Global Financial Services Economic Overview: FSI Health … · and delinquency rates suggests that banks charge-offs will continue to rise. 2009-Q4 data: Still more bad loans, but

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Global Financial Services Economic Overview: FSI Health Indicators Q409

Dr. Jeff Loucks, Douglas P. HandlerCisco IBSG Research & Economics PracticeMarch 15, 2010

2Copyright © 2010 Cisco Systems, Inc. All rights reserved.Cisco ConfidentialCisco Confidential Internet Business Solutions Group

U.S. and Europe: Economic and

Overall FSI Industry Health


Executive Summary: Economic Outlook Q409Economic Outlook:

• U.S.: 2010 looking much better than 2009, but still not good. Consumer and business spending to resume near trend growth rates.

1. Future impact of shifting fiscal and monetary policies from “accelerate” to “neutral” remains to be seen.

2. High unemployment and the mid-term elections in November will create uncertainty and weak policy commitments to major structural reforms.

• Europe: 2010 looking a bit better than 2009, but still not good. Recession relapses possible in Germany, Italy and elsewhere.

1. Weaker Euro may help spur exports by the end of 2010.

2. Sovereign debt crises divert resources that could be used for additional economic stimulus.


Health Check: U.S. Economy and Overall FSI Industry – Q409

Sources: Cisco IBSG Economics, 3/10; U.S. Bureau of Labor Statistics, 3/10; U.S. Bureau of Economic Analysis, 3/10; U.S. Federal Reserve, 3/10 Board, 3/10

U.S. Economy and FSI: Key Metrics and Trend Line

Category Metric Latest Results Trend Line Trend

PeriodEconomic Growth Real GDP (% ch. Q/Q

ann. rate)5.9%

(2009q4)12m

Labor Market Unemployment Rate 9.7%(2010q1 est.)

12m

Financial Services Profits

Gross Profits $305 bn (2009q3)

12m

Yield Curve Slope 10 yr. t-bond – 3 mo., t-bill yield

3.5%(2010q1 est.)

12m

Asset Quality Bank loan charge-off rates

2.9% (2009q4)

12m

Consumer Credit Growth

Consumer credit growth (Q309 % ch. Y/Y)

-4.1% (2009q4)

12m

Presenter

Presentation Notes

Notes: Unless otherwise indicated, “Latest Results” for the metrics included are from Q309. Financial Services Profits=Gross Profits from banks, insurance companies and other financial institutions. Excludes Federal Reserve Board profits (includes banks, insurance companies and other financial institutions. Data from the U.S. Bureau of Economic Analysis, Table 6.16d.


U.S. Economic Growth: GDPThree straight quarters of growth, but forecasts signal dip.

Annualized Q/Q growth

Source: US BEA, 3/10; IBSG Economics, 3/10

= Recession periods

Compared with 2001, a much deeper recession with a much

more muted recovery.


% of labor force

Source: US BLS, 3/10

U.S. Economic Growth: Unemployment rateStill a rising trend, but latest observations are hopeful for a shift in direction.

Extended definition = unemployed + employed part time for economic reasons + discouraged workers

Following the end of the 2001 recession, it took 2-3 years for

the unemployment rate to meaningfully reverse itself.


$bn

Source: US BEA, table 6.16d, excludes Federal Reserve Board profits (includes banks, insurance companies and other financial institutions)

U.S. Economic Growth: Financial Services gross profitsIs the worst over for U.S. financial services firms?

Concentrated bank write-offs

Increase in trading profits


U.S. Economic Growth:U.S. Yield Curve: Spread between long-run and short-run rates

Rate differential

Source: US FRB, 3/10; IBSG Economics, 3/10

= Recession periods

The beginning of the Federal Reserve Board unwinding its

ultra-loose monetary policy.


U.S. Economic Growth:Bank loan and lease charge-off and delinquency rates

Share of bank loans and leases

The widening gap between charge-off rates and delinquency rates suggests that banks

charge-offs will continue to rise.

2009-Q4 data: Still more bad loans, but perhaps a turning point is near. Most of the improvement can be traced to consumer loans. Business loans are still souring.



U.S. Economic Growth:Bank charge-off rates by type of loan

Share of bank loans and leases

57% of loans *

20% of loans *

12% of loans *

* Other loan types not shown.Source: US FRB, 3/10; IBSG Economics, 3/10


% change vs. year-ago

U.S. Economic Growth:Consumer credit continues to fall



Health Check: European Economy and Overall FSI Industry – Q409

Sources: Cisco IBSG Economics, 1/10; Eurostat, 12/09; European Central Bank, 12/09; Government Economic Ministries, 12/09

European Economy and FSI: Key Metrics and Trend Line

Category Metric Latest Results Trend Line Trend

Period

Economic Growth Real GDP (% ch. Q/Q ann. rate)

-0.8-1.6%(2009q4) 12m

Labor Market Unemployment Rate 9.3% (Dec 2009) 12m

Financial Sector Asset Growth Asset Growth 9.0%

(2009q4) 12m

Yield Curve SlopeLong-term minus short-term yields (Eurozone average)

3.1% (2010q1 est.) 12m

Bank Lending Conditions

Net percentage of banks tightening lending standards

6%(2009q4) 12m

Presenter

Presentation Notes

Notes: Unless otherwise indicated, “Latest Results” for the metrics included are from Q309. Financial Sector Asset Growth: Euro area (changing composition), Outstanding amounts at the end of the period (stocks), Eurosystem reporting sector - External assets, Total maturity, All currencies combined - Extra Euro area counterpart, unspecified counterpart sector, denominated in Euro. Data neither seasonally nor working day adjusted. Source - Eurostat series BSI.M.U2.N.C.AXG.A.1.U4.0000.Z01.


E-4 Economic Growth: Real GDPTepid growth returned in 2009 and will continue through 2010.

Source: Local country sources, IBSG Economics

Annualized Q/Q growth


E-4 Economic Growth: Unemployment Rates

% of labor force


European Economic Growth:Financial Sector asset growth abating

Y/Y % change (Euros)

Source: Eurostat series BSI.M.U2.N.C.AXG.A.1.U4.0000.Z01. Euro area (changing composition), Outstanding amounts at the end of the period (stocks), Eurosystem reporting sector - External assets, Total maturity, All currencies combined - Extra Euro area counterpart, Unspecified counterpart sector sector, denominated in Euro, data Neither seasonally or working day adjusted


European Economic Growth:European Yield Curve: Spread between long-run and short-run rates

Rate differential

Source: US FRB, IBSG Economics


European Economic Growth:Slow economic growth and a low rate differential vs. US rates suggest that the Euro will remain weak vs. US$


European Economic Growth:Loan margins and terms are become less favorable to banks

Source: http://www.ecb.int/stats/money/surveys/lend/html/index.en.html (European Central Bank survey of 118 banks in the Euro area). Scores below zero indicate that more banks are loosening standards than tightening them.


Health Check -Banks: U.S. &

Canada and Europe


Executive Summary: Banking Sector Q409

Banking Sector:

• U.S.: Difficult times remain, but the worst might be over, particularly for institutions with a large consumer business.

1. Second wave of housing foreclosures may still derail recovery.

2. Bank failures among second-tier, regional and local banks still mounting: FDIC’s "problem list" of troubled banks and thrifts swelled to 702 at the end of 2009, still growing.

• Europe: Conditions still deteriorating, with little offset in sight from domestic economic growth.

1. Lending conditions more onerous.

2. Return on assets continues to fall; share of non-performing loans still rising.


Health Check: U.S. & Canadian Banks– Q409

Sources: Cisco IBSG Economics, 1/10; Company Financial Reports, 1/10; Capital IQ, 12/09

Category Metric Coverage Latest Results Trend Line Trend

Period

Profitability Return on Assets U.S. & Canadian Banks 0.30% 12m

Risk Non-performing Loans

U.S. & Canadian Banks 2.38% 12m

Capital Strength Tier 1 Capital Ratio


Efficiency Bank Efficiency Ratio


Growth Revenues (excl. loan losses)(% change Y/Y)

JPMC, WFC, C, BAC 57.2% 12m

U.S. & Canadian Banks: Key Metrics and Trend Line

Presenter

Presentation Notes

Notes: The results provided in the table are averages of the FSIs covered. For metrics in which companies’ reported numbers were difficult to reconcile, or in which they would have badly skewed the average, they were omitted. Unless otherwise indicated, US & Canadian Banks include the following institutions: JP Morgan Chase; Citigroup; Wells Fargo; Bank of America; US Bancorp; SunTrust Banks; RBC; Bank of Montreal; Bank of Nova Scotia; TD Bank. Unless otherwise indicated, “Latest Results” for the metrics included are from Q309. Bank Efficiency Ratio (%): There are many ways to calculate Bank Efficiency ratio. We have used the following ratio for all banks (U.S. and Europe) in this study. Bank Efficiency Ratio (%): There are many ways to calculate Bank Efficiency ratio. We have used the following ratio for all banks (U.S. and Europe) in this study: Operating Expenses as a percentage of Net Interest Revenue and Total Non-Interest Revenue. Revenues (excl. Loan Losses) = Not adjusted for M&A activity Risk: Non-performing Loans = Non-performing Loans / Total Loans


Health Check: European Banks– Q409

Sources: Cisco IBSG Economics, 1/10; Company Financial Reports, 1/10; Capital IQ, 12/09


Period

Profitability Return on Assets European Banks 0.07% 12m

Risk Non-performing Loans European Banks 4.43% 12m

Capital Strength Tier 1 Capital Ratio European Banks 9.6% 12m

Efficiency Bank Efficiency Ratio European Banks 44.3% 12m

Growth Revenues (excl. loan losses)% change Y/Y

ING, HSBC, BNP, SA -5.1% 12m

European Banks: Key Metrics and Trend Line

Presenter

Presentation Notes

Notes: The results provided in the table are averages of the FSIs covered. For metrics in which a company’s reported numbers were difficult to reconcile, or in which they would have badly skewed the average, their results were omitted. Unless otherwise indicated, European Banks include the following institutions: Lloyd's Bank; Santander; Unicredit; Societe Generale; Barclays; HSBC; RBS; ING; Standard Chartered PLC; BNP Paribas; Banco Bilbao Vizcaya Argentaria SA. Unless otherwise indicated, “Latest Results” for the metrics included are from Q309. Bank Efficiency Ratio (%): There are many ways to calculate Bank Efficiency ratio. We have used the following ratio for all banks (U.S. and Europe) in this study: Operating Expenses as a percentage of Net Interest Revenue and Total Non-Interest Revenue. The metrics that comprise the Bank Efficiency Ratio are reported semi-annually for many European banks. For Q1 and Q2, we have taken the semiannual results and averaged them across the two quarters. For Q309, the results are incomplete. Moving forward, Q2 and Q4 will be the definitive editions of this report, as the numbers will be more complete. Operating Expenses as a percentage of Net Interest Revenue and Total Non-Interest Revenue. Revenues (excl. Loan Losses) = Not adjusted for M&A activity Risk: Non-performing Loans = Non-performing Loans / Total Loans


Bank Return on Assets

Sources: CapitalIQ, Cisco IBSG Economics

ROA still weak as loan losses mount, especially in Europe.

Low interest rates and declining consumer lending adding to

problem.


Bank Non-performing Loans (% of loans)

Sources: CapitalIQ, IBSG Economics

For European banks, NPL losses accelerating. Worst could

to be over for U.S. banks. However, second wave of U.S.

mortgage defaults could be coming: 20% of borrowers—11 million homeowners—”under

water.”


Bank Tier 1 Capital Ratios

Sources: CapitalIQ, Cisco IBSG Economics & Research.

Banks: Capital Strength


Bank Efficiency Ratio

Source: Company Financial Reports, 3/10; Cisco IBSG Economics, 3/10

Bad quarters by RBS (Q408) in Europe and Citi (Q408, Q409) in

U.S. responsible for spikes. Most banks holding steady.

Bank Efficiency Ratio (%): Efficiency Ratio represents Operating Expenses as a percentage of Net Interest Revenue and Total Non-Interest Revenue.


Top 4 U.S. Banks – Revenues excl. loan lossesNot adjusted for M&A activity

$mn (not adjusted for M&A activity)

Source: CapitalIQ


Top 4 European Banks – Revenues excl. loan lossesNot adjusted for M&A activity

$mn (not adjusted for M&A activity)

Source: CapitalIQ


Quarterly Trends Update – Banks: U.S. & Canada,

Europe, and Emerging Markets


U.S. Banks Face Threat of More Writedowns: Book Value, Fair Value At Odds

U.S. banks required to disclose the estimated fair value of financial instruments elected to keep on their books at the book valueFor several big banks – notably Bank of America, Citi, and JPMC – book value significantly less than fair valueBanks soon to release figures for 2009 –continued negative valuations could trigger multi-billion dollar writedownsThought Starter: Could we see another round of the banking crisis once banks are finally forced to account for the discrepancy between the market price of their assets and the banks’ valuation?

Fair Value minus Book Value ($ bn)

Source: Cisco IBSG Economics, 1/10; Bank of America, 3/09 Citigroup, 3/09; JPMorgan Chase, 3/09; Wells Fargo, 3/09

Presenter

Presentation Notes

Notes: Requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which the Corporation did not elect the fair value option. The fair values of such instruments have been derived, in part, by management’s assumptions, the estimated amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimated fair values. Accordingly, the net realizable values could be materially different from the estimates presented below. In addition, the estimates are only indicative of the value of individual financial instruments and should not be considered an indication of the fair value of the Corporation.


European Banks: Emerging Market Exposure Goes from Weakness to Strength

Emerging markets (EMs) recovering quickly, despite fears that global recession would derail themEuropean banks account for 70% of international lending to EMs, while U.S. and Japanese banks combine for 25% 40% of European banks’ EM lending goes to emerging Europe, while Latin America, Asia account for 25% each, and Africa 15%European banks well-placed to look for growth opportunities in fast-growing regions, where growth is expected to remain stagnant Thought Starter: Will European Banks’ exposure to emerging markets remain a strength, or will volatility leave them vulnerable?

European Banks: Exposure to Emerging Markets as % of Group Profits

Source: Cisco IBSG Economics, 1/10; Citigroup, 1/10


Brazilian Banks: Private Sector Banks to Expand Loan Portfolio Again in 2010

Public and private sector banks’ credit, y-o-y %

Source: BCB data

Private sector banks such as Bradesco and Itaú Unibanco more cautious in expanding loan portfolios in last 12 months. State-owned banks picking up the slack, increasing lending Signs show private sector banks ready to expand lending again Bradesco expects of loan growth of 20% in 2010Similarly, Itaú Unibanco estimates it will expand loan portfolio by 25% in 2010Thought Starter: Were private sector banks overly cautious or prudent in 2009 with their loan portfolios?Will loan expansion mean higher profits, or future writedowns?

Source: Cisco IBSG Economics 1/10; HSBC Global Research, 10/09


Russian Banks: Crisis Averted, But Bad Loans Loom

The Russian banking sector has avoided a crisis that could have led to massive bank failures, government-led recapitalizationHowever, record overdue loans putting a damper on recovery: S&P predicts 14% of all assets in Russian banking system could be non-performing in two yearsFragmentation part of the problem: Although top 30 banks do 80% of lending, there are over 1000 banks in Russia, many with lax loan requirements and low deposit basesBig private and state-owned banks responding by shrinking balance sheets and reducing costsThought Starter: Will big banks right the ship with writedowns and efficiency measures in 2010?Will Russia’s banking sector undergo a much-needed consolidation as smaller banks fail or merge in tough market?

Sources: Cisco IBSG Economics, 1/10; KITFinance, 12/09, The Economist, 1/09

Overdue Loans


Indian Banks: Profit Drops Estimated 4.9% in Q309

Credit off-take and deposits growth

Sources: Cisco IBSG Economics, 1/10; HSBC Global Research, 19 October 2009

Indian banks: C/D and I/D Analysts estimate 4.9% yoy drop in banks’ profit in 3QFY10, chiefly due to slowing business and net interest income (NII) growthIn 3QFY10, credit growth decelerated (11.3% yoy, 2.4% qoq)The lower incremental credit-deposit ratio, at 48.7% ytd (vs 82.9% a year ago), should impact NII growth: Lower cost of funds should aid banks’ net interest margin (NIM)Thought Starter: Will recent deceleration of credit growth allow India banks to fulfill RBI’s (Reserve Bank of India) target of 18% loan growth for FY10?


Health Check -Insurance: U.S. &

Canada and Europe


Health Check: U.S. & Canadian Insurers

Sources: Cisco IBSG Economics, 1/10; Capital IQ, 12/09, Company Financial Filings, 1/10;


Period

Profitability Combined Ratio U.S. & Canadian Insurers 98.1% 12m

Risk Loss Ratio U.S. & Canadian Insurers 65.1% 12m

Capital Strength Insurance Debt / Capital Ratio

U.S. & Canadian Insurers 33.8% 12m

Efficiency Operating Margin U.S. & Canadian Insurers 7.6% 12m

Growth Revenue (Q309 % change Q/Q)

AIG, MFC, PRU, GWO 5.8% 3m

P&C FocusNet Premium Earned (% ch. Quarterly Y/Y)

U.S. & Canadian Insurers -5.4% 12m

Life FocusNet Investment Income (% ch. Quarterly Y/Y)

U.S. & Canadian Insurers 32,759% 12m

U.S. & Canadian Banks: Key Metrics and Trend Line

Presenter

Presentation Notes

Notes: Unless otherwise indicated, “Latest Results” for the metrics included are from Q309. The results provided in the table are averages of the FSIs covered. For metrics in which a company’s reported numbers were difficult to reconcile, or in which they would have badly skewed the average, their results were omitted. Unless otherwise indicated, U& & Canadian Insurers include the following institutions: AIG; Manulife Financial; Marsh & McLennan (MMC); Travelers; Chubb Corp.; Loews Corp.; Prudential; Great West Lifeco Inc.; AFLAC; Hartford Financial Services. Prudential is missing from Combined Ratio, Loss Ratio, Net Written Premiums, and Net Investment Income; it will be added in the next quarter’s edition. Unless otherwise indicated, “Latest Results” for the metrics included are from Q309. Profitability – Combined Ratio = Incurred losses + expenses / earned premium. Combined ratio has been calculated consistently for all insurers. Growth Revenues = Not adjusted for M&A activity. Companies included are: AIG, Manulife, Prudential, and Great West Life. The Economics team was asked to provide separate metrics for P&C and Life Insurance. Because many of the insurers covered offer both life and P&C products, this was not practical for all categories. Instead, we have added two categories that measure revenue from different sources that are (more) applicable to P&C (Net Premiums Earned) and Life (Net Investment Income) businesses. These we have put in the P&C Focus and Life Focus categories. The Economics team was asked to use SG&A / Revenue Ratio for the Efficiency category. This metric was widely unavailable for insurance companies. Thus, we have used Operating Margins instead.


Health Check: European Insurers

Sources: Cisco IBSG Economics, 1/10; Capital IQ, 12/09, Company Financial Filings, 1/10;

European Insurers: Key Metrics and Trend Line


Period

Profitability Combined Ratio (2009E)

European Insurers* 96.3% 12m

Risk Loss Ratio AXA, AZ, ZURN 86.5% 12m

Capital Strength Insurance Debt / Capital Ratio

European Insurers 35.2% 12m

Efficiency Operating Margin European Insurers 13.6% 12m

Growth Revenue (Q309 % change Q/Q)

AXA, AZ, G, AEG 11.1% 3m

P&C FocusNet Premium Earned (Q309 % ch. Y/Y)


Life FocusNet Investment Income (Q309 % ch. Y/Y)


Presenter

Presentation Notes

Notes: Unless otherwise indicated, “Latest Results” for the metrics included are from Q309. The results provided in the table are averages of the FSIs covered. For metrics in which a company’s reported numbers were difficult to reconcile, or in which they would have badly skewed the average, their results were omitted. Unless otherwise indicated, European Insurers include the following institutions: Axa, Allianz, Assicurazioni Generali SpA, Prudential plc, CNP Assurances SA, AEGON, Aviva plc, Mapfre SA, Fortis SA. Unless otherwise indicated, “Latest Results” for the metrics included are from Q309. Important ratios such as Combined Ratio and Loss Ratio are reported semi-annually for many European insurers. For Q1 and Q2, we have taken the semiannual results and averaged them across the two quarters. For Q309, the results are incomplete. Moving forward, Q2 and Q4 will be the definitive editions of this report, as the numbers will be more complete. Growth – Revenues = Not adjusted for M&A activity. Companies included are: The Economics team was asked to provide separate metrics for P&C and Life Insurance. Because many of the insurers covered offer both life and P&C products, this was not practical for all categories. Instead, we have added two categories that measure revenue from different sources that are applicable to P&C (Net Premium Earned) and Life (Net Investment Income) businesses. These we cave put in the P&C Focus and Life Focus categories. The Economics team was asked to use SG&A / Revenue Ratio for the Efficiency category. This metric was widely unavailable for insurance companies. Thus, we have used Operating Margins instead.


Insurance – Profitability: Combined Ratio

Source: Company Financial Reports, 1/10; Cisco IBSG Economics, 1/10Combined Ratio= Expense + Claims / Earned PremiumOver 100, profitability hard to attain with CR over 100


Insurance – Risk: Loss ratio



Insurance – Capital Strength: Insurance Debt / Capital Ratio

Source: CapitalIQ, 12/09; Cisco IBSG Economics, 1/10


Insurance – Efficiency: Operating Margin


Bank Operating Margins = Earnings From Continuing Operations / Total Revenues

Where:Earnings From Continuing Operations = EBT Incl Non-recurring Items - Income Tax Expense - Minority Interest in Earnings - (IS)


U.S. Insurance – Growth: RevenueUS$ m – Not Adjusted for M&A Activity



European Insurance – Growth: RevenueUS$ m – Not Adjusted for M&A Activity



Insurance – Focus on P&C: Net Premium Earned



Insurance – Focus on Life: Net Investment Income



Quarterly Trends Update – Insurance:

U.S. & Canada, Europe, and

Emerging Markets


U.S. P&C Insurers: Low Interest-rate Environment Dampens Investment Returns

For U.S. P&C insurers, returns under pressure due to very competitive pricing environment, low interest ratesIn particular, investment income growth muted because of low interest rates, Investment Income under pressure: cash yields near zero, hurting companies that reduced risk in wake of financial crisisCash flow also declining due to slow premium growth, further hampering growth in investment portfoliosAlthough they ground to a halt in Q109 as crisis deepened, share buybacks could relieve ROE pressure in 2010Thought Starter: With the worst days of the financial crisis past, will insurers take on more risk and improve yields in 2010?Insurance stocks trading near book value, making buybacks more attractive: Will insurers act?

Sources: Cisco IBSG Economics, 1/10; B of A Merrill Lynch, 12/09; Goldman Sachs, 12/09

P&C Share Repurchases – US $m

Presenter

Presentation Notes

Note: Select firms, not all P&C firms.


European Insurers: Solvency II to Change Capital Adequacy Regulation

Solvency II regulation to create risk-based system for assessing capital adequacy of of European insurersThough it will not go into full effect for three years, and full details still being hammered out, Solvency II already affecting some stocks Solvency II to take strong stance on capital stress tests, eligibility of hybrid capital instruments and allowance of “illiquidity premium” when discounting liabilitiesAssociation of British Insurers estimates impact on Solvency II on UK industry alone could be £70 billion Thought Starter: Will Solvency II soften impact be softened during consultation process, or will tighter requirements cause significant changes in how insurers operate?

Sources: Cisco IBSG Economics, 1/10; Daiwa Securities, 1/10; Financial Regulator, 2009

Solvency II: Three Pillars


Asian Insurers: Asia’s Biggest Life Insurers Going Public

Huge Asian life insurers going public in the first half of 2010, evidence that investors keenly interested in sectorChina’s third largest insurer, China Pacific Insurance Company (CPIC) IPO raised US$3.1 billion in December, seventh largest listing worldwideTop Korean firms - Samsung Life, Korea Life, Mirae Asset Life all lining up IPOsAIG planning to list AIA, its Asian life unit with 20m policy holders in 13 countries –could raise US$10-20 billion Japan’s Dai-Ichi Mutual Life IPO in April 2010 to raise US$11 billionIndia’s largest insurer, Life Insurance Corporation (LIC), also mulling IPOThought Starter: With regional titans newly flush with cash, who will win battle for market share?Will Asian life insurers expand to other markets?Sources: Cisco IBSG Economics, 1/10; Woori Investment & Securities, 1/10;

Reuters, 12/09

Top 10 Global IPOsAs of November 2009


Health Check –Capital Markets:

U.S. & Canada and Europe


Health Check: U.S. Capital Markets

Sources: IBSG Economics, 1/10; Company Financial Reports, 1/10; Capital IQ, 12/09


Period

Profitability Return on Equity U.S. Capital Markets 3.57% 12m

Risk Leverage Ratio U.S. Capital Markets 9.3 12m


U.S. Capital Markets 14.2% 12m

Efficiency Operating Margin


Growth Assets Under Management (Q309 % ch. Y/Y)


U.S. Capital Markets: Key Metrics and Trend Line

Presenter

Presentation Notes

Notes: Unless otherwise indicated, “Latest Results” for the metrics included are from Q309. The results provided in the table are averages of the FSIs covered. For metrics in which companies’ reported numbers were difficult to reconcile, or in which they would have badly skewed the average, they were omitted. Unless otherwise indicated, “Latest Results” for the metrics included are from Q309. Unless otherwise indicated, US Capital markets includes: BONY Mellon, Goldman Sachs, State Street, Morgan Stanley, Oppenheimer Holdings, BlackRock. For Tier Capital, results for Oppenheimer Holdings and BlackRock were not available. Growth – Assets Under Management: For some investment banks we have taken “invested assets” as a proxy for “assets under management” since AUM are not provided


Health Check: European Capital Markets

Sources: IBSG Economics, 1/10; Company Financial Reports, 1/10; Capital IQ, 12/09


Period

Profitability Return on Equity European Capital Markets 3.6% 12m

Risk Leverage Ratio European Capital Markets 37.7 12m


European Capital Markets 14.4% 12m

Efficiency Operating Margin

European Capital Markets 9.8% 12m

Growth Assets Under Management (Q309 % ch. Y/Y)

European Capital Markets -9.9% 12m

European Capital Markets: Key Metrics and Trend Line

Presenter

Presentation Notes

Notes: Unless otherwise indicated, “Latest Results” for the metrics included are from Q309. The results provided in the table are averages of the FSIs covered. For metrics in which a company’s reported numbers were difficult to reconcile, or in which they would have badly skewed the average, their results were omitted. Unless otherwise indicated, “Latest Results” for the metrics included are from Q309. Unless otherwise indicated, European Capital Markets include the following institutions: Credit Suisse, Deutsche Bank, UBS, Robeco Groep NV. Growth – Assets Under Management: For some investment banks we have taken “invested assets” as a proxy for “assets under management” since AUM are not provided


Capital Markets – Profitability: Return on Equity



Capital Markets – Risk: Leverage Ratio



Capital Markets – Capital Strength: Tier 1 Capital Ratio



Capital Markets – Efficiency: Operating Margin

Bank Operating Margins = Earnings From Continuing Operations / Total Revenues

Where:Earnings From Continuing Operations = EBT Incl Non-recurring Items - Income Tax Expense - Minority Interest in Earnings - (IS)



Capital Markets – Growth: Assets Under Management

Source: Cisco IBSG, 2010


Quarterly Trends Update – Capital Markets: U.S. & Canada, Europe,

and Emerging Markets


Capital Markets: Global Underwriting Still Down, Regulation Could Make Matters Worse

Global underwriting fee pool for both debt and equity up 37% Y/Y but still far below recent levelsIPOs down, with most activity in Asia and EuropeInvestment banks that have become bank holding companies or that are part of such firms – such Goldman, JPMC, Merrill Lynch – could be further hit by proposed regulation from Obama administrationRegulation could force banks to give up private equity and hedge fund investments, which are a major source of underwriting and advisory feesThought Starter: Will underwriting bounce back, or will skittish markets and regulation force investment banks to look elsewhere for revenue?

Sources: Cisco IBSG Economics, 1/10; JPM Securities, 12/09; Reuters, 1/09

Global Underwriting Fee Pool – US$ billions(2008 and 2009 YTD through November)


Capital Markets: M&A Set for Recovery?

M&A volume is predicted to make a recovery, starting with a slow rise in 2010By 2012, M&A forecast to surpass 2007 levelsHowever, slow start in 2010 has some doubting whether recovery is underwayGlobal deal volume in January 2010 down 17% from January 2009, with U.S. worst performing region, down 72% over the same periodM&A activity in emerging markets is up 170%China another bright spot: Value of announced deals involving Chinese firms up 93%Thought Starter: Will M&A thaw begin in 2010, or will the slump drag on?Will volume in emerging markets give rise to Asian, Latin American players?

Sources: Cisco IBSG Economics, 1/10; JPM Securities, 12/09; Wall Street Journal Blog, 1/29/10

Announced M&A Volume – U.S. Billions(2009-2012 Estimates)

Presenter

Presentation Notes

Click here for WSJ article: http://blogs.wsj.com/deals/2010/01/29/brrrr-ma-volume-still-caught-in-the-deep-freeze/


Technology and Innovation Focus:

Mobility


FSIs: Smartphones Increasing Share of Global Mobile Penetration

Total Global Mobile Phone Shipments (Units m)

Smartphones – with larger screens, keyboards, and increasingly touchscreens, Wi-Fi, and GPS – growing as total global share of mobile phones from 16.6% in 2009 to 28.8% in 2013In the U.S., smartphone penetration high and growing fast, from 31.6% of total mobile phones in 2009 to 52.3% in 2013Dual-mode phones – equipped with both cellular and Wi-Fi capability – to jump from 10% of global mobile phones in 2009 to 25.9% in 2013 Thought Starter: Globally, smartphones with rich features and fast, versatile connections will soon reach critical massWhich FSIs will make advanced mobile services a competitive advantage, and grab a greater share of smartphone users?

Source: Cisco IBSG Economics, 1/10; Infonetics, 9/09


FSIs: Apple iPhone – Will It Drive Mobile Financial Services Adoption into Mainstream?

Total Global Smartphone Share (%) Apple’s iPhone having an impact on mobile financial services by helping to solve problems that have limited uptakeApp store makes distribution easier with a one-stop shop – 20 banks using App store, and over 1,000 financial apps availableMobile browsing experience much improved with large touchscreen, faster downloads, especially with 3GFSIs releasing iPhone-specific apps with more functionality, features than their general mobile offeringBank of America, USAA, Grupo Banco Popular claim that over 40% of mobile customers using iPhonesThought Starter: iPhones 12% of smartphone shipments in Q209 – iPhones alone will not drive mainstream adoptionCan FSIs bring same functionality and excitement to mobile apps for Blackberries, Androids, and “iPhone clones”?

Source: Cisco IBSG Economics, 1/10; Forrester, 8/09; Infonetics, 9/09


Banking: Mobile Banking Growth Stalling, Or Catching Its Breath?

U.S. Consumers and Mobile Banking Usage (%)

Industry insiders claim mobile banking has crossed “acceptance threshold” in 2009But IBSG consumer research suggests mobile banking growth stallingPercentage of U.S. broadband and mobile subscribers that use mobile banking declined slightly over nearly two quarters, from 20% in April 2009 to 19% in SeptemberPercent that use mobile banking at least once a month – regular users – fell from 18% to 16%Thought Starter: Is the decline in mobile banking adoption an anomaly on the way to mainstream adoption? Or will it mobile banking remain niche –even as more consumers buy more sophisticated phones – because of a lack of perceived value?

Source: IBSG Economics & Research, 4/09; 9/09; Mobile Banker, 1/10

Base: U.S. broadband and mobile subscribers

Presenter

Presentation Notes

Mobile Banking: In a September 2009 survey of U.S. broadband subscribers by Cisco IBSG, 16% of consumers who had mobile phones used their phones for mobile banking at least once a month. This is 2% fewer than an IBSG survey of U.S. broadband and mobile subscribers in April 2009, in which 18% of respondents said they used their mobile phones at least once a month.


Mobile Banking: Garanti – Sophisticated Simplicity

Garanti Bank’s mobile service offers a suite of sophisticated transactions, capabilities that simple phones can use –making it more relevant to its full range of customersWith SMS or WAP browsing, customers can make P2P payments, transfer funds between accounts, and pay billsWide variety of transactions available, including stock trading, and ability to buy mutual funds and foreign currencies Garanti also offers iPhone-specific applicationsThought Starter: Will more banks take Garanti’s approach, and offer mobile banking applications for simple – as well as smart – phones?

Source: Garanti Bank, 1/10


Retail Investing: E*Trade Mobile Pro – Trading On the Go

E*Trade offering mobile apps for Blackberry, iPhone that offer real-time trading, transactions Users can:Buy, sell stocks and options, place market, limit, and advanced ordersAbility to transfer funds between accounts and financial institutionsWatch lists, streaming quotes, and visual last trade tracking, which shows whether money is being lost or gained on the last trade made – vital for day tradersView all accounts, portfolios, order history, and transactionsThought Starter: Mobile trading applications a compelling value proposition – trades are time-sensitive, and traders do not want to be chained to a desk How can other FSIs tailor their applications to the mobile context, instead of replicating what can be done online? Source: E*Trade, 1/10


Mobile P2P Payments: PayPal “Send Money”

PayPal’s Send Money app enables Android, Blackberry, iPhone owners to send P2P mobile paymentsApp available in the U.S., Canada, 10 European countries, AustraliaOnly requires recipient’s email address or phone number to complete payment – app accesses phone’s contact list Users can send money in 23 different currencies, check account, view transactionsAlso allows users to bid on eBay items and pay for them via mobile deviceThought Starter: Will the entrance of non-bank payments titan—with over $60 billion in annual transactions—push mobile payments into the mainstream? Will consumer-to-merchant payments emulate P2P model and disintermediate banks?

Source: TechCrunch, 12/18/09; PayPal, 12/17/09


Insurance: Young U.S. Consumers Going Mobile with Insurers

Over 10% of Gen Y and 6% of Gen X customers have used mobile devices to interact with their insurer in past yearGen Y and X a large percent of market for insurers, and will become more important as Baby Boomers enter retirementInsurers trail banks: 10% of online consumers* have interacted with bank using mobile applications in past 3 months, but only 2% with insurerThose that have are unimpressed: 60% of consumers who have used mobile apps for customer service are dissatisfiedThought Starter: Now is the time for insurers to offer innovative mobile servicesBy letting ageing Boomers and late adopters dictate the scope and pace of mobile offerings, insurers risk missing out on tech savvy, affluent young customers

Source: Forrester, 10/09

Presenter

Presentation Notes

*Online consumers=Adults with insurance.


Mobile Insurance: State Farm Pocket Agent

State Farm’s “Pocket Agent” mobile app for iPhone helps customers accelerate, automate interactions Customers can contact agent, locate policy information with one click, and check balances of State Farm Bank and mutual fund accountsEnables mobile claims submission, including pictures of vehicle damage, accident detailsFor iPhones with GPS, customers can: Search for hotels, service stations, tow trucks, locksmiths, and rental cars near current locationFind State Farm-approved repair facility Thought Starter: Will rich mobile applications help insurers increase market share with Gen Y and Gen X customers?

Source: State Farm, 1/10; Springwise, 1/10


Generali France: iPhone App Gives Advisors Access to Client Portfolio

Generali France launching iPhone app in early 2010 for advisor networkApp will enable advisors view client portfolio, detailed data for each client, including investments, investment performance, savings, payment historyGenerali’s goal to increase advisor efficiency and customer experience by making critical client data available while advisors are on the goGenerali also rolling out client-facing version that will give clients mobile account access, provide alerts, and tools like savings simulatorsThought Starter: As smartphone ownership proliferates, will independent agents and customers move toward insurers that provide mobile information and transaction services? Or will they remain “nice to haves”?

Source: Accenture, 11/09

Copyright © 2010 Cisco Systems, Inc. All rights reserved.Cisco Confidential 71

Documents

Global Financial Services Economic Overview: FSI Health … · and delinquency rates suggests that banks charge-offs will continue to rise. 2009-Q4 data: Still more bad loans, but