Swedish Housing Market SEB Enskilda 110613

Equity Research

www.sebenskilda.se Important. All disclosure information can be found on pages 28 – 30 of this document

Unique data collaboration with Boreda AB Unique insights into the leverage of Swedish tenant-owner’s associations

This report has been enabled by data provided by Boreda AB (www.boreda.se), a young company which provides research on Swedish tenant-owner’s associations. We have been allowed access to information on more or less all of Sweden’s tenant-owner associations which has improved our understanding of this segment of the Swedish housing market. Our conclusion after having analysed this data is that risks related to tenant-owner’s associations and their tenant-owners are underestimated.

The perils of double leverage and poor transparency We argue that owners of apartments in Sweden are very often unaware of the debt in the tenant-owner’s associations they are part of. The rapid credit expansion among apartment owners, the short-term borrowing of the tenant-owner’s associations plus these associations’ very limited ability to absorb increased costs means that rather modest mortgage rate hikes (to around 7%) could lead to unpleasant surprises for significant numbers of apartment owners, which in turn could have an adverse effect on the price development of owner occupied apartments and bank stocks.

However, interest rate expectations and margin trends prevent downgrades Interest rate expectations are currently trending downwards; should these expectations materialise, the risks discussed in this report will not materialise. On top of this, margins on residential mortgages in Sweden are expanding rapidly. Thus paradoxically, in the short run, being a mortgage lender could mean being in a sweet spot. This prevents us from making any ratings changes on the back of our findings. However, we urge anyone with interests in the Swedish banking sector to look into these risks if interest rate expectations change as they have done before.

Banks

Sweden

Sector Comment

13 June 2011

Weakest link in Swedish housing market

Average estimated fee increase in Swedish tenant-owner's associations if mortgage rates go to 7%

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11,400 tenant-owner's associations sorted into 20 brackets by borrowing/sqm

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11,400 tenant-owner's associations sorted into 20 brackets by borrowing/sqm

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Source: SEB Enskilda and Boreda

Analysts

Hampus Brodén +46 8 522 297 44 [email protected]

Nicolas McBeath +46 8 522 298 06 [email protected]

SEB ENSKILDA

Sector Comment Weakest link in Swedish housing market

2 13 June 2011

Contents Page

Background: stalling house prices....................................................................................3 No imminent threat of a house price drop.........................................................................3

The canary in the coal mine ...............................................................................................6 Flats and their tenant-owner’s associations ......................................................................6 TOA debt below radar in household statistics...................................................................7 Apartment owners tend to have high leverage..................................................................8 Rapid credit expansion......................................................................................................9 TOA debt as short-term as any household debt .............................................................10 The peril of double leverage............................................................................................10 The scale of the potential problem..................................................................................13 Two reasons this could become problematic ..................................................................18 One reason there is no problem short term ....................................................................19

Appendix I ..........................................................................................................................28 Target prices and risks .....................................................................................................29

SEB ENSKILDA


3 13 June 2011

Background: stalling house prices No imminent threat of a house price drop First, let’s make one thing clear – we see no imminent threat to house prices in Sweden. We believe there are enough fundamental factors to largely justify house price trends of recent years (see Swedish banks and house prices - An in-depth look banks’ exposure to housing, 13 September 2010). The Swedish central bank reached similar conclusions based on various econometric and other approaches in a recent 400-plus page report.

However, we do seem to be at some kind of turning point at the moment where rising rates and tighter lending standards are starting to affect house prices.

House price indices in various countries

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1

AustriaBelgiumSwitzerlandDenmarkSpainFranceUnited KingdomIrelandNorwaySwedenUnited StatesGermanyUnited Kingdom

Spain

Sweden

France

Belgium

Norway

Denmark

USA

Ireland

Austria

Finland

Germany

United Kingdom

Source: SEB Enskilda and Bank of International Settlements

The Swedish residential real estate price trend seems more or less uninterrupted (see chart above). However, a closer look indicates that apartment prices have shown a more negative trend than house prices in recent months (see next chart).

House and apartment price development on a regional basis – Sweden

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Flats medium sized cities Houses Stockholm Houses Gothenburg

Houses Malmoe Houses medium sized cities

Source: SEB Enskilda and Valueguard

Fundamentals justify house price trends for the most part

Turning point

SEB ENSKILDA


4 13 June 2011

The dip in apartment prices is by no means yet a trend, but a couple of factors indicate somewhat weaker residential real estate prices from now on. Firstly, we have again reached a point where home owners are not getting paid to live in their houses, which should make home buyers more price sensitive. In the next chart, we have deflated the actual mortgage rate Swedes are paying with the growth in residential real estate prices. During most of the past 15 years, Swedish home owners have been getting paid to live in their houses, i.e. their monthly interest cost has been lower than the growth in the value of the house. The last time owning a home meant paying instead of making money was in late 2008. However, that situation did not last very long as the popular three-month mortgage rate in Sweden fell from almost 7% to 1.5% in just 12 months in connection with the financial crisis. This pushed house price growth up again and Swedes again started making money on their homes. That is less likely to happen this time around, at least based on money market expectations of future rates.

Volume-weighted Swedish residential mortgage rate deflated by house price growth, %

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ar-9

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Mortgage rate deflated with y-o-y residential real estate growth

Owning your home Makes you Money

Owning your home costs you Money

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ar-9

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Mortgage rate deflated with y-o-y residential real estate growth

Owning your home Makes you Money

Owning your home costs you Money

Source: SEB Enskilda and Datastream

As an additional indication, our house price indicator has stopped working. Historically, a model using short-term interest rates and consumer confidence has worked reasonably well in forecasting house price growth over a six-month horizon. However, this time around our model is not working very well. As the next chart shows, Swedish national house price growth has dipped earlier than implied by the trend in short-term rates and consumer confidence.

SEB Enskilda house price indicator and actual house price development

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Residential real estate prices, y/y ch %Forecasted house price growth based on recorded consumer confidence and interest rates, y/y ch %Forecasted house price growth based on forecasted consumer confidence and interest rates, y/y ch %

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Residential real estate prices, y/y ch %Forecasted house price growth based on recorded consumer confidence and interest rates, y/y ch %Forecasted house price growth based on forecasted consumer confidence and interest rates, y/y ch %

Source: SEB Enskilda

Indications of somewhat weaker residential real estate prices

Swedish national house price growth has dipped earlier than implied by the trend in short-term rates and consumer confidence

SEB ENSKILDA


5 13 June 2011

House price growth stalling before our model implies could, in our view, be due to an emerging and vocal debate about a potential residential real estate bubble in Sweden. This has led to both voluntary and mandatory tightening of lending standards. In February 2010, the Swedish FSA announced that it wanted to cap residential mortgage loan LTVs. Since then, the banks have introduced even harsher maximum LTVs than the regulators and some of the banks have also increased cash flow requirements on mortgages for proposed borrowers. Meanwhile, suggestions of abolishing interest cost deductibility, higher mortgage risk weights and the reintroduction of real estate tax have been made by various stakeholders that would like to see the housing market cool down.

All in all, the data-points above could mean that house prices are stalling. Given the documented autocorrelation1 (i.e. when prices go up they continue to go up and vice versa) in the rate of house price changes, stalling prices could imply a negative house price trend for a period of time. The most recent real estate broker barometer published by SBAB shows that Swedish real estate brokers on aggregate now expect falling apartment values over the coming quarter (see chart below).

SBAB real estate broker barometer

Q105 Q106 Q107 Q108 Q109 Q110 Q111

Net, percent

Condominiums

Houses

Forecast Q211

A negative value indicates real estate brokers that believe in falling prices outnumber the ones who believe in increasing prices Source: SBAB

If falling prices were to become fact, the focus will shift more towards risk and banking investors will start looking for the weakest link in the housing and mortgage market. This is what we have focused on in this report.

1 See for example the Riksbank’s inquiry into the risks of the Swedish housing market (2011), pg. 27.

Stalling prices could imply a negative house price trend for a period of time

If prices fall, the search will be on for the weakest link in the housing and mortgage market

SEB ENSKILDA


6 13 June 2011

The canary in the coal mine We believe the weakest links, or the ‘canary in the coal mine’, in the Swedish housing market are the tenant-owners (condominiums) and tenant-owner’s associations to which they belong. There are several reasons why:

Debts in tenant-owner’s associations are typically not reported as household debt in official statistics, which means these household credit volumes ‘fly below the radar’ in a sense. This means that levels of overall household debt in Sweden typically end up being underestimated.

Apartment prices are more volatile than house prices, which also has implications for the attractiveness of apartments as collateral (see House and apartment price development on a regional basis – Sweden chart at the start of this report).

Individuals’ loan-to-value ratios on apartments are typically slightly higher than for houses in Sweden.

Credit expansion among apartment owners has been very pronounced in recent years, which is cause for caution in our view. Whereas mortgage institutions’ lending with single family houses as collateral has increased by 2x or 9% per year over the past 10 years, lending to apartment buyers has risen by 7x or 21% per year. Part of this difference is because more and more buildings have been turned into tenant-owner’s associations, but even adjusted for this the expansion in credit has clearly been sizable.

Surprisingly, the interest fixing periods of tenant-owner’s associations are just as short term as they are on individual household debt, which means rate changes will feed through fast.

Buyers of tenant-owned apartments in Sweden are often very much unaware of their double-leveraged nature – close to 100% of owner-occupied apartments in Sweden are part of tenant-owner’s associations. This is a key cause for concern.

In terms of the risk of lending to apartment owners, banks’ stress tests are not sophisticated enough to capture potentially large risks relating to the financial situation of the tenant-owner’s associations to which the apartments belong.

Flats and their tenant-owner’s associations We have outlined below what it means to own an apartment that is part of a tenant-owner’s association (TOA). Anyone familiar with the ownership structure of Swedish owner-occupied apartments can go directly to the section TOA debt below radar in household statistics.

Tenant-owner’s associations – the basics explained A tenant-owner’s association is formed when a landlord approaches his/her tenants with an offer to sell them the apartments they are renting. Tenants then form a tenant-owner’s association, which will be the formal buyer of the building. Theoretically, the entire purchase price can be paid by the tenant-owner’s association and financed by a bank loan. Instead of paying rent to the landlord, the tenants would then be paying a fee to the tenant-owner’s association, which now needs to service its debt. Each individual apartment owner’s fee would then be proportionate to their share of the building’s total square metres. The most common practice is that part of the purchase price is paid by the tenant-owner’s association and financed with a bank loan and the remaining part of the purchase price is paid by the apartment holders directly to the seller of the building. Each apartment holder can then choose how much equity to insert into their apartment and take out a mortgage loan on the rest. This means there are typically two layers of debt in Swedish tenant-owned apartments: the individual’s own mortgage loan and then the debt of the tenant-owner’s association that needs to be serviced by the individuals living in the building. The interest costs of the tenant-owner’s association are financed by fees paid by the tenants to the association. These fees also need to cover any joint costs, e.g. maintenance, energy and garbage handling.

SEB ENSKILDA


7 13 June 2011

How tenants become home owners and tenant-owner's associations are formed

PaymentTenant-ow ner's association (TOA)

Ow nership Landlordselling the

Membership building tothe tenants

Apartment Apartment Apartment Apartment Apartmentholder holder holder holder holder

Payment


The chart above illustrates the basic transactions that take place when a tenant-owner’s association is formed. In the next chart we have constructed a hypothetical tenant-owner’s association to illustrate the double leverage that arises in the lion’s share of apartments in such associations.

Hypothetical tenant-owner's association

Tenant-owner's association (TOA)

Apartment Apartment Apartment Apartment Apartment1 2 3 4 5

TOAtotal/average

Square meters 175 150 125 100 75 625Share of TOA debt, SEKm 4,2 3,6 3,0 2,4 1,8 15,0Share of TOA debt, SEKth/sqm 24,0 24,0 24,0 24,0 24,0 24,0

Hypothetical market value of flat, SEKth/sqm 60,0 60,0 60,0 60,0 60,0 60,0Market value of flat, SEKm 10,5 9 7,5 6 4,5 37,5Hypothetical LTV of individual household 75% 35% 0% 80% 90% 53%Mortgage loan of individual household, SEKm 7,9 3,2 0,0 4,8 4,1 19,9

Share of TOA debt + household's debt, SEKm 12,1 6,8 3,0 7,2 5,9 34,9Value of flat if zero leverage (incl TOA) 14,7 12,6 10,5 8,4 6,3 52,5Total loan to value ratio (LTV) 82% 54% 29% 86% 93% 66%


The chart above illustrates how flat owners in Sweden typically have two layers of leverage. We highlight this as a risk: a large proportion of tenant owners do not know how much indirect debt they have, how much of their monthly fee is made up of interest costs for that debt or, most importantly, what changes in interest rates could mean for their future fees. For example, if the owner of apartment no.3 is unaware of the finances of the tenant-owner’s association, they might feel unleveraged when in fact the underlying leverage is more like 30%.

In the example above, an existing building is transformed into a tenant-owner’s association. There are also examples where newly built buildings start life as tenant-owner’s associations. The only difference is that the builder has to market its apartments to people who become the tenant-owners as opposed to people already living in the house.

TOA debt below radar in household statistics Before looking at the potential problem of tenant-owner’s association debt from a bottom up approach, we would just like to make one general remark. Tenant-owner’s association debt is household debt. Despite this, it is not included in central bank statistics under household debt, but under “loans to non-financial corporations”. Therefore, to really capture Swedish household debt, these volumes need to be included. The left-hand chart below shows household debt to GDP for various European countries. In order to get a large comparison base, we have used end-2009 statistics (the debt/GDP ratios do not change much in a year). When we add the tenant-owner’s associations’ debt to total residential mortgage debt, Sweden stands out as one of the countries with the most residential mortgage debt. Also, the relatively low owner-occupation rate in Sweden indicates that the mortgage debt per home owner is actually among the highest in Europe.

Mortgage debt per home owner in Sweden is actually among the highest in Europe

SEB ENSKILDA


8 13 June 2011

Residential mortgage debt to GDP, 2009 Owner occupation rate 2009 (%)

0%

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EU27 UK

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Source: SEB Enskilda and European Mortgage Federation Source: SEB Enskilda and European Mortgage Federation

Apartment owners tend to have high leverage Despite the typical additional leverage in the tenant-owner’s association, apartment buyers on average have higher loan-to-value ratios on their apartments than single family home owners have on their houses. This is evident both from the breakdown of Nordea’s Swedish cover pool (mortgage loans that back up mortgage bond issuance) and new lending data compiled by the Swedish FSA last year.

Loan-to-value ratios in Swedish banks' cover pools, Q1 2010 Loan-to-value ratios on new Swedish mortgage lending

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Break down of LTVs in Nordea's Swedish cover pool

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2005 2006 2007 2008 Q1 2009 Q2 2009 Q3 2009Apartments, %

Single family houses (incl. summer houses), %

Source: SEB Enskilda and company data Source: SEB Enskilda and the Swedish FSA

It is not entirely clear why LTVs of apartment owners are higher than for single family house owners, but we believe it is to do with the higher turnover in the stock of apartments in Sweden compared with houses. In a market with rising residential real estate prices, borrowing on an individual object typically increases when they are turned over. The next chart illustrates the total value of sold tenant-owned apartments in Sweden in recent years. Only in the past six years, apartments worth around SEK 600bn have been sold. Considering that lending to tenant-owners is around SEK 400bn, it is clear that much of it has been added in transactions that have taken place in recent years.

SEB ENSKILDA


9 13 June 2011

Turnover in the market for tenant-owned apartments in Sweden

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Turnove r tenant-owned flats, SEKbn (LHS) LTV on new lend ing to tenant-owners (RHS)

Source: SEB Enskilda, Statistics Sweden and the Swedish FSA

Higher new lending LTVs for apartments could be due to people taking the view that unexpected expenses are more likely for a house than an apartment. We believe this could be a misconception in many cases.

Rapid credit expansion Lending to apartment owners is one of the most rapidly growing segments of all in the Swedish banks’ balance sheets over the past 10 years. Total loan volumes are up 7x over the past 10 years, which translates into a compound annual growth rate of 21%. The rapid growth in lending to apartment buyers means the historical tendency for debt to be primarily in the tenant-owner’s associations’ balance sheets has turned into a situation where tenants have almost twice as much debt as the tenant-owner’s associations. This could be partly why many tenants are losing track of the debt in their respective associations, which we aim to show is the case.

Swedish mortgage institutions lending to tenant owners Combined debt of TOAs and their tenants (SEKm)

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Swedish mortgage institutions' lending tenant-owners, SEKm

SEK 182bn or 43% of currently outstanding loans to tenant-owners have been written since early 2007

Loans to tenant-owners have increased 7x or 21% annually over the last 10 years

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Lending to tenant-owner's associations, SEKm Lending to tenant-owners, SEKm

Source: SEB Enskilda and Statistics Sweden Source: SEB Enskilda and Statistics Sweden

Many tenants are losing track of the debt in their associations

SEB ENSKILDA


10 13 June 2011

TOA debt as short-term as any household debt Swedish residential mortgage loans are relatively short term. Of the outstanding residential mortgage loans in Sweden today, roughly 70% mature within 12 months. When it comes to tenant-owner associations’ debt, the maturity profile seems more or less identical. The charts below illustrate the maturity profiles of mortgage institutes’ lending to households and non-financial corporations. Only 53% of total lending to non-financial corporations is tenant-owner associations’ debt. However, the boards that make the borrowing decisions of such associations are made up of household members. Given that the overall maturity structure of non-financial corporations is identical to that of households, we assume tenant-owner’s associations’ debt maturity profiles are very similar to those of individual households.

Mortgage institutions lending to households Mortgage institutions’ lending to non-financial corporations

> 2 years18%

1 year to 2 years13%

3 months to 1 year15%

<3 months54%

<3 months55%

>2 years22%

1 year to 2 years11%

3 months to 1 year12%

Source: SEB Enskilda and Statistics Sweden Source: SEB Enskilda and Statistics Sweden

The peril of double leverage As described above, not only are flats more leveraged than houses but there is typically additional leverage in the tenant-owner’s association. The big question is whether this is a problem. We argue that for the apartments where additional leverage in the tenant-owner’s association is high, this can get problematic.

To illustrate this, we have picked an existing central Stockholm tenant-owner’s association completely at random. The P&L and balance sheet of this association by the end of 2009 looked as follows (the 2010 annual report is not available yet). This is a fairly typical tenant-owner’s association with a total area of 1,719sqm divided into 31 flats. Three are rented to tenants by the tenant-owner’s association and 28 are owned by the tenants. From the P&L and balance sheet below, we have made a number of important conclusions.

The net result of the tenant-owner’s association is slightly negative, which means there is no room for lower income or higher costs.

The debt servicing costs are roughly equal to the total member fees so if interest costs double so must the member fees.

The interest cost as a percentage of long-term debt is 3.2%, which means that if mortgage rates go to 6-7% this tenant-owner’s association’s interest costs and member fees will in fact have to double.

The average duration of “long-term” debt is eight months, which means increased rates would feed through quickly.

SEB ENSKILDA


11 13 June 2011

Tenant-owner’s association (TOA) X in Stockholm, full-year 2009 annual report

P&L SEK SEK/Sqm CommentsIncomeMember fees 1 059 098 616 => Member fees/long term debt = 3,6%Other income 1 367 930 796

Total income 2 427 028 1 413

CostMaintainance -281 747 -164Administration -125 096 -73Electricity, w ater and garbage -577 711 -336Other costs -177 830 -104Depreciation -341 623 -199Total costs -1 504 007 -875

Financial itemsInterest income 3 885 2Interest cost -927 425 -540 => Interest cost/long term debt = 3,2%Other financial items 0 0Net financial items -923 540 -538

Tax 0 0Net profit -519 0 => No surpluss generated this year

Assets SEK SEK/SqmFixed assets 62 411 144 36 328Current assets 99 287 58Total assets 62 510 431 36 386

Liabilities and equityUnrestricted equity -817 944 -476Restricted equity 33 554 865 19 531

Total equity 32 736 921 19 055

Long term debt 29 274 651 17 040 => Average maturity ~8 monthsShort term debt 498 859 290Reserves 0 0Total liabilies and equity 62 510 431 36 386

Source: SEB Enskilda in collaboration with Boreda AB

Having been in the market for flats in Stockholm ourselves, we believe apartment buyers in Sweden generally have only a very vague understanding of tenant-owner’s associations’ P&Ls and balance sheets. This includes a lack of awareness of tenant-owner’s association indebtedness. Without a good understanding of this, you would not have visibility on the future development in member fees either. This is presumably why the majority of flat owners/buyers seem to view tenant-owner’s association fees as a constant variable. Real estate brokers also often state “no planned increase of member fees” when they are marketing flats.

We went to the building of the tenant-owner’s association described above and collected the names of the tenants. We were able to obtain the phone numbers for 19 of the 28 tenants that owned their own flats and 13 spoke to us about their association’s finances. The 13 included the chairman, the wife of the ex-chairman and the treasurer of the tenant-owner’s association. These three individuals knew roughly how much debt the tenant-owner’s association had but only the current chairman had a good understanding of what rate increases would mean for member fees, This means the current treasurer was not even sure. The remaining 10 individuals had absolutely no idea of how much debt their tenant-owner’s association had and thus no view on their own share of that debt or on the effect on member fees from changes in interest rates. Keep in mind that this tenant-owner’s association was picked at random. It is relatively representative when it comes to the duration of long-term debt. It does however have above-average tenant-owner’s association debt per sqm, which makes the lack of knowledge about debt among the majority of the tenant-owners in the building all the more alarming. As we will show below, there are many tenant-owner’s associations in Sweden with equally high debt per sqm.

How nasty could a negative surprise get for unaware tenants in the example TOA? Most tenant-owners in the example TOA were unaware of their level of indirect debt. The question is thus whether rising rates could indicate a problem for Swedish apartment owners. It depends on the interest rate scenario. If we assume the short-term residential mortgage rate goes to 7%, this is roughly 2pp higher than is currently expected by the money market for end-2013, but by no means an extreme worst case scenario. The new P&L would look as shown in the next chart. To prevent the tenant-owner’s association from making a loss, it needs to increase annual member fees by 106% to SEK 1,269/sqm.

We believe flat buyers in Sweden in general have only a very vague understanding of tenant-owner’s associations’ P&Ls and balance sheets

SEB ENSKILDA


12 13 June 2011

Tenant-owner’s association (TOA) X in Stockholm, after rate increase from 3.2% to 7%

P&L SEK SEK/Sqm CommentsIncomeMember fees 2 181 418 1 269 => Member fees/long term debt = 7,5%Other income 1 367 930 796

Total income 3 549 348 2 064

CostMaintainance -281 747 -164Administration -125 096 -73Electricity, w ater and garbage -577 711 -336Other costs -177 830 -103Depreciation -341 623 -199Total costs -1 504 007 -875

Financial itemsInterest income 3 885 2Interest cost -2 049 226 -1 192 => Interest cost/long term debt = 7,0%Other f inancial items 0 0Net financial items -2 045 341 -1 190

Tax 0 0Net profit 0 0

Assets SEK SEK/SqmFixed assets 62 411 144 36 300Current assets 99 287 58Total assets 62 510 431 36 358

Liabilities and equityUnrestricted equity -817 944 -476Restricted equity 33 554 865 19 516

Total equity 32 736 921 19 041

Long term debt 29 274 651 17 027Short term debt 498 859 290Reserves 0 0Total liabilies and equity 62 510 431 36 358

Source: SEB Enskilda and Boreda AB

What could this mean for a typical flat owner in the building? The next example is based on a hypothetical tenant who has paid SEK 55,000 per sqm (the average in central Stockholm) for a 150sqm apartment and that 70% (the average among Swedish apartment buyers in recent years) of the purchase is debt financed.

Negative surprise potential when rates go up from 3.2% to 7% for above TOA

2009

2010 Change

(%)Change

(SEK 000s) Square meters 150 150 Price, SEK 000s/sqm 55 55 Market value of flat, SEK 000s 8,250 8,250 Loan to value ratio on individual flat 70 70 Loan on individual flat, SEK 000s 5,775 5,775

Interest rate gross (%) 3.2 7.0 3.8Interest rate, net (gross*70%) (%) 2.2 4.9 2.7

Actual rate sensitivity Interest cost on household's loan, SEK 000s 128 283 121 155Member fee, SEK 000s 92 190 106 98Total cost, SEK 000s 220 473 115 253

Rate sensitivity if member fee had actually been constant Interest cost on household's loan, SEK 000s 128 283 121 155Unchanged member fee, SEK 000s 92 92 0 0Total cost, SEK 000s 220 375 70 155

Negative surprise SEK 000s 98 as % of total cost increase (%) 39 Source: SEB Enskilda

For this hypothetical tenant, the increase in total costs (member fee plus own debt servicing cost) when rates go from 3.2% to 7% is 115% or SEK 253,000 per year. If the same tenant thought the member fee would be a constant instead of moving in line with rates, SEK 98,000 or close to 40% of the annual SEK 253,000 cost increase would come as a surprise. See the next chart for foreseen and unforeseen cost increases in different mortgage rate scenarios.

SEB ENSKILDA


13 13 June 2011

Foreseen and unforeseen cost increase in different mortgage rate scenarios

0%

20%

40%

60%

80%

100%

120%

140%

160%

4% 5% 6% 7% 8%

Mortgage rate level

Tota

l inc

reas

e in

sum

of d

ebt s

ervi

cing

cos

t and

TO

A

fee

Foreseen cost increase Unforeseen cost increase


To illustrate the potential problem with unnoticed debt in tenant-owner’s associations, consider the following. Imagine an individual buying a share in a tenant-owner’s association for SEK 55,000 per sqm. If the individual’s loan-to-value ratio is 70%, his or her debt will be SEK 38,500 per sqm. An additional SEK 17,000 in debt per sqm through the TOA then is no small addition. Also, consider the following – the interest cost on the individual’s debt is 30% tax deductible whereas the interest cost on the tenant-owner’s association’s debt is not tax deductible at all. This means that in a scenario where mortgage rates are, e.g. 5%, the net debt servicing cost per sqm for the individual’s direct borrowing is SEK 1,080 per year (SEK 55,000 x 4% x 70%). The net debt servicing cost for the indirect debt at the same time would be SEK 680 per year (SEK 17,000 x 4%). This means that the indirect debt servicing cost net of taxes is almost 40% of total direct and indirect debt servicing costs, even though the indirect debt is “only” around 30% of the sum of direct and indirect debt.

Given this example, it should come as no surprise that we disapprove of banks tending to stress test only the tenant-owners’ direct debt for rate increases and not indirect debt (i.e. their share of the TOA’s debt) when they consider new lending. Stress tests that keep the TOA fee constant regardless of the interest rate scenario do not capture the real sensitivity. There will be individuals that pass these tests that would not if the fee increases in the same interest rate scenario were taken into account. For example, some banks stress test home buyers for a mortgage rate of 9%. Based on the example above, the cost increase that would show up in the bank’s stress test would be SEK 236,000 whereas the real cost increase would be SEK 385,000. This is no small figure considering for example that the median annual household income after tax in Stockholm is around SEK 490,000.

The scale of the potential problem To get a sense of the scale of the potential problem, we have drawn on Boreda’s unique database on the financials of Swedish tenant-owner’s associations. It is based on the most recently released P&Ls and balance sheets and captures 11,400 tenant-owner’s associations responsible for roughly 85% of borrowing by such entities in Sweden. Each bracket includes 570 tenant-owner’s associations. For the full dataset, see appendix I. This data enables us to make a number of important conclusions.

We disapprove of banks tending to stress test only the tenant-owners’ direct debt for rate increases and not indirect debt (their share of the TOA’s debt) when considering new lending

SEB ENSKILDA


14 13 June 2011

Share of total Swedish TOA borrowing per bracket (570 TOAs per bracket)

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Tenant-owner's associations sorted into 20 brackets by borrowing/sqm

Perc

ent o

f tot

al o

utst

andi

ng b

orro

win

g by

Sw

edis

h te

nant

-ow

ner's

asso

ciat

ions


The average Swedish TOA does not look very problematic Our first conclusion is that for the average tenant-owner’s association, the problem is not a big one. For the average tenant-owner’s association, the debt per sqm is SEK 4,811 (not SEK 17,000 as in our example TOA above). If one had bought an apartment for SEK 55,000 per sqm (the average in Stockholm), the debt servicing cost net of taxes “hidden” in the member fee is 15% of total direct and indirect debt servicing costs. An unforeseen cost increase in the event of interest rate rises should not therefore be a particularly big problem. As is often the case when it comes to credit risk, one needs to look at the tails rather than just the averages.

Seems reasonable to take a closer look at one-fifth of the lending We believe that perhaps 10% of the TOAs are at risk of causing their tenant-owners problematic surprises when rates go up. These are the tenants in the tenant-owner’s associations that have more than SEK 10,000 of debt per sqm. These TOAs make up 23% of outstanding loans to tenant-owner’s associations and make up 10% of the total number of associations (see share of total Swedish TOA borrowing per bracket in the next chart).

When tenant-owner’s association debt gets to SEK 10,000/sqm or above, the share of “hidden” total net debt servicing costs for the tenant-owner approaches or surpasses 30% for anyone who has bought the apartment for SEK 55,000 per square meter with 70% loan financing. We have highlighted these brackets in the following chart. We have applied Boreda’s data to the preceding charts to shed further light on the risks facing tenant-owners in those TOAs.

We believe that perhaps 10% of the TOAs are at risk of causing their tenant-owners problematic surprises when rates rise

SEB ENSKILDA


15 13 June 2011

Share of tenant-owner's association debt in various debt/sqm brackets

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20


Tena

nt-o

wne

r's a

ssoc

iatio

n de

bt/s

qm, S

EK

Each bar represents 5% of the total

number of tenant-owner's associations


Unsurprisingly, interest costs make up a large share of costs for indebted TOAs Using Boreda’s database, we can look into the P&L structure for each of these brackets. In the next chart, the costs of the average tenant-owner’s association are broken down into debt servicing costs and other costs (such as maintenance, garbage handling, energy) per sqm.

As illustrated in the next chart, the TOA debt servicing cost as a share of total costs, and thus as a share of total member fee, is high in the most indebted tenant-owner’s associations.

Breakdown of costs in tenant-owners associations sorted by indebtedness

0

200

400

600

800

1000

1200

1400

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20


Ann

ual c

ost p

er s

quar

e m

eter

, SEK

Average non-interest cost/sqm Average interest cost/sqm


SEB ENSKILDA


16 13 June 2011

Most indebted TOAs don’t generate surpluses and so can’t absorb rate increases The next chart also makes it clear that in the two most indebted brackets, the average net result of the tenant-owner’s associations is zero or negative. This means any increase in debt servicing costs would have to be matched by a similar increase in member fees.

Tenant-owner's association result as a percentage of long-term debt

-1,00%

-0,50%

0,00%

0,50%

1,00%

1,50%

2,00%

2,50%

3,00%

3,50%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20


Tena

nt-o

wne

r's a

ssoc

iatio

ns' n

et re

sult/

long

term

deb

t


Interest cost increase equal to fee increase in TOAs that make up 11% of borrowing The next chart illustrates member fees and debt servicing costs as a percentage of long-term debt. It shows that in the last bracket (11% of lending to tenant-owner’s associations), debt servicing costs are more or less identical to member fees. As in our example TOA above, this means a percentage increase in interest costs necessarily leads to the same percentage increase in member fees.

Tenant-owner's association interest costs and member fee as percent of long term debt

0%

10%

20%

30%

40%

50%

60%

70%

80%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20


Average interest cost/Long term debt Average member fee/Long term debt


It therefore seems that maybe 10% of lending is to TOAs where the financial position is very similar to the one we used as an example earlier in this report.

Based on the data above, we can analyse the sensitivity of TOA member fees to interest rate changes. We have simply assumed the TOAs need to keep their results around zero and thus need to compensate for any deficits created by rate hikes by increasing fees.

Any increase in debt servicing costs would have to be matched by a similar increase in member fees

A percentage increase in interest costs necessarily leads to the same percentage increase in member fees

SEB ENSKILDA


17 13 June 2011

Assuming an arbitrary mortgage rate level of 7%, the picture we get is illustrated in the left-hand chart below.

TOA member fee change necessary if mortgage rates go to 7% Interest rate sensitivity of TOA fee in most indebted bracket

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20


Tena

nt-o

wne

r's a

ssoc

iatio

n fe

e in

crea

se

0%

20%

40%

60%

80%

100%

120%

140%

4% 5% 6% 7% 8% 9%

Hypothetical mortgage rate

Cha

nge

in T

OA

mem

ber f

ee a

s ef

fect

of r

ate

chan

ge

TOA member fee change in most indebted bracket at various interest rate levels

Source: SEB Enskilda and Boreda Source: SEB Enskilda and Boreda

There is one bracket that clearly stands out in the left-hand chart above. For the most indebted bracket, the tenant-owner’s associations’ fee would on average need to almost double if mortgage rates were to go to 7%. The interest rate sensitivity in this particular bracket is illustrated in the right-hand chart above. From this chart, it is plain that stress tests based on an 8-9% mortgage rate but assuming the TOA fee is constant do not capture the full picture. It remains to be seen what will happen when Swedish apartment buyers realise that TOA fees are not constant, but could fluctuate fairly significantly with interest rates. Even after such a realisation, many people will still have great difficulty in assessing the risk in the P&Ls and balance sheets of TOAs. People are generally just not fluent in accounting. We believe the reaction among ordinary apartment buyers could be to just apply a general risk premium across the board, which in such a case could affect apartment prices in general relative to house prices. In such a case, there is a risk that the prices of all apartments, not only those in highly leveraged tenant-owner’s associations, will be negatively affected.

Another way of illustrating how residential mortgage rates of around 7%, let alone 8-9%, could be problematic is to take the aggregated debt of tenant-owners and tenant-owner’s associations in Sweden and multiply it by the average mortgage rate that Swedes pay. This should be a good proxy of the aggregated debt servicing cost of TOAs and their tenant-owners in Sweden. At the average mortgage rate of 3.7% in Sweden in April, the annual debt servicing cost would be SEK 21bn – not far from the all-time high of SEK 24bn by end-2008. If rates were to go to 7%, the total debt servicing cost would rise to an estimated SEK 39bn, well above the current all-time high.

SEB ENSKILDA


18 13 June 2011

Estimated TOAs’ and tenant-owners' after tax debt servicing cost, SEKm

0

5,000

10,000

15,000

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Mar

-96

Mar

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Mar

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Mar

-00

Mar

-01

Mar

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-11

TOA debt servicing cost, SEKm TO debt servicing cost, SEKm

Combined debt servicing cost of Swedish tenant-owner's associations and tenant owners if rates go to 9%



CoMbined debt servicing cost of Swedish tenant-owner's associations and tenant owners today

0

5,000

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20,000

25,000

30,000

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Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

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-03

Mar

-04

Mar

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Mar

-06

Mar

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-08

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Mar

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Mar

-11

TOA debt servicing cost, SEKm TO debt servicing cost, SEKm




CoMbined debt servicing cost of Swedish tenant-owner's associations and tenant owners today

Source: SEB Enskilda and Statistics Sweden

Two reasons this could become problematic Swedish banks’ lending to Swedish tenant-owners and tenant-owner’s associations is between 5% (Nordea) and 15% (Handelsbanken) of total lending so exposures are significant (see chart below).

Break down of Swedish banks’ lending Q1 2011

0%

20%

40%

60%

80%

100%

Handelsbanken SEB Swedbank Nordea

Corporate, municipal and other lending CEE residential mortgage lendingOther Nordic residential mortgage lending Swedish single family housesSwedish tenant-owner associations Swedish tenant-owners

Source: SEB Enskilda and company data

If Nordea Sweden is representative of the whole market, the loan-to-value ratio on outstanding tenant-owner loans should be 55-60%. On the face of it, this does not seem too intimidating. However, keep in mind that apartment prices fell more than house prices in the rate increase-related dip in house prices during 2008. Apartment prices fell by almost 20% in Sweden (and even more than that in Stockholm and Malmö) from late 2007 to late 2008 when rates climbed. In light of this and the 33% price increase in apartment prices since the trough until today, a 30% drop in apartment prices is not an outrageous scenario if mortgage rates were to go to 7%. If prices fall by 30%, a 55% average loan-to-value ratio would turn into a 79% average loan-to-value ratio. That would probably be enough to turn the share price momentum of large Swedish mortgage lenders like Handelsbanken and Swedbank quite negative. A price fall like that would include lots of mortgage loans going above loan-to-value ratio of 75%, which would disqualify them from inclusion in the cover pools that back covered bond issuance.

SEB ENSKILDA


19 13 June 2011

In a climate with falling prices and shrinking cover pools, it is not inconceivable that mortgage bond buyers demand better spreads. Higher funding costs would then need to be passed on to borrowers, which would cause house and apartment prices to come down further, this could affect consumer confidence and spending which in turn could affect employment which would mean house prices could take another hit. Thus, even though it would take quite a severe interest rate scenario for loan losses from these segments to threaten Swedish banks’ capital positions, it is not too difficult to envisage scenarios that could hurt banks’ share prices. Still, we believe the main risk to credit quality is an indirect one. This is because falling house prices typically imply a decline in consumer spending, which could in turn mean worsening corporate credit quality. The charts below illustrate the historical correlation between house prices and consumer spending on the one hand (left-hand chart) and consumer spending and corporate bankruptcies on the other (right-hand chart). This is the second reason why falling house prices, despite decent residential mortgage credit quality, could be bad news for the momentum in the share prices of banks.

Growth in residential real estate prices and consumer spending Growth in consumer spending and corporate bankruptcies

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Q11996

Q11997

Q11998

Q11999

Q12000

Q12001

Q12002

Q12003

Q12004

Q12005

Q12006

Q12007

Q12008

Q12009

Q12010

Q12011

Res

iden

tial r

eal e

stat

e pr

ices

, y-o

-y g

row

th

-1%

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1%

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4%

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7%

8%

9%C

onsu

mer

spe

ndin

g, y

-o-y

gro

wth

Re s id e ntial re al e s tate p rice , y -o -y g ro wth Co nsum e r sp e nd ing , y -o -y g ro wth

-60%

-40%

-20%

0%

20%

40%

60%

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100%

Q11996

Q11997

Q11998

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Q12000

Q12001

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Q12003

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Q12005

Q12006

Q12007

Q12008

Q12009

Q12010

Q12011

Cor

pora

te b

ankr

uptc

ies,

y-o

-y g

row

th (r

ever

sed

axis

)

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Con

sum

er s

pend

ing,

y-o

-y g

row

th

Residential real estate price, y-o-y growth Consumer spending, y-o-y growth

Source: SEB Enskilda and Datastream Source: SEB Enskilda and Datastream

One reason there is no problem short term We are negatively surprised that our analysis has led us to the conclusion that residential mortgage rates of a mere 7% could become quite problematic for apartment holders in Sweden. After all, mortgage rates were close to that level as recently as late 2008 and that was before regulators started demanding that banks fund themselves longer term, which is more expensive (i.e. there are more funding costs that need to be passed on to clients). See historical residential mortgage rates below.

Residential mortgage rates of state owned mortgage lender SBAB

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1-10

-199

7

7-10

-199

7

1-10

-199

8

7-10

-199

8

1-10

-199

9

7-10

-199

9

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-200

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-200

0

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1

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-200

2

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2

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3

7-10

-200

3

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4

7-10

-200

4

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-200

5

7-10

-200

5

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6

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6

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7

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7

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8

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8

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9

7-10

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9

1-10

-201

0

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-201

0

1-10

-201

1

3 months 1 years 2 years 3 years 4 years 5 years 7 years 10 years

Source: SEB Enskilda and company data

SEB ENSKILDA


20 13 June 2011

If money markets were to start implying mortgage rate hikes towards 7%, it would be very difficult to have anything but negative ratings on the large mortgage lenders in Sweden, in our view. However, at the moment there is very little to indicate that we are heading towards that level in the short to medium term. Interest rate expectations are even falling at the moment. The left-hand chart below shows money market expectations on three-month Stibor; the right-hand chart illustrates the change in those expectations.

Forward rate agreements on three-month Stibor Change in forward rate agreement rate for 3M Stibor end-2012E

3.343.323.293.263.213.17

3.113.04

2.95

2.85

2.69

2.45

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

Q31

1

Q41

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Q11

2

Q21

2

Q31

2

Q41

2

Q11

3

Q21

3

Q31

3

Q41

3

Q11

4

Q21

4

3M STIBOR FORWARD RATE AGREEMENTS, %

1.5

2

2.5

3

3.5

4

14/0

9/20

09

14/1

1/20

09

14/0

1/20

10

14/0

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10

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10

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9/20

10

14/1

1/20

10

14/0

1/20

11

14/0

3/20

11

14/0

5/20

11

Ex pected lev el of 3M STIBOR in December 2012

Source: SEB Enskilda and SIX Source: SEB Enskilda and SIX

If we use three-month Stibor expectations from the money market and add to the expected future rate the current difference between three-month Stibor and the three-month residential mortgage rate at Swedish banks, we reach an implied expectation of a three-month residential mortgage rate. On this measure, the mortgage rate is currently expected to be 4.58% by end-2013. The right-hand chart below shows that in such an interest rate environment, the least indebted TOAs can even lower fees (as they are generating surpluses today). In this rather modest interest rate hike base-case scenario, the most indebted 5% of tenant-owner’s associations would see their TOA fees rise by one-third.

Three-month mortgage rate implied by FRAs TOA member fee change if mortgage rates go to 4.58%

0.00

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Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114

Add on for liquidity costs and margin to get to banks' mortgage rate

Money market expectations on future 3m STIBOR

Current spread between 3m STIBOR and 3m residential mortgage rate

Implied end 2013 3m residential mortgage rate

4.58%

-10%

-5%

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15%

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20


Tena

nt-o

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r's a

ssoc

iatio

n fe

e in

crea

se

Source: SEB Enskilda and SIX Source: SEB Enskilda and Boreda

Mortgage lending might even be a sweet spot short term When the inherent risk for tenant-owners in Sweden dawned on us while working on this report, we carefully contemplated what it meant for the main mortgage lenders in Sweden (Handelsbanken and Swedbank). However, rate expectations are on their way down and current expectations mean only 5% of tenant-owner’s associations have to hike fees by a mere third and the remaining 95% only marginally over the coming three years. Under such circumstances, it is difficult to see any near-term need to take a negative stance on the shares. Therefore, although we are slightly alarmed that the safety margin is not bigger, we also conclude that we do not seem to be heading towards a dangerous interest rate level in the foreseeable future. In fact, short term, being a large mortgage lender in Sweden looks like being in a sweet spot. This is because pricing discipline among the main players is better than it has been for a very long time.

SEB ENSKILDA


21 13 June 2011

If we subtract the current yields on Swedish banks’ mortgage bonds from their current list prices for residential mortgages, this should be a decent proxy of where new lending margins are heading.

Implied new lending margin 3M residential mortgages, % Implied new lending margin five-year residential mortgages, %

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

10/0

6/19

97

10/0

6/19

98

10/0

6/19

99

10/0

6/20

00

10/0

6/20

01

10/0

6/20

02

10/0

6/20

03

10/0

6/20

04

10/0

6/20

05

10/0

6/20

06

10/0

6/20

07

10/0

6/20

08

10/0

6/20

09

10/0

6/20

10

10/0

6/20

113 month mortgage margin (rolling 30 days)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

10/0

6/19

97

10/0

6/19

98

10/0

6/19

99

10/0

6/20

00

10/0

6/20

01

10/0

6/20

02

10/0

6/20

03

10/0

6/20

04

10/0

6/20

05

10/0

6/20

06

10/0

6/20

07

10/0

6/20

08

10/0

6/20

09

10/0

6/20

10

10/0

6/20

11

5 year mortgage margin (rolling 30 days)

Source: SEB Enskilda, SBAB and Datastream Source: SEB Enskilda, SBAB and Datastream

As seen above, the new lending margins are increasing almost explosively at the moment, heading towards 85bp on three-month loans and 125bp on five-year loans. Some of the banks are coming from back book mortgage margins of 55-60bp. Should discipline remain, it would mean very strong residential mortgage net interest income growth. After all, we are talking new lending margins several tens of basis points above back book margins. We estimate total Swedish residential mortgage lending net interest income of around SEK 10bn. This would increase by roughly SEK 1.5bn for every 10bp that the total residential mortgage book margin expands. For the two largest mortgage lenders in Sweden, Swedbank and Handelsbanken, this translates into a 4-5% positive effect on pre-tax profit for every 10bp in mortgage margin expansion. See the summary of sensitivity to Swedish residential mortgage margin changes below.

Effect on NII and operating profit from a 10bp change in Swedish mortgage margin

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

Swedbank SHB SEB Nordea

Effect on NII as % of NII Effect on NII as % of operating profit


The above very positive trends seem highly likely to play out before any interest rate scenario that would cause the risks we have discussed in this report to materialise. As long as that is the case, we see no need to downgrade Swedbank and Handelsbanken. However, anyone that shares our concern for the long term and would rather avoid these risks completely, be aware that our top pick, Nordea, has the smallest exposure to these potential risks as well as the biggest upside to our target.

SEB ENSKILDA


22 13 June 2011

For our full investment case on Nordea, see previous reports (e.g. Strong report, but of slightly low quality, 29 April). In short, we like Nordea for the following reasons:

Nordea has significantly underperformed other Nordic banks and for a very long time.

The poor absolute and relative performance has occurred alongside the most positive earnings revisions trend by far for all the Swedish banks.

The shares trade below 9x 2012E earnings.

The implied long-term return on tangible equity is low historically compared with both other Swedish banks and the general market.

There is significant upside of around 40% to our target price.

Our estimates of the upside/downside to target prices and our forecasts versus consensus are outlined in the following table.

Nordic banks ranking

Recommendation Price target (SEK) Up-/downside 1 month EPS estimate revision (%) Current Previous Current Previous target price (%) 2011E 2012E 2013E Nordea Bank Buy Hold 98 98 43 0 0 0DnBNOR Buy Hold 106 106 36 0 0 0Swedbank Buy Buy 135 135 32 0 0 0Jyske Bank Buy Buy 294 294 30 0 0 0Pohjola Bank Buy Hold 11 11.1 27 0 0 0Handelsbanken Buy Hold 246 246 26 0 0 0Sydbank Hold Hold 150 150 23 0 0 0Danske Bank Hold Hold 120 120 20 0 0 0SEB Unrated Unrated Unrated Unrated Unrated 0 0 0 Average 30 0 0 0 Recommendation Price target (SEK) Share SEB Enskilda vs consensus EPS (%) SEB Enskilda Consensus SEB Enskilda Consensus price 2011E 2012E 2013E Nordea Bank Buy Buy 98 85 68 -3 3 2DnBNOR Buy Buy 106 96 78 6 2 4Swedbank Buy Buy 135 125 103 6 12 8Jyske Bank Buy Buy 294 290 226 7 1 0Pohjola Bank Buy Buy 11 11 9 4 0 -6Handelsbanken Buy Hold 246 242 195 1 0 0Sydbank Hold Buy 150 165 122 0 -8 3Danske Bank Hold Buy 120 136 100 -4 -12 -8SEB Unrated Hold Unrated 60 51 4 -4 -1 Average 2 -1 0Source: SEB Enskilda, Datastream and Thomson

Nordea (Buy) has the smallest exposure to Swedish tenant-owner’s associations and their tenant-owners of the Swedish banks with around 40% upside to our fair value estimate

SEB ENSKILDA


23 13 June 2011

The valuation of the Nordic banks peer group is outlined in the following table.

Nordic banks valuation

Target P/E (X) P/TBV (x) RoTBV (%) Div. yield (%) Share price chg. (%) Company Price price* MktCap 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E -1M -3M YTD Danske Bank, DKK 100.0 120.0 92,771 11.6 8.0 6.4 0.9 0.8 0.8 8.5 10.6 12.3 2.0 4.0 4.0 -10 -11 -24DNB NOR, NOK 78.0 106.0 126,964 8.7 7.8 7.2 1.1 1.0 1.0 13.5 14.0 14.1 5.1 6.2 6.7 -3 -9 -5Handelsbanken, SEK 194.5 246.0 121,073 9.7 9.1 8.5 1.4 1.3 1.2 14.7 14.4 14.3 4.9 5.1 5.4 -7 -7 -9Jyske Bank, DKK 226.4 294.0 14,659 9.8 7.6 6.5 1.0 0.9 0.8 10.9 12.5 12.9 0.0 0.0 0.0 -8 0 -13Nordea, SEK 68.4 98.0 276,310 9.9 8.2 7.5 1.3 1.1 1.0 13.3 14.5 14.6 4.1 4.9 5.5 -2 -3 -7Pohjola, EUR 8.8 11.1 2,802 9.1 8.4 8.1 1.7 1.6 1.5 20.3 19.9 18.6 5.1 5.7 6.3 -10 -10 -2SEB, SEK 51.5 n.a. 112,890 8.9 9.5 8.8 1.2 1.1 1.0 13.6 11.8 12.0 3.9 4.3 4.7 -9 -9 -8Swedbank, SEK 102.5 135.0 118,858 8.5 7.9 7.5 1.4 1.4 1.3 17.4 17.8 17.6 6.3 6.6 6.7 -11 -7 9Sydbank, DKK 121.8 150.0 8,949 9.6 7.1 5.5 0.9 0.8 0.7 9.4 11.7 13.6 1.6 2.5 4.9 -11 -5 -19

Average 9.5 8.2 7.3 1.2 1.1 1.0 13.5 14.1 14.4 3.7 4.4 4.9 -8 -7 -9Source: SEB Enskilda

The valuation for the European peer group is illustrated in the following charts.

2012E P/BVs of European banks 2012E P/BVs and RoEs of European banks

0.00

0.50

1.00

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2.00

2.50

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k Za

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(SE

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Ban

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(RU

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(GB

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Cre

dit S

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DnB

NO

R (N

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SE

B (S

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Ban

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(PO

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BS (S

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EFG

Inte

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Ban

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Pos

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A (E

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San

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Med

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(IT)

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BNP

Par

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(FR

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nd (G

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Com

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Natix

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Barc

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(GB)

Banc

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PO

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of Ir

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Irish

Ban

k (IR

)

2012

E P

/BV

Swedbank

SEBPohjola Nordea

Jyske Bank

Handelsbanken

DnBNOR

Danske Bank

0.00

0.50

1.00

1.50

2.00

-10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0

2012E ROE (%)

2012

E P/

BV (X

)

Blue dots are non-Nordic European banks

Source: SEB Enskilda and Datastream Source: SEB Enskilda and Datastream

SEB ENSKILDA


24 13 June 2011

Our estimates are outlined in detail for the Swedish banks below.

P&L and key balance sheet items - Nordea

Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11E Q3/11E Q4/11E 2009 2010 2011E 2012E 2013E Net interest income 1,235 1,249 1,310 1,365 1,324 1,396 1,445 1,476 5,281 5,159 5,641 6,333 6,792Commission income 475 538 525 618 602 603 584 605 1,693 2,156 2,394 2,530 2,649Net result from items at fair value 548 289 446 504 544 407 417 417 1,946 1,787 1,784 1,703 1,726Equity method 25 17 29 5 18 5 5 5 48 76 33 35 35Other income 20 18 53 15 22 14 14 14 105 106 64 65 65Total income 2,303 2,112 2,363 2,507 2,510 2,424 2,464 2,517 9,073 9,285 9,916 10,665 11,268

Personnel expenses 687 701 721 675 768 767 758 789 2,723 2,784 3,082 3,113 3,130Other expenses 438 445 436 543 453 492 451 492 1,639 1,862 1,889 1,892 1,909Depreciation and write-downs 39 40 39 52 44 44 44 44 150 170 176 176 176Total costs 1,164 1,187 1,196 1,270 1,265 1,303 1,253 1,325 4,512 4,817 5,147 5,181 5,215

Pre-provision profit 1,139 925 1,167 1,237 1,245 1,121 1,211 1,192 4,561 4,468 4,769 5,484 6,053Loan losses 261 245 207 166 242 132 121 111 1,486 879 607 476 536Disposal of tangible and intangible assets 0 0 0 0 0 0 0 0 0 0 0 0 0Operating profit 878 680 960 1,071 1,003 989 1,090 1,081 3,075 3,589 4,162 5,008 5,517

XO-items and other adjustments 0 50 0 0 0 0 0 0 0 50 0 0 0

Reported pre-tax profit 878 730 960 1,071 1,003 989 1,090 1,081 3,075 3,639 4,162 5,008 5,517Tax 235 191 249 301 261 257 283 281 757 976 1,082 1,302 1,434Minorities 1 2 2 1 2 2 2 2 4 6 8 8 8Net attributable profit 642 537 709 769 740 730 804 798 2,314 2,607 3,072 3,698 4,075Adjusted attributable profit 649 501 708 792 740 730 804 798 2,276 2,650 3,072 3,698 4,075

EPS 0.16 0,13 0,18 0,19 0,18 0,18 0,20 0,20 0,65 0,66 0,76 0,91 1,01Adjusted EPS 0.16 0,12 0,18 0,20 0,18 0,18 0,20 0,20 0,64 0,66 0,76 0,91 1,01DPS 0,25 0,29 0,31 0,37 0,41

Key balance sheet items (EURm) Lending 292,460 302,550 313,980 314,211 330,536 336,709 342,395 348,224 282,411 314,211 348,224 366,279 385,511Deposits 160,012 160,922 165,806 176,390 182,344 184,756 187,196 189,666 153,577 176,390 189,666 198,251 207,284Risk weighted assets 198,000 206,000 207,000 215,000 213,805 217,798 221,476 225,246 191,858 215,000 225,246 236,925 249,365Equity 22,234 22,837 23,564 24,454 24,025 24,755 25,559 26,357 22,340 24,454 26,357 28,802 31,380Tier 1 capital 20,070 20,712 21,433 21,049 21,335 22,065 22,869 23,667 19,577 21,049 23,667 26,112 28,690of which core tier 1 capital 18,182 18,785 19,512 19,103 19,408 20,138 20,942 21,740 17,766 19,103 21,740 24,185 26,763

Credit quality Impaired loans, gross 4,453 4,407 4,651 4,849 5,076 5,082 5,076 5,060 4,102 4,849 5,060 5,060 5,060Reserves 2,423 2,469 2,524 2,534 2,575 2,572 2,559 2,536 2,156 2,534 2,536 2,410 2,357Impaired loans, net 2,030 1,938 2,127 2,315 2,501 2,509 2,517 2,524 1,946 2,315 2,524 2,650 2,703

Bad debt charge / Average loans (%) 0.36 0,33 0,27 0,21 0,30 0,16 0,14 0,13 0,54 0,29 0,18 0,13 0,14Gross NPLs / Total Loans (%) 1.51 1,44 1,47 1,53 1,52 1,50 1,47 1,44 1,44 1,53 1,44 1,37 1,30Risk Provisions / NPLs (%) 54 56 54 52 51 51 50 50 53 52 50 48 47

Capital ratios Tier 1 capital ratio (%) 10.1 10.1 10.4 9.8 10.0 10.1 10.3 10.5 10.2 9.8 10.5 11.0 11.5o/w core tier 1 capital ratio (%) 9.2 9.1 9.4 8.9 9.1 9.2 9.5 9.7 9.3 8.9 9.7 10.2 10.7

Return analysis (%) RoE (stated) 11.5 9.5 12.2 12.8 12.2 12.0 12.8 12.3 11.6 11.1 12.1 13.4 13.5RoE (adjusted) 11.6 8.9 12.2 13.2 12.2 12.0 12.8 12.3 11.4 11.3 12.1 13.4 13.5Return tier 1 capital 13.1 9.8 13.4 14.9 14.0 13.4 14.3 13.7 12.9 13.0 13.7 14.9 14.9Return on core tier 1 capital 14.4 10.8 14.8 16.4 15.4 14.8 15.7 15.0 14.2 14.4 15.0 16.1 16.0NII/average RWA's 1.72 1.68 1.70 1.74 1.64 1.67 1.70 1.71 1.93 1.73 1.70 1.77 1.81NII/average deposits+lending 1.11 1.09 1.11 1.13 1.06 1.08 1.10 1.11 1.24 1.11 1.10 1.15 1.17

Growth rates, Y/Y Net interest income (%) -9 -4 -1 5 7 12 10 8 4 -2 9 12 7Net commission income (%) 25 31 20 33 27 12 11 -2 -13 27 11 6 5Total income (%) 1 -10 4 16 9 15 4 0 11 2 7 8 6Total costs (%) 7 6 10 4 9 10 5 4 4 7 7 1 1Operating profit (%) 5 -17 15 81 14 45 14 1 -11 17 16 20 10Net profit (%) 3 -13 14 72 15 36 13 4 -15 13 18 20 10Adjusted profit (%) 5 -17 15 80 14 46 14 1 -11 16 16 20 10Lending (%) 7 9 11 11 13 11 9 11 7 11 11 5 5Deposits (%) 7 8 12 15 14 15 13 8 3 15 8 5 5Risk weighted assets (%) 5 7 8 12 8 6 7 5 -10 12 5 5 5Source: SEB Enskilda and company data

SEB ENSKILDA


25 13 June 2011

P&L and key balance sheet items - Swedbank

Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11E Q3/11E Q4/11E 2009 2010 2011E 2012E 2013E Net interest income 4,023 3,799 3,980 4,527 4,527 4,612 4,653 4,852 20,765 16,329 18,644 20,378 21,481Net commission income 2,286 2,395 2,310 2,538 2,301 2,389 2,359 2,503 8,453 9,529 9,551 9,985 10,352Net gains on items at fair value 643 809 574 357 255 548 479 479 2,731 2,383 1,760 2,031 2,154Net insurance revenue 120 140 172 147 114 150 150 150 647 579 564 584 604Share of profit/loss of associated cos 146 160 191 127 171 172 174 175 222 624 692 726 763Other revenue 449 469 420 262 1,084 434 434 434 1,812 1,600 2,386 1,858 1,851Total income 7,667 7,772 7,647 7,958 8,452 8,305 8,248 8,592 34,630 31,044 33,597 35,563 37,205

Staff costs -2,296 -2,282 -2,261 -2,213 -2,321 -2,386 -2,203 -2,366 -9,184 -9,052 -9,276 -9,366 -9,419Profit-based staff costs -79 -141 -19 -101 -146 -150 -200 -200 -627 -340 -696 -724 -753Other costs -1,808 -1,781 -1,721 -2,034 -1,693 -1,843 -1,679 -1,920 -7,342 -7,344 -7,135 -7,249 -7,319Depreciation -208 -219 -237 -242 -224 -224 -224 -224 -909 -906 -896 -896 -896Total costs -4,391 -4,423 -4,238 -4,590 -4,384 -4,603 -4,307 -4,710 -18,062 -17,642 -18,003 -18,235 -18,387

Pre-provision profit 3,276 3,349 3,409 3,368 4,068 3,702 3,941 3,882 16,568 13,402 15,593 17,328 18,818Loan losses -2,260 -1,091 -173 77 970 315 159 71 -24,738 -3,447 1,515 -139 -1,384Operating profit 1,016 2,258 3,236 3,445 5,038 4,017 4,100 3,953 -8,170 9,955 17,109 17,189 17,434

XO items and other adjustments 0 0 0 0 0 0 0 0 -1,291 0 0 0 0

Reported pre-tax profit 1,016 2,258 3,236 3,445 5,038 4,017 4,100 3,953 -9,461 9,955 17,109 17,189 17,434Tax -469 -672 -638 -693 -1,182 -755 -778 -760 -981 -2,472 -3,475 -3,958 -4,091Profit from discontinued operations 0 0 0 0 0 0 0 0 0 0 1 2 2Minorities 11 19 7 2 4 15 15 15 69 39 49 50 50Net attributable profit 536 1,567 2,591 2,750 3,852 3,248 3,308 3,178 -10,511 7,444 13,586 13,183 13,295Adjusted net attributable profit 536 1,567 2,591 2,750 3,852 3,248 3,308 3,178 -9,270 7,444 13,585 13,181 13,293

EPS 0.46 1.35 2.23 2.37 3.32 2.83 2.97 2.96 -12.80 6.42 12.10 12.96 13.68Adjusted EPS 0.46 1.35 2.23 2.37 3.32 2.83 2.97 2.96 -11.29 6.42 12.10 12.96 13.68DPS 0.00 2.10 6.50 6.80 6.90

Key Balance Sheet Items (SEKm) Lending 1,214,007 1,239,104 1,214,302 1,187,226 1,173,981 1,188,963 1,202,210 1,215,537 1,290,667 1,187,226 1,215,537 1,280,384 1,357,363

Deposits 511,142 529,048 523,683 534,237 524,107 542,013 547,037 552,099 504,424 534,237 552,099 595,585 620,435Risk weighted assets 777,201 772,164 763,675 750,440 747,125 739,654 732,257 724,935 784,469 750,440 724,935 763,609 809,518Equity 89,340 91,007 92,851 94,897 95,536 94,574 91,084 88,361 89,670 94,897 88,361 87,115 91,517Tier 1 capital 80,367 81,171 82,173 82,385 83,971 83,009 79,519 76,796 81,689 82,385 76,796 75,550 79,952of which core tier 1 capital 73,321 73,682 74,950 75,470 77,329 76,367 72,877 70,154 72,471 75,470 70,154 68,908 73,310

Credit Quality Impaired loans, gross 40,328 42,719 38,631 34,778 31,747 30,800 30,174 29,729 40,132 34,778 29,729 20,950 16,049Reserves 26,573 27,132 24,674 19,367 17,937 17,182 16,597 16,113 26,017 19,367 16,113 12,189 10,180Impaired loans, net 13,755 15,587 13,957 15,411 13,810 13,618 13,577 13,617 14,115 15,411 13,617 8,761 5,869

Bad debt charge / Average loans (%) 0.72 0.36 0.06 -0.03 -0.33 -0.11 -0.05 -0.02 1.92 0.28 -0.13 0.01 0.10Gross NPLs / Total Loans (%) 3.25 3.37 3.12 2.88 2.66 2.55 2.48 2.41 3.05 2.88 2.41 1.62 1.17Risk Provisions / NPLs (%) 66 64 64 56 57 56 55 54 65 56 54 58 63

Capital Ratios Tier 1 capital ratio (%) 10.3 10.5 10.8 11.0 11.2 11.2 10.9 10.6 10.4 11.0 10.6 9.9 9.9o/w core tier 1 capital ratio (%) 9.4 9.5 9.8 10.1 10.4 10.3 10.0 9.7 9.2 10.1 9.7 9.0 9.1

Return Analysis (%) RoE (stated) 2.4 7.0 11.3 11.7 16.2 13.7 14.3 14.2 -12.0 8.1 14.8 15.0 14.9RoE (adjusted) 2.4 7.0 11.3 11.7 16.2 13.7 14.3 14.2 -10.5 8.1 14.8 15.0 14.9Return tier 1 capital 2.6 7.8 12.7 13.4 18.5 15.6 16.3 16.3 -11.7 9.1 17.1 17.3 17.1Return on core tier 1 capital 2.9 8.5 13.9 14.6 20.2 16.9 17.7 17.8 -13.2 10.1 18.7 19.0 18.7NII/average RWA's 2.06 1.96 2.07 2.39 2.42 2.48 2.53 2.66 2.44 2.13 2.53 2.74 2.73NII/average deposits+lending 0.52 0.55 0.53 0.59 0.54 0.56 0.54 0.57 0.47 0.54 0.55 0.55 0.54

Growth Rates, Y/Y Net interest income (%) -31 -28 -21 -4 13 21 17 7 -4 -21 14 9 5Net commission income (%) 23 18 5 7 1 0 2 -1 -4 13 0 5 4Total income (%) -23 -10 -6 0 10 7 8 8 -2 -10 8 6 5Total costs (%) -5 5 -6 -3 0 4 2 3 1 -2 2 1 1Operating profit (%) -165 -200 -224 -299 396 78 27 15 -157 -222 72 0 1Net profit (%) -116 -178 -178 -252 619 107 28 16 -197 -171 83 -3 1Adjusted profit (%) -134 -164 -177 -247 619 107 28 16 -182 -180 82 -3 1Lending (%) -5 -3 -2 -8 -3 -4 -1 2 0 -8 2 5 6Deposits (%) 8 13 10 6 3 2 4 3 -1 6 3 8 4Risk weighted assets (%) -4 -3 -3 -4 -4 -4 -4 -3 -14 -4 -3 5 6Source: SEB Enskilda and company data

SEB ENSKILDA


26 13 June 2011

P&L and key balance sheet items - Handelsbanken

Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11E Q3/11E Q4/11E 2009 2010 2011E 2012E 2013E Net interest income 5,316 5,082 5,327 5,612 5,507 5,766 5,871 5,980 22,000 21,337 23,124 24,775 26,332Net commission income 1,983 1,988 1,924 2,127 1,944 1,990 1,966 2,077 7,393 8,022 7,978 8,514 9,030Net gains on items at fair value 500 424 177 264 361 400 440 450 2,457 1,365 1,651 1,549 1,617Risk result - insurance 37 59 42 67 81 40 40 40 171 205 201 201 201Other dividend income 131 55 3 1 1 50 3 1 141 190 55 61 67Share of profits of associates 7 7 1 -4 2 2 2 2 26 11 8 28 48Other operating income 35 38 32 50 42 -1 51 58 147 156 150 161 173Total income 8,009 7,653 7,506 8,117 7,938 8,247 8,373 8,609 32,335 31,286 33,167 35,289 37,468 Staff costs 2,356 2,352 2,330 2,466 2,457 2,450 2,450 2,450 10,018 9,504 9,807 10,297 10,812Other administrative expenses 1,195 1,276 1,166 1,435 1,189 1,245 1,104 1,293 4,719 5,072 4,831 5,159 5,489Depreciation 115 117 114 106 118 119 120 121 483 452 478 488 497Total costs 3,666 3,745 3,610 4,007 3,764 3,814 3,674 3,864 15,220 15,028 15,116 15,944 16,799

Pre-provision profit 4,343 3,908 3,896 4,110 4,174 4,433 4,699 4,745 17,115 16,258 18,051 19,345 20,669Loan losses 551 369 294 293 244 340 230 320 3,392 1,507 1,134 1,445 1,445Disposal of tang. & intang. assets 0 0 4 -5 0 0 0 0 4 -1 0 0 0Operating profit 3,792 3,539 3,606 3,812 3,930 4,093 4,469 4,425 13,727 14,750 16,917 17,900 19,224

XO-items and other adjustments 29 53 46 89 49 20 20 20 36 217 109 0 0

Reported pre-tax profit 3,821 3,592 3,652 3,901 3,979 4,113 4,489 4,445 13,763 14,967 17,026 17,900 19,224Tax 968 1,019 945 1,030 1,047 1,069 1,167 1,156 3,519 3,962 4,439 4,654 4,998Minority interests 0 0 0 0 0 0 0 0 0 0 0 0 0Net attributable profit 2,853 2,573 2,707 2,871 2,932 3,044 3,322 3,289 10,244 11,005 12,587 13,246 14,226Adjusted attributable profit 2,832 2,535 2,673 2,805 2,896 3,029 3,307 3,274 10,217 10,845 12,506 13,246 14,226

EPS 4.59 4.14 4.35 4.61 4.71 4.89 5.34 5.28 16.43 17.69 20.22 21.28 22.85Adjusted EPS 4.55 4.08 4.30 4.50 4.65 4.87 5.31 5.26 16.39 17.44 20.09 21.28 22.85DPS 8.00 9.00 9.50 10.00 10.50

Key balance sheet items (SEKm) Lending 1,467,686 1,484,406 1,469,109 1,481,678 1,531,500 1,548,820 1,571,183 1,594,094 1,477,183 1,481,678 1,594,094 1,683,283 1,778,059

Deposits 580,612 580,113 572,723 546,173 641,709 645,567 649,489 653,477 549,748 546,173 653,477 705,755 762,215Risk weighted assets 944,150 954,750 943,325 953,563 960,190 966,194 975,244 984,518 941,100 953,563 984,518 1,039,601 1,098,135Equity 85,941 82,592 84,698 88,391 85,311 88,355 91,677 94,966 83,088 88,391 94,966 102,297 110,298Tier 1 capital 86,043 86,587 86,890 87,796 88,819 91,863 95,185 98,474 85,575 87,796 98,474 105,805 113,806of which core tier 1 capital 71,542 71,975 72,671 73,597 74,805 77,849 81,171 84,460 70,730 73,597 84,460 91,791 99,792

Credit quality Impaired loans, gross 7,886 8,594 8,509 9,212 9,132 9,244 9,243 9,332 8,615 9,212 9,332 9,843 10,304Reserves 5,743 5,839 5,786 5,592 5,517 5,564 5,504 5,533 5,380 5,592 5,533 5,583 5,622Impaired loans, net 2,143 2,755 2,723 3,620 3,615 3,680 3,738 3,798 3,235 3,620 3,798 4,261 4,682

Bad debt charge / Av. loans (%) 0.15 0.10 0.08 0.08 0.06 0.09 0.06 0.08 0.23 0.10 0.07 0.09 0.08Gross NPLs / Total Loans (%) 0.54 0.58 0.58 0.62 0.59 0.59 0.59 0.58 0.58 0.62 0.58 0.58 0.58Risk Provisions / NPLs (%) 73 68 68 61 60 60 60 59 62 61 59 57 55

Capital ratios Tier 1 capital ratio (%) 9.1 9.1 9.2 9.2 9.3 9.5 9.8 10.0 9.1 9.2 10.0 10.2 10.4o/w core tier 1 capital ratio (%) 7.6 7.5 7.7 7.7 7.8 8.1 8.3 8.6 7.5 7.7 8.6 8.8 9.1


Growth rates, Y/Y Net interest income (%) -1 -10 -5 5 4 13 10 7 14 -3 8 7 6Net commission income (%) 14 7 7 7 -2 0 2 -2 9 9 -1 7 6Total income (%) -4 -7 -3 2 -1 8 12 6 7 -3 6 6 6Total costs (%) 0 -2 -1 -1 3 2 2 -4 15 -1 1 5 5Operating profit (%) 0 3 11 18 4 16 24 16 -10 7 15 6 7Net profit (%) 3 2 11 14 3 18 23 15 -16 7 14 5 7Adjusted profit (%) -1 0 10 12 2 19 24 17 -13 6 15 6 7Lending (%) -3 -1 0 0 4 4 7 8 0 0 8 6 6Deposits (%) 3 2 -5 -1 11 11 13 20 1 -1 20 8 8Risk weighted assets (%) -4 0 2 1 2 1 3 3 -14 1 3 6 6Source: SEB Enskilda and company data

SEB ENSKILDA


27 13 June 2011

P&L and key balance sheet items - SEB

(SEKm) Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11E Q3/11E Q4/11E 2009 2010 2011E 2012E 2013E Net interest income 3,542 3,762 4,180 4,526 4,261 4,404 4,550 4,744 18,046 16,010 17,958 19,042 19,947Net fee and commission income 3,194 3,673 3,387 3,906 3,503 3,577 3,398 3,704 13,470 14,160 14,181 14,642 15,270Net financial income 950 977 727 512 1,235 822 824 830 4,488 3,166 3,711 3,512 3,730Net life insurance income 879 778 818 780 782 825 862 900 3,597 3,255 3,369 3,627 4,029Other income 170 34 -230 314 -109 129 129 129 589 288 278 541 542Total income 8,735 9,224 8,882 10,038 9,672 9,757 9,763 10,307 40,190 36,879 39,498 41,363 43,518

Staff costs -3,438 -3,616 -3,392 -3,558 -3,610 -3,695 -3,654 -3,747 -14,244 -14,004 -14,706 -15,157 -15,611Other expenses -1,784 -1,875 -1,679 -1,965 -1,798 -1,935 -1,801 -1,977 -6,620 -7,303 -7,512 -7,564 -7,599Net deferred acquisition costs 0 0 0 0 0 0 0 0 0 0 0 0 1Depr., amort. and impairment charges -409 -416 -405 -650 -433 -430 -406 -658 -1,684 -1,880 -1,927 -1,947 -1,971Restructuring costs 0 0 0 0 0 0 0 0 0 0 0 0 0Total costs -5,631 -5,907 -5,476 -6,173 -5,841 -6,061 -5,861 -6,383 -22,548 -23,187 -24,145 -24,669 -25,180

Pre-provision profit 3,104 3,317 3,406 3,865 3,831 3,696 3,902 3,924 17,642 13,692 15,353 16,695 18,338Gains/losses tang. & intangible assets -4 -3 0 21 6 3 3 3 4 14 15 13 14Loan losses -1,813 -639 196 419 537 275 125 -75 -12,030 -1,837 862 -1,003 -1,378Operating profit 1,287 2,675 3,602 4,305 4,374 3,974 4,030 3,852 5,616 11,869 16,230 15,705 16,974

XO items and other adjustments -146 -71 -2,241 -92 -893 0 0 0 -1,956 -2,550 -893 0 0

Reported pre-tax profit 1,141 2,604 1,361 4,213 3,481 3,974 4,030 3,852 3,660 9,319 15,337 15,705 16,974Tax -452 -600 -765 -704 -865 -770 -811 -869 -2,482 -2,521 -3,315 -3,817 -4,086Minority interests -15 -17 -15 -6 -14 -15 -15 -15 -64 -53 -59 -64 -64Net attributable profit 674 1,987 581 3,503 2,602 3,189 3,204 2,969 1,114 6,745 11,963 11,824 12,824Adjusted attributable profit 674 1,972 2,835 3,384 3,434 3,112 3,139 2,945 2,327 8,864 12,631 11,824 12,824

EPS 0.31 0.91 0.26 1.60 1.19 1.45 1.46 1.35 0.61 3.07 5.45 5.39 5.84Adjusted EPS 0.31 0.90 1.29 1.54 1.57 1.42 1.43 1.34 1.28 4.04 5.76 5.39 5.84DPS 1.00 1.50 2.00 2.20 2.40

Key balance sheet items (SEKm) Lending 1,203,833 1,226,476 1,088,736 1,074,879 1,113,807 1,114,757 1,136,783 1,158,889 1,187,837 1,074,879 1,158,889 1,220,559 1,284,080Deposits 739,907 759,347 717,005 711,541 707,095 707,845 708,613 709,398 801,088 711,541 709,398 733,588 758,818Risk weighted assets 811,808 824,462 797,483 799,798 777,000 777,663 793,028 808,450 795,177 799,798 808,450 877,015 950,337Equity 100,091 98,214 97,105 99,543 97,856 100,968 104,107 107,052 99,417 99,543 107,052 114,488 122,484Tier 1 capital 100,411 102,195 100,896 101,980 102,362 109,304 112,443 115,388 101,604 101,980 115,388 122,824 130,820of which core tier 1 capital 84,684 86,216 86,164 87,387 88,190 95,132 98,271 101,216 85,381 87,387 101,216 108,652 116,648

Credit quality Impaired loans, gross 27.219 26,900 25,621 24,200 22,069 20,691 19,531 18,629 28,573 24,200 18,629 17,770 16,482Reserves 19.141 18,963 17,362 16,000 14,204 13,233 12,452 11,901 18,555 16,000 11,901 10,273 9,252Impaired loans, net 8.078 7,937 8,259 8,200 7,865 7,458 7,079 6,729 10,018 8,200 6,729 7,497 7,230

Bad debt charge / Average loans (%) 0.61 0.21 -0.07 -0.15 -0.20 -0.10 -0.04 0.03 0.97 0.16 -0.08 0.08 0.11Gross NPLs / Total Loans (%) 2.23 2.16 2.32 2.22 1.96 1.83 1.70 1.59 2.37 2.22 1.59 1.44 1.27Risk Provisions / NPLs (%) 70 70 68 66 64 64 64 64 65 66 64 58 56

Capital ratios (transition rules) Tier 1 capital ratio (%) 12.4 12.4 12.7 12.8 13.2 14.1 14.2 14.3 12.8 12.8 14.3 14.0 13.8o/w core tier 1 capital ratio (%) 10.4 10.5 10.8 10.9 11.4 12.2 12.4 12.5 10.7 10.9 12.5 12.4 12.3


Growth rates (y-o-y) Net interest income (%) -35 -25 0 36 20 17 9 5 -4 -11 12 6 5Net commission income (%) 8 5 4 4 10 -3 0 -5 -12 5 0 3 4Total income (%) -19 -18 -2 10 11 6 10 3 -3 -8 7 5 5Total costs (%) -3 1 5 8 4 3 7 3 -9 3 4 2 2Operating profit (%) -51 37 414 1189 240 49 12 -11 -58 111 37 -3 8Net profit (%) -34 -1130 2321 1258 286 60 451 -15 -89 505 77 -1 8Adjusted profit (%) -50 96 11711 -6250 410 58 11 -13 -78 281 42 -6 8Lending (%) -9 -6 -10 -10 -7 -9 4 8 -8 -10 8 5 5Deposits (%) -11 -8 -5 -11 -4 -7 -1 0 -5 -11 0 3 3Risk weighted assets (%) -2 -3 -1 6 -4 -6 -1 1 -19 1 1 8 8Source: SEB Enskilda and company data

SEB ENSKILDA


28 13 June 2011

Appendix I The following table is based on Boreda’s unique database on the financials of Swedish tenant-owner’s associations. It is based on the most recently released P&Ls and balance sheets and captures 11,400 tenant-owner’s associations responsible for roughly 85% of borrowing by such entities in Sweden. Each bracket includes 570 tenant-owner’s associations.

Detailed data on Swedish tenant-owner's associations sorted by debt per sqm

Bracket

Sum of outstanding

TOA debt, (SEKm)

Share of

total TOA debt (%)

Avg TOA

debt, SEKth/sqm

Avg interest

cost, SEK/sqm

Avg non-interest

cost, SEKt/sqm

Avg net result/Long

term debt (%)

Share of TOAs with

positive net result (%)

Avg interest cost/Long term debt

(%)

Average member fee/Long

term debt (%)

Avg share of short

term debt (%)

Aveconstruction

year

Avg year of TOA

formation 1 262 0.12 83 12 516 3.03 59.47 2.65 126.07 36.78 1949 19672 1 987 0.91 564 23 506 2.91 66.55 4.15 83.25 50.16 1952 19623 3 719 1.70 952 37 515 2.37 67.37 3.91 51.77 45.88 1952 19614 4 621 2.11 1 305 51 524 0.79 63.57 3.89 37.76 41.38 1951 19605 5 472 2.50 1 640 61 526 0.76 65.50 3.73 31.63 40.23 1950 19606 6 218 2.84 1 987 73 540 0.16 60.70 3.70 26.29 41.27 1949 19627 6 976 3.18 2 338 87 550 -0.20 61.82 3.73 22.95 41.70 1950 19638 7 333 3.35 2 721 99 557 -0.16 62.87 3.63 20.27 39.77 1949 19669 8 527 3.89 3 165 112 560 -0.38 59.12 3.53 17.75 44.75 1950 197110 9 042 4.13 3 692 136 551 -0.15 63.92 3.68 15.42 42.57 1952 197511 9 007 4.11 4 253 156 578 -0.70 60.07 3.66 13.79 43.38 1952 197812 10 932 4.99 4 896 179 555 -0.08 59.65 3.65 12.01 40.73 1956 198613 11 557 5.27 5 558 207 524 0.17 60.95 3.73 11.10 42.22 1959 198814 12 565 5.73 6 221 227 522 0.09 63.57 3.66 9.78 42.88 1962 199215 15 567 7.10 6 913 258 513 0.15 65.26 3.73 9.19 38.89 1967 199416 17 011 7.76 7 665 280 496 0.21 65.67 3.65 8.52 39.52 1972 199717 19 470 8.88 8 431 305 477 0.29 67.95 3.62 7.95 36.85 1976 199818 20 938 9.55 9 289 327 462 0.43 73.86 3.52 7.31 38.84 1981 200019 23 185 10.58 10 396 364 493 0.00 74.96 3.50 6.57 38.25 1983 200220 24 788 11.31 14 146 480 707 -0.58 63.16 3.41 4.85 48.16 1972 2004Total 219 176 100.00 4 811 174 534 0.46 64.30 3.64 26.21 41.71 1959 1979Source: SEB Enskilda and Boreda

SEB ENSKILDA


29 13 June 2011

Target prices and risks Target price definition and associated risks Our target price is the analyst's assessment of what total return an investor should expect over the coming six to 12 months. The target is based on fundamental equity research and other factors at the analyst's discretion. Please refer to published reports on the individual companies for a detailed description of the target price methodology.

Risk levels The risk level is the analyst’s view of the uncertainty in the earnings forecasts based on an assessment of the company’s business model, operating risk as well as financial risk. We use two risk levels with the following explanations:

Normal risk: All forecasts involve uncertainty and we view companies in this risk level to have normal forecast risks

High risk: The earnings forecasts are more uncertain than for an average listed company due to business model, operating risk, financial risk or any other reason at the analyst’s discretion. All companies with shorter track record than 12 months as a listed company are by definition classified as high risk according to SEB Enskilda.

SEB ENSKILDA


30 13 June 2011

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SEB ENSKILDA


31 13 June 2011

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SEB Enskilda’s standardised recommendation structure Consolidated distribution Corporate Finance clients last 12M. as per 31 Mar 2011 (%) Distribution as per 31 Mar 2011 (%) Buy Attractive risk/reward - at least 10% upside to target price. 61.5 11.2 Hold Fairly valued - the shares are trading close to target price. 34.5 3.7 Sell Unattractive risk/reward - the shares are trading above target price. 4.0 0.3 Unrated Company not covered, or we are not allowed to have a recommendation for compliance reasons.

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