Key operational risks
With robust balance sheets, relatively stable liquidity and earnings growth, Nordic
banks have gone through the credit crisis largely unaffected. We expect increasing
risk to revenue growth going forward. Slowing loan growth, a turning credit cycle,
weakening equity market activity, and funding and lending competition should give
way for marked profitability pressure for the Nordic banks.
Our 2008-09 forecasts are 9% below consensus
In our view, the main risks to earnings come from equity market related income and
loan losses. 1) Booming Nordic equity market trends during the last couple of years
have resulted in record-high commission and explaining 50% of total revenue growth.
We see 6-7% downside to consensus estimates for commissions and net financial
income in 2008-09. Trends during previous troughs suggest notable contraction of
equity market related revenue. 2) After years of net recoveries, sharply falling
provisioning levels and aggressive loan growth in Nordic and emerging markets,
Nordic banks should experience a normalisation of loan losses. we see loan losses
going from 3bps to 22bps over in 2009 vs consensus 17bps.
M&A unlikely
The divestment of the Swedish government's stake in Nordea is still on investors'
minds and may be an upside risk to share prices. However, we believe M&A risk is
overstated. Many international banks are short of capital and the Swedish
government is unlikely to advocate an in-market merger at this stage of the cycle
owing to the negative effects on Swedish labour supply.
Stock specific views
On a sector level, some earnings uncertainty appears to be priced in, but we see
further downside. We downgrade SEB to a Sell in view of the cyclicality for the banks
operations, and Nordea to Sell owing to its high valuation; SHB remains Sell due to
the low profitability and growth we expect. We downgrade Danske Bank to a Hold
following the macro headwinds, Swedbank stays at Hold as much of the Baltic
banking risk looks priced in. We initiate coverage of DnB NOR with a Hold as we see
earnings resilience and capital strength but no clear share price triggers. More
attractive options may be found outside of the Nordic universe; we believe Santander
(Buy) and HSBC (Hold) present better price upside potential.

Contents
B A N K S 2 5 A P R I L 2 0 0 8 2
E X E C U T I V E S U M M A R Y
Not immune 3
At 9% below 2008-09F consensus, we have a contrarian view on Nordic banks,
which have been relatively unaffected by the first-round downturn. We believe
they are not immune to second-round earnings effects.
V A L U A T I O N C O M M E N T
Valuation 9
Whilst in line with historical average PEs, Nordic banks are trading at a discount
on a P/B basis. However, with risks to the wider economy and downside to
consensus ROEs, we see downside to share prices.
I N V E S T M E N T V I E W
Earnings instability 11
So far the actual impact from market turbulence has been limited. However,
falling risk appetite, record-low loan-loss charges, slumping provision levels and a
few years of aggressive lending leave room for earnings downside.
S E C T O R D Y N A M I C S
Sensitivity analysis 18
Stressing earnings beyond our base case highlights the weaknesses for the
individual banks. Contrary to what many assume, low risk today does not
necessarily correlate with historically low risk.
C O M P A N Y P R O F I L E S
Danske Bank 22
DnB NOR 24
Nordea 40
S E B 42
Svenska Handelsbanken 44
Swedbank 46
A P P E N D I X
Appendix 48
2008F and 2009F pre-tax profit streams: ABN AMRO forecasts versus consensus 48