474.4 438.3 402.2 374.2 0.0% 488.3 444.2 407.9 377.5 351.7 Changes in 0.1% 448.7 409.0 379.0 348.9 325.7 losses as of 2008 Provisions on loan 0.2% 411.8 376.2 349.2 322.2 301.4

Sensitivity on Required rate of return and Capital ratio (tier 2) Required rate of return 9.7% 10.2% 10.7% 11.2% 11.7% 9.0% 557.3 510.5 472.0 439.7 412.3 10.0% 522.8 477.3 439.9 408.6 382.0 11.0% 488.3 444.2 407.9 377.5 351.7 12.0% 453.8 411.0 375.8 346.4 321.4 Capital ratio 13.0% 419.3 377.9 343.8 315.3 291.1

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