jpm banks

www.jpmorganmarkets.com

Europe Equity Research11 September 2013

European BanksShifting from core to total capital – introducing Bank ‘Enterprise Valuation’: Value in Southern Europe

European Banks

Kian Abouhossein AC

(44-20) 7134-4575

[email protected]

Bloomberg JPMA ABOUHOSSEIN <GO>

J.P. Morgan Securities plc

Sofie Peterzens

(44-20) 7134-4716

[email protected]

Bloomberg JPMA PETERZENS <GO>


Delphine Lee

(33-1) 40 15 49 28

[email protected]

Bloomberg JPMA DLEE <GO>


Garima Jaithliya

(91-22) 6157-3343

[email protected]

J.P. Morgan India Private Limited

Amit Ranjan

(44-20) 7134-4576

[email protected]


Vivek Gautam

(44-20) 7742 3244

[email protected]


Raul Sinha

(44-20) 7742-2190

[email protected]

Bloomberg JPMA SINHA <GO>


Marta Bastoni

(44-20) 7134-4720

[email protected]

Bloomberg JPMA BASTONI <GO>


Jaime Becerril

(44-20) 7742-6449

[email protected]

Bloomberg JPMA BECERRIL <GO>


Paul Formanko

(44-20) 7134-4718

[email protected]


See page 214 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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In this 200+ page report, we look at the optimal capital structure for 25 banks accounting for c.80% of European Bank market value, by comparing capital required for i) the EU bail-in requirement, ii) Basel 3 revised leverage ratio consultation, and iii) Basel 3 Core Equity Tier I. We also implement a new valuation methodology in order to use the new total capital structure of Eurobanks adjusting for leverage as is the case in an industrial company (i.e. EV for banks). We conclude based on our new valuation methodology:

We are moving up the “risk curve” on Euro-area banks. Hence our only ‘default’ Euro bank is not anymore just SocGen but we now add Deutsche Bank to the list as the cheapest large cap Eurobank.

We also become more positive on Southern Euro-banks for the first time in two years expressing our view through upgrading Unicredit to OW at normalized EV/cashflow of 5.1x and we also upgrade Caixabank at 5.2x 2015E.

We remain cautious on Emerging Market (EM) exposure, we downgrade HSBC from OW to N which is currently valued at 1.2x P/NAV and normalised EV/EBITDA ex growth 8.6x 2015E and also remove it from our top picks portfolio. We do however upgrade Santander today from UW to N despite its material EM exposure due to relative underperformance and better funding evolution in Spain.

Within bank sub-business segments we remain OW private banking and Tier II FICC restructuring: our top pick remains UBS.

Within Nordic banks, we reiterate our top pick Danske Bank and also see value in Nordea due to potential dividend payout.

Within UK bank domestics, we retain Barclays as OW followed by Lloyds and RBS. We see however limited value so in the UK.

So we add to our top picks in Euro-area banks: UCG, Caixabank, and Deutsche Bank. We retain: UBS, Société Générale, Danske Bank and Nordea. We remove HSBC.

Our new valuation methodology is based on moving from core Basel 3 capital to total Basel 3 capital, with increased focus on leverage and loss-absorbing capacity. In our view, traditional valuations are not capturing these changes, and hence we reintroduce alternative measures of valuation to complement traditional metrics. Valuing banks on a ‘EV/EBITDA’ type metric, which takes into account the full franchise value (so market cap and bail-in debt), we conclude that on this basis the banking sector looks slightly expensive at 7.5x 2015E normalised EV/EBITDA (excluding growth) vs. 5.9x for EU corporate (Telecoms at 5.0x and Utilities 6.4x), in contrast to its attractiveness on a P/NAV and P/E basis. Hence, the focus should be on bottom up stock selection to outperform.

Our new valuation model takes into account the optimal capital structure for a bank: i) Basel 3 Core Tier I above 10%, ii) at least 10% of bail-in funds to total liabilities, and iii) a Basel leverage ratio above 3.5% by 2015e. Amongst all pieces of proposed capital requirements, we estimate that the leverage ratio will account for €72bn of the €79bn additional capital need we see for the European banks by 2015E. We expect all new capital requirements including bail-in, leverage ratio and Basel 3 to reduce group EPS by -9% and RoNAV by -0.8% from 11.3% to 10.6% in our analysis on 2015e estimates for a sample of 25 European banks.

http://www.institutionalinvestor.com/Research_CustomerService.aspx

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Kian Abouhossein(44-20) [email protected]

Sofie Peterzens(44-20) [email protected]

Equity Ratings and Price Targets

Mkt Cap Price Rating Price TargetCompany Ticker ($ mn) CCY Price Cur Prev Cur PrevBNP Paribas BNP FP 80,297.64 EUR 50.74 N n/c 49.00 n/cBBVA BBVA SM 58,813.96 EUR 7.75 UW n/c 6.54 5.61CaixaBank CABK SM 18,929.04 EUR 2.96 OW N 3.40 2.17Credit Agricole ACA FP 26,791.73 EUR 8.19 N n/c 8.50 n/cUniCredit UCG IM 34,900.28 EUR 4.55 OW N 5.51 4.00UBS UBSN VX 77,152.93 CHF 19.19 OW n/c 21.00 n/cSwedbank SWEDA SS 25,939.27 SEK 155.00 N n/c 165 n/cStandard Chartered STAN LN 57,470.83 GBp 1,511 N n/c 1,800 n/cSociété Générale GLE FP 37,005.69 EUR 36.75 OW n/c 39.00 n/cCommerzbank CBK GR 13,701.62 EUR 9.08 N n/c 8.87 n/cCredit Suisse Group CSGN VX 39,804.18 CHF 28.71 OW n/c 34.00 n/cDanske Bank DANSKE DC 19,569.88 DKK 118.80 OW n/c 140 n/cDeutsche Bank DBK GR 46,884.27 EUR 34.71 OW n/c 40.00 n/cDnB ASA DNB NO 26,505.70 NOK 97.80 N n/c 100 n/cErste Bank EBS AV 14,277.29 EUR 25.06 OW n/c 35.00 n/cHandelsbanken SHBA SS 28,613.77 SEK 289.80 UW n/c 270 n/cKBC Group KBC BB 19,958.50 EUR 36.11 OW n/c 45.00 n/cLloyds Banking Group LLOY LN 87,316.67 GBp 78 N n/c 77 n/cSantander SAN SM 83,337.04 EUR 5.67 N UW 5.86 4.36SEB SEBA SS 23,758.17 SEK 71.10 N n/c 75 n/cRoyal Bank of Scotland RBS LN 62,691.09 GBp 356 N n/c 335 n/cNordea Bank AB NDA SS 49,668.82 SEK 80.45 OW n/c 97 n/cIntesaSanpaolo ISP IM 34,748.53 EUR 1.60 N UW 1.65 1.19HSBC Holdings plc HSBA LN 206,319.50 GBp 706 N OW 800 n/cBanco Popular POP SM 9,074.09 EUR 4.00 UW n/c 2.41 2.05

Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 10 Sep 13.

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Table of ContentsExecutive Summary – Optimizing Eurobank Capital Structure ...................................................................................6

Optimal Capital Structure Factor 1: Bail-in reducing PBT by 10% and RoNAV by 1%........................................................................................................................22

Optimal Capital Structure Factor 2: Basel 3 leverage ratio proposal resulting shortfall of €72bn - reducing PBT by 5% ............................................................................28

Optimal Capital Structure Factor 3: Basel 3 Core Tier I ratio resulting in a capital shortfall of €3.6bn – EPS dilution of 1% excluding ‘harmonisation’ impact............32

Valuation .................................................................................35

Our ‘unleveraged bank valuation’ EV/EBITDA methodology ................................39

Cash flow analysis – comparison of valuation........................................................40

Market dividend expectations too high ..................................................................48

Upgrading Italian banks on valuation.....................................................................50

Upgrading Spanish banks: Caixabank OW, Santander to N ....................................52

UK Banks: Downgrading HSBC to Neutral ...........................................................54

Investment Banking: L-T preference for UBS reconfirmed, but Deutsche Bank OW on valuation ..........................................................................................................55

French banks: Maintain preference for Société Générale ........................................56

Bail-in capital requirements ..................................................60

Implicit government guarantees removed under bail-in leading to higher funding costs......................................................................................................................63

Bail-in challenging in practice ...............................................................................65

Unintended consequences from moving from bail-out to bail-in .............................66

Key issues of uncertainty to assess bail-in proposal................................................68

The impact of bail-in: Methodology ......................................69

The scope of the bail-in tool ..................................................................................69

The minimum bail-in requirement .........................................................................71

JPMe bail-in calculation methodology and health warning .....................................71

The Cost of Bail-in................................................................................................73

BASE CASE – Impact on existing sub and senior debt if with no replacement .......85

Sensitivity to base case scenario - Lower bail-in premium for excess bail-inable senior debt ............................................................................................................89

BEAR CASE - Banks fulfill 10% requirement through own funds to protect senior creditors................................................................................................................93

Conclusions for 25 large cap EU banks in our analysis...........................................98

Leverage ratio.......................................................................102

Basel 3 Leverage ratio framework based on the revised consultation ....................103

Timing and Disclosure requirement of Revised Basel 3 Leverage Consultation Ratio...........................................................................................................................104

Revised Basel 3 Leverage Consultation Ratio definition.......................................104

JPMe Leverage ratio calculation methodology and Health Warning .....................107

Conclusions from our Basel 3 leverage ratio analysis based on revised consultation...........................................................................................................................111

Sensitivity to changes in net credit derivatives exposure.......................................117

European Banks

Rohit Nigam

(44-20) 7134-4719

[email protected]

Anna V Marshall

(44- 20) 7742-2762

[email protected]


For Specialist Sales Advice please contact;

Harry Harutunian

(44-20) 7779-2695

[email protected]

James Lloyd

(44-20) 7742-4267

[email protected]

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Sensitivity to changes in gross repo exposure.......................................................122

UK regulatory leverage requirements...................................................................128

US: Differences in leverage ratio levels and definitions compared to the revised Basel leverage ratio consultation..........................................................................130

Balance sheet size in the US likely to be reduced by most European IBs but P&L impact uncertain..................................................................................................134

Overview of the US regulatory agencies’ rules and proposals ..............................................................................136

Generally applicable leverage ratio......................................................................136

Supplementary leverage ratio...............................................................................136

Implication of a higher leverage ratio on the banking industry .................................................................................138

Basel 3 Core Tier I capital against JPM required capital requirement...........................................................................142

European banks; average Basel 3 Core Tier I to improve to 12.0% end 2015e from 10.5% end 2013e.................................................................................................142

Most European Banks to close their capital shortfall vs. JPM minimum requirement by 2015e .............................................................................................................142

Key differences in EU implementation vs. Basel 3...............................................146

Risk weight harmonization – Credit RWAs..........................................................146

Risk weight harmonization – Market RWAs ........................................................148

Valuation and Earnings strips.............................................156

BNP Paribas........................................................................................................156

BBVA.................................................................................................................156

CaixaBank ..........................................................................................................156

Credit Agricole ...................................................................................................157

UniCredit............................................................................................................157

UBS....................................................................................................................157

Swedbank ...........................................................................................................158

Standard Chartered..............................................................................................158

Société Générale .................................................................................................158

Commerzbank.....................................................................................................159

Credit Suisse Group ............................................................................................159

Danske Bank.......................................................................................................159

Deutsche Bank ....................................................................................................160

DnB ASA ...........................................................................................................160

Erste Bank ..........................................................................................................160

Handelsbanken....................................................................................................161

KBC Group.........................................................................................................161

Lloyds Banking Group ........................................................................................161

Santander............................................................................................................162

SEB ....................................................................................................................162

Royal Bank of Scotland.......................................................................................162

Nordea Bank AB.................................................................................................163

IntesaSanpaolo....................................................................................................163

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HSBC Holdings plc.............................................................................................163

Banco Popular.....................................................................................................164

Investment Thesis, Valuation and Risks ............................165

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Executive Summary – Optimizing Eurobank Capital Structure

In order to strengthen and prevent bank failures in a ‘tail’ risk scenario as we witnessed during the structured credit crisis, regulators are introducing tougher total capital requirements such as i) Basel 3 capital rules, ii) revised Basel leverage ratio proposal and iii) an EU bail-in regime. In this report we look at the optimal capital structure using these three regulations for 25 banks accounting for c.80% of European Bank market value, by comparing their Basel 3 Core Equity Tier 1, bail-in funds and the revised Basel leverage ratios proposed to minimum requirements which we view as adequate. In our analysis we forecast €79bn of additional total capital required predominantly due to the leverage ratio proposal (€72bn) by 2015E in the form of alternative Basel 3 Tier I bail-in capital. We estimate the ROE impact from all three measures to equal below 1% of negative RoNAV to 10.6% by 2015E for the banks in our analysis. By introducing different capital measures, we believe regulators aim to reduce regulatory arbitrage and ensure banks are more resilient and better prepared for any future crisis.

Post capital optimization, we also implement a new valuation methodology in order to take into account the new capital structure of European banks and adjusting for leverage. In short, we look at an unleveraged capital structure against the bank’s cash flow. We take leverage into account in order to better compare banks on a like-for-like basis, as well as against industrial sector valuations.

We believe focus on capital is moving from core capital to total capital, with increased focus on leverage and loss-absorbing capacity. In our view, traditional valuations are not capturing these changes, and hence we reintroduce alternative measures of valuation to complement traditional metrics. As an example, CSG, with a minimum core Tier I Basel 3 target of 10%, cannot be compared to UBS with a target of 13% core equity tier 1 as CSG will be operating more leveraged within the capital structure. In addition, the total capital ratio of 17.5% that both Swiss banks have to operate on is all bail-in able capital. In order to compare banks we adjust for this leverage and make both banks comparable. We adjust for the total bank capital structure including Tier I Basel 3 alternative capital (ie capital that can lead to share count dilution for shareholders). In short, the days when banks could issue cheap debt to finance acquisitions/grow businesses to make ROIs work, is over and we put banks that are using more leverage vs. less leverage banks on an equal footing.

Table 1: List of banks covered:

European banks:

BBVA

BNPPCaixabank

CASA

CBKCSG

Danske

DBDnB

Erste

HSBCISP

KBC

LloydsNDA

Popular

RBSSAN

SEB

SHBSoc Gen

STAN

Swed

UCG

UBS

Source: J.P. Morgan.

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Comparing European bank “EV” to traditional valuation metric

Cheap on ‘traditional’ valuation metrics

Comparing banks to other industries on traditional metrics, banks look attractive on both a P/E and a P/BV basis, as shown in Table 3, however, these metrics do not take into account the banks’ leverage.

Based on P/E multiples, European banks appear inexpensive, trading at 9.5x 2015E earnings, a ~20% discount to the market excluding financials at 11.4x.

The discount is even more pronounced based on P/BV, with banks trading at 0.8x book value in 2015E, vs. 1.7x for the market ex financials, in our view highlighting market concerns over the ‘true’ BV of banks. Hence, the implied CoE for banks is 11% compared to market 9%.

In the new regulatory environment, with regulators introducing clear, observable measures of bail-in capital, we believe traditional valuation metrics are not able to fully capture the intricacies of the regulatory world in which banks have to operate, with constraints on capital structure, funding, and balance sheet size as well as maturity profile. Hence we reintroduce our unleveraged valuation which takes into account both core equity and other own funds (i.e. CoCos, additional alternative tier 1 and tier 2) that potentially convert into shares and dilute the 'going concern’ of a bank.

Bank ‘EV’/cashflow metrics: not so cheap against high yielding sectors

Valuing banks on a EV/EBITDA metric, which takes into account the full franchise value (so market cap and bail-in debt), we conclude that on this basis the banking sector looks slightly expensive at 7.5x 2015E normalised EV/EBITDA (excluding growth) vs. 5.9x for EU corporates, in contrast to itsattractiveness on a P/NAV and P/E basis.

Comparing banks to telecoms/utilities sectors (viewing a bank either as a financial service provider or a financial utility in mature sectors), banks again appear expensive, trading at a 7.5x normalised EV/EBITDA multiple for an 8.8% ROE compared to telecoms at 5.0x and utilities at 6.4x, with 2015E ROEs of 13.2% and 9.8% respectively. Hence, in conclusion, we believe banks on a sector basis are not particularly cheap, however, we see material risk-reward opportunities as valuation gaps between stocks are quite material and hence there is relative value within the banking sector where cash flow generation and capital position are solid and valuation is attractive on an EV basis. In our view, there is outperformance potential by focusing on stock selection rather than sector call.

Table 2: European Banks Average 2015E:

European banks: 2015EBasel III CET1 12.0%Basel III Leverage Ratio 3.9%Bail-in funds 13.0%P/E 9.5P/NAV 1.0RoNAV 11.3%RoNAV Normalized 11.8%EV/EBITDA ex RWA growth 7.7EV/EBITDA incl. RWA growth 8.4EV/EBITDA ex RWA growth (normalised) 7.5EV/EBITDA incl RWA growth (normalised) 8.1

Source: J.P. Morgan. Based on prices at cob 9

Sept 2013. Refers to banks in our report.

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Table 3: European Corporates – valuation multiples and ratios based on IBES estimates

P/E Dividend Yield EV/EBITDA Price to Book ROE

13E 14E 15E 13E 14E 15E 13E 14E 15E 13E 14E 15E 13E 14E 15EEurope 13.6 12.1 10.9 3.5% 3.8% 4.2% - - - 1.6 1.5 1.4 11.6% 12.3% 12.8%Europe ex Financials 13.9 12.5 11.4 3.5% 3.7% 4.0% 7.0 6.4 5.9 2.0 1.8 1.7 14.0% 14.5% 14.8%Energy 10.0 9.0 8.6 4.7% 4.9% 5.1% 3.9 3.6 3.6 1.2 1.1 1.1 11.6% 12.2% 12.0%Materials 15.1 12.6 10.8 3.0% 3.3% 3.6% 7.5 6.7 5.9 1.5 1.4 1.3 9.8% 11.0% 11.9%Chemicals 15.2 13.7 12.4 3.1% 3.2% 3.5% 8.5 7.9 7.1 2.3 2.1 2.0 14.9% 15.4% 15.6%Construction Materials 17.6 13.1 10.6 2.4% 2.9% 3.4% 8.2 7.1 6.2 1.0 1.0 0.9 5.9% 7.4% 8.7%Metals & Mining 14.6 11.5 9.6 3.0% 3.3% 3.6% 6.8 6.2 5.3 1.2 1.2 1.1 8.3% 9.7% 10.9%Industrials 16.2 13.8 12.2 3.0% 3.3% 3.6% 8.1 7.2 6.4 2.4 2.2 2.0 14.6% 15.6% 16.1%Capital Goods 15.9 13.5 12.0 3.0% 3.3% 3.6% 8.3 7.2 6.5 2.4 2.2 2.0 14.6% 15.7% 16.1%Transport 16.3 13.3 11.2 3.2% 3.2% 3.7% 6.7 6.1 5.4 1.9 1.8 1.6 12.5% 13.4% 14.4%Business Svs 18.6 16.6 14.9 2.5% 2.8% 3.1% 11.2 10.1 9.0 4.4 4.0 3.6 19.7% 20.2% 20.2%Discretionary 14.3 12.6 11.3 2.7% 3.0% 3.4% 6.5 5.8 5.2 2.1 1.9 1.7 14.7% 15.2% 15.5%Automobile 9.6 8.4 7.5 3.0% 3.4% 3.8% 4.0 3.5 3.3 1.1 1.0 0.9 11.9% 12.5% 12.9%Consumer Durables 17.8 15.3 13.7 2.1% 2.4% 2.7% 9.9 8.6 6.6 2.8 2.5 2.3 14.8% 15.5% 15.7%Media 15.9 14.6 13.5 3.3% 3.5% 3.8% 9.2 8.6 7.8 3.4 3.2 2.9 20.1% 20.5% 20.2%Retailing 20.4 18.2 16.4 2.7% 2.9% 3.3% 12.1 11.7 10.4 5.8 5.4 4.9 25.0% 25.2% 25.5%Hotels, Rests & Leisure 18.6 16.5 14.9 2.6% 2.9% 3.3% 9.9 9.0 8.1 3.1 2.9 2.6 17.0% 17.6% 17.7%Staples 17.1 15.6 14.3 2.9% 3.2% 3.5% 10.9 10.0 9.1 2.9 2.7 2.5 16.8% 17.2% 17.2%Food & Drug Retailing 13.6 12.2 11.3 3.2% 3.7% 4.0% 6.9 6.4 6.0 1.7 1.6 1.5 11.1% 12.5% 12.6%Food Beverage & Tobacco 17.4 16.0 14.6 3.0% 3.3% 3.6% 11.7 10.7 9.8 3.2 3.0 2.7 18.7% 18.8% 18.9%Household Products 19.3 17.8 16.4 2.2% 2.4% 2.6% 12.5 11.4 9.7 3.3 3.1 2.8 16.4% 16.2% 16.1%Healthcare 14.9 13.7 12.5 3.2% 3.4% 3.7% 10.2 9.4 8.5 3.4 3.1 2.9 22.3% 22.5% 22.8%Financials 11.6 10.1 8.9 3.8% 4.4% 5.2% - - - 0.9 0.9 0.8 7.6% 8.5% 9.2%Banks 14.0 12.1 9.5 3.7% 4.4% 5.3% 8.8 8.4 7.5 0.9 0.8 0.8 6.7% 7.9% 8.8%

Diversified Financials 12.3 10.7 9.2 2.2% 3.2% 4.4% - - - 1.0 1.0 0.9 7.6% 8.6% 9.4%Insurance 9.7 9.3 8.7 4.7% 5.0% 5.2% - - - 1.1 1.0 0.9 10.8% 10.6% 10.7%Real Estate 17.0 16.0 15.1 5.1% 5.3% 5.6% - - - 0.9 0.9 0.9 5.5% 5.5% 5.7%IT 22.6 17.5 14.7 1.7% 1.9% 2.1% 11.0 8.8 7.4 3.1 2.8 2.5 13.4% 15.8% 16.6%Software and Services 16.6 14.9 13.3 1.8% 2.0% 2.2% 10.2 8.9 7.5 3.6 3.2 2.8 20.5% 20.4% 19.8%Technology Hardware 26.7 18.9 15.6 1.9% 2.2% 2.6% 9.1 7.1 6.1 2.2 2.1 1.9 8.2% 10.9% 12.1%Semicon & Semicon Equip 37.8 21.7 16.4 1.3% 1.4% 1.6% 17.7 11.4 8.8 3.7 3.3 2.9 9.5% 15.6% 18.1%Telecoms 12.0 11.4 10.8 5.4% 5.5% 5.6% 5.1 5.2 5.0 1.6 1.6 1.5 13.3% 13.3% 13.2%Utilities 11.4 11.5 11.0 6.0% 6.0% 6.1% 6.6 6.6 6.4 1.1 1.0 1.0 10.4% 9.7% 9.8%

Source: I/B/E/S, Datastream. Based on prices COB 9Sept 2013. Note: We use the JPM Banks EV/EBITDA excluding RWA growth as it is closer to the industry sector EV/EBITDA which does not

account for capex. In this report, we focus on unlevered cash flow valuation as measured by JPM Banks EV/EBITDA. This measure replicates traditional non-financials' EV/EBITDA ratios and

excludes RWAs growth capital consumption. But this JPM methodology is not fully comparable to industrials' EV/EBITDA, for example we need to define business debt for banks and also include a

measure of maintenance capex. We use normalized EV/EBITDA 2015E

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Stock selection – the key driver for Eurobank outperformance in 2013/14E: JPM Top Picks

In our Eurobank top pick portfolio we are moving up the risk curve as in our view the market is not yet pricing in the improved capital structure, funding profile and ‘real cash flow’ generation of some of the Eurobanks.

Our new portfolio of top picks is: UBS, DB, Soc Gen, UCG, Caixabank, Nordea and Danske. Our portfolio of top pick stocks has outperformed the SX7P index of banks by 4.7% in 2012 and 13.2% in 2013 YTD, as shown in Table 4 below. We use the arithmetic sum of relative performance of our top picks portfolio in each period to arrive at the total performance for the portfolio

Table 4: JPMorgan Top Picks Performance relative to banking sector

%

Jan-12 to Feb-12

Feb-12 to July-12

July-12 to Jan-13

Jan-13 to May-13

May-13 to July-13

July-13 to Sep-13

UBS UBS UBS UBS UBS UBSSwedbank Swedbank Swedbank Swedbank Swedbank SG

DNB DNB DNB SG SG HSBCDBK SG SG STAN HSBC CSG

STAN STAN STAN CSG CSG DANSKECSG DANSKE NORDEA

Top picks average performance over the period 12.8 -15.6 40.0 11.8 -6.6 10.2SX7P performance 16.3 -14.8 31.0 2.2 -7.1 7.1Top Picks' relative performance -3.5 -0.8 9.0 9.6 0.5 3.1Top Picks' relative performance FY 2012 4.7Top Picks' relative performance YTD 2013 13.2

Source: J.P. Morgan estimates, Bloomberg

1. More positive on Euro-area banks: Société Générale to be joined by Deutsche Bank, Unicredit and Caixabank due to valuation discounts

Hence our only ‘default’ Euro bank is not anymore just SociétéGénérale where we still see material upside on additional cost saves and the turnaround in international retail, but we add Deutsche Bank as not just the cheapest big cap stock in Europe on traditional valuation metrics but still cheapest on an EV/cashflow basis (Deutsche Bank: Upgrading from N to OW: 'Cheapest' Eurobank - 'Bear case' capital scenario more than discounted). We also become more positive on Southern Europe for the first time in two years, expressing our view through upgrading Unicredit to OW (from n) with its strong capital base and balance sheet funding and yet it is still cheap on valuation compared to the rest of Europe (see page 50). To express our more positive view on Southern Europe and especially Italy we also upgrade Intesa from UW to N. We also upgrade Caixabankto OW (from N) as one of the cheapest Eurobanks in our EV/cashflow valuation on a 2015E basis. We note that both offer further upside on a normalized provision basis.

2. Continue to avoid Emerging Market exposure

We remain cautious on Emerging Market (EM) exposure as discussed in our report European Banks: Fed tapering: Who is afraid of EM sell-off? We are! Running Eurobank exposure at risk published 6 June 2013, and with limited concern on EM risk expressed by the market, we downgrade HSBC from OW to N which is currently valued at 1.2x P/NAV and

https://jpmm.com/research/content/GPS-1137667-0





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normalised EV/EBITDA ex growth 8.6x 2015E and also remove from our top picks portfolio. We do however upgrade Santander today from UW to N despite its material EM exposure due to underperformance against peers and Eurobanks in the past three months, some stabilization in Brazil and a more stable and predictable Spanish domestic banking environment accounting for 14% of profit by 2015E.

3. Within bank sub-business segments remain OW private banking and Tier II FICC restructuring:

Our top pick remains UBS, being the largest private bank in the world accounting for 51% of group profits in 2015E, with asset gathering accounting for 60%. We also applaud UBS for the ongoing shrinkage of its FICC franchise, accounting for only 5% of revenues and 13% capital by 2015E. We see UBS as a material dividend payout story and its strong capital generation is reflected in our normalised EV/cashflow valuation of 8.2x – which we consider cheap considering its excellent business mix. We note DB is for us a valuation call as the 8th cheapest bank in our European bank coverage and cheapest large cap bank even after discounting a capital raise of €9bn in our ‘bear’ case scenario based on its current valuation, as discussed in our recent upgrade note (Deutsche Bank: Upgrading from N to OW: 'Cheapest' Eurobank - 'Bear case' capital scenario more than discounted). We note that CSG is now the third IB in our pecking order considering its limited IB restructuring drive despite its FICC Tier II franchise but it clearly offers WM gearing and long-term restructuring potential to be discounted in the future. CSG however is not in our top pick portfolio.

4. Value remains in some selective Nordics: Danske Bank and Nordea

Within the Nordics we recently switched our preference from Swedbank into Nordea, which is in our top picks due to the potential DPS payout at 65% (JPMe 2013-2015E) translating into a 7.0% dividend yield in 2015E. Trading at 1.4x 2015E P/NAV, Nordea is also cheaper than Swedbank at 1.8x as well as less at risk from mortgage risk weighting increases. We continue to reiterate our top pick Danske Bank due to i) its ongoing asset quality improvement, ii) cheap valuation, trading at 0.9x 2015E P/NAV, and iii) strong capital position today, which offers future dividend upside potential (JPMe 40% payout in 2015E translating into a 5.1% dividend yield).

5. UK banks: preference for domestics over UK-Asian leading to HSBC downgrade, but overall limited value today

We believe that the relative attractions of the domestic UK banking sector have improved compared to HSBC and StanChart, which face potential headwinds within some EM economies. Further, with HSBC having outperformed StanChart by 15% YTD and now at a 14% PE premium to StanChart (10.2x 2015 P/E vs 8.9x 2015 P/E JPMe), we downgrade HSBC from OW to N. However, the UK domestic banks valuation is inline with Euro retail peers, both on traditional valuation metrics as well as on our EV/cashflow valuation. We retain Barclays as OW. Our preference is for Lloyds over RBS. So overall we find limited value in UK banks.




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Table 5: European Banks JPMe stock selection EV/EBITDA valuation, RoNAV and other traditional metrics

%

2015e EV/EBITDA

(ex RWA growth)

2015e EV/EBITDA (including

RWA growth)

2015e normalised EV/EBITDA

(ex RWA growth)


(inc RWA growth)

2014e EV/EBITDA

(ex RWA growth)

2014e EV/EBITDA

(incl RWA growth)

2013e EV/EBITDA

(ex RWA growth)

2013e EV/EBITDA

(incRWA growth)

P/E15E

P/NAV2015E

RoNAV2015E

RoNAV(normalised)

2015E

Dividend yield

2015E

B3 Core Equity Tier 12015E

Top PicksUBS 8.2 7.7 8.2 7.7 10.7 9.1 12.3 7.8 9.9 1.6 15.8% 15.7% 5.0% 16.4%Soc Gen 7.6 8.0 6.9 7.2 7.6 7.9 8.5 5.2 7.9 0.7 8.6% 9.9% 4.9% 11.4%DB 6.0 7.5 5.9 7.4 6.6 7.3 7.7 6.4 5.8 0.7 12.4% 12.6% 2.2% 11.2%UCG 5.4 6.0 5.1 5.6 6.3 6.9 7.4 4.9 8.5 0.5 6.4% 6.9% 2.0% 10.6%Caixabank 5.4 5.1 5.2 4.9 5.3 5.0 3.1 3.8 11.4 0.6 6.7% 6.8% 7.9% 9.3%NDA 7.9 8.0 8.1 8.2 8.6 8.3 9.3 6.2 9.3 1.4 14.8% 14.4% 7.0% 15.5%Danske 7.7 7.9 7.8 7.9 8.7 8.6 11.0 17.4 7.8 0.9 10.9% 10.8% 5.1% 14.5%Average 6.9 7.2 6.7 7.0 7.7 7.6 8.5 7.4 8.7 0.9 10.8% 11.0% 4.9% 12.7%

SwissCS 7.9 7.9 7.9 7.9 8.4 8.4 9.2 9.1 8.2 1.1 13.4% 13.4% 3.6% 12.2%UKLloyds 7.2 7.0 7.3 7.0 7.7 6.9 8.5 6.1 10.0 1.2 12.2% 12.1% 5.9% 13.0%RBS 8.3 7.5 8.2 7.3 8.7 5.4 9.6 6.0 11.8 0.7 6.2% 6.4% 1.8% 11.2%STAN 6.8 11.1 7.3 12.4 7.9 13.2 9.5 19.0 8.9 1.2 13.8% 12.9% 4.7% 11.2%HSBC 8.6 11.1 8.6 11.2 9.5 12.0 9.8 10.0 10.2 1.2 12.5% 12.4% 5.5% 10.7%FranceBNPP 7.3 7.9 6.7 7.1 7.4 7.8 7.7 8.0 9.4 0.9 9.6% 10.8% 4.0% 11.4%CASA 10.5 9.4 9.6 8.6 10.7 8.7 11.6 8.5 6.3 0.7 11.0% 12.5% 0.0% 9.5%ItalyISP 4.8 4.6 4.5 4.4 5.1 4.9 5.9 5.4 10.0 0.7 7.3% 7.8% 3.8% 11.1%GermanyCBK 12.2 10.6 12.2 10.6 14.2 12.1 - 14.3 11.6 0.4 3.7% 3.7% 0.0% 10.1%SpainSAN 7.8 9.3 5.9 6.7 6.3 7.0 6.9 7.4 11.8 1.0 10.5% 15.2% 10.8% 9.7%BBVA 10.1 10.7 5.9 6.1 6.4 6.8 6.7 7.4 13.4 1.2 9.9% 18.0% 5.4% 10.1%Popular 5.0 4.8 4.7 4.5 9.3 8.5 - 15.7 9.5 0.7 9.6% 10.2% 0.0% 8.9%NordicsSwed 9.2 9.5 9.5 9.9 10.1 10.5 10.8 14.1 10.0 1.8 17.6% 16.9% 7.5% 16.6%SHB 9.3 11.1 9.5 11.2 10.0 11.7 10.2 17.4 12.2 1.6 13.7% 13.5% 4.2% 17.1%SEB 9.1 10.5 9.7 11.4 10.2 13.1 10.7 13.9 10.4 1.4 13.5% 12.6% 4.8% 15.0%DnB 7.1 9.5 6.9 9.3 7.6 25.1 8.6 10.5 8.4 1.0 12.5% 12.7% 3.0% 12.8%CEEMAErste 6.5 8.4 7.1 9.3 7.9 9.1 9.2 7.5 6.5 1.1 16.2% 14.4% 6.2% 11.0%KBC 7.4 8.2 8.1 9.1 8.9 9.1 8.3 6.7 8.9 1.3 14.9% 13.4% 3.7% 9.3%

Average 7.7 8.4 7.5 8.1 8.4 9.3 8.8 9.6 9.5 1.0 11.3% 11.8% 4.4% 12.0%

Source: Bloomberg and J.P. Morgan estimates. *Bloomberg closing prices used as of Sep 9, 2013.KBC capital position is calculated after deducting positive AFS reserves (c. €800mn by 15E) and including penalty payments on remaining government capital.. Note

CBK and Popular 2013E EV/EBITDA ex growth are not meaningful, because out of scale.

12




Optimal capital structure analysis – quantifying capital required: €79bn

In our view, the optimal capital structure for a bank is to have a Basel 3 Core Tier I above 10%, at least 10% of bail-in funds to total liabilities (vs. the European Council’s proposal that 8% of total liabilities must be bailed-in before resolution funds can be used; to apply in 2018), and a Basel leverage ratio above 3.5% by 2015E (vs. the Basel Committee's proposal of a minimum of 3.0% with final rules coming into force in 2018). We estimate that 11 banks out of the 25 banks covered in this report will meet all the requirements by 2015E: UBS, Lloyds, RBS, HSBC, STAN, UCG, ISP, SAN, Caixabank, SHB and Erste.

Based on our estimates of individual minimum regulatory requirement, we see €3.6bn capital shortfall arising due to Basel 3 Core Tier I requirement, €72bn shortfall due to Basel 3 leverage EU requirement (i.e. additional alternativeBasel 3 Tier I) and €7bn shortfall 10% EU Bail-in funds requirement.

Overall for the optimal capital structure these three regulations combinedresults in €3.6bn Basel 3 Core Tier I capital shortfall, €70bn additional alternative Tier 1 Basel 3 shortfall and €6bn of additional sub debt shortfall.The optimal capital structure takes into account the combined capital raised to meet all the capital requirements, hence the overall additional alternative Tier 1 and Tier 2 issuance requirements are lower than the shortfall based on individual regulation. In our view, banks like UCG, Intesa, Handelsbanken and UBS have an optimal capital structure exceeding the Basel 3 capital, bail-in and leverage minimums by a healthy margin and are seeing limited earnings impact, whilst we see a Basel 3 capital shortfall of €1.8bn for CASA, Tier I Basel 3 alternative leverage shortfalls of €32bn for CASA and €12bn for DBK, and bail-in funds shortfall of €4bn for BBVA. Note that for CASA, we have run our analysis on the listed entity but note that regulators and rating agencies focus on the Credit Agricole Group including the well capitalized unlisted Regional Banks; in addition, we have not included the positive impact from the extension of Switch expected by year end. For further discussion on CASA please see our note “Credit Agricole: high cost of equity on Basel leverage uncertainties” from 29 July 2013.

Basel 3 Core Tier I: €3.6bn capital shortfall only compared to JPMe minimum requirements. Post optimizing the capital structure, we expect the Basel 3 Core Tier I to improve from 10.5% on average end 2013e to 12.0% end 2015e, with shortfalls reduced to €3.6bn vs. our minimum requirements. The capital shortfall is driven by CASA with €1.8bn shortfall, DNB with €1.0bn and KBC with €0.7bn vs. the JPMe minimum Basel 3 Core Tier I ratio. Note that for CASA, the €1.8bn shortfall does not include the extension of Switch expected by year end; including the extension of Switch, we estimate Basel 3 Core Tier I ratio would increase to 10.5% end 2015e, implying no shortfall to our minimum 10%.

Table 6: European Banks: Total shortfall and optimum issuance requirement 2015E

€ billion

Shortfall based on individual regulationBasel III CET1 capital 3.6Basel III alternative bail-in B3T1 72Bail-in funds 7

Optimum issuance requirementBasel III CET1 3.6Additional tier 1 ( Tier 1 Cocos) 70Sub Debt (Tier 2 Cocos) 6

Total issuances 79

Source: J.P. Morgan estimates, Company data.



13




Basel 3 leverage: €72bn additional alternative Tier 1 capital shortfall to JPMe minimum 3.5% leverage ratio, which we expect banks to fulfill by issuing Tier 1 cocos. We expect Basel 3 leverage ratio to improve to 3.9% end 2015e on average post the optimal capital structure, above the JPMe 3.5% minimum. However, a few banks stand below and the total €72bn shortfall is concentrated on CASA (€32.1bn), DB (€11.5bn), SG (€6.6bn), CBK (€7.3bn), CS (€5.5bn), BNP (€4.3bn), Nordea (€1.3bn) and Danske (€1.3bn). Note that we have run the sensitivity on CASA but regulators focus on Credit Agricole Group which has a Basel 3 leverage ratio of 3.3%, implying a shortfall of only €3.3bn to min 3.5%. To improve CASA Basel leverage earlier, by end 2015e, CASA could consider several mitigation initiatives: i) issue additional Basel 3 Tier I cocos/hybrids; ii) raise equity and issue additional Basel 3 Tier I cocos/hybrids; or iii) sell the insurance business to the Regional Banks, unwind the intragroup exposures and exit capital markets, as discussed in our note “Credit Agricole: high cost of equity on Basel leverage uncertainties” on 29 July 2013.

EU Bail-in funds: €7bn subordinated debt shortfall to minimum JPMe 10% minimum requirement, which we expect will be met by issuing additional alternative tier 1 or tier 2 capital. Assuming that EU banks already comply with our minimum Basel 3 capital and leverage ratio requirements, the shortfallto 10% bail-in requirements would then be limited to €6bn, mainly driven by BBVA with €4.1bn, SEB with €0.9bn and Swedbank with €0.9bn.

Retiring senior debt helps offset costs for an optimal capital structure

We estimate that European banks will have excess senior debt above the JPMe bail-in requirement (10% of total liabilities). We further estimate 85bps bail-in premium on senior debt in our analysis. Given that the banks will operate with excess senior debt in 2015E, we believe that the banks will partly reduce the reliance on senior debt through natural maturity (€1.2trn of maturing senior unsecured bank debt in EU by 2015E) to limit the increase in absolute funding costs. Additionally we believe the leverage ratio rules will incentivize banks to shrink the balance sheets, which potentially on the liability side will be done by reducing senior debt. For the purpose of our analysis we assume that the banks will retire 25% of the excess senior bail-inable debt by 2015E and in addition replace any new capital issuance with excess senior unsecured debt, which, based on the current maturity profile, can be achieved without buy-backs. For example, for CASA we assume that i) the €34bn combined CET1 and coco capital issuances will replace existing senior, and ii) in addition that CASA will redeem 25% of its excess senior unsecured bail-in funds implying a total senior redemption of €43bn vs. €50bn of maturing debt in the next 3 years. The reason for the adjustment is not to double count for new and maturing issuances.

14




Table 7: European Banks: Summary of capital requirements vs. current estimated levels 2015E Table (1 of 2)

EUR mn

2015E CASA DB CBK Soc Gen CS BNPP BBVA NDA Danske DnB SEB Swed KBCRequirementsBasel III CET1 10.0% 10.0% 9.0% 10.0% 10.0% 10.0% 9.0% 13.0% 13.0% 13.5% 13.0% 13.0% 10.0%Basel III leverage ratio 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%Bail-in requirement 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%

Current estimateBasel III CET1 9.5% 11.2% 10.1% 11.4% 12.2% 11.4% 10.1% 15.5% 14.5% 12.8% 15.0% 16.6% 9.3%Basel III leverage ratio 1.7% 2.8% 2.6% 3.0% 3.0% 3.3% 4.8% 3.3% 3.3% 4.5% 4.4% 4.1% 3.5%Available bail-in funds 11% 13% 14% 12% 10% 12% 9% 13% 10% 13% 10% 10% 12%

Deficit/SurplusBasel III CET1 - + + + + + + + + - + + -Basel III leverage ratio - - - - - - + - - + + + -Bail-in requirement + + + + + + - + - + - - +

Issuance requirement based on individual regulationsBasel III CET1 1,805 - - - - - - - - 1,016 - - 711Additional tier 1 issuance 33,890 11,524 7,303 6,605 5,539 4,297 - 1,332 1,298 - - - 92Regulatory capital to meet bail-in - - - - - - 4,060 - 1,203 - 947 877 -

Optimum issuance requirement combining all threeBasel III CET1 1,805 - - - - - - - - 1,016 - - 711Additional tier 1 issuance (Tier 1 Cocos) 32,085 11,524 7,303 6,605 5,539 4,297 - 1,332 1,298 - - - -Additional sub debt (Tier 2 Cocos) - - - - - - 4,060 - - - 947 877 -Total issuances 33,890 11,524 7,303 6,605 5,539 4,297 4,060 1,332 1,298 1,016 947 877 711

Source: J.P. Morgan estimates, Company data. Note: For CSG, current additional tier 1 outstanding includes issued high-trigger Buffer Capital Notes (“CoCos”) of CHF 1.6 bn, and also includes exchange in Oct 2013 of remaining CHF 3.8 bn hybrid tier1 notes into

BCNs

15




Table 8: European Banks: Summary of capital requirements vs. current estimated levels 2015E Table (2 of 2)

EUR mn

2015E Popular UBS Lloyds RBS HSBC STAN UCG ISP SAN Caixabank SHB Erste Total/AverageRequirementsBasel III CET1 9.0% 13.0% 10.0% 10.0% 10.0% 10.0% 9.0% 9.0% 9.0% 9.0% 13.0% 10.0% 10.5%Basel III leverage ratio 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%Bail-in requirement 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%

Current estimateBasel III CET1 8.9% 16.4% 13.0% 11.2% 10.7% 11.2% 10.6% 11.1% 9.7% 9.3% 17.1% 11.0% 12.0%Basel III leverage ratio 4.1% 4.1% 4.5% 3.6% 4.5% 6.0% 4.3% 4.3% 4.7% 3.8% 3.9% 5.4% 3.9%Available bail-in funds 12% 11% 11% 15% 10% 12% 20% 19% 10% 15% 29% 13% 13.0%

Deficit/SurplusBasel III CET1 - + + + + + + + + + + +Basel III leverage ratio + + + + + + + + + + + +Bail-in requirement + + + + + + + + + + + +

Issuance requirement based on individual regulationsBasel III CET1 88 - - - - - - - - - - - 3,620Additional tier 1 issuance - - - - - - - - - - - - 71,880Regulatory capital to meet bail-in - - - - - - - - - - - - 7,088

Optimum issuance requirement combining all threeBasel III CET1 88 - - - - - - - - - - - 3,620Additional tier 1 issuance (Tier 1 Cocos) - - - - - - - - - - - - 69,984Additional sub debt (Tier 2 Cocos) - - - - - - - - - - - - 5,885Total Issuances 88 - - - - - - - - - - - 79,489

Source: J.P. Morgan estimates, Company data

16




Table 9: European Banks – Optimising capital structure 2015e (1/2)

€ million

CASA DB CBK Soc Gen CS BNPP BBVA NDA Danske DnB SEB Swed KBCOLDBasel 3 Core Tier I capital 32,491 44,506 22,395 40,946 27,976 72,974 34,940 25,851 18,161 18,344 13,004 9,965 9,847Tier 1 cocos 0 0 0 944 4,380 0 1,139 0 0 0 0 0 0Tier I hybrids - current 8,850 13,098 2,259 4,978 4,372 10,307 1,860 1,976 3,760 403 1,652 692 2,104Tier 2 cocos 0 0 0 0 3,968 0 0 0 0 0 0 0 769Additional Tier 2 & other sub debt 18,850 6,427 9,878 6,211 3,420 10,643 7,386 3,601 2,045 1,760 392 878 2,328Senior 87,169 88,320 54,450 69,590 25,061 78,406 12,169 40,500 16,360 20,509 13,961 9,991 14,800Total 147,360 152,351 88,982 122,669 69,177 172,330 57,494 71,928 40,327 41,017 29,009 21,527 29,848

Total liabilities in reg capital adj for derivatives 1,366,539 1,162,286 626,267 1,037,982 679,564 1,456,740 615,543 558,793 415,298 307,051 299,564 224,042 254,757Total exposure post asset reduction for leverage 1,896,593 1,600,868 848,495 1,385,582 1,082,710 2,207,734 723,491 776,660 555,995 406,129 297,891 241,594 283,966Basel III RWA 342,956 395,648 221,869 358,487 229,406 638,150 345,743 166,708 125,618 143,412 86,649 60,110 105,574

Bail-in funds (%) 10.8% 13.1% 14.2% 11.8% 10.2% 11.8% 9.3% 12.9% 9.7% 13.4% 9.7% 9.6% 11.7%Basel III Leverage Ratios (%) 1.7% 2.8% 2.6% 3.0% 3.0% 3.3% 4.8% 3.3% 3.3% 4.5% 4.4% 4.1% 3.5%Basel III Capital Ratios (%) 9.5% 11.2% 10.1% 11.4% 12.2% 11.4% 10.1% 15.5% 14.5% 12.8% 15.0% 16.6% 9.3%

NEWBasel 3 Core Tier I capital 34,296 44,506 22,395 40,946 27,976 72,974 34,940 25,851 18,161 19,361 13,004 9,965 10,557Tier 1 cocos 32,085 11,524 7,303 7,550 9,919 4,297 1,139 1,332 1,298 0 0 0 0Tier I hybrids - current 8,850 13,098 2,259 4,978 4,372 10,307 1,860 1,976 3,760 403 1,652 692 2,104Tier 2 cocos 0 0 0 0 3,968 0 4,060 0 0 0 947 877 769Additional Tier 2 & other sub debt 18,850 6,427 9,878 6,211 3,420 10,643 7,386 3,601 2,045 1,760 392 878 2,328Senior 43,935 64,884 38,733 56,616 18,301 66,371 12,169 34,823 16,265 17,677 13,961 9,991 13,529Total 138,016 140,439 80,567 116,300 67,956 164,591 61,554 67,583 41,530 39,201 29,956 22,404 29,288

Bail-in funds (%) 10.1% 12.1% 12.9% 11.2% 10.0% 11.3% 10.0% 12.1% 10.0% 12.8% 10.0% 10.0% 11.5%Basel III Leverage Ratios (%) 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 5.0% 3.5% 3.5% 4.8% 4.4% 4.1% 3.7%Basel III CET1 ratios (%) 10.0% 11.2% 10.1% 11.4% 12.2% 11.4% 10.1% 15.5% 14.5% 13.5% 15.0% 16.6% 10.0%

Common equity issuance 1,805 0 0 0 0 0 0 0 0 1,016 0 0 711Tier 1 coco issuance 32,085 11,524 7,303 6,605 5,539 4,297 0 1,332 1,298 0 0 0 0Tier 2 coco issuance 0 0 0 0 0 0 4,060 0 0 0 947 877 0

Total issuances (CET1+T1 cocos+T2cocos) 33,890 11,524 7,303 6,605 5,539 4,297 4,060 1,332 1,298 1,016 947 877 711

Senior redemption (Case I, excess senior debt redemption) -43,234 -23,436 -15,717 -12,974 -6,759 -12,035 0 -5,677 -95 -2,832 0 0 -1,271Senior redemption (Case II senior debt redemption limited to coco issuances) -32,085 -11,524 -7,303 -6,605 -5,539 -4,297 0 -1,332 -95 0 0 0 0

Source: J.P. Morgan estimates. Note: For CSG, current additional tier 1 outstanding includes issued high-trigger Buffer Capital Notes (“CoCos”) of CHF 1.6 bn, and also includes exchange in Oct 2013 of remaining CHF 3.8 bn hybrid tier1 notes into BCNs

17




Table 10: European Banks – Optimising capital structure 2015e (2/2)

€ million

Popular UBS Lloyds RBS HSBC STAN UCG ISP SAN Caixabank SHB Erste TotalOLDBasel 3 Core Tier I capital 7,417 28,431 42,586 53,955 111,987 35,252 47,099 34,988 58,229 15,217 12,161 12,524Tier 1 cocos 0 0 0 0 0 0 0 0 0 0 0 0Tier I hybrids - current 134 2,587 1,647 11,000 7,013 3,961 2,554 2,544 3,195 90 1,227 377Tier 2 cocos 0 4,371 10,774 0 0 0 0 0 0 0 0 0Additional Tier 2 & other sub debt 777 4,092 10,289 12,989 25,247 9,589 14,343 8,141 9,391 4,020 382 4,423Senior 9,109 20,689 35,316 64,913 55,477 16,400 101,240 70,741 43,421 34,738 71,911 11,750Total 17,437 60,169 100,611 142,857 199,725 65,201 165,235 116,414 114,236 54,065 85,681 29,074

Total liabilities in reg capital adj for derivatives 147,028 540,056 916,589 971,544 1,996,716 534,314 828,203 617,668 1,128,298 350,540 293,395 216,193Total exposure post asset reduction for leverage 183,057 701,703 954,345 1,513,150 2,492,700 587,802 1,087,617 820,156 1,233,831 403,893 314,021 231,414Basel III RWA 83,392 172,897 326,841 481,828 1,042,231 315,832 444,460 316,343 598,874 164,214 70,910 114,332

Bail-in funds (%) 11.9% 11.1% 11.0% 14.7% 10.0% 12.2% 20.0% 18.8% 10.1% 15.4% 29.2% 13.4% 13.0%Basel III Leverage Ratios (%) 4.1% 4.1% 4.5% 3.6% 4.5% 6.0% 4.3% 4.3% 4.7% 3.8% 3.9% 5.4% 3.9%Basel III Capital Ratios (%) 8.9% 16.4% 13.0% 11.2% 10.7% 11.2% 10.6% 11.1% 9.7% 9.3% 17.1% 11.0% 12.0%

NEWBasel 3 Core Tier I capital 7,505 28,431 42,586 53,955 111,987 35,252 47,099 34,988 58,229 15,217 12,161 12,524Tier 1 cocos 0 0 0 0 0 0 0 0 0 0 0 0Tier I hybrids - current 134 2,587 1,647 11,000 7,013 3,961 2,554 2,544 3,195 90 1,227 377Tier 2 cocos 0 4,371 10,774 0 0 0 0 0 0 0 0 0Additional Tier 2 & other sub debt 777 4,092 10,289 12,989 25,247 9,589 14,343 8,141 9,391 4,020 382 4,423Senior 8,403 19,148 33,078 54,963 55,464 13,457 80,636 57,079 43,070 29,985 57,826 9,886Total 16,819 58,628 98,373 132,907 199,711 62,259 144,631 102,752 113,884 49,312 71,596 27,210

Bail-in funds (%) 11.4% 10.9% 10.7% 13.7% 10.0% 11.7% 17.5% 16.6% 10.1% 14.1% 24.4% 12.6% 12.3%Basel III Leverage Ratios (%) 4.1% 4.1% 4.5% 3.6% 4.5% 6.0% 4.3% 4.3% 4.7% 3.8% 3.9% 5.4% 4.1%Basel III CET1 Ratios (%) 9.0% 16.4% 13.0% 11.2% 10.7% 11.2% 10.6% 11.1% 9.7% 9.3% 17.1% 11.0% 12.1%

Common equity issuance 88 0 0 0 0 0 0 0 0 0 0 0 3,620Tier 1 coco issuance 0 0 0 0 0 0 0 0 0 0 0 0 69,984Tier 2 coco issuance 0 0 0 0 0 0 0 0 0 0 0 0 5,885

Total issuances (CET1+T1 cocos+T2cocos) 88 - - - - - - - - - - - 79,489

Senior redemption (Case I, excess senior debt redemption) -706 -1,541 -2,238 -9,950 -13 -2,943 -20,604 -13,662 -351 -4,753 -14,085 -1,864 - 196,740Senior redemption (Case II senior debt redemption limited to coco issuances) 0 0 0 0 0 0 0 0 0 0 0 0 -68,781

Source: J.P. Morgan estimates.

18




Optimal Capital Structure analysis- running the numbers: RoNAV declines 1% to 10.6% 2015E

We conclude that the new regulations will increase capital requirements and drive up capital as well as funding costs and thus increase pressure on banks’ profitability. Additionally the tougher capital requirements could, in our view,push banks to reduce their balance sheet sizes and focus more on the optimal capital/funding structure, which potentially could lead to retiring of excess senior unsecured funding. We expect the Basel 3 capital, bail-in and leverage ratio requirements to reduce EPS by ~9% on average and RoNAV to ~10.6% from 11.3% with the biggest earnings impact coming from bail-in. The most impacted banks from Basel 3 capital, bail-in and leverage ratio rules are CBK, CASA, and Caixabank with an estimated 35%, 34%, and 27% hit in EPS respectively post regulation, while SHB, Nordea, UBS, RBS, Lloyds, HSBC, STAN, ISP and UCG are relatively unaffected.

CBK is one of the most impacted with EPS dilution of 35% and RoNAV declining from 3.7% in our current estimates to 2.4% in 2015e, with most of the impact coming from a) the Basel 3 leverage ratio shortfall of €7.3bn to improve leverage from 2.6% to our minimum 3.5%, and b) the additional cost of bail-in of 60bp for sub debt and 90bp for senior debt, only partly offset by senior debt redemption of estimated €16bn.

CASA is also materially affected with EPS dilution of 34% and RoNAV decreasing to 7.9% from 11.0% in 2015e. Note however that our sensitivity scenario is based on CASA, which has a significant Basel 3 leverage shortfall of €34bn to improve leverage from 1.7% to 3.5% in our estimates. However, regulators focus on Credit Agricole Group, which has a Basel leverage of 3.3%, implying only €3.3bn shortfall to our 3.5% minimum. As discussed in our note “Credit Agricole: high cost of equity on Basel leverage uncertainties” on 29 July 2013, to improve CASA Basel leverage by end 2015e, CASA could consider several mitigation initiatives: a) issue additional Basel 3 Tier I cocos/hybrids; b) raise equity and issue additional Basel 3 Tier I cocos/hybrids; or c) sell the insurance business to the Regional Banks, unwind the intragroup exposures and exit capital markets. The company has not commented on these options.

Caixabank is also significantly impacted with EPS dilution of 27% and RoNAV declining to 4.9% from 6.7% in 2015e. The impact is mostly driven by the incremental cost of bail-in debt of 170bp for senior and 120bp for sub debt.

SHB and Nordea are well positioned with no impact on EPS for SHB and only -3% for Nordea. Basel 3 capital and leverage as well as bail-in funds are already more than adequate at SHB. Nordea’s €1.3bn leverage shortfall to improve Basel leverage from 3.3% to 3.5% is largely offset by the positive impact from redeeming €6bn of senior debt.

HSBC & STAN are also well positioned with EPS impact of up to -2% only in our sensitivity scenario, driven entirely by the repricing of bail-inable debt for the additional bail-in cost of 30bp for sub and 40bp for senior. RoNAV remains high at 12.2% for HSBC and 13.8% for STAN.

Table 11: European Bank: 2015E impact due to regulations on average

%

% EPS dilution

% Impact on RoNAV

Bail-in funds -10% -1.0%B3 leverage -5% -0.4%Basel CET1 -1% 0.0%

Overall impact * -9% -1%

Source: J.P. Morgan estimates. Note:- Overall

impact is calculated post optimum capital structure including senior redemption


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UBS, RBS & Lloyds are also broadly unaffected with EPS impact of 0-2% in our view, driven by the repricing of bail-inable debt. Note however that our estimates are based on the banks delivering on their asset reduction targets of SF342bn, £65bn and £50bn respectively.

ISP & UCG are also well positioned with small EPS impact from our sensitivity analysis. The negative impact from the repricing of wholesale funding - 60bp for sub debt and 90bp for senior - is more than offset by the redemption of €21bn of senior debt for UCG and €14bn for ISP.

Assuming banks would not retire any maturing excess bail-inable debt by 2015E to offset the bail-in premium on senior funding, we estimate that the average EPS impact for the European banks would be -17% with RoNAV falling on average by 1.5% from 11.3% to 9.9%. The most impacted bank would be CBK with a -73% EPS hit, while UBS, HSBC and Standard Chartered would see limited earnings impact (-2% EPS hit respectively).

Note that to get to the optimal capital structure, we have assumed: i) equity capital raise to get to minimum Basel 3 Core Tier I ratio, ii) issuance of additionalalternative Tier 1 cocos at a average cost equal to 7%, iii) costs offset from the redemption of senior to optimize the impact on liquidity (e.g. excess cash at central banks), and iv) based on new capital structure, repricing of wholesale funding (senior and sub) for the additional cost for bail-in feature.

For current cost of senior and sub debt we use 5 yr CDS data, as we believe the CDS give fair and comparable costs for debt issuance. We note that some recent issuance have been inside CDS spread levels. For additional alternative Tier 1 cocos we have assumed a cost of 7%, equivalent to the average cost of the issuances by CSG, KBC, BBVA and UBS.

Table 12: Funding cost assumptions for the optimal capital structure

%

AssumptionFinancing cost on existing sub debt CDS spread + currency swapIncrease due to bail-in on existing sub debt 30bps/59bps/119bps depending on bail-in segmentationFinancing cost new debt CDS spread + currency swap + bail-in premiumFinancing cost of cocos 7% - average of current CSG, KBC, BBVA and UBS coco issuance


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Table 13: European Banks –Impact from reaching an optimal capital structure on 2015e EPS, NAV & RoNAV (1/2)

lcl ccy million

CBK CASA Caixabank KBC Soc Gen Popular BBVA Erste DB DnB BNPP Danske SANNet income 868 3,158 1,447 1,679 3,570 913 3,598 1,650 6,006 18,747 6,590 14,922 6,145Interest income - capital raising 0 38 0 15 0 2 0 0 0 60 0 0 0Cost of cocos/Add Tier I -385 -1,578 0 0 -320 0 0 0 -531 0 -205 -507 0Cost of add sub debt 0 0 0 0 0 0 -234 0 0 0 0 0 0Additional cost bail-in -402 -646 -559 -283 -548 -154 -158 -225 -668 -1,309 -689 -644 -441Cost of redeeming senior (Case I) 484 1,300 164 38 388 42 0 56 585 486 315 19 14Resulting net income 566 2,272 1,053 1,450 3,089 803 3,206 1,481 5,393 17,983 6,011 13,790 5,718

NOSH (m) 1,139 2,488 5,705 417 801 2,209 6,345 430 1,027 1,629 1,244 1,001 13,112add shares (m) 0 231 0 21 0 24 0 0 0 84 0 0 0Resulting NOSH (m) 1,139 2,720 5,705 438 801 2,232 6,345 430 1,027 1,713 1,244 1,001 13,112

EPS 0.76 1.27 0.25 4.03 4.45 0.41 0.57 3.84 5.85 11.51 5.30 14.91 0.47Resulting EPS 0.50 0.84 0.18 3.31 3.86 0.36 0.51 3.44 5.25 10.50 4.83 13.78 0.44

EPS dilution -35% -34% -27% -18% -13% -13% -11% -10% -10% -9% -9% -8% -7%

NAV/share 20.9 12.2 4.0 28.5 53.5 4.6 5.8 24.9 49.5 96.7 56.9 141.5 4.6Resulting NAV/share 20.6 11.8 3.9 28.0 52.9 4.6 5.7 24.5 48.9 96.2 56.5 140.3 4.6

RoNAV 3.7% 11.0% 6.7% 14.9% 8.6% 9.6% 9.9% 16.2% 12.4% 12.5% 9.6% 10.9% 10.5%Resulting RoNAV 2.4% 7.9% 4.9% 12.9% 7.5% 8.5% 8.8% 14.5% 11.2% 12.0% 8.7% 10.1% 9.8%Impact -1.3% -3.1% -1.8% -2.0% -1.2% -1.2% -1.1% -1.7% -1.3% -0.5% -0.8% -0.8% -0.7%

Case II- Sensitivity to senior debt redemption assumption assuming senior debt redemption limited to coco issuance Cost of redeeming senior (Case II) 225 965 0 0 198 0 0 0 288 0 112 19 0

EPS 0.76 1.27 0.25 4.03 4.45 0.41 0.57 3.84 5.85 11.51 5.30 14.91 0.47Resulting EPS 0.21 0.67 0.14 3.18 3.55 0.34 0.51 3.24 4.86 10.10 4.61 13.78 0.43EPS dilution -73% -47% -44% -21% -20% -19% -11% -16% -17% -12% -13% -8% -7%

NAV/share 20.9 12.2 4.0 28.5 53.5 4.6 5.8 24.9 49.5 96.7 56.9 141.5 4.6Resulting NAV/share 20.3 11.6 3.9 27.8 52.6 4.6 5.7 24.3 48.5 95.8 56.2 140.3 4.6

RoNAV 3.7% 11.0% 6.7% 14.9% 8.6% 9.6% 9.9% 16.2% 12.4% 12.5% 9.6% 10.9% 10.5%Resulting RoNAV 1.0% 6.4% 3.7% 12.4% 6.9% 7.9% 8.8% 13.7% 10.3% 11.5% 8.3% 10.1% 9.7%Impact -2.7% -4.7% -3.0% -2.6% -1.7% -1.7% -1.1% -2.5% -2.1% -1.0% -1.2% -0.8% -0.8%

Source: J.P. Morgan estimates. Note: For CSG, current additional tier 1 outstanding includes issued high-trigger Buffer Capital Notes (“CoCos”) of CHF 1.6 bn, and also includes exchange in Oct 2013 of remaining CHF 3.8 bn hybrid tier1 notes into BCNs

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Table 14: European Banks – Impact from reaching an optimal capital structure on 2015e EPS, NAV & RoNAV (2/2)

Lcl ccy million

SEB CS Swed NDA HSBC Lloyds UBS STAN RBS ISP SHB UCG AverageNet income 14,876 5,482 16,717 4,000 20,415 5,582 7,265 6,391 3,321 2,580 14,814 3,072Interest income - capital raising 0 0 0 0 0 0 0 0 0 0 0 0Cost of cocos/Add Tier I 0 -316 0 -70 0 0 0 0 0 0 0 0Cost of add sub debt -285 0 -260 0 0 0 0 0 0 0 0 0Additional cost bail-in -570 -125 -411 -165 -438 -150 -125 -129 -259 -549 -2,183 -786Cost of redeeming senior (Case I) 0 200 0 118 0 53 44 110 259 576 2,520 940Resulting net income 14,021 5,242 16,047 3,884 19,978 5,485 7,184 6,373 3,322 2,607 15,152 3,226

NOSH (m) 2,200 1,614 1,097 4,050 19,076 72,588 3,833 2,495 11,544 16,425 635 5,792add shares (m) 0 0 0 0 0 0 0 0 0 0 0 0Resulting NOSH (m) 2,200 1,614 1,097 4,050 19,076 72,588 3,833 2,495 11,544 16,425 635 5,792

EPS 6.76 3.40 15.23 0.99 1.07 7.69 1.90 2.56 28.77 0.16 23.31 0.53Resulting EPS 6.37 3.25 14.62 0.96 1.05 7.56 1.87 2.55 28.77 0.16 23.85 0.56

EPS dilution -6% -4% -4% -3% -2% -2% -1% 0% 0% 1% 2% 5% -9%

NAV/share 51.8 26.5 88.5 6.9 8.8 65.0 12.3 19.5 476.2 2.2 176.4 8.5Resulting NAV/share 51.4 26.4 87.8 6.8 8.8 64.9 12.3 19.5 476.2 2.2 176.9 8.5

RoNAV 13.5% 13.4% 17.6% 14.8% 12.5% 12.2% 15.9% 13.8% 6.2% 7.3% 13.7% 6.4% 11.3%Resulting RoNAV 12.7% 12.8% 16.9% 14.3% 12.2% 12.0% 15.7% 13.8% 6.2% 7.3% 14.0% 6.7% 10.6%Impact -0.8% -0.6% -0.7% -0.4% -0.3% -0.2% -0.2% 0.0% 0.0% 0.1% 0.3% 0.3% -0.8%

Case II- Sensitivity to senior debt redemption assumption assuming senior debt redemption limited to coco issuance Cost of redeeming senior (Case II) 0 164 0 28 0 0 0 0 0 0 0 0

EPS 6.76 3.40 15.23 0.99 1.07 7.69 1.90 2.56 28.77 0.16 23.31 0.53Resulting EPS 6.37 3.22 14.62 0.93 1.05 7.47 1.86 2.50 26.22 0.12 19.06 0.36EPS dilution -6% -5% -4% -6% -2% -3% -2% -2% -9% -26% -18% -31% -17%

NAV/share 51.8 26.5 88.5 6.9 8.8 65.0 12.3 19.5 476.2 2.2 176.4 8.5Resulting NAV/share 51.4 26.3 87.8 6.8 8.8 64.8 12.3 19.4 473.7 2.2 172.1 8.3

RoNAV 13.5% 13.4% 17.6% 14.8% 12.5% 12.2% 15.9% 13.8% 6.2% 7.3% 13.7% 6.4% 11.3%Resulting RoNAV 12.7% 12.7% 16.9% 13.9% 12.2% 11.9% 15.6% 13.5% 5.7% 5.4% 11.2% 4.4% 9.9%Impact -0.8% -0.7% -0.7% -0.8% -0.3% -0.3% -0.3% -0.3% -0.6% -1.9% -2.5% -2.0% -1.5%Source: J.P. Morgan estimates. Note: For CSG, current additional tier 1 outstanding includes issued high-trigger Buffer Capital Notes (“CoCos”) of CHF 1.6 bn, and also includes exchange in Oct 2013 of remaining CHF 3.8 bn hybrid tier1 notes into BCNs

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Optimal Capital Structure Factor 1: Bail-in reducing PBT by 10% and RoNAV by 1%

Whilst the European Council is proposing that 8% of total liabilities must be bailed-in before resolution funds can be used, we think the actual bail-in requirement could be higher. We run two scenarios for assessing a JPMe 10% bail-in liability requirement namely a base case and a bear case.

In our base case we assume that the 10% JPMe bail-in requirement would be fulfilled by total available loss-absorbing own funds and eligible liabilities i.e. equity, sub-debt and senior unsecured with maturity greater than 1 year.

In our bear case we assume that banks would want to meet the JPMe 10% minimum bail-in requirement with own funds only i.e. equity and sub-debt (T1 and T21) excluding senior debt.

In our base case we do not see any sector deficit in terms of the absolute amount of bail-in liabilities required, although we note that BBVA has a deficit of 1% of liabilities with the bank needing to raise €4.1bn in eligible bail-in liabilities in order to meet a JPMe 10% minimum bail-in requirement. Additionally, Danske, SEB and Swedbank have small deficits of 0.3-0.4% vs. the JPMe 10% minimum, reflecting their reliance on secured covered bond funding.

In our bear case we see a sector deficit of 3.6% of total liabilities with no European bank meeting the minimum with own funds. Standard Chartered, RBS and Erste with 9.1%, 8.0% and 8.0% respectively of own funds to total liabilities are best placed, while CASA with 4.4% and Handelsbanken with 4.7% of own funds to total liabilities are in the weakest position. Although the Nordic banks are on a B3 Core Equity Tier 1 measure some of the best capitalized banks in Europe, on a bail-in measure they stack up slightly below average, with own funds to total liabilities averaging 5.5% vs. sector average of 6.4%.

1 Please note that we have used the B3 definition for Core Equity Tier 1 and B2 definition for Additional Tier 1 and Tier 2

The Council of the European

Union is proposing that a minimum of 8% of total liabilities

including own funds must be

bailed-in before any resolution funds can be used. However, we

think banks will operate above

the 8% threshold and hence assume a 10% JPMe minimum

(losses prior to resolution action

do not count towards the 8% min level). The bail-in tool will not

apply until 1 Jan 2018.

We note that FINMA has developed a resolution strategy for Switzerland’s global systemically important banks and this may not fully replicate the Council of the European Union proposal. However, for the purpose of like-for-like comparison across the European Banking sector, we are running this exercise for both UBS and CSG based on the Council of the European Union proposal.

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Table 15: European Banks’ minimum loss-absorbing bail-in requirement and availability of loss-absorbing liabilities

EUR bn

Total liabs ex

der

Loss-absorbing bail-in

requirement (10% of total

liabs)

Total capital under

Basel III

Senior debt >1

year

Total available

loss-absorbing

liabs

Total available

loss-absorbing liabs incl

senior debt –BASE CASE

Additional issuance

requirement to meet 10%

total liabs with own

funds and senior debt –BASE CASE

Total available

loss-absorbing

own funds –BEAR CASE

Additional issuance

requirement to meet 10% total liabs with own

funds only –BEAR CASE

BBVA 616 62 45 12 57 9% 4 7% 16Danske 415 42 24 16 40 10% 1 6% 18SEB 300 30 15 14 29 10% 1 5% 15Swed 224 22 12 10 22 10% 1 5% 11CASA 1,367 137 60 87 147 11% - 4% 76HSBC 1,997 200 144 55 200 10% - 7% 55DB 1,162 116 64 88 152 13% - 6% 52BNPP 1,457 146 94 78 172 12% - 6% 52Soc Gen 1,038 104 53 70 123 12% - 5% 51SAN 1,128 113 71 43 114 10% - 6% 42CBK 626 63 35 54 89 14% - 6% 28Lloyds 917 92 65 35 101 11% - 7% 26NDA 559 56 31 41 72 13% - 6% 24CS 680 68 44 25 69 10% - 6% 24RBS 972 97 78 65 143 15% - 8% 19UCG 828 83 64 101 165 20% - 8% 19ISP 618 62 46 71 116 19% - 7% 16Caixabank 351 35 19 35 54 15% - 6% 16SHB 293 29 14 72 86 29% - 5% 16UBS 540 54 39 21 60 11% - 7% 15KBC 255 25 15 15 30 12% - 6% 10DnB 307 31 21 21 41 13% - 7% 10Popular 147 15 8 9 17 12% - 6% 6STAN 534 53 49 16 65 12% - 9% 5Erste 216 22 17 12 29 13% - 8% 4

Total 17,545 1,754 1,128 1,067 2,195 13% 7 6% 627

Source: Company reports and J.P. Morgan estimates. Total capital includes Basel II.5 hybrids

We estimate an average 85bps bail-in premium for senior bail-in debt with the cost of senior unsecured debt expected to increase on average to 244bps from 159bps for European banks. Given that subordinated debt provides loss-absorbing resources, while senior unsecured debt generally doesn’t in a non-bankruptcy scenario, we believe that the bail-in premium for senior instruments should be higher than subordinated debt. For the purpose of our analysis we assume that the subspread increase is 70% of the senior spread increase, in line with our Fixed Income colleagues’ investor survey on the impact of bail-in on funding costs (European Bank Bail-In Survey Results: Investor Views on Bail-in Senior Debt and Basel III Subordinated Debt). Using this method we see an average 59bps bail-in premium for subordinated debt, with the cost of sub debt issuances expected to rise to 318bps from 259bps.




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We have derived the 85bps senior unsecured premium by using the average of four different methods, which are discussed in more detail in The Cost of Bail-insection on page 73:

1. The yield comparison between sub debt, senior unsecured debt and CoCo yields, which assumes that senior debt is no longer bailed-out and hence should, at least in theory, take more of the subordinated debt characteristics including pricing. Using this method we see the senior unsecured bail-in premium ranging from 90-170bps with an average of 125bps reflecting the average Z-spread difference between existing coco-senior unsecured and coco-subordinated issues. Moreover, we see an average 88bps increase for subordinated debt using this method.

2. The case studies of Danish banks to see how the relative CDS spreads developed with the two cases of Danish bail-in, which indicates an average senior unsecured bail-in premium of 80bps (ranging from 40-160bps) and 56bps premium (ranging from 28-112bps) for subordinated debt.

3. The investor bail-in debt survey assessment from our Fixed Income colleagues, which suggests a bail-in premium of 59bps (85bps average increase for an A-rated name of which 30% has already been incorporated in the market level). Overall we see the senior unsecured bail-in premium increasing by 30-122bps depending on the bail-in segmentation of the bank and 21-85bps for subordinated debt (average increase of 43bps).

4. The yield pick-up from a higher loss given default (LGD) factor given that the recovery rates should in theory be lower under bail-in than bail-out, suggesting that the senior bail-in premium could rise by 74bps on average and sub debt premium by 52bps.

Table 16: Bail-in cost estimates under different scenarios

Implied increase in spread – Senior in bp Implied increase in spreads – Sub in bp

Base figure Low Medium High Base figure Low Medium HighBail-in cost under yield comparison method 125 63 125 250 88 44 88 175Bail-in cost under scenario Denmark 80 40 80 160 56 28 56 112Bail-in cost under scenario Fixed Income investor survey 59 30 59 122 43 21 43 85Bail-in cost under higher LGD assumption 74 37 74 148 52 26 52 104

Average 85 42 85 170 59 30 59 119

Source: J.P. Morgan estimates, Bloomberg. Notes: The high, medium and low bail-in segment categories refer to the relative likelihood of bail-in, depending on the strength of the equity resources

and asset quality. The High factor is 200% of the estimated impact, medium is 100% of the estimated impact and low is 50% of the estimated impact. Sub debt factor is 70% of the senior debt

factor.

We believe bail-in could represent a material cost to bank debt issuers, with a 42bp to 170p increase in spreads on longer term unsecured senior debt depending on the risk profile of the bank, and 30bp to 119bp on sub debt. We see an average 54% or 85bps increase in senior debt funding cost and 23% or 59bps in sub debt funding costs due to bail-in, across all eligible bail-in liabilities. Therefore in our view, despite no deficits on average in terms of the absolute level of available liabilities in the system, we see material cost to bank debt issuers. As shown in Table 17 we estimate that the cost of senior unsecured issuances post bail-in willrise on average to 244bps from 159bps and subordinated debt to 318bps from 259bps for European banks.

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Table 17: European Banks: Increase in sub and senior spreads due to bail-in

%

Bail-in Segment*

Current CDS on

senior debt

Increase due to bail-in (senior

debt) %pt

CDS post bail-in

(senior debt)

% uplift due to bail-in

(senior debt)

Current CDS on

sub debt

Increase due to bail-in

(sub debt) %pt

CDS post bail-in

(sub debt)

% uplift due to bail-in

(sub debt)DnB med 0.7% 0.9% 1.6% 115% 1.4% 0.6% 2.0% 43%Erste high 1.6% 1.7% 3.3% 107% 2.7% 1.2% 3.8% 45%KBC high 1.6% 1.7% 3.3% 106% 2.3% 1.2% 3.4% 53%Caixabank high 2.1% 1.7% 3.8% 82% 4.5% 1.2% 5.6% 27%DB med 1.1% 0.9% 1.9% 77% 1.8% 0.6% 2.4% 33%BNPP med 1.2% 0.9% 2.1% 70% 1.9% 0.6% 2.5% 31%SHB low 0.7% 0.4% 1.1% 65% 1.1% 0.3% 1.4% 27%CASA high 1.6% 1.0% 2.6% 63% 2.5% 0.7% 3.3% 28%NDA low 0.7% 0.4% 1.1% 62% 1.3% 0.3% 1.6% 23%Soc Gen med 1.6% 0.9% 2.4% 53% 2.5% 0.6% 3.1% 24%CBK med 1.7% 0.9% 2.5% 51% 3.9% 0.6% 4.5% 15%UBS low 0.9% 0.4% 1.3% 47% 1.4% 0.3% 1.7% 22%SEB low 0.9% 0.4% 1.4% 46% 1.8% 0.3% 2.1% 17%CS low 1.0% 0.4% 1.4% 42% 1.4% 0.3% 1.7% 21%HSBC med 1.0% 0.4% 1.5% 41% 1.6% 0.3% 1.9% 19%Swed low 1.1% 0.4% 1.5% 40% 1.7% 0.3% 2.0% 17%Popular high 4.6% 1.7% 6.3% 37% 6.4% 1.2% 7.6% 19%Danske med 1.2% 0.4% 1.6% 35% 2.1% 0.3% 2.4% 14%SAN med 2.5% 0.9% 3.4% 34% 3.6% 0.6% 4.2% 17%BBVA med 2.7% 0.9% 3.5% 32% 3.8% 0.6% 4.4% 16%Lloyds med 1.4% 0.4% 1.8% 31% 2.3% 0.3% 2.6% 13%ISP med 2.8% 0.9% 3.7% 30% 4.0% 0.6% 4.6% 15%STAN med 1.4% 0.4% 1.9% 30% 2.2% 0.3% 2.5% 13%UCG med 3.2% 0.9% 4.0% 27% 4.5% 0.6% 5.1% 13%RBS med 1.7% 0.4% 2.1% 25% 3.3% 0.3% 3.6% 9%

Average 1.6% 0.8% 2.4% 54% 2.6% 0.6% 3.2% 23%

Source: Bloomberg and J.P. Morgan estimates. * Bail-in segmentation is based on for the surplus or deficit above Basel 3 equity tier one requirements and asset quality (NPL ratio).

We see bail-in reducing JPMe 2015e RoNAVs by 1.0% to an average 10.4% for the European banks (see Table 18). The most impacted banks vs. JPMe earnings are CBK, Caixabank and CASA (41%, 37% and 24% PBT hits respectively) whilst the Swiss and UK banks are relatively un-impacted given their high levels of bail-inable own funds and optimal levels of senior unsecured debt.

We see the lowest average impact on PBT post bail-in in 2015e for UBS, HSBC and Standard Chartered with a 1.4%, 1.5% and 1.6% PBT hitrespectively. Post bail-in in 2015e we see the JPMe RoNAV for UBS, HSBC and Standard Chartered at 15.6%, 12.3% and 13.6% respectively.

We estimate that only CBK, Caixabank and CASA are likely to see a severe earnings impact from bail-in, knocking their 2015e PBT by 41%, 37% and 24% respectively. This equates to an estimated post bail-in RoNAV of 2.0%, 4.6% and 8.4% respectively in 2015e for the three banks. Note that we have run the analysis on CASA although regulators focus on Credit Agricole Group,including the well capitalized Regional Banks.

We recognize institutions that have large bail-in buffers, less secured instruments relative to senior unsecured and/or large own fund buffers could potentially enforce lower losses on senior unsecured creditors in a bail-in scenario, given that there is more senior unsecured funding available to cover the losses. We have taken further reduction in funding costs into account in our base case sensitivity analysis on page 89.

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Whilst a combination of both eligible bail-in liabilities and own funds can be used to meet the minimum bail-in requirement, we think banks may be pushed by the funding markets to cover the minimum or at least a large part of the minimum with own funds (i.e. T1 and T2) to minimize the increase in senior unsecured funding costs. We believe the cost of senior unsecured instruments could be lower if the bank’s regulatory capital base is relatively larger, which should absorb the first losses once the bank reaches the point of non-viability. In our bear case, where we assume that the JPMe bail-in minimum of 10% is met by own funds (i.e. T1 and T2) and any new subordinated debt replaces existing senior debt, we see a 11% average PBT earnings hit and 1.0% RoNAV hit in 2015e with the sector JPMe RoNAV falling to 10.3% from 11.3%. Under this scenario the most impacted banks vs. JPMe earnings are CASA, CBK and Caixabank (3.6%, 2.7% and 2.0% RoNAV hits respectively) while Standard Chartered, UBS and HSBC remainrelatively un-impacted (0.2%, 0.3% and 0.4% RoNAV hits respectively).

Table 18: European Banks: Impact on funding cost due to bail-in under different scenarios

% EUR mn

BASE CASE- impact on existing sub and senior debtBEAR CASE - JPMe 10% min bail-in requirement met with own funds (i.e.

Tier 1 and Tier 2)2015E Clean

PBT2015E PBT post bail-in

Impact on PBT

(%)RoNAV

2015

RoNAV 2015E post

bail-in

Impact on

RoNAV2015E

Clean PBT

2015E PBT post bail-

inImpact on

PBT (%)RoNAV

2015E

RoNAV 2015E post

bail-in

Impact on

RoNAV

CBK 1,321 786 -41% 3.7% 2.0% -1.7% 1,321 464 -65% 3.7% 0.9% -2.7%Caixabank 1,722 1,082 -37% 6.7% 4.6% -2.1% 1,722 1,110 -36% 6.7% 4.7% -2.0%CASA 4,623 3,536 -24% 11.0% 8.4% -2.7% 4,623 3,159 -32% 11.0% 7.4% -3.6%UCG 5,548 4,587 -17% 6.4% 5.1% -1.2% 5,548 5,081 -8% 6.4% 5.8% -0.6%SHB 2,192 1,881 -14% 13.7% 11.7% -1.9% 2,192 2,073 -5% 13.7% 12.9% -0.7%ISP 4,966 4,301 -13% 7.3% 6.3% -1.0% 4,966 4,611 -7% 7.3% 6.7% -0.5%Popular 1,308 1,142 -13% 9.6% 8.4% -1.2% 1,308 1,106 -15% 9.6% 8.2% -1.5%KBC 2,584 2,280 -12% 14.9% 13.0% -1.9% 2,584 2,340 -9% 14.9% 13.4% -1.6%Erste 2,320 2,063 -11% 16.2% 14.2% -2.0% 2,320 2,166 -7% 16.2% 15.0% -1.2%Soc Gen 5,959 5,300 -11% 8.6% 7.5% -1.1% 5,959 5,128 -14% 8.6% 7.2% -1.4%DB 9,426 8,559 -9% 12.4% 11.3% -1.2% 9,426 8,633 -8% 12.4% 11.4% -1.1%BBVA 5,306 4,913 -7% 9.9% 9.1% -0.8% 5,306 4,808 -9% 9.9% 8.9% -1.1%BNPP 11,030 10,238 -7% 9.6% 8.8% -0.8% 11,030 10,223 -7% 9.6% 8.8% -0.8%DnB 3,194 3,007 -6% 12.5% 11.7% -0.7% 3,194 3,055 -4% 12.5% 11.9% -0.5%RBS 6,242 5,895 -6% 6.2% 5.8% -0.4% 6,242 5,802 -7% 6.2% 5.7% -0.5%Danske 2,686 2,554 -5% 10.9% 10.4% -0.5% 2,686 2,430 -10% 10.9% 9.8% -1.0%SEB 2,139 2,041 -5% 13.5% 12.9% -0.6% 2,139 1,944 -9% 13.5% 12.3% -1.2%SAN 10,072 9,628 -4% 10.5% 9.9% -0.6% 10,072 9,298 -8% 10.5% 9.5% -1.0%NDA 5,333 5,145 -4% 14.8% 14.2% -0.5% 5,333 5,093 -5% 14.8% 14.1% -0.7%Swed 2,395 2,318 -3% 17.6% 17.0% -0.6% 2,395 2,267 -5% 17.6% 16.7% -0.9%Lloyds 8,972 8,787 -2% 12.2% 12.0% -0.3% 8,972 8,619 -4% 12.2% 11.8% -0.5%CS 6,625 6,495 -2% 13.4% 13.1% -0.3% 6,625 6,494 -2% 13.4% 13.1% -0.3%STAN 6,938 6,828 -2% 13.8% 13.6% -0.2% 6,938 6,847 -1% 13.8% 13.6% -0.2%HSBC 21,378 21,046 -2% 12.5% 12.3% -0.2% 21,378 20,815 -3% 12.5% 12.1% -0.4%UBS 7,499 7,391 -1% 15.8% 15.6% -0.2% 7,499 7,367 -2% 15.8% 15.5% -0.3%Average 5,671 5,272 -10% 11.3% 10.4% -1.0% 5,671 5,237 -11% 11.3% 10.3% -1.0%


We believe the markets have yet to discount for the European proposal on resolution & recovery schemes including bail-in. In our view the structure of the bond market is changing under bail-in, and we believe unsecured and uninsured creditors will demand higher returns on funding to compensate for the removal of implied government guarantees and burden-sharing in a resolution scenario(i.e. higher loss given default). Whilst bail-in so far has been used only as a resolution tool, we believe it will impact future access to funding and lead to materially higher funding costs for a going concern bank. We note that post the removal of the implicit government guarantee (i.e. bail-in) in the UK in February

27




2008, the UK banks’ CDS spreads have shown reduced correlation to UK sovereign CDS.

Table 19: UK banks’ CDS coupled with sovereign pre 2008 financial crisis

start date 07 Apr 06 07 Apr 06 07 Apr 06end date 21 Feb 08 21 Feb 08 21 Feb 08

Security 1 UK CDS UK CDS UK CDSSecurity 2 HSBC CDS RBS CDS Lloyds CDS

R^2 0.91 0.94 0.93

Source: Bloomberg and J.P. Morgan estimates.

Table 20: UK banks’ CDS less correlated with sovereign post 2008 removal of government guarantee

start date 22 Feb 08 22 Feb 08 22 Feb 08end date 9 Sept 13 9 Sept 13 9 Sept 13


R^2 0.23 0.15 0.20


Similarly, comparing Danske’s CDS pre and post resolution bail-in, we note that the spread difference between Danske and its Nordic peers has widened by ~80bps post bail-in.

Figure 1: Bail-in impact on funding costs, Danish example – Danske’s 5yr snr CDS vs. average 5yr snr CDS of Nordic peers and Danish bail-in bps

Source: Bloomberg, Company Reports and J.P. Morgan.

-100

-50

0

50

100

150

200

250

300

350

400

Jan-

09

Feb

-09

Mar

-09

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-09

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-09

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-10

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11

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-11

Mar

-11

Apr

-11

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-11

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11

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1

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-11

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-11

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-11

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-11

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-11

Jan-

12

Feb

-12

Mar

-12

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-12

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2

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-12

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13

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-13

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-13

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-13

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-13

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13

Jul-1

3

Aug

-13

Difference (bps) Danske Bank 5yr Snr CDS Average Nordic Peers 5 yr Snr CDS

Bail-in introduced

1st bail-in case: Amagerbankenfailed

2nd bail in case: Fjordbank Mors failed

Split of good/bad bank introduced

Danske DKK7bn capital increase

28




Optimal Capital Structure Factor 2: Basel 3 leverage ratioproposal resulting shortfall of €72bn - reducing PBT by 5%

We assess the potential capital impact by assuming that banks would need at least a JPMe 3.5% leverage ratio by 2015e, including a 50bp buffer over the proposed minimum 3.0% regulatory requirement. We recognize that the minimum could be higher, with the Dutch Finance Minister calling for a 4% leverage ratio minimum for SIFIs. We estimate that the Basel leverage consultation document published on June 26, 2013 would in its current form lead to a 15% average increase in balance sheet due to the treatment of derivatives, securities financing transactions and off-balance sheet items.

Compared to a JPMe 3.5% leverage ratio minimum we see a total capital shortfall of €72bn in 2015e, or asset reduction need of €2.1 trillion. Most exposed banks would be: DB with €11.5bn shortfall, CBK with €7bn, CASA with €34bn (note however that regulators focus on Credit Agricole Group with more adequate leverage ratio of 3.3% rather than CASA), whilst the best positioned banks are STAN with 6% Basel leverage ratio, Erste Bank (5.4%), BBVA (4.8%) and SAN (4.7%).

Based on our estimates, getting to a JPMe 3.5% leverage ratio on the proposed Basel 3 leverage ratio requirements will reduce JPMe 2015e PBT by 5% on average for the European banks. The most impacted banks by our estimates are CASA and CBK (52%, and 39% PBT hits respectively) whilst UBS, UK, Spanish and Italian banks are not likely to be impacted given their strong leverage ratios.

In our sensitivity analysis, we have assumed that to improve Basel 3 leverage ratio to our minimum 3.5% for European banks, banks would not issue common equity nor reduce assets but issue alternative capital, i.e. additional alternative Tier I cocos at a cost of 7%, equivalent to the average cost of the issuances by CSG, KBC, BBVA and UBS.

29




Table 21: Basel 3 leverage ratios end 2015e vs. minimum 3.5%

€ million

Basel 3 leverage ratio*

Total exposure reduction required to get to 3.5%

% total leverage exposure

Additional Tier I issuance required to get to 3.5%

% Tier I capital

Additional cost of issuance

% impact PBT 15e

CASA 1.7% 968,288 51% 33,890 104% -2,421 -52%CBK 2.6% 208,647 25% 7,303 33% -522 -39%DB 2.8% 329,266 21% 11,524 26% -823 -9%Socgen 3.0% 188,726 14% 6,605 16% -472 -8%CSG 3.0% 158,251 15% 5,539 17% -350 -5%Danske 3.3% 37,096 7% 1,298 7% -93 -3%BNPP 3.3% 122,772 6% 4,297 6% -307 -3%Nordea 3.3% 38,053 5% 1,332 5% -95 -2%KBC 3.5% 2,616 1% 92 1% -7 0%UBS 4.1% - 0% - 0% 0 0%Lloyds 4.5% - 0% - 0% 0 0%RBS 3.6% - 0% - 0% 0 0%HSBC 4.5% - 0% - 0% 0 0%STAN 6.0% - 0% - 0% 0 0%UCI 4.3% - 0% - 0% 0 0%ISP 4.3% - 0% - 0% 0 0%SAN 4.7% - 0% - 0% 0 0%BBVA 4.8% - 0% - 0% 0 0%Caixabank 3.8% - 0% - 0% 0 0%Popular 4.1% - 0% - 0% 0 0%SEB 4.4% - 0% - 0% 0 0%SWED 4.1% - 0% - 0% 0 0%SHB 3.9% - 0% - 0% 0 0%DNB 4.5% - 0% - 0% 0 0%Erste 5.4% - 0% - 0% 0 0%Total/Av 3.9% 2,053,714 6% 71,880 9% -5,090 -5%

Source: J.P. Morgan estimates. *Based on our understanding of Basel’s latest proposals for leverage ratio from the 26 June 2013 consultation paper, Basel 3 leverage ratios calculated on Basel 3

Tier I capital fully loaded. Note: we have run the sensitivity on CASA although regulators focus on Credit Agricole Group, and hence, the actual shortfall is significantly lower. Note: For CSG, current

additional tier 1 outstanding includes issued high-trigger Buffer Capital Notes (“CoCos”) of CHF 1.6 bn, and also includes exchange in Oct 2013 of remaining CHF 3.8 bn hybrid tier1 notes into

BCNs.

We also highlight that the proposed B3 leverage ratio rules are far from final, implementation long-dated, and we make material assumptions, in particular on:

Netting of credit protection: In the Basel proposal sold credit protection (written credit derivatives) is accounted for at full notional value and can be reduced only by bought credit protection on the same reference name with the same level of seniority. In our base case scenario we assume that 90% of the credit protection bought can be used to offset against the credit protection sold. We recognize that this assumption could vary from bank to bank and that the number could be lower or higher in some cases, as some hedges might not qualifyunder the proposed Basel III leverage ratio framework.

The table below shows sensitivity of 75% and 50% credit derivative netting assumption to our leverage ratio estimates. Most sensitive banks to the assumption around credit derivatives netting are UBS, MS, GS, DB, CSG and BNP, with retail banks in general least impacted.

30




Table 22: Sensitivity to netting of credit protection assumption on JPMe Leverage ratio calculation based on the revised Basel proposal guidelines

2015E B3 leverageratio assuming 90% of

CDS bought can be used to offset CDS

sold

2015E B3 leverage ratio assuming 75% of


sold

Sensitivity to 75% CDS netting

assumption vs 90% netting assumption

2015E B3 leverage ratio assuming 50% of


sold

Sensitivity to 50% CDS netting

assumption vs 90% netting assumption

UBS 4.1% 3.4% -0.6% 2.7% -1.4%MS 3.2% 2.8% -0.5% 2.2% -1.0%GS 3.5% 3.1% -0.4% 2.6% -0.9%DB 2.8% 2.5% -0.3% 2.1% -0.7%CSG 3.0% 2.7% -0.3% 2.4% -0.6%BNPP 3.3% 3.1% -0.2% 2.8% -0.5%RBS 3.6% 3.5% -0.1% 3.3% -0.2%Socgen 3.0% 2.9% -0.1% 2.8% -0.2%HSBC 4.5% 4.4% -0.1% 4.3% -0.2%CASA 1.7% 1.6% -0.1% 1.5% -0.2%KBC 3.5% 3.4% 0.0% 3.4% -0.1%STAN 6.0% 6.0% 0.0% 5.9% -0.1%BBVA 4.8% 4.8% 0.0% 4.8% -0.1%Nordea 3.3% 3.3% 0.0% 3.3% 0.0%CBK 2.6% 2.6% 0.0% 2.6% 0.0%Lloyds 4.5% 4.5% 0.0% 4.5% 0.0%Erste 5.4% 5.4% 0.0% 5.4% 0.0%SWED 4.1% 4.1% 0.0% 4.1% 0.0%SEB 4.4% 4.4% 0.0% 4.4% 0.0%Danske 3.3% 3.3% 0.0% 3.3% 0.0%SAN 4.7% 4.7% 0.0% 4.7% 0.0%SHB 3.9% 3.9% 0.0% 3.9% 0.0%DNB 4.5% 4.5% 0.0% 4.5% 0.0%Caixabank 3.8% 3.8% 0.0% 3.8% 0.0%Popular 4.1% 4.1% 0.0% 4.1% 0.0%UCI 4.3% 4.4% 0.0% 4.4% 0.1%ISP 4.3% 4.3% 0.1% 4.4% 0.2%


Basel leverage proposals punitive for repo transactions: In the Basel proposal securities financing transactions (SFT) are reported gross of collateral with no recognition of accounting netting, which is punitive for repo transactions as it does not allow for netting of collateral or exposure (i.e. banks are not allowed to offset repos against reverse repos). The rationale is to discourage banks from rehypothecating assets. In our base case scenario, we assume that gross SFTsmatch the reported on balance sheet number. We recognize that this assumption could potentially underestimate the impact from valuing SFTs at gross value and that the number could be higher in some cases, given that netting of repos and reverse is currently allowed under IFRS and US GAAP reporting.

The table below shows sensitivity of 2x and 3x gross repos compared to the reported number to our leverage ratio estimates. Most sensitive banks to the assumption around higher gross repos are UBS and CBK. We have excluded GS, MS, Danske, RBS and HSBC from this sensitivity analysis given that they all report the gross repo exposures.

Table 23: Global IBs: Re-hypothecation at FY12

$ billion

MS* 469.0GS* 459.3DBK 344.3CSG 320.2UBS 311.6


Note: *GS and MS are at Q113

31




Table 24: Sensitivity to assumption around gross repos being a multiple of on balance sheet number on JPMe Leverage ratio calculationbased on the revised Basel proposal guidelines

2015E B3 leverageratio assuming gross repos are 1x reported

number


number

Sensitivity to 2x gross SFT

assumption vs 1x


number

Sensitivity to 3x gross SFT

assumption vs 1xUBS 4.1% 3.6% -0.4% 3.3% -0.8%CBK 2.6% 2.3% -0.3% 2.0% -0.6%CSG 3.0% 2.6% -0.3% 2.4% -0.6%DB 2.8% 2.5% -0.3% 2.3% -0.5%BNPP 3.3% 3.1% -0.2% 2.9% -0.4%SEB 4.4% 4.2% -0.2% 4.0% -0.4%Nordea 3.3% 3.1% -0.2% 3.0% -0.4%UCG 4.3% 4.1% -0.2% 4.0% -0.4%KBC 3.5% 3.3% -0.1% 3.2% -0.3%Popular 4.1% 3.9% -0.1% 3.8% -0.3%SAN 4.7% 4.6% -0.1% 4.5% -0.2%SWED 4.1% 4.0% -0.1% 3.9% -0.2%ISP 4.3% 4.1% -0.1% 4.0% -0.2%Socgen 3.0% 2.8% -0.1% 2.7% -0.2%SHB 3.9% 3.8% -0.1% 3.7% -0.2%DNB 4.5% 4.4% -0.1% 4.4% -0.2%STAN 6.0% 5.9% -0.1% 5.8% -0.1%CASA 1.7% 1.6% -0.1% 1.6% -0.1%BBVA 4.8% 4.8% -0.1% 4.7% -0.1%Erste 5.4% 5.4% 0.0% 5.3% -0.1%Lloyds 4.5% 4.4% 0.0% 4.4% 0.0%Caixabank 3.8% 3.8% 0.0% 3.8% 0.0%


The UK PRA’s (Prudential Regulation Authority) capital exercise introduced a PRA adjusted leverage ratio requirement of 3% for UK banks. We believe that this is a highly punitive measure in the context of global peers, with UK listed banks having to comply with stricter UK requirements by 1H14 rather than 2018 or 2015. Note that this leverage ratio requirement is not applicable to all the entities regulated by the PRA. UK PRA Leverage ratio calculation methodology is more challenging than the current CRD4 Leverage ratio rules – the denominator of the PRA Leverage ratio is same as CRD4, however, the numerator is adjusted for additional provisions and future conduct costs and only high trigger (fully loaded) CoCos are included in the numerator. We don’t have enough disclosure to calculate the leverage ratio of UK Banks on PRA-adjusted basis given the banks don’t disclose the PRA adjustments at H113 level. However, PRA said in its June release that HSBC, Lloyds, RBS and Stan Chartered will likely exceed the 3% leverage ratio post adjustments by FY13E based on their plans submitted to the PRA.

32




Optimal Capital Structure Factor 3: Basel 3 Core Tier I ratioresulting in a capital shortfall of €3.6bn – EPS dilution of 1%excluding ‘harmonisation’ impact

We estimate that average fully loaded Basel 3 Core Tier I will improve from 10.5% on average end 2013e to 12.0% end 2015e, mainly driven by retained earnings, as well as RWAs reduction for a few banks – e.g. UBS, UK domestic banks, CASA, domestic Spanish banks, and ISP.

By end 2015e year end, we expect the great majority of banks to reach our JPMe minimum levels, with capital shortfall reducing to €4bn, mostlyconcentrated with €1.8bn for CASA, €1.0bn for DNB and €0.7bn for KBC.

We see limited impact from Basel 3 CET1 requirements as most of the banks are well above minimum requirements on our estimates. We estimate that only DNB, KBC, CASA and Popular are likely to fall short of our JPMe minimum capital requirements. Assuming that the banks reach required capital level by FY15E, we see potential EPS dilution of 5% for DNB followed by KBC with 4% EPS dilution. We note that DNB’s capital position is calculated using 25% mortgage risk weights vs. 11% currently, and KBC’s capital position is calculated after deducting positive AFS reserves (c. €800mn by 15E) and including penalty payments on remaining government capital. Also note that for CASA, our estimated €1.8bn shortfall does not include the positive impact from the extension of Switch expected by year end, which would increase Basel 3 CT1 to 10.5% end 2015e.

33




Table 25: European Banks – 2015e Basel 3 Core Tier I shortfall vs. JPM minimum requirements

Lcl ccy

Basel 3 Common

Tier I 2015eMin

2015e*

Shortfall/Excess2015e (EUR mn)

Shortfall /Excess % market cap

Net interest income on

capital issues

Add shares issued

EPS 2015E

Resulting EPS 2015E

EPS % dilution due to CET1

issuance

CASA 9.5% 10.0% -1,805 -9% 38 231 1.27 1.18 -7%DnB 12.8% 13.5% -1,016 -5% 60 84 11.51 10.98 -5%KBC 9.3% 10.0% -711 -5% 15 21 4.03 3.87 -4%Popular 8.9% 9.0% -88 -1% 2 24 0.41 0.41 -1%CS 12.2% 10.0% 5,040 14% 0 0 3.40 3.40 0%UBS 16.4% 13.0% 5,920 10% 0 0 1.90 1.90 0%DB 11.2% 10.0% 4,941 14% 0 0 40.25 40.25 0%Lloyds 13.0% 10.0% 9,902 16% 0 0 7.69 7.69 0%RBS 11.2% 10.0% 5,772 13% 0 0 28.77 28.77 0%HSBC 10.7% 10.0% 7,764 3% 0 0 1.07 1.07 0%STAN 11.2% 10.0% 3,668 6% 0 0 2.56 2.56 0%Soc Gen 11.4% 10.0% 5,097 19% 0 0 4.45 4.45 0%BNPP 11.4% 10.0% 9,159 15% 0 0 5.30 5.30 0%CBK 10.1% 9.0% 2,426 24% 0 0 0.76 0.76 0%UCG 10.6% 9.0% 7,097 28% 0 0 0.53 0.53 0%ISP 11.1% 9.0% 6,517 27% 0 0 0.16 0.16 0%SAN 9.7% 9.0% 4,330 7% 0 0 0.47 0.47 0%BBVA 10.1% 9.0% 3,823 9% 0 0 0.57 0.57 0%Caixabank 9.3% 9.0% 438 3% 0 0 0.25 0.25 0%NDA 15.5% 13.0% 4,179 11% 0 0 0.99 0.99 0%SEB 15.0% 13.0% 1,740 10% 0 0 6.76 6.76 0%Swed 16.6% 13.0% 2,151 11% 0 0 15.23 15.23 0%SHB 17.1% 13.0% 2,942 14% 0 0 23.31 23.31 0%Danske 14.5% 13.0% 1,831 12% 0 0 14.91 14.91 0%Erste 11.0% 10.0% 1,091 10% 0 0 3.84 3.84 0%Total shortfall 12.0% 10.6% -3,620 -5% 115 360 -1%

Source: J.P. Morgan estimates. *Min 2015E is highest of regulatory requirement, company target and our assumption of required minimum levels. KBC capital position is calculated after deducting

positive AFS reserves (c. €800mn by 15E) and including penalty payments on remaining government capital. DNB’s capital position is calculated using 25% mortgage risk weights vs. 11%

currently.

Note however that capital risk we have not discounted in our analysis remains with:

RWAs harmonization – Risk weights have come under increased focus with market participants and now also regulators questioning the consistency of the banks’ risk-weighted assets and internal models across jurisdictions.

Credit RWAs: While the difference in risk weights can be partly explained by the procyclicality and the riskiness of the portfolios, it still undermines the comparability of capital ratios across geographies. We highlight that the average mortgage risk weights across Europe vary from 8% in Finland to 51% in Latvia and average corporate risk weights from 31% in Germany to 100% in Greece.

34




Table 26: Banking book risk weights under Basel II

Mortgages* Corporate loansBelgium 9% 45%Denmark 14% 36%Estonia 20% 90%Finland 8% 37%France 15% 50%Germany 18% 31%Greece 35% 100%Hungary 41% naItaly** 15% 52%Italy (Standard Model) 20% 75%Latvia 51% 97%Lithuania 30% 93%Netherlands 14% NaNorway 12% 55%Slovakia 50% naSpain 35% 66%Sweden 15% 42%UK 20% 65%

Source: J.P. Morgan estimates, Company data. Swedish Central Bank's financial stability report, May 2012; Advanced Model –Source

Pillar 3 June 2011 - TAB 7.4 - ISP, MPS, UCG, Corporate loans are calculated using company averages for that country.

Market RWAs: The extent of proportionate use of Internal models and Standardised approaches to calculate market RWAs also varies considerably across banks which in turn leads to additional uncertainty in market RWA reported across banks in our view as we believe the Internal models are not comparable across banks/jurisdictions. For European Banks in our analysis, 88% of market RWAs are Internal Models based compared to 46% for U.S. IBs GS and MS. With the Basel Committee carrying a Regulatory Consistency Assessment Programme (RCAP) on trading book assets, and SNB talking about calculation of RWAs under both Standardized and Internal models method, we see momentum towards some form of convergence in RWAs.

Basel proposals for the revised framework for securitization: The Basel Committee has performed a broader review of the securitization framework, and in its consultation paper, is seeking to make capital requirements more prudent and risk sensitive. The main change in our view is the closer alignment of the Standardised Approach (SA) and Internal Ratings-Based (IRB) approaches, with risk weights increased significantly for higher rated securitization exposures, and the risk weight floor rising to 20% vs. 7% previously for senior tranches under the current Ratings-Based Approach. The Basel proposals could result in much higher capital requirements for securitizations, and in our worst-case scenario, we estimate up to 160bp Basel 3 Core Tier I impact for DB which would be the most affected.

Table 27: Global IBs: 2015E B3CET sensitivity to market RWAs

$ billions

Pre Post Δ (%)

UBS 16.4% 15.1% -1.4%

CSG 12.2% 11.0% -1.2%

DBK 11.2% 10.2% -1.0%SG 11.4% 11.1% -0.3%

BNP 11.4% 11.1% -0.3%

MS 13.3% 13.3% 0.0%GS 11.8% 11.8% 0.0%


Table 28: Global IBs: 2014E B3CET sensitivity to Basel securitization proposal- worst case

$ billion

B3CET 2014E

B3CET1 – worst

case

Δ (%)

DB 10.5% 8.9% -1.6%UBS 14.7% 13.2% -1.5%CASA 8.3% 7.3% -1.0%SG 10.7% 10.0% -0.6%BNPP 11.0% 10.4% -0.6%CS 10.8% 10.6% -0.2%

Source: J.P. Morgan estimates

35




Valuation

Going concern valuation- JPM Unlevered Valuation methodology for European Banks

The case for banks’ attractiveness is compelling based on traditional valuation multiples with banks looking cheap on both P/E and P/NAV basis vs. other sectors as shown in Table 29.

Based on P/E multiples, European banks appear inexpensive, trading at 9.5x 2015E earnings, a ~20% discount to the market excluding financials at 11.4x.

The discount is even more pronounced based on P/BV, with banks trading at 0.8x book value in 2015E, vs. 1.7x for the market ex financials, in our view highlighting market concerns over the safety of NAV, and indeed, stated book value in the banks sector.

However, we believe traditional valuation metrics are not able to fully capture the intricacies of a new regulatory world in which banks have to operate with constraints on capital structure, amount/seniority/duration of funding, and composition of the balance sheet both in terms of maturity profile as well as absolute size.

Post the 2008 financial crisis we believe regulatory and investor focus has shifted from core equity tier 1 capital ratios to total capital ratios (including cocos, AT1 and T2) to better reflect total loss-absorbing buffers available at a bank. Therefore we believe that own funds (i.e. equity plus cocos and sub debt) rather than core equity is becoming an increasingly important tool to value a bank. Hence we reintroduce our “unleveraged bank valuation” EV/EBITDA valuation to take into account the full franchise value, not just equity. In other words, we look at the valuation of a bank from an optimal capital structure standpoint, i.e. taking into consideration the level of own funds (equity, AT1 and T2).

Our core cash flow valuation is based on JPM Banks EV/EBITDA, excluding RWA growth as well as normalised provision EV/EBITDA to analyse long-term going concern valuations. In this valuation we look at the market value of equity, adjusted for i) business debt and the cost of funding this debt, and ii) any excess or capital deficit. We use the JPM Banks EV/EBITDA growth excluding RWA growth as it is closer to the industry sector EV/EBITDA which does not account for capex. We also run a version including growth, where we adjust the cash flow for cash consumed for RWA growth.

We see an average value of 7.5x normalized for the banking sector (excluding RWA growth) compared to 5.9x for broader European corporate ex financials and conclude that on this basis the sector looks slightly expensive vs. EU corporate in general.

Comparing banks to telecoms/utilities sectors (viewing a bank either as a financial service provider or a financial utility in mature sectors), banks again appear relatively expensive, trading at a 7.5x normalised EV/EBITDA multiple for an 8.8% ROE compared to telecoms at 5.0x and utilities at 6.4x with 2015E ROEs of 13.2% and 9.8% respectively.

We detail our “unleveraged bank

valuation" EV/EBITDA methodology below. We adjust

EV for additional bail-in debt

requirements and use the EBITDA as starting point.

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In the new, tougher regulatory environment, we believe the cost of debt will be higher, as bondholders no longer will be bailed-out. In addition, unless innovative instruments are fully loss-absorbing, they will not be counted as Tier 1 capital anymore, allowing banks to leverage their balance sheet with “cheap” debt. Hence, investors will need to focus much more on balance sheet size, and more importantly,the usage and optimization of the capital structure. Therefore, we believe a better measure of “real” return analysis is the EV/EBITDA.

Table 29: European Corporates – valuation multiples and ratios based on IBES estimates

P/E Dividend Yield EV/EBITDA Price to Book ROE

13E 14E 15E 13E 14E 15E 13E 14E 15E 13E 14E 15E 13E 14E 15EEurope 13.6 12.1 10.9 3.5% 3.8% 4.2% - - - 1.6 1.5 1.4 11.6% 12.3% 12.8%Europe ex Financials 13.9 12.5 11.4 3.5% 3.7% 4.0% 7.0 6.4 5.9 2.0 1.8 1.7 14.0% 14.5% 14.8%Energy 10.0 9.0 8.6 4.7% 4.9% 5.1% 3.9 3.6 3.6 1.2 1.1 1.1 11.6% 12.2% 12.0%Materials 15.1 12.6 10.8 3.0% 3.3% 3.6% 7.5 6.7 5.9 1.5 1.4 1.3 9.8% 11.0% 11.9%Chemicals 15.2 13.7 12.4 3.1% 3.2% 3.5% 8.5 7.9 7.1 2.3 2.1 2.0 14.9% 15.4% 15.6%Construction Materials 17.6 13.1 10.6 2.4% 2.9% 3.4% 8.2 7.1 6.2 1.0 1.0 0.9 5.9% 7.4% 8.7%Metals & Mining 14.6 11.5 9.6 3.0% 3.3% 3.6% 6.8 6.2 5.3 1.2 1.2 1.1 8.3% 9.7% 10.9%Industrials 16.2 13.8 12.2 3.0% 3.3% 3.6% 8.1 7.2 6.4 2.4 2.2 2.0 14.6% 15.6% 16.1%Capital Goods 15.9 13.5 12.0 3.0% 3.3% 3.6% 8.3 7.2 6.5 2.4 2.2 2.0 14.6% 15.7% 16.1%Transport 16.3 13.3 11.2 3.2% 3.2% 3.7% 6.7 6.1 5.4 1.9 1.8 1.6 12.5% 13.4% 14.4%Business Svs 18.6 16.6 14.9 2.5% 2.8% 3.1% 11.2 10.1 9.0 4.4 4.0 3.6 19.7% 20.2% 20.2%Discretionary 14.3 12.6 11.3 2.7% 3.0% 3.4% 6.5 5.8 5.2 2.1 1.9 1.7 14.7% 15.2% 15.5%Automobile 9.6 8.4 7.5 3.0% 3.4% 3.8% 4.0 3.5 3.3 1.1 1.0 0.9 11.9% 12.5% 12.9%Consumer Durables 17.8 15.3 13.7 2.1% 2.4% 2.7% 9.9 8.6 6.6 2.8 2.5 2.3 14.8% 15.5% 15.7%Media 15.9 14.6 13.5 3.3% 3.5% 3.8% 9.2 8.6 7.8 3.4 3.2 2.9 20.1% 20.5% 20.2%Retailing 20.4 18.2 16.4 2.7% 2.9% 3.3% 12.1 11.7 10.4 5.8 5.4 4.9 25.0% 25.2% 25.5%Hotels, Rests & Leisure 18.6 16.5 14.9 2.6% 2.9% 3.3% 9.9 9.0 8.1 3.1 2.9 2.6 17.0% 17.6% 17.7%Staples 17.1 15.6 14.3 2.9% 3.2% 3.5% 10.9 10.0 9.1 2.9 2.7 2.5 16.8% 17.2% 17.2%Food & Drug Retailing 13.6 12.2 11.3 3.2% 3.7% 4.0% 6.9 6.4 6.0 1.7 1.6 1.5 11.1% 12.5% 12.6%Food Beverage & Tobacco 17.4 16.0 14.6 3.0% 3.3% 3.6% 11.7 10.7 9.8 3.2 3.0 2.7 18.7% 18.8% 18.9%Household Products 19.3 17.8 16.4 2.2% 2.4% 2.6% 12.5 11.4 9.7 3.3 3.1 2.8 16.4% 16.2% 16.1%Healthcare 14.9 13.7 12.5 3.2% 3.4% 3.7% 10.2 9.4 8.5 3.4 3.1 2.9 22.3% 22.5% 22.8%Financials 11.6 10.1 8.9 3.8% 4.4% 5.2% - - - 0.9 0.9 0.8 7.6% 8.5% 9.2%Banks 14.0 12.1 9.5 3.7% 4.4% 5.3% 8.8 8.4 7.5 0.9 0.8 0.8 6.7% 7.9% 8.8%

Diversified Financials 12.3 10.7 9.2 2.2% 3.2% 4.4% - - - 1.0 1.0 0.9 7.6% 8.6% 9.4%Insurance 9.7 9.3 8.7 4.7% 5.0% 5.2% - - - 1.1 1.0 0.9 10.8% 10.6% 10.7%Real Estate 17.0 16.0 15.1 5.1% 5.3% 5.6% - - - 0.9 0.9 0.9 5.5% 5.5% 5.7%IT 22.6 17.5 14.7 1.7% 1.9% 2.1% 11.0 8.8 7.4 3.1 2.8 2.5 13.4% 15.8% 16.6%Software and Services 16.6 14.9 13.3 1.8% 2.0% 2.2% 10.2 8.9 7.5 3.6 3.2 2.8 20.5% 20.4% 19.8%Technology Hardware 26.7 18.9 15.6 1.9% 2.2% 2.6% 9.1 7.1 6.1 2.2 2.1 1.9 8.2% 10.9% 12.1%Semicon & Semicon Equip 37.8 21.7 16.4 1.3% 1.4% 1.6% 17.7 11.4 8.8 3.7 3.3 2.9 9.5% 15.6% 18.1%Telecoms 12.0 11.4 10.8 5.4% 5.5% 5.6% 5.1 5.2 5.0 1.6 1.6 1.5 13.3% 13.3% 13.2%Utilities 11.4 11.5 11.0 6.0% 6.0% 6.1% 6.6 6.6 6.4 1.1 1.0 1.0 10.4% 9.7% 9.8%

Source: I/B/E/S, Datastream. Based on prices COB 9Sept 2013. Note: We use the JPM Banks EV/EBITDA growth excluding RWA growth as it is closer to the industry sector EV/EBITDA which

does not account for capex. In this report, we focus on unlevered cash flow valuation as measured by JPM Banks EV/EBITDA. This measure replicates traditional non-financials' EV/EBITDA ratios

and excludes RWAs growth capital consumption. But this JPM methodology is not fully comparable to industrials' EV/EBITDA, for example we need to define business debt for banks and also

include a measure of maintenance capex. We use 2015E normalized EV/EBITDA 2015E

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In terms of Eurobanks on “unleveraged bank valuation” EV/EBITDA,

Intesa, Popular, Caixabank and UCG appear amongst the cheapest names on this metric with EV/EBITDAs (excl. RWA growth) of 4.8x, 5.0x, 5.4x and 5.4x respectively, which in our view would suggest a buy signal. With the Italian banks having stronger capital positions than the domestic Spanish banks and trading at lower P/NAV multiples, we prefer the Italian banks over the domestic Spanish banks. On the back of this we upgrade UCG to OW (from N), Intesa to Neutral (from UW), Caixabank to OW (from N) and Santander to N (from UW).

The most expensive names on an EV/EBITDA metric are CBK, CASA and BBVA at 12.2x, 10.5x and 10.1x respectively for below Eurobank average RoNAVs. Whilst especially CBK looks more investable on a traditional P/NAV basis, trading at 0.4x, on an EV/EBITDA basis the bank look less attractive in our view.

Our new portfolio top picks are: UBS, DB, Soc Gen, UCG, Caixabank, Nordea and Danske. Although banks on a sector basis are not particular cheap in our view, we see opportunities as valuation gaps between stocks are quite significant, especially within the banking sector where cash flow generation and capital position are solid and valuation is attractive on an EV basis. Hence, we believe there is outperformance potential by focusing on stock selection rather than sector call.

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Table 30: European Banks JPMe stock selection EV/EBITDA valuation, RoNAV and other traditional metrics

2015e EV/EBITDA

(ex RWA growth)

2015e EV/EBITDA (including

RWA growth)


(ex RWA growth)


(inc RWA growth)

2014e EV/EBITDA

(ex RWA growth)

2014e EV/EBITDA

(incl RWA growth)

2013e EV/EBITDA

(ex RWA growth)

2013e EV/EBITDA

(incRWA growth)

P/E15E

P/NAV2015E

RoNAV2015E

RoNAV(normalised)

2015E

Dividend yield

2015E

B3 Core Equity Tier 12015E

Top PicksUBS 8.2 7.7 8.2 7.7 10.7 9.1 12.3 7.8 9.9 1.6 15.8% 15.7% 5.0% 16.4%Soc Gen 7.6 8.0 6.9 7.2 7.6 7.9 8.5 5.2 7.9 0.7 8.6% 9.9% 4.9% 11.4%DB 6.0 7.5 5.9 7.4 6.6 7.3 7.7 6.4 5.8 0.7 12.4% 12.6% 2.2% 11.2%UCG 5.4 6.0 5.1 5.6 6.3 6.9 7.4 4.9 8.5 0.5 6.4% 6.9% 2.0% 10.6%Caixabank 5.4 5.1 5.2 4.9 5.3 5.0 3.1 3.8 11.4 0.6 6.7% 6.8% 7.9% 9.3%NDA 7.9 8.0 8.1 8.2 8.6 8.3 9.3 6.2 9.3 1.4 14.8% 14.4% 7.0% 15.5%Danske 7.7 7.9 7.8 7.9 8.7 8.6 11.0 17.4 7.8 0.9 10.9% 10.8% 5.1% 14.5%Average 6.9 7.2 6.7 7.0 7.7 7.6 8.5 7.4 8.7 0.9 10.8% 11.0% 4.9% 12.7%

SwissCS 7.9 7.9 7.9 7.9 8.4 8.4 9.2 9.1 8.2 1.1 13.4% 13.4% 3.6% 12.2%UKLloyds 7.2 7.0 7.3 7.0 7.7 6.9 8.5 6.1 10.0 1.2 12.2% 12.1% 5.9% 13.0%RBS 8.3 7.5 8.2 7.3 8.7 5.4 9.6 6.0 11.8 0.7 6.2% 6.4% 1.8% 11.2%STAN 6.8 11.1 7.3 12.4 7.9 13.2 9.5 19.0 8.9 1.2 13.8% 12.9% 4.7% 11.2%HSBC 8.6 11.1 8.6 11.2 9.5 12.0 9.8 10.0 10.2 1.2 12.5% 12.4% 5.5% 10.7%FranceBNPP 7.3 7.9 6.7 7.1 7.4 7.8 7.7 8.0 9.4 0.9 9.6% 10.8% 4.0% 11.4%CASA 10.5 9.4 9.6 8.6 10.7 8.7 11.6 8.5 6.3 0.7 11.0% 12.5% 0.0% 9.5%ItalyISP 4.8 4.6 4.5 4.4 5.1 4.9 5.9 5.4 10.0 0.7 7.3% 7.8% 3.8% 11.1%GermanyCBK 12.2 10.6 12.2 10.6 14.2 12.1 - 14.3 11.6 0.4 3.7% 3.7% 0.0% 10.1%SpainSAN 7.8 9.3 5.9 6.7 6.3 7.0 6.9 7.4 11.8 1.0 10.5% 15.2% 10.8% 9.7%BBVA 10.1 10.7 5.9 6.1 6.4 6.8 6.7 7.4 13.4 1.2 9.9% 18.0% 5.4% 10.1%Popular 5.0 4.8 4.7 4.5 9.3 8.5 - 15.7 9.5 0.7 9.6% 10.2% 0.0% 8.9%NordicsSwed 9.2 9.5 9.5 9.9 10.1 10.5 10.8 14.1 10.0 1.8 17.6% 16.9% 7.5% 16.6%SHB 9.3 11.1 9.5 11.2 10.0 11.7 10.2 17.4 12.2 1.6 13.7% 13.5% 4.2% 17.1%SEB 9.1 10.5 9.7 11.4 10.2 13.1 10.7 13.9 10.4 1.4 13.5% 12.6% 4.8% 15.0%DnB 7.1 9.5 6.9 9.3 7.6 25.1 8.6 10.5 8.4 1.0 12.5% 12.7% 3.0% 12.8%CEEMAErste 6.5 8.4 7.1 9.3 7.9 9.1 9.2 7.5 6.5 1.1 16.2% 14.4% 6.2% 11.0%KBC 7.4 8.2 8.1 9.1 8.9 9.1 8.3 6.7 8.9 1.3 14.9% 13.4% 3.7% 9.3%

Average 7.7 8.4 7.5 8.1 8.4 9.3 8.8 9.6 9.5 1.0 11.3% 11.8% 4.4% 12.0%

Source: Bloomberg and J.P. Morgan estimates. *Bloomberg closing prices used as of Sep 9, 2013.KBC capital position is calculated after deducting positive AFS reserves (c. €800mn by 15E) and including penalty payments on remaining

government capital. Note CBK and popular 2013E EV/EBITDA ex growth are not meaningful.

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Our ‘unleveraged bank valuation’ EV/EBITDA methodology

Enterprise Value (EV) is the cost of buying the right to the whole of an enterprise's core cash flow. It is the sum of the market value of equity and debt less cash and equals the estimated value of the operations of an enterprise as represented by the value of the various claims on cash flow and profit.

Cash flow valuation methodIn our cash flow valuation for the banks we look at the ratio of Enterprise Value (EV) to free cash flow on an unlevered basis. The aim is to mimic the traditional EV/EBITDA valuation of other industries. We make a number of adjustments to the text-book model, to make it useful from a bank’s perspective, though a number of important caveats remain. These adjustments also mean that comparisons to other sectors need to be treated with some caution.

Enterprise Value

Enterprise Value (EV) – this represents the value to financial stakeholders in the company – i.e. the value of the company’s operation from the perspective of equity as well as debt investors. The value for equity holders is straightforward, and will simply equal the market value of the shares based on the current share price or the market cap in other words.

The value for debt investors is more discretionary as a bank’s business model is based on deploying liabilities in terms of deposits, wholesale funding (including senior funding) and repos, or as part of its financial markets operations. Hence we only want to consider the subordinated debt that in our view represents an investment into the bank itself, i.e. long-term ongoing operational business debt.

For the purpose of this analysis we consider the market value of debt which is not captured in equity valuation. We assume that funding such as deposit, wholesale and repo funding is part of the bank’s going concern business and hence exclude it. We instead assume that the market value of debt consists only of subordinated debt and minority interests. In addition, we adjust for the optimal capital structure by assuming the bank needs to take on capital/sub debt to meet its B3 ET1/leverage/bail-in targets, alternatively would return capital to bring capital in line with the targets. We assume that the capital increase/reduction is the same in years 2013-2015e. So in short, we add to the market cap of the bank sub debt/bail-in debt as required under the optimal capital structure for each bank in our analysis.

Lastly, we adjust our EV for equity-accounted stakes, which we do not consider as cash earnings generating and hence deduct from our EV.

We do not deduct cash, as cash holding are generally volatile and part of the bank’s normal course of business (e.g. cash collateral received, short-term interbank placements, payment services and cash management, liquidity required due to regulations).

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Cash flow

We base our cash flow analysis on adjusted pretax earnings which we adjust for non-cash items which we define as: i) depreciation, ii) maintenance capex (assumed as 105% of depreciation), and iii) equity-accounted profits.

In addition, we add back the cost of external debt. We assume the cost of funding for minorities is 6% and the current 5 year sub CDS for subordinated debt. We also include the additional net interest cost due to bail-in debt.

Table 31: Funding cost assumptions for the cash flow model

%

AssumptionFinancing cost on existing sub debt CDS spread + currency swapIncrease due to bail-in on existing sub debt 30bps/59bps/119bps depending on bail-in segmentationFinancing cost new debt CDS spread + currency swap + bail-in premiumFinancing cost of cocos 7% - average of current CSG, KBC, BBVA and UBS coco issuanceFinancing cost minorities 6%


We maintain our estimated 2013-2015e levels of loan losses, bearing in mind that the level of current losses for most banks remains above the normalized level. Additionally, for 2015e we run the EV/EBITDA calculations on normalized loss assumptions.

Some important caveats to our ‘unleveraged bank valuation’ EV/EBITDAmethodology:

Whilst we have adjusted for the interest cost of issued subordinated debt, and we are comfortable to treat interest income earned on loans and other balance sheet assets as unleveraged earnings, leveraged interest earnings such as Fixed Income trading income also contribute to the EBITDA for a bank, making this an imperfect measure of unleveraged cash flows

Whilst all outstanding senior debt at current market value is in the text-book formula included in the EV, we have excluded it given the nature of banks’ business where lending and borrowing is part of the normal course of business. Hence we have only included subordinated debt in our EV calculations, i.e. long-term ongoing operational business debt. We believe this adjustment better reflects the franchise value in the tougher regulatory environment.

Whilst cash is generally deducted from EV valuations (as no multiple or discount is generally placed on the value of cash), the cash balances of banks are part of the normal course of business (e.g. cash collateral received, short-term interbank placements, payment services and cash management) and tend to be volatiledepending on the refinancing cycles, and therefore we have not deducted from our EV.

We also highlight that the EBITDA is based on pre-tax profits and as such the cash flow does not take into account the different tax regimes across Europe.

Cash flow analysis – comparison of valuation

With investor focus moving from core capital to total capital ratios, we shift away from P/E valuations to focus instead on JPM Banks EV/EBITDA valuations for a measure of the value of the banks as a going concern.

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We summarize the result of this exercise in Table 32 below, where we run several different valuations on the cash flow data (including/excluding RWA growth and published/normalized losses).

Looking at the JPMe Banks EV/EBITDA valuation excluding RWA growth, which is comparable to corporate EV/EBITDA valuations as these do not take into account Capex.

The cheapest banks on an EV/EBITDA metric are: i) Intesa at 4.8x 2015e, ii) Popular at 5.0x, iii) Caixabank at 5.4x, and iv) UCG at 5.4x, which in our view suggests upside potential in these names. With the Italian banks being slightly cheaper on a traditional P/NAV basis and having stronger capital bases than the domestic Spanish banks, we prefer the Italian banks over the Spanish and upgrade UCG to OW (from N) and Intesa to Neutral from (UW). While the Italian banks look very cheap on this metrics, it is important to keep in mind that the tax rate for the two banks is very high (we consider normalized rates of 45%for Intesa, more concentrated in Italy, and 35% for Unicredit group, benefitting from lower blended rate from lower Italian concentration).

Banks that are expensive on a cash flow basis but cheap on traditional metrics include CBK at 0.4x P/NAV and 12.2x on JPMe Banks EV/EBITDA equivalent excl. RWA growth, and CASA at 0.7x P/NAV but 10.5x on JPMe Banks EV/EBITDA excl. RWA growth.

Assuming normalized losses in 2015e, the cheapest banks on a EV/EBITDA metric are Intesa at 4.5x, Popular at 4.7x and UCG at 5.1x for a 7.8%, 10.2% and 6.9% normalized RoNAV respectively, while CBK at 12.2x for a 3.7% normalized RoNAV, SEB at 9.7x for a 12.6% normalized RoNAV and CASA at 9.6x for a 12.5% normalized RoNAV are the most expensive banks in a normalized loss environment.

Banks such as BBVA and Handelsbanken are expensive on both cash flow and traditional basis, trading at an EV/EBITDA multiple of 10.1x and 9.3x respectively and a P/NAV multiple of 1.2x and 1.6x respectively.

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Table 32: European Banks: 2015E Unlevered valuation analysis (Table 1 of 2)

EUR million

CS UBS DB Lloyds RBS HSBC STAN Soc Gen BNPP CASA CBK UCG ISPMarket Cap 35,660 58,489 34,806 64,906 45,367 154,846 41,768 28,276 61,620 19,937 10,068 26,157 24,295+Implied total capital financing 5,539 -3,871 11,524 -8,961 -995 -53 -3,668 6,605 4,297 33,890 7,303 -7,097 -6,282+Subordinated Debt (incl Cocos) 16,108 11,028 19,525 22,850 24,138 32,099 13,482 12,133 20,950 27,700 12,137 16,897 10,685+Minority Interests 5,671 1,619 256 383 563 6,253 445 9,929 7,552 5,728 885 3,560 586-Equity accounted stakes -1,754 -687 -3,673 0 0 -12,105 -1,253 -2,060 -7,251 -18,900 -744 -3,493 -2,706

Total EV 61,223 66,578 62,438 79,178 69,073 181,039 50,773 54,884 87,168 68,355 29,648 36,023 26,578

Free EBITDA Clean PBT 6,612 7,484 9,426 9,028 6,281 21,271 6,904 5,959 11,030 4,623 1,321 5,548 4,966Less equity accounted earnings 65 -71 150 0 0 2,279 200 155 508 1,222 46 175 65Add depreciation -995 -546 -8 -1,695 -1,090 -1,119 -306 -925 -1,543 -712 -316 -932 -622Add amortisation -29 -86 0 -823 -855 -731 -192 0 0 0 0 0 0Less maintenance capex( 105% depreciation cost) -1,045 -573 -8 -1,780 -1,145 -1,175 -322 -971 -1,620 -748 -332 -979 -653Add interest 1,245 553 1,191 1,268 1,197 1,421 554 1,463 1,445 3,131 1,173 1,333 680 Financing cost new debt 159 0 436 0 0 0 0 297 169 1,496 421 0 0 Financing cost on existing sub debt 200 185 624 436 1,092 951 488 437 699 1,095 628 1,019 582 Increase due to bailin on existing subdebt 23 20 116 36 71 95 40 66 124 197 72 100 63 Financing cost of cocos 522 251 0 773 0 0 0 67 0 0 0 0 0 Financing cost minorities 340 97 15 23 34 375 27 596 453 344 53 214 35Free cash flow ex RWA growth 7,771 8,167 10,467 11,034 8,278 21,087 7,434 7,221 11,890 6,497 2,432 6,659 5,550

Less cash consumed for growth capital 0 -526 2,154 -344 -943 4,711 2,879 360 865 -790 -362 657 -180FY13 RWAs 228,954 176,603 374,112 332,310 494,242 989,894 285,457 354,883 629,499 350,856 225,887 437,158 318,343

FY14 RWAs 228,954 172,556 395,648 328,868 484,816 1,037,006 314,249 358,487 638,150 342,956 221,869 444,460 316,343Target B3 core equity ratio 10.0% 13.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 9.0% 9.0% 9.0%

Free cash flow inc RWA growth 7,771 8,693 8,313 11,378 9,221 16,376 4,555 6,860 11,025 7,287 2,794 6,002 5,730

I) 2015E Unlevered valuation ex RWA growth 7.9 8.2 6.0 7.2 8.3 8.6 6.8 7.6 7.3 10.5 12.2 5.4 4.8

II) 2015E Unlevered valuation in RWA growth 7.9 7.7 7.5 7.0 7.5 11.1 11.1 8.0 7.9 9.4 10.6 6.0 4.6

Add normalised loan losses 10 -76 137 -119 191 -154 -444 746 1,209 621 0 428 358

2015e normalized EV/EBITDA (ex RWA growth) 7.9 8.2 5.9 7.3 8.2 8.6 7.3 6.9 6.7 9.6 12.2 5.1 4.52015e normalized EV/EBITDA (incl RWA growth) 7.9 7.7 7.4 7.0 7.3 11.2 12.4 7.2 7.1 8.6 10.6 5.6 4.4


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EUR million

SAN BBVA Caixabank Popular NDA SEB Swed SHB Danske DnB Erste KBC Average

Market Cap 61,461 43,614 14,000 6,762 36,983 17,480 19,864 20,484 15,676 19,654 10,698 14,886+ Implied total capital financing -1,406 4,060 -438 88 1,332 947 877 -1,170 1,298 1,016 -1,091 711+Subordinated Debt (incl Cocos) 12,586 10,385 4,110 911 5,577 2,047 1,572 1,612 5,805 2,176 4,800 5,201+Minority Interests 18,658 2,362 0 46 4 0 18 0 0 0 3,929 382-Equity accounted stakes -4,453 -6,921 -10,064 -941 -585 -144 -418 -23 -150 -361 -220 0

Total EV 86,846 53,500 7,608 6,866 43,311 20,330 21,913 20,902 22,630 22,485 18,116 21,179

Free EBITDA Clean PBT 10,072 5,306 1,722 1,308 5,333 2,143 2,399 2,195 2,686 3,212 2,320 2,584Less equity accounted earnings 694 971 582 17 87 2 92 1 22 99 0 0Add depreciation -2,468 -1,183 -416 -122 0 0 -78 -53 0 -209 -367 -310Add amortisation 0 0 0 0 0 0 0 0 0 0 0 0Less maintenance capex( 105% depreciation cost) -2,592 -1,242 -437 -128 0 0 -82 -56 0 -219 -385 -326Add interest 1,827 1,023 291 85 211 105 86 45 273 75 489 300 Financing cost new debt 0 235 0 0 41 33 30 0 50 0 0 0 Financing cost on existing sub debt 633 480 242 71 153 66 50 40 206 62 197 162 Increase due to bailin on existing subdebt 74 55 49 11 17 6 5 5 17 13 57 52 Financing cost of cocos 0 112 0 0 0 0 0 0 0 0 0 63 Financing cost minorities 1,119 142 0 3 0 0 1 0 0 0 236 23Free cash flow ex RWA growth 11,082 5,298 1,410 1,369 5,457 2,245 2,389 2,237 2,937 3,178 2,791 2,869

Less cash consumed for growth capital 1,739 288 -79 -62 43 314 76 348 60 820 624 293FY13 RWAs 579,554 342,540 165,086 84,077 166,374 84,367 59,617 68,343 125,155 138,147 108,096 102,644

FY14 RWAs 598,874 345,743 164,214 83,392 166,708 86,785 60,204 71,021 125,618 144,218 114,332 105,574Target B3 core equity ratio 9.0% 9.0% 9.0% 9.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.5% 10.0% 10.0%

Free cash flow inc RWA growth 9,343 5,010 1,489 1,431 5,414 1,931 2,313 1,888 2,877 2,358 2,167 2,576



Add normalised loan losses 3,648 3,821 52 79 -127 -145 -93 -26 -26 61 -230 -239

2015e normalized EV/EBITDA (ex RWA growth) 5.9 5.9 5.2 4.7 8.1 9.7 9.5 9.5 7.8 6.9 7.1 8.1 7.52015e normalized EV/EBITDA (incl RWA growth) 6.7 6.1 4.9 4.5 8.2 11.4 9.9 11.2 7.9 9.3 9.3 9.1 8.1


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EUR million

CS UBS DB Lloyds RBS HSBC STAN Soc Gen BNPP CASA CBK UCG ISPMarket Cap 35,660 58,489 34,806 64,906 45,367 154,846 41,768 28,276 61,620 19,937 10,068 26,157 24,295+ Implied total capital financing 5,539 -3,871 11,524 -8,961 -995 -53 -3,668 6,605 4,297 33,890 7,303 -7,097 -6,282+Subordinated Debt (incl Cocos) 16,108 11,028 19,525 22,850 24,138 32,099 13,482 12,133 20,950 27,700 12,137 16,897 10,685+Minority Interests 5,671 1,619 256 383 563 6,253 445 9,929 7,552 5,728 885 3,596 586-Equity accounted stakes -1,754 -687 -3,673 0 0 -12,105 -1,253 -2,060 -6,895 -18,900 -744 -3,493 -2,706

Total EV 61,223 66,578 62,438 79,178 69,073 181,039 50,773 54,884 87,523 68,355 29,648 36,059 26,578

Free EBITDA Clean PBT 6,103 5,639 8,254 8,012 5,103 19,183 6,313 5,106 9,800 3,832 970 3,496 3,704Less equity accounted earnings 65 -71 150 0 0 2,036 182 148 490 1,162 46 185 65Add depreciation -995 -548 -8 -1,695 -1,090 -1,119 -306 -925 -1,543 -712 -316 -961 -628Add amortisation -29 -86 0 -823 -855 -731 -192 0 0 0 0 0 0Less maintenance capex( 105% depreciation cost) -1,045 -576 -8 -1,780 -1,145 -1,175 -322 -971 -1,620 -748 -332 -1,009 -660Add normalised loan losses 10 -79 190 294 876 -218 -405 820 1,180 651 175 1,132 903Add interest 1,245 553 1,191 1,268 1,197 1,421 554 1,463 1,445 3,131 1,173 1,335 680 Financing cost new debt 159 0 436 0 0 0 0 297 169 1,496 421 0 0 Financing cost on existing sub debt 200 185 624 436 1,092 951 488 437 699 1,095 628 1,019 582 Increase due to bailin on existing subdebt 23 20 116 36 71 95 40 66 124 197 72 100 63 Financing cost of cocos 522 251 0 773 0 0 0 67 0 0 0 0 0 Financing cost minorities 340 97 15 23 34 375 27 596 453 344 53 216 35Free cash flow ex RWA growth 7,273 6,242 9,486 10,312 7,976 19,025 6,457 7,196 11,857 6,416 2,081 5,730 5,191

Less cash consumed for growth capital 0 -1,052 980 -1,172 -4,817 3,917 2,605 231 626 -1,404 -362 486 -270FY13 RWAs 228,954 184,698 364,311 344,028 542,411 950,721 259,409 352,573 623,235 364,896 225,887 431,763 321,343

FY14 RWAs 228,954 176,603 374,112 332,310 494,242 989,894 285,457 354,883 629,499 350,856 221,869 437,158 318,343Target B3 core equity ratio 10.0% 13.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 9.0% 9.0% 9.0%





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EUR million

SAN BBVA Caixabank Popular NDA SEB Swed SHB Danske DnB Erste KBC Ave


Total EV 85,341 53,500 7,608 6,952 43,311 20,330 21,913 20,902 22,630 22,485 17,963 21,172

Free EBITDA Clean PBT 8,537 4,125 897 470 4,991 2,030 2,274 2,105 2,298 2,887 1,718 2,073Less equity accounted earnings 686 840 544 17 80 2 92 1 22 99 0 0Add depreciation -2,358 -1,150 -416 -122 0 0 -78 -53 0 -209 -367 -310Add amortisation 0 0 0 0 0 0 0 0 0 0 0 0Less maintenance capex( 105% depreciation cost) -2,476 -1,207 -437 -129 0 0 -82 -56 0 -219 -385 -326Add normalised loan losses 4,033 4,129 815 219 -85 -139 -92 -53 61 96 100 33Add interest 1,737 1,023 291 85 211 105 86 45 273 75 480 299 Financing cost new debt 0 235 0 0 41 33 30 0 50 0 0 0 Financing cost on existing sub debt 633 480 242 71 153 66 50 40 206 62 197 162 Increase due to bailin on existing subdebt 74 55 49 11 17 6 5 5 17 13 57 52 Financing cost of cocos 0 112 0 0 0 0 0 0 0 0 0 63 Financing cost minorities 1,029 142 0 3 0 0 1 0 0 0 227 23Free cash flow ex RWA growth 13,504 8,379 1,439 751 5,036 1,993 2,173 2,093 2,610 2,948 2,279 2,390

Less cash consumed for growth capital 1,280 455 -80 -64 -157 443 94 309 -18 2,052 303 55FY13 RWAs 565,331 337,489 165,972 84,793 167,581 80,957 58,890 65,962 125,297 122,949 105,069 102,094

FY14 RWAs 579,554 342,540 165,086 84,077 166,374 84,367 59,617 68,343 125,155 138,147 108,096 102,644Target B3 core equity ratio 9.0% 9.0% 9.0% 9.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.5% 10.0% 10.0%

Free cash flow inc RWA growth 12,224 7,924 1,519 815 5,193 1,550 2,078 1,783 2,629 897 1,976 2,335




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EUR million

CS UBS DB Lloyds RBS HSBC STAN Soc Gen BNPP CASA CBK UCG ISPMarket Cap 35,660 58,489 34,806 64,906 45,367 154,846 41,768 28,276 61,620 19,937 10,068 26,157 24,295+ Implied total capital financing 5,539 -3,871 11,524 -8,961 -995 -53 -3,668 6,605 4,297 33,890 7,303 -7,097 -6,282+Subordinated Debt (incl Cocos) 16,108 11,028 19,525 22,850 24,138 32,099 13,482 12,133 20,950 27,700 12,137 16,897 10,685+Minority Interests 5,671 1,619 256 383 563 6,253 445 9,929 7,552 5,728 885 3,632 586-Equity accounted stakes -1,754 -687 -3,710 0 0 -12,105 -1,253 -2,060 -6,552 -18,900 -744 -3,493 -2,706

Total EV 61,223 66,578 62,401 79,178 69,073 181,039 50,773 54,884 87,867 68,355 29,648 36,095 26,578

Free EBITDA Clean PBT 5,456 4,850 6,894 6,045 2,957 19,007 5,295 3,614 8,751 3,107 -55 2,394 2,776Less equity accounted earnings 65 -71 191 0 0 1,823 165 146 352 1,077 46 200 6Add depreciation -995 -577 -8 -1,695 -1,090 -1,119 -306 -925 -1,543 -712 -316 -1,001 -641Add amortisation -29 -86 0 -823 -855 -731 -192 0 0 0 0 0 0Less maintenance capex( 105% depreciation cost) -1,045 -606 -8 -1,780 -1,145 -1,175 -322 -971 -1,620 -748 -332 -1,051 -673Add normalised loan losses 17 -127 260 1,301 2,222 -760 -517 1,549 1,620 779 414 1,410 1,112Add interest 1,245 553 1,191 1,268 1,197 1,421 554 1,463 1,445 3,131 1,173 1,337 680 Financing cost new debt 159 0 436 0 0 0 0 297 169 1,496 421 0 0 Financing cost on existing sub debt 200 185 624 436 1,092 951 488 437 699 1,095 628 1,019 582 Increase due to bailin on existing subdebt 23 20 116 36 71 95 40 66 124 197 72 100 63 Financing cost of cocos 522 251 0 773 0 0 0 67 0 0 0 0 0 Financing cost minorities 340 97 15 23 34 375 27 596 453 344 53 218 35Free cash flow ex RWA growth 6,632 5,404 8,153 9,353 7,177 18,520 5,343 6,434 11,387 5,905 1,057 4,892 4,530

Less cash consumed for growth capital -94 -3,140 -1,569 -3,578 -4,344 339 2,675 -4,139 341 -2,105 -1,014 -2,409 -348FY13 RWAs 229,898 208,851 380,000 379,812 585,854 947,329 232,664 393,962 619,825 385,941 233,135 458,527 325,215Normalised GrowthFY14 RWAs 228,954 184,698 364,311 344,028 542,411 950,721 259,409 352,573 623,235 364,896 221,869 431,763 321,343Target B3 core equity ratio 10.0% 13.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 9.0% 9.0% 9.0%


I) 2013E Unlevered valuation ex RWA growth 9.2 12.3 7.7 8.5 9.6 9.8 9.5 8.5 7.7 11.6 - 7.4 5.9



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EUR million

SAN BBVA Caixabank Popular NDA SEB Swed SHB Danske DnB Erste KBC Average


Total EV 83,902 53,500 7,608 6,952 43,311 20,330 21,913 20,902 22,630 22,485 17,821 21,165

Free EBITDA Clean PBT 7,262 3,446 -674 -409 4,476 1,950 2,184 2,057 1,619 2,519 801 1,949Less equity accounted earnings 1,043 617 643 16 73 2 92 1 22 99 0 0Add depreciation -2,269 -1,120 -416 -129 0 0 -77 -53 0 -209 -367 -310Add amortisation 0 0 0 0 0 0 0 0 0 0 0 0Less maintenance capex( 105% depreciation cost) -2,382 -1,176 -437 -135 0 0 -81 -56 0 -219 -385 -326Add normalised loan losses 4,340 4,226 3,487 408 25 -160 -141 -53 179 128 677 312Add interest 1,651 1,023 291 85 211 105 86 45 273 75 472 299 Financing cost new debt 0 235 0 0 41 33 30 0 50 0 0 0 Financing cost on existing sub debt 633 480 242 71 153 66 50 40 206 62 197 162 Increase due to bailin on existing subdebt 74 55 49 11 17 6 5 5 17 13 57 52 Financing cost of cocos 0 112 0 0 0 0 0 0 0 0 0 63 Financing cost minorities 943 142 0 3 0 0 1 0 0 0 218 22Free cash flow ex RWA growth 12,097 8,021 2,441 61 4,639 1,893 2,034 2,045 2,049 2,613 1,931 2,544

Less cash consumed for growth capital 747 761 429 -357 -2,391 434 481 842 751 478 -442 -615FY13 RWAs 557,030 329,033 161,200 88,757 185,976 77,622 55,192 59,485 119,518 119,412 109,493 108,248Normalised GrowthFY14 RWAs 565,331 337,489 165,972 84,793 167,581 80,957 58,890 65,962 125,297 122,949 105,069 102,094Target B3 core equity ratio 9.0% 9.0% 9.0% 9.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.5% 10.0% 10.0%

Free cash flow inc RWA growth 11,349 7,260 2,011 418 7,030 1,459 1,553 1,203 1,298 2,136 2,373 3,159




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Market dividend expectations too high

Whilst our dividend yields rising over the next 3 years we are concerned by market expectations. We recognize that European banks’ dividends could remain at risk due to incremental headwinds to capital resulting from i) new bail-in requirements that encourage banks to hold more own funds, ii) tougher capital requirements including Basel 3 Core Equity Tier 1 minimums and RWAs harmonization, iii) introduction of leverage ratios, iv) revised framework for securitization, and v) local regulations imposing more demanding requirements.

Consensus Dividend at risk: Market expectation of DPS coming down but still higher than our estimates

We highlight that market-implied DPS expectations for DB, CS and CASA are higher than our DPS estimates in some years and believe that market dividend expectations could be at risk. We highlight that market-implied DPS expectations for DBK are higher than our DPS estimates in 2014E (paid out in 2015) and believe that market dividend expectations are at risk considering ongoing capital at risk concerns. For DB, we estimate DPS at €0.75p.a. until 2015.

DB: We estimate i) FY13E declared DPS (paid out in ‘14E) of 75c, in line with last year vs. market implied expectations of 74c, ii) FY14E declared DPS (paid out in ‘15E) of 75c vs. market-implied expectations of €0.93 and iii) FY15E declared DPS (paid out in ‘16E) of 75c.

CSG: We estimate i) FY13E declared DPS (paid out in ‘14E) of SF0.75 vs. market-implied expectations of SF0.88, ii) FY14E declared DPS (paid out in ‘15E) of SF0.75 vs. market-implied expectations of SF1.07 and iii) FY15E declared DPS (paid out in ‘16E) of SF1.00.

CASA: We conservatively estimate no dividend payment in the years 2013 to 2015 (paid out in 2014 to 2016) vs. market expectation of i) €0.25 paid in 2014E ii) €0.30 paid in 2015E and iii) €0.30 paid in 2016E.

SG: We estimate i) FY13E declared DPS (paid out in ‘14E) of €0.95, equivalent to ~25% payout on earnings adjusted for own debt, vs. market-implied expectations of €0.85, ii) FY14E declared DPS (paid out in ‘15E) of €1.50, equivalent to ~40% payout, vs. market-implied expectations of €1.20 and iii) FY15E declared DPS (paid out in ‘16E) of €1.75, equivalent to ~40% payout vs. market-implied expectations of €1.28. Note that the company guides to 25% payout for FY13, and 35% to 50% from 2014. In our view, 50% payout is unlikely given the ongoing regulatory uncertainties (EU Banking Union, new Basel Securitization framework, trading book review for market RWAs).

In Table 38 below we show our estimates of announced dividends in a financial year (paid out in next year) and compare these with market-implied dividend expectations.

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Table 38: JPMe DPS estimates and market-implied DPS expectations

Local Currency

UBS CS DBK BNP SG HSBC BBVA SAN CASA ISP UCGDPS announced in FY12 0.15 0.75 0.75 1.50 0.45 0.45 0.41 0.62 0.00 0.05 0.09

JPMe DPS accrued in FY13E 0.30 0.75 0.75 1.50 0.95 0.50 0.41 0.60 0.00 0.05 0.06Market implied DPS paid in FY14E 0.26 0.88 0.74 1.67 0.85 0.59 0.35 0.40 0.25 0.05 0.09JPMe/ Market implied difference(%) 15% -15% 1% -10% 12% -15% 17% 50% -100% 0% -33%

JPMe DPS accrued in FY14E 0.60 0.75 0.75 1.70 1.50 0.55 0.41 0.60 0.00 0.06 0.09Market implied DPS paid in FY15E 0.55 1.07 0.93 1.80 1.20 0.52 0.27 0.30 0.05 0.09JPMe/ Market implied difference(%) 9% -30% -19% -6% 25% 6% 122% -100% 20% 0%

JPMe DPS accrued in FY15E 0.95 1.00 0.75 2.00 1.75 0.60 0.41 0.60 0.00 0.06 0.09Market implied DPS paid in FY16E - - - 1.84 1.28 0.52 0.24 0.30 0.09JPMe/ Market implied difference(%) 9% 37% 15% 150% -100% 0%


In Table 39 below we show our dividend estimates for 2013-2015E and how these will be paid.

Table 39: European Banks: JPMe Dividend per share and Dividend yield forecasts, 2013-2015E

€ million

13E DPS

14E DPS

15E DPS

2015E div. yield

Excess/Shortfall to Basel 3 CET1 min. requirement (EUR) Notes

CASA 0.00 0.00 0.00 0.0% -1,805 -DnB 2.26 2.59 2.88 3.0% -1,016 CashKBC 0.00 1.06 1.33 3.9% -711 CashPopular 0.00 0.00 0.00 0.0% -88 No dividend payment at the moment.Caixabank 0.23 0.23 0.23 8.0% 438 20c DPS target, 5c per quarter, all scrip - avg take-up 90%Erste 0.33 1.13 1.54 6.2% 1,091 CashSEB 2.80 3.20 3.38 4.9% 1,740 CashDanske 1.75 5.10 5.97 5.2% 1,831 CashSwed 10.11 10.82 11.43 7.5% 2,151 CashCBK 0.00 0.00 0.00 0.0% 2,426 No dividendSHB 11.00 11.50 12.00 4.2% 2,942 CashSTAN 0.90 0.98 1.06 4.6% 3,668 60% cash 40% scripBBVA 0.41 0.41 0.41 5.6% 3,823 BBVA 2 dividends cash, 2 scrip 0.10c each. Usual acceptance 85%NDA 0.53 0.59 0.64 7.1% 4,179 CashSAN 0.60 0.60 0.60 11.0% 4,330 SAN 4 dividends 0.15c each, full scrip. Usual acceptance 85%DB 0.75 0.75 0.75 2.2% 4,941 CashCS 0.75 0.75 1.00 3.7% 5,040 Scrip and cash in 2011-2012, cash from 2013E onwardsSoc Gen 0.95 1.50 1.75 5.1% 5,097 SG dividends 60% scrip, 40% cashRBS 0.00 0.00 6.00 1.8% 5,772 CashUBS 0.30 0.60 0.95 5.1% 5,920 CashISP 0.05 0.06 0.06 3.9% 6,517 CashUCG 0.06 0.09 0.09 2.0% 7,097 CashHSBC 0.50 0.55 0.60 5.6% 7,764 all cashBNPP 1.50 1.70 2.00 4.1% 9,159 BNP dividends all cashLloyds 1.10 3.40 4.50 6.1% 9,902 Lloyds


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Upgrading Italian banks on valuation

We upgrade Italian banks on valuation: We raise our recommendation on Unicredit from Neutral to Overweight and raise Intesa from Underweight to Neutral. We prefer Unicredit because: 1) cheaper valuation on traditional metrics, 2) more attractive geographical differentiation, and 3) better positioned for “low for long” interest rate environment (See July’s note)

Italian banks (UCG and ISP) appear particularly attractive when looking at the metrics discussed in this note:

Capital position is solid, with Basel 3 Core Equity Tier 1 ratio expected to be well above 10% in 2015E (10.6% for UCG, 11.1% for ISP).

Leverage ratio is estimated above the 3.9% average for European banks, at 4.3% for both Unicredit and Intesa.

Both banks see limited earnings impact even in our bear case bail-in scenario of 10% of bail-inable liabilities to be covered by own fund only. Moreover, the banks have a high proportion of bail-inable liabilities to total liabilities (equity + additional Tier 1 + senior debt): 20% for UCG and 19% for Intesa, vs. 13% average for European banks.

Most importantly, our “unleveraged bank valuation” EV/EBITDA shows that Italian banks are particularly cheap in a European context because of the capital exceeding the level of the optimal capital structure requirement. On a cash-flow metric the valuation for UCG is 5.1x and for Intesa 4.5x vs. the 7.5x European bank average. We note however that this ratio is slightly distorted by the high tax rate of both UCG and ISP (resp. 38% and 47%), given that the EV/EBITDA metric looks at the pre-tax earnings. We estimate that after normalizing the tax rate to the European average EV/EBITDA 2015E would rise to 5.6x for Unicredit and 5.4x for Intesa, still well below the European average.

Table 40: Summary valuation comparison

UCG ISP European averageP/NAV 2015E 0.5 0.7 1.0P/E 2015E 8.5 10.0 9.5RoNAV 2015E 6.4% 7.3% 11.3%EV/EBITDA 2015E 5.1 4.5 7.5B3 Core equity tier 1 2015E 10.6% 11.1% 12.1%Leverage ratio 4.30% 4.30% 3.9%Loss-absorbing funds 20% 19% 13%


We note that the excess capital reflects the ongoing uncertainty due to the upcoming Asset Quality review and stress test, which is pushing the two banks to maintain a safety buffer. This is, in our view, one reason why the Italians look so good on anEV/EBITDA comparative valuation.

In terms of earning estimates, we are changing our number marginally: for UCG, EPS 2015E increased from €0.43 to €0.46 and for ISP from €0.13 to €0.14. We expect the AQR to take place mid-2014e. Our forecast for both banks includes coverage going up from c. 44% to c. 47% by 2015e, with provisions now slightly more concentrated in 2013e and 2014e.


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The increase in price target for both banks comes from the removal of the provision shortfall to reach 50% coverage by 2015e. As the macro situation appears less worrying, we assume that there is less risk that Italian banks will be asked to reach such a high level of coverage and assume that the increase to 47% already in our forecast will be enough. We look at Bear and Bull case to set risks around our earning forecast:

Table 42: Bull-Bear scenarios impact on RoNAV and PT

€

Base case 2015 forecast Bull scenario Bear scenarioUCGCost of risk (bps) 107 84 129Loan growth (%y/y) 1.8% 3.8% -0.2%Costs (%y/y) -3.4% -4.4% -2.4%

RoNAV (%) 6.4% 9.5% 5.3%PT (€) 5.51 7.25 3.82PT/NAV 0.5 0.8 0.3

ISPCost of risk (bps) 109 74 144Loan growth (%y/y) 1.0% 3.0% -1.0%Costs (%y/y) -1.0% -2.0% 0.0%

RoNAV (%) 7.3% 9.5% 5.4%PT (€) 1.65 2.14 1.19PT/NAV 0.7 1.0 0.6


Table 41: Bull-Bear scenarios

-

Bull scenario Bear

scenario

Cost of

risk

(bps)

COR

consistent

with coverage unchanged

COR

consistent

with coverage at

50%

Loan growth

(%y/y)

2%> base case

2% < base case

Costs (%y/y)

1%pts < 2014-2015

1%pts > in 2014-2015

than base

case


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Upgrading Spanish banks: Caixabank OW, Santander to N

We upgrade our recommendation on Santander from UW to Neutral and Caixabank from Neutral to OW. The main reason behind the upgrade is our more constructive view on Spain, taking into account a more favorable domestic environment, lower cost of equity and better valuations as we move our estimates to 2015 from a previous 2014. The positive impact or the EV valuation method described in this document is also supportive of these changes.

Our more constructive approach to Spain is based on some macro stabilization as highlighted by our economists, also reflected in our latest “Spain in Pictures”. There are some signs of economic stabilization in Spain and rationalization on pricing for the first time in the funding markets that should benefit larger banks operating in Spain. We remain generally cautious on the economy and are still waiting for a final cleanup of the banks, where hopefully the ECB will give banks a necessary push to go ahead and just do it.

Santander: upgrade to Neutral from UW

We upgrade Santander to Neutral from UW, increasing our TP to €5.86 from previous €4.36, as we adjust our estimates to a better funding evolution in Spain and a more than likely favorable resolution on Spanish deferred tax assets that will help improve its capital position (RWAs also dropped as much as 7% in 2Q13). Santander screens positively vs its domestic peers in the EV/EBITDA estimates, as we see value in the share, making 11% RoTBV in 2015.

What has changed since our UW call in June: Early June we downgraded our view on Santander due to a mix of low capital, relative expensive valuation, high consensus’ figures and Latam turmoil. It’s fair to say there have been changes since then. In the past three months the stock has underperformed BBVA and European banks by 7% and 5% respectively. Consensus expectations for 2013-15 have fallen by 15% on average in the period and we are now just 10% below Bloomberg Consensus, from 25% in June.

Why are we not going OW? While we acknowledge the improvement in Santander’s domestic market and progress in capital are being made, the stock’s valuation (1.0x P/TBV 2015E), upcoming Asset Quality Review and increasing turmoil in Emerging Markets are still large challenges, given SAN generates most of its revenues in Latin America. A stabilization in Latam and a less dilutive dividend policy would help us become more positive in the stock, which we currently view as fairly valued.

Caixabank: upgrade to OW from Neutral

We upgrade Caixabank to Neutral from UW, increasing our TP from €2.10 to €3.40 as we rollover to 2015 estimates and look beyond the 2014 recovery in Spain. Caixabank becomes our only OW amongst Spanish domestic names, set to benefit in Spain from a relatively lower cost of funding than its pure domestic peers and a favourable resolution on Spanish deferred tax assets. The main challenges we see are the potential impacts of the ECB Asset Quality Review, further losses in the integration of its acquired businesses (Banco Valencia, B. Civica), as well as further deterioration in Spain. We see value in the share, making 8% RoTBV in 2015, attractive relative to its valuation.

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Caixabank has been dragged over the past few years by its complicated structure, a dilutive dividend policy and most importantly a very low profitability result of a mortgage-focused business over the past decade. The integrations of Banca Civica and Banco de Valencia will take time but we believe there is still much upside in the bank’s cost base, still one of the most inefficient in Spain.

Why do we turn OW now? Caixabank has one of the lowest valuations amongst European banks at 0.6x P/TBV (2015E) and considering its capital position looks solid in the near term, the main challenge is profitability, where we consider it hassignificant levers to achieve it. Having a final share count, selling non strategic stakes and showing progress on provisions and costs should lead in our view to a re-rating of the stock upwards. Considering it’s the largest bank in Spain by assets, we would expect it to benefit from a potential recovery in Spain.

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UK Banks: Downgrading HSBC to Neutral

Prefer Domestic UK banks to HSBC and Standard Chartered

With an improving economic outlook for the UK (JPMe 3.1% UK GDP growth in 2014) and substantial progress on capital made by domestic UK banks in 2013, we believe that the relative attractions of the domestic UK banks sector have improved compared to HSBC and StanChart, which face headwinds within some EM economies. Further, with HSBC having outperformed StanChart by 15% YTD and now at a 14% PE premium to StanChart (10.2x 2015 P/E vs 8.9x 2015 P/E JPMe) we believe that HSBC’s positives are now discounted from the perspective of European bank investors who can invest in recovery/value stocks and StanChart at a cheaper valuation. We remain cautious on EM (Asian and Latin America) trends with EM provisions for both HSBC and StanChart expected to remain below normalised levels within consensus. In our view, an increase in EM provisions remains the key risk for both banks over the next 12 months given their premium valuation (1.3x P/TNAV 2014E) relative to other UK/European banks (sector at 1.1x P/TNAV 2014). With HSBC trading at 1.3x 2014 P/TNAV for 12.5% RoNAV 2015E we move to Neutral from OW with StanChart already at Neutral.

We now prefer StanChart to HSBC in Europe. With slower economic growth, weakness in local FX and tighter monetary policy across some EM economies, we believe the outlook for impairments could get challenging over the next 12 months. Our EPS forecasts on HSBC are below consensus, 5% for 2014 and 6% for 2015. We still see HSBC’s strong balance sheet (10.1% B3 CT1) and dividend as a support (5% yield 2014E) and expect the shares to outperform local EM/Asia peers, however,we believe that they are less attractive in a UK/European context.

Barclays: We note our OW recommendation on Barclays and continue to prefer Lloyds to RBS within the domestic UK banks. Barclays has taken action to address the issue of leverage via a £5.8bn rights issue (taking B3 CT1 to 9.3%) and movedon from the ongoing drag of redress costs by taking £2bn in provisions, thereby materially addressing balance sheet concerns.

Lloyds: We prefer Lloyds over RBS. Following strong Q2 results at Lloyds, we upgraded our EPS estimates by 19% for 2015E. We continue to see Lloyds as well placed to resume dividend payments given its now strong capital ratios (9.6% B3 CT1) and estimate that the shares are yielding 4.5% and 6% based on our ‘14 & ’15 DPS forecasts, respectively. We note that Lloyds is likely to end up as the best capitalized UK bank on our estimates with ‘15E B3 CET1 of 13.0%, which may create an option for capital return through buybacks in addition to a normalizing dividend policy. Lloyds trades at 1.2x P/TNAV ‘14E and 10.0x ‘15 PE.

RBS: We believe that a “bad bank” split is unlikely to fundamentally change valuation attractions, given the market already values the shares at 9.6x Core 2015 EPS. Our analysis shows that transferring £63bn of Non core, UK CRE and Irish assets to a “bad bank” on a capital-neutral basis would improve Core EPS by only 3% to 36p in 2015. The shares are 10% undervalued in this scenario but uncertainties from an EC state aid review would arise. In our view, a strategy refresh is required at RBS and potential catalysts would include: further restructuring or rebasing of expectations for Markets, a reassessment of the shape of Core RBS and a more aggressive strategy towards the disposal or IPO of Citizens.

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Investment Banking: L-T preference for UBS reconfirmed, but Deutsche Bank OW on valuation

Within Global IBs, our preference remains for WM gearing, which we see as the only area of structural growth in banking, as discussed in our note, “Global Banking: Wealth Management - only area of structural growth in banking: OW UBS, CSG, Julius Baer and MS” published 23 Jan 2013. We stick with our preference for Tier II FICC IBs due to restructuring leading to capital release with IB divisions currently valued below tangible BV for UBS, CSG and MS in our SOP implied valuation. We believe Tier I IBs will continue to remain more exposed to the IB regulatory changes as they try to “defend their turf” in the highly scalable IB business while Tier II IBs have the option to step back more aggressively to move to an ‘agency-type’ low capital and cost IB model. We continue to prefer Equity gearing over FICC as we see 3% CAGR growth in Equities revenues over the next 2 years compared to -2% decline in the FICC revenue wallet with increased regulation weighing on the FICC revenue wallet.

UBS: We see Wealth management/Asset gathering as the only area of structural growth in banking as discussed in our note, “Global Banking: Wealth Management -only area of structural growth in banking: OW UBS, CSG, Julius Baer and MS”. We play this theme through UBS which is our Top Global IB pick considering its business mix of asset gathering gearing (60% of 2015E Net Income) through the largest private bank in the world and also material capital release potential (5.1% dividend yield in 2015E). UBS is trading at 9.9x P/E, 1.6x P/NAV and RoNAV ex own debt of 15.9% in 2015E with Basel 3 CET1 ratio of 16.4% on a fully loaded basis, assuming the exercise of the SNB StabFund option in 2013. UBS also remains relatively less impacted from ongoing concerns around EM/Securitization as well as increased IB regulation due to its FICC restructuring with FICC revenues only contributing 5% to Group revenues in our 2015E.

DBK: DBK is the cheapest “Eurobank” in our coverage universe on a P/E basis, trading at 5.8x P/E vs. IB peers at 9.1x and Eurobanks at 9.5x in 2015E. The current valuation of DBK is discounting our ‘bear case’ €9bn capital raise scenario with exit PE 8.7x 2015E below Eurobanks at 9.5x, and we believe new management, now almost one year post Investor Day is under pressure to create S/H value. In our view DB management has inherited material unresolved legacy problems from the old DB management team, ranging from asset marks, litigation, to capital positioning. New management needs to move forward more aggressively in our view: i) deliver in 3Q 13 with €50bn-100bn of assets reduction to improve leverage, ii) focus on generating B3TI capital through asset reductions, iii) accelerate cost saving program at YE2013, and iv) start settling litigation issues. Investor confidence is low in DB delivering and hence risk-reward is attractive, even after factoring in impact from regulations outstanding as well as €2bn in post-tax litigation charges above €3bn litigation reserves at Q2. We believe DBK should put our ‘bear case’ capital concerns to rest by moving away from its ‘muddle through’ strategy and i) raise an additional €3bn capital in ABB, and ii) reduce RWAs by 15% (€60bn).






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French banks: Maintain preference for Société Générale

Within French banks, SG remains our preferred pick – we view the risk/reward as attractive with shares trading at 7.9x PE, 0.7x NAV 2015e vs. 9.4x PE and 0.9x NAV for BNPP. We believe 10% RoNAV is achievable in the long term, driven by cost savings and turnaround in international retail, which would provide additional ~15% upside and imply 7x PE. We remain Neutral on BNPP on relative valuation - whilst the group benefits from stronger capital, this is reflected in relative valuation with BNPP trading at 10.1x PE adjusted for optimal capital structure vs. 8.9x for SG in 2015e in our sensitivity analysis. On EV/EBITDA ~7.8x, BNPP would trade at similar level as SG, however, we would prefer SG for the turnaround/recovery story at this point given the still limited visibility on capital consumption/return for BNPP until the Investor Day next year. We also reiterate our Neutral rating on CASA – although we expect earnings visibility to improve for French retail and Italian consumer finance, valuation is not as cheap adjusted for optimal capital structure relative to peers with CASA trading at 9.3x PE and 9.6x EV/EBITDA, and in our view, cost of equity will remain high due to question marks on the Danish compromise for the treatment of insurance as well as uncertainties on Basel 3 leverage ratio for CASA.

Société Générale: SG offers double-digit earnings progression with cashflow generation of c.70bp p.a. by our estimates. We estimate €3.6bn of net profits in 2015e, vs. €3.3bn underlying in 2012; long term, we see potential upside to our estimates with additional €0.5bn profits to €4bn and EPS of close to €5.00 implying PE of 7x, 10% RoNAV vs. 8.6% in our 2015e base case, driven by cost savings and turnaround in international retail. At 0.7x NAV, valuation appears attractive vs. 1.0x for the sector. The capital debate appears to be over with the end of the deleveraging plan; Basel 3 Core Tier I was strengthened by c.250bp to 10% end 2013e, increasing to 11.4% end 2015e and SG offers a dividend yield of 5% assuming only 40% payout. Further improvement is required to get Basel 3 leverage ratio up from our estimated 3% end 2015e to our minimum 3.5%. However, even adjusted for our optimal capital structure, SG would be trading at 9.0x PE 2015e vs. 10.4x PE for the sector. Looking at EV/EBITDA valuation adjusted for our optimal capital structure (incl. growth), SG would trade at 6.9x in 2015e vs. 7.5x for the sector.

Nordic Banks: Prefer Danske and NordeaWithin the Nordic banks we prefer Danish geared banks, in particular Danske and Nordea offering upside potential from improving Danish macro and softer capital requirements, to more expensive names such as Handelsbanken. With Sweden and Norway expected to implement some of toughest capital rules in Europe (up to ~2.5% countercyclical buffer as well as 2x/3x higher mortgage risk weights),we prefer Nordic banks less exposed to these two markets, hence less regulatory risk on capital and more upside potential on the payout. Whilst we recognize solid top line revenue progression for DNB (~6% core revenue growth in 2014/2015e), we believe capital is tight with a B3 ET1 of 12.8% in 2015e (adjusted for 25% mortgage risk weights) vs. an up to 14.5% B3 ET1 JPMe minimum (12% minimum CET1 + up to 2.5% countercyclical buffer). Although Handelsbanken’s, Swedbank’s and SEB’s RoNAVs at 13.7%, 17.6% and 13.5% respectively are above the European average at 11.3%, we see few catalysts and in our view the banks are trading at fair value for now (1.6x, 1.8x and 1.4x respectively 2015 P/NAV).

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Danske: Trading at 0.9x P/NAV for a 10.9% RoNAV and 5.1% dividend yield in 2015E, Danske is our top Nordic pick. We like the asset recovery story in Danske and believe the worst is behind us in Denmark and Ireland (gross NPLs fell -1% qoq/-8% yoy in 2Q13 and coverage including collateral is at 90%). We see group losses falling from 65bps in 2012e to 23bps in 2014e and 19bps in 2015e. With management focusing on improving earnings (by +DKK5-6bn by 2015e) and cost efficiency (2015e cost income target of 46%), we believe Danske will reach at least a 10.9% RoNAV in 2015e. Whilst Danske has disappointed in the past, expectations are low and we see limited risk for consensus earnings downgrades. With a JPMe B3 ET1 of 12.0% at 2Q13 (adjusted for DKK100bn higher RWAs), we believe Danske could pay a 20%/40%/40% dividend in ‘13/14/15e.

Nordea: Trading at 1.4x P/NAV for a 14.6% RoNAV and 7.0% dividend yield in 2015E, Nordea looks attractive in our view. We see upside potential from i) improved profitability stemming from better pricing and product mix, ii) enhanced efficiency as Nordea is cutting underlying costs by €450mm by 2015, iii) improving asset quality with Denmark showing signs of recovery (27bps of losses in ’12 falling to 16bps in ‘15e), iv) a dividend payout rising to 65% already in 2013E on the back of €35bn of scheduled RWA reductions, and v) strong capital position with the B3 ET1 fully loaded reaching 15.5% in 2015E.

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59




BA

IL-I

N

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Bail-in capital requirements

Since the financial crisis in 2008 a number of banks (RBS, Lloyds, Fortis etc) have been bailed out with public money as they were considered too big to fail. We have also seen a number of banks that haven’t been bailed out and failed (e.g. Icelandic banks, Lehman), but instead severely threatened the financial stability. The EC estimates a €121bn cost of the 2008-2010 crisis in terms of state aid (asset relief and recapitalization) and estimates that if banks had also been recapitalized to meet B3 10.5% total capital minimum requirements, the total cost would have exceeded €400bn, or 17% of total EU bank liabilities.

Senior unsecured creditors have on average recovered ~52% in the 21 bank failures since Sept 2008 listed below. While this is above the often-quoted 40% assumption, dispersion among names is high, with the average recovery rate averaging only 3.625% for the Icelandic bankruptcies (Glitnir, Landsbanki & Kaupthing), while it is 84% for the restructured or failure to pay events for European banks.

Table 43: Historical Recovery Rates – Global CDS Auction

-

Reference Entity Date of Credit Event Final Recovery Rate Type of event Region SectorFannie Mae 08-Sep-08 91.510 Bankruptcy North America FinancialFreddie Mac 08-Sep-08 94.000 Bankruptcy North America FinancialLehman 15-Sep-08 8.625 Bankruptcy North America FinancialWashington Mutual 29-Sep-08 57.000 Bankruptcy North America Financial

Glitnir 07-Oct-08 3.000 Bankruptcy Europe FinancialLandsbanki 07-Oct-08 1.250 Bankruptcy Europe FinancialKaupthing 09-Oct-08 6.625 Bankruptcy Europe FinancialJSC BTA 28-Apr-09 10.250 Failure to pay EM FinancialJSC Alliance Bank 15-May-09 16.750 Failure to pay EM FinancialBradford & Bingley 07-Sep-09 94.625 Failure to pay Europe FinancialCIT Group Inc. 03-Nov-09 68.125 Bankruptcy North America FinancialFinancl Guaranty Ins Co(FGIC)

03-Dec-09 26.000 Failure to pay North America Financial

AMBAC Assurance Corp 26-Mar-10 20.000 Bankruptcy North America FinancialAmbac Financial Group 09-Nov-10 9.500 Bankruptcy North America FinancialAnglo 24-Nov-10 76.000 Restructuring Europe FinancialAllied Irish 19-Jun-11 70.125 Failure to Pay Europe FinancialIrish Life 01-Jul-11 71.000 Restructuring Europe FinancialBKIR 07-Jul-11 76.625 Restructuring Europe FinancialNorthern Rock 15-Dec-11 99.125 Restructuring Europe FinancialSNS 01-Feb-13 95.500 Restructuring Europe FinancialBankia 18-Apr-13 88.500 Restructuring Europe Financial

Average 51.625

Source: J.P. Morgan, Credit Fixings, ISDA. Senior unsecured 2.5-5y bucket only.

The recent financial crisis has proved that authorities had limited resolution tools. European leaders are now looking back at the shortcomings of the 2008 crisis and proposing to continue to install tougher measures to make banks less vulnerable to a potential financial crisis. The lessons learned from the recent financial crisis are many, but BIS highlights group structure, liquidity and information sharing among supervisors as examples of where improvements are needed.

In response to the recent financial crisis, the European Commission has laid down a framework for the Resolution and Recovery of banks and investment firms. The European Parliament and Council have finalized their proposed revisions to the Commission’s proposal and are currently working with the Commission to agree a

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final framework, which is expected to come into force in 2015 (with the bail-in provisions proposed to come into effect either in 2016 or 2018). The frameworkconsists of 3 stages:

Preparation and prevention: aims to improve supervision and resolvability in the European banking sector. In other words, the preparation and prevention tool aims to reduce the probability of a bank failure and ex ante identify ways to effectively address a failing bank.

Early intervention: early remedial actions by supervisors in an effort to avoid bank resolution and return the bank to normal course of business.

Resolution: tools for restructuring a failing bank, to ensure continuity of critical services, maintain financial stability and restore a bank to viability. The resolution process is managed by a resolution authority (central bank, regulator, deposit guarantee scheme, ministry of finance, etc)

Table 44: Stages of the bank recovery and resolution process

-

Normal course of business / Preparation and prevention => Early intervention => Bank Resolution

Ongoing supervision + Preparatory measures to avoid problems Early intervention measures by supervisors Non-judicial tools

Capital requirements Raise own funds by shareholders Sale of business Liquidity Replace managers Bridge bank Large exposure limits Implement recovery plan Asset separation Reporting Divestment of activities Bail-in/debt write-down On/off site supervision, etc. More frequent reporting Supervisory programs Special management Enhanced supervision Etc. Stress testing Recovery plans

Preventative measures to ensure resolvability Bank Insolvency

Resolution plans Winding up / liquidation Change of legal and business structure Limit exposures Divestment Reduction of complexity

Source: European Commission.

The resolution authority can deploy four resolution tools (or a combination of them) for a bank if it reaches the point of non-viability (PNV):

Sale of business: selling all or parts of shares or assets and liabilities to one or more buyers without the consent of shareholders.

Bridge bank: a bridge bank is a temporary institution, owned wholly or in part by the government, that takes over the viable business (“good bank”) of the failing bank with the objective to later return the bank to private ownership. In other words, the “good bank” is spun off to a new entity generally under government ownership, while the original entity is wound-down.

Asset separation: asset separation is basically the opposite from a bridge bank, where the “bad assets” are transferred to an asset management vehicle, ownedwholly or in part by the government and placed into run-off.

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Bail-in / debt write-down: resolution authorities can force creditors to take losses by writing-off or converting to equity (“bailing in”) certain liabilities owed by a defaulted bank. Write down and bail-in are designed to protect taxpayers’ money and instead let creditors share the burden to absorb losses/recapitalize the bank to be viable in the long run. The burden sharing is expected to rest on subordinated and senior creditors primarily, as secured creditors and insured depositors are excluded.

Figure 2: Stages of the bank resolution / insolvency

Source: European Commission.

In the most recent proposal, the Council of the European Union is proposing that a minimum of 8% of total liabilities including own funds must be bailed-in (subject to specified derogations) before any resolution funds can be used. Above this level, the use of resolution funds is proposed to be capped at 5% of total liabilities. Additionally, all unsecured bondholders must be fully bailed-in before a bank is eligible to receive capital directly from the European Stability Mechanism (ESM).

For the purpose of calculating the 8% minimum of total liabilities (including own funds), losses which have been absorbed prior to the resolution action will not be taken into account. Based on European Parliament procedure file, the RRD proposal will not be considered until the Parliament’s plenary session scheduled for 19 November 2013. The European Commission could recommend a harmonized minimum requirement for eligible debt and own funds for banks in 2016 at the earliest, given that it will be based on recommendations by the European Banking Authority (EBA), which are due by 31 Oct 2016. The bail-in tool will not apply until 1 Jan 2018 (2016 under the EP proposal).

Decision about non-viability

Winding-up / liquidationJudicial insolvency procedure

Bail-in / debt write down

Asset separation

Bridge bankSale of business

Administrative resolution

procedure

Bank resolution

Bank insolvency

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To ensure that institutions always have sufficient loss-absorbing capacity, a minimum requirement for own funds and eligible liabilities will be introduced. In the council proposal the minimum requirement is defined as a sufficient aggregate amount of own funds and eligible liabilities (MREL) as a percentage of total liabilities and own funds (excluding derivatives liabilities). Eligible liabilities, sub debt and sub loans that do not qualify as Additional Tier 1 or Tier 2 capital are included in own funds and eligible liabilities if, among other restrictions, theremaining maturity is = or >1 year. The MREL may be partially met through contractual bail-in instruments.

Implicit government guarantees removed under bail-in leading to higher funding costs

One of the intended consequences with the recovery and resolution directive is to remove the implicit state guarantee from the banking sector and transfer the burden sharing to creditors. This could potentially lead to credit rating downgrades of the banks given that most banks in Europe benefit from implied government support. This could also increase the expected funding costs for banks, which in turn might be passed on the customers and shareholders.

Under bail-in the structure of the bond market is changing and we believe unsecured and uninsured creditors will demand higher returns on funding to compensate for the removal of implied government guarantees and burden sharing in a resolution scenario (i.e. higher loss given default).

Figure 3: Changes in uplift of large international banks in selected European countriesNotches; numerical equivalents of average rating uplifts and changes in

rating uplifts

Source: Bloomberg, Moody's and OECD Secretariat estimates. Notes: Average uplift,

calculated as the difference in notches between “all-in credit rating” (AICR) and the adjusted

“stand-alone credit rating” (SACR*), which already factors in parental and co-operative support;

hence the difference reflects regional government and systemic support only. Sample consists

of 118 large European banks. Number of banks headquartered in countries shown in

parentheses.

Figure 4: Estimated yearly reduction in funding costs due to implicit guarantee. Per country where banks are headquartered, in USD billion, as of March 2012

Sources: OECD Secretariat estimates, Bloomberg, Moody's, Bankscope, bank specific annual reports. Notes: Number of banks in parentheses. Estimated implied yearly reduction in cost of outstanding debt in billion USD, per country in which banks are headquartered (with the exception of Dexia, in which case Dexia Credit Local is allocated to France and Dexia BIL to Luxembourg, even though the Dexia group is headquartered in Belgium). Note that these estimates do not necessarily imply equivalent local taxpayer burden. Using adjusted stand-alone credit rating. Total number of banks is 123.

-4

-3

-2

-1

0

1

2

3

4

5

Average Uplift* July 2012 Average change in Uplift* December 2010 - July 2012

0

5

10

15

20

25

30

35

40

45

Lower bound, USD bn (debt of rated bank entity only) Upper bound, USD bn (subsidiaries included)

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The OECD estimates the benefits that implied government guarantees have given to banks in some cases up to a 4-notch rating upgrade (e.g. Luxembourg). Using their conclusions, we show in the table below the impact of a 2-notch downgrade for the ST senior debt for each bank under consideration. In our view rating support is important to maintain senior bail-in debt as sufficiently large and liquid asset class, and we highlight that senior debt of 11 banks in our coverage would be rated junk if the rating uplift was to be removed.

In our view bank debt rated BBB or below would be at risk due to higher CVA risk and hence less counterparties wanting to trade with them.

Table 46: Selected banks S&P issuer rating and implied issuer rating after a 2-notch downgrade.

Name SP Issr ST LC Rtg Implied new rating with loss of 2-notch Sov supportNDA AA- ASHB AA- AHSBC A+ A-STAN A+ A-BNPP A+ A-SWED A+ A-SEB A+ A-SG A BBB+CA A BBB+NAT A BBB+ERSTE A BBB+KOM A BBB+RAIF A BBB+RBS A- BBBLLOY A- BBBDANSKE A- BBBCMZ A- BBBJYSKE A- BBBPKO A- BBBPEK BBB+ BBB-KBC BBB+ BBB-

SAN BBB BB+ISP BBB BB+UCG BBB BB+BBVA BBB- BBCAIXABANK BBB- BBOTP BB B+SAB BB B+POP BB- BBES BB- BBANKIA BB- B

Source: Bloomberg, J.P. Morgan, S&P. Light grey represents the lowest investment grade BBB-; dark grey represents speculative

grade

Despite efforts to remove implied government guarantees, the OECD estimates that the implied guarantees still remain substantial. According to OECD, as of March 2012 the annual reduction in funding costs due to implicit guarantees was €27bn in Germany, €6bn in the UK, €4bn in France, €4bn in Italy and €1bn in Spain. The differences reflect credit rating differences, debt outstanding and the number of banks headquartered in the country. Based on the OECD data we estimate the implied pricing benefit from each country's implicit government guarantees, comparing banking sector debt in each country to the OECDs estimate of the implicit guarantee provided to banks headquartered in each country.

Table 45: BIS standardized CVA risk weighting by credit agency rating

Risk

weight

Multiple vs. AAA

Risk weight

AAA 8.8% 1.0

AA 8.8% 1.0

A 10.0% 1.1BBB 12.5% 1.4

BB 25.0% 2.9

B 37.5% 4.3CCC 125.0% 14.3

Source: June 2011 BIS Basel 3 disclosure

http://www.bis.org/publ/bcbs189.pdf


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Table 47: OECD estimates of the implicit guarantees for banks headquartered in EC countries.

EUR bn Germany UK France Italy Spain

Total banking assets, 2012 7,257 7,551 6,583 2,603 3,595Total banking deposits, 2012 2,760 3,402 2,507 1,033 1,795Total banking sector debt, 2012 996 1,373 1,068 537 501

Implicit guarantee in EUR bn, OECD estimate 27 6 4 4 1JPMe Implied avoided debt yield 2.73% 0.47% 0.38% 0.75% 0.28%

Source: OECD http://www.oecd.org/dataoecd/16/25/50586138.pdf, ECB., J.P. Morgan

Bail-in challenging in practice

Involving bondholders in loss absorbing could prove more challenging in practice than theory in our view. Whilst subordinated debt holders were part of the burden sharing in Anglo Irish in late 2010 and in SNS Reeal in 2013, senior bond holders have been protected in both deals, which raises the question: why it is so difficult for the governments to impose losses on senior unsecured instruments? Some explanations in our view could be:

Contagion reflects the concern that a default in one bank could spread to another bank, which could have significant adverse effects on financial stability. Whilst it might be easier to impose bail-in on small, non-systemic banks (e.g. Danish examples), we believe it could prove challenging in practice to effectively and rapidly enforce bail-in on large, systemically important banks without severely disrupting the functioning of the financial markets given the interconnectedness.

Removing implied government guarantees by imposing bail-in at a time when unsecured funding is under stress could have negative ramifications and exacerbate the stresses for the entire banking sector in a country (e.g. if the wholesale markets are closed, it could result in liquidity stresses for other banks).

Preference for certain creditors (retail deposits, SMEs, deposit guarantee funds etc.) could become legally challenging if such legal priority does not already exist in law, as it essentially creates different tiering among similarly ranking senior unsecured creditors.

Threat to the “no creditor worse off in liquidation”. The more that is excluded from the eligible bail-inable liabilities (for various reasons), the less loss-absorbing funds will be available in a bail-in scenario, which takes us to the point of “no creditor worse off” principle. If the scope of eligible bail-in liabilities is narrowed, it could at least in theory mean that the liabilities that are subject to bail-in could have a higher loss absorption rate in a bail-in scenario than in a default scenario.

http://www.oecd.org/dataoecd/16/25/50586138.pdf

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Unintended consequences from moving from bail-out to bail-in

Whilst the purpose of the resolution regime is to move away from “bail-out” to “bail-in”, we believe there could be unintended consequences that force losses back on the government/taxpayers.

In terms of the ECB, we note that almost 18% of the €14.5tr eligible collateral held is unsecured bank debt (additionally ~11% is secured), leaving the ECB with exposure to potential write-downs in this collateral. Whilst the EC Directive Proposals allow for instruments of the same seniority to be treated differently, it would be a more complex issue to treat the same instrument differently depending on the owner.

Figure 5: Eligible collateral by asset type held at the ECB, 1Q12-1Q13€ billion

Source: ECB. http://www.ecb.int/paym/pdf/collateral/collateral_data.pdf?13ba33db0a2ca20c3ca364b6e79af8ef

In terms of insurers, looking at the J.P. Morgan coverage of the large insurance entities, we see that on average >80% of the insurers’ shareholder equity is covered by exposure to bank debt, with almost €227bn exposure (compared to sovereign net exposure of €533bn). The bank debt exposure is marked to market.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Q112 2Q12 3Q12 4Q12 1Q13

Other marketable assets

Asset-backed securities

Corporate bonds

Covered bank bonds

Uncovered bank bonds

Regional government securities

Central government securities

We note that in the case of the Greek debt restructuring, all the

private creditors were subjected to

53.5% principal write-down, whereas there was no haircut for

ECB/central banks.

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Table 48: Summary table of Insurers’ exposure to European bank debt, FY 2012

€ million

Total bank debt exposure

Total bank debt/Sh equity

Tier I/Sh equity

Tier II and other sub/Sh equity

Total sub debt/Sh equity

Senior & Covered debt/Sh equity

Aegon 9,712 41% 2% 4% 6% 36%Ageas 5,700 58% na na 5% 53%Allianz* 37,500 72% 3% 10% 13% 60%Aviva 7,519 79% 4% 24% 28% 51%AXA 50,800 111% 2% 14% 16% 94%Baloise 9,926 205% na na 7% 199%Hannover Re 2,860 45% na na na naING 24,100 44% na na 0% 44%Groupama 7,775 148% 6% 34% 40% 108%LGEN 3,750 60% 4% 14% 18% 41%Munich* 5,901 21% 1% 2% 3% 17%Phoenix 2,956 154% 19% 28% 47% 107%Prudential 6,182 52% 4% 17% 21% 30%Resolution 5,565 89% na na 13% 76%RSA 2,429 53% 1% 5% 6% 47%SCOR* 600 12% na na 3% 9%Standard Life 2,362 47% na na 3% 44%Swiss Life 17,302 208% 6% 31% 37% 170%Swiss Re* 3,363 13% na na na naZurich* 20,333 78% na na 7% 71%

Average 226,636** 80% 5% 17% 15% 70%

Source: Company reports and J.P. Morgan estimates. * as of 1Q13. **Total.

Overall insurers are significantly exposed to the value of bank debt. This could create a potential moral hazard issue which may reduce the likelihood of regulatorsever initiating bail-in for a large institution once broader systemic risks are taken into account.

In terms of Retail holders of prefs and structured deposits, we are already seeing the risk to Retail debt holders of bail-in, as around 2/3rd of the sub debt in Spain is held by Retail investors. Bankia announced in May 2013 a €15.5bn capital increase at €1.35 per share, leading to partial nationalization and severe dilution for the bank’s former shareholders. Bankia was the first Spanish bank to apply a bail-in of its preferred shares (38%), perpetual sub debt (36%) and sub debt with maturity (13%), where the latter could be exchanged for zero coupon debt or equity while the first 2 converted into equity and there was no cash option.

We note the significant exposure of Spanish retail deposit holders to bail-in debt. The problem is less acute elsewhere in our view - whilst other potential bail-in instruments, such as structured notes, are popular in France for example, they are mainly sold to institutional and corporate clients, so there is less risk of placing the cost on the individual taxpayers

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Key issues of uncertainty to assess bail-in proposal

We highlight our technical questions and concerns for bail-in or burden sharing …

Firstly, we question the definition of non-viability rather than default, without a clear known set of conditions which will definitely trigger bail-in; there is still a moral hazard that governments will bail-out rather than enforcing bail-in, especially when considering the potential consequences of writing down bank debt held by insurance and pension companies, or deposits or sub debt held by voters/taxpayers. Whilst we note that uncovered depositors were written down equally with senior debt holders in the Danish bail-in, we note that in the Irish situation only sub debt holders were written off, despite loss levels which could have justified additional writedowns of senior debt holdings, in our view.

One of the key principles for bail-in is that ‘no creditor is worse off’ than they would be in a liquidation of a financial institution. We question how we can estimate ‘no creditor worse off’ compared to liquidation? We believe it could be hard to prove that the compensation from a bail-in is more favorable than in a liquidation scenario given difficulty of assessing the recovery value in liquidation.

Whilst the resolution authority has the power to suspend termination rights, we question if the bail-in could trigger non-payment instead (i.e. counterparties may refuse to make payments and deliveries to a failing entity in a bail-in scenario), which could add further pressure on the ailing bank.

The definition of bail-inable liabilities is not fully clear and subject to interpretation, hence we believe uncertainty could arise in determining which liabilities are bail-inable.

Related to the above, we believe it could be hard within a short timeframe to quantify the “unsecured excess part” of a secured liability, especially if the underlying collateral is illiquid.

We also question whether we could potentially end up with different classes of senior debt, bail-in and non-bail-in, and if that could potentially threaten theongoing liquidity of the bail-in market.

In addition, we are concerned about the conflict of interest, with the ECB potentially holding bank debt as collateral offering liquidity to the banking system.

Finally we reiterate our questions on jurisdiction in terms of EU entities operating subsidiaries outside the EU, and non-EU entities operating branches or subsidiaries inside the EU.

……and our remaining fundamental questions on likely effectiveness of bail-in

We consider the issue of SIFI status from the perspective of crisis management and bail-in, where the priority is to prevent deposit holders/taxpayers from suffering losses, which would imply it is a less relevant measure for IBs. However, the rules are not explicitly limited to deposit institutions and we wonder what makes a bail-in SIFI - the share of covered retail deposits, net interbank exposure? We note that in the Danish example, bail-in was used on two very small, non systemic banks, but with the impact on funding costs the Danish government subsequently introduced two further Bank package resolution tools, to clearly signal the very lowlikelihood of using bail-in in future scenarios.

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The impact of bail-in: Methodology

In the most recent proposal, the Council of the European Union is proposing that a minimum of 8% of total liabilities including own funds must be bailed-in before any resolution funds can be used. Above this level, the use of resolution funds is proposed to be capped at 5% of total liabilities and will require EU approval. Additionally, all unsecured bondholders must be fully bailed-in before a bank is eligible to receive capital directly from the European Stability Mechanism(ESM).

For the purpose of calculating the 8% minimum of total liabilities (including own funds), losses which have been absorbed prior to the resolution action will not be taken into account. Based on the European Parliament procedure file, the RRD proposal will not be considered until the Parliament’s plenary session, scheduled for 19 November 2013. The European Commission could recommend a harmonized minimum requirement for eligible debt and own funds for banks in 2016 at the earliest, given that it will be based on recommendations by the European Banking Authority (EBA), which are due by 31 Oct 2016. The bail-in tool will not apply until 1 Jan 2018 (2016 under the EP proposal).

The scope of the bail-in tool

The purpose of the bail-in tool is to enable resolution authorities to write-down,or convert into equity, claims of shareholders and creditors of a failing bank. The Council is proposing that eligible retail and SME deposits, as well as liabilities to the European Investment Bank (EIB), have preference over the claims of ordinary unsecured, non-preferred creditors, including large corporate depositors. The deposit guarantee scheme, which would step in for covered deposits (i.e. deposits below €100,000) would have a higher ranking than eligible deposits.

The bail-in tool can be applied to the liabilities of any EU financial institution, financial holding company and parent financial holding company.

The bail-in tool would be subject to all liabilities apart from certain liabilitiesthat are permanently excluded from bail-in:

covered deposits (i.e. up to €100,000, any amount exceeding it can be subject to bail-in)

secured liabilities including covered bonds, however, any unsecured part of a secured liability is not exempt from bail-in (although covered bonds and cover pool hedges may be exempted from this provision)

liabilities arising from holding client assets or client money, or a fiduciary relationship

inter-bank liabilities with an original maturity of less than 7 days

liabilities arising from a participation in payment systems which have a remaining maturity of less than 7 days

liabilities to employees of failing institutions, such as fixed salary and pensionbenefits

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commercial claims relating to goods and services critical for the daily functioningof the institution

tax or social security claim

National resolution authorities would also have the power to exclude, or partially exclude, liabilities on a discretionary basis for the following reasons:

if they cannot be bailed in within a reasonable time

to ensure continuity of critical functions

to avoid contagion

to avoid value destruction that would raise losses borne by other creditors

Resolution authorities would be able to compensate for the discretionary exclusion of some liabilities by i) passing these losses on to other creditors, as long as no creditor is worse off than under normal insolvency proceedings, or ii) through a contributionby the resolution fund. The resolution fund may only make a contribution provided that:

a minimum of 8% of total liabilities including own funds has been bailed-in

the contribution of the resolution financing arrangement does not exceed 5%. In special circumstances the resolution may seek further funding from alternative funding sources if i) the 5% limit has been reached, or ii) if all bail-inable debt (excluding eligible deposits) has been written down or converted in full.

In addition to the above, the resolution fund can in a special circumstance make a contribution if all of the below is met:

the loss absorption and recapitalization is >20% of RWAs, and

the ex-ante resolution fund has already reached at least 3% of covered deposits of all credit institutions authorized in the country, and

the institution has <€900bn of assets on a consolidated basis

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The minimum bail-in requirement

To ensure that institutions always have sufficient loss-absorbing capacity, a minimum requirement for own funds and eligible liabilities will be introduced. In the Council proposal the minimum requirement is defined as a sufficient aggregate amount of own funds and eligible liabilities (MREL) as a percentage of total liabilities and own funds (excluding derivatives liabilities). Eligible liabilities, sub debt and sub loans that do not qualify as Additional Tier 1 or Tier 2 capital are included in own funds and eligible liabilities if, among other restrictions, theremaining maturity is ≥1 year. The MREL may be partially met through contractual bail-in instruments.

The minimum requirement is proposed to be determined by the appropriate resolution authority on the basis of specific criteria, including:

loss-absorbing capacity

the size and business model

risk profile, including own funds

the extent to which a deposit guarantee scheme could contribute to resolution

potential impact on financial stability and contagion risk should the institution be subject to failure

- The resolution authority may also decide to apply a minimum requirement for subsidiaries. The Commission could recommend a harmonized MREL applicable to all banks in 2016 at the earliest, if recommended by which is based on recommendations by the European Banking Authority (EBA) in a proposed report on MREL proposed to be completed by 31 Oct 2016.

JPMe bail-in calculation methodology and health warning

Whilst the Council has provided more detail around the scope of the bail-in tool (i.e. a minimum of 8% of total liabilities must be bailed-in before resolution funds can be used), no minimum requirement has been set and is unlikely to be proposed before 2016 at the earliest (post the EBA recommendations due 31 Oct 2016).

For the purpose of our bail-in calculation methodology, we assume on the basis of the Council proposal:

Own funds and eligible liabilities: include Core Tier 1, Additional Tier 1 (AT1), Tier 2 (T2)2, contractual bail-in instruments, subordinated debt >1 year (not included in the T1 and T2 capital), and senior debt >1 year. We recognize that the scope of bail-inable instruments could be wider in reality given that the unsecured part of secured liabilities, corporate deposits, interbank debt >1 year etc are included.

We assume depositor preference in our analysis - both for non-guaranteed deposit and for Deposit Guarantee Funds. The assumed depositor preference is implicitly defined in Article 98a (insolvency hierarchy) in the proposal from the EU Council.

2 Please note that we have used the B3 definition for Core Equity Tier 1 and B2 definition for Additional Tier 1 and Tier 2

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Total liabilities and own funds: include total liabilities and own funds, but exclude all derivatives liabilities, in line with the proposed language for the minimum requirement (Article 39). We note however that in the scope of the bail-in tool (Article 38), there is no reference to exclusion of derivatives liabilities.

Minimum requirement: with the EU Council proposing that a minimum of 8% of total liabilities must be bailed-in before resolution funds can be used, we think the minimum requirement could be set above 8%, given that the 8% of losses that must be absorbed are measured prospectively from the point of resolution (i.e. losses that have been absorbed prior to the resolution action do not count towards the 8% min level of bail-in). Therefore, for the purpose of our calculations, we assume that banks would need at least a 2% add-on to cover any future losses that could occur prior to the point of resolution and hence set the min bail-in requirement at 10%.

We note that FINMA has developed a resolution strategy for Switzerland’s global systemically important banks and this may not fully replicate the Council proposal. However, for the purpose of like-for-like comparison across the European Banking sector, we are running this exercise for both UBS and CSG based on the Council of the European Union proposal.

Likelihood of bail-in: Capital and compliance with the preparation and prevention tools should in theory reduce the probability of default, therefore we use regulatory capital ratios as a first step to estimate the bail-in segment (high, medium or low) as these take into account the riskiness of assets. In order to estimate the probability of resolution leading to bail-in losses, i.e. the probability that write-down powers are exercised on sub debt and senior debt because resources lower down in the capital structure hierarchy have been fully written off, we adjust the relative risk of bail-in for the surplus or deficit above Basel 3 equity tier one requirements, as shown below. Additionally, we take into consideration asset quality (NPL ratio), as we believe this might be another factor that debt investors take into consideration when assessing the likelihood of bail-in of the issuer. We recognize however that NPL definitions vary across Europe, which make NPLs in some cases not fully comparable, but we believe it gives a general indication of the asset quality of the bank.

We consider any surplus in excess of 10% as low bail-in segmentation, any surplus between 0%-10% as medium bail-in segmentation and any capital shortfall as high bail-in segmentation. We also use asset quality as our second criterion for determining the bail-in segmentation, as shown in Table 49.

Table 49: Assumption of likelihood of bail-in based on equity tier 1 and asset quality

Bail-in segment Based on B3ET1 Based on asset qualityHigh B3CET1 <minimum requirement NPL ratio>5%Medium excess B3CET1 0-10% NPL ratio 2-5%Low excess B3CET1 >10% NPL ratio< 2%


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Table 50: European Banks: Bail-in segment based on equity tier 1 and asset quality (Table 1 of 2)

CS UBS DB Lloyds RBS HSBC STAN SG BNPP CASA CBK UCG ISP2015E Basel III CET1 ratio * 12.2% 16.4% 11.2% 13.0% 11.2% 10.7% 11.2% 11.4% 11.4% 9.5% 10.1% 10.6% 11.1%Min requirement 10.0% 13.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 9.0% 9.0% 9.0%% excess /deficit 22% 26% 12% 30% 12% 7% 12% 14% 14% -5% 12% 18% 23%Bail-in segmentation on B3ET1 low low low low low med low low low high low low low

NPL ratios 2015E 0.7% 1.2% 2.4% 5.1% 9.1% 3.1% 2.0% 5.5% 5.9% 3.5% 6.1% 15.7% 14.1%

Bail-in segmentation low low med med med med med med med high med med med

Source: J.P. Morgan estimates. * Fully loaded

Table 51: European Banks: Bail-in segment based on equity tier 1 and asset quality (Table 2 of 2)

SAN BBVA Caixabank POP NDA SEB Swed SHB Danske DnB Erste KBC Ave2015E Basel III CET1 ratio * 9.7% 10.1% 9.3% 8.9% 15.5% 15.0% 16.6% 17.1% 14.5% 12.8% 11.0% 9.3% 12.0%Min requirement 9.0% 9.0% 9.0% 9.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.5% 10.0% 10.0% 10.6%% excess /deficit 8% 12% 3% -1% 19% 15% 28% 32% 11% -5% 10% -7% 13%Bail-in segmentation onB3ET1 med low med high low low low low low high med high

NPL ratios 2015E 4.6% 4.1% 10.1% 5.7% 2.0% 0.0% 0.0% 0.0% 5.5% 2.5% 8.8% 5.2% 4.9%

Bail-in segmentation med med high high low low low low med med high high

Source: J.P. Morgan estimates. * Fully loaded

Based on our required B3 ET1 and asset quality estimates, we see the deficits and the highest debt writedown risks in KBC. Please note that KBC capital position is calculated after deducting positive AFS reserves (c. €800mn by 15E) and including penalty payments on remaining government capital

As we assume senior debt ranks below both guaranteed and non-guaranteed deposits, it would be written-off first regardless of the size of the deposit cushion, therefore the factors determining the additional risk pricing requirements for senior bail-in debt are the liabilities held lower down in the hierarchy i.e. equity then subordinated debt and then CoCos.

With bail-in introducing an expected loss given default/resolution, we would expect this increased risk to be reflected in increased yield requirements for both senior and subordinated outstanding debt (excluding CoCos and already existing perpetuals).

The Cost of Bail-in

We assume that the cost of bail-in for banks is dependent on i) the absolute quantity of own funds needed, ii) the incremental cost for increasing the level of own funds, and iii) the additional funding cost premium of eligible bail-in liabilities.

i) We increase the costs for all remaining long-term senior unsecured debt and sub debt (ex perpetuals and CoCos) with respect to bail-in. Only non-equity tier one and tier two sub debt, which counts as regulatory capital and where Basel has said there must be discretionary write-down permission available to authorities (if a trigger event occurs effective from 2013), is explicitly bail-in. We believe the risk of writedown is reflected to a greater extent in sub debt than in senior debt. Therefore we expect the cost of sub debt to increase, but to a lesser extent than the cost of senior debt i.e. we would expect the sub vs. senior spread to narrow, with senior taking on more sub characteristics.

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ii) We assess the potential increase in costs for bail-in debt using four methods, and apply the increase according to whether each bank has a higher, medium or lower bail-in write-down risk.

a. the yield comparison between sub debt, senior unsecured debt and CoCo yields

b. the case studies of Danish banks to see how the relative CDS spreads developed with the two cases of Danish bail-in

c. the investor bail-in debt survey assessment from our Fixed Income colleagues

d. estimating the yield pick-up from a higher loss given default (LGD) factor (the recovery rates should in theory be lower under bail-in than bail-out)

We have used the average of all four methodologies as our base case input figure, as shown in the table below, and have assigned high, medium and low writedown risk according to capital deficits/surplus over required B3 and asset quality levels (as discussed earlier in this report). In addition, we assume 50% lower impact from bail-in for banks operating in the UK and Denmark, where bail-in has already been implemented as a resolution tool and banks have as a consequence already seen a spread pick-up.

Given that subordinated debt provides loss-absorbing resources, while senior unsecured debt generally doesn’t in a non-bankruptcy scenario, we believe that the bail-in premium for senior instruments should be higher than subordinated debt. For the purpose of our analysis we assume that the sub spread increase is 70% of the senior spread increase in line with our Fixed Income colleagues’ investor survey on the impact of bail-in on funding costs (European Bank Bail-In Survey Results: Investor Views on Bail-in Senior Debt and Basel III Subordinated Debt).

The outputs are summarized in the tables below, where we estimate a 170bp uplift for high risk banks, 85bp for medium and 42bp for low risk banks for senior debt, and a 119bp increase on sub debt for high risk banks, 59bp for medium and 30bp for low risk names.

Table 52: Bail-in cost estimates under different scenarios

Implied increase in spread – Senior in bp Implied increase in spreads – Sub in bp

Base figure Low Medium High Base figure Low Medium HighBail-in cost under yield comparison method 125 63 125 250 88 44 88 175Bail-in cost under scenario Denmark 80 40 80 160 56 28 56 112Bail-in cost under scenario Fixed Income investor survey 59 30 59 122 43 21 43 85Bail-in cost under higher LGD assumption 74 37 74 148 52 26 52 104

Average 85 42 85 170 59 30 59 119

Source: J.P. Morgan estimates, Bloomberg. Notes: The high, medium and low bail-in segment categories refer to the relative likelihood of bail-in, depending on the strength of the equity resources

and asset quality. The High factor is 200% of the estimated impact, medium is 100% of the estimated impact and low is 50% of the estimated impact. Sub debt factor is 70% of the senior debt

factor.

For current cost of senior and sub debt we use 5 yr CDS data, as we

believe the CDS give fair and

comparable costs for debt issuance. We note that some

recent issuance have been inside

CDS spread levels, however in our view these have mainly been more

reflective of smaller ticket or

private placement type activity rather than real market pricing.



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a) The yield comparison method

In our methodology we use the fact that CoCos already provide loss-absorbing resources, while senior debt generally doesn’t in a non-bankruptcy scenario. Therefore the uplift in spreads to account for bail-in costs for senior instruments should be lower than the uplift in spreads to account for conversion options in CoCos, as CoCos should have greater conversion risk than bail-in debt. However, with senior/sub debt being subject to increased writedown risk in future, the sub/senior spreads should rise, as the spreads factor in higher LGDs.

Here we take our reference CoCo yields from existing CoCo issuances and look at the issuances by CS, KBC, Lloyds, Rabobank and UBS as examples of instruments in the market, although we note differences in terms of i) triggers for conversion, ii) consequences for conversion (equity conversion, 100% write-off, partial write-offs, conversion into shares), and iii) call options and step-up clauses. We note that due to liquidity premiums, the yield at issue of currently issued CoCos is likely to be technically inflated, suggesting that spreads would be lower if CoCos become a larger and more liquid assets class.

The table below shows coupons at issuance and current yield for CoCos in issues.

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Table 53: Selected CoCo issuances by European banks

IssuerYear of

Issue Features Year of Maturity Value issued Yield on issue Trigger for conversion Consequence of conversionCurrent

yield*BBVA 2013 Tier 1 Notes Perpetual $1.5bn 9.00% to May 2018 thereafter

US SW5 +826.2bpsCET1 < 5.125%, CT1 < 7.0%, T1 < 6% and/or non-viability event

Mandatory conversion into new shares

9.6%

CS 2011 Tier 2 Buffer Capital Notes 2041, redeemable after 2016

$2.0bn 7.875%, reset every 5 years at 5yr $US MS + 522bps

Core Tier 1 < 7% Mandatory conversion into ordinary shares

6.7%

CS 2012 Tier 1 Buffer Capital Notes 2022 CHF0.75bn 7.125% to Mar 2017 thereafter US SW5 +668.5bps

Core Tier 1 < 7% Mandatory conversion into ordinary shares

6.2%

CS 2013 Tier 2 Buffer Capital Notes 2023 $2.5bn 6.50% Core Tier 1 < 5% Write-down 6.4%CS 2013 Tier 1 Perpetual CHF0.29bn 6.00% Core Tier 1 < 5.125% Mandatory conversion into

ordinary shares5.9%

KBC 2013 Subordinated Contingent 2023 $1.0bn 8.00% Core Tier 1 < 7% Permanent write down to zero of principal and accrued interest

8.0%

Lloyds 2009 Lloyds Enhanced Capital Notes 10, 12, 15 yr £7.5bn 8%-11% Core Tier 1 < 5% Conversion into new and/or existing shares in Lloyds if CT1 falls <5%

n/a

Rabobank 2010 Senior Contingent Notes (not convertible)

2020 €1.25bn 6.875% Equity Capital Ratio < 7% Automatic and permanent 75% write-down if trigger occurs

4.9%

Rabobank 2011 Hybrid Tier 1 Notes Perpetual $2.0bn 8.40% to Jun 2017 thereafter US Treasury +749bps

Equity Capital Ratio < 5% Notes will absorb losses pro rata with equity capital and other loss absorbing instruments

7.9%

Rabobank 2011 Hybrid Tier 1 Notes Perpetual $2.0bn 8.375% to Jul 2016 thereafter US Treasury +642.5bps

Equity Capital Ratio < 8% Cancel accrued unpaid interest and write down

7.3%

UBS 2012 Tier 2 Notes 2022 $2.0bn 7.625% Core Tier 1 < 5% Write-down 6.2%UBS 2012 Tier 2 Notes 2022 $2.0bn 7.25% to Feb 2017 thereafter US

SW5 +606.1bpsCore Tier 1 < 5% Write-down 6.5%

UBS 2013 Tier 2 Notes 2023 $1.5bn 4.75% to May 2018 thereafter US SW5 +376.5bps

Core Tier 1 < 5% Write-down 5.6%

UCG 2010 Tier 1 Capital Notes Perpetual €0.5bn 9.375% fixed to July 2020 thereafter Euribor 3M + 749bps

Total Capital <6% or the prevailing min requirement in Italy

Write-down 8.0%

Source: Bloomberg and company reports. *Bloomberg prices close of 2 Sept 2013.

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We estimate parameters around the potential yield increase we would expect once senior unsecured debt qualifies as bail-in debt, based on three principles

i) CoCos: CoCos already price in writedown risk by design and so should not see increased premiums due to bail-in

ii) Sub debt: the sub bail-in premium should be 0 or greater as newly issued regulatory qualifying capital must have bail-in qualities from Jan 2013 under Basel 3

iii) Senior unsecured debt: the senior bail-in premium should be greater than 0 as writedown powers are not yet generally applicable in a non-bankruptcy scenario (i.e. LGD should go up)

The figure below and discussion in the comments illustrate a potential scenario.

In the figure below we would conclude that the maximum potential yield pick-up for senior unsecured instruments from bail-in is equal to the CoCo – senior unsecured spread (in the example below: 12% - 3% = 9%) minus the CoCo – Sub spread (in the example below: 12% - 8% = 4%) i.e. 5% maximum pick-up from bail-in in this example. In other words, we have assumed that the senior unsecured spreads could potentially reach up to the level of the subordinated spreads.

Figure 6: Illustrative picture for comparative CoCo, Sub and senior unsecured issuance (same maturity, currency, amount, call features etc.)

Source: J.P. Morgan.

Key conclusions on spreads post bail-in

Senior increase (5%) will be larger than sub increase (3%)

Senior + Senior-bail-in premium (3%+5% = 8%) should remain lower than Sub + Sub-bail-in premium (8%+3% = 11%)

Sub + Sub-bail-in premium (11%) should remain below CoCos (12%) (written down afterwards)

Spread between Sub and Senior post bail-in (11%-8% = 3%) should decrease compared to current spread (8%-3%= 5%)

The maximum potential Senior bail-in premium should not exceed the difference between the current CoCo-Snr Unsecured spread (12% -3% = 9%) and the current CoCo-Sub spread (12%-8% = 4%) i.e. it should not exceed 5% otherwise the cost of Senior Bail-inable debt (3%+5% =8%) could exceed the cost of Sub Bail-inable (8%+x%) in a scenario where there is no additional bail-in premium paid for Sub debt.

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For the purpose of comparing the spreads between CoCos, sub and senior issuances,we have used the Z-Spread. The Z-Spread is the flat spread over the treasury yield curve required in discounting the scheduled coupon at present market price. The advantage of the Z-Spread is that is not dependent upon only one point on the yield curve and takes account of all of the relevant term-structure. Should we have used the yield-to maturity (YTM) instead, the spreads could be markedly different depending on the coupon payment even if the bonds have the same cash flow dates and maturity. This issue is eliminated using the Z-Spread. We however highlight that the respective CoCo, sub and senior instruments i) are of different amounts (we have tried to select benchmark issues only, where possible), ii) in some instances have been issued in different currencies given the lack of comparable instruments in the same currency, and iii) have slightly different maturities, which in our view could account for part of the spread difference. Hence yield comparison method is only a rough estimate.

Applying these principles to the issuances from CS, KBC, Lloyds, Rabobank and UBS, we calculate a potential pick-up premium in the range of 90bp to 170bp and an average pick-up of 125bps, as shown in Table 54.

Table 54: Selected European banks: CoCo, Senior and Sub Z spread comparison

Currency billion

Issuer Coupon %Maturity

year Tenor Outstanding Currency YTM*Z-

Spread*

CoCo – Snr Unsecured Z

spread

CoCo –Sub Z

spread

Maximum spread pick

up

CS CoCo 7.125 2022 10 0.750 CHF 6.3% 4.4% 3.5% 2.6% 0.9%Sub 5.400 2020 10 2.500 USD 4.0% 1.8%Senior 4.375 2020 10 2.000 USD 3.4% 1.0%

KBC CoCo 8.000 2023 10 1.000 USD 8.1% 6.0% 5.1% 3.6% 1.5%Sub 4.050 2020 15 1.450 SKK 4.3% 2.4%Senior 4.600 2021 10 0.100 EUR 2.9% 0.9%

Lloyds CoCo 9.875 2023 14 0.057 GBP 8.0% 5.3% 3.9% 2.2% 1.7%Sub 9.625 2023 30 0.300 GBP 5.9% 3.2%Senior 7.500 2024 15 0.606 GBP 4.3% 1.5%

Rabobank CoCo 6.875 2020 10 1.250 EUR 4.9% 3.4% 2.7% 1.8% 1.0%Sub 3.750 2020 10 1.000 EUR 3.2% 1.6%Senior 4.125 2021 10 2.000 EUR 2.3% 0.7%

UBS CoCo 7.250 2022 10 2.000 USD 5.8% 4.2% 3.8% 2.8% 1.1%Sub 4.500 2019 15 0.893 EUR 1.6% 1.4%Senior 6.000 2018 10 1.500 EUR 1.7% 0.3%

Average 3.8% 2.6% 1.25%

Source: Bloomberg. * Bloomberg prices close of 9 Sept 2013.

b) Danish banks

Here we consider the CDS behavior of Danske Bank. There was a step-up in CDS spreads on 1st October 2010 when Denmark enacted its bail-in laws as part of its Bank Package 3, where unsecured creditors and depositors >€100k bear the losses. Looking at the performance of the 5yr senior CDS of Danske Bank and compared to simple average of the 5yr senior CDS of Nordea, SEB, Svenska Handelsbanken and Swedbank, we note a substantial change in their relationship. In 2H10, the spread between these two measures has moved from an average of -9bp before October 1st 2010, to an average of +28bp after, a swing of almost 40bp (see Figure 7).

Z-Spread: The constant spread

that will make the price of a

security equal to the present value of its cash flows when added to the

yield at each point on the spot rate

Treasury curve where a cash flow is received. In other words, each

cash flow is discounted at the

appropriate Treasury spot rate plus the Z-spread. In other words, the Z-

spread is the basis point spread

that would need to be added to the implied spot yield curve such that

the discounted cash flows of a

bond are equal to its present value (its current market price).

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Figure 7: Danske’s 5yr senior vs. average 5yr senior CDS of Nordic peers and Danish bail-in eventsbps

Source: Bloomberg.

Around the times of the Amagerbanken (Feb 2011) and Fjordbank Mors (Jun 2011) bankruptcies, where senior creditors were subject to bail-in, there were further step-ups in CDS levels, for example from 27th June to 29th June the CDS jumped from 126bps to 168bps then settled around 145-150bps, so a further 25bp to 40bp impact from collapse of small banks representing <1% of domestic banking assets, adding up to 65-80bps (i.e. 40bps initial move + 25-40bps additional impact) total impact of bail-in for Danske. In terms of the losses suffered by bondholders, the initial estimates of 41% haircuts were revised down to ~25% within a few quarters of the defaults, and down to 16% for Amagerbanken and 14% for Fjordbank Mors as the final loss.

It is worth noting that Bank Package 3 had a much greater impact on the smaller Danish banks, effectively shutting many out of the funding markets and so after this the Danish government introduced two additional support packages, the Consolidation Package (Bank Package 4) and the Development Package (BankPackage 5). Under the Consolidation Package the government encourages mergers between a distressed bank and a non-distressed bank by providing state-guaranteed funding and taking over the non-performing assets of the distressed bank. The Development Package, which is designed to strengthen growth, support export financing and provide credit to SMEs and the agricultural sector, has been used as a means of transferring bad assets (e.g. for FIH where DKK16bn of commercial real estate loans were the transferred to the government).

-100

-50

0

50

100

150

200

250

300

350

400

Jan-

09

Feb

-09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-0

9

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Difference (bps) Danske Bank 5yr Snr CDS Average Nordic Peers 5 yr Snr CDS

Bank Package 3 introduced

Amagerbankenfailed

Fjordbank Mors failed

Bank Package 4 introduced

Danske DKK7bn capital increase

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Following Bank Package 3, the perceived implicit guarantees came under pressure both in the case of small but also large banks, with the top credit rating of the Danish sovereign remaining unchanged at the highest level. For example, Danske, the largest bank in Denmark, experienced an increase in its secondary market yield spreads over bonds from other banks from the region (Figure 8), even though the stand-alone credit ratings of Danske as well as those of the three reference banks remained unchanged (although Danske’s all-in rating was lowered as a result of the credit uplift compression). That said, Danske was also characterized by some important weaknesses, such as exposure to Ireland and high asset impairment, and the removal of the general state guarantee for bank liabilities implied that market participants paid more attention to those weaknesses.

c) The bail-in survey conducted by our Fixed Income colleagues.

Here we look at our Fixed Income colleagues’ investor survey on the impact of bail-in on funding costs. As detailed in the note, European Bank Bail-In Survey Results: Investor Views on Bail-in Senior Debt and Basel III Subordinated Debt, the respondents suggested an 85bps average increase for single A rated bank, of which 30% is already priced into the current market levels. Assuming an 85bps bail-inpremium and that 30% is already incorporated into the existing market levels would imply that the senior spreads would have to widen a further 59bps for the bail-in premium to be fully priced in. The results of the survey also indicated a greater degree of divergence between covered and senior spreads as well as senior and subordinated spreads, with respondents expecting an average covered/senior spread of 0.30x and a senior/subordinated spread of 0.70x under a bail-in framework. Additionally, the survey suggested that investors are becoming more demanding in terms of the minimum capital requirements in order to invest in bail-inable senior debt, with over 50% of the respondents requiring a 17% capital buffer, implying that issuers would be incentivized to populate loss-absorbing buffers with subordinated debt, which also in our view explains the greater divergence between senior and subordinated spreads compared to previous surveys. The survey also suggested that investors plan to maintain a reduced allocation to bank debt post bail-in, with the caveat that it remained investment grade rather than high yield.

Table 55: Waterfall capital structure hierarchy, based on Article 43 ofthe EC Crisis Management Directive Proposal

1st written

down

Common Equity

2nd AT1 and T2

3rd Subordinated debt

4th Senior Unsecured

4th Secured liab not fully

covered by collateral

5th Uncov. Deposits

6th Deposit Guar. Fund

Source: EC Crisis Mgt Directive Proposal, J.P.Morgan

Note 1: Uncovered deposits and deposit

guarantee funds are also subject to bail-in, but

latest EC Directive proposals (19 June 2013)

suggests that they rank behind snr unsecured.



81




We note that the spreads have tightened since the previous Fixed Income survey in July 2012 (European Bank Bail-In Survey Results: Investor Views on Bail-In Senior Debt and Resolution Regimes) when respondents suggested an 117bp averageincrease for single A rated bank, or 64% of the average spreads for a single A rated bank at the time. At that time less than half believed that bail-in was priced in.

d) Estimating the bail-in premium by assuming an increase in the LGD

Our fourth calculation method for estimating the cost of bail-in is based on the expected loss, probability of default and loss given default function. We would argue that loss given default (LGD) should go up due to the resolution regimes (i.e. bail-in vs. bail-out previously), while the probability of default (PD) could come down due to improved regulatory requirements (Basel 3, LCR, NSFR etc). In other words, although senior unsecured loss absorption could be higher in future in case of a bank failure, banks should be less likely to fail given the tougher regulatory environment.

While the overall PD would decrease in a bail-in environment where the authorities have more tools to ensure the going concern nature of banks, the actual point of default is no longer the reference point for the determination of losses for bondholders and losses will occur at the point of regulatory intervention, known as the ‘point of non-viability’, which would be more relevant for bondholders. It is likely that regulators would intervene early if a bank’s ET1 ratio fell below the regulatory minimum where a point of non-viability could be triggered. Although the point of non-viability is less clearly defined than a default, we believe tougher capital and liquidity requirements will counteract any increase in the PD from government intervention. Hence, for the purpose of estimating the EL we assume that the PD remains unchanged.

For the purpose of our analysis i) we assume that CDS reflects the expected loss (EL), ii) the probability of default is based on the S&P rating3, iii) the loss given default is the expected loss divided by probability of default, and iv) the LGDs rise by 20% as a result of bail-in given that “bail-out” is removed. The 20% increase in LGD is based on JPM’s best estimate of the impact of the removal of the implied government guarantee and could in reality be lower or higher. Using this formula we arrive at an estimated 74bps cost for bail-in for senior unsecured instruments.

3 PDs are based on JPMe equity research best estimates: 0.02% PD for AAA & AA rating, 0.03% for A rating, 0.07% for BBB rating and 1.32% for BB rating.

Article 98a in EU Council

proposal from June 2013:

eligible deposits from natural persons and micro, SMEs

shall have a higher priority

ranking than the claims of ordinary unsecured, non-

preferred creditors;

covered deposits shall have a higher priority ranking than

that part of eligible deposits

from natural persons and micro, SMEs which exceeds

the coverage level;

the ranking of the deposit guarantee scheme

subrogating to the rights and

obligations of covered depositors in insolvency shall

correspond to the ranking of

covered deposits

liabilities to the EIB shall have

a higher priority ranking than

the claims of ordinary unsecured, non-preferred

creditors



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Table 56: Estimated bail-in premium assuming 20% higher LGD

bps

5 yr snr CDS* (EL)

(a) *

S&P long-term snr foreign currency rating (PD)

Implied S&P LGD** (EL/PD)

LGD increase due to bail-in

LGD post

bail-in

Implied 5 yr snr CDS due to higher LGD

(PD*LGD) (b)

Difference between implied CDS and actual

CDS (b-a)BBVA 265 BBB- 38% 20% 58% 405 140BNP 120 A+ 40% 20% 60% 180 60Caixabank 540 BBB- 77% 20% 97% 680 140CASA 161 A 54% 20% 74% 221 60Commerzbank 167 A- 56% 20% 76% 227 60CS 100 A- 33% 20% 53% 160 60Danske 119 A- 40% 20% 60% 179 60Deutsche 110 A 37% 20% 57% 170 60DNB 76 A+ 25% 20% 45% 136 60Erste 149 A 50% 20% 70% 209 60Handelsbanken 65 AA- 32% 20% 52% 105 40HSBC 102 AA- 51% 20% 71% 142 40Intesa 282 BBB 40% 20% 60% 422 140KBC 161 A- 54% 20% 74% 221 60Lloyds 74 A- 25% 20% 45% 134 60Nordea 68 AA- 34% 20% 54% 108 40RBS 165 A- 55% 20% 75% 225 60Santander 249 BBB 36% 20% 56% 389 140SEB 91 A+ 30% 20% 50% 151 60Soc Gen 159 A 53% 20% 73% 219 60Stan 140 A+ 47% 20% 67% 200 60Swedbank 104 A+ 35% 20% 55% 164 60UBS 90 A 30% 20% 50% 150 60UCG 316 BBB 45% 20% 65% 456 140

Average 173 41% 20% 61% 235 74

Source: J.P. Morgan estimates and Bloomberg. *Bloomberg close prices as of 2 Sept 2013. **LGDs are based on JPMe estimates of PDs corresponding to respective rating class: 0.02% PD for

AAA & AA rating, 0.03% for A rating, 0.07% for BBB rating and 1.32% for BB rating.

Other examples of higher funding costs post bail-in

Whilst the EC impact assessment reduced the theoretical cost of funding with the assumption that the “no creditor worse off” principle should reduce the theoretical cost of bail-in by 50%, we do not apply this mitigant as this principle does not guarantee lower losses than insolvency, and therefore we do not view it as automatically value-enhancing.

Similar to Denmark, we believe that the removal of implicit government guarantee may be better understood in the UK relative to other markets. The Banking (Special Provisions) Act 2008 was passed in parliament on 21 February 2008 in order to enable the UK Government to nationalize Northern Rock (22 Feb 2008). This Act also allowed the Treasury to nationalize the mortgage and personal loan book of Bradford and Bingley in September 2008. This Banking (Special Provisions) Act 2008 expired on 21 Feb 2009 when it was superseded by the Banking Act 2009.

Although there is by no means conclusive evidence of reduced implicit guarantee in the UK post the Banking (Special Provisions) Act 2008, UK bank CDS spreads have showed reduced correlation to UK sovereign CDS post February 2008. The table below shows that the CDS spreads for the domestic UK banks were highly correlated with the sovereign CDS spreads before the introduction of the Banking (Special Provisions) Act 2008.

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Table 57: UK banks’ CDS coupled with sovereign pre 2008 financial crisis

start date 07 Apr 06 07 Apr 06 07 Apr 06end date 21 Feb 08 21 Feb 08 21 Feb 08


R^2 0.91 0.94 0.93


Table 58: UK banks’ CDS less correlated with sovereign post 2008 removal of government guarantee

start date 22 Feb 08 22 Feb 08 22 Feb 08end date 9 Sept 13 9 Sept 13 9 Sept 13


R^2 0.23 0.15 0.20


Whilst bail-in so far has been used only as a resolution tool, we believe the decoupling of the UK banks’ CDS spreads from the government’s CDS suggests that funding spreads could go up as a consequence. As shown in Figure 8, UK banks have on average been trading at a ~30bps premium vs. Deutsche and BNP compared to a 2bps discount pre-bail-in. Hence, this is in our view an indication that markets haveyet to discount for the European proposal on resolution & recovery schemes,including bail-in.

Figure 8: 5 year snr CDS of HSBC, Lloyds and RBS vs. the average 5yr snr CDS for Deutsche and BNP bps

Source: Bloomberg.

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Difference (bps) UK bank 5yr snr CDS ave DB & BNP 5yr snr CDS ave

Implicit government guarantee removed

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We also note the possibility for using our Fixed Income colleagues’ comparison of the differential between existing Rabobank senior contingent notes (SCN; contingent but not convertible) and plain vanilla senior unsecured from the same issuer with similar maturity as there are similarities in risk profile of senior contingent notes (SCN) and bail-in senior. Our Fixed Income colleagues conclude that for senior instruments with a similar maturity and issuer risk, there is on average an incremental risk premium of 345bp for the contingent features in their report The $2.8 Trillion Question? Assessing The Impact of EU Resolution Regimes on Senior Debt ” published on 23 March 2012. This would potentially represent a negative read-across for the rest of the European banking sector given Rabobank is one of the highest rated European banks (Aa2 by Moody’s/AA- by S&P/AA by Fitch) with a substantial buffer over the trigger level. For banks with weaker ratings/capital buffers, this could imply a proportionally higher risk premium. Since the issuance,the 345bp spread differential has narrowed to 254bps, but is still quite substantial in absolute terms, representing a high 2.7x multiple of the matched maturity senior CDS mid-level of 80bp. Despite the negative read-across for the bail-in premium we highlight issues that should be taken into consideration and the reasons why we exclude Rabobank from our bail-in valuations:

The senior contingent note (SCN) is the first of its kind and an illiquid instrument; hence we do not believe it is a good comparison.

The trigger point is more clearly defined for the SCN than under the proposed bail-in language.

We believe the 75% writedown could potentially be larger than in a bail-in scenario given that investors have on average lost ~48% in the bank failures seen since 2008.

Rabobank’s subordinated debt issuances with similar maturity trade tighter than the SCN. In our view there is an argument that the 75% initial loss for the SCN ismore junior than the senior part of an unsecured instrument, given that the SCN will be immediately written-down to 25% of par when the trigger point is reached.

Rabobank contingent issuances:

In Mar 2010 Rabobank issued a

€1.25bn senior contingent note ("SCN") with a coupon of 6.875%.

The note is contingent, but not

convertible. If Rabobank’s equity capital ratio falls <7% before the

notes mature, the par amount and

unpaid coupons will be written down by 75% and investors will

immediately be repaid at this

redemption price. Unless previously redeemed or purchased

and cancelled, the SCN will be

redeemed at 100% of the principal amount on in March 2020.

We would highlight that the

Rabobank issuance is unusual for a number of reasons: i) Rabobank

is unlisted, ii) Rabobank is mutually

owned and therefore can’t convert bonds into equity, and iii)

Rabobank's current equity capital

ratio is 15.3%, providing a substantial capital buffer before its

contingent debt can be written

down.




85




BASE CASE – Impact on existing sub and senior debt if with no replacement

With the EU Council proposing that a minimum of 8% of total liabilities must be bailed-in before resolution funds can be used, we believe the minimum requirement could be set above 8%, given that the 8% (of losses that must be absorbed before bail-out) is measured prospectively from the point of resolution (i.e. losses that have been absorbed prior to the resolution action do not count towards the 8% min level of bail-in). Therefore we assume that banks would need at least a 2% add-on to cover any future losses that could occur prior to the point of resolution and hence set the JPMe min bail-in requirement at 10%.

In our first scenario we assume:

The JPMe minimum bail-in requirement of 10% of total liabilities excluding derivatives is met by own funds and bail-inable liabilities

Any shortfall to the 10% minimum requirement is covered by subordinated debt, as we believe it could be more difficult to issue senior bail-inable debt if the loss-absorbing buffers are smaller. In our view institutions that have large parts of senior instruments potentially excluded (e.g. short-term debt, customer deposits, secured instruments and potentially derivatives), significant amounts of secured instruments relative to senior unsecured and/or smaller own fund buffers could potentially enforce higher losses on senior unsecured creditors in a bail-in scenario, given that there is less senior unsecured funding available to cover the losses.

The current yields on sub and senior unsecured debt equal the respective 5-year CDS spreads.

The additional yield pick-up from bail-in equals 100% of our estimated increase in sub debt and for senior unsecured debt, apart from the UK and Danish banks, where we have assumed only a 50% yield pick-up given that bail-in has already been implemented as resolution tool and banks have as a consequence already seen a spread pick-up.

We do not see any sector deficit in terms of the absolute amount of bail-in liabilities required although we note that BBVA has a deficit of 1% of liabilities, with the bank needing to raise €4.1bn in eligible bail-in liabilities in order to comply with a JPMe 10% minimum level. Additionally, Danske, SEB and Swedbank have deficits of €1.2bn, €0.9bn and €0.9bn respectively equaling a ~0.3-0.4% of total liabilities. Despite no sector deficit, we see the bail-in premium cost as a drag on banks’ profitability. We estimate that bail-in will lead to JPM 2015e RoNAVs to fall from 11.3% on average to 10.4% post bail-in.

The most impacted banks vs. JPMe earnings are CASA, Caixabank and CBK (2.7%,2.1% and 1.7% RoNAV hits respectively) whilst the UK and Swiss banks are relatively unimpacted (0.2-0.4% RoNAV hits respectively), reflecting the optimal level of bail-in own funds and liabilities. We recognize that in our base case scenario banks with large excess bail-inable funds get penalized, for example Handelsbanken sees a 1.9% hit on RoNAV and 14% on PBT, given its large excess of bail-inable liabilities (29% of total liabilities vs. 13% average). Note also that we have run the exercise on CASA, although capital, leverage and bail-in requirements will apply to Credit Agricole Group ,including the well capitalized Regional Banks, and hence, actual impact could be much smaller in our view.

86




Swiss banks: UBS and CS are the least impacted from the proposed bail-in rules with a 0.2% and 0.3% hit on RoNAV and 1% and 2% hit on PBT respectively in 2015e. We estimate RoNAV of 15.6% for UBS and 13.1% for CS post bail-in in 2015e. In our view this reflects the banks’ “just” right level of own funds and bail-inable liabilities, which results in a relatively lower increase in existing funding costs.

German banks: The impact from bail-in on DBK is in line with the sector average with a 1.2% hit on RoNAV and 9% hit on PBT driven by the increase in cost of existing senior debt. For CBK the impact is more dramatic, with a 1.7% fall in RoNAV and 41% cut in PBT post bail-in. We estimate RoNAV of 11.3% for DBK and 2.0% for CBK post bail-in in 2015e.

UK banks: Similar to the Swiss banks, the UK banks are relatively unaffected from the proposed bail-in rules, with an average 0.3% hit on RoNAV and 2.7% hit on PBT. We estimate a JPMe RoNAV of 12.3% for HSBC, 12.0% for Lloyds, 5.8% for RBS and 13.6% for Standard Charter post bail-in in 2015e.

French banks: The average impact from bail-in on the French banks is 1.5% hit on RoNAV and 14% hit on PBT, with CASA seeing the biggest impact (2.7% hit on RoNAV and 24% hit on PBT) reflecting a) the higher bail-in cost as a result of the weaker capital position, and b) the high proportion of subordinated debt. Note however that we have run the sensitivity scenario on CASA, although the leverage, capital and bail-in requirements will apply to Credit Agricole Group,including the well capitalized Regional Banks, and hence, actual impact could be lower. Earnings impact is more limited for SG & BNP at -11% and -7% respectively. We estimate a JPMe RoNAV of 8.8% for BNP, 8.4% for CASA and 7.5% for SocGen post bail-in 2015e.

Italian banks: We see a 17% PBT hit and 1.2% RoNAV hit for UCG from bail-in, while the impact on Intesa is slightly smaller with a 13% reduction in PBT and 1.0% in RoNAV post bail-in. The earnings drag for UCG and ISP reflect to a large extent their excess bail-in buffers (20% and 19% bail-in buffers to total liabilities vs. 13% average for Eurobanks). We estimate a JPMe RoNAV of 6.3% for ISP and 5.1% for UCG post bail-in in 2015e.

Spanish banks: Caixabank is the most impacted Spanish bank from bail-in (2.0% hit on RoNAV and 37% hit on PBT), reflecting its large bail-in buffers, while BBVA is the second most impacted Spanish bank given its €4.1bn bail-in shortfall (0.8% hit on RoNAV and 7% hit on PBT). Santander is seeing only a 0.6% RoNAV and 4% PBT hit from bail-in. We estimate a JPMe RoNAV of 9.9% for Santander, 9.1% for BBVA, 8.4% for Popular and 4.6% for Caixabankpost bail-in in 2015e.

Nordic banks: We estimate that bail-in will lead on average to a 0.8% decline in JPMe RoNAV to 13.0% and a 6% fall in PBT post bail-in in 2015e. Handelsbanken is the most impacted Nordic bank from bail-in (1.9% RoNAV and 14% PBT hit) given its large excess bail-in buffers (29% of total liabilities). We estimate a JPMe 2015e RoNAV of 10.4% for Danske, 11.7% for DNB, 11.7% for Handelsbanken, 14.2% for Nordea, 12.9% for SEB and 17.0% for Swedbank post bail-in in 2015e.

Erste and KBC: We estimate a JPMe RoNAV of 14.2% for Erste and 13.0% for KBC post bail-in in 2015e. The two banks are seeing on average an 11% decline in PBT and 1.9% fall in RoNAV post bail-in.

87




Table 59: European Banks: BASE CASE Scenario - Impact on cost of funding due to bail-in increase on existing sub and senior debt (Table 1 of 2)

EUR million

CS UBS DB Lloyds RBS HSBC STAN Soc Gen BNPP CASA CBK UCG ISP

Additional issuance requirement to meet 10% total liabilities (ex der) 0 0 0 0 0 0 0 0 0 0 0 0 0

Current yield on sub-debt 3% 3% 3% 4% 5% 3% 4% 4% 3% 4% 5% 6% 5%additional yield from bail-in 0.3% 0.3% 0.6% 0.3% 0.3% 0.3% 0.3% 0.6% 0.6% 0.7% 0.6% 0.6% 0.6%

Current yield on senior debt 2.4% 2.3% 2.5% 2.8% 3.1% 2.4% 2.8% 3.0% 2.6% 3.0% 3.1% 4.6% 4.2%additional yield from bail-in 0.4% 0.4% 0.9% 0.4% 0.4% 0.4% 0.4% 0.9% 0.9% 1.0% 0.9% 0.9% 0.9%

Increase in interest cost on current sub ex perpetuals and CoCos due to bailin23 20 116 36 71 96 40 67 125 198

72 101 64

Increase in interest cost on senior debt due to bailin107 88 751 150 276 236 70 592 667 889

463 861 601

Increase in interest cost due to additional sub debt issuance- - - - - - - - - -

- - -

Total increase in interest cost on sub and senior130 108 867 186 347 332 110 658 791 1,087

535 961 665

2015E Clean PBT 6,625 7,499 9,426 8,972 6,242 21,378 6,938 5,959 11,030 4,623 1,321 5,548 4,9662015E Normalised PBT 6,635 7,423 9,563 8,854 6,432 21,223 6,492 6,705 12,238 5,244 1,321 5,976 5,324

Post bail-in clean 2015E PBT 6,495 7,391 8,559 8,787 5,895 21,046 6,828 5,300 10,238 3,536 786 4,587 4,301Post bail-in normalised 2015E PBT 6,505 7,315 8,696 8,668 6,085 20,891 6,382 6,047 11,447 4,157 786 5,014 4,659

Impact on PBT from bail-in (%) -2% -1% -9% -2% -6% -2% -2% -11% -7% -24% -41% -17% -13%

Impact on normalised PBT from bail-in (%) -2% -1% -9% -2% -5% -2% -2% -10% -6% -21% -41% -16% -12%

RoNAV 2015E 13.4% 15.8% 12.4% 12.2% 6.2% 12.5% 13.8% 8.6% 9.6% 11.0% 3.7% 6.4% 7.3%RoNAV 2015E post bailin 13.1% 15.6% 11.3% 12.0% 5.8% 12.3% 13.6% 7.5% 8.8% 8.4% 2.0% 5.1% 6.3%

RoNAV 2015E normalised (for loan losses) 13.4% 15.7% 12.6% 12.1% 6.4% 12.4% 12.9% 9.9% 10.8% 12.5% 3.7% 6.9% 7.8%RoNAV normalised 2015E post bailin 13.1% 15.4% 11.5% 11.8% 6.0% 12.2% 12.7% 8.8% 10.0% 9.9% 2.0% 5.7% 6.8%

Net impact of bail-in in % points -0.3% -0.2% -1.2% -0.3% -0.4% -0.2% -0.2% -1.1% -0.8% -2.7% -1.7% -1.2% -1.0%


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Table 60: European Banks: BASE CASE Scenario - Impact on cost of funding due to bail-in increase on existing sub and senior debt (Table 2 of 2)

EUR million

SAN BBVA Caixabank POP NDA SEB Swed SHB Danske DnB Erste KBC Total/Average

Additional issuance requirement to meet 10% total liabilties (ex der) 0 4,060 0 0 0 947 877 0 1,203 0 0 0 7,088



Increase in interest cost on current sub ex perpetuals and CoCos due to bailin 75 55 49 11 17 6 5 5 17 13 57 53 1,390 Increase in interest cost on senior debt due to bailin 369 103 591 155 172 59 42 306 70 174 200 252 8,243 Increase in interest cost due to additional sub debt issuance - 234 - - - 33 30 - 46 - - - 342 Total increase in interest cost on sub and senior 444 393 640 166 189 98 77 310 132 187 257 304 9,975

2015E Clean PBT 10,072 5,306 1,722 1,308 5,333 2,139 2,395 2,192 2,686 3,194 2,320 2,584 141,779 2015E Normalised PBT 13,720 9,127 1,722 1,386 5,206 1,995 2,302 2,166 2,660 3,254 2,090 2,345 151,403

Post bail-in clean 2015E PBT 9,628 4,913 1,082 1,142 5,145 2,041 2,318 1,881 2,554 3,007 2,063 2,280 131,804 Post bail-in normalised 2015E PBT 13,276 8,734 1,082 1,221 5,017 1,896 2,225 1,856 2,527 3,067 1,833 2,041 141,428

Impact on PBT from bail-in (%) -4% -7% -37% -13% -4% -5% -3% -14% -5% -6% -11% -12% -10%


RoNAV 2015E 10.5% 9.9% 6.7% 9.6% 14.8% 13.5% 17.6% 13.7% 10.9% 12.5% 16.2% 14.9% 11.3%RoNAV 2015E post bailin 9.9% 9.1% 4.6% 8.4% 14.2% 12.9% 17.0% 11.7% 10.4% 11.7% 14.2% 13.0% 10.4%

RoNAV 2015E normalised (for loan losses) 15.2% 18.0% 6.7% 10.2% 14.4% 12.6% 16.9% 13.5% 10.8% 12.7% 14.4% 13.4% 11.8%RoNAV normalised 2015E post bailin 14.6% 17.2% 4.6% 9.0% 13.9% 12.0% 16.4% 11.6% 10.2% 12.0% 12.5% 11.4% 10.8%



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Sensitivity to base case scenario - Lower bail-in premium for excess bail-inable senior debt

Not to discourage banks from holding excess bail-in liabilities, bond investors may request a smaller bail-in premium for banks with excess bail-in buffers in our view. We believe institutions that have large bail-in buffers, less secured instruments relative to senior unsecured and/or large own fund buffers could potentially enforce lower losses on senior unsecured creditors in a bail-in scenario, given that there is more senior unsecured funding available to cover the losses. In order to not penalize banks with large bail-inable buffers, we assume that the bail-in premium for excess senior funding diminishes.

Specifically in this sensitivity we assume that Banks with excess bail-in liabilities face a lower bail-in premium for their excess bail-in liabilities. Further we assume:

The JPMe minimum bail-in requirement of 10% of total liabilities excluding derivatives is met by own funds and bail-inable liabilities

Any shortfall to the 10% minimum requirement is covered by subordinated debt, as we believe it could be more difficult to issue senior bail-inable debt if the loss-absorbing buffers are smaller.


The additional yield pick-up from bail-in equals 100% of our estimated increase in sub debt and for senior unsecured debt for all bail-inable liabilities up to 10% to total liabilities, 50% for excess bail-in liabilities over the minimum 10% and zero for excess bail-in liabilities over 20%. Moreover, for banks operating in the UK and Denmark we have assumed only a 50% yield pick-up given that bail-in has already been implemented as resolution tool and banks have as a consequence already seen a spread pick-up.

As we show in the Table 61 and Table 62, we see an 8% average 2015e PBT hit and 0.8% RoNAV hit after assuming a lower bail-in premium for excess senior unsecured debt. Overall we see the sector JPMe RoNAV of 11.3% pre-bail-in falling to 10.5% post bail-in. Similar to our base case, the most impacted banks vs. JPMe earnings are CBK, Caixabank and CASA (32%, 28% and 22% PBT hits respectively) whilst UBS and Standard Chartered are relatively unimpacted (1% PBT hits both). However, we note that the earnings drag on the banks with large excess bail-in funds is smaller in the sensitivity analysis compared to our base case.

Swiss banks: The impact on UBS and CS is relatively limited, with an average 0.3% hit on RoNAV and 1.6% on PBT in 2015e, given the lack of significant excess bail-inable debt. We estimate 2015e RoNAV of 15.6% for UBS and 13.1% for CS under this scenario.

German banks: Adjusting the bail-in premium for excess bail-in senior debt, we see a 1.0% hit on DB’s RoNAV and 8% hit on PBT. However, the impact on CBK is more significant with a 1.3% reduction in RoNAV and 32% hit on PBT. We estimate RoNAV of 11.5% for DBK and 1.3% for CBK post bail-in in 2015e in the sensitivity analysis.

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UK banks: The impact on RoNAV is limited, averaging 0.2% and 2.2% for PBT with RBS being the most impacted UK bank (0.3% RoNAV hit and 4% PBT hit). Under this scenario we estimate a JPMe RoNAV of 12.3% for HSBC, 12.0% for Lloyds, 5.9% for RBS and 13.7% for Standard Chartered post bail-in in 2015e.

French banks: The impact from bail-in is limited on BNP and SocGen (0.7% and 1.0% hits on RoNAV respectively), while CASA is seeing a 2.5% hit on RoNAV and 22% hit on PBT in our sensitivity analysis reflecting a) the higher bail-in cost as a result of the weaker capital position, and b) the high proportion of subordinated debt. Note however that we have run the sensitivity scenario on CASA, although the leverage, capital and bail-in requirements will apply to Credit Agricole Group, including the well capitalized Regional Banks, and hence, actual impact could be lower. Earnings impact is more limited for SG & BNP at -10% and -6% respectively. We estimate a JPMe RoNAV of 8.9% for BNP, 8.5% for CASA and 7.6% for SocGen post bail-in 2015e.

Italian banks: UCG and Intesa are on average seeing a 10% hit on PBT and 0.7% hit on RoNAV post bail-in. In our sensitivity analysis we estimate a JPMe RoNAV of 6.6% for ISP and 5.6% for UCG post bail-in in 2015e.

Spanish banks: In our sensitivity analysis Caixabank and Popular are the most impacted Spanish banks, with a 1.5% and 1.1% hit on RoNAV respectively and 28% and 11% hit on PBT. The impact on Caixabank reflects its excess bail-in buffers (loss-absorbing funds/total liabilities of 15% vs. 13% average for Eurobanks and 10% average for its Spanish peers). In our sensitivity analysis we estimate a JPMe RoNAV of 9.9% for Santander, 9.1% for BBVA, 8.6% for Popular and 5.1% for Caixabank post bail-in in 2015e.

Nordic banks: The impact on the Nordic banks in our sensitivity analysis is manageable, with an average 0.6% decline in JPMe 2015e RoNAV and 5% fall in PBT post bail-in in 2015e. In our sensitivity analysis we estimate a JPMe RoNAV of 10.4% for Danske, 11.9% for DNB, 12.5% for Handelsbanken, 14.3% for Nordea, 12.9% for SEB, and 17.0% for Swedbank post bail-in in 2015e.

Erste and KBC: In our sensitivity analysis we estimate a JPMe RoNAV of 14.7% for Erste and 13.2% for KBC post bail-in in 2015e. The two banks are seeing on average a 1.6% decline in RoNAV and 9% in PBT post bail-in in 2015e.

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Table 61: European Banks: Sensitivity to base case - Impact on existing sub and senior debt with lesser impact on excess senior debt (Table 1 of 2)

EUR million

CS UBS DB Lloyds RBS HSBC STAN Soc Gen BNPP CASA CBK UCG ISP

Additional sub debt issuance requirement to meet 10% net liab (ex der) 0 0 0 0 0 0 0 0 0 0 0 0 0

Excess senior debt after 10% requirement 1,220 6,163 36,122 8,952 45,703 53 11,770 18,871 26,656 10,706 26,355 82,415 54,647Excess senior debt after 20% requirement 0 0 0 0 0 0 0 0 0 0 0 0 0



Increase in interest cost due to additional sub debt issuance - - - - - - - - - - - - -Increase in interest cost on current sub ex perpetuals & CoCos due to bail-in 23 20 116 36 71 96 40 67 125 198 72 101 64Increase in interest cost on senior debt due to bail-in 101 62 444 112 82 236 20 431 440 780 239 160 137Increase in interest cost on excess senior debt due to bail-in 3 13 154 19 97 0 25 80 113 55 112 350 232Total increase in interest cost on sub and senior 127 95 714 167 250 332 85 578 678 1,033 423 611 433



Impact on PBT from bail-in (%) -2% -1% -8% -2% -4% -2% -1% -10% -6% -22% -32% -11% -9%Impact on normalised PBT from bail-in (%) -2% -1% -7% -2% -4% -2% -1% -9% -6% -20% -32% -10% -8%

RoNAV 2015E 13.4% 15.8% 12.4% 12.2% 6.2% 12.5% 13.8% 8.6% 9.6% 11.0% 3.7% 6.4% 7.3%RoNAV 2015E post bail-in 13.1% 15.6% 11.5% 12.0% 5.9% 12.3% 13.7% 7.6% 8.9% 8.5% 2.3% 5.6% 6.6%

RoNAV 2015E normalised (for loan losses) 13.4% 15.7% 12.6% 12.1% 6.4% 12.4% 12.9% 9.9% 10.8% 12.5% 3.7% 6.9% 7.8%RoNAV normalised 2015E post bail-in 13.1% 15.5% 11.7% 11.8% 6.1% 12.2% 12.7% 8.9% 10.1% 10.0% 2.3% 6.1% 7.2%



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Table 62: European Banks: Sensitivity to base case - Impact on existing sub and senior debt with lesser impact on excess senior debt (Table 2 of 2)

EUR million

SAN BBVA Caixabank POP NDA SEB Swed SHB Danske DnB Erste KBCTotal/

Average

Additional sub debt issuance requirement to meet 10% net liab(ex der) 0 4,060 0 0 0 947 877 0 1,203 0 0 0 7,088

Excess senior debt after 10% requirement 1,406 0 19,011 2,734 16,049 0 0 56,342 0 10,312 7,454 4,372 447,312Excess senior debt after 20% requirement 0 0 0 0 0 0 0 27,002 0 0 0 0 27,002



Increase in interest cost due to additional sub debt issuance - 234 - - - 33 30 - 46 - - - 342Increase in interest cost on current sub ex perpetuals & CoCos due to bail-in 75 55 49 11 17 6 5 5 17 13 57 53 1,390Increase in interest cost on senior debt due to bail-in 357 103 267 108 104 59 42 66 70 87 73 177 4,758Increase in interest cost on excess senior debt due to bail-in 6 - 162 23 34 - - 120 - 44 63 37 1,742Total increase in interest cost on sub and senior 438 393 478 142 155 98 77 191 132 143 194 267 8,232


Post bail-in clean 2015E PBT 9,634 4,913 1,244 1,165 5,179 2,041 2,318 2,001 2,554 3,051 2,127 2,317 133,546Post bail-in normalised 2015E PBT 13,282 8,734 1,244 1,244 5,051 1,896 2,225 1,975 2,527 3,111 1,897 2,078 143,171

Impact on PBT from bail-in (%) -4% -7% -28% -11% -3% -5% -3% -9% -5% -4% -8% -10% -8%Impact on normalised PBT from bail-in (%) -3% -4% -28% -10% -3% -5% -3% -9% -5% -4% -9% -11% -8%


RoNAV 2015E normalised (for loan losses) 15.2% 18.0% 6.7% 10.2% 14.4% 12.6% 16.9% 13.5% 10.8% 12.7% 14.4% 13.4% 11.8%RoNAV normalised 2015E post bail-in 14.6% 17.2% 5.1% 9.2% 14.0% 12.0% 16.4% 12.3% 10.2% 12.1% 13.0% 11.7% 11.0%



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BEAR CASE - Banks fulfill 10% requirement through own funds to protect senior creditors

Whilst eligible bail-in liabilities and own funds can be used as part of the minimumbail-in requirement, we think banks may be incentivized to cover the minimum or at least a large part of the minimum with own funds (i.e. T1 and T2) to minimize the increase in funding costs.

In our Bear Case we assume that the minimum bail-in requirement is 10% of total liabilities (excluding derivatives) and that it will be fully covered by own fundsonly. We believe the cost of senior unsecured instruments could be lower if the bank’s regulatory capital base is relatively larger, which should absorb the first losses once the bank reaches the point of non-viability. Therefore we think banks may be encouraged by the funding markets to cover the minimum bail-in levels by own funds.

Assuming that equity and subordinated debt are wiped first in line with the waterfall loss hierarchy, could potentially lead to a higher difference between sub and senior recoveries than in the recent past given the larger regulatory capital buffer and could be supportive of higher sub/senior ratios. Capital retention, equity capital raisings and/or issuance of subordinated/hybrid debt could in our view be ways for banks to mitigate the cost of bail-in debt, as it could potentially i) be a cheaper form of funding for fast and profitably growing banks, ii) reduce the need for new senior debt issuances, and iii) act as sufficient protection for senior unsecured debt holders not to require a bail-in premium. For the purpose of our analysis we assume:

The JPMe minimum bail-in requirement is 10% of total liabilities excluding derivatives.

Banks fulfill the 10% minimum through sub debt/own funds to protect senior unsecured creditors. As a health warning we highlight that we have used the Basel 3 definition for Core Equity Tier 1 and Basel 2 definition for Additional Tier 1 and Tier 2.

Any shortfall to the JPMe 10% minimum requirement is met by issuing sub/hybrid debt. Further we assume that any increase in sub debt/own funds replace existing senior debt.


The additional yield pick-up from bail-in equals 100% of our estimated increase in sub debt, but we have assumed no increase in senior unsecured debt funding costs, as we believe the increase in own funds would protect senior debt investors from taking the first hit before the resolution fund steps in. Additionally, for banks operating in the UK and Denmark, we have assumed only a 50% sub yield pick-up given that bail-in has already been implemented as resolution tool and banks have as a consequence already seen a spread pick-up.

In our bear case we see a sector deficit of 3.6% of total liabilities with no European bank meeting the minimum with own funds. Standard Chartered, RBS and Erste with 9.1%, 8.0% and 8.0% respectively of own funds to total liabilities are best placed, while CASA with 4.4% and Handelsbanken with 4.7% of own funds to total liabilities are in the weakest position. Although the Nordic banks are on a B3 Core Equity Tier 1 measure some of the best capitalized banks in Europe, on a bail-in measure they stack up slightly below average with own funds to total liabilities averaging 5.5% vs. a sector average of 6.4%.

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Assuming that the JPMe bail-in minimum of 10% is met by own funds (i.e. equity and sub debt), but that any increase in subordinated/hybrid issues replace senior funding, we see a 11% average PBT hit and 1.0% RoNAV hit in 2015e with the sector JPMe RoNAV falling to 10.3% (from 11.3%). In this scenario we see the biggest earnings drag on CASA, CBK and Caixabank (3.6%, 2.7% and 2.0% RoNAV hits respectively), while the Swiss and UK banks are best placed to meet the bail-in requirement with own funds.

Swiss banks: Limited impact on UBS and CS with their RoNAVs falling by only 0.3% and PBT by 2% in 2015e. We estimate a JPMe 2015e RoNAV of 15.5% for UBS and 13.1% for CS post bail-in under this scenario.

German banks: Assuming that the 10% JPMe min bail-in level is met by own funds and any subordinated issuances replace senior debt, we see a 2.7% cut in RoNAV and 65% cut in PBT for CBK, while only a 1.1% hit on RoNAV and 8% hit to PBT for Deutsche Bank. We estimate Deutsche Bank RoNAV to decline to 11.4% post bail-in in this scenario and 1.0% for CBK in 2015E.

UK banks: UK banks are well placed to meet the JPMe 10% bail-in requirement with own funds with an average 0.4% hit on RoNAV and 4% hit on PBT reflecting the banks’ relatively high level of own funds to total liabilities (average of 7.9% vs. sector average of 6.4%). We estimate a JPMe RoNAV of 12.1% for HSBC, 11.8% for Lloyds, 5.7% for RBS and 13.6% for Standard Chartered post bail-in in 2015e.

French banks: With below sector average own funds to total liabilities of 5.3% vs. 6.4% for the sector, the average impact on the French banks is a 1.9% hit on RoNAV and 18% hit on PBT, with CASA seeing the biggest impact (3.6% hit on RoNAV and 32% on PBT) reflecting a) the higher bail-in cost as a result of the weaker capital position, and b) the high proportion of subordinated debt. Note however that we have run the sensitivity scenario on CASA, although the leverage, capital and bail-in requirements will apply to Credit Agricole Group,including the well-capitalized Regional Banks, and hence, actual impact could be lower. Earnings impact is more manageable for SG & BNP, with a 14% and 7% hit respectively. We estimate a JPMe RoNAV of 8.8% for BNP, 7.4% for CASA and 7.2% for SocGen post bail-in 2015e.

Italian banks: In our bear case scenario we see ISP’s and UCG’s RoNAV fall by 0.5% and 0.6% respectively and PBT by 7% and 8%, reflecting the banks’relatively high level of own funds to total liabilities (ISP 7.4% and UCG 7.7%). Under this scenario we estimate a JPMe RoNAV of 6.7% for ISP and 5.8% for UCG post bail-in in 2015e.

Spanish banks: With the Spanish banks having own funds to total liabilities of 6.2% on average, slightly below sector average of 6.4%, the average RoNAV impact of -1.4% for the Spanish banks is manageable in our view. Assuming that the JPMe 10% min. bail-in level is met by own funds, we see a JPMe RoNAV of 9.5% for Santander, 8.9% for BBVA, 8.2% for Popular and 4.7% for Caixabankpost bail-in in 2015e.

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Nordic banks: Whilst the Nordic banks have among the highest B3 ET1 ratios across Europe, they score less well when it comes to own funds (equity and sub debt) as % of total liabilities. The Nordic banks’ JPMe 2015e RoNAV falls on average by 0.9% and PBT by 6% in 2015e, with SEB and Danske seeing the largest RoNAV impacts (1.2% and 1.0% respectively). In our bear case weestimate a JPMe RoNAV of 9.9% for Danske, 11.9% for DNB, 12.9% for Handelsbanken, 14.1% for Nordea, 12.3% for SEB, and 16.7% for Swedbank post bail-in.

Erste and KBC: If the JPMe 10% min bail-in level is met by own funds, Erste’s and KBC’s JPMe 2015e RoNAV would fall by 1.2% and 1.5% respectively and PBT by 7% and 9% respectively. We estimate a JPMe RoNAV post bail-in of 15.0% for Erste and 13.4% for KBC under this scenario.

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Table 63: European Banks: BEAR CASE- Impact of funding cost if banks fulfill the 10% requirement through capital and sub debt and protect senior (Table 1 of 2)

EUR million

CS UBS DB Lloyds RBS HSBC STAN Soc Gen BNPP CASA CBK UCG ISPTotal available loss absorbing liabilities incl senior debt (% of liabs ex der) 10% 11% 13% 11% 15% 10% 12% 12% 12% 11% 14% 20% 19%Total available loss absorbing liabilities excl senior debt (% of liabs ex der) 6% 7% 6% 7% 8% 7% 9% 5% 6% 4% 6% 8% 7%

Add sub debt issuance requirement to meet 10% net liabilities (ex der) 23,840 14,525 52,198 26,364 19,211 55,424 4,630 50,719 51,750 76,463 28,095 18,825 16,094

Senior debt which gets replaced 23,793 14,497 52,198 26,527 19,330 55,146 4,606 50,719 51,750 76,463 28,095 18,825 16,094

Current yield on sub-debt 2.6% 2.8% 3.2% 3.7% 4.7% 3.0% 3.6% 3.9% 3.3% 3.9% 5.3% 5.9% 5.4%additional yield from bail-in (sub-debt) 0.3% 0.3% 0.6% 0.3% 0.3% 0.3% 0.3% 0.6% 0.6% 0.7% 0.6% 0.6% 0.6%additional yield from bail-in (snr debt) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Increase in interest cost on current sub ex perpetuals & CoCos due to bail-in 23 20 116 36 71 96 40 67 125 198 72 101 64Interest cost on new sub debt 680 446 1,980 1,051 958 1,815 182 2,281 2,036 3,565 1,650 1,226 970Total increase in interest cost on sub (current +additional) 703 466 2,096 1,087 1,030 1,911 222 2,347 2,161 3,763 1,722 1,326 1,033

Interest savings from replacing senior debt 583 341 1,320 733 593 1,346 130 1,517 1,366 2,313 862 872 692



Impact on clean PBT from bail-in (%) -2% -2% -8% -4% -7% -3% -1% -14% -7% -32% -65% -8% -7%



RoNAV 2015E normalised (for loan losses) 13.4% 15.7% 12.6% 12.1% 6.4% 12.4% 12.9% 9.9% 10.8% 12.5% 3.7% 6.9% 7.8%RoNAV 2015E normalised post bail-in 13.1% 15.4% 11.6% 11.6% 5.9% 12.0% 12.7% 8.5% 10.0% 8.9% 0.9% 6.3% 7.3%



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Table 64: European Banks: BEAR CASE- Impact of funding cost if banks fulfill the 10% requirement through capital and sub debt and protect senior (Table 2 of 2)

EUR million

SAN BBVA Caixabank Popr NDA SEB Swed SHB Danske DnB Erste KBCTotal/

AverageTotal available loss absorbing liabilities incl senior debt (% of liabs ex der) 10% 9% 15% 12% 13% 10% 10% 29% 10% 13% 13% 12% 13%Total available loss absorbing liabilities excl senior debt (% of liabs ex der) 6% 7% 6% 6% 6% 5% 5% 5% 6% 7% 8% 6% 6%

Add sub debt issuance requirement to meet 10% net liabilities (ex der) 42,015 16,229 15,727 6,375 24,451 14,908 10,869 15,570 17,563 10,197 4,296 10,428 626,767

Senior debt which gets replaced 42,015 12,169 15,727 6,375 24,451 13,983 10,007 15,594 16,360 10,255 4,296 10,428 619,704

Current yield on sub-debt 5.0% 5.2% 5.9% 7.8% 2.7% 3.2% 3.1% 2.5% 3.5% 2.8% 4.0% 3.6% 4.0%additional yield from bail-in (sub-debt) 0.6% 0.6% 1.2% 1.2% 0.3% 0.3% 0.3% 0.3% 0.3% 0.6% 1.2% 1.2% 0.6%additional yield from bail-in (snr debt) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Increase in interest cost on current sub ex perpetuals & CoCos due to bail-in 75 55 49 11 17 6 5 5 17 13 57 53 1,390Interest cost on new sub debt 2,344 936 1,107 571 733 515 369 434 667 344 225 505 27,589Total increase in interest cost on sub (current +additional) 2,419 991 1,156 582 749 521 374 439 684 357 282 557 28,978

Interest savings from replacing senior debt 1,667 501 558 383 521 330 249 327 431 225 130 317 18,308


Post bail-in clean 2015E PBT 9,298 4,808 1,110 1,106 5,093 1,944 2,267 2,073 2,430 3,055 2,166 2,340 130,935Post bail-in normalised 2015E PBT 12,946 8,629 1,110 1,185 4,965 1,799 2,174 2,047 2,404 3,116 1,936 2,100 140,559

Impact on clean PBT from bail-in (%) -8% -9% -36% -15% -5% -9% -5% -5% -10% -4% -7% -9% -11%



RoNAV 2015E normalised (for loan losses) 15.2% 18.0% 6.7% 10.2% 14.4% 12.6% 16.9% 13.5% 10.8% 12.7% 14.4% 13.4% 11.8%RoNAV 2015E normalised post bail-in 14.2% 17.0% 4.7% 8.7% 13.7% 11.3% 16.0% 12.8% 9.7% 12.2% 13.3% 11.8% 10.8%



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Conclusions for 25 large cap EU banks in our analysis

We see bail-in reducing JPMe 2015e RoNAVs by 1% to 10.4% for the European banks. The most impacted banks vs. JPMe earnings are CBK, Caixabank and CASA (40%, 37% and 24% PBT hits respectively) whilst the Swiss and UK banks are relatively unimpacted given their high levels of bail-inable own funds and optimal levels of senior unsecured debt.

We do not see any sector deficit in terms of the absolute amount of bail-in liabilities required although we note that BBVA has a deficit of 1% of liabilities, with the bank needing to raise €4.1bn in eligible bail-in liabilities in order to comply with a JPMe 10% minimum level. Additionally, Danske, SEB and Swedbank have deficits of €1.2bn, €1.0bn and €0.9bn respectively, equaling a ~0.3-0.4% of total liabilities. Despite no sector deficit, we see the bail-in premium cost as a drag on banks’ profitability. We estimate that bail-in will lead to JPM 2015e RoNAVs to fall by 1.0% from 11.3% on average to 10.4% post bail-in.

In our base case we see the lowest average impact on PBT post bail-in in 2015e for UBS, HSBC and Standard Chartered with a 1.4%, 1.5% and 1.6% PBT hit respectively. Post bail-in in 2015e we see the JPMe RoNAV for UBS, HSBC and Standard Chartered at 15.6%, 12.3% and 13.6% respectively.

We estimate that only CBK, Caixabank and CASA are likely to see a severe earnings impact from bail-in, hurting their 2015 PBT by 40%, 37% and 24% respectively. This equates to an estimated post bail-in RoNAV of 2.0%, 4.6% and 8.4% respectively in 2015e for the three banks.

We realize that in our base case scenario banks with large excess bail-inable funds get penalized, for example Handelsbanken sees a 1.9% RoNAV hit and 14% PBT hit, given its large excess of bail-inable liabilities (29% of total liabilities vs. 13% average). We recognize institutions that have large bail-in buffers, less secured instruments relative to senior unsecured and/or large own fund buffers could potentially enforce lower losses on senior unsecured creditors in a bail-in scenario, given that there is more senior unsecured funding available to cover the losses.

Assuming a 50% lower bail-in premium for excess senior unsecured debt, we see on average an 8% hit on 2015e PBT and 0.8% hit on RoNAV for the European banks. Overall we see the sector JPMe RoNAV of 11.3% pre-bail-in falling to 10.5% post bail-in if we assume a lower bail-in premium for excess bail-inable debt. In our sensitivity analysis the most impacted banks vs. JPMe earnings are CBK, Caixabank and CASA (32%, 27% and 22% PBT hits respectively) whilst Standard Chartered, UBS and HSBC are relatively unimpacted (1.2%, 1.2% and 1.5% hits on PBT respectively).

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Whilst eligible bail-in liabilities and own funds can be used as part of the minimum bail-in requirement, we think banks may be pushed by the funding markets to cover the minimum or at least a large part of the minimum with own funds (i.e. T1 and T2) to minimize the increase in funding costs. We believe the cost of senior unsecured instruments could be lower if the bank’s regulatory capital base is relatively larger, which should absorb the first losses once the bank reaches the point of non-viability. Assuming that the JPMe bail-in minimum of 10% is met by own funds (i.e. T1 and T2) and any new subordinated debt replaces existing senior debt, we see an 11% average PBT earnings hit and 1.0% RoNAV hit in 2015e with the sector JPMe RoNAV falling to 10.3% from 11.3%. In our bear case scenario the most impacted banks vs. JPMe earnings are CASA, CBK and Caixabank (3.6%, 2.7% and 2.0% RoNAV hits respectively), while Standard Chartered, UBS and HSBC remain relatively unimpacted (0.2%, 0.3% and 0.4% RoNAV hits respectively).

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Leverage ratio

The leverage ratio impact from Basel’s latest proposals from the 26 June 2013 consultation document is not as bad as feared by the market, although proposals would lead to an 11% average increase in balance sheet. However, the revised leverage rules could become more important than capital ratios and could impact IB-related businesses such as long-dated credit derivatives, securitization, Delta 1 & prime brokerage due to limited netting & recognition of collateral. The risk is that certain business lines cannot be maintained, especially in FICC-geared IB, or the cost of doing business becomes more expensive for the end-user.

Based on minimum 3% leverage ratio, the great majority of banks would stand above minimums end 2015e; however, banks will need to run with a buffer over the minimum 3% in our view, and we view 3.5% as a more adequate level.

Compared to the 3.5% minimum, total shortfall would amount to €72bn in our estimates, or banks would need to reduce assets by €2.1 trillion. Most exposed banks would be: DB with €11.5bn shortfall, CBK with €7.3bn, CASA with €33.9bn (note however that regulators focus on Credit Agricole Group solvency ratios rather than CASA), whilst the best positioned banks are STAN with 6% Basel leverage ratio, Erste Bank (5.4%), BBVA (4.8%) and SAN (4.7%).

We would be also concerned about local regulators imposing tougher or additional requirements:

The UK PRA’s (Prudential Regulation Authority) capital exercise introduced a new PRA adjusted leverage ratio requirement of 3% for UK listed banks. We believe that this is a highly punitive measure in the context of global peers, with UK listed banks having to comply with stricter UK requirements by 1H14 rather than 2018 or 2015. Note that this leverage ratio requirement is not applicable to all the entities regulated by the PRA. UK PRA Leverage ratio calculation methodology is also more challenging than the current CRD4 Leverage ratio rules – The denominator of the PRA Leverage ratio is same as CRD4, however, the numerator is adjusted for additional provisions and future conduct costs and only high trigger (fully loaded) CoCos are included in the numerator. The adjustments to capital include i) Additional provisions: Expected losses on commercial real estate and Euro-area assets on a 3-year view instead of 1-year as required under IFRS, ii) Future conduct costs: Potential litigation and redress costs that may evolve over the next 3 years and iii) Additional PVA (Prudent Valuation Adjustment) on top of PVA adjustments already in the CET1 capital.

US regulators have proposed higher supplementary leverage ratio standards for U.S. top tier bank holding companies (BHCs) - 5% for the BHC and 6% for their Insured Depositary Institution (IDI) subsidiaries. The agencies proposed a supplementary leverage ratio buffer of 2% for U.S. top-tier BHCs with at least $700 billion in total consolidated assets or at least $10 trillion in assets under custody, and a 3% buffer for all their IDI subsidiaries, taking the supplementary leverage ratio requirement to 5% for the US top-tier BHC and 6% for their IDI subsidiaries. Specific rules for US operations of foreign banks remain unclear, with no further clarity on the Fed proposals for enhanced supervision of foreign banks.

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We also warn that the rules are far from final, implementation long-dated, and we make material assumptions, in particular on:

Netting of credit protection: The Basel Committee has proposed in the recent Consultative Document on the revised leverage ratio framework that the sold credit protection (written credit derivatives) are accounted for at full effective notional value, unless the bank holds offsetting credit protection bought on the same reference name with the same level of seniority. The rationale for this adjustment is to show the full potential future loss in the event that the underlying credit event is triggered on the underlying reference entity. In our base case scenario we assume that 90% of the credit protection bought can be used to offset against the credit protection sold. We recognize that this assumption could vary from bank to bank and that the number could be lower or higher in some cases, as some hedges might not qualify under the proposed Basel III leverage ratio framework. Despite our assumption that 90% of the credit protection bought can be used to offset against the credit protection sold, total derivative exposure (incl. potential future exposure) is one of the key constituents of the new proposed Basel 3 exposure measure (denominator) based on our estimates ranging from -9% to 44% of the total exposure.

Basel leverage proposals punitive for repo transactions: In the Consultative Document on the revised leverage ratio framework, the Basel Committee is proposing that securities financing transactions are reported gross of collateral with no recognition of accounting netting. This means that the revised guidance on the leverage ratio is punitive for repo transactions as it does not allow for netting of collateral or exposure (i.e. banks are not allowed to offset repos against reverse repos). The rationale for this adjustment is to discourage banks from rehypothecating assets. In our base case scenario, we assume that gross securities financing transactions (SFT) match the reported on balance sheet number. We recognize that this assumption could potentially underestimate the impact from valuing SFTs at gross value and that the number could be higher in some cases, given that netting of repos and reverse is currently allowed under IFRS and US GAAP reporting. The inability of banks to offset repos against reverse repos could increase the denominator of the leverage ratio by up to $6tr according to JPM’s Asset Allocation Research (Flows & Liquidity: Leverage ratios to hit repo markets).

Basel 3 Leverage ratio framework based on the revised consultation

The Basel Committee is proposing a 3% minimum leverage ratio for banks in its latest Consultative Document on Leverage. With the revised leverage ratio framework the Basel Committee aims to introduce a “simple, transparent, non-risk-based leverage ratio” that doesn’t take into account the riskiness of the underlying assets, unlike the other proposed capital requirements that depend on the inherent balance sheet risks. With the revised leverage ratio framework the Basel Committee intends to create a level playing field for all banks worldwide, and has noted it aims to:

“restrict the build-up of leverage in the banking sector to avoid destabilising deleveraging processes that can damage the broader financial system and the economy” and

“reinforce the risk-based requirements with a simple, non-risk-based “backstop” measure”.

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Whilst the Basel Committee aims for a harmonized “simple, transparent non-risk-based leverage ratio”, the accounting and exposure treatments are complex, in our view. The leverage ratio is intended to force banks to hold the same amount of capital against all loans, derivatives and securities financing transactions (without recognizing most of the collateral), however, we believe it could decrease the attractiveness of some collateralized businesses such as long-dated credit derivatives, securitization, Delta 1, and prime brokerage for banks, which are likely materially impacted under the revised leverage framework in the Consultative Document.

Although leverage is coming into increased focus following the Basel Committee’s “Consultative Document: Revised Basel III leverage ratio framework and disclosurerequirement” from June 2013, it is not new. The leverage ratio was discussed by the Basel Committee in the “Basel III: A global regulatory framework for more resilient banks and banking systems” document from Dec 2010 (revised June 2011). The main objective with introducing a leverage ratio is to strengthen global capital and liquidity rules, as well as improve the banking sector’s ability to absorb shocks arising from financial and economic stress. We discuss the parameters of the preceding version of the leverage ratio framework in the “Global Investment Banks: Can universal banking model survive the new wave of uncoordinated IB regulations? OW Tier II IBs” report from 11 Apr 2013 (pages 110 to 116).

Timing and Disclosure requirement of Revised Basel 3 Leverage Consultation Ratio

Under Basel 3, a leverage ratio will be used as a supplementary measure to the risk-based framework. The ratio defined as Tier 1 capital to “total exposure” must be at least 3% and would be calculated as an average over the fiscal quarter. The Committee will test a minimum Tier 1 leverage ratio of 3% during the parallel run period from 1 January 2013 to 1 January 2017. Banks need to disclose this ratio and its components from 1 January 2013 to supervisors and will need to disclose publicly starting 1 January 2015 and final rules will come into force from 2018.

The Basel Committee proposes in the Consultative Document that four items must be publicly disclosed quarterly, irrespective of the frequency of financial statement publication: i) the Basel III leverage ratio based on the average of the monthly leverage ratios over the quarter, ii) end of the quarter Tier 1 capital (numerator), iii) end of the quarter Exposure Measure (denominator), and iv) the end of quarter leverage ratio. With the exception of the mandatory quarterly frequency requirement,disclosures must be published by banks with the same frequency as, and concurrent with, the publication of their financial statements.

Revised Basel 3 Leverage Consultation Ratio definition

The revised Basel 3 leverage consultation ratio is defined as Tier 1 capital to “the exposure measure”. The minimum is proposed at 3% and the ratio would be calculated as an average over the fiscal quarter as well as end of the quarter number. The definition of the proposed leverage ratio framework is:

Capital Measure: Numerator of the leverage ratio would consist of only high quality capital that is generally consistent with the Basel 3 Tier 1 capital (CET1 and Additional Tier I capital).




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Exposure Measure: The exposure measure under the revised leverage framework in the consultation paper is defined as the sum of a bank's:

a) on-balance sheet exposures

b) derivative exposures

c) securities financing transaction exposures (i.e. repos, securities lending & borrowing)

d) other off-balance sheet exposures.

Whilst the general principles and off-balance sheet items related to commitments remain broadly the same as in the preceding proposal, the major change is in the calculation of derivative (especially credit derivatives) and repos exposure. We list the key aspects of the Basel Committee’s Consultative Document below:

specification of a broad scope of consolidation for the inclusion of exposures;

clarification of the general treatment of derivatives and related collateral;

enhanced treatment of written credit derivatives; and

enhanced treatment of Securities Financing Transactions (SFTs) (i.e., repos).

There is more clarity on the treatment of derivatives-related collateral in the revised proposal; both written credit derivatives and gross repos are included in Exposure Measure.

Treatment of derivatives – the Consultative Document proposes that banks calculate their derivatives exposures as the replacement cost (obtained by marking-to-market) for the current exposure plus an add-on for potential future credit exposure (PFE). Further, collateral received or provided (cash or non-cash) cannot be used to offset the exposure, irrespective of whether it was received or provided in relation to derivatives traded on an exchange, through a central counterparty, or otherwise (under US GAAP derivatives are reported net of collateral, while under IFRS derivatives are reported gross of collateral):

Derivatives Exposure: “Total Exposure = replacement cost (RC) + add-on”

“Collateral received in connection with derivative contracts does not reduce the economic leverage inherent in a bank’s derivatives position. In particular, the exposure arising from the contract underlying is not reduced. As such, collateral received (cash or non-cash) may not be netted against derivatives exposures whether or not netting is permitted under the bank’s operative accounting or risk-based framework. When calculating the exposure amount by applying paragraphs 23 to 25 above, a bank must not reduce the exposure amount by any collateral received from the counterparty. Furthermore, the replacement cost (RC) must be grossed up by any collateral amount used to reduce its value, including when collateral received by a bank has reduced the derivatives assets reported on-balance sheet under its operative accounting framework.

Similarly, with regards to collateral provided, all banks must gross up their Exposure Measure by the amount of any derivatives collateral provided where

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the provision of that collateral reduced their on-balance sheet assets under their operative accounting framework.”

Written credit derivatives – the Consultative Document proposes that written credit derivatives will be treated in the same way as cash instruments (e.g. loans and bonds) and are to be included in the exposure measure at their effective notional amounts. The effective notional amount of a written credit derivative may be reduced by the effective notional amount of a purchased credit derivative on the same reference name and level of seniority.

Treatment of Securities Financing Transactions (SFT) – SFTs are transactions such as repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin lending transactions, where the value of the transactions depends on market valuations and the transactions are often subject to margin agreements. The Consultative Document proposes that SFT assets are recognized at gross value for accounting purposes and hence does not give any recognition of accounting netting of (cash) payables against (cash) receivables (e.g. as currently permitted under the IFRS and US GAAP accounting frameworks). Additionally, the SFT exposure measure now also includes counterparty credit risk calculated as current exposure without an add-on for potential future exposure for SFTs.

The key changes to the exposure definition are highlighted in box below.

Table 65: Leverage Ratio Common Disclosure Template

ItemLeverage Ratio

FrameworkOn-balance sheet exposures

1 On-balance sheet items (exclude derivatives and SFTs; include collateral)2 (Assets deducted in determining Basel III Tier 1 capital)3 Total on-balance sheet exposures (excluding derivatives and SFTs)

Derivative exposures

4 Replacement cost

5 Add-on amount

6 Gross up for derivatives collateral provided7 Gross notional credit derivatives sold8 (Notional offsets and add-on deductions for written credit derivatives)

9 Total derivative exposuresSecurities financing transaction exposures

10 Gross SFT assets (with no recognition of accounting netting)11 SFT counterparty exposure12 Agent transaction exposures13 Adjustment for sales accounting transactions (if any)

14 Total securities financing transaction exposuresOther off-balance sheet exposures

15 Off-balance sheet exposures with 100% credit conversion factors; of which:15 a) for example, “Commitments including liquidity facilities”

...16 Off-balance sheet exposures with 10% credit conversion factor; of which:16 a) for example, “ Credit card lines”

...17 Other off-balance sheet exposures

Capital and Total Exposures18 Tier 1 capital (end of reporting period value)19 Total Exposures (end of reporting period value)

Leverage Ratios20 End of period leverage ratio (end of reporting period value)21 Basel III leverage ratio (avg. of the monthly leverage ratios over the quarter)

Source: BCBS

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JPMe Leverage ratio calculation methodology and Health Warning

The Consultative Document on the Revised Basel III Leverage Ratio Framework requires a health warning given the limited information available for some of the items in the new Basel III leverage disclosure template. Our assumptions are based on our best estimates and we recognize that the actual reported numbers could differ from our estimates. Our key assumptions for our Basel III leverage ratio are:

Consultation paper and not final version – given that this is a Consultative Document issued for comments by 20 Sept 2013, the document is subject to changes and thus we believe the final leverage ratio framework could look different from the framework proposed in this Consultative Document.

Minimum level - we assume that banks would need at least a JPMe 3.5% leverage ratio by 2015e, including a 50bp buffer over the minimum 3.0% regulatory requirement. We recognize that the minimum could be higher, with the Dutch Finance Minister calling for a 4% leverage ratio minimum for SIFIs.

Disclosure not detailed enough to make accurate estimates – whilst the Basel Committee aims for a “simple, transparent non-risk-based leverage ratio”, some of the details around the accounting and exposure treatments are complex, in our view. With the Basel Committee proposing to revise the treatment of written credit derivatives and securities financing transactions (SFT), we lack details,especially on these line items and have therefore made assumptions that we discuss in more detail below.

Accounting differences between different accounting standards – the Basel Committee aims with the revised leverage ratio to have a uniform measure to calculate leverage for all banks worldwide, despite differences in accounting standards used. This means that banks reporting under different accounting standards could have different calculations depending on the accounting treatment.

The insurance assets are not deducted from the total leverage exposuremeasure: the Basel leverage ratio proposals are still unclear on the treatment of insurance and do not make any mention of the specific treatment of insurance capital under CRD IV’s Danish Compromise. However, the proposals do state that “where a banking, insurance and financial investee is included in the accounting consolidation where the investment by a bank in the capital of an investee is included in the definition of Tier 1 capital of the bank, the investee’s assets and its other exposures are to be included in the Exposure Measure of the bank. This applies to investees that are inside the scope of regulatory consolidation or inside the scope of accounting consolidation, irrespective of whether these investees are banking, insurance, financial, commercial, or securitisation investees.” Our understanding is that, given that the insurance capital is not deducted from Tier I capital for French banks which apply CRD IV's Danish compromise, then insurance assets on their balance sheet are to be included in the total leverage exposure for the calculation of the Basel 3 leverage ratio. Note that implementation of Basel 3 could differ in the EU which could introduce adjustments to the leverage rules, to address the treatment of insurance under the Danish compromise. However, these are still early days, and at this point, our analysis and estimates are based on the global Basel proposals.

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Intra-group exposures – in order to avoid double counting of exposures between consolidated entities, banks may offset the on- and off-balance sheet exposures of consolidated entities to calculate the exposure measure. Intra-group exposures are typically already consolidated under a bank’s accounting or regulatory consolidation; therefore we have not made any adjustments for potential intra-group exposure offsets. The Basel 3 leverage proposals do not allow the netting of loans and deposits, and we understand that intragroup exposures would also be included in the total leverage exposure measure.

Basel 3 Tier 1 Capital – according to the Consultative Document, the numerator of the leverage ratio would consist of Basel 3 Tier 1 capital (CET1 and AT1 capital). We include in our leverage calculation the Basel III common equity tier I capital and Tier 1 notes issued by banks (incl. Tier 1 contingent capital) in the capital measure wherever applicable (e.g. CSG). We understand that as the Basel III T1 would be subject to transitional arrangements from 2013 to 2018, so theoretically leverage ratios could be higher than our estimates, but we have not included phased-in arrangements for capital in our leverage ratio calculation as we look at capital on a fully loaded basis.

Gross amounts assumed – with the Basel Committee focusing on the gross amounts, we have used the gross derivatives (PRV) and SFT values as the basis of our calculations.

Assumptions around the potential future exposure – the potential future exposure (PFE) is an add-on factor to the replacement value and should reflect the potential future credit exposure that could arise from the derivative over the remaining life of the contract. Some banks report this number, but others do not. For the banks that don’t report the PFE, we have calculated the number by applying the add-on factor formula proposed by the Basel Committee.

The gross add-on (Agross) is calculated by applying a weighting factor to the notional principal amount of the underlying book (Table 66). The net add-on is defined as Anet = 0.4*Agross + 0.6*NGR*Agross where Agross is the gross add-on and NGR = (net current replacement cost) / (gross replacement cost). All banks in our analysis provide notional values of derivatives by products. For banks which don’t disclose the maturity breakdown or an estimate of Potential Future Exposure on derivatives, we use BIS published aggregate data as a proxy.

Table 66: Basel Credit Conversion factors under the current exposure method

Within 1 year 1-5 years After 5 yearsInterest rate products 0.0% 0.5% 1.5%FX products 1.0% 5.0% 7.5%Equity products 6.0% 8.0% 10.0%Commodities* 8.5% 9.5% 11.5%Precious metal except gold 7.0% 7.0% 8.0%Other Commodities 10.0% 12.0% 15.0%

Source: Basel http://www.bis.org/publ/bcbs116.pdf., J.P. Morgan estimates. Note:* Assuming average of precious metal except gold

and other commodities

Bilateral regulatory counterparty netting – in the Consultative Document the Basel Committee proposes that derivatives exposure is calculated as the replacement cost plus the PFE add-on minus regulatory bilateral netting. The consultative document proposes that the netting rules from the Basel II framework are used (except for cross product netting).


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“Banks must calculate their derivatives exposures, including where a bank sells protection using a credit derivative, as the replacement cost (RC) for the current exposure plus an add-on for potential future exposure as described in paragraph 24 applying the regulatory bilateral netting rules…”

For the purpose of our estimates we have assumed that 90% of all counterparty netting agreements are legally enforceable should a termination event be triggered. We recognize that the netting benefit could in reality be higher or lower, given cross product netting for example.

Different treatment of derivatives collateral under US GAAP and IFRS –The Basel opinion is that whilst collateral is used to mitigate credit risk, it does not reduce the economic leverage in a bank’s derivates book. Our opinion, however, differs from the Basel opinion. In our view, derivative and financing positions that are mark-to-market on a daily basis should not be treated like an accrual book and hence should be netted against collateral adjusted on a daily basis. In addition, in our view capital should be used for unexpected losses and not for gross notional exposures. However, the Basel Committee is proposing that derivates should be accounted for gross of collateral. Under US GAAP netting of derivative collateral is allowed, while IFRS does not give any recognition of collateral. To adjust for this, the Basel Committee is proposing that collateral received (cash or non-cash) may not be netted against the derivatives exposure even if it is allowed under the prevailing accounting treatment. This means that for banks reporting under US GAAP collateral received is added back, while under IFRS no adjustment is needed (since IFRS does not allow for netting of collateral against the exposure). Similarly, for collateral provided, banks have to include any derivatives collateral that has been posted and subsequently reduces the banks’ on-balance sheet items under the accounting framework. Simply put, the Basel Committee aims for consistency and proposes that derivatives exposure is reported excluding collateral (similar to a loan, which is not netted against the value of underlying collateral/security) and any collateral posted, which reduces the size of the on-balance sheet assets which is included (i.e. restricts banks to reduce the size of the balance sheet by posting more collateral).

“Non-cash collateral provided (or posted) is not generally netted from a bank’s assets under the accounting frameworks. However, cash collateral posted often is netted, e.g. primarily under US GAAP. Generally, under IFRS, when a bank with derivatives liabilities posts cash collateral, the decrease in its cash assets is offset by a corresponding increase in receivables assets. As such, its total accounting assets remain unchanged. Under US GAAP, which provides an exception to the intent to settle on a net basis criterion, when a bank with derivative liabilities posts cash collateral, the bank’s cash assets decrease and its derivatives liabilities fall by a corresponding amount. Such banks must gross up their Exposure Measure by the amount of the posted cash collateral. This treatment is necessary to ensure a consistent policy treatment for reporting under US GAAP and IFRS. Finally, under IFRS or under other accounting frameworks, banks must gross-up their Exposure Measure by the amount of derivatives collateral provided if the provision of derivatives collateral reduced their on-balance sheet assets.”

This means that we have adjusted the derivatives exposure for collateral for all banks that report under US GAAP, while we have made no adjustment for banks that report under IFRS.

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Gross amount of the credit protection sold – the Basel Committee is proposing in the Consultative Document that the sold credit protection (written credit derivatives) are accounted for at full effective notional value, unless the bank holds offsetting credit protection bought on the same reference name with the same level of seniority. The rationale for this adjustment is to show the full potential future loss in the event that the underlying credit event is triggered on the underlying reference entity. For the purposes of our estimates, we have assumed that 90% of the credit protection bought can be used to offset credit protection sold. We recognize that this assumption could vary from bank to bank and that the number could be lower or higher in some cases, as some hedgesmight not qualify under the proposed Basel III leverage ratio framework.

Double counting of credit protection adjusted for – since written credit protection is included in the exposure at the notional amount and as an add-on for derivatives, written credit derivatives could be double counted. We have therefore deducted the individual add-on relating to a written credit derivative, in line with the revised leverage ratio framework in the Consultative Document.

No accounting netting for securities financing transactions (SFT) – in line with the treatment of derivatives collateral, the Basel Committee is proposing in the Consultative Document that securities financing transactions (repos, reverse repos, securities financing and borrowing) are accounted for gross of collateral, i.e. it should be viewed as a loan on a gross basis (instead of a securitized net product). We use 100% gross exposures for SFTs for US banks; whereas for banks which report under IFRS, we use the on balance sheet SFTs which may be understated due to netting permitted under IFRS due to limited disclosure around SFTs. JPM’s Asset Allocation Research (Flows & Liquidity: Leverage ratios to hit repo markets) estimates that the inability of banks to offset repos against reverse repos could increase the denominator of the leverage ratio by up to $6tr.

“Gross SFT assets recognised for accounting purposes should reflect no recognition of the accounting netting of (cash) payables against (cash) receivables (e.g. as currently permitted under the IFRS and US GAAP accounting frameworks).”

We note that the treatment of SFT under the revised leverage ratio framework in the Basel Consultation document is more punitive than CRD 4 as it does not allow netting of exposure and collateral in the exposure calculation (i.e. repos and reverse repos can not be offset against each other with the same counterparty), which is currently allowed under IFRS and US GAAP reporting.

Additionally, counterparty credit risk is to be included as a credit risk in the Consultative Document. For the purpose of our calculations we have assumed that the counterparty credit risk is 5% of the gross SFT assets. The low credit risk reflects the collateralized and short-dated nature of SFT transactions (generally <6 months with collateral haircuts, hence the counterparty risk should be relatively low).

Sale accounting transactions and bank acting as agent – with no disclosure available on sale accounting or agent SFT transactions, we have assumed zero impact from these two items for the purpose of our estimates. We recognize that they are unlikely to be zero in reality, but these items are likely to have a limited impact on the leverage ratio in our view.



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Other deductions from the leverage exposure measure: To ensure the consistency of the leverage ratio, the exposure measure should be measured consistently with capital with respect to deductions from capital, e.g. goodwill and intangibles deducted from Basel 3 Tier I capital are also deducted from the leverage exposure. Similarly, DTAs and financial stakes are also deducted from the leverage exposure measure, to the extent that they are deducted from Basel 3 capital.

Asset reduction plans included in our leverage ratio calculations - We include the asset reduction plans outlined by the banks by FY15E in our leverage ratio calculations. We don’t include the asset reductions for the banks which have not outlined asset reduction targets. We include $520bn (SF493bn) asset reduction for UBS, $72bn asset reduction for CSG, $75bn asset reduction for DB and $6bn for SG by FY15E in our leverage ratio calculation.

Conclusions from our Basel 3 leverage ratio analysis based on revised consultation

We see that the 3% leverage ratio requirement under the new Basel III is manageable for most of banks in our coverage by 2015E. The table overleaf shows our leverage ratio estimates for European banks and US IBs based on the revised proposals outlined in the recent Basel consultation in FY15E Basel 3 capital forecast. In respect to balance sheet data, we use the latest data available (end Dec 2012 or June 2013). We adjust assets for asset reduction plans.

Based on 3.5% minimum however, we estimate €72bn shortfall for banks in our coverage, equivalent to 9% additional Tier I issuance required. Alternatively, banks would have to reduce €2.1 trillion of assets, or 6% of total exposures.

We estimate that STAN, Erste Bank, BBVA, Santander, DNB and HSBC will have the highest Basel leverage ratios by end 2015e, with 6.0%, 5.4%, 4.8%, 4.7%, 4.5% and 4.5% respectively without any asset reductions.

Lloyds also has relatively high Basel leverage ratios, reaching 4.5% on our estimates, however, it is based on material asset reduction plans of £50bn.

We estimate that only DB, CBK and CASA are likely to have significantleverage ratio shortfalls in FY15E with an estimated B3 Tier 1 leverage ratio of 2.8%, 2.6%, and 1.7% respectively. This equates to an estimated €11.5bn, €7.3bn and €33.9bn capital shortfall, equivalent to over 50% of their Tier I capital base.

Société Générale and BNP Paribas Basel leverage ratios stand at 3.0% and 3.3% respectively end 2015e in our estimates, slightly short of the minimum 3.5%. Implied capital shortfall would also be significant, amounting to €6.6bn for SG and €4.3bn for BNPP or asset reduction required would be €189bn and €123bn respectively. Note that for SG, We have included the $1.25bn Tier I cocos issued end Aug 2013.

Credit Suisse Basel leverage ratio stands at 3% end 2015e, including Additional Tier 1 capital issued or in place to be issued by CSG. Excluding the additional Tier 1 capital, CS Basel leverage ratio would stand at 2.6% end 2015e. Total shortfall to reach our potential target of 3.5% would amount to €5.5bn or 17% of Tier I capital base.

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For CASA, we have estimated 1.7% Basel leverage ratio for the listed entity, however, we note that the regulator looks at Credit Agricole Group instead, and the 3% minimum requirement will likely only be required for Credit Agricole Group in our view. Credit Agricole Group Basel leverage stands at 3.3% in our 2015e estimates; however, investors and shareholders will likely focus on CASA's 1.7% Basel leverage. We estimate that the minimum 3% could be achieved by end 2017e, through retained earnings, unwinding €267bn of intragroup exposures, issuing €7.3bn of Tier I hybrids/cocos and reducing assets by €100bn, with limited impact on EPS. To improve CASA Basel leverage earlier, by end 2015e, CASA could consider several mitigation initiatives: 1) issue additional Basel 3 Tier I cocos/hybrids; or 2) raise equity and issue additional Basel 3 Tier I cocos/hybrids; or 3) sell the insurance business to the Regional Banks, unwind the intragroup exposures and exit capital markets. As discussed in our note “Credit Agricole: high cost of equity on Basel leverage uncertainties” on 29 July 2013, EPS dilution in these scenarios could however be significant, up to estimated 19%, and execution risk would be high with many practical issues in our view.

For Deutsche Bank, we estimate 2.8% Basel leverage ratio end 2015e, implying €11.5bn capital shortfall or €329bn asset reduction to reach our minimum target of 3.5%. DBK with its Q2 conference call provided a glide path to meet CRD 4 leverage ratio requirements through asset reductions on balance sheet as well as reduction in CRD 4 gross up. However, we believe investor focus is on Basel consultation on leverage in June as well as FDIC leverage ratio proposals in the US. Basel consultation proposals are much more punitive on the denominator of the leverage ratio than CRD 4 and we estimate DB to reach Basel leverage ratio of 2.8% by 2015E on a fully loaded Basel 3 common equity T1 capital basis. In order to meet our 3.5% minimum by 2015E, DB in our estimates needs €11.5bn in Basel 3 compliant additional T1 capital on top of the €250bn in planned exposure reduction. DBK has indicated that it plans to comply with CRD 4 requirements through reduction in balance sheet assets of €80bn-130bn and reduction in CRD 4 gross up of €120bn-170bn. The key components of €80bn-130bn balance sheet asset reduction as indicated by DB are: a) NCOU de-risking, b) Optimization of collateral management, c) Review level of trading inventory, d) Review of cash and liquidity pool, and e) Portfolio measures. DBK on the Q2 conference call indicated €300mn (c.3% of JPM 2015E PBT) in estimated negative PBT impact from the use of the leverage toolbox. However, the indirect impact on franchise earnings from these measures is still uncertain in our view. The key components of measures to reduce CRD 4 gross up by €120bn-170bn as indicated by DB are: i) Clearing house netting, ii) Tear-ups / trade compression, iii) Review of unutilized lending commitments.



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Morgan Stanley, with a Basel leverage ratio of 3.2%, would also be short of our 3.5% minimum, and the shortfall of €3bn would be equivalent to 8% of Tier I capital base. Note also that US requirements for leverage could be higher, with US agencies proposing 5% minimum supplementary leverage for US SIFIs. Based on the U.S. Proposed Supplementary Leverage ratio, MS indicated that the pro-forma Supplementary Leverage ratio of Holding Company was c.4.2% at June 30, 2013 and it has a clear path to meet the 5% ratio requirement in 2015. The key components of this path would be focused on the denominator, with RWA reductions as well as exposure reduction through compression of offsetting bilateral trades as well as benefits from central clearing.

Total derivative exposure (incl. potential future exposure) is one of the key constituents of the revised Basel 3 exposure measure (denominator), contributing up to 40% to the exposure measure. Amongst the banks in our analysis, GS has the biggest absolute derivative exposure, followed by BNP and DB based on our estimates. However, as a % of total exposure measure, GS, UBS and MS derivative exposure contribute 40%, 36% and 33% to the asset base respectively.

Reverse repos and SFTs contribute up to 25% to the exposure measure based on our estimate, with GS and MS reverse repos and SFTs contributing 23% and 25% to the asset base (exposure measure).

We include SF342bn asset reduction for UBS, SF78bn asset reduction for CSG, €250bn asset reduction for DB, £65bn for RBS and £50bn for Lloyds by FY15E in our leverage ratio calculation.

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Table 67: JPMe Leverage ratio calculations based on new Basel proposal guidelines - (1/3)

EUR million

CSG UBS DB Lloyds RBS HSBC STAN Socgen BNPPBalance sheet as at Q2 13 Q2 13 Q2 13 H113 H113 H113 Q2 13 Q2 13 Q2 13

On-balance sheet items: 746,133 915,789 1,909,879 1,032,144 1,431,745 2,005,150 503,167 1,254,082 1,861,338exclude derivatives -31,828 -269,082 -635,866 -51,138 -439,910 -226,803 -41,347 -189,270 -344,848exclude Securities Financing Transactions -140,648 -81,269 -161,350 -3,335 -116,876 -159,241 -7,535 -57,570 -159,670Assets deducted in determining Basel III Tier 1 capital -7,371 -7,017 -5,149 -111,975 -4,709 -72,036 -6,691 -8,900 -14,700Total on-balance sheet exposures (excluding derivatives and SFTs) 566,286 558,421 1,107,514 865,696 870,250 1,547,069 447,594 998,342 1,342,120Replacement cost 31,828 269,082 586,581 51,138 429,062 226,803 41,347 177,603 321,510Counterparty netting 62,195 -200,793 -532,903 -30,655 -326,693 -173,331 -22,421 -152,343 -276,073Add-on amount 154,790 118,223 255,360 27,681 175,403 116,810 14,235 81,055 270,448Gross up for derivatives collateral provided 48,355 0 0 0 0Gross notional credit derivatives sold 663,561 861,074 1,274,960 3,630 267,224 305,573 21,867 269,345 1,052,751Notional offsets and add-on deductions for written credit derivatives -639,690 -793,039 -1,212,632 -3,267 -240,502 -275,015 -19,680 -242,410 -947,475Total derivative exposures 321,038 254,547 371,366 48,526 304,495 200,840 35,348 133,249 421,160Gross SFT assets (with no recognition of accounting netting) 140,648 81,269 161,350 3,335 182,148 226,534 7,535 57,570 159,670SFT counterparty exposure 0 0 0 0Total securities financing transaction exposures 147,680 85,332 169,418 3,502 191,256 237,861 7,912 60,449 167,654Other off-balance sheet exposures 110,877 80,799 202,570 95,480 223,668 506,931 96,948 190,156 276,800Total exposures 1,145,882 979,099 1,850,868 1,013,205 1,589,668 2,492,700 587,802 1,382,196 2,207,734Total asset reduction by 2015E -63,172 -277,396 -250,000 -58,860 -76,518 0 0 3,386Total exposure post asset reduction 1,082,710 701,703 1,600,868 954,345 1,513,150 2,492,700 587,802 1,385,582 2,207,734

2015E Basel 3 Common equity T1 capital (fully loaded) 27,976 28,431 44,506 42,586 53,955 111,987 35,252 40,946 72,974Current Additional Tier 1 outstanding 1,298 0 0 0 0 0 0 0 0Total Additional Tier 1 capital outstanding including existing hybrids to be converted to BCNs 4,380 0 0 0 0 0 0 944 02015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 32,356 28,431 44,506 42,586 53,955 111,987 35,252 41,890 72,974

2015E Leverage ratio (B3CET1) post asset reduction 2.6% 4.1% 2.8% 4.5% 3.6% 4.5% 6.0% 3.0% 3.3%2015E Leverage ratio (B3CET1+AT1) post asset reduction 3.0% 4.1% 2.8% 4.5% 3.6% 4.5% 6.0% 3.0% 3.3%

To reach 3.5% leverage ratio (B3ET1+AT1 fully loaded)Total additional exposure reduction required (in mn) 158,251 - 329,266 - - - - 188,726 122,772

Further total exposure reduction required (%) 15% 0% 21% 0% 0% 0% 0% 14% 6%

Total additional tier 1 issuance required (mn) 5,539 - 11,524 - - - - 6,605 4,297

Total additional tier1 issuance required (% of B3CET1+AT1) 17% 0% 26% 0% 0% 0% 0% 16% 6%


BCNs. **We do not include loss absorbing capital of SF4.2bn issued by UBS or any potential further CoCo issuance by UBS in our analysis. UBS - Total asset reduction target of SF493bn at 2012 year end, split as SF400bn in Corporate Center Non-core, SF38bn

Corporate Center legacy portfolio and SF55bn in Group treasury activities. CS - Total balance sheet reduction target of less than SF900bn and total off-balance sheet exposures (including derivative add-ons) of less than Sf290bn. CASA: the leverage ratio is for CASA

the listed entity, and the ratio has not been adjusted for insurance and not adjusted for intragroup exposures either (text unclear); note however that the regulator looks at Credit Agricole group rather than CASA. SG: includes $1.25bn of Tier I cocos issued in Aug

2013.

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€ million

CASA CBK UCI ISP SAN BBVA Caixabank POP NordeaBalance sheet as at Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13

On-balance sheet items: 1,784,905 636,963 889,632 647,785 1,223,118 618,503 350,989 160,297 621,896exclude derivatives -327,697 -80,042 -59,763 -56,620 -91,437 -48,722 -7,490 -1,801 -78,875exclude Securities Financing Transactions -82,642 -128,955 -48,921 -23,609 -34,128 -10,377 -39 -6,311 -47,367Assets deducted in determining Basel III Tier 1 capital -17,100 -5,553 -3,481 -2,100 -22,559 -13,073 -11,371 -2,217 -3,684Total on-balance sheet exposures (excluding derivatives and SFTs) 1,357,466 422,413 777,467 565,456 1,074,994 546,331 332,089 149,967 491,970Replacement cost 316,701 196,665 118,479 54,940 166,149 53,616 7,490 1,801 137,303Counterparty netting -263,427 -100,958 -66,467 -30,113 -94,129 -43,783 0 0 -59,990Add-on amount 57,776 45,172 1,026 1,503 2,049 21,154 0 0 54,796Gross up for derivatives collateral provided 0 0 0 0 0 0 0 0Gross notional credit derivatives sold 538,137 34,317 70,365 77,513 478 23,969 0 0 25,350Notional offsets and add-on deductions for written credit derivatives -484,323 -30,885 47,734 70,114 -430 -21,330 0 0 -22,815Total derivative exposures 164,863 144,312 171,137 173,957 74,116 33,626 7,490 1,801 134,644Gross SFT assets (with no recognition of accounting netting) 82,642 128,955 48,921 23,609 34,128 10,377 39 6,311 47,367SFT counterparty exposure 0 0 0 0 0 0 0 0 0Total securities financing transaction exposures 86,774 135,403 51,367 24,789 35,834 10,896 41 6,627 49,735Other off-balance sheet exposures 287,490 86,368 88,446 55,954 48,886 132,638 64,274 24,662 105,919Total exposures 1,896,593 788,495 1,088,417 820,156 1,233,831 723,491 403,893 183,057 782,268Total asset reduction by 2015E 0 60,000 -800 0 0 0 0 0 -5,608Total exposure post asset reduction 1,896,593 848,495 1,087,617 820,156 1,233,831 723,491 403,893 183,057 776,660

2015E Basel 3 Common equity T1 capital (fully loaded) 32,491 22,395 47,099 34,988 58,229 34,940 15,217 7,417 25,851Current Additional Tier 1 outstanding 0 0 0 2,544 0 1,139 0 0 0Total Additional Tier 1 capital outstanding including existing hybrids to be converted to BCNs 0 0 0 0 0 0 0 0 02015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 32,491 22,395 47,099 34,988 58,229 34,940 15,217 7,417 25,851

2015E Leverage ratio (B3CET1) post asset reduction 1.7% 2.6% 4.3% 4.3% 4.7% 4.8% 3.8% 4.1% 3.3%2015E Leverage ratio (B3CET1+AT1) post asset reduction 1.7% 2.6% 4.3% 4.3% 4.7% 4.8% 3.8% 4.1% 3.3%

To reach 3.5% leverage ratio (B3ET1+AT1 fully loaded)Total additional exposure reduction required (in mn) 968,288 208,647 - - - - - - 38,053

Further total exposure reduction required (%) 51% 25% 0% 0% 0% 0% 0% 0% 5%

Total additional tier 1 issuance required (mn) 33,890 7,303 - - - - - - 1,332



116





€ million

SEB SWED SHB Danske DNB Erste KBC GS MSAverage ex

GS & MSBalance sheet as at Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13

On-balance sheet items: 298,005 216,833 274,312 444,824 314,342 210,201 253,297 706,188 604,025exclude derivatives -21,195 -8,205 -10,349 -39,896 -11,870 -9,355 -9,875 -51,059 -29,168exclude Securities Financing Transactions -14,592 -7,316 -7,721 -45,388 -6,925 -2,016 -12,745 -246,885 -204,385Assets deducted in determining Basel III Tier 1 capital -983 -1,566 -941 -3,062 -1,082 0 0 0 0Total on-balance sheet exposures (excluding derivatives and SFTs) 261,235 199,745 255,300 356,477 294,464 198,830 230,677 408,243 370,472Replacement cost -22,117 8,796 10,537 66,914 14,574 9,339 8,299 51,059 29,168Counterparty netting -13,051 -7,630 -6,262 -50,700 -8,460 -4,791 -3,959 39,808 51,573Add-on amount 8,312 5,876 2,913 43,421 8,908 4,893 5,035 154,212 78,352Gross up for derivatives collateral provided 0 0 0 0 6,908 0 0 77,192 72,858Gross notional credit derivatives sold 414 571 115 1,240 7 699 19,025 1,289,786 1,306,947Notional offsets and add-on deductions for written credit derivatives -414 -514 -114 -1,004 -7 -629 -17,123 -1,066,669 -1,161,822Total derivative exposures -26,856 7,099 7,190 59,871 21,929 9,511 11,278 545,388 377,074Gross SFT assets (with no recognition of accounting netting) 14,592 7,316 7,721 103,994 7,297 2,016 12,745 295,924 270,791SFT counterparty exposure 0 0 0 0 0 0 0Total securities financing transaction exposures 15,322 10,974 8,107 109,193 7,661 2,117 13,382 310,721 284,330Other off-balance sheet exposures 48,190 23,822 43,424 30,453 82,074 20,957 28,629 112,008 109,132Total exposures 297,891 241,641 314,021 555,995 406,129 231,414 283,966 1,376,360 1,141,009Total asset reduction by 2015E 0 -47 0 0 0 0 0Total exposure post asset reduction 297,891 241,594 314,021 555,995 406,129 231,414 283,966 1,376,360 1,141,009

2015E Basel 3 Common equity T1 capital (fully loaded) 13,004 9,965 12,161 18,161 18,344 12,524 9,847 48,149 36,813Current Additional Tier 1 outstanding 0 0 0 0 0 0 0 0 0Total Additional Tier 1 capital outstanding including existing hybrids to be converted to BCNs 0 0 0 0 0 0 0 0 02015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 13,004 9,965 12,161 18,161 18,344 12,524 9,847

48,149 36,813

2015E Leverage ratio (B3CET1) post asset reduction 4.4% 4.1% 3.9% 3.3% 4.5% 5.4% 3.5% 3.5% 3.2% 3.9%2015E Leverage ratio (B3CET1+AT1) post asset reduction 4.4% 4.1% 3.9% 3.3% 4.5% 5.4% 3.5% 3.5% 3.2% 3.9%

To reach 3.5% leverage ratio (B3ET1+AT1 fully loaded)Total additional exposure reduction required (in mn) - - - 37,096 - - 2,616 683 89,208 2,053,714

Further total exposure reduction required (%) 0% 0% 0% 7% 0% 0% 1% 0% 8% 6%

Total additional tier 1 issuance required (mn) - - - 1,298 - - 92 24 3,122 71,880



117




Sensitivity to changes in net credit derivatives exposure

The Basel Committee has proposed in the recent Consultative Document on the revised leverage ratio framework that the sold credit protection (written credit derivatives) are accounted for at full effective notional value, unless the bank holds offsetting credit protection bought on the same reference name with the same level of seniority. The rationale for this adjustment is to show the full potential future loss in the event that the underlying credit event is triggered on the underlying reference entity.

In our base case scenario we assume that 90% of the credit protection bought can be used to offset against the credit protection sold. We recognize that this assumption could vary from bank to bank and that the number could be lower or higher in some cases, as some hedges might not qualify under the proposed Basel III leverage ratio framework. Despite our assumption that 90% of the credit protection bought can be used to offset against the credit protection sold, total derivative exposure (incl. potential future exposure) is one of the key constituents of the new proposed Basel 3 exposure measure (denominator) based on our estimates, ranging from -9% to 40% of the total exposure.

We have given the banks in our analysis the “benefit of the doubt”, netting 90% of credit protection, although we believe some derivatives written are not fully hedged under Basel suggested standards and create basis risk. Hence, in this section we perform a sensitivity analysis for changes to assumptions around the percentage of credit derivatives bought which can be used to offset the credit protection sold.

Scenario 1: Base Case - 90% of the credit protection bought can be used to offset against the credit protection sold

In this scenario, we estimate €72bn of overall Tier I leverage shortfall, with DB, CBK and CASA likely to have a significant leverage ratio shortfall in FY15E with an estimated B3 Tier 1 leverage ratio of 2.8%, 2.6% and 1.7% respectively. This equates to an estimated €11.5bn, €7.3bn and €33.9bn capital shortfall respectively. For CASA however, we note that regulators focus on Credit Agricole Group rather than the listed entity, and CA Group Basel leverage is higher at 3.3% in our estimates.

118




Table 70: JPMe Leverage ratio calc based on new Basel proposal guidelines and assuming 90% of the credit protection bought can be used to offset against the credit protection sold (1/2)

EUR billion

CSG UBS DB Lloyds RBS HSBC STAN SG BNPP CASA CBK UCI ISP

Gross notional credit derivatives sold 664 861 1,275 4 267 306 22 269 1,053 538 34 70 78Notional offsets and add-on deductions for written credit derivatives -640 -793 -1,213 -3 -241 -275 -20 -242 -947 -484 -31 48 70Total exposure measure 1,146 979 1,851 1,013 1,590 2,493 588 1,382 2,208 1,897 788 1,088 820Total exposure measure post asset reduction 1,083 702 1,601 954 1,513 2,493 588 1,386 2,208 1,897 848 1,088 820

2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 32.4 28.4 44.5 42.6 54.0 112.0 35.3 41.9 73.0 32.5 22.4 47.1 35.0

2015E Leverage ratio (B3CET1+AT1) post asset reduction 3.0% 4.1% 2.8% 4.5% 3.6% 4.5% 6.0% 3.0% 3.3% 1.7% 2.6% 4.3% 4.3%

To reach 3.5% leverage ratio (B3ET1+AT1 fully loaded)Total additional exposure reduction required (bn) 158 0 329 0 0 0 0 189 123 968 209 0 0Further total exposure reduction required (%) 15% 0% 21% 0% 0% 0% 0% 14% 6% 51% 25% 0% 0%

Total additional tier 1 issuance required (bn) 6 0 12 0 0 0 0 7 4 34 7 0 0Total additional tier1 issuance required (% of B3CET1+AT1) 17% 0% 26% 0% 0% 0% 0% 16% 6% 104% 33% 0% 0%



Corporate Center legacy portfolio and SF55bn in Group treasury activities. CS - Total balance sheet reduction target of less than SF900bn and total off-balance sheet exposures (including derivative add-ons) of less than Sf290bn. SG: leverage ratio including $1.25bn

of Additional Tier I cocos issued in Aug 2013. CASA: Basel leverage ratio for listed entity, but note that regulators focus on Credit Agricole Group solvency ratios instead.

Table 71: JPMe Leverage ratio calc based on new Basel proposal guidelines and assuming 90% of the credit protection bought can be used to offset against the credit protection sold (1/2)

EUR billion

SAN BBVACaixabank Popular Nordea SEB SWED SHB Danske DNB Erste KBC GS MS

Average ex GS & MS

Gross notional credit derivatives sold 0 24 0 0 25 0 1 0 1 0 1 19 1,290 1,307Notional offsets and add-on deductions for written credit derivatives 0 -21 0 0 -23 0 -1 0 -1 0 -1 -17 -1,067 -1,162Total exposure measure 1,234 723 404 183 782 298 242 314 556 406 231 284 1,376 1,141Total exposure measure post asset reduction 1,234 723 404 183 777 298 242 314 556 406 231 284 1,376 1,141

2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 58.2 34.9 15.2 7.4 25.9 13.0 10.0 12.2 18.2 18.3 12.5 9.8

48.1 36.8

2015E Leverage ratio (B3CET1+AT1) post asset reduction 4.7% 4.8% 3.8% 4.1% 3.3% 4.4% 4.1% 3.9% 3.3% 4.5% 5.4% 3.5% 3.5% 3.2% 3.9%

To reach 3.5% leverage ratio (B3ET1+AT1 fully loaded)Total additional exposure reduction required (bn) 0 0 0 0 38 0 0 0 37 0 0 3 1 89 2,054Further total exposure reduction required (%) 0% 0% 0% 0% 5% 0% 0% 0% 7% 0% 0% 1% 0% 8% 6%

Total additional tier 1 issuance required (bn) 0 0 0 0 1 0 0 0 1 0 0 0 0 3 72Total additional tier1 issuance required (% of B3CET1+AT1) 0% 0% 0% 0% 5% 0% 0% 0% 7% 0% 0% 1% 0% 8% 9%


119




Scenario 2: 75% of the credit protection bought can be used to offset against the credit protection sold

In this scenario, we estimate that Basel Tier I leverage shortfall increases to €94bn, with DB, CS, CASA, SG, BNP and CBK all having significant leverage ratio shortfall in FY15E, with capital shortfalls ranging from €0.2bn for KBC to €37bn for CASA. For CASA however, we note that regulators focus on Credit Agricole Group rather than the listed entity, and CA Group Basel leverage is higher at 3.3% in our estimates.

Table 72: JPMe Leverage ratio calculations based on new Basel proposal guidelines and assuming 75% of the credit protection bought can be used to offset against the credit protection sold

EUR billion


Gross notional credit derivatives sold 664 861 1,275 4 267 306 22 269 1,053 538 34 70 78Notional offsets and add-on deductions for written credit derivatives -533 -661 -1,011 -3 -200 -229 -16 -202 -790 -404 -26 40 58Total exposure measure 1,252 1,111 2,053 1,014 1,630 2,539 591 1,423 2,366 1,977 794 1,080 808Total exposure measure post asset reduction 1,189 834 1,803 955 1,553 2,539 591 1,426 2,366 1,977 854 1,080 808



To reach 3.5% leverage ratio (B3ET1+AT1 fully loaded)Total additional exposure reduction required (bn) 265 22 531 0 12 0 0 229 281 1,049 214 0 0Further total exposure reduction required (%) 22% 3% 29% 0% 1% 0% 0% 16% 12% 53% 25% 0% 0%






120





EUR billion

SAN BBVACaixab

ank Pop Nordea SEB SWED SHB Danske DNB Erste KBC GS MSAverage ex

GS & MS

Gross notional credit derivatives sold 0 24 0 0 25 0 1 0 1 0 1 19 1,290 1,307Notional offsets and add-on deductions for written credit derivatives 0 -18 0 0 -19 0 0 0 -1 0 -1 -14 -889 -968Total exposure measure 1,234 727 404 183 786 298 242 314 556 406 232 287 1,554 1,335Total exposure measure post asset reduction 1,234 727 404 183 780 298 242 314 556 406 232 287 1,554 1,335


48.1 36.8





Scenario 3: 50% of the credit protection bought can be used to offset against the credit protection sold

In this scenario, we estimate that Basel Tier I leverage shortfall increases to €139bn, with DB, UBS, CS, CASA, SG, BNP, RBSand CBK all having significant leverage ratio shortfall in FY15E, with capital shortfalls ranging from €0.4bn for KBC to €41bn for CASA. For CASA however, we note that regulators focus on Credit Agricole Group rather than the listed entity, and CA Group Basel leverage is higher at 3.3% in our estimates.

121





EUR billion


Gross notional credit derivatives sold 664 861 1,275 4 267 306 22 269 1,053 538 34 70 78Notional offsets and add-on deductions for written credit derivatives -355 -441 -674 -2 -134 -153 -11 -135 -526 -269 -17 27 39Total exposure measure 1,430 1,332 2,390 1,015 1,697 2,615 597 1,490 2,629 2,112 802 1,067 789Total exposure measure post asset reduction 1,367 1,054 2,140 956 1,620 2,615 597 1,493 2,629 2,112 862 1,066 789



To reach 3.5% leverage ratio (B3ET1+AT1 fully loaded)Total additional exposure reduction required (bn) 443 242 868 0 78 0 0 296 544 1,184 222 0 0Further total exposure reduction required (%) 32% 23% 41% 0% 5% 0% 0% 20% 21% 56% 26% 0% 0%







EUR billion

SAN BBVACaixab

ank Popular Nordea SEB SWED SHB Danske DNB Erste KBC GS MSAverage ex

GS & MS

Gross notional credit derivatives sold 0 24 0 0 25 0 1 0 1 0 1 19 1,290 1,307Notional offsets and add-on deductions for written credit derivatives 0 -12 0 0 -13 0 0 0 -1 0 0 -10 -593 -645Total exposure measure 1,234 733 404 183 792 298 242 314 556 406 232 292 1,850 1,657Total exposure measure post asset reduction 1,234 733 404 183 787 298 242 314 556 406 232 292 1,850 1,657


48.1 36.8





122




Sensitivity to changes in gross repo exposure

In the Consultative Document on the revised leverage ratio framework the Basel Committee is proposing that securities financing transactions are reported gross of collateral with no recognition of accounting netting. This means that the revised guidance on the leverage ratio is punitive for repo transactions as it does not allow for netting of collateral or exposure (i.e. banks are not allowed to offset repos against reverse repos). The rationale for this adjustment is to discourage banks from rehypothecating assets.

In our base case scenario we assume that gross securities financing transactions (SFT) match the reported on balance sheet number. We recognize that this assumption could potentially underestimate the impact from valuing SFTs at gross value and that the number could be higher in some cases, given that netting of repos and reverse repos is currently allowed under IFRS and US GAAP reporting. The inability of banks to offset repos against reverse repos could increase the denominator of the leverage ratio by up to $6tr according to JPM’s Asset Allocation Research (Flows & Liquidity: Leverage ratios to hit repo markets). In the case of US broker dealers for example the net repo exposure reported in the liability side was only $185bn as of the end of Q1, vs. gross exposure of $2.6tr, so reported net exposure was less than 10% of gross exposure or in other words the gross exposure was 10x the reported number. However, under IFRS banks report repos gross of collateral while under US GAAP they report net of collateral, which means that the difference between the on balance sheet exposure and the gross exposure should be smaller for banks reporting under IFRS than under US GAAP. In Europe only 3banks report the gross SFT exposure, HSBC, RBS and Danske, which would suggest that under IFRS the gross SFTs are on average ~2x larger than the balance sheet number.

Table 76: Gross SFTs to balance sheet SFTs for Danske and RBS, end-12

Local currency millions

Danske HSBC RBSBalance sheet SFTs 338,461 159,241 99,283Gross SFTs 775,494 226,534 154,730

Gross SFTs/BS SFTs 2.3x 1.4x 1.6x

Source: Company reports.

We have given the banks in our analysis the “benefit of the doubt”, using the reported balance sheet repo amount, although we recognize that inability to offset repos with reverse repos under the Basel proposed standards. Therefore, in this section we perform a sensitivity analysis for changes to assumptions around the level of gross SFTs.


123




Scenario 1: Base Case – the gross SFTs match reported balance sheet SFTs

In this scenario, we estimate €71bn of overall Tier I leverage shortfall, with DB, CBK and CASA likely to have a significant leverage ratio shortfall in FY15E with an estimated B3 Tier 1 leverage ratio of 2.8%, 2.6% and 1.7% respectively. This equates to an estimated €11.5bn, €7.3bn and €33.9bn capital shortfall respectively.

Table 77: European Banks - JPMe Leverage ratio calculations based on new Basel proposal guidelines and assuming gross repo exposure to be 1x reported numbers (Table 1 of 2)

€bn CSG UBS DB Lloyds STAN Socgen BNPP CASA CBK UCI ISPAssuming gross repos exposure to be 1x reported numberGross SFT assets (with no recognition of accounting netting) 141 81 161 3 8 58 160 83 129 49 24Total exposure measure 1,146 979 1,851 1,013 588 1,382 2,208 1,897 788 1,088 820Total exposure measure post asset reduction 1,083 702 1,601 954 588 1,386 2,208 1,897 848 1,088 820

2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 32 28 45 43 35 42 73 32 22 47 35

2015E Leverage ratio (B3CET1+AT1) post asset reduction 3.0% 4.1% 2.8% 4.5% 6.0% 3.0% 3.3% 1.7% 2.6% 4.3% 4.3%

To reach 3.5% leverage ratio (B3ET1+AT1 fully loaded)

Total additional exposure reduction required (in bn) 158 - 329 - - 189 123 968 209 - -Further total exposure reduction required (%) 15% 0% 21% 0% 0% 14% 6% 51% 25% 0% 0%

Total additional tier 1 issuance required (bn) 6 - 12 - - 7 4 34 7 - -Total additional tier1 issuance required (% of B3CET1+AT1) 17% 0% 26% 0% 0% 16% 6% 104% 33% 0% 0%

Source: J.P. Morgan estimates, Company data. Note: We exclude RBS, HSBC, GS, MS and Danske from repo sensitivities

124





€ bn

SAN BBVA Caixabank

Popular Nordea SEB SWED SHB DNB Erste KBC Ave

Assuming gross repos exposure to be 1x reported numberGross SFT assets (with no recognition of accounting netting) 34 10 0 6 47 15 7 8 7 2 13Total exposure measure 1,234 723 404 183 782 298 242 314 406 231 284Total exposure measure post asset reduction 1,234 723 404 183 777 298 242 314 406 231 284

2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 58 35 15 7 26 13 10 12 18 13 10

2015E Leverage ratio (B3CET1+AT1) post asset reduction 4.7% 4.8% 3.8% 4.1% 3.3% 4.4% 4.1% 3.9% 4.5% 5.4% 3.5% 3.9%


Total additional exposure reduction required (in bn) - - - - 38 - - - - - 3 2,017Further total exposure reduction required (%) 0% 0% 0% 0% 5% 0% 0% 0% 0% 0% 1% 6%

Total additional tier 1 issuance required (bn) - - - - 1 - - - - - 0 71Total additional tier1 issuance required (% of B3CET1+AT1) 0% 0% 0% 0% 5% 0% 0% 0% 0% 0% 1% 10%

Source: J.P. Morgan estimates, Company data Note: We exclude RBS, HSBC, GS, MS and Danske from repo sensitivities.

125




Scenario 2: Gross SFT are 2x larger than the reported balance sheet SFTs

In this scenario, we estimate that Basel Tier I leverage shortfall increasing to €99bn, with DB, CS, CASA, SG, BNP, and CBK all having significant leverage ratio shortfall in FY15E, with capital shortfalls ranging from €1bn for KBC to €37bn for CASA.


€ bn

CSG UBS DB Lloyds STAN Socgen BNPP CASA CBK UCI ISP SAN Assuming gross repos exposure to be 2x reported numberGross SFT assets (with no recognition of accounting netting) 281 163 323 7 15 115 319 165 258 98 47 68Total exposure measure 1,287 1,060 2,012 1,017 595 1,440 2,367 1,979 917 1,137 844 1,268Total exposure measure post asset reduction 1,223 783 1,762 958 595 1,443 2,367 1,979 977 1,137 844 1,268

2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 32 28 45 43 35 42 73 32 22 47 35 58



Total additional exposure reduction required (in bn) 299 - 491 - - 246 282 1,051 338 - - -Further total exposure reduction required (%) 24% 0% 28% 0% 0% 17% 12% 53% 35% 0% 0% 0%

Total additional tier 1 issuance required (bn) 10 - 17 - - 9 10 37 12 - - -Total additional tier1 issuance required (% of B3CET1+AT1) 32% 0% 39% 0% 0% 21% 14% 113% 53% 0% 0% 0%

Source: J.P. Morgan estimates, Company data. Note: We exclude RBS, HSBC, GS, MS and Danske from repo sensitivities

126




Table 80: European Banks- JPMe Leverage ratio calculations based on new Basel proposal guidelines and assuming gross repo exposure to be 2x reported numbers (Table 2 of 2)

€ bn

BBVA Caixabank

Popular Nordea SEB SWED SHB DNB Erste KBCAverage

Assuming gross repos exposure to be 2x reported numberGross SFT assets (with no recognition of accounting netting) 21 0 13 95 29 15 15 15 4 25Total exposure measure 734 404 189 830 312 249 322 413 233 297Total exposure measure post asset reduction 734 404 189 824 312 249 322 413 233 297

2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 35 15 7 26 13 10 12 18 13 10



Total additional exposure reduction required (in bn) - - - 85 - - - - - 15 2,808Further total exposure reduction required (%) 0% 0% 0% 10% 0% 0% 0% 0% 0% 5% 8%

Total additional tier 1 issuance required (bn) - - - 3 - - - - - 1 98Total additional tier1 issuance required (% of B3CET1+AT1) 0% 0% 0% 12% 0% 0% 0% 0% 0% 5% 13%

Source: J.P. Morgan estimates, Company data Note: We exclude RBS, HSBC, GS, MS and Danske from repo sensitivities

Scenario 3: Gross SFT are 3x larger than the reported balance sheet SFTs

In this scenario, we estimate that Basel Tier I leverage shortfall increases to €129bn, with DB, CASA, SG, BNP, CSG, UBS, and CBK likely to have a leverage ratio shortfall in FY15E, with capital shortfalls ranging from €1bn for KBC to €40bn for CASA.


€ bn

CSG UBS DB Lloyds STAN Socgen BNPP CASA CBK UCI ISP SAN

Assuming gross repos exposure to be 3x reported numberGross SFT assets (with no recognition of accounting netting) 422 244 484 10 23 173 479 248 387 147 71 102Total exposure measure 1,427 1,142 2,174 1,020 603 1,497 2,527 2,062 1,046 1,186 867 1,302Total exposure measure post asset reduction 1,364 864 1,924 961 603 1,501 2,527 2,062 1,106 1,185 867 1,302

2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 32 28 45 43 35 42 73 32 22 47 35 58



Total additional exposure reduction required (in bn) 440 52 652 - - 304 442 1,134 467 - - -Further total exposure reduction required (%) 32% 6% 34% 0% 0% 20% 17% 55% 42% 0% 0% 0%

Total additional tier 1 issuance required (bn) 15 2 23 - - 11 15 40 16 - - -Total additional tier1 issuance required (% of B3CET1+AT1) 48% 6% 51% 0% 0% 25% 21% 122% 73% 0% 0% 0%

Source: J.P. Morgan estimates, Company data. Note: We exclude RBS, HSBC, GS, MS and Danske from repo sensitivities.

127





€ bn

BBVA Caixabank

Popular Nordea SEB SWED SHB DNB Erste KBCAverage

Assuming gross repos exposure to be 3x reported numberGross SFT assets (with no recognition of accounting netting) 31 0 19 142 44 22 23 22 6 38Total exposure measure 744 404 196 877 327 256 329 421 235 309Total exposure measure post asset reduction 744 404 196 871 327 256 329 421 235 309

2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 35 15 7 26 13 10 12 18 13 10


To reach 3.5% leverage ratio (B3ET1+AT1 fully loaded)Total additional exposure reduction required (in bn) - - - 133 - - - - - 28 3,650Further total exposure reduction required (%) 0% 0% 0% 15% 0% 0% 0% 0% 0% 9% 11%

Total additional tier 1 issuance required (bn) - - - 5 - - - - - 1 128Total additional tier1 issuance required (% of B3CET1+AT1) 0% 0% 0% 18% 0% 0% 0% 0% 0% 10% 17%

Source: J.P. Morgan estimates, Company data Note: We exclude RBS, HSBC, GS, MS and Danske from repo sensitivities

128




UK regulatory leverage requirements

The PRA’s (Prudential Regulation Authority) capital exercise (see our note UK Banks: PRA - active approach on capital should be a long term positive published 21 June 2013) introduced a new PRA adjusted leverage ratio requirement of 3% for UK listed banks. We believe that this is a highly punitive measure in the context of global peers, with UK listed banks having to comply with stricter UK requirements by 1H14 rather than 2018 or 2015. Note that this leverage ratio requirement is not applicable to all the entities regulated by the PRA.

UK PRA Leverage ratio calculation methodology: The starting point of the PRA Leverage ratio methodology is the current CRD4 Leverage ratio rules. The denominator of the PRA Leverage ratio is same as CRD4, however, the numerator is adjusted for additional provisions and future conduct costs and only high trigger (fully loaded) CoCos are included in the numerator. The adjustments to capital include i) Additional provisions: Expected losses on commercial real estate and Euro-area assets on a 3-year view instead of 1-year as required under IFRS, ii) Futureconduct costs: Potential litigation and redress costs that may evolve over the next 3 years and iii) Additional PVA (Prudent Valuation Adjustment) on top of PVA adjustments already in the CET1 capital.

Table 83: PRA methodology on leverage

PRA Leverage calculation methodology CommentsCapital starting point CRD4 CET1 Capital including PVA adjustments (to place greater emphasis on the inherent uncertainty

around the value at which positions could be exited in trading book)- Additional Provisions adjustments Expected losses on UK CRE, Euro-area assets and some other portfolios identified as

having significant embedded expected loss on a 3-year view instead of 1-year as required under IFRS

- Future conduct costs Potential litigation and redress costs that may evolve over the next 3 years incl PPI, swaps, LIBOR etc.

- Additional PVA On top of the PVA adjustment in the CET1 capital+ CoCos with High trigger on a fully loaded basis

Numerator Tier 1 capital on a PRA basis

Denominator CRD4 Leverage measure as per CRD4 rules

Leverage ratio = Tier 1 Capital on PRA basis -------------------------------------------- CRD4 Leverage measure

= (CRD4 CET1 Capital - Additional provisions on 3yr basis - future conduct costs -additional PVA + high trigger fully loaded CoCos) ----------------------------------------------------------------------------------------------------------------- (CRD4 Leverage measure)

Source: J.P. Morgan estimates, PRA.

PRA adjustments to UK Banks’ capital: The table below shows the adjustments made by the UK PRA to the UK Banks' capital. Note that the PRA adjustments were based on FY12 data and the banks have likely taken mitigation actions to reduce the adjustments in 1H13, including taking provisions for conduct costs, deleveraging and increasing coverage on problematic asset classes. Hence the PRA adjustments are likely to be lower at H113 level.

Table 84: UK Banks: PRA adjustments to capital

£ billion

HSBC Lloyds RBS Stan

PRA adjustments to capital at FY12 -7.8 -12.1 -7.1 0as % of 1H13 capital -9% -42% -17% 0%as % of B3 RWAs -1.0% -4.0% -1.5% 0.0%as % of CRD4 Leverage measure -0.39% -1.48% -0.58% 0.00%


https://markets.jpmorgan.com/CFP_Research/ArticleServlet?doc=GPS-1147357-0&referrerPortlet=search_analyst

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UK Banks’ Leverage ratio: The table below shows our estimates of the UK Bank’s Leverage ratio on various metrics. UK Banks fare relatively well in the context of the European banking sector on our estimates. However, the benchmark is also set higher in the UK by the PRA with compliance on a PRA adj CRD4 basis by H114.

We don’t have enough disclosure to calculate the leverage ratio of UK Banks on PRA-adjusted basis given the banks don’t disclose the PRA adjustments at H113 level. However, PRA said in its June release that HSBC, Lloyds, RBS and Stan Chartered will likely exceed the 3% leverage ratio post adjustments by FY13E based on their plans submitted to the PRA.

Table 85: UK Banks: Leverage ratio based on various standards

HSBC Lloyds RBS StanNew Basel proposals 4.5% 4.5% 3.6% 6.0%CRD4 rules 4.8% 4.7% 4.0% 6.0%PRA rules (CRD4 post adjustments) >3% by FY13E >3% by FY13E >3% by FY13E >3% by FY13E

Source: J.P. Morgan estimates, Company data. Note that we do not assume balance sheet growth for HSBC and Standard Chartered

for the leverage calculation and include the planned asset reduction for RBS and Lloyds.

Prudent Valuation Adjustment (PVA): CRD4 capital rules include provisions on prudent valuation of the trading book which should apply to all instruments measured at fair value. This adjustment should be made to the own funds while calculating the CET1 capital. The text below is an excerpt from the final CRD4 text:

“When marking to market, an institution shall use the more prudent side of bid and offer unless the institution can close out at mid market. Where institutions make use of this derogation, they shall every six months inform their competent authorities of the positions concerned and furnish evidence that they can close out at mid-market.”

The EBA is expected to develop and submit draft regulatory technical standards on PVA to the European Commission by 1st Feb 2015.

UK Application of PVA: UK banks have taken significant PVA charges in their B3CET1 capital based on the PRA guidelines. During the capital and leverage exercise undertaken by the UK PRA, a further PVA adjustment was made to the B3 CET1 capital but the amounts were not disclosed by the banks or the PRA.

Table 86: PVA adjustments in the B3CET1 capital

£ billion

RBS HSBC Stan

PVA adjustment in B3 CET1 capital -0.5 -1.5 -0.1as % of B3 RWAs -0.11% -0.18% -0.06%as % of CRD4 Leverage measure -0.04% -0.07% -0.02%


The PRA says that the PVA adjustments place greater emphasis on the inherent uncertainty around the value at which positions could be exited. PRA indicates that further work is being undertaken internationally, and this PVA adjustment was an interim measure by the PRA while it waits for the conclusions of more detailed studies.

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US: Differences in leverage ratio levels and definitions compared to the revised Basel leverage ratio consultation

Under US proposals, US top tier banks would be required to meet minimum supplementary leverage of 5% for the bank holding company and 6% for the deposit-taking subsidiaries, as of 1 Jan 2018. The US supplementary leverage ratio is also based on the “old” Basel leverage ratio guidelines from June 2011, as detailed in our note "Global Investment Banks: Can universal banking model survive the new wave of uncoordinated IB regulations? OW Tier II IB” on 11 April 2013, rather than the latest Basel leverage proposals from June 2013 which are much more stringent as less netting is permitted. US regulators are however likely to adjust the leverage ratio definition more in line with global standards in our view, once Basel leverage ratios are finalized.

US 2013 capital rules make no specific mention of the treatment for foreign banks' US operations, and we are still waiting for further clarity from the Fed on its proposals for enhanced supervision of foreign banks. Although the Fed will comment on its proposals in a separate document, we see some read-across to European banks:

European banks' US operations will in our view likely need to operate with a US GAAP leverage ratio of at least 4% (minimum unchanged).

We note that in December 2012, the Federal Reserve published a Notice of Proposed Rulemaking compelling larger foreign banking organizations (FBOs) with material US operations to establish an Intermediate Holding Company (IHC) for virtually all of their US subsidiaries. The proposal included that IHCs of foreign banks would be subject to the same risk-based and leverage capital standards applicable to US bank holding companies. The aim with the proposal is to strengthen capital positions of the IHCs and promote a level playing field among banks operating in the US. IHCs with $50bn or more in assets also would be subject to the Fed’s capital plan rule. We believe the US subsidiaries of foreign banks with large broker-dealer operations could be more penalized under the leverage rules given the large amount of low risk assets booked either outright or via repos in the US. Foreign bank subsidiaries in the US may have to shed a significant portion of the low-risk, but balance sheet-consumptive assets, given higher capital costs which would be a blow to repo markets. More than half of the NY Fed’s primary dealers are foreign-related, suggesting that a potential retrenchment from foreign broker dealers could have a material impact on repo markets via reduced intermediation and willingness to make markets.

We also see a risk that US operations could also be subject to a 3% Basel leverage ratio if total asset size in the US exceeds $250bn – this is the general threshold to be considered as an ‘advanced approach’ bank – such banks are required to maintain a 3% supplementary leverage ratio.

Timeframe for European banks’ US operations is as uncertain as minimum requirements in our view. According to the Fed Dec 2012 proposals, foreign banking organizations with total global consolidated assets of $50bn or more as of 1 July 2014 will be subject to the proposed rules starting on 1 July 2015.



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Timeframe for the leverage ratio: focus will be on 2015 rather than 2018 in our view. Under US proposals, US top tier banks would be required to meet minimum supplementary leverage of 5% for the bank holding company and 6% for the deposit-taking subsidiaries, as of 1 Jan 2018. Public disclosure and reporting however starts 1 Jan 2015. In our view, investors will focus on 2015e rather than 2018, as we believe that banks will be under market pressure as soon as disclosure is available and the2018 implementation date is irrelevant.

Capital & Asset reduction analysis by bank based on 2015

Based on the Basel leverage ratio definition under their latest proposal, the 5% supplementary leverage ratio requirement for US IBs would be challenging: GS and MS would likely be short of the 5%, with an estimated 3.5% and 3.2% end 2015e. This would imply $27bn supplementary leverage ratio shortfall for both GS and MS, equivalent to 43% and 55% additional Tier I issuance required, or $550bn (30% of leverage exposure) and $538bn (35%) of asset reduction respectively. This could limit dividend payout or share buyback in our estimates.

European banks would be required to maintain a minimum of 3% Basel leverage ratio, under Basel's latest proposals. We estimate that European banks have lower Basel 3 leverage ratios vs. US IBs, with 2.8% for DB, 3.0% for CS, 3.0% for SG, 3.3% for BNPP and 4.1% for UBS end 2015e. Based on Basel 3% minimum, only DB, SG and CS would likely have a leverage ratio shortfall end 2015e with $4.6bn, $0.8bn and $0.2bn of capital shortfall respectively, equivalent to 7%, 1% and 0.4% of additional Tier I issuance required.

We add GS and MS for comparability purposes with European Banks, as we believe the US is ahead of the curve in terms of both the starting point of leverage ratio as well as the proposals on leverage ratios. Both GS and MS will need to operate at a 5% supplementary leverage ratio over time, including the 2% leverage buffer. In addition, Insured Depository institution subsidiaries of both banks would need to operate at the 6% “well capitalized” threshold under the proposals.

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Table 87: JPMe Basel Leverage ratio calculations based on latest proposals (June 2013) and US GAAP

$ million

CSG UBS DB Socgen BNPP GS MS Avg.

Balance sheet as at Q2 13 Q2 13 Q2 13 2012 2012 Q2 13 Q2 13

On-balance sheet items: 973,441 1,194,783 2,484,753 1,631,561 2,421,601 938,456 802,691exclude derivatives -41,524 -351,058 -827,262 -246,240 -448,647 -67,853 -38,761exclude Securities Financing Transactions -183,496 -106,027 -209,916 -74,899 -207,731 -328,087 -271,608Assets deducted in determining Basel III Tier 1 capital -9,617 -9,154 -6,699 -11,579 -19,125 0 0Total on-balance sheet exposures (excluding derivatives and SFTs) 738,805 728,543 1,440,876 1,298,843 1,746,098 542,516 492,322Replacement cost 41,524 351,058 763,142 231,062 418,285 67,853 38,761Counterparty netting 81,143 -261,964 -693,306 -198,198 -359,171 52,901 68,535Add-on amount 201,946 154,239 332,223 105,452 351,853 204,933 104,122Gross up for derivatives collateral provided 63,086 102,581 96,821Gross notional credit derivatives sold 865,713 1,123,399 1,658,723 350,417 1,369,628 1,714,001 1,736,806Notional offsets and add-on deductions for written credit derivatives -834,571 -1,034,637 -1,577,634 -315,375 -1,232,666 -1,417,501 -1,543,950Total derivative exposures 418,841 332,094 483,147 173,357 547,929 724,768 501,095Gross SFT assets (with no recognition of accounting netting) 183,496 106,027 209,916 74,899 207,731 393,255 359,855SFT counterparty exposure 9,175 5,301 10,496 3,745 10,387 19,663 17,993Total securities financing transaction exposures 192,671 111,329 220,412 78,643 218,117 412,918 377,848Other off-balance sheet exposures 144,656 105,414 263,544 247,393 360,117 148,848 145,026Total exposures 1,494,973 1,277,380 2,407,979 1,798,237 2,872,261 1,829,049 1,516,291Total asset reduction by 2015E -82,417 -361,904 -325,250 4,405Total exposure post asset reduction 1,412,556 915,475 2,082,729 1,802,642 2,872,261 1,829,049 1,516,291

2015E Basel 3 Common equity T1 capital (fully loaded) 36,499 37,092 57,902 53,270 94,939 63,985 48,921Current Additional Tier 1 outstanding 1,693Total Additional Tier 1 capital outstanding including existing hybrids to be converted to BCNs 5,7142015E Basel III Tier 1 Capital (CET1 + AT1 incl. existing hybrids to be converted to BCNs) 42,213 37,092 57,902 53,270 94,939 63,985 48,921

2015E Leverage ratio (B3CET1) post asset reduction 2.6% 4.1% 2.8% 3.0% 3.3% 3.5% 3.2% 3.2%

2015E Leverage ratio (B3CET1+AT1) post asset reduction 3.0% 4.1% 2.8% 3.0% 3.3% 3.5% 3.2% 3.3%

Min. Basel leverage ratio requirement 3.0% 3.0% 3.0% 3.0% 3.0% 5.0% 5.0%

To reach min. leverage ratio (B3ET1+AT1 fully loaded)Total additional exposure reduction required (in mn) 5,446 - 152,649 26,963 - 549,350 537,871

Further total exposure reduction required (%) 0.4% 0% 7% 1% 0% 30% 35% 11%

Total additional tier 1 issuance required (mn) 163 - 4,579 809 - 27,468 26,894

Total additional tier1 issuance required (% of B3CET1+AT1) 0.4% 0% 8% 2% 0% 43% 55% 15%

Total additional tier1 issuance required (% of market cap) 0% 0% 11% 3% 0% 37% 53%

2015E US GAAP leverage ratio ex derivs & repos 4.9% 5.0% 4.0% 4.1% 5.4% 11.8% 9.9% 6%

Min. US GAAP leverage ratio requirement 4.0% 4.0%



Corporate Center legacy portfolio and SF55bn in Group treasury activities. CS - Total balance sheet reduction target of less than SF900bn and total off-balance sheet exposures (including derivative add-ons) of less than Sf290bn.

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No clarity yet for European banks' US operations

Specific rules for US operations of foreign banks remain unclear, with no further clarity on the Fed proposals for enhanced supervision of foreign banks.US 2013 capital rules make no mention of the treatment for foreign banks' US operations.

Under the Dec 2012 Fed proposals, European banks would be required to organize US subsidiaries under a single US intermediate holding company (IHC) which would be subject to the same risk-based and leverage capital standards applicable to US BHCs, i.e. minimum generally applicable US GAAP leverage ratio of 4% which remains unchanged.

European banks’ US operations would likely need to operate with a US GAAP leverage ratio above 4%, as well as potentially meet the 3% minimum supplementary leverage ratio in our view. We see these requirements as significant constraints.

European banks would need to operate in the US with a US GAAP leverage ratio above 4% in our view, as a) the Fed will likely require 5%, which is the level needed to be considered as “well capitalized”, b) the 4% minimum would likely have to be met in future stress testing exercises/CCARs as well, which would imply higher ratios on a business-as-usual basis.

There is also a risk that European banks' US operations would need to comply with the 3% Basel leverage ratio in our view, which would be an additional constraint and may trigger asset reduction by banks to avoid falling into the scope of the proposed requirement. The Basel leverage ratio is required only for ‘advanced approaches’ bank holding companies, generally BHCs with over $250bn of total consolidated assets. In our view, US operations of DB, with total assets over $300bn, would likely fall in the scope of the advanced approaches banks and be required to maintain the 3% Basel leverage ratio. Whether they would have to maintain 3% under stress is unclear however, as the 3% minimum is only a prompt corrective action (PCA) requirement for insured depositary institutions. Over time, DB could reduce total assets in the US (wholesale operations, renegotiating client books) to run under $250bn in our view. BNPP, with estimated total assets of $240bn, may fall outside the scope and might have to comply only with the 4% generally applicable leverage ratio.

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Table 88: PCA levels for all insured depository institutions

PCA category Total Risk-based Capital (RBC) measure

(total RBC-ratio-(percent)

Tier 1 RBC measure (tier 1

RBC ratio percent)

Common equity tier 1 RBC measure

(common equity tier 1 RBC ratio (percent)

Leverage Measure PCA requirements

Leverage ratio

(percent)

Supplementary leverage ratio

(percent)*

Well capitalized ≥ 10 ≥ 8 ≥ 6.5 ≥ 5 Not applicable Unchanged from current rule*

Adequately-capitalized ≥ 8 ≥ 6 ≥ 4.5 ≥ 4 ≥ 3.0 "

Undercapitalized < 8 < 6 < 4.5 < 4 < 3.00 "

Significantly undercapitalized

< 6 < 4 < 3 < 3 Not applicable "

Critically undercapitalized

Tangible Equity (defined as tier 1 capital plus non-tier 1 perpetual stock) to Total Assets ≤ 2 Not applicable

Source: FDIC. Note: The supplementary leverage ratio as a PCA requirement applies only to advanced approaches FDIC-supervised institutions that are insured depository institutions. The

supplementary leverage ratio also applies to advanced approaches bank holding companies, although not in the form of a PCA.

Balance sheet size in the US likely to be reduced by most European IBs but P&L impact uncertain

We believe most European banks with large IB operations in the U.S. would work towards reducing the size of their US balance sheets to comply with 1. US Foreign Banking organization proposals and 2. Potential leverage ratio requirements for the US operations.

We believe repo book would be one area which most banks would be targeting to reduce total assets, but the P&L impact of these reductions remains uncertain in our view. Also, the impact of repo book reduction on the ability of these banks to participate in the government bond market is also uncertain at this point.

Deutsche Bank Trust Corporation is a US bank holding company with $72bn in assets as of Jun-13. Besides this, Deutsche has other material entities in the US, such as Deutsche Bank Securities Inc. which had $240bn in assets as of Dec-11.

We estimate DB may be able to reduce the size of its funded balance sheet in the US to c.$300bn. DB management also indicated on its Q2 conference call that capital is not a constraint for its US business and it also has a plan in place to meet the 3% supplementary leverage ratio requirement in the US While DBK management has outlined to an extent its plan to comply with the US FBO proposals, it is still not clear to us if these plans are likely to get the approval of BaFin and with the Fed rules not final yet, uncertainty has remained.

CSG has a legal entity structure which we believe is most suited for the new regulatory landscape. CSG had $345bn in assets at the end of H1 13 in Credit Suisse (USA), Inc. We estimate CSG could reduce its balance sheet size in the US by c.30% i.e. towards $240bn, which means it would be subject to only the 4% generally applicable leverage ratio.

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UBS Americas Inc., which is a wholly owned subsidiary of UBS AG, had SF215bn in assets as of Dec-12, down from SF302bn at the end of Dec-11. We believe UBS operates mainly through branches with the equity sitting in parent bank UBS AG. However, UBS is undergoing a major FICC restructuring which means the balance sheet size is likely to decline further. We estimate UBS Americas Inc. balance sheet to reduce further by SF75bn to SF83bn on an adjusted basis.

BNP Paribas' US subsidiaries had total assets of $240bn in our estimates, including $63.3bn for Bank of the West, $39.2bn for BNP Paribas Prime Brokerage and $126.7bn for BNP Paribas Securities as of end 2012, as per the SEC filings. Bank of the West is the only well capitalized subsidiary with equity of $11.6bn and Tier I leverage ratio of 12.5%, whilst BNP Paribas Securities had equity of $2bn only. To comply with Dodd Frank Section 165, the group will likely reconsider the legal structure of its operations, to benefit from Bank of the West strong capital.

Société Générale's US subsidiaries had total assets of $53bn in our estimates, including $36.4bn for SG Americas Securities, and $16.2bn for Newedge USA, as of end 2012 as per SEC filings. SG Americas Securities had shareholders' equity of $2.2bn, whilst Newedge USA had equity of $581m only. To comply with Dodd Frank Section 165, the group will also likely reconsider the legal structure of its operations.

Table 89: European IBs: US operation balance sheets likely to be reduced to comply with leverage ratio requirements– 1/2

$ million

CS1 UBS DB

Credit Suisse

(USA), Inc.

Credit Suisse Securities

(Europe) LimitedCredit Suisse International

UBS Americas

Inc.2

UBS Ltd.3

Deutsche Bank US

subsidiaries

Deutsche Bank UK

subsidiaries

Subsidiary Net Income 877 2,267 -658 -732 -2,508 -2,538 29 - - -Subsidiary Equity 46,845 22,899 8,357 15,589 6,007 2,225 3,782 - - -

Total Assets 500,568 243,836 128,670 128,063149,61

4 90,973 58,642 600,000 300,000 300,000

Source: Company reports and J.P. Morgan estimates. Note: **Subsidiary assets include Credit Suisse (USA) Inc. and Credit Suisse (Europe) Limited for CS; UBS Americas Inc. and UBS Limited

for UBS;. DB subsidiary assets are estimated numbers for US and UK. 1. Subsidiary P&L data for 2012; 2.P&L data for 2012; 3.P&L data for 2011.

Table 90: European IBs: US operation balance sheets likely to be reduced to comply with leverage ratio requirements – 2/2

$ million

BNP SocGen

BancWest

BNP Paribas Prime

Brokerage

BNP Paribas Securities

Corporation

BNP Paribas UK Holdings

LtdNewedge

USA****SG Americas

Securities LLC

Societe Generale Investments (UK)

Limited

Subsidiary Net Income -

555- - 58 - - 25 22

Subsidiary Equity 15,747 11,654 533 2,034 2,059 3,104 581 2,225 299Total Assets 192,095 63,343 39,251 126,692 2,059 58,802 16,215 36,450 6,137

Source: Company reports and J.P. Morgan estimates. Note: * **Subsidiary assets include Credit Suisse (USA) Inc., Credit Suisse International and Credit Suisse (Europe) Limited for CS; UBS

Americas Inc. and UBS Limited for UBS;. DB subsidiary assets are estimated numbers for US and UK; **** 50% consolidated.

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Overview of the US regulatory agencies’ rules and proposals

Generally applicable leverage ratio

The generally applicable Leverage ratio remains unchanged at 4% minimum, however, it is more conservative than the current ratio as it incorporates a more stringent definition of Tier 1 capital under Basel 3.

The generally applicable leverage ratio is the ratio of Tier 1 capital to the total consolidated assets as reported minus amounts deducted from tier 1 capital. The consolidated reported assets for the US institutions remain on a US GAAP basis which allows netting of repos and derivatives.

Supplementary leverage ratio

A new minimum supplementary leverage ratio of 3%, starting on 1 Jan 2018,was established for banking organizations subject to advanced approaches rules, which are generally mandatory for banking organizations and their subsidiaries that have $250 billion or more in total consolidated assets or that have consolidated total on-balance sheet foreign exposure at the most recent year-end equal to $10 billion or more.

The supplementary leverage ratio is calculated as Tier 1 capital to total leverage exposure. The total leverage exposure equals the sum of the following:

1) The balance sheet carrying value of all of the on-balance sheet assets less amounts deducted from tier 1 capital

2) The PFE amount for each derivative contract to which the FDIC-supervised institution is counterparty (or each single-product netting set of such transactions). The FDIC notes that collateral may not be used to reduce the PFE amount for derivative contracts.

3) 10% of the notional amount of unconditionally cancellable commitments made; and

4) The notional amount of all other off-balance sheet exposures (ex. securities lending, securities borrowing, reverse repos, derivatives and unconditionally cancellable commitments). While the introduction of the no netting rule for off-balance sheet repos is not explicit in the US leverage ratio proposal, the Notice of the Proposed Rulemaking did make note of the Basel Committee’s consultative paper, leaving the door open for similar Basel 3 no-netting treatment for off-balance sheet repos in the US.

The calculation of total leverage exposure in the proposed FDIC rules is based on the June 2011 Basel leverage ratio guidelines rather than the latest Basel consultation paper released on 26 June 2013. However, US regulators will consider whether or not to adopt the final Basel leverage rules, once they’re finalized.

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US regulators have proposed higher supplementary leverage ratio standards for US top tier bank holding companies (BHCs) - 5% for the BHC and 6% for their Insured Depositary Institution (IDI) subsidiaries. The agencies proposed a supplementary leverage ratio buffer of 2% for US top-tier BHCs with at least $700 billion in total consolidated assets or at least $10 trillion in assets under custody, and a 3% buffer for all their IDI subsidiaries, taking the supplementary leverage ratio requirement to 5% for the US top-tier BHC and 6% for their IDI subsidiaries.

Timing of implementation: "Consistent with Basel III, the interim final rule implements for reporting purposes the proposed supplementary leverage ratio for advanced approaches FDIC-supervised institutions starting on January 1, 2015 and requires advanced approaches FDIC-supervised institutions to comply with the minimum supplementary leverage ratio requirement starting on January 1, 2018" (page 51 of the 2013 interim final rule).

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Implication of a higher leverage ratio on the banking industry

In our view, the proposed changes decrease the attractiveness of collateralized businesses for banks, which may see a varying degree of negative impact as a result of the revised leverage ratio framework outlined in the recent consultation. In particular, banks with large derivatives and repos books are affected. The risk is that certain business lines cannot be maintained or the cost of doing business becomes more expensive for the end-user. For example:

Leverage ratio could significantly hurt the repo markets. The revised guidance on leverage ratio regulations is punitive for repo transactions as it not only forbids netting of collateral but does not allow netting of exposure either. In other words,repos are accounted for on a gross basis with no benefit given for offsetting repo and reverse repo positions in the calculation of the exposure measure. The inability of banks to offset repos against reverse repos could increase the denominator of the leverage ratio by up to $6tr according to JPM’s Asset Allocation Research (Flows & Liquidity: Leverage ratios to hit repo markets).

Repos are a $7tr universe approximately across the US, Europe and Japan, which is equal to close to 10% of the $77tr of the reported assets of G4 commercial banks including US broker-dealers. However, off-balance repos as well as accounting reporting which allows for netting between repos and reverse repos under both IFRS and US GAAP as well as collateral netting under US GAAP, means that most of this $7tr of repos is not captured in reported balance sheets, i.e. it is not included in the above $77tr figure of commercial bank assets. Repos are typically reported in the liability side while reverse repos are reported in the asset side. But when netting is allowed, only the net exposure is reported either as a net reverse repo exposure in the asset side or as a net repo exposure in the liability side. This net exposure is small. In the case of US broker dealers for example, the net repo exposure reported in the liability side was only $185bn as of the end of Q1, vs. gross exposure of $2.6tr, so reported net exposure was less than 10% of gross exposure.

If the same 10% is applied to the whole of the $7tr of G4 repos, i.e. assuming that around $700bn is accounted via existing reporting of net repos in banks’ balance sheets, then under the revised Basel proposal which forces reporting of total gross rather than net exposures, the Exposure Measure would increase by more than $6tr. Applying the 3% minimum capital requirement to this $6tr potentially results to additional capital of $180bn across the whole of the G4.

A retrenchment in repo markets seems inevitable following these rules, especially in the US where subsidiaries of foreign banks, which typically have large broker-dealer businesses in the US, are required to meet the leverage ratio specifically for the balance sheet assets and capital located in the US. This is unwelcome news for the liquidity of the underlying securities, given the historically tight relationship between trading volumes in bond markets and the outstanding amount of repos.


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Liquidity in the government securities markets could be impaired: The ability for banks to offset their reverse repos and repos has always supported the matched book trading business, which has facilitated in making government securities one of the most liquid markets. It is the repo market which makes government securities more liquid by allowing fast and efficient financing and short covering. The removal of offsets could force banks to scale back their matched repo books, impairing liquidity in the government securities markets. It could also force dealers to scale back their participation in Treasury auctions if they cannot buy and sell Treasuries or make markets cost effectively. For more detailed discussion, please refer to our US Fixed Income strategists’ report “Q&A about leverage ratios” on 19 Aug 2013.

While we see a bigger impact on repo markets, the impact on derivatives marketsshould not be underestimated. Similar to repos, banks will have to reassess their derivative portfolios and businesses against the higher leverage buffer. Thederivative exposures arise both from the contract’s underlying asset and fromcounterparty credit risk exposure.

Financing businesses that rely on collateral to reduce or mitigate risk while carrying large but relatively liquid gross asset positions, such as parts of Delta 1 and Prime brokerage.

Long-dated credit derivatives may suffer due to the additional treatment for written credit derivatives where the full effective notional value referenced by a written credit derivative is required to be incorporated into the exposure measure. The effective notional amount of the written credit derivative may be reduced by the purchased credit derivative on the same reference name and level of seniority under certain conditions. We believe at times it is difficult to hedge credit derivatives due to liquidity in the underlying and hence it is too expensive to hedge in-line with proposed Basel guidelines and hence offset would not be available.

Given the treatment of repos and derivatives under the proposed revised Basel 3 leverage ratio, we believe it could increase hedging costs for banks and clients, potentially significantly.

Structuring and securitization inventory would be impacted as they cannot be hedged perfectly in line with Basel requirements. In addition, credit protection would be more expensive when inventory is held. So the originator will have to pay extra fees or securitization will become a pure facilitation business, limiting the scope of potential issuance.

One aspect that the revised Basel 3 leverage ratio proposal tries to address is re-hypothecation and to which extent rehypothecation should be encouraged. According to BIS, the recent crisis suggests that greater reliance on rehypothecation in banks’ balance sheets i) increase interconnectedness, ii) make banks more vulnerable to financial shocks, iii) delay the recovery of assets, and iv) prompt banks to build up leverage in good times.

Table 91: Global IBs: Re-hypothecation at FY12

$ billion

MS* 469.0GS* 459.3DBK 344.3CSG 320.2UBS 311.6


Note: *GS and MS are at Q113



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Rehypothecation decreases however the (net) demand for collateral and the funding liquidity requirements of banks, since collateral can be reused to support more than one transaction. This in turn lowers the cost of trading, which is beneficial for market liquidity. Certain types of collateral rehypothecation (and reuse) play an important role in financial market functioning, and reduce transaction and liquidity costs.

Re-hypothecation could be impacted in our view as the non cash collateral received, if re-hypothecated for cash assets, will count towards the leverage ratio under the revised Basel Leverage ratio consultation document. This may impact liquidity for banks, reduce collateral velocity as well as cost for end users in our view.

Of all collateral delivered in 2011

76% was cash and 21% was

government securities. 95% of the cash collateral was eligible

for and 90% used in

rehypothecation, and in the region of 60% and 40% for

securities. Additionally, 93% of

credit derivative trades in 2011 had collateral arrangements,

which is the highest of any OTC

derivative asset class.

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BA

SE

L C

OR

E E

QU

ITY

TIE

R 1

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Basel 3 Core Tier I capital against JPM required capital requirement

European banks; average Basel 3 Core Tier I to improve to 12.0% end 2015e from 10.5% end 2013e

We estimate that average Basel 3 Core Tier I will improve from 10.5% on average end 2013e to 12.0% end 2015e, mainly driven by retained earnings, as well as RWAs reduction for a few banks – e.g. UBS, UK domestic banks, CASA, domestic Spanish banks, and ISP.

Figure 9: European Banks – Basel 3 Core Tier I ratios (fully loaded) 2015e vs. 2013e

%


Most European Banks to close their capital shortfall vs. JPM minimum requirement by 2015e

In Table 92 below, we compare European Banks’ Basel 3 Core Tier I ratios fully loaded end 2015e to our JPM minimum requirements including SIFI buffer - with our methodology based on business mix and/or bank management target levels. Note that our JPM minimum levels are generally higher than regulatory minimums including SIFI buffers.

We estimate €31bn of capital shortfall vs. minimum requirement (including SIFI buffer) end 2013e, mostly concentrated at:

15.9

%

15.7

%

13.0

%

13.8

%

14.0

%

12.7

%

10.4

%

12.8

%

9.5% 10

.6%

10.1

%

9.9%

9.1%

10.8

%

9.7% 10

.3%

10.3

%

10.3

%

8.6% 9.0%

8.0%

7.2%

7.1% 7.

6%

7.3%

17.1

%

16.6

%

16.4

%

15.5

%

15.0

%

14.5

%

13.0

%

12.8

%

12.2

%

11.4

%

11.4

%

11.2

%

11.2

%

11.2

%

11.1

%

11.0

%

10.7

%

10.6

%

10.1

%

10.1

%

9.7%

9.5%

9.3%

9.3%

8.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

SH

B

Sw

ed

UB

S

ND

A

SE

B

Dan

ske

Lloy

ds

DnB C

S

BN

PP

Soc

Gen DB

RB

S

ST

AN

ISP

Ers

te

HS

BC

UC

G

BB

VA

CB

K

SA

N

CA

SA

KB

C

Cai

xa

Pop

ular

2013e 2015e

143




CASA, with a €10bn shortfall to minimum 10% at end 2013e vs. >10% for peers SG and BNPP: Note however that: a) the regulator focuses only on Credit Agricole Group which is well capitalized with Basel 3 Core Tier I already at 10% end June 2013, b) this excludes the extension of Switch guarantee mechanism to €35bn of insurance RWAs in our estimates, by year end. The extension of Switch would improve Basel 3 Core Tier I to 8% end 2013e.

Spanish Banks with a €11bn shortfall end-2013e vs. minimum 9%, splitSantander with €5.6bn shortfall, Caixabank with €2.3bn, Popular €1.5bn and BBVA €1.4bn. However, we note that this shortfall disappears by 2015e driven by retained earnings and as such, the Spanish banks are adequately capitalized in our view.

RBS, with £4.2bn capital shortfall FY13E (90bps shortfall) vs. minimum 10% UK requirement.

KBC, with a €3bn shortfall vs. minimum 10% - we expect fully loaded Basel 3 equity ratio (ex government capital) to reach 9.2% by YE13, improving to 10.9% by 2015E. However, this includes positive AFS reserves (€1bn) and does not adjust for penalty payments on remaining state capital. Removing the positive AFS reserves and incorporating penalty payments on remaining government capital, B3 fully loaded equity ratio comes to 7.1% YE 2013, increasing to 8.2% by 2014E and 9.3% by 2015E, on the back of improving profitability and ongoing restructuring - these ratios represent a capital shortfall (against 10% levels) of €3bn 2013E and €700mn 2015E. Please note that while the market would factor in capital shortfall (on a clean basis) in valuations, regulatory pressure should be limited - as state capital is grandfathered as common equity and AFS reserves are included. Management intends to maintain a fully loaded B3 ratio (with grandfathering of state aid, inclusion of AFS reserves etc) of 10% from 2013 onwards.

DNB, with a 12.8% B3 ET1 ratio, has a NOK2.6bn capital shortfall in 2013e assuming no increase in mortgage risk weights and a 13% B3 ET1 minimum target, in line with Nordic peers. However, DNB is well above the regulatory B3 ET1 minimum of 9% by Jul13 and 10% by Jul14 (which rises to 11% by Jul15 and 12% by July 16).

Danske has a DKK2.3bn capital shortfall in 2013e vs. its internal B3 ET1 target of 13.0%, but it is well above the regulatory B3 minimum of 10.5% in 2022. We are however conservative in our assumptions as we use DKK100bn increase in corporate risk weights (pending appeal with the Danish FSA) in our B3 ET1 assumption, which reduces the JPMe B3 ET1 by ~160bps (i.e. without this adjustment Danske's B3 ET1 would be ~14.3% by end-13e).

Swiss banks: FINMA capital requirement for both UBS and CSG is minimum 10% Basel 3 CET1 ratio, another 3% in high trigger CoCo and low trigger CoCo of up to 6% depending on balance sheet size. UBS reaches a strong Basel 3 common equity Tier 1 ratio of 13.0% by 2013E, which is well above the 10% minimum requirement from FINMA. UBS however has decided to run at 13% B3CET1 ratio and meet the balance capital requirements through CoCo. CSG on the other hand reaches 9.5% B3CET1 ratio at the end of 2013E and has indicated that it plans to run with 10% B3CET1 ratio and meet the additional capital requirements through high and low trigger CoCo. Please note we include SF1bn in net litigation charge for both UBS and CSG in our capital calculation.

144




Table 92: European Banks – Basel 3 Core Tier I shortfall vs. JPMe minimum requirements

EUR million

Basel 3 Core Tier I 2013e Min 2013e

Excess/Shortfall 2013e

Shortfall % market cap

Basel 3 Core Tier I 2015e Min 2015e

Excess/Shortfall 2015e

Shortfall % market cap

CASA 7.2% 10.0% -10,109 -52% 9.5% 10.0% -1,805 -9%KBC 7.1% 10.0% -2,957 -21% 9.3% 10.0% -711 -5%Popular 7.3% 9.0% -1,455 -23% 8.9% 9.0% -88 -1%DnB 12.8% 13.0% -292 0% 12.8% 13.5% -1,016 -1%SEB 14.0% 13.0% 830 1% 15.0% 13.0% 1,740 1%Swed 15.7% 13.0% 1,559 1% 16.6% 13.0% 2,151 1%Danske 12.7% 13.0% -355 0% 14.5% 13.0% 1,831 2%SHB 15.9% 13.0% 1,941 1% 17.1% 13.0% 2,942 2%Caixabank 7.6% 9.0% -2,332 -17% 9.3% 9.0% 438 3%HSBC 10.3% 10.0% 2,901 1% 10.7% 10.0% 7,764 4%STAN 10.8% 10.0% 2,113 4% 11.2% 10.0% 3,668 7%SAN 8.0% 9.0% -5,625 -9% 9.7% 9.0% 4,330 7%UBS 13.0% 13.0% -92 0% 16.4% 13.0% 5,920 8%BBVA 8.6% 9.0% -1,391 -3% 10.1% 9.0% 3,823 9%Erste 10.3% 10.0% 301 3% 11.0% 10.0% 1,091 10%NDA 13.8% 13.0% 1,382 4% 15.5% 13.0% 4,179 11%CS 9.5% 10.0% -1,226 -3% 12.2% 10.0% 5,040 12%DB 9.9% 10.0% -441 -1% 11.2% 10.0% 4,941 14%BNPP 10.6% 10.0% 3,529 6% 11.4% 10.0% 9,159 15%RBS 9.1% 10.0% -4,939 -13% 11.2% 10.0% 5,772 15%Soc Gen 10.1% 10.0% 226 1% 11.4% 10.0% 5,097 19%Lloyds 10.4% 10.0% 1,262 2% 13.0% 10.0% 9,902 19%CBK 9.0% 9.0% -39 0% 10.1% 9.0% 2,426 24%ISP 9.7% 9.0% 2,200 9% 11.1% 9.0% 6,517 27%UCG 10.3% 9.0% 5,419 21% 10.6% 9.0% 7,097 28%

Total shortfall / av. 10.5% 10.5% -31,255 -13% 12.0% 10.6% -3,620 -5%


By end 2015e year end however, we expect the great majority of banks to reach at least minimum requirements, with capital shortfall reduced to €3.6bn, including €1.8bn for CASA, €1.0bn for DnB, €0.7bn for KBC. We note that DNB’s capital position is calculated using 25% mortgage risk weights vs. 11% currently, and KBC’scapital position is calculated after deducting positive AFS reserves (c. €800mn by 15E) and including penalty payments on remaining government capital

Although DNB is well capitalized in a European context, we see a capital shortfall in 2015e reflecting the Norwegian regulator’s desire to have the toughest capital requirements in Europe. In addition to the 12% B3 ET1 minimum requirement for SIFI banks by July 2016, the regulator is proposing to introduce an up to 2.5% countercyclical buffer that needs to be covered by ET1 and doubling/tripling mortgage risk weights from ~11% to ~20-35%. Norway is expected to make a decision on the countercyclical buffer and mortgage risk weights in 2H13e. Assuming a 13.5% minimum B3 ET1 requirement (including a 1.5% countercyclical buffer) and 25% mortgage risk weights, would translate into a NOK8.2bn capital shortfall for DNB in 2015e (B3 ET1 of 12.8%).

With the Swedish banks being among the best capitalized banks across Europe, Sweden is moving ahead of Europe by implementing stricter and earlier capital requirements than those proposed under CRD4. In Sweden SIFI banks must hold a 12% min B3 ET1 by Jan 2015 and all banks target at least a 13% fully loaded B3 ET1. Additionally the regulators are considering potentially introducing a countercyclical buffer of up to 2.5% and increasing mortgage risk weights even further from the recent hike to 15% (from ~5%, done in Pillar 2). Adjusting for 15% mortgage risk weights and generous dividend payouts (~50-75%), we see the Swedish banks reaching a B3 ET1 of 13.8-15.9% by end-13e and 15.5-17.1% by end-15e.

145




Denmark is looking to implement slightly stricter B3 ET1 requirements than Europe, but in line with the European timeframe. Under the latest proposal Danske would need to hold a 10.5% min ET1 (includes a 3.5% SIFI buffer) and a total capital ratio of 17.6% by 2022. In addition, risk weights are increasing. After benchmarking risk weights across banks, the Danish FSA ordered Danske to increase its corporate risk weights by at least 10% from the current ~32% (ex Ireland), translating into a ~DKK100bn increase in RWAs in ‘13e. Adjusting for the higher corporate risk weights we see Danske's B3 ET1 reaching 14.5% by end-15e vs. 13.0% internal target, hence Danske is in view our well placed to meet the tougher regulatory environment and its internal target.

SG & BNPP: SG & BNPP would be well capitalised at 11.4% Basel 3 Core Tier I end 2015e, with respectively €5bn and €9bn of excess capital above the minimum 10%.

CASA would reach 9.5% end 2015e including current Switch, implying a €1.8bn shortfall to our minimum 10%. However, with the extension of Switch expected by year end, Basel 3 Core Tier I would improve further to 10.5% end 2015e.

Swiss banks: UBS reaches a strong Basel 3 common equity Tier 1 ratio of 16.4% by 2015E which is well above the 13% B3CET1 ratio target it aims to operate with. CSG reaches 12.2% B3CET1 ratio at the end of 2015E and has indicated that it plans to run with 10% B3CET1 ratio and meet the additional capital requirements through high and low trigger CoCo. Please note we include SF1bn in net litigation charge for both UBS and CSG in our capital calculation.

Deutsche Bank reaches 11.2% B3CET1 ratio by the end of 2015E, after including €1bn in net litigation charges in our capital calculation; which is 170bps above the 9.5% minimum requirement including the 2.5% SIB charge.

Lloyds and HSBC: We estimate both Lloyds and HSBC to be at 13.0% and 10.7% B3CET1 ratio at FY15E which is above the minimum UK B3CET1 requirement of 10%. We note that at H113, HSBC was already above 10% and Lloyds was at 9.6% fully loaded B3CET1.

Italian Banks: Capital is already well above the minimum requirements, in 2Q13 the fully loaded B3 CET1 was at 9.7% for UCG and 11% for ISP. For UCG we expect the ratio to reach 10.6% by 2015, while for ISP we expect it to remain almost flat at the very high level of 11.1% in 2015E. We consider that Italian banks will maintain a high level of capitalization in order to be able to face the possibility of extraordinary loan loss provisions as part of the Asset quality review.

Erste Bank - post the recent capital increase (€660mn) and full repayment of participation capital (€1,764mn), Erste’s fully loaded Basel 3 equity ratio would stand at 10.3% at the end of 2013 (a year earlier vs. management’s intention to maintain 10% fully loaded ratio from 2014 onwards). This includes 40bps negative impact from implementation of B3 and 40bps from IRB implementation in Romania resulting in higher RWAs (to be implemented in 2015). Given the improving profitability and limited asset growth, we see B3 core equity levels further improving to 10.7% by 2014E and 11.0% by 2015E with c.€1bn capital buffer over 10% levels (15E).

146




Key differences in EU implementation vs. Basel 3

We note however that EU implementation of Basel 3 can differ from the original Basel 3 document as well as within EU countries. We highlight below the key differences in implementation:

Insurance capital treatment under CRD IV: CRD IV has introduced a key difference with the original Basel 3 rules on the treatment of insurance capital. Under Basel 3, insurance capital is to be fully deducted from common equity, once the 10% threshold for stakes in financial institutions has been fully used, however, CRD IV will likely allow EU banks to risk weight their insurance capital at 370% instead, effectively introducing a less punitive treatment for insurance capital. This CRD IV capital treatment, also called the "Danish Compromise”, will be used by French banks mostly. There could be a risk that the Single Supervisory Mechanism puts an end to such treatment, although we see little risk of changes by end 2015. CASA would be the most exposed to the potential removal of the Danish compromise, as detailed in our note "Credit Agricole: High cost of equity on Basel leverage uncertainties" on 29 July 2013.

Credit Valuation Adjustment charges under CRD IV: The EU directive could introduce exemptions from CVA capital charges for corporates and sovereigns. This would lead to €5bn to €25bn of RWAs relief for EU banks in our estimates. The US is not contemplating similar exemptions at this point.

AFS: In CRD IV, national regulators have the flexibility to set a 5-year grandfathering from 2013 for unrealized gain/loss adjustments. Under Basel 3, unrealized gains/losses are adjusted in Common Equity Tier I from the date of Basel 3 implementation (2013).

DTAs: The CRD IV directive gives European Banks a longer phasing period for DTA deductions from common equity (10 years rather than 5 years under Basel 3). Whilst this would have no impact on Basel 3 fully loaded Core Tier I ratios, this would provide European Banks more capital flexibility in the short/medium term vs. US peers. In addition, there are also national differences within the EU, e.g. the Italian government passed a law that converts into tax credits the DTA connected with the recognition of loan loss provisions and goodwill impairment4, thereby reducing Basel 3 capital deductions from DTAs.

Risk weight harmonization – Credit RWAs

Risk-weighted assets (RWAs) for European banks have been trending down as a % of total assets over the past 5 years, whilst the opposite could have been expected given the negative credit migration we have witnessed since the beginning of the financial crisis in 2008. In our view this is one reason why risk weights have come under increased focus, with market participants questioning the consistency of the banks’ risk-weighted assets and internal models across jurisdictions.

4 In Italy, losses on loan loss provisions and goodwill impairment can be deducted in the year they are recognised only for 30bp of the nominal value, with the rest of the amount becoming a Deferred Tax Asset.



147




Figure 10: European banks'* average RWA to total assets, 2009-2012 %

Source: Company reports and J.P. Morgan estimates. *includes European banks covered by JPM.

With capital being one of the most important metrics to assess a bank’s solvency and strength, large differences in risk weights across banks is not helping the confidence in reported RWAs.

The banks across Europe have differences in risk weights for the banking book exposures. While the difference in risk weights can be partly explained by the procyclicality and the riskiness of the portfolios, it still undermines the comparability of capital ratios across geographies. The table below shows the average risk weights used by the banks across Europe.

Table 93: Banking book risk weights under Basel II

Mortgages* Corporate loansBelgium 9% 45%Denmark 14% 36%Estonia 20% 90%Finland 8% 37%France 15% 50%Germany 18% 31%Greece 35% 100%Hungary 41%Italy** 15% 52%Italy (Standard Model) 20% 75%Latvia 51% 97%Lithuania 30% 93%Netherlands 14%Norway 12% 55%Slovakia 50%Spain 35% 66%Sweden 15% 42%UK 20% 65%

Source: J.P. Morgan estimates, Company data. Swedish Central Bank's financial stability report, May 2012; Advanced Model –Source

Pillar 3 June 2011 - TAB 7.4 - ISP, BMPS, UCG, Corporate loans are calculated using company averages for that country

The following table shows the comparison between risk weights of 55 banks across Europe compiled by Basel.

36%35%

34%

32%

2009 2010 2011 2012

European banks RWA/Total Assets

148




Figure 11: Comparison between advanced* and foundation** IRB for banks, average vs. range between minimum and maximum risk weight%

Source: BIS. * data from 55 banks on average was used in the sample. **data from 29 banks on average was used in the sample.

Nordics: In Sweden the regulator has implemented a risk weight floor of 15% for Swedish mortgages (vs. ~5% previously) within Pillar 2 to ensure that banks preserve own funds which cover the risks in the Swedish mortgage books. The IMF has recommended that mortgage risk weights should be raised to 35% over time in Sweden to prevent a housing bubble and consumer debt spiraling out of control. Norway is planning to follow Sweden by hiking mortgage risk weights to 20-35% (DNB has 11% as of 2Q13), potentially already in 2013. In Denmark the regulator considered Danske’s corporate risk weights too low and requested the bank to increase them by 10% to ~42% on average. These measures have been proposed to make banks more resilient and improve longer-term financial stability. We believe there could be more similar measures introduced in Europe over the coming years.

Risk weight harmonization – Market RWAs

We have discussed the issue of non-comparability of market RWAs across IBs for some time now, in our notes, “Global Investment Banks: Basel 4: Market RWAs convergence - capital at risk analysis” published 4th September, 2012 and “Global Investment Banks: Market RWA consistency questioned: DB downgrade to UW, upgrade GS to OW” published 6th July 2010.

The Basel Committee’s Standards Implementation Group (SIG) trading book subgroup in its publication, “Regulatory consistency assessment programme (RCAP) – Analysis of risk-weighted assets for market risk”, also presented the preliminary results of its analysis of RWA outcomes for banks’ trading books assets while indicating that a similar analysis was underway for the banking book.

31%45%

3%

18%

33%

56%

2%16%

0%

20%

40%

60%

80%

100%

120%

Advanced All Corporate Sovereign Bank Foundation All Corporate Sovereign Bank

Range between min and max risk weight Average risk weight

https://na-markets.jpmorgan.com/research/content/GPS-436229-0





149




Why regulators are focused on RWA harmonization:

1. As shown in Table 94Table 92, Market RWA numbers for different banks vary significantly even post Basel 3, with GS reporting Market RWAs of $184bn in Q2 13 while DB reported Q2 13 Market RWAs of $73bn (€55bn) under Basel 2.5 while UBS which is substantially restructuring its FICC businesses’ reported Q2 13 Basel 2.5 Market RWAs of $21bn (SF19bn).

We do not think MS takes three times more risk than CSG, as is reflected in its market RWAs, which are 3.1x those of CSG and 2.0x those of DBK.

The extent of proportionate use of Internal models and Standardised approaches to calculate market RWAs varies considerably across banks,which in turn leads to additional uncertainty in market RWA reported across banks in our view as we believe the Internal models are not comparable across banks/jurisdictions. Based on 2012 Pillar 3 disclosures, 98% of UBS market RWAs are internal model based, while SG and BNPP based on 2012 Pillar 3 disclosure are at 82-89% internal models based. For US IBs GS and MS based on Q2 13 regulatory capital disclosures, an average 46% of Market RWAs is based on Internal models and the rest is Standardised.

Table 95: Last reported Basel 2.5 Market RWA split (%)

2012/Q2 13

Internal model approach Standardized approachGS* 44% 56%MS* 49% 51%SG 82% 18%CSG 85% 15%DBK* 86% 14%BNP 89% 11%UBS 98% 2%

Source: J.P. Morgan estimates, Company data. *Q2 13.

2. Similarly, FICC RWAs across IBs also do not look comparable to us, with MS having Basel 3 RWAs of $239bn in FICC at the end of Q2 13, compared to CSG at $112bn. DBK is targeting <€200bn (<$257bn) in CB&S RWAs by 2015.

3. We also take a look at the reported diversification benefits by different banks and concur with the Basel Committee’s view that diversification benefits for the banks using internal models approach have been on the higher side. This is despite the fact that we do not include the diversification benefits within each of the broad market risk categories in our comparison as these are not reported by banks and it is not possible for us to compare this across banks, due to lack of data.

We would welcome rationalisation of diversification benefits between the Standardised and Internal Models based approaches to make at least VaR-based Market RWAs more comparable.

Table 94: Market RWAs pre and post JPMe market RWA convergence 2015E

$ billions

Pre Post Δ (%)

GS 184 184 0%

MS 143 143 0%DBK 73 126 72%

CSG 46 78 69%

BNP 45 69 53%SG 35 49 41%

UBS 21 40 96%

Source: Company reports and J.P. Morgan

estimates. Note: $ conversion using current

exchange rates.

150




Table 96: Global Banks: large variation in diversification benefits as % of VaR in 2011 and 2012

Local ccy, millions

Average VaR FY

2011Diversification

benefit 2011

% diversification

benefit 2011

Average VaR FY

2012Diversification

benefit 2012

% diversification

benefit 2012 Comment

BofA 167 163 49% 75 117 61% GroupBNP 144 178 55%

42 52 55%Group , BNP Paribas scope excluding Fortis, average of quarterly averages in 2012

UBS 76 55 42% 33 38 54% GroupDB* 50 64 56%

56 63 53%CIB, trading market risk outside of CIB is immaterial, 9M average VAR for 2012

MS 102 63 38% 64 55 46% Group , Primary risk categories onlySG 38 61 62% 31 21 41% Group , taking average of quarterly averagesCS 75 44 37% 55 39 41% IBCiti 213 162 43% 122 82 40% Group , Total Trading VAR

Source: Company Reports, J.P. Morgan estimates.

In our estimates, post our market RWA convergence exercise, market RWAs increase by average 58% for European IBs by moving towards a more US IBs type 50:50 split of market RWAs under Standardised and Internal models method respectively. Post our exercise, market RWAs for the European IBs are more inline with their US peers. For European banks where we do not have the Q2 13 split between Internal and Standardised methods, we use the 2012 split of Internal vs. Standardised market RWAs.

Table 97: Average 58% increase in market RWAs for continental European IBs to reach 50% split on Internal models based market RWAs

$ millions

DBK CSG UBS BNP SG GS MSAvg. ex

U.S.Avg. U.S.

Period used for market RWA split Q2 13 2012 2012 2012 2012 Q2 13 Q2 13

Market risk in the trading book Q2 13 73,133 46,353 20,596 44,913 35,080 183,916 142,966

Implied Increase in Market RWAs using 50% Standardised approach 52,986 32,067 19,772 29,152 18,208 0 0

Total Implied increase in market RWAs (net of mc/ms adjustments) 52,986 32,067 19,772 23,632 14,276 0 0

% Implied increase in market RWAs 72% 69% 96% 53% 41% 0% 0% 58% 0%

Total market risk in the trading book (new) 126,119 78,420 40,367 68,545 49,356 183,916 142,966

% Internal model based 50% 50% 50% 50% 50% 44% 49% 50% 46%% Standardised 50% 50% 50% 50% 50% 56% 51% 50% 54%


Risk weights vs. un-risk weighted: given the large variation in risk weights across banks, regulators are now also looking to introduce a simple leverage ratio that is independent from the risk weight that we discuss in more detail in the leverage ratio section of this report (pg 102).

151




Curve Ball Securitisation Proposal Impact on RWAs

The Basel Committee has performed a broader review of the securitization framework, and in its consultation paper, is seeking to make capital requirements more prudent and risk sensitive: a) mitigate mechanistic reliance on external credit ratings, b) address the issue of too low risk weights for highly rated securitization exposures and too high risk weights for low rated senior securitisation exposures, and c) reduce cliff effects following deterioration in credit quality in the underlying pool.

The Basel proposals could result in much higher capital requirements for securitizations in our worst case scenario, in particular for high quality senior tranches in our view.

The main change in our view is the closer alignment of the Standardised Approach (SA) and Internal Ratings-Based (IRB) approaches, with both SA and IRB approaches using the same risk weights and look-up table for long-term ratings, to avoid arbitrage opportunities. As illustrated in Table 98 below, risk weights have been increased significantly for higher rated securitization exposures, and the risk weight floor has been increased to 20% vs. 7% previously for senior tranches under the current Ratings Based Approach.

Table 98: Illustrative Revised Ratings Based Approach (RBA) risk weights under Alternative A vs. current RBA risk weights (in brackets)

%

Ratings

Senior

Non senior

Thin Thickness = 0.10 Thickness = 0.25 Thickness = 0.50

1 yr 5 yr 1 yr 5 yr 1 yr 5 yr 1 yr 5 yr 1 yr 5 yr

AAA 20 (7) 58 (7) 20 (12) 175 (12) 20 (12) 128 (12) 20 (12) 94 (12) 20 (12) 68 (12)AA+ 32 (8) 75 (8) 32 (15) 228 (15) 32 (15) 169 (15) 32 (15) 126 (15) 32 (15) 94 (15)AA 51 (8) 97 (8) 67 (15) 306 (15) 67 (15) 233 (15) 64 (15) 174 (15) 57 (15) 122 (15)AA- 61 (8) 110 (8) 103 (15) 344 (15) 103 (15) 271 (15) 93 (15) 198 (15) 78 (15) 136 (15)A+ 71 (10) 124 (10) 153 (18) 388 (18) 153 (18) 317 (18) 128 (18) 223 (18) 101 (18) 150 (18)A 81 (12) 141 (12) 220 (20) 433 (20) 212 (20) 360 (20) 168 (20) 250 (20) 124 (20) 166 (20)A- 94 (20) 162 (20) 326 (35) 478 (35) 291 (35) 417 (35) 213 (35) 296 (35) 147 (35) 197 (35)BBB+ 106 (35) 183 (35) 458 (50) 574 (50) 385 (50) 482 (50) 269 (50) 337 (50) 179 (50) 225 (50)BBB 118 (60) 203 (60) 609 (75) 707 (75) 476 (75) 553 (75) 330 (75) 383 (75) 218 (75) 253 (75)BBB- 136 (100) 235 (100) 851 (100) 980 (100) 598 (100) 689 (100) 414 (100) 477 (100) 273 (100) 315 (100)BB+ 153 (250) 265 (250) 1036 (250) 1195 (250) 729 (250) 840 (250) 504 (250) 581 (250) 333 (250) 384 (250)BB 170 (425) 294 (425) 1181 (425) 1250 (425) 889 (425) 1024 (425) 601 (425) 693 (425) 391 (425) 450 (425)BB- 210 (650) 363 (650) 1230 (650) 1250 (650) 1028 (650) 1185 (650) 683 (650) 787 (650) 438 (650) 505 (650)B+ 262 (1250) 442 (1250) 1247 (1250) 1250 (1250) 1167 (1250) 1250 (1250) 773 (1250) 875 (1250) 494 (1250) 560 (1250)B 321 (1250) 485 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 883 (1250) 913 (1250) 565 (1250) 584 (1250)B- 389 (1250) 502 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 915 (1250) 915 (1250) 586 (1250) 586 (1250)CCC 472 (1250) 568 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 971 (1250) 971 (1250) 621 (1250) 621 (1250)Below CCC-

1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250)

Source: BIS, J.P. Morgan. Note: Tranche thickness is essentially the size of the tranche relative to the entire securitization transaction. For example, a securitization of $100 pool of loans might be

tranched into a $1 first loss position, a $2 mezzanine position and a $97 senior tranche. The $2 mezzanine position would have a tranche thickness of 2%.

Requirements to use the revised RBA have also been tightened: at least two eligible credit ratings would be needed to use the revised RBA for a securitization exposure; and similarly to the current framework, a bank would use the second best credit rating, regardless of how many eligible credit ratings were available. This calls into question the treatment for all those securitisations that have been issued with only one rating. Strict interpretation of the proposed rules would imply that a large part of the securitization exposures currently calculated using the exiting RBA would have to switch to more punitive risk weights under the Backstop Concentration Ratio Approach (BCRA)5.

5 For definition, see section below from page 5.

152




The enhanced approaches also differentiate for additional risk drivers:

Thickness of non-senior tranches: Tranche thickness is essentially the size of the tranche relative to the entire securitization transaction. For example, a securitization of a $100 pool of loans might be tranched into a $1 first loss position, a $2 mezzanine position and a $97 senior tranche. The $2 mezzanine position would have a tranche thickness of 2%. Under the current securitization framework’s ratings-based approaches, tranche thickness is not fully taken into account.

Maturity of the tranche: Tranche maturity would be based on the weighted-average maturity of the contractual cash flows of the tranche. Instead of calculating the weighted-average maturity, a bank would be allowed to choose simply to use the final legal maturity. As under the wholesale IRB framework, tranche maturity would have a 5-year cap and a 1-year floor. For intra-year maturities, the formula would generate the risk weights or a simple linear interpolation is used.

In addition, the Backstop Concentration Ratio Approach (BCRA) would be the only possible treatment for all resecuritisation exposures. In other words, resecuritisation exposures would not be subject to either of the two hierarchies proposed by Basel.

This means that for re-securitization exposures, the capital requirement would be a function of the detachment point of the tranche and the Standardised Approach risk weights for the underlying pool of exposures. In our view, this would lead to significant increases in risk weights.

Due to the lack of granularity on disclosures for securitization tranches (senior vs. non senior, maturity, thickness of the tranches, ratings etc.), estimating the impact from proposed changes remains challenging.

We have however run two sensitivity scenarios based on available Pillar 3 data, and detail our methodology below.

It is important to note that:

Our best case and worst case scenarios are extreme, however, the actual impact from Basel proposals are likely to be closer to our worst case scenarios in our view, as virtually all ABS will be 5-year maturity and hence attract the higher risk weights.

We have not made estimates for a) the standardized approach which accounts for a more limited portion of RWAs for European banks which rely more heavily on IRB approaches, and b) re-securitization exposures which capital requirements would have to be calculated using the Backstop Concentration Ratio Approach (BCRA), with even more significant increases in RWAs in our view.

We have not made estimates for US Investment Banks GS and MS as disclosure is even poorer with no Pillar 3 data and there would be some double counting with our estimates for US Basel 2.5 requirements for securitizations, as set by the latest market risk framework (US Risk-Based Capital Guidelines: Market Risk from June 2012) - $88bn for GS and $35bn for MS. For more detailed analysis, please refer to our note “Global Investment Banks: US Basel 2.5 NPR2 capital at risk analysis” on 25 Jan 2012.

153




In our best case sensitivity scenario, the impact would be significantly more manageable, with RWAs for IRB securitization exposures only multiplied by up to 1.7x on average in our estimates.

We estimate additional securitisation RWAs of only €4.4bn for SG, €4.8bn for BNPP, €5.6bn for DB, and SF0.2bn for CS.

Table 99: European Banks – Securitisation RWA Sensitivity to changes in Basel securitization framework – Best case scenario for IRB securitization exposures

Local currency in million, end 2012

EAD for IRB securitisations Current RW

Current RWAfor IRB

securitisationsNew RW –best case

New RWA –best case

Increase (x) -best case

Additional RWAs –

best caseSG 14,128 47% 6,700 79% 11,098 1.7 4,398BNPP 24,916 26% 6,420 45% 11,221 1.7 4,801CASA 53,895 29% 15,744 50% 26,765 1.7 11,021DB 55,519 41% 22,513 52% 28,825 1.3 5,618CS 22,552 24% 5,411 25% 5,637 1.0 226UBS n.a. - 12,050 - 12,050 1.0 0

Source: J.P. Morgan estimates, Company data. NB: re-securitisation exposures are excluded from the analysis.

In our best case scenario, Basel securitization proposals would have limited negative impact – up to 25bp on Basel 3 Core Tier I for CASA - and could even have a neutral impact on overall capital – UBS, as lower rated senior securitisations would attract lower risk weights than the blunt 1250% in the current framework.

Table 100: European Banks – 2014e Basel 3 Core Tier I sensitivity to Basel securitisation proposals – Best case scenario

€ million

Current RWA for securitisations Basel 3 Core Tier I

Additional RWAs– best case

New RWA for securitizations –

best caseBasel 3 Core Tier I

– best caseImpact –

best caseSG 6,700 10.7% 4,398 11,098 10.6% -0.13%BNPP 6,420 11.0% 4,801 11,221 10.9% -0.08%CASA 15,744 8.3% 11,021 26,765 8.1% -0.25%DB 22,513 10.5% 5,618 28,825 10.4% -0.15%CS 5,411 10.8% 226 5,637 10.8% -0.01%UBS 12,050 14.7% 0 12,050 14.7% 0.00%


Our best case sensitivity scenario is based on the following assumptions:

For RBA exposures: we assume that banks would be able to use the revised RBA, with risk weights increasing for higher rated tranches but decreasing for lower rated tranches. As we have limited data on the securitization tranches (maturity, thickness of the tranche etc) apart from the average risk weight under current RBA, we assume the best case scenario under the revised RBA, e.g. if the average risk weight is 20% under current RBA, we assume that the new risk weight under the revised RBA would be 94% implied for a A minus-rated senior tranche with maturity of 1 year.

For IAA exposures: We simplistically assume that the average risk weight for the total IAA exposures would increase to the best case scenario in the revised RBA/IAA look up table. For example, BNPP has EAD of €719m and RWA of €2,114m under IAA, the average risk weight is hence 16%. We assume under revised IAA/RBA that the new risk weight is 32%.

154




For SFA exposures: we simplistically assume that the RWAs would double for securitization exposures.

In our worst case scenario however, we estimate potentially significant impact from the Basel proposals for securitization capital requirements, with RWAs for IRB securitization exposures multiplied by 2x to 6x for European Banks in our estimates.

DB would be the most impacted in our worst case sensitivity scenario, driven by large increases in RWAs for higher rated tranches. We estimate additional securitisation of €68bn for DB. French banks would also be significantly affected, with RWAs increases of €23bn for SG, €35bn for BNPP, €47bn for CASA. This compares to only SF6bn for CS and SF24bn for UBS.

Table 101: European Banks – Securitisation RWA Sensitivity to changes in Basel securitization framework – Worst case scenario for IRB securitization exposures

Local currency in million, end 2012

EAD for IRB securitisations Current RW

Current RWAfor IRB

securitisationsNew RW –

worst caseNew RWA –worst case

Increase (x) -worst case

Additional RWAs – worst

caseSG 14,128 47% 6,700 208% 29,415 4.4 22,715BNPP 24,916 26% 6,420 166% 41,461 6.5 35,041CASA 53,895 29% 15,744 117% 62,976 4.0 47,232DB 55,519 41% 22,513 178% 98,939 4.4 68,020CS 22,552 24% 5,411 51% 11,576 2.1 6,165UBS n.a. - 12,050 - 36,150 3.0 24,100

Source: J.P. Morgan estimates, Company data. NB: re-securitisation exposures are excluded from the analysis.

In our worst case scenario however, Basel securitization proposals would have a material negative impact, reducing Basel 3 Core Tier by 23bp for CS to 160bp for DB in our estimates. DB would be the most impacted, with Basel 3 Core Tier I decreasing 160bp to 8.9% end 2014e. Under that scenario, we assume that risk weights on lower rated securitizations would remain high at close to 1,250% as in the current framework, and high rated securitizations would attract significantly higher risk weights.

Table 102: European Banks – 2014e Basel 3 Core Tier I sensitivity to Basel securitisation proposals – Worst case scenario

€ million

Current RWA for securitisations

Basel 3 Core Tier I

Additional RWAs– worst case

New RWA for securitizations – worst case

Basel 3 Core Tier I– worst case

Impact –worst case

SG 6,700 10.7% 22,715 29,415 10.0% -0.64%BNPP 6,420 11.0% 35,041 41,461 10.4% -0.58%CASA 15,744 8.3% 47,232 62,976 7.3% -0.99%DB 22,513 10.5% 68,020 98,939 8.9% -1.60%CS 5,411 10.8% 6,165 11,576 10.6% -0.23%UBS 12,050 14.7% 24,100 36,150 13.2% -1.46%


155




Our worst case sensitivity scenario is based on the following assumptions:

For RBA exposures: we assume that banks would be able to use the revised RBA, with risk weights increasing significantly. As we have limited data on the securitization tranches (maturity, thickness of the tranche etc) apart from the average risk weight under current RBA, we assume the worst case scenario under the revised RBA, e.g. if the average risk weight is 20% under current RBA, we assume that the new risk weight under the revised RBA would be 433% implied for a thin non senior tranche with maturity of 5 years.

For IAA exposures: disclosures are more limited in Pillar 3 reports, and we have no granularity on EAD/RWA per ratings or risk weights bands. We simplistically assume that the average risk weight for the total IAA exposures would increase to the worst case scenario in the revised RBA/IAA look up table. For example, BNPP has EAD of €719m and RWA of €2114m under IAA, the average risk weight is hence 16%. We assume under revised IAA/RBA that the new risk weight is 344%.

For SFA exposures: we simplistically assume that the RWAs would triple for securitization exposures.

156




Valuation and Earnings strips

BNP Paribas

Neutral

Company DataPrice (€) 50.74Date Of Price 10 Sep 13Price Target (€) 49.00Price Target End Date 31-Dec-1452-week Range (€) 51.04-36.57Market Cap (€ bn) 60.58Shares O/S (mn) 1,194

BNP Paribas (BNPP.PA;BNP FP)

FYE Dec 2012A 2013E 2014E 2015EAdj.EPS FY (€) 5.19 4.25 4.70 5.30Headline EPS FY (€) 5.36 4.29 4.29 5.13NAV/Sh FY (€) 48.68 51.18 53.77 56.90BV/Sh FY (€) 60.12 61.68 64.24 67.37Adj.P/E FY 9.8 12.0 10.8 9.6P/NAV FY 1.0 1.0 0.9 0.9DPS FY (€) 1.52 1.50 1.70 2.00Dividend Yield FY 3.0% 3.0% 3.4% 3.9%Source: Company data, Bloomberg, J.P. Morgan estimates.

BBVA

Underweight


BBVA (BBVA.MC;BBVA SM)

FYE Dec 2011A 2012A 2013E(Prev)

2013E(Curr)

2014E(Prev)

2014E(Curr)

2015E(Prev)

2015E(Curr)

Adj.EPS FY (€) 0.61 0.30 0.37 0.66 0.46 0.53 0.57 0.64Adj.P/E FY 12.8 26.2 17.6 11.7 14.1 14.8 11.4 12.1Dividend (Net) FY (€) 0.42 0.42 0.41 0.42 0.41 0.24 0.41 0.30NAV/Sh FY (€) 6.06 5.66 6.3 6.05 6.0 6.16 5.8 6.32P/BV FY 1.0 1.0 0.8 1.0 0.8 1.0 0.9 1.0RoNAV FY 11.1% 5.7% 6.30% 11.7% 7.70% 8.7% 9.9% 10.4%Core Tier 1 Ratio FY 10.3% 11.5% 12.5% 12.1% 12.5% 12.5% 12.70% 13.0%Source: Company data, Bloomberg, J.P. Morgan estimates.

CaixaBank

Overweight


CaixaBank (CABK.MC;CABK SM)

FYE Dec 2011A 2012A 2013E(Prev)

2013E(Curr)

2014E(Prev)

2014E(Curr)

2015E(Prev)

2015E(Curr)

Adj.EPS FY (€) 0.26 0.04 (0.01) 0.05 0.16 0.20 0.24 0.29Dividend (Net) FY (€) 0.00 2.84 0.23 3.70 0.23 3.70 0.23 3.70NAV/Sh FY (€) 5.09 4.46 3.6 4.44 3.9 4.73 3.9 4.72P/BV FY 0.5 0.6 0.6 0.6 0.5 0.6 0.5 0.6P/NAV FY 0.6 0.7 0.7 0.7 0.6 0.6 0.6 0.6RoNAV FY 51.3% 52.9% - 71.0% - 53.4% - 50.1%Adj.P/E FY 11.6 72.3 NM 62.6 15.1 14.7 9.7 10.2Source: Company data, Bloomberg, J.P. Morgan estimates.

157




Credit Agricole

Neutral


Credit Agricole (CAGR.PA;ACA FP)

FYE Dec 2012A 2013E 2014E 2015EAdj.EPS FY (€) 1.18 0.83 1.05 1.27Headline EPS FY (€) (2.60) 0.87 1.05 1.27NAV/Sh FY (€) 9.12 9.78 10.84 12.11BV/Sh FY (€) 15.96 16.53 17.66 18.93Dividend (Net) FY (€) 0.00 0.00 0.00 0.00Adjusted P/E FY 7.0 9.9 7.8 6.5P/NAV FY 0.9 0.8 0.8 0.7Dividend Yield FY 0.0% 0.0% 0.0% 0.0%RoNAV FY 13.0% 8.7% 10.2% 11.0%Source: Company data, Bloomberg, J.P. Morgan estimates.

UniCredit

Overweight


UniCredit (CRDI.MI;UCG IM)

FYE Dec 2012A 2013E(Prev)

2013E(Curr)

2014E(Prev)

2014E(Curr)

2015E(Prev)

2015E(Curr)

Adj.EPS FY (€) 0.28 0.24 0.22 0.34 0.33 0.50 0.53P/E (x) FY 20.3 30.4 35.5 16.8 17.4 10.6 9.9NAV/Sh FY (€) 7.93 8.09 8.07 8.24 8.21 8.49 8.49P/NAV FY 0.6 0.6 0.6 0.6 0.6 0.5 0.5ROE FY 2.9% 2.2% 2.0% 3.1% 3.1% 4.5% 4.8%ROA FY 0.2% 0.1% 0.1% 0.2% 0.2% 0.3% 0.3%Net Income Attributable to Ordinary Shareholders FY (€ mn)

865 865 741 1,571 1,509 2,484 2,670

Dividend Yield FY 1.9% 1.3% 1.3% 2.0% 2.0% 2.0% 2.0%RoNAV FY 4.0% 3.0% 2.7% 4.2% 4.1% 6.0% 6.4%Source: Company data, Bloomberg, J.P. Morgan estimates.

UBS

Overweight

Company DataPrice (SF) 19.19Date Of Price 10 Sep 13Price Target (SF) 21.00Price Target End Date 31-Dec-1452-week Range (SF) 19.47-11.29Market Cap (SF bn) 71.94Shares O/S (mn) 3,749

UBS (UBSN.VX;UBSN VX)

FYE Dec 2010A 2011A 2012A 2013E 2014E 2015EAdj.EPS FY (SF) 1.73 0.54 0.90 1.40 1.70 1.90Adj.P/E FY 11.1 35.5 21.4 13.8 11.3 10.1Headline EPS FY (SF) 1.99 1.10 (0.72) 1.03 1.25 1.76NAV/Sh FY (SF) 9.65 11.64 10.29 10.82 11.46 12.25P/NAV FY 2.0 1.6 1.9 1.8 1.7 1.6Tier 1 Ratio FY 17.8% 15.9% 21.3% 12.2% 13.9% 15.6%Dividend (Net) FY (SF) 0.00 0.10 0.15 0.30 0.60 0.95RoNAV FY 22.4% 10.2% (6.6%) 9.5% 11.0% 14.6%Source: Company data, Bloomberg, J.P. Morgan estimates.

158




Swedbank

Neutral

Company DataPrice (Skr) 155.00Date Of Price 10 Sep 13Price Target (Skr) 165Price Target End Date 31-Dec-1552-week Range (Skr) 169.70-

115.80Market Cap (Skr bn) 170.16Shares O/S (mn) 1,098

Swedbank (SWEDa.ST;SWEDA SS)

FYE Dec 2012A 2013E 2014E 2015EAdj.EPS FY (Skr) 13.05 13.48 14.42 15.23P/E (x) FY 13.6 13.1 10.7 10.2NAV/Sh FY (Skr) 81.64 81.04 84.64 88.45P/NAV FY 1.9 1.9 1.8 1.8ROE FY 14.2% 14.4% 15.2% 15.4%ROA FY 0.8% 0.8% 0.8% 0.8%Net Attributable Income FY (Skr mn)

14,304 12,962 15,827 16,717

Gross Yield FY 6.4% 6.5% 7.0% 7.4%RoNAV FY 16.5% 16.6% 17.4% 17.6%Source: Company data, Bloomberg, J.P. Morgan estimates.

Standard Chartered

Neutral

Company DataPrice (p) 1,511Date Of Price 10 Sep 13Price Target (p) 1,800Price Target End Date 31-Dec-1452-week Range (p) 1,861-1,377Market Cap (£ bn) 36.62Shares O/S (mn) 2,424Fiscal Year End Dec

Standard Chartered (STAN.L;STAN LN)

FYE Dec 2012A 2013E 2014E 2015EAdj.EPS FY ($) 2.17 2.14 2.36 2.56Adj.P/E FY 10.9 11.1 10.0 9.3Headline EPS FY ($) 1.99 1.94 2.39 2.59Adjusted PBT FY ($ mn) 7,518 7,783 8,371 9,153NAV/Sh FY ($) 15.15 16.10 17.85 19.52RoNAV FY 14% 12% 14% 14%Core Tier 1 Ratio FY 11.7% 11.3% 11.5% 11.6%DPS FY ($) 0.84 0.90 0.98 1.06Source: Company data, Bloomberg, J.P. Morgan estimates. Priced intraday at 9.16am

Société Générale

Overweight

Company DataPrice (€) 36.75Date Of Price 10 Sep 13Price Target (€) 39.00Price Target End Date 31-Dec-1452-week Range (€) 37.00-22.00Market Cap (€ bn) 27.92Shares O/S (mn) 760

Société Générale (SOGN.PA;GLE FP)

FYE Dec 2012A 2013E 2014E 2015EAdj.EPS FY (€) 3.46 3.40 3.90 4.45NAV/Sh FY (€) 45.99 47.15 49.19 51.27DPS FY (€) 0.45 0.95 1.50 1.75Adj.P/E FY 10.6 10.8 9.4 8.2P/NAV FY 0.8 0.8 0.7 0.7Dividend Yield FY 1.2% 2.6% 4.1% 4.8%Headline EPS FY (€) 1.02 2.92 3.86 4.39BV/Sh FY (€) 65.32 64.99 67.27 69.12Source: Company data, Bloomberg, J.P. Morgan estimates.

159




Commerzbank

Neutral


Commerzbank (CBKG.DE;CBK GR)

FYE Dec 2011A 2012A 2013E 2014E 2015EAdj.EPS FY (€) 2.71 0.23 0.61 0.54 0.76Adj.P/E FY 3.4 39.2 14.9 16.8 11.9Headline EPS FY (€) 0.93 (0.05) (0.19) 0.54 0.76NAV/Sh FY (€) (4.44) 25.68 19.57 20.11 20.87P/NAV FY NM 0.4 0.5 0.5 0.4RoNAV FY (352800.0%) 0.9% (0.9%) 2.7% 3.7%Core Tier 1 Ratio FY 10.1% 12.3% 11.4% 12.0% 12.6%Bloomberg EPS FY (€) 2.71 0.85 0.35 0.80 1.22Source: Company data, Bloomberg, J.P. Morgan estimates.

Credit Suisse Group

Overweight

Company DataPrice (SF) 28.71Date Of Price 10 Sep 13Price Target (SF) 34.00Price Target End Date 31-Dec-1452-week Range (SF) 29.32-19.06Market Cap (SF bn) 37.11Shares O/S (mn) 1,293

Credit Suisse Group (CSGN.VX;CSGN VX)

FYE Dec 2010A 2011A 2012A 2013E 2014E 2015EAdj.EPS FY (SF) 4.09 1.62 3.02 2.80 3.15 3.40Adj.P/E FY 7.0 17.7 9.5 10.3 9.1 8.4Headline EPS FY (SF) 4.34 1.60 1.04 2.52 3.10 3.47NAV/Sh FY (SF) 20.77 20.32 20.77 22.02 24.37 26.85Dividend (Net) FY (SF) 1.30 0.75 0.75 0.75 0.75 1.00P/NAV FY 1.4 1.4 1.4 1.3 1.2 1.1Tier 1 Ratio FY 17.2% 15.2% 19.4% 16.8% 18.2% 19.6%RoNAV FY 20.5% 8.2% 15.2% 14.5% 13.7% 13.4%Source: Company data, Bloomberg, J.P. Morgan estimates.

Danske Bank

Overweight

Company DataPrice (Dkr) 118.80Date Of Price 10 Sep 13Price Target (Dkr) 140Price Target End Date 31-Dec-1552-week Range (Dkr) 118.90-89.55Market Cap (Dkr bn) 110.12Shares O/S (mn) 927

Danske Bank (DANSKE.CO;DANSKE DC)

FYE Dec 2012A 2013E 2014E 2015EAdj.EPS FY (Dkr) 5.38 8.97 12.76 14.91Adj.P/E FY 22.1 13.2 9.3 8.0NAV/Sh FY (Dkr) 119.84 124.85 132.51 141.45P/NAV FY 1.0 1.0 0.9 0.8ROE FY 4.0% 6.3% 8.5% 9.5%ROA FY 0.2% 0.3% 0.4% 0.4%Net Attributed Income FY (Dkr mn)

4,725 8,746 12,768 14,922


160




Deutsche Bank

Overweight


Deutsche Bank (DBKGn.DE;DBK GR)

FYE Dec 2010A 2011A 2012A 2013E 2014E 2015EAdj.EPS FY (€) 2.72 4.35 3.89 4.20 5.05 5.85Headline EPS FY (€) 3.18 5.18 0.17 2.78 4.14 5.73Adj.P/E FY 12.8 8.0 8.9 8.3 6.9 5.9P/NAV FY 1.0 0.9 0.9 0.8 0.8 0.7Divident (Net) FY (€) 0.75 0.75 0.75 0.75 0.75 0.75NAV/Sh FY (€) 33.91 38.79 40.51 41.82 45.18 50.11Tier 1 Ratio FY 12.3% 12.9% 15.1% 15.0% 15.5% 16.0%RoNAV FY 8.0% 12.0% 9.8% 10.2% 11.6% 12.3%Source: Company data, Bloomberg, J.P. Morgan estimates.

DnB ASA

Neutral

Company DataPrice (Nkr) 97.80Date Of Price 10 Sep 13Price Target (Nkr) 100Price Target End Date 30-Dec-1552-week Range (Nkr) 102.80-67.40Market Cap (Nkr bn) 159.30Shares O/S (mn) 1,629Fiscal Year End Dec

DnB ASA (DNB.OL;DNB NO)

FYE Dec 2011A 2012A 2013E 2014E 2015EAdj.EPS FY (Nkr) 8.00 8.31 9.03 10.34 11.51P/E (x) FY 12.2 11.8 10.8 9.5 8.5NAV/Sh FY (Nkr) 68.03 74.48 80.31 88.07 96.70P/NAV FY 1.4 1.3 1.2 1.1 1.0ROE FY 11.4% 11.0% 11.1% 11.7% 11.9%ROA FY 0.7% 0.6% 0.6% 0.7% 0.7%Net Attributable Income FY (Nkr mn)

13,024 13,529 14,703 16,849 18,747

Gross Yield FY 2.0% 2.1% 2.3% 2.6% 2.9%RoNAV FY 12.1% 11.7% 11.7% 12.3% 12.5%Source: Company data, Bloomberg, J.P. Morgan estimates.

Erste Bank

Overweight


Erste Bank (ERST.VI;EBS AV)

FYE Dec 2012A 2013E 2014E 2015E 2016EAdj.EPS FY (€) 1.25 1.13 2.81 3.84 4.32Adj.P/E FY 20.0 22.2 8.9 6.5 5.8NAV/Sh FY (€) 20.77 21.64 22.49 24.92 27.64P/NAV FY 1.2 1.2 1.1 1.0 0.9ROA FY 0.2% 0.2% 0.6% 0.8% 0.8%RoNAV FY 6.6% 5.4% 13.0% 16.2% 16.4%Core Tier 1 Ratio FY 9.6% 11.1% 11.5% 11.7% 12.0%Net Income Attributable to Ordinary Shareholders FY (€ mn)

484 570 1,209 1,650 1,857

Source: Company data, Bloomberg, J.P. Morgan estimates.

161




Handelsbanken

Underweight

Company DataPrice (Skr) 289.80Date Of Price 10 Sep 13Price Target (Skr) 270Price Target End Date 31-Dec-1552-week Range (Skr) 308.80-

224.30Market Cap (Skr bn) 187.70Shares O/S (mn) 648

Svenska Handelsbanken (SHBa.ST;SHBA SS)


14,019 13,993 14,203 14,814


KBC Group

Overweight


KBC Group (KBC.BR;KBC BB)

FYE Dec 2012A 2013E 2014E 2015E 2016EAdj.EPS FY (€) 2.65 3.29 3.07 4.03 4.64Adj.P/E FY 13.6 11.0 11.8 9.0 7.8NAV/Sh FY (€) 21.58 22.96 25.44 28.54 31.03P/NAV FY 1.7 1.6 1.4 1.3 1.2RoNAV FY 10.6% 14.8% 12.7% 14.9% 15.6%Gross Yield FY 2.8% 0.0% 2.9% 3.7% 6.9%Core Tier 1 Ratio FY 8.3% 11.0% 11.9% 12.8% 13.3%Net Income Attributable to Ordinary Shareholders FY (€ mn)

1,496 1,372 1,479 1,849 2,076

Source: Company data, Bloomberg, J.P. Morgan estimates.

Lloyds Banking Group

Neutral

Company DataPrice (p) 78Date Of Price 10 Sep 13Price Target (p) 77Price Target End Date 31-Dec-1452-week Range (p) 79-36Market Cap (£ bn) 55.64Shares O/S (mn) 71,331

Lloyds Banking Group Plc (LLOY.L;LLOY LN)

FYE Dec 2012A 2013E 2014E 2015EAdj.EPS FY (p) 1.06 5.23 6.89 7.69Adj.P/E FY 73.4 14.9 11.3 10.1NAV/Sh FY (p) 54.9 56.7 60.9 64.7P/NAV FY 1.4 1.4 1.3 1.2RoNAV FY (3.6%) 7.4% 9.4% 11.8%DPS FY (p) 0.00 1.10 3.40 4.50Headline EPS FY (p) (2.04) 4.11 5.54 7.38Core Tier 1 Ratio FY 12.0% 14.1% 15.5% 16.7%Source: Company data, Bloomberg, J.P. Morgan estimates.

162




Santander

Neutral


Santander (SAN.MC;SAN SM)

FYE Dec 2011A 2012A 2013E 2014E 2015EAdj.EPS FY (€) 0.51 0.23 0.38 0.46 0.53Adj.P/E FY 11.2 24.4 14.8 12.3 10.7Dividend (Gross) FY (€) 0.61 0.62 0.60 0.60 0.60NAV/Sh FY (€) 5.35 4.46 4.02 3.97 3.99P/BV FY 0.6 0.7 0.8 0.8 0.8P/NAV FY 1.1 1.3 1.4 1.4 1.4RoNAV FY 10.0% 4.9% 9.1% 11.6% 13.3%Core Tier 1 Ratio FY 10.0% 10.3% 11.8% 12.5% 13.3%Source: Company data, Bloomberg, J.P. Morgan estimates.

SEB

Neutral

Company DataPrice (Skr) 71.10Date Of Price 10 Sep 13Price Target (Skr) 75Price Target End Date 31-Dec-1552-week Range (Skr) 74.15-50.30Market Cap (Skr bn) 155.85Shares O/S (mn) 2,192

Skandinaviska Enskilda Banken AB (SEBa.ST;SEBA SS)


11,607 13,548 14,100 14,876


Royal Bank of Scotland

Neutral

Company DataPrice (p) 356Date Of Price 10 Sep 13Price Target (p) 335Price Target End Date 31-Dec-1452-week Range (p) 370-241Market Cap (£ bn) 39.95Shares O/S (mn) 11,221Fiscal Year End Dec

Royal Bank of Scotland Group Plc (RBS.L;RBS LN)

FYE Dec 2012A 2013E 2014E 2015EAdj.EPS FY (p) (3.41) 10.15 23.64 28.77Adj.P/E FY NM 35.1 15.1 12.4NAV/Sh FY (p) 452 450 451 473P/NAV FY 0.8 0.8 0.8 0.8RoNAV FY (11.6%) 1.5% 4.1% 5.5%Net Attributable Income FY (£ mn)

(5,971) 773 2,088 2,909

Core Tier 1 Ratio FY 10.3% 10.7% 11.9% 13.0%DPS FY (p) 0.00 0.00 0.00 6.00Source: Company data, Bloomberg, J.P. Morgan estimates.

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Nordea Bank AB

Overweight

Company DataPrice (Skr) 80.45Date Of Price 10 Sep 13Price Target (Skr) 97Price Target End Date 31-Dec-1552-week Range (Skr) 85.00-57.50Market Cap (Skr bn) 325.82Shares O/S (mn) 4,050Market Cap ($ bn) 49.67

Nordea Bank AB (NDA.ST;NDA SS)

FYE Dec 2012A 2013E 2014E 2015EAdj.EPS FY (€) 0.77 0.84 0.93 1.00Adj.P/E FY 12.0 11.0 9.9 9.3NAV/Sh FY (€) 6.12 6.20 6.52 6.86ROE FY 11.4% 11.9% 12.9% 13.1%ROA FY 0.4% 0.5% 0.6% 0.6%Divident (Net) FY (€) 0.34 0.53 0.59 0.64Net Income Attributable to Ordinary Shareholders FY (€ mn)

3,078 3,319 3,705 3,963

RoNAV FY 13.0% 13.5% 14.5% 14.8%Source: Company data, Bloomberg, J.P. Morgan estimates.

IntesaSanpaolo

Neutral


IntesaSanpaolo (ISP.MI;ISP IM)

FYE Dec 2012A 2013E 2014E 2015E(Prev)

2015E(Curr)

Adj.EPS FY (€) 0.12 0.09 0.12 0.15 0.16P/E (x) FY 16.3 24.6 16.4 12.0 11.4NAV/Sh FY (€) 2.12 2.08 2.12 2.20 2.20P/NAV FY 0.8 0.8 0.8 0.7 0.7ROE FY 4.2% 2.9% 3.9% 4.9% 5.1%ROA FY 0.3% 0.2% 0.3% 0.4% 0.4%Net Income Attributable to Ordinary Shareholders FY (€ mn)

1,605 1,066 1,599 2,192 2,298

Dividend Yield FY 3.1% 3.1% 3.8% 3.8% 3.8%RoNAV FY 6.5% 4.1% 5.5% 7.0% 7.3%Source: Company data, Bloomberg, J.P. Morgan estimates.

HSBC Holdings plc

Neutral

Company DataPrice (p) 706Date Of Price 10 Sep 13Price Target (p) 800Price Target End Date 31-Dec-1452-week Range (p) 773-559Market Cap (£ bn) 131.47Shares O/S (mn) 18,624Fiscal Year End Dec

HSBC Holdings plc (HSBA.L;HSBA LN)

FYE Dec 2012A 2013E 2014E 2015EHeadline EPS FY ($) 0.74 0.95 0.97 1.08Adj.EPS FY ($) 0.80 0.91 0.97 1.07Adj.P/E FY 13.8 12.2 11.5 10.4Net Attributable Income FY ($ mn)

13,454 17,659 18,290 20,415

NAV/Sh FY ($) 7.88 8.03 8.41 8.84P/NAV FY 1.4 1.4 1.3 1.3RoNAV FY 10.8% 11.5% 11.9% 12.5%Core Tier 1 Ratio FY 12.3% 11.5% 11.7% 11.9%Source: Company data, Bloomberg, J.P. Morgan estimates.

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Banco Popular

Underweight


Banco Popular (POP.MC;POP SM)

FYE Dec 2011A 2012E 2013E 2014E 2015EAdj.EPS FY (€) 1.27 (1.22) 0.01 0.20 0.86Adj.P/E FY 3.2 NM 637.1 19.6 4.6Dividend (Net) FY (€) 0.00 0.00 0.00 0.00 0.00Headline EPS FY (€) 1.71 (1.46) 0.01 0.24 1.02NAV/Sh FY (€) 30.13 35.37 6.24 5.95 6.46P/BV FY 0.1 0.1 0.6 0.6 0.6P/NAV FY 0.1 0.1 0.6 0.7 0.6RoNAV FY 0.0% (30.5%) (2.5%) 4.8% 9.0%Source: Company data, Bloomberg, J.P. Morgan estimates.

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Investment Thesis, Valuation and Risks

BNP Paribas (Neutral; Price Target: €49.00)

Investment ThesisWe remain Neutral on BNP Paribas on a relative basis. The bank trades at 10.6x our 2014e earnings and 0.9x NAV 2014e for a RoNAV of 8.5% ex own debt, vs SG at 8.9x PE, 0.7x NAV for RoNAV of 7.8%. We note BNP Paribas is better positioned from a capital and leverage perspective, and should be able to comply with new Basel 3 requirements quicker and at a lower cost. However, we believe this is already reflected in the valuation with the stock trading at a premium to French peers.

Valuation

Our sum-of-the-parts-based Dec-2014e price target for BNP Paribas is €49.

Our SOP multiples are differentiated by business, e.g. 5-7x for CIB, 7.5x for French retail, 5-9x for EM, as well as franchise quality. Our valuation accounts for 1) the impact from Basel 3 capital requirements with €82bn increase in RWAs, and 2) additional market RWAs from potential market RWA convergence, in our scenario analysis, offset by additional RWA mitigation/legacy asset reduction beyond 2015e.

BNP Paribas –Valuation Dec-14e SOP-based

€ million

2015 Earnings P/E Capital P/BV

AuM (bn)

% of AuM

Value/ share

% of total Valuation ROE

French Retail Banking 1,374 7.5 6,664 1.5 8.3 17% 10,306 21%Personal Finance and Int. Retail Banking 1,881 7.3 12,020 1.1 11.1 23% 13,808 16% Personal Finance 963 7.0 4,176 1.6 5.4 11% 6,739 23% BancWest 598 7.0 4,260 1.0 3.4 7% 4,187 14% Europe Mediterranean 320 9.0 3,584 0.8 2.3 5% 2,883 9%Other Domestic markets 588 7.0 3,101 1.3 3.3 7% 4,113 19%Investment Solutions 1,766 8.0 9,929 1.4 888.0 1.6% 11.4 23% 14,173 nm Wealth & Asset Management 618 9.0 3,329 1.7 718.0 0.8% 4.5 9% 5,564 19% Insurance 878 7.5 6,000 1.1 170.0 3.9% 5.3 11% 6,583 15% Securities Services 270 7.5 600 3.4 1.6 3% 2,026 45%Corporate & Investment Banking 1,553 7.0 22,525 0.5 8.7 18% 10,872 7%BNL bc 335 6.5 5,840 0.4 1.8 4% 2,178 6%Belgian retail banking 393 7.5 3,101 0.9 2.4 5% 2,946 13%Other central revenues/costs -1,475 6.5 4,213 -4.3 -9% -5,374Other capital 175 11,579 1.0 9.3 19% 11,579Group 6,590 9.2 78,974 0.8 49 100% 60,488 8%Nb shares (m) 1,244Target price (€) 49


Risks to Rating and Price Target

Key risks to achieving our rating and price target include:

The performance of the capital markets, in particular with respect to demand for equity derivatives, and derivatives trading profits in the environment of increasing correlation and falling dividend expectations impacting the CIB division, as well as structured credit pricing leading to potential asset writedowns both at BNP Paribas and Fortis Bank.

Asset quality, and the performance of the Italian, Emerging Markets, US operations in BancWest as well as its US commercial real estate book, which, in our view, requires potentially further writedowns.

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The French retail banking environment, and the net interest margin trends in this market, equity markets performances, macro-economic conditions as well as the impact of the interest rate environment and changes to the shape of the yield curve.

Downside risks also include:

Potential additional sovereign debt writedowns/mark-to-market on the group's €15bn of banking exposures to Greece, Ireland, Portugal, Italy and Spain. Negative capital and funding implications from the ongoing uncertainties on the sovereign risk. Deterioration in the funding outlook for Italy in a scenario with weaker economic conditions and further ratings downgrades.

Headwind from French politics: earnings risk from the implementation of the French banking law.

Upside risks also include:

More positive outcome on proposed regulations, whether in the US or Europe.

Large business disposals at above 1x book value. At this point, strategic focus is on growth. However, longer term, there could be more changes to the business model,including business disposals.

BBVA (Underweight; Price Target: €6.54)

Investment Thesis :

We maintain our UW recommendation on BBVA, with €5.61 TP following the latest asset disposals, removal of floors in Spain and downturn in Emerging Markets. We still see BBVA as one of the Spanish banks, with Santander, set to benefit most from the restructuring of the domestic financial system. The bank’s foreign exposure is a significant advantage relative to other domestic players, although we consider its Spanish exposure will determine the ultimate direction of the stock’s performance in the near term, as we see it trading expensive relative to other European peers. We still see BBVA lagging Santander in terms of losses recognition in Spain, a vital item for us.

Valuation

We derive our UW recommendation on BBVA with a 2014 SOTP PER-based PT of €5.61 from 1) 2014E adjusted earnings of €2.7bn, 2) our assumptions about the sustainable RoTBV per division, 3) average cost of equity of 12.2% and 4) sustainable growth rate of 2.5%.


Risks to our rating and PT are the following: 1) Further deterioration in Spanish corporate and mortgage asset quality would lead to credit losses beyond those calculated, as regulatory risk on provisioning and capital is still very high. On the positive side: (1) an improvement in funding costs would lower funding costs for BBVA and its peers; 2) improvement of the Spanish economic and property markets would lower expected credit losses; 3) easing of the deposits war would help preserve margins; 4) strong growth in Latam economies could be sustained.

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CaixaBank (Overweight; Price Target: €3.40)

Investment Thesis

We upgrade our recommendation on Caixabank from Neutral to OW, as we expect the bank will benefit from lower funding costs in Spain and a favourable DTA resolution will improve its capital position allowing for further cleanup in the loan book. The bank still has a very low profitability in its domestic business where we expect there is ample room to cut costs and become more efficient after the integration of Banco de Valencia and Banca Civica. Our main concerns are around its large real estate portfolio, potential surprises in the acquired institutions and the M&A overhang dragging the stock.

Caixabank becomes our top pick amongst Spanish domestic banks, as we expect it to benefit from its scale and weaker competitors in retreat. The weak macro outlook and valuation are the main challenges it will have to face, in our view.

Valuation

Our Dec 15 SOTP PER-based PT of €3.40 is the result of a 1) 1% growth rate, 2) 10.5% cost of equity, 3) a sustainable RoTBV of 7% and 4) 8% required Core Tier 1 capital

Risks to Rating and Price TargetRisks to our rating and price target are 1) further deterioration of the sovereign turmoil would increase pressure on margins; 2) falling interest rates would lower the profitability of its loan book; 3) further asset quality deterioration would increase potential losses; 4) early implementation of Basel III would be punitive; 5) LTRO redemption would lower deposits yields across the system; and 6) a freeze of the wholesale market would be a negative.

Credit Agricole (Neutral; Price Target: €8.50)

Investment ThesisWe remain Neutral on Credit Agricole due to the uncertainty on Basel leverage. Earnings visibility has improved at CASA post Emporiki disposal and the CIB deleverage, with a more stable business mix, and sentiment should also improve as:a) concerns on the group’s gearing to French macro are overdone in our view given CASA's low NPL of 2.4% and high NPL coverage ratios; b) the Investor Day will provide full clarity on CASA Basel 3 capital plans. However, question marks on the capital treatment of insurance (Danish compromise) will likely continue to weigh on the stock, and the debate will shift from capital to leverage in our view. Although Credit Agricole Group Basel leverage is above the 3% minimum in our 2015e estimates, investors focus on CASA's low 1.7% Basel leverage will likely remain the main hurdle to a full re-rating and we expect share performance to be capped by the uncertainty and execution risk on the potential mitigation initiatives.

Valuation

Our sum-of-the-parts-based Dec-2014E price target for Credit Agricole is €8.5.

Our SOTP multiples are differentiated by business, e.g. 5-7x for CIB, 7-8x for French retail, 5-8x for EM, as well as franchise quality. Our valuation accounts for the impact from Basel 3 capital requirements with €54bn increase in RWAs.

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Credit Agricole – SOP Valuation (Dec-14e)

€ million

2015e Earnings

P/E Capital P/BV AuM (bn)

% of AuM

Value/ share

% of total

Valuation ROE

Total Retail Banking 2,096 7.4 17,489 0.9 6.2 73% 15,474 12% Credit Lyonnais - French Retail 627 7.5 3,409 1.4 1.9 22% 4,699 18% Regional Banks - French Retail 980 7.5 5,132 1.4 3.0 35% 7,349 19% Specialised Financial Services (SFS) 232 7.0 4,779 0.3 0.7 8% 1,624 5% International Retail Banking 257 7.0 4,170 0.4 0.7 8% 1,802 6%Asset Gathering 1,785 7.9 4,973 2.8 5.7 67% 14,122 36% Asset management 660 8.0 750.8 0.7% 2.1 25% 5,279 Private Banking 163 10.0 132.2 1.2% 0.7 8% 1,630 Insurance 962 7.5 3,164 2.3 231.5 3.1% 2.9 34% 7,213 30%Corporate & Investment Banking 1,047 5.0 12,856 0.4 2.1 25% 5,235 8%Other revenues and costs -1,722 7.1 1,994 -4.1 -48% -10,176Other capital -48 -3,421 1.0 -1.4 -16% -3,421Group 3,158 6.7 33,891 0.6 8.5 100% 21,234 9%Target Price 8.5



Key risks to achieving our rating and price target include:

Asset quality in the group’s main markets: France, Italy and Emerging Markets (North Africa mainly).

The performance of the capital markets, and its impact on both Corporate &Investment Banking and Asset Gathering revenues.

The French retail banking environment, and the net interest margin trends in this market, equity markets performances, macro-economic conditions as well as the impact of the interest rate environment and changes to the shape of the yield curve.

Downside risks also include:

Potential additional sovereign debt writedowns/mark-to-market on the group's €4.9bn of banking exposures to Ireland, Portugal, Italy and Spain. Negative capital and funding implications from the ongoing uncertainties on the sovereign risk. Deterioration in the funding outlook for Italy in a scenario with weaker economic conditions and further ratings downgrades.

Headwind from French politics: earnings risk from the implementation of theFrench banking law.

Upside risks also include:

More positive outcome on proposed regulations, whether in the US or Europe.

Large business disposals at above 1x book value. At this point, strategic focus is on growth. However, longer term, there could be more changes to the business model, including business disposals.

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UniCredit (Overweight; Price Target: €5.51)

Investment Thesis

We like UCG’s business mix and revenues diversification, and we think that Unicredit has a relative advantage in a low interest rates environment, due to the relatively higher proportion of time deposits funding. We see potential upside in case of further substantial declines in Italian sovereign spreads and improvement of the asset quality.

Valuation

We upgrade UCG to Overweight from Neutral on relative valuation. We increase our Dec 14 TP to €5.51 (previously €4.00) on a 2015E SOTP valuation. We maintain our SOTP valuation on geographical segmentation. We assign capital requirements in terms of core tier 1 at 8% Commercial banking, 10% for CIB, and 11% for international operations, and an average group CoE of c.11%. The price target change is due to 1) Removing the provision shortfall (to reach 50% coverage) from SOP valuation: as economic outlook improves slightly, we consider that the 47% coverage should be enough and the regulator will not push for a 50% coverage. 2) c. 5bps of cost of risk moved from 2015 to 2013 and 2014: AQR may increase provision levels earlier rather than later. 3) We raise sustainable ROE for the Italian business to 8% from 6%, consistent with P/BV of 0.8x for the business. 4)We raise sustainable ROE for CIB at 10%.

UCG SOTP valuation



We believe the key risks that could keep our rating and target price from being achieved include the following:

On the downside: 1) UCG’s profitability could still be subject to volatility due to sovereign risks affecting Italy, which could further impact the bank's cost of funding and LLP levels. 2) CEE contributes a significant portion to UCG's earnings; consequently a deterioration of the macro environment in the region and currency movements could adversely impact UCG earnings. 3) Upcoming AQR and stress test could impair profitability due to higher provisions

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UBS (Overweight; Price Target: SF21.00)

Investment ThesisUBS is trading at 10.0x P/E, 1.5x P/NAV and RoNAV ex own debt of 15.9% in 2015E with Basel 3 CET1 ratio of 16.4% on a fully loaded basis, assuming the exercise of the SNB StabFund option in 2013. UBS is our top global IB pick considering its business mix of asset gathering gearing through the largest private bank in the world and material capital release potential.

ValuationOur Dec-14 SOP based Price Target for UBS is SF21; we value the Wealth Management division of UBS at 13x 2015E P/E, in line with our cashflow model implied value. Our SOP multiples are differentiated by business and franchise quality, and the IB multiple accounts for regulatory uncertainty. Taking these factors into account, we value Investment Bank on a 6.0x 2015E P/E, Wealth Management and Retail & Corporate on a 13x and 7.0x P/E respectively, Global Asset Management on a 6.0x P/E and Wealth Management Americas on 10.0x P/E. Our price target implies a 10.8x P/E on overall 2015E earnings.


Risks that could prevent the stock from achieving our target price and OW rating include:

The performance of the capital markets, impacting both the investment banking capital markets business as well as the performance of UBS assets under management.

Potential risk of further markdowns in remaining legacy credit assets, and potential risk of further balance sheet assets becoming impaired, although greatly reduced post transaction with SNB.

The US, as well as global, economies could experience a sharper slowdown with a corresponding deterioration in credit quality and weaker revenues.

Legal risk in part from the structured credit and financial market crisis, could become an issue in particular for banks with material capital markets activities as well as within asset and wealth management.

Recent developments around retrocessions could impact gross margins in Wealth Management in the short-term.

Swedbank (Neutral; Price Target: Skr165.00)

Investment thesis

Our rating for Swedbank is Neutral. Whilst we continue to favor Swedbank for its: i) highly profitable mortgage business (2015e RoNAV of 31%); ii) improving top line revenue growth in the Baltics (JPMe: ~4% income growth in ’14-15e; 2015e RoNAV of 12%); iii) good cost management with a 43% cost-income ratio in 2015e; and iv) strong capital position with JPMe 2015e B3 ET1 of 16.6%, we believe i) Swedbank has reached fair value, trading at 1.7x 2015e P/NAV, ii) we see slower NII growth going forward (~57% of income), as front book mortgage margins are ~10-15bps below the back book margins, iii) Baltic recoveries fading, which should translate into higher group losses in a stable asset quality environment (JPMe: 5bps of losses in 2013e rising to 9bps in 2014-2015e) and iv) regulatory uncertainty as even higher mortgage risk weights or a countercyclical buffer could be introduced in Sweden.

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Valuation

Our Dec-2015e PT is SEK165. We value Swedbank at 1.9x P/NAV and 10.8x P/E for a RoNAV of 17.6% in ‘15e.


The key risks to our rating and PT being achieved include:

Upside risk from better than expected NII progression and mortgage margins.

Upside risk from stronger than expected recovery in the Baltics.

Upside risk from potential buybacks.

Downside risk from slowdown in Swedish retail activity given Swedbank’s proportionately larger exposure here, with a 26% market share in Swedish mortgages.

Downside risk from higher than expected funding costs and/or weaker than expected success in defending lending margins.

Downside risk from weaker than expected cost management.

Downside risk from higher than expected loan losses in Sweden.

Downside risk from higher mortgage risk weights.

Standard Chartered (Neutral; Price Target: 1,800p)

Investment Thesis

While StanChart’s H1’13 trading statement reassured concerns over near term earnings in our view with an improved performance in Q2 after a weak Q1; we expect the focus to shift from Q2 towards the outlook for earnings in H2 and 2014, which may be more challenging. Given that we remain cautious on EM/Asian bank valuations in the current environment, we see limited re-rating in the absence of earnings upgrades. We prefer Standard Chartered to HSBC on valuation.

Valuation

Our sum of the parts based Dec 2014E price target for Standard Chartered of 1800p is calculated using the Gordon Growth model using cost of equity of 10% and sustainable returns and allocated equity fully adjusted for Basel 3.


The key upside and downside risks that could prevent our rating and price target from being achieved include the following:

Macro economic risks (both upside and downside): Being an EM focused bank, StanChart is exposed to general macro economic variables in EM such as slowdown or quicker than expected recovery in GDP growth, inflationary pressures, depreciation of EM currencies & cross border & political risks.

Pickup in growth (upside): Standard Chartered remains geared to growth in Asiaand a faster than expected pickup in growth in Asia poses upside risk to our estimates.

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Regulation (downside): Group estimates annual regulatory costs well north of $500mn excluding the impact of the PLAC buffer which could potentially add a further $400m-$600m.

Société Générale (Overweight; Price Target: €39.00)

Investment ThesisSG risk/reward is attractive at current prices, in our view. The capital debate appears to be over, with the end of the deleveraging plan and Basel 3 Core Tier I strengthened by c.250bp to 10% end 2013e. Legacy assets are no longer an issue, in our view, and funding/liquidity has also improved with LCR above 100% in Q1 13already. Whilst 2013 remains a challenging year for profitability, longer term, SG offers double-digit earnings progression with cashflow generation of c.70bp p.a. by our estimates. We estimate €3.6bn of net profits in 2015e, vs. €3.3bn underlying in 2012; long term, we see potential upside to our estimates with additional €0.5bn profits to €4bn and EPS of close to €5.00 implying PE of 7.0x, 10% RoNAV vs. 8.6% in our 2015e base case, driven by cost savings and turnaround in international retail. At 0.7x NAV, valuation appears attractive vs. 1.0x for the sector.

Valuation Our sum-of-the-parts-based Dec-2014E price target for Société Générale is €39.

Note that our SoP multiples are differentiated by business (e.g. 5-7x for CIB, 7-8x for French retail, 5-8x for Emerging Markets, 10x for Private Banking, 6-9x for Asset Management & Securities Services) and franchise quality, e.g. we value SG CIB at 6x vs. 7x for IB Tier I players. We have also accounted for an additional €40bn in RWAs as a result of Basel 3 rules, and an additional market RWAs from potential market RWA convergence in our scenario analysis, net of additional RWA mitigation/legacy asset reduction.

Société Générale - SOP valuation Dec-2014e

€ million

2015e Earnings P/E Capital P/B

AuM (bn)

% of AuM

Value/ share

% of total Valuation ROE

Retail banking in France 1,282 7.5 8,127 1.2 12 31% 9,618 16%Specialised financial services (SFS) 726 6.5 4,590 1.0 6 15% 4,719 16%Retail international 455 8.0 6,888 0.5 5 12% 3,638 7%Global Investment & Management Services 325 8.5 1,622 1.7 87.5 3.2% 4 9% 2,774 20% Asset management 130 8.0 450 2.3 1 3% 1,040 29% Private Banking 133 10.0 683 2.0 87.5 1.5% 2 4% 1,332 20% Securities Services & Online services 62 6.5 489 0.8 1 1% 401 13%Total Corporate & Investment Banking 1,530 6.0 12,748 0.7 12 30% 9,179 12%Central revenues/costs -847 6.9 253 -7 -18% -5,618Unallocated capital 99 6,293 1.0 8 21% 6,293Group 3,570 8.6 40,521 0.8 39 100% 30,603 9%Nb shares 7822013E Target price 39Source: J.P. Morgan estimates.


We believe the key risks that could keep our rating and price target from being achieved include the following:

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Asset quality trends in CEE/EM, in Romania, in particular, and its impact on International Retail performance. Emerging market macro risks related to FX as well as the political environment are also key.

Potential additional sovereign debt writedowns on the group's €1.6bn of net banking book exposures to Ireland, Italy and Spain. Negative capital and funding implications from the ongoing uncertainties on the sovereign risk.

Performance of the capital markets, and its impact on both Corporate & Investment Banking and Asset Gathering revenues. Equity derivatives revenues are particularly sensitive to the demand for structured products, volatility and correlation levels as well as dividend expectations.

Provision and mark-to-market risk in SG's legacy assets, US residential mortgage-backed securities in particular as well as monoline exposures.

The French retail banking environment and the net interest margin trends in this market, as well as the impact of the interest rate environment and changes to the shape of the yield curve.

Headwind from French politics: earnings risk from the implementation of the French banking law.

Commerzbank (Neutral; Price Target: €8.87)

Investment Thesis

We maintain our Neutral recommendation and adjust our TP to €8.87 (€8.74) as we see Commerzbank fairly valued considering its ongoing restructuring and asset disposal overhang the stock still has. The bank will benefit from good wholesale market access but the low rates environment and potential losses in its Non Core Assets portfolio will continue to drive the share price, in our view, where we have no strong view to the upside.

Valuation

Our Dec-14 target price of €8.87 is based on a sum-of-the-parts valuation, using our 2014 earnings and an expected ROTE14E of 4%. This is not close to the current share price and lack of clarity on further credit losses justify our Neutral recommendation. Multiples assigned are in line with those we use to value other banks in the region.


The key risks that we believe could prevent our rating and target price from being achieved include the following. On the positive side, a faster than expected adjustment in its Non Core Assets portfolio would lead to lower expected losses in the long run, while rising interest rates would also benefit the stock's margins in its core businesses. A healthier economic recovery in Europe would also help lower the potential losses in its CRE portfolio.

On the negative side 1) Further sovereign deterioration across European countries, as well as deterioration in the prices of retail and commercial real estate and deterioration in the ship finance business; 2) pressure on deposit rates in Germany due to savings banks, which could be a headwind to achieving our estimated earnings. 3) a stronger/weaker-than-expected economic environment, which would lower/increase our provision estimates, especially in the NCA division, which we currently value at -0.6x BV.

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Credit Suisse Group (Overweight; Price Target: SF34.00)

Investment ThesisCS’s valuation looks attractive to us, trading at 1.1x P/NAV for RONAV ex own debt of 13.4% in 2015E with about 66% of group net income from private banking and wealth management. CSG has made good progress on cost reductions particularly in the IB with additional SF1.7bn in Group costs savings to come over the remaining period of 2013E and 2014-15E. In addition, the capital position has improved materially post the announced actions in July-12, with CSG reaching a strong Basel 3 common equity Tier 1 ratio of 12.2% on a fully loaded basis by2015E.

ValuationOur Dec-14 SOP-based price target for CSG is SF34; we value the WMC division of CS at 13x 2015E P/E, inline with our cashflow model implied value. Our SOP multiples are differentiated by business and for franchise quality. Taking these factors into account, we value Wealth Management clients on a 2015E P/E of 13.0x and Corporate and Institutional Clients on 7.5x for a total Private Banking 2015 P/E of 11.6x. We value Asset Management at a 8.0x P/E. Our PT implies a 10.1x P/E on overall 2015E earnings.

Risks to Rating and Price TargetWe believe the key risks that could keep our OW rating and target price from being achieved include the following:

The performance of the capital markets, impacting both the investment banking capital markets business and the performance of Credit Suisse’s assets under management.

Growth in new private banking money and the development of private banking transaction margins. Impact of legislation and regulatory issues surrounding Swiss banking secrecy and customer confidentiality.

The US, as well as other major economies, could experience a slowdown with a corresponding deterioration in credit quality and weaker revenues. In addition, widening credit spreads could affect funding costs.

Legal risk, in part from the structured credit and financial market crisis, could become an issue, particularly for banks with material capital markets activities as well as within asset and wealth management.

Danske Bank (Overweight; Price Target: Dkr140.00)

Investment Thesis

We maintain our rating for Danske at Overweight. We like the asset recovery story in Danske and believe the worst is behind us in Denmark and Ireland (gross NPLs fell -1% qoq/-8% yoy in 2Q13 and coverage is at 42%). We see group losses falling from 65bps in 2012e to 23bps in 2014e and 19bps in 2015e. With management focusing on improving earnings (by +DKK5-6bn by 2015e) and cost efficiency (2015e cost income target of 46%), we believe Danske will reach at least a 10.9% RoNAV in 2015e. Whilst Danske has disappointed in the past, expectations are low and we see limited risk for consensus earnings downgrades. With a JPMe B3 ET1 of 12.0% at

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2Q13 (adjusted for DKK100bn higher RWAs), we believe Danske could pay a 20%/40%/40% dividend in ‘13/14/15e.

Valuation

We use a SOTP valuation methodology to value Danske Bank. Our Dec-15e PT is DKK140, which represents 0.9x 2015e P/NAV for 10.9% RoNAV.


The key risks to our rating and PT being achieved include the following:

Downside risk from further macro deterioration in Denmark and/or Ireland

Downside risk from higher shipping, agricultural and SME losses

Downside risk from falling house prices in Denmark and weaker than expected asset quality.

Downside risk from repricing and cost cutting efforts not materializing according to plan.

Downside risk from higher mortgage risk weights.

Short-term downside risk from lower insurance revenues if rates rise (long-term positive).

Deutsche Bank (Overweight; Price Target: €40.00)

Investment Thesis

We are OW due to the perfect mix of i) worst large cap bank share price performance YTD, ii) cheapest Eurobank on 5.8x PE 2015E, iii) discounting our ‘bear case’ €9bn capital raise scenario with exit PE 8.6x 2015E below Eurobanks at 9.6x, and iv) new management now almost one year post Investor Day under pressure to create S/H value.

Valuation

Our new Dec-14 SOP earnings based Price Target for DB is €40. Please note our SOP multiples are differentiated by business and franchise quality. We value DB’s Tier 1 CB&S division at 6x P/E. We value the AWM division at a discount to Swiss peers, owing to the better Private Banking franchise of both Swiss peers. We also include estimated €40bn increase in market RWAs from potential RWA convergence in our SOP.


We believe the key downside risks that could keep our OW rating and target price from being achieved include the following:

The performance of the capital markets, impacting both the investment banking capital markets business (particularly Fixed Income) as well as the performance of Deutsche Bank’s asssets under management.

Downside risks include a decline in capital market and trading activity, with DB highly geared to the trading environment through its CB&S division.

Provision and mark-to-market risk in DB’s riskier assets such as monoline exposures, leverage finance, RMBS, CMBS, CDOs and other structured credit.

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The US, as well as global, economies could experience slowdown with a corresponding deterioration in credit quality and weaker revenues. In addition, widening credit spreads could affect DB’s profitability.

Legal risk in part from the structured credit and financial market crisis could beworse than our estimates, and become an issue in particular for banks with material capital markets activities such as DB.

IB regulatory landscape toughens further from current levels, impacting earnings materially compared to our estimates.

DnB ASA (Neutral; Price Target: Nkr100.00)

Investment Thesis

We maintain our Neutral rating on DNB. Whilst we like the earnings potential in DNB, we believe regulatory headwinds in Norway should not be ignored. The Norwegian regulator is expected to increase Norwegian mortgage risk weights to ~20-35%, introduce a min B3 ET1 of up to 14.5% (12% min + up to 2.5% countercyclical buffer) by Jul 2016 and potentially limit covered bond and wholesale funding. Although higher mortgage risk weights offer an opportunity to reprice, we believe this is to some extent offset by the tough capital requirements, lower volume growth and potential covered bond funding restrictions/higher liquidity requirements.

In our view DNB is a good macro hedge against the more resilient Norwegian economy (~80% of revenues from Norway with GDP growth of ~2.7% p.a. ‘14-‘15e), and we see solid top line revenue progression (+6% core revenue growth in ‘14e/’15e), as well as upside potential on the cost line as management targets a 45% cost-income ratio in 2015e. However, we believe capital is still tight, especially if the Norwegian regulator sets the B3 ET1 min capital requirement at 14.5% (12% min + up to 2.5% countercyclical buffer) as of in Jul16 vs. DNB’s JPMe B3 ET1 of 12.8% in 2015e including 25% mortgage risk weights. Trading at 1.0x P/NAV for a 12.5% RoNAV in 2015e we believe DNB is trading at fair value for now.

Valuation

Our target price is based on our sum-of-the-parts valuation analysis, considering historical P/E multiples reflecting the relative quality of earnings for each division and relative stronghold to peers. Our Dec 2015 price target is Nkr100.00, which reflects 1.0x 2015e P/NAV for 12.5% RoNAV.


Upside risk from repricing potential on the back of higher mortgage risk weights.

Upside risk from lower than expected mortgage risk weights and capital requirements.

Downside risk on capital from higher mortgage risk weights (~20-35% vs. 11.4% as of 2Q13) and tough minimum capital requirements (potentially B3 ET1 of 14.5%).

Downside risk from sentiment pressures with volatile/negative oil prices and shipping indices given DNB’s ~7% shipping exposure in its loan book.

Downside risk from a correction in the Norwegian house prices leading to weaker than expected asset quality.

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Downside risk from Norwegian growth and cost cutting efforts not materializing according to plan.

Erste Bank (Overweight; Price Target: €35.00)

Investment Thesis

Erste has a strong retail franchise within CEEMEA – with a top 3 market position in Czech, Romania, Slovakia and Austria; with c.17mn clients and >3000 branches. While the stock has rerated to close to 1x NAV, it still trades at 30-40% discount to single country EM banks. We expect this discount to narrow (normalizing provisions improve bottom line and capital concerns now abated) and provide the next leg of re-rating.

Valuation

Our Dec-14 price target (incorporating 2015 estimates), based on Gordon growth, SOP, PE and NAV multiples, and is set at €35. Our Gordon growth model incorporates a long term growth rate of 3%, 11% cost of equity and a 16% normalized RoNAV. Change vs. previous target stems from i) earnings revisions ii) rolling over PT to incorporate 2015 estimates (vs. 2014 before hand) iii) removing capital shortfall from our sum-of-parts valuation (given Erste is reaching c.10.9% B3 equity tier 1 by 2015 on our estimates).

Erste group valuation methodology (Dec 14 PT 35)

Gordon GrowthLT growth rate, g 3%Hurdle rate, ke 11%Normal RoNAV 16%Fair value, EUR 37PE multipleEPS 15E forecast 3.84Fair value earnings multiple 9Fair value, EUR 35NAV 25Discount to NAV (premium) -40%Fair value, EUR 35Sum of partsFair value, EUR 36Price target, EUR 35


Erste Sum of Parts valuation methodology

Net income As % of P/E Implied Value(15E) Group Assigned €mn

CEE 1,195 72% 10.0 11,951Austria 261 16% 9.0 2,348GCIB 106 6% 6.0 635Group Markets 219 13% 5.0 1,093Group Center -130 -8% 5.0 -652Total 1,650 100% 15,375Capital shortfallGroup value 15,375Shares 430Fair value 36Source: J.P. Morgan estimates.


1. Lower than expected growth in CEE countries- if the Euro sovereign crisis escalates, growth of CEE countries could be hampered (being correlated to Euro area growth), which would be negative for the revenues.

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2. Currency depreciation in Hungary and Romania would put further strain on FX portfolios. Also the risk of Hungarian government implementing policies which are not in favor of banking system is also present.

3. Rise in funding costs - which would be negative for the margins.

4. Higher than expected asset quality deterioration in Austria and CEE.

5. Acquisition risk- management has been vocal about expanding presence in Poland and Serbia.

Handelsbanken (Underweight; Price Target: Skr270.00)

Investment thesis

We maintain our U/W rating for Handelsbanken reflecting:

Valuation: we continue to view Handelsbanken as relatively expensive and believe the other Nordic banks offer better upside potential. Whilst Handelsbanken offers growth, patience is needed as growth is very slow (after 15 years in the UK, UK accounts for ~7% of group revenues and the UK market share is ~0.3%).

Reliance on market funding: Handelsbanken is in our view too market funding geared with a 265% loan/deposit ratio and short-term (<1yr) market funding accounting for 50% of total market funding, although we recognize that this is part of Handelsbanken’s strategy.

Low funding costs could be impacted by the proposed bail-in rules. The EU Council is proposing that a min of 8% of total liabilities must be bailed-in before resolution funds can be used. Whilst bail-in debt can be used as part of the 8% min, we think Handelsbanken may want to cover this with regulatory capital (T1 + T2) to ensure that its funding costs remain among the lowest in Europe(Handelsbanken’s wholesale funding comprise ~53% of total funding), which in our view could hold them back from repatriating capital in the short-term.

Capital. Despite leverage (equity/total assets) of 3.9%, we view Handelsbanken’s capital position as solid with a JPM B3 2015e ET1 of 17.1% (adjusted for higher mortgage risk weights, 15% assumed for Sweden).

Valuation

We use a SOTP methodology to value Handelsbanken by applying P/Es of 7.0-10.0x reflecting earnings volatility, RoNAV and the nature of the business; our Dec 2015 price target is SKr270.00, and implies 1.6x 2015e NAV for a 13.7% RoNAV.

Risks to Our View

The key risks to our rating and PT being achieved include the followingUpside risk from stronger than expected Swedish growth.

Upside risk from stronger than expected delivery from the growing UK and international businesses.

Upside risk from a special dividend or buybacks given Handelsbanken’s strong capital position with a 2Q13 B3 ET1 of 17.8%.

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KBC Group (Overweight; Price Target: €45.00)

Investment Thesis

KBC is moving steadily towards normalization, after having undergone a restructuring process since 2008. Disposal of non-core and volatile assets would turn KBC's earnings stream into a more cleaner and sustainable one, underpinned by the strong profitability of its Belgium and Czech operations. We expect share re-rating to continue, driven by improving profitability and organic capital rebuild.

Valuation

Our PT (Dec-14) is based on sum of parts methodology, incorporating 2015 estimates. We incorporate shortfall against 10% fully loaded Basel 3 equity ratio into our sum of part valuation to arrive at our price target. Please note that we calculate the shortfall based on capital levels which exclude the full amount of AFS reserves and penalty on remaining government capital. Change vs. previous price target stems from earnings revision.

KBC- sum of part valuation

2015E Earnings 2015E RWA Capital required Capital PE Value P/B RoEBelgium 1,500 52,264 10% 5,226 10.0 14,996 2.9 29%Czech 547 16,020 10% 1,602 10.0 5,473 3.4 34%IM 46 17,632 10% 1,763 6.0 279 0.2 3%Group Center -244 9,758 10% 976 6.0 -1,466 -1.5 -25%Total value 19,282Capital shortfall -710Group Value 18,572NOSH 417Target price, € 45


JPM capital allocation and shortfall against 10% B3 equity ratio, excluding govt capital and AFS reserves and including penalties on remaining govt capital

€mn,% 2015E RWA Capital required Capital

Belgium 52,264 10% 5,226Czech 16,020 10% 1,602IM 17,632 10% 1,763Group Center 9,758 10% 976RWA inflation 9,900 10% 990Total Basel 3 105,574 10.0% 10,557Current estimate 9.3% 9,847Shortfall 710Source: J.P. Morgan estimates.

Risks to Our Rating and Price Target

Downside risks:

Deteriorating macro in KBC's core geographies- thereby slowing growth/recovery and leading to lower revenues and higher cost of risk.

Worse than expected recovery in Ireland, and pickup in NPL levels (higher than expectations) - leading to further writedowns.

Unfavourable policies being implemented in Hungary- causing further stress within the banking sector.

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Interference by the Central bank or regulator- similar to the conditionality imposed on repayment of Flemish government capital.

Upside risks:

Writebacks on CDO portfolio- could boost capital position and limit the capital shortfall (on clean basis)

Further re-financing of shareholder loans- would have a positive impact on capital levels

Lloyds Banking Group (Neutral; Price Target: 77p)

Investment Thesis

Lloyds continues to make good progress on balance sheet restructuring and remains on track to achieve the non core reductions target of <£70bn TPAs by FY13E. The group remains geared to the prospects of a UK economic recovery and a better bank earnings outlook in the UK is likely to benefit Lloyds the most in our view. Following the strong Q2 results, we continue to see Lloyds as well placed to resume dividend payments given its now strong capital ratios (9.6% B3 CT1) and estimate that the shares are yielding 4.6% and 6% based on our ‘14 & ’15 DPS forecasts. Further upside may depend on the regulator’s allowance for buybacks, given our ‘15E CT1 of 13.0%. We continue to prefer Lloyds over RBS

Valuation

Our sum of the parts based Dec-2014E price target for Lloyds Banking Group of 77p is calculated using weighted blend of Gordon Growth and P/E valuation with sustainable returns and allocated equity fully adjusted for Basel III.



UK economy (upside and downside): Lloyds Banking Group is significantly geared to the UK economy through its exposure to mortgages and CRE and a slowdown or faster than expected UK recovery poses risks to our investment thesis.

Interest rates (upside): With SVR mortgages constituting almost 60% of the Lloyds mortgage book, the Group remains significantly geared to interest rate environment in the UK. An earlier than expected increase in the interest rates poses an upside risk to our rating and PT.

Redress costs (downside): If the PPI costs continue to remain elevated in the UK, it poses a downside risk to our earnings estimates and investment thesis.

Non core (upside): With outlook for UK asset prices turning positive, noncore reduction may continue to be capital accretive which poses upside risks to our estimates

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Santander (Neutral; Price Target: €5.86)

Investment Thesis

We upgrade our recommendation on Santander from UW to Neutral, adjusting our target price to a Dec-14 SOTP-based PT of €5.86 (from previous €4.36) as we adjust our numbers to lower funding costs in Spain and assume a favourable resolution of Spanish DTAs before year end. On valuation, the upside on current market price is very small making SAN fairly valued in our view, as it appears expensive relative to other EU Peers and our estimates are still around 12% below Consensus (Bloomberg). The upcoming ECB’s Asset Quality Review and economic downturn in Emerging Markets (mainly Latam) are the main reasons why we’re not OW on the stock yet, as well as the bank’s current dividend policy.

Valuation

We derive our PT of €5.86 using a SOTP-based valuation from 1) 2014E earnings of €5.5bn, 2) average cost of equity of 11.6%, 3) sustainable growth rate of 3%.


Risks to our rating and PT are the following: 1) resolution of the European sovereign turmoil would lower funding costs dramatically; 2) improvement or deterioration of the economy and property market in Spain; 3) stronger/weaker than expected growth in Latam economies would have a positive or negative impact on earnings; 4) regulations such as Basel III or liquidity rules in the UK could be delayed which would be positive for the bank

SEB (Neutral; Price Target: Skr75.00)

Investment Thesis

We maintain our Neutral recommendation for SEB. Whilst we recognize SEB’s fee generating potential, growing low risk Swedish mortgage business (~30% of the group revenues) and solid capital position, we believe SEB’s large merchant banking franchise could continue to see low single digit revenue growth.

Whilst Merchant Banking revenues were up 19% qoq in 2Q13, 1H13 MB revenues were -3% yoy, 1H13 Transaction Banking revenues were -21% yoy, 3Q is generally a seasonally weaker quarter and GDP growth in ’13e remains slow at ~1.4% (BBG consensus estimates). This, combined with intensifying competition for capital light products could, in our view, put pressure on SEB’s corporate revenue progression in the short-term. With GDP growth of ~2.5% in ’14-15e (BBG cons), we see Merchant Banking revenues growing by ~3% yoy in ’14-15e.

We view positively SEB’s cost cap of SEK22.5bn in ‘13e & ‘14e and believe management will meet this target.

We believe SEB is very well positioned to meet the tougher capital rules in Sweden (min B3 ET1of 12% by Jan 2015) with a B3 ET1 of 14.2% already in 2Q13. However, with the 15% mortgage risk weights reducing ET1 by 50bps, uncertainty around future regulation (risk weights, recovery & resolution etc) and potentially a countercyclical buffer being introduced in Sweden, we think SEB’s payout ratio could be ~45% in ’13e and ~50% in 14-15e.

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Valuation

We use a SOTP methodology to value SEB. Our Dec. 2015 price target of Skr75.00 stands at a 2015e target valuation of 1.4x P/NAV for a 13.5% RoNAV.


Key risks to our rating and PT being achieved include the following:

Downside risk from uncertainty in the sustainability of performance in Trading and Capital markets (30%-40% FX, 25%-40% equities, 25%-35% Capital Markets, around 5% Structured derivatives etc).

Downside risk if there is no recovery in corporate loan growth or if corporate loan losses are higher than expected, this would proportionately impact SEB more than the peers, as approx 35% of the group's value is in Merchant Banking.

Upside risk from stronger than expected margin progression in the retail book.

Upside risk from stronger than expected earnings from wealth management.

Upside risk from better than expected delivery on costs and/or losses.

Royal Bank of Scotland (Neutral; Price Target: 335p)

Investment Thesis

RBS has made the most significant balance sheet progress in the UK Banks sector since 2008 in our view and, while the valuation appears cheap for LT value investors, we now believe that the group’s earnings recovery make take longer than expected given the challenges facing the Markets division. We remain Neutral prefer Lloyds over RBS.

Valuation

Our sum of the parts based Dec 2014E price target for RBS of 335p is calculated using a weighted blend of Gordon Growth and P/E valuations. We use cost of equity of 10% and 11.5% for the Group ex Markets and Markets respectively, and sustainable returns and allocated equity fully adjusted for Basel 3.



Regulatory risks (downside): The key regulatory risk in our view is ICB recommendation implementations, including the structure of bail-in debt and PLAC. The other regulatory risks include proposed changes in Basel rules and financial reform in OTC derivatives.

Capital Markets Performance (both upside and downside): The Group is geared to fixed income cycle through markets division and a slowdown or better than expected recovery in volumes poses risk to our investment thesis.

UK economy (both upside and downside): RBS is significantly geared to UK economy and credit cycle through its exposure to UK CRE and a slowdown or faster than expected UK recovery poses risks to our investment thesis.

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Non core (upside): With outlook for UK asset prices turning positive, noncore reduction may continue to be capital accretive which poses upside risks to our estimates.

Litigation (downside): We believe that the potential litigation costs for RBS could run into several billions of pounds over time and poses risks to the potential capital return scenarios.

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Nordea Bank AB (Overweight; Price Target: Skr97.00)

Investment Thesis

We maintain our Overweight rating for Nordea unchanged reflecting upside potential from improved profitability stemming from better pricing and product mix, enhanced efficiency, improving asset quality and a higher dividend payout. Overall we expect Nordea to outperform the market.

Given Nordea’s market stronghold in the Nordics combined with stable GDP growth, we see lending growth remaining ~3% p.a. in 2014-2015e. Whilst recognizing margin pressure from the low interest rate environment, we believe there is additional repricing potential in Norway, Finland and Denmark. Overall we see on average ~4% NII growth in 2014-2015e.

We see a -1% annual decline in costs in 2013-2015e reflecting the Polish exit as well €450mm of underlying gross cost saves (management is guiding for flat costs pre the Polish announcement).

With NPL growth contraction (-2% qoq in 2Q13), we think the worst could be behind it and see LLP/gross loans of 21bp in ‘13e and 16bps in ‘15e.

We believe Nordea’s 2015 13% ROE target in the current rate environment is ambitious, but achievable. We see a ROE of 13.1% and RoNAV of 14.6% in 2015e.

Nordea’s capital position is sound with a 2Q13 B3 ET1 of 13.1%, 50bps capital improvement coming from exiting Poland and €35bn of RWA reductions in the pipeline.

Valuation

Our Dec-15 price target is SEK97. We use a SOTP valuation methodology to value Nordea by applying P/Es of 7.0-11.0x reflecting earnings volatility, RoNAV and the nature of the business. Our Dec 2015 PT of SEK97 yields 1.6x 2014e P/NAV for a 14.6% RoNAV.


The key risks to our rating and PT being achieved include:

Downside risk from repricing and cost cutting efforts not materializing according to plan.

Downside risk from €35bn of scheduled RWA reductions not materializing according to plan.

Downside/upside risk from weaker/better than expected asset quality.

Downside risk from the sale of the Polish business falling through.

Downside risk from the Swedish government selling its remaining ~7% shareholding.

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IntesaSanpaolo (Neutral; Price Target: €1.65)

Investment Thesis

We consider ISP a superior name in an Italian context in terms of profitability. However, 90% of the business is driven by Italian economic performance. We acknowledge the solid capital position, and upgrade our recommendation on the stock to Neutral from Underweight on valuation grounds, as the stock appears cheap in a European context, although not as cheap when compared to Unicredit.

We note that the excess capital reflects ongoing uncertainty due to the upcoming Asset Quality review and stress test, which is pushing ISP to maintain a safety buffer. This is, in our view, one reason why ISP looks so good on an EV/EBITDA comparative valuation. In terms of earning estimates, we are changing our numbers marginally: EPS 2015E increased from €0.13 to €0.14. Our forecast for ISP includes coverage going up from c. 44% to c. 47% by 2015e, with provisions now slightly more concentrated in 2013e and 2014e.

The increase in price target for ISP banks comes from the removal of the provision shortfall to reach 50% coverage by 2015e. As the macro situation appears less worrying, we assume that there is less risk that Italian banks will be asked to reach such a high level of coverage and assume that the increase to 47% already in our forecast will be enough.

Valuation

We Increase our Dec 2014 TP to €1.65 (vs. €1.19 before) for ISP using a 2015E earnings-based SOTP valuation. We assign capital requirements in terms of core tier 1 at 8% for retail, 10% for CIB, 10% for asset management and 11% for international operations, and an average group CoE of c.11%. The higher price target is due to: 1) Removing the provision shortfall (to reach 50% coverage) from SOP valuation: as economic outlook improves slightly, we consider that the 46% coverage should be enough and the regulator will not push for a 50% coverage. 2) c. 5bps of cost of risk moved from 2015 to 2013 and 2014: AQR may increase provision levels earlier rather than later. 3) We raise sustainable ROE for the Italian business to 10% from 8% , consistent with P/BV of 1.0x for the business. 4)We raise sustainable ROE for CIB to 8%.

ISP SOTP Valuation



We see several risks on the upside that could prevent the stock from achieving our target price and rating, including: 1) accelerated cost efforts, 2) a better-than-

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expected credit quality trend due to a more benign economic environment, 3) faster or more significant declines in Italian sovereign spread, which would positively impact cost of funding.

The risks on the downside are connected with: 1) asset quality deterioration requiring more provisioning than what already penciled in. 2) Lower growth in loan volumes. 3)Less capacity of repricing on the asset side.

HSBC Holdings plc (Neutral; Price Target: 800p)

Investment Thesis

With an improving economic outlook for UK economy and our cautious stance on Emerging Markets (EM), we downgrade HSBC to Neutral in the context of UK Banks sector. HSBC has outperformed StanChart by 15% YTD and now trades at a 14% PE premium to StanChart (10.3x 2015 P/E vs 9x 2015 P/E JPMe) and we believe that HSBC’s positive attributes and DM tailwinds are now discounted from the perspective of European bank investors who can invest in pure play recovery/value stocks and StanChart at a cheaper valuation.

Valuation

Our sum of the parts based Dec 2014E price target for HSBC of 800p is calculated using weighted blend of Gordon Growth & P/E valuations on our 2015E estimates. We use cost of equity of 10% for Group & sustainable returns & allocated equity fully adjusted for Basel 3.



Macro economic risks (both upside and downside): Being a Global bank, HSBC is exposed to general macro economic variables such as slowdown or quicker than expected recovery in GDP growth, inflationary pressures, FX & cross border & political risks.

US consumer asset quality (upside): Group is significantly exposed to US consumer asset quality through HFC run off portfolio. A better than expected improvement in the US house prices and consumer asset quality poses upside risk to our estimates.

EM provisions (downside): An increase in EM provision remains the key downside risk for HSBC given the current Asian provisions remain low at 12bps annualised in H113. With slower economic growth, weakness in local FX and tighter monetary policy across some EM economies, we believe the outlook for impairments could get increasingly challenging over the next 12 months.

Banco Popular (Underweight; Price Target: €2.41)

Investment Thesis

Our Underweight recommendation for Popular can be explained mainly by the expected weak evolution of revenues and still deteriorating asset quality that will remain an ongoing theme for Popular (and the sector in general). We expect to see

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more clarity and tangible evidence of Popular overcoming its provisions/capital shortfall before adopting a more positive stance on the stock.

Valuation

Our target price of €2.41 (Dec-14 SOTP-PER based) vs. previous €2.05 was calculated using a 1) 1% growth rate, 2) 11% cost of equity, 3) a sustainable RoE of 8% and 4) 8% required Core Tier 1 capital.


Risks to our rating and price target are 1) resolution of the European sovereign turmoil would lower funding costs dramatically 2) increasing interest rates would benefit the bank’s margins 3) improvement in the economic prospects would lower credit losses 4) easing of the deposits costs following regulatory action would benefit margins 5) more favourable regulations or a delay of Basel III Implementation would lower pressure on capital.

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BNP Paribas: Summary of FinancialsProfit and Loss Statement Ratio Analysis€ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E € in millions, year end Dec FY11A FY12A FY13E FY14E FY15E

Per Share DataNet interest income 23,981 21,489 19,540 19,024 19,285 EPS Reported 5.05 5.36 4.29 4.29 5.13

% Change Y/Y (0.3%) (10.4%) (9.1%) (2.6%) 1.4% EPSAdjusted 6.83 5.19 4.25 4.70 5.30

Non-interest income 18,403 17,583 18,958 19,736 20,547 % Change Y/Y 3.3% (24.0%) (18.2%) 10.8% 12.6%Fees & commissions 8,419 7,577 - - - DPS 1.20 1.52 1.50 1.70 2.00

% change Y/Y (0.8%) (10.0%) - - - % Change Y/Y (43.4%) 27.3% (1.4%) 13.3% 17.6%Trading revenues 3,733 3,360 - - - Dividend yield 2.4% 3.0% 3.0% 3.4% 3.9%

% change Y/Y (26.9%) (10.0%) - - - Payout ratio 23.7% 28.4% 34.9% 39.6% 39.0%Other Income 18,403 17,583 18,958 19,736 20,547 BV per share 56.80 60.12 61.68 64.24 67.37Total operating revenues 42,384 39,072 38,498 38,760 39,832 NAV per share 44.48 48.68 51.18 53.77 56.90

% change Y/Y (3.4%) (7.8%) (1.5%) 0.7% 2.8% Shares outstanding 1,194 1,241 1,244 1,244 1,244Total expenses (26,126) (26,550) (25,712) (26,215) (25,940)

% change Y/Y (1.5%) 1.6% (3.2%) 2.0% (1.0%) Return ratiosPre-provision operating profit 16,258 12,522 12,785 12,545 13,892 RoRWA 1.3% 1.1% 1.0% 1.1% 1.2%

% change Y/Y (6.4%) (23.0%) 2.1% (1.9%) 10.7% Pre-tax ROE 18.7% 13.9% 11.0% 11.9% 12.7%Loan loss provisions (6,797) (3,941) (4,442) (3,986) (3,670) ROE 12.2% 8.7% 6.6% 7.1% 7.6%Other provisions - - - - - RoNAV 15.7% 11.0% 8.5% 9.0% 9.6%

Earnings before tax 9,651 10,372 8,824 9,050 10,730% change Y/Y (25.9%) 7.5% (14.9%) 2.6% 18.6% Revenues

Tax (charge) (2,757) (3,059) (2,697) (2,851) (3,434) NIM (NII / RWA) 3.9% 3.7% 3.6% 3.5% 3.5%% Tax rate 28.6% 29.5% 30.6% 31.5% 32.0% Non-IR / average assets 0.9% 0.9% 1.0% 1.0% 1.0%

Minorities (844) (760) (786) (860) (910) Total rev / average assets 2.1% 2.0% 2.0% 2.0% 2.0%Net Income (Reported) 6,050 6,553 5,341 5,339 6,386 NII / Total revenues 56.6% 55.0% 50.8% 49.1% 48.4%

Fees / Total revenues 19.9% 19.4% - - -Trading / Total revenues 8.8% 8.6% - - -

Balance sheet€ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E € in millions, year end Dec FY11A FY12A FY13E FY14E FY15E

ASSETS Cost ratiosNet customer loans 665,834 630,520 630,520 636,825 643,193 Cost / income 61.6% 68.0% 66.8% 67.6% 65.1%

% change Y/Y (2.8%) (5.3%) 0.0% 1.0% 1.0% Cost / assets 1.3% 1.4% 1.3% 1.3% 1.3%Loan loss reserves - - - - - Staff numbers - - - - -Investments 4,060 5,836 6,082 6,426 6,781

Other interest earning assets - - - - - Balance Sheet Gearing% change Y/Y - - - - - Loan / deposit 121.9% 117.5% 117.5% 118.7% 119.9%

Average interest earnings assets 1,833,128 1,785,830 1,732,551 1,680,602 1,634,592 Investments / assets - - - - -Goodwill 11,406 10,591 10,488 10,488 10,488 Loan / assets 34.1% 33.5% 32.5% 32.2% 32.5%Other assets - - - - - Customer deposits / liabilities 29.0% 28.5% 28.5% 28.6% 28.6%Total assets 1,965,283 1,907,290 1,970,290 1,970,290 1,970,290 LT Debt / liabilities 9.8% 8.8% 9.2% 9.2% 9.2%LIABILITIES Asset Quality / Capital

Customer deposits 546,284 536,513 536,513 536,513 536,513 Loan loss reserves / loans - - - - -% change Y/Y (6.0%) (1.8%) 0.0% 0.0% 0.0% NPLs / loans - - - - -

Long term funding 157,786 173,198 173,198 173,198 173,198 LLP / RWA (1.1%) (0.7%) (0.8%) (0.7%) (0.7%)Interbank funding - - - - - Loan loss reserves / NPLs - - - - -Average interest bearing liabs 929,289 856,170 838,201 838,201 838,201 Growth in NPLs (7.0%) 4.2% 4.3% 2.8% 0.0%Other liabilities 1,005,519 1,037,667 1,035,424 1,031,951 1,027,681 RWAs 614,000 552,000 540,410 546,674 555,325Retirement benefit liabilities - - - - - % YoY change 2.1% (10.1%) (2.1%) 1.2% 1.6%

Shareholders' equity 68,102 78,645 80,900 84,373 88,643 Core Tier 1 9.6% 11.8% 12.9% 13.3% 13.8%Minorities 10,256 8,536 8,536 8,536 8,536 Total Tier 1 11.6% 13.6% 14.7% 15.1% 15.6%Total liabilities & Shareholders Equity 1,965,283 1,970,290 1,970,290 1,970,290 1,970,290

Source: Company reports and J.P. Morgan estimates.

189




BBVA: Summary of FinancialsProfit and Loss Statement Ratio Analysis€ in millions, year end Dec FY12A FY13E FY14E FY15E FY16E € in millions, year end Dec FY12A FY13E FY14E FY15E FY16E

Per Share DataNet interest income 15,122 14,615 15,106 15,556 - EPS Reported 0.30 0.66 0.53 0.64 -

% Change Y/Y 15.0% (3.4%) 3.4% 3.0% - EPSAdjusted 0.30 0.66 0.53 0.64 -Non-interest income 7,319 6,932 6,929 7,178 - % Change Y/Y (51.4%) 124.6% (20.8%) 22.2% -Fees & commissions 4,353 4,453 4,361 4,492 - DPS 0.42 0.42 0.24 0.30 -

% change Y/Y 8.0% 2.3% (2.1%) 3.0% - % Change Y/Y 0.0% 0.4% (42.2%) 22.2% -Trading revenues 1,767 2,248 2,171 2,243 - Dividend yield 5.4% 5.4% 3.1% 3.8% -

% change Y/Y 19.3% 27.2% (3.4%) 3.3% - Payout ratio 142.2% 63.6% 46.4% 46.4% -Other Income 7,319 6,932 6,929 7,178 - BV per share 7.60 7.88 7.93 8.04 -

Total operating revenues 22,441 21,547 22,034 22,734 - NAV per share 5.66 6.05 6.16 6.32 -% change Y/Y 12.1% (4.0%) 2.3% 3.2% - Shares outstanding 5,449 5,796 5,978 6,166 -

Total expenses (10,786) (11,288) (11,462) (11,794) -% change Y/Y 10.8% 4.6% 1.5% 2.9% - Return ratios

Pre-provision operating profit 11,655 10,259 10,572 10,940 - RoRWA 0.5% 1.2% 0.9% 1.2% -% change Y/Y 13.3% (12.0%) 3.0% 3.5% - Pre-tax ROE 4.2% 9.2% 10.0% 11.9% -

Loan loss provisions (7,980) (5,382) (5,150) (4,718) - ROE 4.2% 8.8% 6.7% 8.2% -

Other provisions (651) (1,036) (785) (433) - RoNAV 5.7% 11.7% 8.7% 10.4% -Earnings before tax 1,659 4,012 4,638 5,789 -

% change Y/Y (51.9%) 141.8% 15.6% 24.8% - RevenuesTax (charge) 276 (937) (985) (1,303) - NIM (NII / RWA) 4.6% 4.4% 4.5% 4.5% -

% Tax rate 16.6% 23.4% 21.2% 22.5% - Non-IR / average assets 1.2% 1.1% 1.1% 1.1% -Minorities (651) (622) (514) (528) - Total rev / average assets 3.6% 3.4% 3.4% 3.5% -

Net Income (Reported) 1,676 3,845 3,139 3,957 - NII / Total revenues 67.4% 67.8% 68.6% 68.4% -Fees / Total revenues 19.4% 20.7% 19.8% 19.8% -Trading / Total revenues 7.9% 10.4% 9.9% 9.9% -

Balance sheet

€ in millions, year end Dec FY12A FY13E FY14E FY15E FY16E € in millions, year end Dec FY12A FY13E FY14E FY15E FY16E

ASSETS Cost ratiosNet customer loans 383,410 396,347 406,222 414,202 - Cost / income 48.1% 52.4% 52.0% 51.9% -

% change Y/Y (0.8%) 3.4% 2.5% 2.0% - Cost / assets 1.7% 1.8% 1.8% 1.8% -Loan loss reserves (10,945) (11,010) (11,032) (11,263) - Staff numbers - - - - -

Investments 10,162 10,212 10,264 10,315 -Other interest earning assets - - - - - Balance Sheet Gearing

% change Y/Y - - - - - Loan / deposit 120.6% 112.6% 114.1% 115.6% -Average interest earnings assets - - - - - Investments / assets 1.7% 1.6% 1.6% 1.6% 1.6%Goodwill 8,912 8,912 8,912 8,912 - Loan / assets 61.9% 60.8% 61.7% 62.4% 62.6%Other assets - - - - - Customer deposits / liabilities 49.3% 52.0% 54.2% 54.4% -Total assets 637,785 645,235 654,616 661,188 - LT Debt / liabilities 17.1% 15.8% 15.3% 15.6% 15.6%

ALIABILITIES Asset Quality / CapitalCustomer deposits 292,716 320,427 326,173 330,404 - Loan loss reserves / loans (2.8%) (2.7%) (2.6%) (2.6%) -

% change Y/Y 3.7% 9.5% 1.8% 1.3% - NPLs / loans 4.2% 4.3% 4.2% 4.2% 4.2%Long term funding 99,043 92,609 93,705 94,892 - LLP / RWA (2.4%) (1.6%) (1.5%) (1.4%) -Interbank funding 106,511 77,613 61,210 64,291 - Loan loss reserves / NPLs 62.1% 63.0% 63.0% 63.0% 63.0%

Average interest bearing liabs - - - - - Growth in NPLs 9.5% 0.6% 0.2% 2.1% -Other liabilities 28,237 61,335 55,967 52,550 - RWAs 329,033 335,522 340,400 343,818 -Retirement benefit liabilities - - - - - % YoY change (0.5%) 2.0% 1.5% 1.0% -Shareholders' equity 41,430 45,666 47,393 49,570 - Core Tier 1 11.5% 12.1% 12.5% 13.0% -Minorities 2,372 2,205 2,205 2,205 - Total Tier 1 11.5% 12.1% 12.5% 13.0% -Total liabilities & Shareholders Equity 637,785 663,929 651,160 658,851 -


190




CaixaBank: Summary of FinancialsProfit and Loss Statement Ratio Analysis€ in millions, year end Dec FY12A FY13E FY14E FY15E FY16E € in millions, year end Dec FY12A FY13E FY14E FY15E FY16E


% Change Y/Y 22.1% (0.8%) 4.1% 4.9% - EPSAdjusted 0.04 0.05 0.20 0.29 -Non-interest income 2,865 2,890 2,938 3,009 - % Change Y/Y (84.0%) 15.6% 326.8% 44.2% -Fees & commissions 1,701 1,794 1,900 1,915 - DPS 2.84 3.70 3.70 3.70 -

% change Y/Y 8.9% 5.5% 5.9% 0.8% - % Change Y/Y - 30.4% 0.0% 0.0% -Trading revenues 455 541 300 300 - Dividend yield 95.8% 124.9% 124.9% 124.9% -

% change Y/Y 32.7% 18.9% (44.5%) 0.0% - Payout ratio 6927.2% 7817.3% 1831.6% 1270.6% -Other Income 2,865 2,890 2,938 3,009 - BV per share 5.10 5.04 5.32 5.26 -


Total expenses (3,566) (4,780) (3,705) (3,606) -% change Y/Y 6.7% 34.0% (22.5%) (2.7%) - Return ratios

Pre-provision operating profit 3,171 1,950 3,231 3,597 - RoRWA - - - - -% change Y/Y 0.1% (38.5%) 65.7% 11.3% - Pre-tax ROE (0.3%) (1.1%) 5.1% 7.9% -

Loan loss provisions (3,942) (4,323) (1,498) (742) - ROE 1.1% 1.1% 4.4% 6.4% -

Other provisions - - - - - RoNAV 52.9% 71.0% 53.4% 50.1% -Earnings before tax (62) (248) 1,271 2,147 -

% change Y/Y (105.3%) 300.5% (611.8%) 69.0% - RevenuesTax (charge) 291 513 (160) (406) - NIM (NII / RWA) - - - - -

% Tax rate (469.4%) (206.7%) 12.6% 18.9% - Non-IR / average assets 0.9% 0.8% 0.8% 0.8% -Minorities (1) (13) (13) (13) - Total rev / average assets 2.2% 1.9% 1.9% 2.0% -

Net Income (Reported) 228 252 1,098 1,728 - NII / Total revenues 57.5% 57.1% 57.6% 58.2% -Fees / Total revenues 25.2% 26.7% 27.4% 26.6% -Trading / Total revenues 6.8% 8.0% 4.3% 4.2% -

Balance sheet



% change Y/Y 18.4% 7.0% (1.0%) (1.0%) - Cost / assets 1.2% 1.3% 1.0% 1.0% -Loan loss reserves - - - - - Staff numbers - - - - -


% change Y/Y - - - - - Loan / deposit 135.0% 142.8% 139.8% 136.8% -Average interest earnings assets - - - - - Investments / assets 2.7% 2.5% 2.4% 2.4% 2.4%Goodwill 2,877 2,891 2,891 2,891 - Loan / assets 64.8% 62.7% 62.9% 62.6% 62.4%Other assets - - - - - Customer deposits / liabilities 49.4% 47.2% 48.3% 49.5% -Total assets 348,294 368,827 366,859 364,920 - LT Debt / liabilities 17.7% 15.7% 15.5% 15.6% 15.7%

ALIABILITIES Asset Quality / CapitalCustomer deposits 160,833 162,710 164,618 166,560 - Loan loss reserves / loans - - - - -

% change Y/Y 24.7% 1.2% 1.2% 1.2% - NPLs / loans 0.0% 0.0% 0.0% 0.0% 0.0%Long term funding 52,564 52,980 52,980 52,980 - LLP / RWA - - - - -Interbank funding 51,311 57,707 57,707 57,707 - Loan loss reserves / NPLs - - - - -

Average interest bearing liabs - - - - - Growth in NPLs - 2.1% 0.0% 0.0% -Other liabilities 11,269 21,203 15,405 9,189 - RWAs 0 0 0 0 -Retirement benefit liabilities - - - - - % YoY change - - - - -Shareholders' equity 22,711 24,113 26,033 28,368 - Core Tier 1 - - - - -Minorities 0 0 0 0 - Total Tier 1 - - - - -Total liabilities & Shareholders Equity 348,294 368,827 366,859 364,920 -


191




Credit Agricole: Summary of FinancialsProfit and Loss Statement Ratio Analysis€ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E € in millions, year end Dec FY11A FY12A FY13E FY14E FY15E

Per Share DataNet interest income 15,169 14,730 8,883 9,663 9,020 EPS Reported (0.60) (2.60) 0.87 1.05 1.27

% Change Y/Y 1.8% (2.9%) (39.7%) 8.8% (6.7%) EPSAdjusted 1.03 1.18 0.83 1.05 1.27Non-interest income 5,617 1,838 7,916 7,285 8,434 % Change Y/Y 25.6% 14.0% (29.7%) 27.5% 20.6%Fees & commissions 4,672 2,626 2,626 2,757 2,812 DPS 0.00 0.00 0.00 0.00 0.00

% change Y/Y (4.6%) (43.8%) 0.0% 5.0% 2.0% % Change Y/Y (100.0%) - - - -Trading revenues (3,622) 5,255 1,500 2,000 2,000 Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0%

% change Y/Y (166.5%) (245.1%) (71.5%) 33.3% 0.0% Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0%Other Income 5,617 1,838 7,916 7,285 8,434 BV per share 17.33 15.96 16.53 17.66 18.93

Total operating revenues 20,786 16,568 16,799 16,948 17,454 NAV per share 9.46 9.12 9.78 10.84 12.11% change Y/Y 3.3% (20.3%) 1.4% 0.9% 3.0% Shares outstanding 2,469 2,489 2,490 2,488 2,488

Total expenses (13,613) (12,334) (11,678) (11,530) (11,555)% change Y/Y 3.2% (9.4%) (5.3%) (1.3%) 0.2% Return ratios

Pre-provision operating profit 7,173 4,234 5,121 5,417 5,899 RoRWA - - - - -% change Y/Y 3.3% (41.0%) 20.9% 5.8% 8.9% Pre-tax ROE 9.7% 9.1% 7.4% 9.0% 10.2%

Loan loss provisions (5,657) (3,737) (3,113) (2,747) (2,497) ROE 5.8% 7.1% 5.1% 6.2% 6.9%

Other provisions - - - - - RoNAV 10.8% 13.0% 8.7% 10.2% 11.0%Earnings before tax (187) (2,211) 3,107 3,832 4,623

% change Y/Y (107.2%) 1082.4% (240.5%) 23.3% 20.7% RevenuesTax (charge) (1,027) (373) (580) (801) (1,020) NIM (NII / RWA) - - - - -

% Tax rate (549.2%) (16.9%) 18.7% 20.9% 22.1% Non-IR / average assets 0.3% 0.1% 0.4% 0.4% 0.5%Minorities (271) 42 (351) (411) (445) Total rev / average assets 1.3% 0.9% 0.9% 0.9% 1.0%

Net Income (Reported) (1,471) (6,478) 2,178 2,620 3,158 NII / Total revenues 73.0% 88.9% 52.9% 57.0% 51.7%Fees / Total revenues 22.5% 15.8% 15.6% 16.3% 16.1%Trading / Total revenues (17.4%) 31.7% 8.9% 11.8% 11.5%

Balance sheet

€ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E € in millions, year end Dec FY11A FY12A FY13E FY14E FY15E


% change Y/Y 4.3% (8.2%) (0.4%) (3.8%) 0.0% Cost / assets 0.8% 0.7% 0.6% 0.6% 0.6%Loan loss reserves (15,979) (11,778) (8,999) (9,089) (9,180) Staff numbers - - - - -

Investments 18,300 18,600 18,900 18,900 18,900Other interest earning assets - - - - - Balance Sheet Gearing

% change Y/Y - - - - - Loan / deposit 89.6% 90.1% 94.1% 94.2% 94.2%Average interest earnings assets 1,517,477 1,634,250 1,586,955 1,479,710 1,479,710 Investments / assets 0.0% 0.0% 0.0% 0.0% 0.0%Goodwill 17,500 13,983 13,977 13,977 13,977 Loan / assets 46.0% 41.9% 39.4% 39.2% 38.4%Other assets 102,080 104,717 262,176 262,176 262,176 Customer deposits / liabilities 41.7% 35.9% 38.6% 37.2% 37.3%Total assets 1,723,600 1,842,400 1,784,900 1,784,900 1,784,900 LT Debt / liabilities 38.4% 41.8% 45.5% 47.4% 48.1%

LIABILITIES Asset Quality / CapitalCustomer deposits 698,300 644,300 670,400 645,325 645,325 Loan loss reserves / loans (2.0%) (1.6%) (1.2%) (1.3%) (1.3%)

% change Y/Y 6.5% (7.7%) 4.1% (3.7%) 0.0% NPLs / loans 2.8% 2.5% 1.9% 1.6% 1.7%Long term funding 656,606 795,532 812,057 834,343 831,185 LLP / RWA - - - - -Interbank funding - - - - - Loan loss reserves / NPLs 67.7% 71.9% 76.6% 77.7% 77.7%Average interest bearing liabs 836,433 820,650 858,056 920,017 917,043 Growth in NPLs 10.1% (32.4%) (25.6%) 1.0% 1.0%

Other liabilities 314,703 351,773 250,780 250,780 250,780 RWAs 333,700 293,100 326,328 326,956 329,056Retirement benefit liabilities - - - - - % YoY change (10.2%) (12.2%) 11.3% 0.2% 0.6%Shareholders' equity 42,797 39,727 41,154 43,944 47,102 Core Tier 1 6.3% 9.2% 9.0% 9.8% 10.7%Minorities 6,500 5,500 6,386 6,386 6,386 Total Tier 1 11.2% 11.7% 10.3% 11.1% 12.0%Total liabilities & Shareholders Equity 1,723,600 1,842,400 1,784,900 1,784,900 1,784,900


192




UniCredit: Summary of FinancialsProfit and Loss Statement Ratio Analysis€ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E € in millions, year end Dec FY11A FY12A FY13E FY14E FY15E

Per Share DataNet interest income 15,433 14,285 13,395 14,159 15,128 EPS Reported (4.83) 0.22 0.13 0.26 0.46

% Change Y/Y (3.5%) (7.4%) (6.2%) 5.7% 6.8% EPSAdjusted (0.25) 0.28 0.22 0.33 0.53Non-interest income 9,387 10,863 10,752 10,315 10,298 % Change Y/Y (717.1%) (213.1%) (23.9%) 52.6% 60.9%Fees & commissions 8,097 7,793 8,183 8,347 8,430 DPS 0.00 0.09 0.06 0.09 0.09

% change Y/Y (4.2%) (3.8%) 5.0% 2.0% 1.0% % Change Y/Y (100.0%) - (32.0%) 50.0% 0.0%Trading revenues 1,119 2,808 2,300 1,700 1,600 Dividend yield 0.0% 1.9% 1.3% 2.0% 2.0%

% change Y/Y 6.3% 151.0% (18.1%) (26.1%) (5.9%) Payout ratio 0.0% 59.1% 46.9% 34.5% 19.5%Other Income 9,387 10,863 10,752 10,315 10,298 BV per share 26.67 10.63 10.70 10.87 11.24

Total operating revenues 24,820 25,147 24,146 24,475 25,426 NAV per share 18.55 7.93 8.07 8.21 8.49% change Y/Y (4.3%) 1.3% (4.0%) 1.4% 3.9% Shares outstanding 1,930 5,792 5,792 5,792 5,792

Total expenses (15,460) (14,979) (14,582) (13,999) (13,528)% change Y/Y (0.1%) (3.1%) (2.7%) (4.0%) (3.4%) Return ratios

Pre-provision operating profit 9,360 10,168 9,564 10,476 11,898 RoRWA - 0.7% 0.3% 0.4% 0.7%% change Y/Y (10.5%) 8.6% (5.9%) 9.5% 13.6% Pre-tax ROE (11.6%) 0.5% 3.6% 5.5% 8.6%

Loan loss provisions (6,025) (9,613) (7,200) (6,900) (6,300) ROE (0.8%) 2.9% 2.0% 3.1% 4.8%

Other provisions (9,396) (196) (370) (450) (400) RoNAV (1.0%) 4.0% 2.7% 4.1% 6.4%Earnings before tax (6,728) 287 2,212 3,451 5,500

% change Y/Y (440.0%) (104.3%) 671.8% 56.0% 59.4% RevenuesTax (charge) (1,416) 1,539 (840) (1,311) (2,090) NIM (NII / RWA) - 6.2% 3.0% 3.3% 3.4%

% Tax rate (21.0%) 537.1% 38.0% 38.0% 38.0% Non-IR / average assets 1.0% 1.2% 1.2% 1.1% 1.1%Minorities (365) (358) (240) (240) (350) Total rev / average assets 2.7% 2.7% 2.6% 2.7% 2.8%

Net Income (Reported) (9,317) 865 741 1,509 2,670 NII / Total revenues 62.2% 56.8% 55.5% 57.9% 59.5%Fees / Total revenues 32.6% 31.0% 33.9% 34.1% 33.2%Trading / Total revenues 4.5% 11.2% 9.5% 6.9% 6.3%

Balance sheet



% change Y/Y 0.7% (2.2%) (3.0%) 1.1% 1.8% Cost / assets 1.7% 1.6% 1.6% 1.5% 1.5%Loan loss reserves 559,553 547,144 530,730 536,515 546,172 Staff numbers 160,360 156,354 155,589 87,542 80,451

Investments - - - - -Other interest earning assets 99,364 108,686 108,686 91,685 91,685 Balance Sheet Gearing

% change Y/Y 3.3% 9.4% 0.0% (15.6%) 0.0% Loan / deposit - - - - -Average interest earnings assets 853,488 850,494 837,159 823,210 822,168 Investments / assets 10.5% 11.2% 11.8% 11.1% 10.1%Goodwill 15,685 15,658 15,658 15,658 15,658 Loan / assets 60.1% 59.7% 58.6% 58.9% 59.8%Other assets 55,088 66,186 66,186 67,228 68,323 Customer deposits / liabilities 45.3% 47.5% 48.7% 50.0% 50.3%Total assets 926,768 926,838 911,168 899,983 911,220 LT Debt / liabilities 20.7% 19.4% 20.0% 20.4% 20.6%

LIABILITIES Asset Quality / CapitalCustomer deposits 395,288 409,514 411,829 416,387 423,441 Loan loss reserves / loans - - - - -

% change Y/Y 1.3% 3.6% 0.6% 1.1% 1.7% NPLs / loans - - - - -Long term funding 166,082 170,451 170,451 172,155 173,877 LLP / RWA - (2.1%) (1.7%) (1.6%) (1.4%)Interbank funding 131,807 117,445 113,922 91,137 92,049 Loan loss reserves / NPLs 792.4% 726.6% 647.6% 600.4% 586.9%Average interest bearing liabs 835,905 835,951 826,941 815,479 812,061 Growth in NPLs 6.3% 10.0% 8.6% 5.1% 2.5%

Other liabilities 21,715 22,356 12,641 17,026 16,464 RWAs 0 458,527 431,763 437,158 444,460Retirement benefit liabilities - - - - - % YoY change - - (5.8%) 1.2% 1.7%Shareholders' equity 51,479 61,579 61,973 62,961 65,109 Core Tier 1 - 10.4% 11.0% 10.9% 11.1%Minorities 3,318 3,669 3,632 3,596 3,560 Total Tier 1 - 10.9% 11.6% 11.5% 11.7%Total liabilities & Shareholders Equity 926,768 926,838 911,168 899,983 911,220


193




UBS: Summary of FinancialsProfit and Loss Statement Ratio AnalysisSF in millions, year end Dec FY11A FY12A FY13E FY14E FY15E SF in millions, year end Dec FY11A FY12A FY13E FY14E FY15E

Per Share DataNet interest income 6,826 5,994 5,121 5,172 5,224 EPS Reported 1.10 (0.72) 1.03 1.25 1.76

% Change Y/Y 9.8% (12.2%) (14.6%) 1.0% 1.0% EPSAdjusted 0.54 0.90 1.40 1.70 1.90Non-interest income 21,043 19,569 23,925 23,703 25,549 % Change Y/Y (68.8%) 65.7% 55.6% 21.5% 11.8%Fees & commissions 15,234 15,609 17,323 18,269 19,196 DPS 0.10 0.15 0.30 0.60 0.95

% change Y/Y (11.2%) 2.5% 11.0% 5.5% 5.1% % Change Y/Y - 50.0% 100.0% 100.0% 58.3%Trading revenues 4,352 3,277 5,999 4,534 5,453 Dividend yield 0.5% 0.8% 1.6% 3.1% 5.0%

% change Y/Y (41.7%) (24.7%) 83.1% (24.4%) 20.3% Payout ratio 9.2% NM 29.7% 49.0% 55.1%Other Income 21,043 19,569 23,925 23,703 25,549 BV per share 14.18 12.25 12.77 13.42 14.22

Total operating revenues 27,869 25,563 29,045 28,875 30,773 NAV per share 11.64 10.29 10.82 11.46 12.25% change Y/Y (13.1%) (8.3%) 13.6% (0.6%) 6.6% Shares outstanding 3,768 3,748 3,768 3,768 3,768

Total expenses (22,437) (24,360) (23,871) (22,773) (22,287)% change Y/Y (8.6%) 8.6% (2.0%) (4.6%) (2.1%) Return ratios

Pre-provision operating profit 5,432 1,203 5,174 6,102 8,486 RoRWA 0.9% 1.6% 2.5% 2.9% 3.4%% change Y/Y (27.8%) (77.9%) 330.1% 17.9% 39.1% Pre-tax ROE 5.7% 10.7% 14.6% 16.8% 17.8%

Loan loss provisions (83) (118) (32) (36) (40) ROE 4.1% 6.8% 11.4% 13.2% 13.9%

Other provisions - - - - - RoNAV 10.2% (6.6%) 9.5% 11.0% 14.6%Earnings before tax 5,349 (1,986) 5,138 6,066 8,446

% change Y/Y (28.2%) (137.1%) (358.7%) 18.1% 39.2% RevenuesTax (charge) (923) (450) (1,065) (1,183) (1,647) NIM (NII / RWA) 3.1% 2.8% 2.4% 2.3% 2.4%

% Tax rate 17.3% (22.7%) 20.7% 19.5% 19.5% Non-IR / average assets 1.5% 1.5% 2.1% 2.4% 3.0%Minorities (268) (276) (208) (190) (190) Total rev / average assets 2.0% 1.9% 2.5% 2.9% 3.6%

Net Income (Reported) 4,158 (2,712) 3,866 4,693 6,609 NII / Total revenues 24.5% 23.4% 17.6% 17.9% 17.0%Fees / Total revenues 54.7% 61.1% 59.6% 63.3% 62.4%Trading / Total revenues 15.6% 12.8% 20.7% 15.7% 17.7%

Balance sheet

SF in millions, year end Dec FY11A FY12A FY13E FY14E FY15E SF in millions, year end Dec FY11A FY12A FY13E FY14E FY15E


% change Y/Y 1.4% 5.0% 5.1% 1.0% 2.0% Cost / assets 1.6% 1.8% 2.1% 2.3% 2.6%Loan loss reserves - - - - - Staff numbers 62,904 60,965 53,976 53,272 52,581


% change Y/Y - - - - - Loan / deposit 77.9% 75.3% 77.1% 77.9% 79.5%Average interest earnings assets 1,155,604 1,161,523 980,856 807,170 691,491 Investments / assets 4.7% 4.5% 5.6% 6.5% 7.4%Goodwill 9,695 6,461 6,647 6,647 6,647 Loan / assets 19.3% 20.4% 24.8% 30.2% 35.5%Other assets - - - - - Customer deposits / liabilities 25.2% 30.8% 37.9% 44.8% 52.1%Total assets 1,419,161 1,259,233 1,057,043 904,280 787,306 LT Debt / liabilities 10.3% 9.5% 9.1% 9.6% 9.6%

LIABILITIES Asset Quality / CapitalCustomer deposits 342,409 371,892 381,535 381,535 381,535 Loan loss reserves / loans - - - - -

% change Y/Y 3.0% 8.6% 2.6% 0.0% 0.0% NPLs / loans - - - - -Long term funding 140,617 104,656 96,693 82,189 69,861 LLP / RWA (0.0%) (0.1%) (0.0%) (0.0%) (0.0%)Interbank funding - - - - - Loan loss reserves / NPLs - - - - -Average interest bearing liabs 739,354 704,181 638,406 595,734 564,844 Growth in NPLs (48.6%) 49.1% 0.0% 0.0% 0.0%

Other liabilities 135,655 140,468 119,681 79,783 54,838 RWAs 240,962 192,505 228,163 218,163 213,163Retirement benefit liabilities - - - - - % YoY change 21.2% (20.1%) 18.5% (4.4%) (2.3%)Shareholders' equity 53,446 45,896 48,134 50,566 53,596 Core Tier 1 14.1% 19.0% 12.2% 13.9% 15.6%Minorities 4,406 4,353 2,000 2,000 2,000 Total Tier 1 15.9% 21.3% 12.2% 13.9% 15.6%Total liabilities & Shareholders Equity 1,419,161 1,259,233 1,057,043 904,280 787,306


194




Swedbank: Summary of FinancialsProfit and Loss Statement Ratio AnalysisSkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E Skr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E


% Change Y/Y 6.7% 5.5% 1.1% 3.9% - EPSAdjusted 13.05 13.48 14.42 15.23 -Non-interest income 15,985 15,304 16,340 16,783 - % Change Y/Y 4.2% 3.3% 7.0% 5.6% -Fees & commissions 9,614 9,992 10,308 10,598 - DPS 9.90 10.11 10.82 11.43 -

% change Y/Y 0.2% 3.9% 3.2% 2.8% - % Change Y/Y 86.8% 2.1% 7.0% 5.6% -Trading revenues 3,073 2,217 2,850 2,919 - Dividend yield 6.4% 6.5% 7.0% 7.4% -

% change Y/Y 94.0% (27.8%) 28.5% 2.4% - Payout ratio 86.8% 85.6% 75.0% 75.0% -Total operating revenues 36,268 36,711 37,978 39,265 - BV per share 93.89 93.29 96.89 100.70 -

% change Y/Y 6.5% 1.2% 3.5% 3.4% - NAV per share 81.64 81.04 84.64 88.45 -Total expenses (16,560) (16,516) (16,731) (16,997) - Shares outstanding 1,097 1,097 1,097 1,097 -

% change Y/Y (10.0%) (0.3%) 1.3% 1.6% -Pre-provision operating profit 19,708 20,195 21,246 22,268 - Return ratios

% change Y/Y 26.0% 2.5% 5.2% 4.8% - RoRWA 2.9% 3.0% 3.1% 3.2% -Loan loss provisions 185 (654) (1,118) (1,158) - Pre-tax ROE 19.4% 18.5% 19.0% 19.2% -Other provisions - - - - - ROE 14.2% 14.4% 15.2% 15.4% -

Earnings before tax 19,466 18,996 19,777 20,858 - RoNAV 16.5% 16.6% 17.4% 17.6% -% change Y/Y 26.2% (2.4%) 4.1% 5.5% -

Tax (charge) (4,157) (3,748) (3,941) (4,130) - Revenues% Tax rate 21.4% 19.7% 19.9% 19.8% - NIM (NII / RWA) 4.1% 4.3% 4.2% 4.3% -

Minorities (8) (9) (10) (11) - Non-IR / average assets 0.9% 0.8% 0.8% 0.8% -Net Income (Reported) 14,304 12,962 15,827 16,717 - Total rev / average assets 2.0% 2.0% 2.0% 2.0% -

NII / Total revenues 55.9% 58.3% 57.0% 57.3% -Fees / Total revenues 26.5% 27.2% 27.1% 27.0% -Trading / Total revenues 8.5% 6.0% 7.5% 7.4% -

Balance sheetSkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E Skr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E

ASSETS Cost ratiosNet customer loans 1,238,864 1,258,278 1,296,027 1,334,907 - Cost / income 45.7% 45.0% 44.1% 43.3% -

% change Y/Y 2.3% 1.6% 3.0% 3.0% - Cost / assets 0.9% 0.9% 0.9% 0.9% -Loan loss reserves (8,622) (5,337) 5,311 5,250 - Staff numbers 0 0 - - -Cash and bank holdings 130,058 201,838 209,911 207,812 -Other interest earning assets 215,538 274,207 283,728 280,890 - Balance Sheet Gearing

% change Y/Y (17.6%) 27.2% 3.5% (1.0%) - Loan / deposit 213.7% 185.1% 185.1% 188.7% -Average interest earnings assets 1,612,677 1,635,308 1,692,105 1,733,237 877,024 Cash / assets 7.0% 10.6% 10.7% 10.4% -Goodwill 11,452 11,620 11,620 11,620 - Loan / assets 66.2% 66.6% 66.2% 66.3% 66.5%Other assets 24,008 28,692 28,163 28,964 - Customer deposits / liabilities 33.2% 37.8% 37.8% 37.3% -Total assets 1,846,860 1,901,448 1,958,492 2,007,454 - LT Debt / liabilities 44.2% 42.9% 42.1% 42.6% 43.0%ALIABILITIES Asset Quality / Capital

Customer deposits 579,663 679,907 700,304 707,307 - Loan loss reserves / loans (0.7%) (0.4%) 0.4% 0.4% -% change Y/Y 3.2% 17.3% 3.0% 1.0% - NPLs / loans 1.6% 1.0% 0.9% 1.0% 1.0%

Long term funding 767,454 753,565 783,708 815,056 - LLP / RWA 0.0% (0.1%) (0.2%) (0.2%) -Interbank funding 122,202 125,242 122,737 120,282 - Loan loss reserves / NPLs 61.6% 55.0% 45.1% 42.1% 40.6%Average interest bearing liabs 1,492,955 1,526,569 1,593,691 1,635,986 827,050 Growth in NPLs (43.8%) (18.0%) 6.6% 6.0% -Other liabilities 62,803 63,674 62,911 65,789 - RWAs 479,970 512,129 518,450 523,560 -

Retirement benefit liabilities - - - - - % YoY change (6.9%) 6.7% 1.2% 1.0% -Shareholders' equity 103,032 102,375 106,332 110,511 - Core Tier 1 15.5% 15.7% 15.9% 16.6% -Minorities 154 153 153 153 - Total Tier 1 18.1% 17.7% 18.2% 18.9% -Total liabilities & Shareholders Equity 1,846,860 1,901,448 1,958,492 2,007,454 -


195




Standard Chartered: Summary of FinancialsProfit and Loss Statement Ratio Analysis$ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E $ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E


% Change Y/Y 20% 6% 2% 6% 8% % YoY change (3%) (1%) (3%) 23% 8%Non-interest income 7,484 8,002 8,645 9,445 10,139 EPSAdjusted 2.01 2.17 2.14 2.36 2.56

% change 9% 2% 5% 6% 6% % Change Y/Y (1%) 8% (1%) 11% 8%Total operating revenues 17,637 18,783 19,679 21,086 22,673 DPS 0.76 0.84 0.90 0.98 1.06

% change Y/Y 10% 6% 5% 7% 8% % Change Y/Y 10% 11% 7% 9% 8%Operating costs (9,824) (10,055) (10,569) (11,161) (11,816) BV per share 17.08 18.80 19.21 20.94 22.57

% change Y/Y 9% 2% 5% 6% 6% % YoY change 5% 10% 2% 9% 8%

PPOP 7,813 8,728 9,110 9,925 10,857 NAV per share 13.49 15.15 16.10 17.85 19.52% change Y/Y 11% 12% 4% 9% 9% % YoY change 7% 12% 6% 11% 9%

Loan loss provisions (908) (1,196) (1,534) (1,794) (1,968) Shares outstanding 2,384 2,413 2,442 2,453 2,491% YoY change 3% 32% 28% 17% 10%

Other provisions (111) (196) (12) (1) (1) Returns & MarginsAssociates and Exceptionals 74 182 219 241 265 RoRWA 2% 2% 2% 2% 2%

Pretax profit 6,775 6,851 7,020 8,371 9,153 ROE 12% 12% 11% 12% 12%% change Y/Y 11% 1% 2% 19% 9% RoNAV 15% 14% 12% 14% 14%

Tax (1,842) (1,891) (2,106) (2,302) (2,517) Pre-tax ROE 17% 17% 17% 17% 17%Minorities (84) (98) (114) (128) (144)Net Income (Reported) 4,748 4,761 4,699 5,840 6,391 NIM (NII / RWA) 4% 4% 3% 3% 3%

% YoY change 12% 0% (1%) 24% 9% Non-IR / average assets 1% 1% 1% 1% 1%Total rev / average assets 3% 3% 3% 3% 3%

.

Balance sheet$ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E $ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E

ASSETS BALANCE SHEET GEARING

Net customer loans 263,765 283,885 302,394 327,091 354,951 Loan / deposit 78% 76% 78% 80% 82%% change Y/Y 10% 8% 7% 8% 9% Loan / assets 45% 44% 45% 45% 46%

Total assets 599,070 636,518 673,879 721,122 773,725 Customer deposits / liabilities 61% 64% 61% 60% 60%% YoY change 16% 6% 6% 7% 7%

.LIABILITIES CAPITALCustomer deposits 342,701 377,639 380,904 403,255 427,134 RWAs 270,510 301,861 343,953 378,490 416,665

% change Y/Y 12% 10% 1% 6% 6% % YoY change 10% 12% 14% 10% 10%Shareholders' equity 40,714 45,362 46,917 51,374 56,240 Core Tier 1 31,833 35,339 38,923 43,380 48,246

% YoY change 7% 11% 3% 9% 9% % YoY change 10% 11% 10% 11% 11%Minorities 661 693 590 590 590Total liabilities 557,695 590,463 626,372 669,158 716,894 Core Tier 1 ratio 11.8% 11.7% 11.3% 11.5% 11.6%% YoY change 17% 6% 6% 7% 7% Total Tier 1 14% 13% 13% 13% 13%


196




Société Générale: Summary of FinancialsProfit and Loss Statement Ratio Analysis€ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E € in millions, year end Dec FY11A FY12A FY13E FY14E FY15E


% Change Y/Y 2.0% (7.3%) (7.3%) (2.2%) 0.8% EPSAdjusted 3.61 3.46 3.40 3.90 4.45Non-interest income 13,431 11,800 12,325 13,860 14,387 % Change Y/Y (32.3%) (4.3%) (1.7%) 14.6% 14.3%Fees & commissions 7,179 6,977 6,628 7,291 7,656 DPS 0.00 0.45 0.95 1.50 1.75

% change Y/Y (4.1%) (2.8%) (5.0%) 10.0% 5.0% % Change Y/Y (100.0%) - 111.1% 57.9% 16.7%Trading revenues 4,432 3,201 3,233 3,556 3,734 Dividend yield 0.0% 1.2% 2.6% 4.1% 4.8%

% change Y/Y (17.5%) (27.8%) 1.0% 10.0% 5.0% Payout ratio 0.0% 44.1% 32.4% 38.5% 39.3%Other Income 13,431 11,800 12,325 13,860 14,387 BV per share 62.26 65.32 64.99 67.27 69.12

Total operating revenues 25,638 23,112 22,813 24,118 24,731 NAV per share 42.58 45.99 47.15 49.19 51.27% change Y/Y (2.9%) (9.9%) (1.3%) 5.7% 2.5% Shares outstanding 756 763 775 789 813

Total expenses (17,036) (16,438) (15,868) (15,972) (16,225)% change Y/Y 3.0% (3.5%) (3.5%) 0.7% 1.6% Return ratios



Other provisions - - - - - RoNAV 8.4% 7.6% 7.3% 8.1% 8.9%Earnings before tax 4,112 1,544 3,615 5,106 5,959

% change Y/Y (29.6%) (62.4%) 134.1% 41.3% 16.7% RevenuesTax (charge) (1,323) (334) (917) (1,537) (1,799) NIM (NII / RWA) 3.6% 3.4% 3.3% 3.3% 3.3%

% Tax rate 32.2% 21.6% 25.4% 30.1% 30.2% Non-IR / average assets 1.2% 1.0% 1.0% 1.1% 1.1%Minorities (405) (434) (437) (521) (590) Total rev / average assets 2.2% 1.9% 1.8% 1.9% 2.0%

Net Income (Reported) 2,384 776 2,261 3,048 3,570 NII / Total revenues 47.6% 48.9% 46.0% 42.5% 41.8%Fees / Total revenues 28.0% 30.2% 29.1% 30.2% 31.0%Trading / Total revenues 17.3% 13.8% 14.2% 14.7% 15.1%

Balance sheet



% change Y/Y (1.0%) (4.5%) (2.6%) 0.0% 0.0% Cost / assets 1.5% 1.4% 1.3% 1.3% 1.3%Loan loss reserves (16,111) (20,046) (23,971) (27,159) (29,861) Staff numbers - - - - -

Investments 2,014 2,119 2,060 2,060 2,060Other interest earning assets 130,403 144,795 173,969 173,969 173,969 Balance Sheet Gearing

% change Y/Y 54.6% 11.0% 20.1% 0.0% 0.0% Loan / deposit 116.7% 112.4% 105.5% 105.5% 105.5%Average interest earnings assets 1,068,195 1,118,432 1,158,616 1,165,777 1,165,777 Investments / assets - - - - -Goodwill 6,973 5,320 5,215 5,215 5,215 Loan / assets 34.5% 31.9% 29.8% 29.4% 29.4%Other assets 68,460 74,612 63,618 63,618 63,618 Customer deposits / liabilities 30.1% 28.2% 29.2% 29.2% 29.3%Total assets 1,181,372 1,252,347 1,254,082 1,254,082 1,254,082 LT Debt / liabilities 11.3% 10.5% 11.1% 10.8% 10.8%


% change Y/Y 0.8% (0.9%) 3.8% 0.0% 0.0% NPLs / loans 5.7% 5.5% 5.3% 5.5% 5.5%Long term funding 108,583 135,744 129,623 129,623 129,623 LLP / RWA (1.2%) (1.2%) (1.3%) (1.0%) (0.8%)Interbank funding 112,245 124,447 115,431 112,678 109,582 Loan loss reserves / NPLs 65.3% 81.1% 104.8% 117.5% 129.6%Average interest bearing liabs 559,961 579,211 596,222 593,646 590,721 Growth in NPLs 4.3% (14.9%) 4.9% 2.3% 0.0%

Other liabilities 558,299 591,706 596,652 596,652 596,652 RWAs 349,275 324,092 312,990 315,301 318,904Retirement benefit liabilities - - - - - % YoY change 4.3% (7.2%) (3.4%) 0.7% 1.1%Shareholders' equity 47,067 49,809 50,353 53,106 56,202 Core Tier 1 9.0% 10.7% 11.9% 12.6% 13.4%Minorities 4,045 4,288 3,883 3,883 3,883 Total Tier 1 10.7% 12.5% 13.0% 13.7% 14.4%Total liabilities & Shareholders Equity 1,181,372 1,250,696 1,254,082 1,254,082 1,254,082


197




Commerzbank: Summary of FinancialsProfit and Loss Statement Ratio Analysis€ in millions, year end Dec FY12A FY13E FY14E FY15E FY16E € in millions, year end Dec FY12A FY13E FY14E FY15E FY16E

Per Share DataNet interest income 6,487 5,377 5,347 5,454 - EPS Reported (0.05) (0.19) 0.54 0.76 -

% Change Y/Y (3.5%) (17.1%) (0.6%) 2.0% - EPSAdjusted 0.23 0.61 0.54 0.76 -Non-interest income 3,388 3,955 4,319 4,482 - % Change Y/Y (91.4%) 163.0% (11.2%) 41.0% -Fees & commissions - - - - - DPS 0.00 0.00 0.00 0.00 -

% change Y/Y - - - - - % Change Y/Y - - - - -Trading revenues - - - - - Dividend yield 0.0% 0.0% 0.0% 0.0% -

% change Y/Y - - - - - Payout ratio 0.0% 0.0% 0.0% 0.0% -Other Income 3,388 3,955 4,319 4,482 - BV per share 32.65 22.25 22.79 23.56 -

Total operating revenues 9,875 9,331 9,665 9,937 - NAV per share 25.68 19.57 20.11 20.87 -% change Y/Y (0.1%) (5.5%) 3.6% 2.8% - Shares outstanding 779 1,139 1,139 1,139 -

Total expenses (7,340) (7,436) (6,979) (7,034) -% change Y/Y (8.2%) 1.3% (6.1%) 0.8% - Return ratios

Pre-provision operating profit 2,535 1,895 2,686 2,903 - RoRWA 0.2% - - - -% change Y/Y 33.6% (25.2%) 41.7% 8.1% - Pre-tax ROE 3.5% (0.2%) 3.8% 5.0% -


Other provisions - - - - - RoNAV 0.9% (0.9%) 2.7% 3.7% -Earnings before tax 875 (55) 970 1,321 -

% change Y/Y 72.6% (106.3%) (1865.5%) 36.2% - RevenuesTax (charge) (806) (38) (242) (330) - NIM (NII / RWA) 5.5% - - - -

% Tax rate 92.1% (69.0%) 25.0% 25.0% - Non-IR / average assets 0.5% 0.6% 0.7% 0.7% -Minorities (103) (102) (112) (123) - Total rev / average assets 1.5% 1.5% 1.5% 1.6% -

Net Income (Reported) (34) (194) 616 868 - NII / Total revenues 65.7% 57.6% 55.3% 54.9% -Fees / Total revenues - - - - -Trading / Total revenues - - - - -

Balance sheet



% change Y/Y (6.1%) 0.6% 0.0% 0.0% - Cost / assets 1.1% 1.2% 1.1% 1.1% -Loan loss reserves 16,443 16,018 16,787 16,787 - Staff numbers - - - - -


% change Y/Y - - - - - Loan / deposit - - - - -Average interest earnings assets 628,864 622,065 625,431 620,799 309,253 Investments / assets 14.3% 14.0% 13.8% 13.6% 13.5%Goodwill - - - - - Loan / assets 44.3% 43.5% 43.4% 43.7% 43.9%Other assets - - - - - Customer deposits / liabilities 43.6% 43.9% 44.3% 44.7% -Total assets 636,012 647,300 642,621 638,035 - LT Debt / liabilities 14.8% 12.4% 11.7% 11.6% 11.5%

ALIABILITIES Asset Quality / CapitalCustomer deposits 265,842 272,946 272,946 272,946 - Loan loss reserves / loans 5.6% 5.4% 5.7% 5.7% -

% change Y/Y 4.1% 2.7% 0.0% 0.0% - NPLs / loans 3.1% 6.3% 6.1% 6.1% 6.1%Long term funding 79,332 72,994 71,534 70,103 - LLP / RWA - - - - -Interbank funding 110,242 128,547 122,120 122,120 - Loan loss reserves / NPLs 169.8% 87.7% 90.7% 92.9% 92.9%

Average interest bearing liabs 457,457 464,952 470,543 465,884 232,585 Growth in NPLs 17096931.0% (4.5%) 0.0% 0.0% -Other liabilities 19,256 20,573 24,266 21,332 - RWAs 208,135 232,783 225,887 221,869 -Retirement benefit liabilities - - - - - % YoY change (12.0%) 11.8% (3.0%) (1.8%) -Shareholders' equity 25,441 25,336 25,951 26,819 - Core Tier 1 12.3% 11.4% 12.0% 12.6% -Minorities 886 885 885 885 - Total Tier 1 12.3% 11.4% 12.0% 12.6% -Total liabilities & Shareholders Equity 636,012 647,300 642,621 638,035 -


198




Credit Suisse Group: Summary of FinancialsProfit and Loss Statement Ratio AnalysisSF in millions, year end Dec FY11A FY12A FY13E FY14E FY15E SF in millions, year end Dec FY11A FY12A FY13E FY14E FY15E


% Change Y/Y (1.7%) 11.1% 23.2% (0.2%) (0.3%) EPSAdjusted 1.62 3.02 2.80 3.15 3.40Non-interest income 18,996 16,457 17,768 18,031 18,351 % Change Y/Y (60.3%) 86.2% (7.5%) 12.6% 8.1%Fees & commissions 12,952 13,100 14,106 14,670 15,257 DPS 0.75 0.75 0.75 0.75 1.00

% change Y/Y (8.0%) 1.1% 7.7% 4.0% 4.0% % Change Y/Y (42.3%) 0.0% 0.0% 0.0% 33.3%Trading revenues 5,020 1,195 2,700 2,754 2,782 Dividend yield 2.6% 2.6% 2.6% 2.6% 3.5%

% change Y/Y (46.2%) (76.2%) 126.0% 2.0% 1.0% Payout ratio 46.2% 24.8% 26.8% 23.8% 29.4%Other Income 18,996 16,457 17,768 18,031 18,351 BV per share 27.59 27.44 27.52 29.86 32.34

Total operating revenues 25,429 23,607 26,576 26,818 27,116 NAV per share 20.32 20.77 22.02 24.37 26.85% change Y/Y (17.0%) (7.2%) 12.6% 0.9% 1.1% Shares outstanding 1,220 1,294 1,601 1,601 1,601



Loan loss provisions (187) (170) (143) (135) (135) ROE 6.0% 11.4% 11.3% 11.0% 11.0%

Other provisions - - - - - RoNAV 8.2% 15.2% 14.5% 13.7% 13.4%Earnings before tax 2,749 1,973 5,940 7,037 7,878

% change Y/Y (59.5%) (28.2%) 201.1% 18.5% 12.0% RevenuesTax (charge) (671) (589) (1,633) (1,800) (2,048) NIM (NII / RWA) 2.8% 3.1% 3.5% 3.1% 3.1%


Net Income (Reported) 1,953 1,350 4,036 4,964 5,564 NII / Total revenues 25.3% 30.3% 33.1% 32.8% 32.3%Fees / Total revenues 50.9% 55.5% 53.1% 54.7% 56.3%Trading / Total revenues 19.7% 5.1% 10.2% 10.3% 10.3%

Balance sheet

SF in millions, year end Dec FY11A FY12A FY13E FY14E FY15E SF in millions, year end Dec FY11A FY12A FY13E FY14E FY15E


% change Y/Y 6.7% 3.8% 0.8% 0.0% 0.0% Cost / assets 2.1% 2.1% 2.2% 2.2% 2.1%Loan loss reserves (910) (922) (909) (918) (927) Staff numbers - - - - -

Investments - - - - -Other interest earning assets 518,788 441,799 392,019 384,210 380,383 Balance Sheet Gearing

% change Y/Y (5.1%) (14.8%) (11.3%) (2.0%) (1.0%) Loan / deposit 66.0% 71.4% 68.9% 68.9% 68.9%Average interest earnings assets 780,490 735,065 675,454 455,357 259,348 Investments / assets 1.4% 1.3% 1.3% 1.3% 1.3%Goodwill 8,591 8,389 8,554 8,554 8,554 Loan / assets 21.7% 24.1% 26.8% 27.6% 27.8%Other assets - - - - - Customer deposits / liabilities 35.1% 38.5% 42.3% 42.9% 43.3%Total assets 1,049,165 924,187 888,979 881,170 877,343 LT Debt / liabilities 16.8% 16.4% 16.4% 16.0% 16.2%


% change Y/Y 8.8% (4.0%) 4.4% 0.0% 0.0% NPLs / loans 0.8% 0.7% 0.7% 0.7% 0.7%Long term funding 162,655 148,134 133,505 133,505 133,505 LLP / RWA (0.1%) (0.1%) (0.1%) (0.0%) (0.0%)Interbank funding - - - - - Loan loss reserves / NPLs 53.8% 53.1% 53.8% 54.6% 55.2%Average interest bearing liabs 834,761 788,138 711,559 688,861 681,232 Growth in NPLs (7.8%) 0.6% (3.2%) 0.0% 0.0%

Other liabilities 131,251 122,086 123,216 120,638 118,871 RWAs 241,753 224,296 282,834 282,834 282,834Retirement benefit liabilities - - - - - % YoY change 10.5% (7.2%) 26.1% 0.0% 0.0%Shareholders' equity 33,674 35,498 44,063 47,826 51,788 Core Tier 1 9.3% 14.1% 13.0% 14.4% 15.8%Minorities 7,411 6,786 7,005 7,005 7,005 Total Tier 1 15.2% 19.4% 16.8% 18.2% 19.6%Total liabilities & Shareholders Equity 1,049,165 924,053 889,439 881,170 877,343


199




Danske Bank: Summary of FinancialsProfit and Loss Statement Ratio AnalysisDkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E Dkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E


% Change Y/Y (3.2%) (2.8%) 6.3% 4.2% - EPSAdjusted 5.38 8.97 12.76 14.91 -Non-interest income 22,878 19,210 21,746 22,730 - % Change Y/Y 118.8% 66.6% 42.3% 16.9% -Fees & commissions 8,859 9,397 9,950 10,446 - DPS 0.00 1.75 5.10 5.97 -

% change Y/Y 6.7% 6.1% 5.9% 5.0% - % Change Y/Y - - 192.0% 16.9% -Trading revenues 10,479 7,739 8,578 8,980 - Dividend yield 0.0% 1.5% 4.3% 5.0% -


% change Y/Y 5.3% (9.4%) 9.5% 4.3% - NAV per share 119.84 124.85 132.51 141.45 -Total expenses (24,637) (23,996) (23,707) (23,423) - Shares outstanding 977 1,001 1,001 1,001 -

% change Y/Y (5.2%) (2.6%) (1.2%) (1.2%) -Pre-provision operating profit 21,019 17,355 21,579 23,828 - Return ratios

% change Y/Y 20.9% (17.4%) 24.3% 10.4% - RoRWA 0.6% 1.0% 1.4% 1.6% -Loan loss provisions (12,480) (5,584) (4,440) (3,798) - Pre-tax ROE 7.2% 8.5% 11.5% 12.7% -Other provisions - - - - - ROE 4.0% 6.3% 8.5% 9.5% -

Earnings before tax 8,539 11,771 17,139 20,030 - RoNAV 4.8% 7.4% 9.9% 10.9% -% change Y/Y 103.1% 37.9% 45.6% 16.9% -


Minorities 0 0 0 0 - Non-IR / average assets 0.7% 0.6% 0.6% 0.7% -Net Income (Reported) 4,725 8,746 12,768 14,922 - Total rev / average assets 1.3% 1.2% 1.3% 1.4% -


Balance sheetDkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E Dkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E


% change Y/Y (1.6%) 4.0% 3.1% 4.0% - Cost / assets 0.7% 0.7% 0.7% 0.7% -Loan loss reserves (47,793) (48,188) (47,647) (46,777) - Staff numbers 0 0 0 0 -Cash and bank holdings 97,267 67,609 66,257 64,932 -Other interest earning assets 297,913 236,369 235,017 237,067 - Balance Sheet Gearing

% change Y/Y 42.2% (20.7%) (0.6%) 0.9% - Loan / deposit 209.1% 213.9% 213.8% 213.6% -Average interest earnings assets 3,034,138 2,981,844 2,935,790 2,988,478 1,507,926 Cash / assets 2.8% 2.0% 1.9% 1.9% -Goodwill 18,530 18,530 18,530 18,530 - Loan / assets 55.7% 57.0% 59.6% 60.5% 61.1%Other assets 27,097 20,325 22,466 22,306 - Customer deposits / liabilities 27.8% 28.4% 28.4% 28.5% -Total assets 3,485,181 3,350,275 3,417,281 3,485,626 - LT Debt / liabilities 28.3% 29.5% 30.7% 31.0% 31.2%ALIABILITIES Asset Quality / Capital

Customer deposits 929,092 909,384 927,572 946,123 - Loan loss reserves / loans (2.4%) (2.4%) (2.3%) (2.1%) -% change Y/Y 9.4% (2.1%) 2.0% 2.0% - NPLs / loans 5.8% 5.7% 5.4% 5.2% 5.1%

Long term funding 954,330 978,008 1,007,348 1,037,568 - LLP / RWA (1.4%) (0.6%) (0.5%) (0.4%) -Interbank funding 459,932 415,999 424,319 432,805 - Loan loss reserves / NPLs 42.4% 42.3% 42.6% 42.2% 41.9%Average interest bearing liabs 2,322,734 2,386,717 2,390,220 2,446,773 1,237,701 Growth in NPLs 0.9% (1.4%) (0.5%) (0.5%) -Other liabilities 924,852 822,060 825,557 827,691 - RWAs 891,258 934,352 933,293 936,745 -

Retirement benefit liabilities - - - - - % YoY change (8.2%) 4.8% (0.1%) 0.4% -Shareholders' equity 138,230 145,696 153,357 162,310 - Core Tier 1 13.0% 13.2% 14.0% 14.9% -Minorities 4 0 0 0 - Total Tier 1 17.4% 17.3% 18.2% 19.1% -Total liabilities & Shareholders Equity 3,485,181 3,350,275 3,417,281 3,485,626 -


200




Deutsche Bank: Summary of FinancialsProfit and Loss Statement Ratio Analysis€ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E € in millions, year end Dec FY11A FY12A FY13E FY14E FY15E


% Change Y/Y 11.9% (8.9%) (10.4%) 3.2% (2.9%) EPSAdjusted 4.35 3.89 4.20 5.05 5.85Non-interest income 15,785 17,848 18,399 18,159 18,790 % Change Y/Y 59.7% (10.5%) 8.1% 20.2% 15.7%Fees & commissions 11,544 11,510 11,743 12,212 12,701 DPS 0.75 0.75 0.75 0.75 0.75

% change Y/Y 8.2% (0.3%) 2.0% 4.0% 4.0% % Change Y/Y 0.0% 0.0% 0.0% 0.0% 0.0%Trading revenues 3,059 5,599 6,131 6,192 6,254 Dividend yield 2.2% 2.2% 2.2% 2.2% 2.2%

% change Y/Y (8.8%) 83.0% 9.5% 1.0% 1.0% Payout ratio 17.4% 454.3% 28.5% 18.3% 13.2%Other Income 15,785 17,848 18,399 18,159 18,790 BV per share 56.72 57.30 56.11 59.49 64.47

Total operating revenues 33,229 33,739 32,634 32,849 33,051 NAV per share 38.79 40.51 41.82 45.18 50.11% change Y/Y 16.3% 1.5% (3.3%) 0.7% 0.6% Shares outstanding 929 929 1,019 1,019 1,019

Total expenses (25,669) (30,427) (25,421) (25,198) (25,023)% change Y/Y 12.2% 18.5% (16.5%) (0.9%) (0.7%) Return ratios

Pre-provision operating profit 7,560 3,312 7,213 7,651 8,028 RoRWA 1.1% 1.0% 1.2% 1.4% 1.6%% change Y/Y 33.1% (56.2%) 117.8% 6.1% 4.9% Pre-tax ROE 13.0% 9.5% 12.3% 13.8% 14.7%


Other provisions - - - - - RoNAV 12.0% 9.8% 10.2% 11.6% 12.3%Earnings before tax 5,200 653 4,481 6,506 9,026

% change Y/Y 31.7% (87.4%) 586.1% 45.2% 38.7% RevenuesTax (charge) (1,064) (495) (1,777) (2,289) (3,187) NIM (NII / RWA) 4.8% 4.4% 4.1% 4.0% 3.7%

% Tax rate 20.5% 75.8% 39.7% 35.2% 35.3% Non-IR / average assets 0.8% 0.9% 0.9% 1.0% 1.0%Minorities - - - - - Total rev / average assets 1.6% 1.6% 1.7% 1.8% 1.8%

Net Income (Reported) 4,136 158 2,703 4,218 5,839 NII / Total revenues 52.5% 47.1% 43.6% 44.7% 43.1%Fees / Total revenues 34.7% 34.1% 36.0% 37.2% 38.4%Trading / Total revenues 9.2% 16.6% 18.8% 18.9% 18.9%

Balance sheet



% change Y/Y 1.2% (3.7%) (1.4%) 0.0% 0.0% Cost / assets 1.3% 1.4% 1.3% 1.3% 1.4%Loan loss reserves 4,162 4,696 4,696 4,790 4,886 Staff numbers 102,062 98,219 97,989 97,989 97,989


% change Y/Y - - - - - Loan / deposit 69.3% 65.7% 67.5% 68.5% 69.5%Average interest earnings assets 1,847,720 1,914,561 1,766,544 1,662,025 1,627,977 Investments / assets - - - - -Goodwill 15,802 14,219 14,223 14,223 14,223 Loan / assets 20.2% 19.4% 20.2% 21.0% 21.7%Other assets - - - - - Customer deposits / liabilities 28.5% 29.5% 30.4% 31.8% 32.8%Total assets 2,164,103 2,012,329 1,900,815 1,837,114 1,773,182 LT Debt / liabilities 8.4% 7.9% 8.0% 8.0% 8.4%

LIABILITIES Asset Quality / CapitalCustomer deposits 601,730 577,202 559,382 564,976 559,327 Loan loss reserves / loans 1.0% 1.2% 1.1% 1.1% 1.1%

% change Y/Y 12.7% (4.1%) (3.1%) 1.0% (1.0%) NPLs / loans 2.4% 2.6% 2.5% 2.4% 2.4%Long term funding 163,416 158,097 144,203 145,645 147,101 LLP / RWA (0.5%) (0.5%) (0.5%) (0.5%) (0.4%)Interbank funding - - - - - Loan loss reserves / NPLs 37.7% 41.4% 46.7% 47.0% 47.5%Average interest bearing liabs 734,395 750,223 719,442 707,103 708,524 Growth in NPLs 34.6% (11.5%) 0.0% 0.9% 0.9%

Other liabilities 200,160 164,320 244,468 170,284 105,477 RWAs 381,245 333,600 364,311 374,112 395,648Retirement benefit liabilities - - - - - % YoY change 10.2% (12.5%) 9.2% 2.7% 5.8%Shareholders' equity 53,390 54,003 57,945 61,393 66,461 Core Tier 1 - - - - -Minorities 1,270 407 256 256 256 Total Tier 1 12.9% 15.1% 15.0% 15.5% 16.0%Total liabilities & Shareholders Equity 2,164,103 2,012,329 1,900,815 1,837,114 1,773,182


201




DnB ASA: Summary of FinancialsProfit and Loss Statement Ratio AnalysisNkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E Nkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E




% change Y/Y (49.0%) 19.9% (5.0%) 5.0% - Payout ratio 25.3% 25.0% 25.0% 25.0% -Total operating revenues 41,683 45,427 47,216 50,042 - BV per share 78.61 84.48 92.24 100.87 -

% change Y/Y (0.9%) 9.0% 3.9% 6.0% - NAV per share 74.48 80.31 88.07 96.70 -Total expenses (20,947) (21,616) (20,616) (21,018) - Shares outstanding 1,629 1,629 1,629 1,629 -

% change Y/Y 3.8% 3.2% (4.6%) 2.0% -Pre-provision operating profit 20,736 23,810 26,601 29,024 - Return ratios

% change Y/Y (5.2%) 14.8% 11.7% 9.1% - RoRWA 1.3% 1.5% 1.6% 1.7% -Loan loss provisions (3,180) (3,705) (3,561) (3,390) - Pre-tax ROE 14.3% 15.1% 16.0% 16.3% -Other provisions - - - - - ROE 11.0% 11.1% 11.7% 11.9% -

Earnings before tax 17,556 20,105 23,040 25,635 - RoNAV 11.7% 11.7% 12.3% 12.5% -% change Y/Y (4.9%) 14.5% 14.6% 11.3% -




Balance sheetNkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E Nkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E


% change Y/Y 1.5% 4.5% 4.0% 4.0% - Cost / assets 1.0% 0.9% 0.8% 0.8% -Loan loss reserves (11,793) (14,356) (14,406) (14,088) - Staff numbers 0 0 0 0 -Cash and bank holdings 298,892 434,864 347,891 278,313 -Other interest earning assets 336,028 488,596 403,772 336,429 - Balance Sheet Gearing

% change Y/Y 32.6% 45.4% (17.4%) (16.7%) - Loan / deposit 160.0% 134.8% 151.5% 165.0% -Average interest earnings assets 1,958,538 2,158,295 2,278,435 2,271,241 1,137,204 Cash / assets 13.2% 17.2% 13.8% 11.0% -Goodwill 0 0 0 0 - Loan / assets 58.7% 55.4% 54.8% 56.9% 57.8%Other assets 14,309 20,893 21,520 22,165 - Customer deposits / liabilities 38.0% 42.1% 39.3% 37.5% -Total assets 2,264,846 2,528,690 2,519,281 2,537,832 - LT Debt / liabilities 33.5% 32.0% 31.1% 32.5% 33.1%ALIABILITIES Asset Quality / Capital

Customer deposits 810,959 1,006,336 930,861 888,972 - Loan loss reserves / loans (0.9%) (1.0%) (1.0%) (1.0%) -% change Y/Y 9.6% 24.1% (7.5%) (4.5%) - NPLs / loans 2.2% 2.4% 2.6% 2.6% 2.5%

Long term funding 729,137 721,712 756,842 786,351 - LLP / RWA (0.3%) (0.4%) (0.3%) (0.3%) -Interbank funding 251,388 299,680 305,674 311,788 - Loan loss reserves / NPLs 40.4% 40.7% 39.8% 38.1% 37.4%Average interest bearing liabs 1,735,197 1,909,606 2,010,553 1,990,244 993,555 Growth in NPLs 0.4% 20.2% 5.6% 1.5% -Other liabilities 278,825 291,146 302,039 311,354 - RWAs 953,010 981,240 1,102,528 1,150,978 -



202




Erste Bank: Summary of FinancialsProfit and Loss Statement Ratio Analysis€ in millions, year end Dec FY12A FY13E FY14E FY15E FY16E € in millions, year end Dec FY12A FY13E FY14E FY15E FY16E


% Change Y/Y (6.0%) (9.5%) 0.9% 5.7% 5.3% EPSAdjusted 1.25 1.13 2.81 3.84 4.32Non-interest income 1,303 1,446 1,716 1,851 1,967 % Change Y/Y 494.9% (9.9%) 149.7% 36.5% 12.5%Fees & commissions 1,721 1,782 1,860 1,969 2,090 DPS 0.40 0.33 1.13 1.54 1.73

% change Y/Y (3.7%) 3.5% 4.4% 5.9% 6.2% % Change Y/Y - (17.2%) 239.5% 36.5% 12.5%Trading revenues (418) (336) (144) (118) (123) Dividend yield 1.6% 1.3% 4.5% 6.1% 6.9%

% change Y/Y (73.2%) (19.7%) (57.1%) (18.1%) 4.2% Payout ratio 32.7% 23.9% 40.0% 40.0% 40.0%Total operating revenues 6,538 6,186 6,500 6,908 7,294 BV per share 32.58 28.48 28.89 31.19 33.78

% change Y/Y 12.8% (5.4%) 5.1% 6.3% 5.6% NAV per share 20.77 21.64 22.49 24.92 27.64Total expenses (3,757) (3,657) (3,620) (3,710) (3,841) Shares outstanding 395 410 430 430 430

% change Y/Y (2.4%) (2.7%) (1.0%) 2.5% 3.5%Pre-provision operating profit 2,781 2,530 2,880 3,198 3,453 Return ratios

% change Y/Y 43.0% (9.0%) 13.9% 11.0% 8.0% RoRWA 0.4% 0.4% 1.2% 1.5% 1.6%Loan loss provisions (1,980) (1,729) (1,163) (878) (852) Pre-tax ROE 6.4% 6.5% 14.3% 18.0% 18.6%Other provisions - - - - - ROE 4.0% 3.8% 10.0% 12.8% 13.3%

Earnings before tax 801 801 1,718 2,320 2,600 RoNAV 6.6% 5.4% 13.0% 16.2% 16.4%% change Y/Y (348.7%) (0.1%) 114.5% 35.1% 12.1%

Tax (charge) (170) (80) (366) (517) (578) Revenues% Tax rate 21.2% 10.0% 21.3% 22.3% 22.2% NIM (NII / RWA) 4.8% 4.6% 4.7% 4.7% 4.7%

Minorities (148) (151) (142) (153) (165) Non-IR / average assets 0.6% 0.7% 0.8% 0.8% 0.9%Net Income (Reported) 484 570 1,209 1,650 1,857 Total rev / average assets 3.1% 2.9% 3.1% 3.2% 3.2%

NII / Total revenues 80.1% 76.6% 73.6% 73.2% 73.0%Fees / Total revenues 26.3% 28.8% 28.6% 28.5% 28.7%Trading / Total revenues (6.4%) (5.4%) (2.2%) (1.7%) (1.7%)

Balance sheet



% change Y/Y (2.7%) (1.4%) 3.3% 6.1% 6.8% Cost / assets 1.8% 1.7% 1.7% 1.7% 1.7%Loan loss reserves (7,644) (8,387) (8,221) (7,714) (7,103) Staff numbers - - - - -

Investments 0 0 0 0 0Other interest earning assets - - - - - Balance Sheet Gearing

% change Y/Y - - - - - Loan / deposit 107.2% 105.4% 105.3% 105.7% 106.7%Average interest earnings assets 208,999 208,598 208,603 216,306 227,182 Investments / assets 0.0% 0.0% 0.0% 0.0% 0.0%Goodwill 2,894 2,807 2,751 2,696 2,642 Loan / assets 59.5% 58.5% 59.1% 59.6% 60.3%Other assets - - - - - Customer deposits / liabilities 62.3% 64.5% 64.8% 65.0% 64.7%Total assets 213,824 207,917 213,629 224,193 236,704 LT Debt / liabilities 15.3% 14.9% 14.8% 14.4% 14.0%

ALIABILITIES Asset Quality / CapitalCustomer deposits 123,053 124,284 128,012 134,413 141,133 Loan loss reserves / loans (5.8%) (6.4%) (6.1%) (5.4%) (4.7%)

% change Y/Y 3.5% 1.0% 3.0% 5.0% 5.0% NPLs / loans 9.2% 10.5% 9.9% 8.8% 7.9%Long term funding 29,427 28,838 28,838 29,415 30,004 LLP / RWA (1.9%) (1.7%) (1.1%) (0.8%) (0.7%)Interbank funding 21,822 21,822 22,913 24,059 25,262 Loan loss reserves / NPLs 63.2% 60.8% 61.8% 61.7% 59.6%

Average interest bearing liabs 190,044 189,785 190,996 197,467 205,785 Growth in NPLs 6.2% 14.0% (3.5%) (5.9%) (4.7%)Other liabilities 11,825 9,168 9,193 10,491 13,211 RWAs 105,323 100,899 103,926 110,162 116,772Retirement benefit liabilities - - - - - % YoY change (7.6%) (4.2%) 3.0% 6.0% 6.0%Shareholders' equity 12,855 11,690 12,416 13,406 14,520 Core Tier 1 9.6% 11.1% 11.5% 11.7% 12.0%Minorities 3,483 3,634 3,776 3,929 4,094 Total Tier 1 11.6% 11.5% 11.8% 12.1% 12.3%Total liabilities & Shareholders Equity 213,824 207,917 213,629 224,193 236,704


203




Handelsbanken: Summary of FinancialsProfit and Loss Statement Ratio AnalysisSkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E Skr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E


% Change Y/Y 11.0% 2.8% 4.8% 4.9% - EPSAdjusted 22.18 22.02 22.35 23.31 -Non-interest income 8,981 9,328 9,256 9,351 - % Change Y/Y 14.2% (0.7%) 1.5% 4.3% -Fees & commissions 7,369 7,619 7,606 7,668 - DPS 10.75 11.00 11.50 12.00 -

% change Y/Y (4.0%) 3.4% (0.2%) 0.8% - % Change Y/Y 10.3% 2.3% 4.5% 4.3% -Trading revenues 1,120 1,187 1,186 1,201 - Dividend yield 3.7% 3.8% 4.0% 4.1% -

% change Y/Y 10.2% 6.0% (0.1%) 1.3% - Payout ratio 48.5% 49.9% 51.4% 51.5% -Total operating revenues 35,062 36,150 37,377 38,854 - BV per share 160.21 163.30 174.22 185.60 -

% change Y/Y 6.9% 3.1% 3.4% 4.0% - NAV per share 149.09 151.22 161.90 173.03 -Total expenses (16,700) (17,013) (17,561) (18,134) - Shares outstanding 648 648 648 648 -

% change Y/Y 8.0% 1.9% 3.2% 3.3% -Pre-provision operating profit 18,362 19,137 19,815 20,721 - Return ratios

% change Y/Y 5.9% 4.2% 3.5% 4.6% - RoRWA 2.6% 2.6% 2.4% 2.4% -Loan loss provisions (1,251) (1,248) (1,512) (1,630) - Pre-tax ROE 17.3% 17.1% 16.7% 16.4% -Other provisions - - - - - ROE 14.1% 13.4% 13.0% 12.7% -







% change Y/Y 5.6% 3.3% 4.1% 4.5% - Cost / assets 0.7% 0.7% 0.7% 0.7% -Loan loss reserves (4,128) (4,205) (4,569) (4,884) - Staff numbers - - - - -Cash and bank holdings 236,545 219,809 226,404 203,763 -Other interest earning assets 338,426 327,960 345,370 317,971 - Balance Sheet Gearing

% change Y/Y (29.9%) (3.1%) 5.3% (7.9%) - Loan / deposit 246.3% 267.3% 267.7% 271.6% -Average interest earnings assets 2,161,293 2,167,236 2,245,173 2,330,372 1,182,289 Cash / assets 9.9% 9.0% 8.8% 7.7% -Goodwill 7,206 7,824 7,981 8,141 - Loan / assets 67.6% 70.9% 70.9% 70.8% 71.0%Other assets 240,580 239,493 259,580 293,687 - Customer deposits / liabilities 29.9% 27.9% 27.6% 27.4% -Total assets 2,383,951 2,437,292 2,559,157 2,661,523 - LT Debt / liabilities 50.6% 52.6% 53.7% 54.0% 54.3%ALIABILITIES Asset Quality / Capital

Customer deposits 682,223 649,575 675,558 695,825 - Loan loss reserves / loans (0.2%) (0.2%) (0.3%) (0.3%) -% change Y/Y (5.9%) (4.8%) 4.0% 3.0% - NPLs / loans 0.4% 0.4% 0.5% 0.5% 0.5%

Long term funding 1,172,593 1,253,097 1,314,795 1,379,578 - LLP / RWA (0.2%) (0.2%) (0.3%) (0.3%) -Interbank funding 183,945 201,187 211,247 219,696 - Loan loss reserves / NPLs 58.4% 55.6% 53.4% 51.4% 50.7%Average interest bearing liabs 2,070,465 2,071,310 2,152,729 2,248,349 1,147,549 Growth in NPLs 6.8% 4.5% 14.6% 9.8% -Other liabilities 241,340 227,664 244,711 246,212 - RWAs 517,309 573,633 594,336 617,630 -



204




KBC Group: Summary of FinancialsProfit and Loss Statement Ratio Analysis€ in millions, year end Dec FY12A FY13E FY14E FY15E FY16E € in millions, year end Dec FY12A FY13E FY14E FY15E FY16E


% Change Y/Y (16.1%) (11.9%) 0.2% 4.0% 6.1% EPSAdjusted 2.65 3.29 3.07 4.03 4.64Non-interest income 2,956 2,903 2,706 2,844 2,966 % Change Y/Y 79.2% 24.1% (6.7%) 31.2% 15.2%Fees & commissions 1,324 1,502 1,489 1,552 1,614 DPS 1.00 0.00 1.06 1.33 2.49

% change Y/Y (13.8%) 13.5% (0.9%) 4.3% 4.0% % Change Y/Y 9892.8% (100.0%) - 25.1% 87.1%Trading revenues 969 886 770 790 820 Dividend yield 2.8% 0.0% 2.9% 3.7% 6.9%

% change Y/Y 38.4% (8.5%) (13.1%) 2.6% 3.8% Payout ratio 37.7% 0.0% 34.6% 33.0% 53.7%Other Income 664 515 447 501 533 BV per share 21.58 22.96 25.44 28.54 31.03

Total operating revenues 7,488 6,897 6,710 7,010 7,387 NAV per share 21.58 22.96 25.44 28.54 31.03% change Y/Y (8.5%) (7.9%) (2.7%) 4.5% 5.4% Shares outstanding 417 417 417 417 417

Total expenses (4,184) (3,786) (3,780) (3,816) (3,924)% change Y/Y (10.7%) (9.5%) (0.2%) 0.9% 2.8% Return ratios

Pre-provision operating profit 3,304 3,111 2,930 3,194 3,464 RoRWA 0.8% 1.4% 1.4% 1.8% 2.0%% change Y/Y (5.5%) (5.8%) (5.8%) 9.0% 8.4% Pre-tax ROE 13.0% 13.0% 14.2% 16.9% 18.1%

Loan loss provisions (1,072) (1,104) (858) (610) (584) ROE 6.0% 9.2% 8.8% 11.0% 12.1%

Other provisions (123) (58) 0 0 0 RoNAV 10.6% 14.8% 12.7% 14.9% 15.6%Earnings before tax 2,078 1,949 2,073 2,584 2,879

% change Y/Y 35.8% (6.2%) 6.4% 24.7% 11.4% RevenuesTax (charge) (553) (567) (587) (728) (796) NIM (NII / RWA) 4.0% 4.1% 4.3% 4.4% 4.5%


Net Income (Reported) 1,496 1,372 1,479 1,849 2,076 NII / Total revenues 60.5% 57.9% 59.7% 59.4% 59.8%Fees / Total revenues 17.7% 21.8% 22.2% 22.1% 21.8%Trading / Total revenues 12.9% 12.8% 11.5% 11.3% 11.1%

Balance sheet



% change Y/Y (7.1%) 1.7% 2.0% 4.5% 5.5% Cost / assets 1.5% 1.5% 1.5% 1.5% 1.4%Loan loss reserves (4,882) (5,313) (5,484) (5,103) (4,652) Staff numbers - - - - -


% change Y/Y - - - - - Loan / deposit 100.2% 96.2% 95.2% 96.5% 97.0%Average interest earnings assets 240,362 232,214 235,122 243,123 254,874 Investments / assets 24.5% 26.1% 26.0% 26.1% 26.2%Goodwill 1,328 1,282 1,282 1,282 1,282 Loan / assets 49.2% 51.2% 52.3% 52.3% 52.5%Other assets - - - - - Customer deposits / liabilities 53.2% 57.8% 58.5% 57.8% 57.8%Total assets 256,886 249,832 254,767 265,757 278,763 LT Debt / liabilities 12.2% 13.5% 13.9% 13.9% 13.7%

ALIABILITIES Asset Quality / CapitalCustomer deposits 128,258 135,953 140,032 144,233 151,445 Loan loss reserves / loans (3.7%) (3.9%) (4.0%) (3.5%) (3.1%)

% change Y/Y (4.6%) 6.0% 3.0% 3.0% 5.0% NPLs / loans 5.5% 6.0% 6.2% 5.2% 4.3%Long term funding 31,373 32,841 33,370 34,431 35,530 LLP / RWA (1.0%) (1.2%) (0.9%) (0.6%) (0.6%)Interbank funding 22,919 17,877 16,983 17,492 18,542 Loan loss reserves / NPLs 66.0% 64.9% 64.0% 68.2% 70.7%

Average interest bearing liabs 206,936 199,041 200,028 204,271 211,837 Growth in NPLs (2.5%) 10.7% 4.6% (12.6%) (12.2%)Other liabilities 22,308 17,661 19,341 23,758 26,858 RWAs 102,148 92,194 92,744 95,674 99,705Retirement benefit liabilities - - - - - % YoY change (19.1%) (9.7%) 0.6% 3.2% 4.2%Shareholders' equity 15,599 14,326 14,861 15,655 16,193 Core Tier 1 8.3% 11.0% 11.9% 12.8% 13.3%Minorities 362 368 375 382 389 Total Tier 1 13.8% 15.8% 16.3% 16.8% 16.7%Total liabilities & Shareholders Equity 256,885 249,832 254,767 265,757 278,763


205




Lloyds Banking Group: Summary of FinancialsProfit and Loss Statement Ratio Analysis£ in millions, year end Dec FY12A FY13E FY14E FY15E £ in millions, year end Dec FY12A FY13E FY14E FY15E

Per Share DataNet interest income 10,335 10,761 11,051 11,143 EPS Reported (2.04) 4.11 5.54 7.38

% Change Y/Y (15%) 4% 3% 1% Adj Diluted EPS(p) 1.06 5.23 6.89 7.69Non-interest income 8,051 7,596 7,615 7,718 % Change Y/Y 158% 392% 32% 12%Other income - - - - BV per share 0.63 0.63 0.66 0.70Total operating revenues 18,386 18,357 18,666 18,861 NAV per share 54.9 56.7 60.9 64.7

% change Y/Y (13%) (0%) 2% 1% Shares outstanding 70,343 71,431 72,202 72,974Operating costs (10,082) (9,514) (9,105) (8,828) s

% change Y/Y (5%) (6%) (4%) (3%) Returns ratiosPPOP 8,304 8,843 9,561 10,033 RoRWA 0.2% 1.2% 1.7% 2.0%

% change Y/Y (20%) 6% 8% 5% Pre-tax ROE 5.2% 11.5% 14.6% 15.4%Loan loss provisions (5,697) (3,740) (2,797) (2,411) ROE 1.6% 8.4% 10.7% 11.3%Other non recurrent items (3,177) (1,077) (1,310) (300) JPM adjusted RoNAV (3.6%) 7.4% 9.4% 11.8%Pretax profit (570) 4,026 5,454 7,322

% change Y/Y (84%) (806%) 35% 34% Revenues

Tax (773) (1,090) (1,460) (1,946) NIM 1.93% 2.10% 2.26% 2.31%% Tax rate (136%) 27% 27% 27% Non-IR / average assets 1% 1% 1% 1%Minorities (84) (26) (16) (16) Total rev / average assets 2% 2% 2% 2%Net Income (Reported) (1,427) 2,910 3,978 5,360 NII / Total revenues 56% 59% 59% 59%

NII / Total revenues 56% 59% 59% 59%. s

Balance sheet£ in millions, year end Dec FY12A FY13E FY14E FY15E £ in millions, year end Dec FY12A FY13E FY14E FY15E

ASSETS BALANCE SHEET GEARINGNet customer loans 517,225 499,869 483,465 489,494 Loan / deposit 121% 158% 162% 160%% change Y/Y (9%) (3%) (3%) 1% Loan / assets 57% 57% 58% 59%

Total assets 924,552 859,833 834,038 817,358 Customer deposits / liabilities 49% 39% 38% 40%. aLIABILITIES CAPITALCustomer deposits 426,912 317,016 298,395 305,817 RWAs 310,299 290,441 280,548 277,643

% change Y/Y 3% (26%) (6%) 2% % YoY change (12%) (6%) (3%) (1%)Shareholders' equity 43,999 44,714 47,907 50,812 Core Tier 1 37,193 40,910 43,459 46,364% change Y/Y (4%) 2% 7% 6% % YoY change (2%) 10% 6% 7%

Minorities 685 323 323 323Total liabilities 879,868 814,796 785,809 766,222 Core Tier 1 ratio 12.0% 14.1% 15.5% 16.7%% change Y/Y (5%) (7%) (4%) (2%) Tier 1 ratio 42,754 42,309 44,858 47,763

a


206




Santander: Summary of FinancialsProfit and Loss Statement Ratio Analysis€ in millions, year end Dec FY12A FY13E FY14E FY15E FY16E € in millions, year end Dec FY12A FY13E FY14E FY15E FY16E


% Change Y/Y 2.8% (9.3%) 10.3% 6.5% - EPSAdjusted 0.23 0.38 0.46 0.53 -Non-interest income 13,483 14,145 14,045 14,595 - % Change Y/Y (54.2%) 64.6% 20.5% 14.4% -Fees & commissions - - - - - DPS 0.62 0.60 0.60 0.60 -

% change Y/Y - - - - - % Change Y/Y 1.3% (3.6%) 0.0% 0.0% -Trading revenues - - - - - Dividend yield 11.0% 10.6% 10.6% 10.6% -

% change Y/Y - - - - - Payout ratio 267.5% 156.7% 130.0% 113.7% -Other Income 13,483 14,145 14,045 14,595 - BV per share 7.87 7.47 7.22 7.05 -


Total expenses (19,983) (20,258) (21,033) (21,963) -% change Y/Y 2.2% 1.4% 3.8% 4.4% - Return ratios

Pre-provision operating profit 23,422 21,032 22,942 24,503 - RoRWA 0.4% 0.8% 1.0% 1.3% -% change Y/Y 1.0% (10.2%) 9.1% 6.8% - Pre-tax ROE 11.4% 9.5% 11.9% 13.9% -


Other provisions - - - - - RoNAV 4.9% 9.1% 11.6% 13.3% -Earnings before tax 8,481 6,906 9,062 11,206 -

% change Y/Y (17.8%) (18.6%) 31.2% 23.7% - RevenuesTax (charge) (2,314) (1,638) (2,185) (2,717) - NIM (NII / RWA) 5.3% 5.0% 5.7% 5.9% -

% Tax rate 27.3% 23.7% 24.1% 24.2% - Non-IR / average assets 1.1% 1.1% 1.1% 1.1% -Minorities (895) (1,106) (1,381) (1,570) - Total rev / average assets 3.4% 3.3% 3.4% 3.5% -

Net Income (Reported) 2,295 4,148 5,496 6,919 - NII / Total revenues 68.9% 65.7% 68.1% 68.6% -Fees / Total revenues - - - - -Trading / Total revenues - - - - -

Balance sheet



% change Y/Y (2.9%) (1.9%) 3.8% 2.2% - Cost / assets 1.6% 1.6% 1.6% 1.6% -Loan loss reserves - - - - - Staff numbers - - - - -


% change Y/Y - - - - - Loan / deposit 118.1% 113.8% 112.7% 109.6% -Average interest earnings assets - - - - - Investments / assets 0.3% 0.4% 0.4% 0.4% 0.4%Goodwill 24,626 24,842 24,842 24,842 - Loan / assets 60.9% 59.0% 58.6% 58.6% 58.4%Other assets - - - - - Customer deposits / liabilities 49.6% 50.7% 51.5% 52.9% -Total assets 1,269,598 1,270,343 1,314,671 1,348,134 - LT Debt / liabilities 19.9% 19.0% 17.4% 16.4% 16.0%

ALIABILITIES Asset Quality / CapitalCustomer deposits 589,104 600,772 630,810 662,351 - Loan loss reserves / loans - - - - -

% change Y/Y 0.0% 2.0% 5.0% 5.0% - NPLs / loans - - - - -Long term funding 238,547 213,456 206,311 199,777 - LLP / RWA (2.3%) (2.4%) (2.3%) (2.2%) -Interbank funding 131,670 98,115 101,058 104,090 - Loan loss reserves / NPLs - - - - -

Average interest bearing liabs - - - - - Growth in NPLs 4.7% 4.2% 4.0% 4.0% -Other liabilities 24,196 65,461 68,177 55,847 - RWAs 557,030 523,975 535,438 553,787 -Retirement benefit liabilities - - - - - % YoY change (1.6%) (5.9%) 2.2% 3.4% -Shareholders' equity 71,860 74,047 78,046 83,318 - Core Tier 1 10.3% 11.8% 12.5% 13.3% -Minorities 9,415 10,643 12,024 13,593 - Total Tier 1 11.1% 12.6% 13.4% 14.2% -Total liabilities & Shareholders Equity 1,269,598 1,270,343 1,314,671 1,348,134 -


207




SEB: Summary of FinancialsProfit and Loss Statement Ratio AnalysisSkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E Skr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E



% change Y/Y (3.9%) 5.7% 2.5% 2.6% - % Change Y/Y 57.1% 1.8% 14.4% 5.5% -Trading revenues 4,579 4,161 4,185 4,249 - Dividend yield 3.9% 3.9% 4.5% 4.8% -



% change Y/Y 0.6% (5.0%) 0.0% 1.4% -Pre-provision operating profit 15,167 18,192 19,171 20,210 - Return ratios

% change Y/Y 7.0% 19.9% 5.4% 5.4% - RoRWA 1.7% 2.0% 2.0% 2.0% -Loan loss provisions (931) (1,230) (1,516) (1,575) - Pre-tax ROE 13.4% 15.3% 15.2% 15.1% -Other provisions - - - - - ROE 11.3% 12.2% 12.1% 12.1% -

Earnings before tax 14,236 16,962 17,656 18,635 - RoNAV 13.0% 13.9% 13.7% 13.5% -% change Y/Y (4.8%) 19.1% 4.1% 5.5% -






% change Y/Y 4.2% 5.4% 4.0% 4.0% - Cost / assets 1.0% 0.9% 0.9% 0.8% -Loan loss reserves (9,169) (8,781) (9,029) (9,267) - Staff numbers - - - - -Cash and bank holdings 191,445 229,026 229,026 240,477 -Other interest earning assets 335,186 372,506 376,811 394,173 - Balance Sheet Gearing

% change Y/Y (6.2%) 11.1% 1.2% 4.6% - Loan / deposit 143.4% 142.2% 146.4% 146.4% -Average interest earnings assets 2,309,403 2,430,435 2,557,704 2,655,382 1,354,167 Cash / assets 7.8% 8.8% 8.6% 8.7% -Goodwill - - - - - Loan / assets 50.3% 50.3% 50.5% 50.8% 50.9%Other assets 75,817 52,152 40,530 27,575 - Customer deposits / liabilities 36.8% 36.9% 36.2% 36.5% -Total assets 2,453,456 2,595,637 2,673,506 2,767,079 - LT Debt / liabilities 27.2% 28.3% 28.6% 28.9% 29.0%ALIABILITIES Asset Quality / Capital

Customer deposits 862,260 916,430 925,595 962,618 - Loan loss reserves / loans (0.7%) (0.7%) (0.7%) (0.7%) -% change Y/Y 0.1% 6.3% 1.0% 4.0% - NPLs / loans 1.3% 1.0% 1.0% 1.0% 1.0%

Long term funding 661,851 701,784 736,873 766,348 - LLP / RWA (0.1%) (0.2%) (0.2%) (0.2%) -Interbank funding 170,656 214,946 217,095 221,437 - Loan loss reserves / NPLs 65.1% 67.7% 68.4% 65.0% 62.8%Average interest bearing liabs 1,908,422 2,008,346 2,114,420 2,183,302 1,111,344 Growth in NPLs (23.4%) (8.4%) 5.5% 10.4% -Other liabilities 382,322 372,052 383,839 391,160 - RWAs 675,032 704,033 733,690 754,720 -



208




Royal Bank of Scotland: Summary of FinancialsProfit and Loss Statement Ratio Analysis£ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E £ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E

Per Share DataNet interest income 12,689 11,695 10,820 10,817 10,831 EPS Reported (18.46) (54.27) 6.88 18.36 25.20

% Change Y/Y (11%) (8%) (7%) (0%) 0% Adj Diluted EPS(p) (2.43) (3.41) 10.15 23.64 28.77Non-interest income 15,020 13,441 8,744 8,658 8,505 % Change Y/Y (146%) 40% (398%) 133% 22%Other income - - - - - BV per share 6.79 6.15 6.17 6.16 6.35Total operating revenues 27,709 25,136 19,564 19,475 19,336 NAV per share 477 452 450 451 473

% change Y/Y (15%) (9%) (22%) (0%) (1%) Shares outstanding 11,023 11,171 11,284 11,457 11,630Operating costs (18,746) (17,046) (12,911) (12,254) (11,796) s

% change Y/Y (13%) (9%) (24%) (5%) (4%) Returns ratiosPPOP 8,963 8,090 6,653 7,221 7,541 RoRWA (0.1%) (0.1%) 0.2% 0.6% 0.8%

% change Y/Y (19%) (10%) (18%) 9% 4% JPM adjusted RoNAV (3.7%) (11.6%) 1.5% 4.1% 5.5%Loan loss provisions (7,439) (5,229) (4,006) (2,813) (2,188) APBT before g'will & integration 1,524 2,861 2,647 4,408 5,353 NIM 2.65% 2.65% 2.54% 2.61% 2.67%Other non recurrent items (1,157) (2,190) (456) (300) (300) Non-IR / average assets 1% 1% 1% 1% 1%Pretax profit (1,011) (5,296) 2,008 3,508 4,753 Total rev / average assets 2% 2% 2% 2% 2%

% change Y/Y 28% 424% (138%) 75% 35% NII / Total revenues 46% 47% 55% 56% 56%Tax (1,250) (522) (916) (1,101) (1,474) NII / Total revenues 46% 47% 55% 56% 56%% Tax rate (124%) (10%) 46% 31% 31%Minorities (28) 123 (117) 0 0Net Income (Reported) (1,998) (5,971) 773 2,088 2,909. s

Balance sheet£ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E £ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E

ASSETS BALANCE SHEET GEARINGNet customer loans 454,112 430,088 421,715 407,626 403,129 Loan / deposit 110% 99% 96% 93% 90%% change Y/Y (10%) (5%) (2%) (3%) (1%) Loan / assets 32% 31% 34% 36% 37%

Total assets 1,506,867 1,312,295 1,181,114 1,122,080 1,088,434 Customer deposits / liabilities 29% 35% 40% 42% 44%.LIABILITIES CAPITALCustomer deposits 414,143 433,239 440,644 440,641 446,054 RWAs 437,800 459,600 457,924 417,258 409,300

% change Y/Y (3%) 5% 2% (0%) 1% % YoY change (6%) 5% (0%) (9%) (2%)Shareholders' equity 74,819 68,678 69,579 70,536 73,815 Core Tier 1 60,138 47,320 48,840 49,797 53,076% change Y/Y (0%) (8%) 1% 1% 5% % YoY change (2%) (21%) 3% 2% 7%

Minorities 1,234 1,770 475 475 475Total Liabilities and Shareholder Equity 1,506,867 1,312,295 1,181,065 1,122,012 1,088,352 Core Tier 1 ratio 13.7% 10.3% 10.7% 11.9% 13.0%% change Y/Y 4% (13%) (10%) (5%) (3%) Tier 1 ratio 56,990 57,135 58,184 59,141 62,420

a


209




Nordea Bank AB: Summary of FinancialsProfit and Loss Statement Ratio Analysis€ in millions, year end Dec FY12A FY13E FY14E FY15E FY16E € in millions, year end Dec FY12A FY13E FY14E FY15E FY16E


% Change Y/Y 4.9% (2.7%) 4.1% 3.9% - EPSAdjusted 0.77 0.84 0.93 1.00 -Non-interest income 4,474 4,643 4,810 4,931 - % Change Y/Y 9.4% 9.3% 10.8% 6.9% -Fees & commissions 2,496 2,679 2,769 2,866 - DPS 0.34 0.53 0.59 0.64 -




% change Y/Y (0.7%) (2.5%) (0.2%) 0.7% -Pre-provision operating profit 5,008 5,151 5,559 5,874 - Return ratios

% change Y/Y 17.1% 2.8% 7.9% 5.7% - RoRWA 1.6% 1.9% 2.2% 2.4% -Loan loss provisions (932) (724) (619) (591) - Pre-tax ROE 15.0% 15.6% 17.0% 17.3% -Other provisions - - - - - ROE 11.4% 11.9% 12.9% 13.1% -


Tax (charge) (991) (1,102) (1,230) (1,316) - Revenues% Tax rate 24.3% 24.9% 24.9% 24.9% - NIM (NII / RWA) 3.0% 3.2% 3.5% 3.6% -



Balance sheet€ in millions, year end Dec FY12A FY13E FY14E FY15E FY16E € in millions, year end Dec FY12A FY13E FY14E FY15E FY16E


% change Y/Y 2.7% 0.3% 1.1% 3.0% - Cost / assets 0.7% 0.8% 0.8% 0.8% -Loan loss reserves (2,848) (2,912) (2,864) (2,973) - Staff numbers 0 0 0 0 -Cash and bank holdings 36,060 30,279 31,187 31,499 -Other interest earning assets 54,634 49,122 49,088 49,937 - Balance Sheet Gearing

% change Y/Y (1.8%) (10.1%) (0.1%) 1.7% - Loan / deposit 172.5% 173.4% 168.6% 165.4% -Average interest earnings assets 487,622 491,355 488,074 499,638 253,582 Cash / assets 5.3% 4.8% 4.8% 4.7% -Goodwill 3,425 3,369 3,369 3,369 - Loan / assets 49.0% 52.9% 54.2% 53.7% 53.7%Other assets 147,484 116,825 126,506 129,888 - Customer deposits / liabilities 30.9% 33.0% 33.4% 34.1% -Total assets 677,420 634,363 653,394 672,996 - LT Debt / liabilities 27.2% 28.8% 29.3% 29.8% 30.1%ALIABILITIES Asset Quality / Capital

Customer deposits 200,678 200,213 208,222 218,633 - Loan loss reserves / loans (0.8%) (0.8%) (0.8%) (0.8%) -% change Y/Y 5.6% (0.2%) 4.0% 5.0% - NPLs / loans 1.8% 1.9% 1.9% 1.9% 2.0%

Long term funding 184,340 176,664 183,731 192,917 - LLP / RWA (0.5%) (0.4%) (0.4%) (0.4%) -Interbank funding 55,426 62,881 66,025 68,666 - Loan loss reserves / NPLs 43.1% 42.4% 42.6% 41.7% 41.8%Average interest bearing liabs 440,051 447,611 456,090 476,319 243,719 Growth in NPLs 27.0% (3.3%) 3.1% 3.3% -Other liabilities 208,760 166,125 165,644 161,624 - RWAs 185,976 167,581 166,374 166,708 -

Retirement benefit liabilities - - - - - % YoY change (5.7%) (9.9%) (0.7%) 0.2% -Shareholders' equity 28,211 28,476 29,769 31,152 - Core Tier 1 11.8% 13.8% 14.7% 15.5% -Minorities 5 4 4 4 - Total Tier 1 11.8% 13.8% 14.7% 15.5% -Total liabilities & Shareholders Equity 677,420 634,363 653,394 672,996 -


210




IntesaSanpaolo: Summary of FinancialsProfit and Loss Statement Ratio Analysis€ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E € in millions, year end Dec FY11A FY12A FY13E FY14E FY15E

Per Share DataNet interest income 9,780 9,430 8,299 8,800 9,432 EPS Reported (0.56) 0.10 0.06 0.10 0.14

% Change Y/Y 1.3% (3.6%) (12.0%) 6.0% 7.2% EPSAdjusted 0.72 0.12 0.09 0.12 0.16Non-interest income 7,004 8,451 8,327 8,317 8,364 % Change Y/Y 278.4% (82.6%) (30.0%) 34.2% 34.7%Fees & commissions - - - - - DPS 0.05 0.05 0.05 0.06 0.06

% change Y/Y - - - - - % Change Y/Y (37.5%) 0.0% 0.0% 20.0% 0.0%Trading revenues 919 2,182 1,500 1,200 1,000 Dividend yield 3.1% 3.1% 3.1% 3.8% 3.8%

% change Y/Y 98.9% 137.4% (31.3%) (20.0%) (16.7%) Payout ratio NM 51.2% 77.1% 61.6% 42.9%Other Income 7,004 8,451 8,327 8,317 8,364 BV per share 3.41 3.20 3.16 3.02 3.10

Total operating revenues 16,784 17,881 16,626 17,117 17,795 NAV per share 2.18 2.12 2.08 2.12 2.20% change Y/Y 2.0% 6.5% (7.0%) 2.9% 4.0% Shares outstanding 14,707 16,425 16,425 16,425 16,425


Pre-provision operating profit 7,647 8,968 8,246 8,904 9,665 RoRWA 3.1% 0.6% 0.4% 0.6% 0.8%% change Y/Y 5.9% 17.3% (8.1%) 8.0% 8.5% Pre-tax ROE (1.2%) 7.5% 5.6% 7.5% 9.9%


Other provisions (1,287) (527) (370) (300) (299) RoNAV 1.0% 6.5% 4.1% 5.5% 7.3%Earnings before tax 2,018 3,610 2,776 3,704 4,966

% change Y/Y (49.0%) 78.9% (23.1%) 33.4% 34.1% RevenuesTax (charge) 910 (1,523) (1,305) (1,741) (2,334) NIM (NII / RWA) 2.9% 2.9% 2.6% 2.8% 3.0%


Net Income (Reported) (8,190) 1,605 1,066 1,599 2,298 NII / Total revenues 58.3% 52.7% 49.9% 51.4% 53.0%Fees / Total revenues - - - - -Trading / Total revenues 5.5% 12.2% 9.0% 7.0% 5.6%

Balance sheet



% change Y/Y (0.7%) (0.0%) (2.0%) 1.0% 1.0% Cost / assets 1.3% 1.2% 1.1% 1.1% 1.1%Loan loss reserves (22,746) (24,145) (27,801) (29,701) (29,101) Staff numbers 100,192 100,192 101,695 - -

Investments - - - - -Other interest earning assets - - - - - Balance Sheet Gearing

% change Y/Y - - - - - Loan / deposit - - - - -Average interest earnings assets 590,957 600,267 614,763 606,875 604,586 Investments / assets 24.0% 25.8% 27.5% 27.4% 27.3%Goodwill 15,041 14,719 14,719 14,719 14,719 Loan / assets 52.9% 52.5% 50.9% 51.4% 52.3%Other assets - - - - - Customer deposits / liabilities 33.3% 35.0% 36.0% 37.3% 37.5%Total assets 699,184 737,018 728,373 714,875 719,344 LT Debt / liabilities 28.5% 26.3% 25.7% 26.0% 26.3%


% change Y/Y (10.8%) 10.6% 2.0% 2.0% 1.0% NPLs / loans 9.9% 11.4% 13.1% 14.0% 14.1%Long term funding 160,245 159,307 159,307 159,307 160,900 LLP / RWA (1.3%) (1.4%) (1.6%) (1.5%) (1.4%)Interbank funding - - - - - Loan loss reserves / NPLs 54.1% 51.3% 49.9% 51.5% 51.4%Average interest bearing liabs 444,981 443,382 453,257 450,620 447,959 Growth in NPLs 12.2% 18.8% 9.7% 5.1% (0.2%)

Other liabilities 52,280 62,365 50,626 50,700 47,673 RWAs 325,206 307,215 304,143 304,143 304,143Retirement benefit liabilities - - - - - % YoY change (2.1%) (5.5%) (1.0%) 0.0% 0.0%Shareholders' equity 47,040 49,613 48,947 49,561 50,873 Core Tier 1 10.1% 10.9% 10.7% 10.9% 11.3%Minorities 718 586 586 586 586 Total Tier 1 11.5% 11.7% 11.5% 11.7% 12.2%Total liabilities & Shareholders Equity 639,221 673,472 666,733 658,167 662,636


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HSBC Holdings plc: Summary of FinancialsProfit and Loss Statement Ratio Analysis$ in millions, year end Dec FY12A FY13E FY14E FY15E $ in millions, year end Dec FY12A FY13E FY14E FY15E

Per Share DataNet interest income 37,672 34,646 34,575 36,529 EPS Reported 0.74 0.95 0.97 1.08

% Change Y/Y (7%) (8%) (0%) 6% % YoY change (19%) 28% 3% 11%Non-interest income 27,885 29,798 31,508 32,999 EPSAdjusted 0.80 0.91 0.97 1.07

% change (5%) (7%) 0% 2% % Change Y/Y 6% 13% 6% 11%Fees & commissions 16,430 16,857 17,749 18,734 BV per share 9.48 9.54 9.91 10.33% YoY change (4%) 3% 5% 6% % YoY change 7% 1% 4% 4%Trading revenues 8,501 11,138 11,349 11,845 NAV per share 7.88 8.03 8.41 8.84% YoY change 12% 31% 2% 4% % YoY change 11% 2% 5% 5%

Other income - - - - DPS 0.45 0.50 0.55 0.60Total operating revenues 65,557 64,444 66,083 69,528 % Change Y/Y 10% 11% 10% 9%

% change Y/Y (4%) (2%) 3% 5% Dividend yield 4% 5% 5% 5%Operating costs (38,603) (35,926) (36,066) (36,675) Payout ratio 61.1% 53.1% 56.9% 56.1%

% change Y/Y (5%) (7%) 0% 2% Shares outstanding 18,476 18,705 18,855 19,005PPOP 26,954 28,519 30,017 32,853

% change Y/Y (2%) 6% 5% 9% Returns & MarginsLoan loss provisions (8,311) (6,509) (7,282) (7,672) RoRWA 1.3% 1.4% 1.4% 1.5%

% YoY change (31%) (22%) 12% 5% ROE 8.8% 9.6% 10.0% 10.7%Income from Associates 3,557 2,417 2,700 3,022 RoNAV 10.8% 11.5% 11.9% 12.5%Pretax profit 20,649 25,201 25,435 28,203 Pre-tax ROE 13.3% 13.8% 13.9% 14.7%

% change Y/Y (6%) 22% 1% 11%Tax (5,315) (5,165) (5,179) (5,733)

Minorities (1,307) (1,805) (1,393) (1,482)Net Income (Reported) 13,454 17,659 18,290 20,415 NIM - - - -

% YoY change (16%) 30% 3% 11% Non-IR / average assets 1% 1% 1% 1%Total rev / average assets 2% 2% 2% 2%

.

Balance sheet

$ in millions, year end Dec FY12A FY13E FY14E FY15E $ in millions, year end Dec FY12A FY13E FY14E FY15E

ASSETS BALANCE SHEET GEARINGNet customer loans 997,623 976,212 1,013,452 1,056,801 Loan / deposit 74% 72% 72% 73%

% change Y/Y 6% (2%) 4% 4% Loan / assets 37% 37% 36% 35%Total assets 2,692,538 2,712,002 2,881,515 3,067,651 Customer deposits / liabilities 53% 53% 52% 51%

% YoY change 5% 1% 6% 6%.LIABILITIES CAPITALCustomer deposits 1,340,014 1,348,618 1,398,240 1,451,879 RWAs 1,123,943 1,260,569 1,312,509 1,374,975

% change Y/Y 7% 1% 4% 4% % YoY change (7%) 12% 4% 5%Shareholders' equity 175,242 178,529 186,906 196,385 Core Tier 1 138,789 145,349 153,726 163,205

% YoY change 10% 2% 5% 5% % YoY change 13% 5% 6% 6%Minorities 7,887 8,291 8,291 8,291Total liabilities 2,509,409 2,525,182 2,686,318 2,862,975 Core Tier 1 ratio 12.3% 11.5% 11.7% 11.9%% YoY change 5% 1% 6% 7% Total Tier 1 151,048 154,601 162,978 172,457


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Banco Popular: Summary of FinancialsProfit and Loss Statement Ratio Analysis€ in millions, year end Dec FY11A FY12E FY13E FY14E FY15E € in millions, year end Dec FY11A FY12E FY13E FY14E FY15E

Per Share DataNet interest income 2,087 2,719 2,550 2,737 3,001 EPS Reported 1.71 (1.46) 0.01 0.24 1.02

% Change Y/Y (14.2%) 30.3% (6.2%) 7.3% 9.6% EPSAdjusted 1.27 (1.22) 0.01 0.20 0.86Non-interest income 910 1,059 1,142 1,187 1,244 % Change Y/Y (33.4%) (196.3%) (100.5%) 3151.3% 323.8%Fees & commissions - - - - - DPS 0.00 0.00 0.00 0.00 0.00

% change Y/Y - - - - - % Change Y/Y - - - - -Trading revenues - - - - - Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0%

% change Y/Y - - - - - Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0%Other Income 910 1,059 1,142 1,187 1,244 BV per share 30.11 35.37 6.24 6.19 6.98

Total operating revenues 2,997 3,778 3,692 3,924 4,245 NAV per share 30.13 35.37 6.24 5.95 6.46% change Y/Y (11.8%) 26.1% (2.3%) 6.3% 8.2% Shares outstanding 275 280 1,682 1,841 1,841

Total expenses (1,369) (1,761) (1,700) (1,584) (1,583)% change Y/Y 5.1% 28.7% (3.5%) (6.8%) (0.0%) Return ratios

Pre-provision operating profit 1,627 2,016 1,991 2,340 2,661 RoRWA - - - - -% change Y/Y (22.3%) 23.9% (1.2%) 17.5% 13.7% Pre-tax ROE 5.4% (38.4%) 0.1% 5.8% 19.0%

Loan loss provisions (1,690) (5,658) (1,866) (1,150) (115) ROE 5.8% (27.1%) 0.1% 4.1% 15.6%

Other provisions 507 150 (114) (550) (250) RoNAV 0.0% (30.5%) (2.5%) 4.8% 9.0%Earnings before tax 444 (3,492) 11 640 2,297

% change Y/Y (43.0%) (886.2%) (100.3%) 5722.2% 258.9% RevenuesTax (charge) 40 1,031 5 (192) (408) NIM (NII / RWA) - - - - -

% Tax rate 9.0% (29.5%) 50.0% 30.0% 17.8% Non-IR / average assets 0.7% 0.7% 0.7% 0.8% 0.8%Minorities (4) (0) (3) (3) (3) Total rev / average assets 2.3% 2.6% 2.4% 2.6% 2.8%

Net Income (Reported) 480 (2,461) 14 445 1,885 NII / Total revenues 69.6% 72.0% 69.1% 69.8% 70.7%Fees / Total revenues - - - - -Trading / Total revenues - - - - -

Balance sheet



% change Y/Y (1.3%) 13.6% (7.8%) (1.0%) (1.0%) Cost / assets 1.0% 1.2% 1.1% 1.0% 1.0%Loan loss reserves - - - - - Staff numbers 14,062 16,501 16,206 16,206 16,206

Investments 0 976 1,219 1,219 1,219Other interest earning assets - - - - - Balance Sheet Gearing

% change Y/Y - - - - - Loan / deposit 140.8% 136.3% 124.0% 121.6% 118.1%Average interest earnings assets - - - - - Investments / assets 1.2% 0.3% 0.7% 0.8% 0.8%Goodwill - - - - - Loan / assets 76.8% 74.3% 70.4% 68.5% 68.4%Other assets - - - - - Customer deposits / liabilities 56.1% 54.1% 57.8% 58.4% 59.2%Total assets 130,926 158,594 153,869 152,604 151,393 LT Debt / liabilities 2.1% 1.9% 1.5% 1.4% 1.3%

ALIABILITIES Asset Quality / CapitalCustomer deposits 68,743 79,830 84,100 84,920 86,575 Loan loss reserves / loans - - - - -

% change Y/Y (13.4%) 16.1% 5.3% 1.0% 1.9% NPLs / loans - - - - -Long term funding 2,835 2,170 2,096 1,991 1,892 LLP / RWA - - - - -Interbank funding - - - - - Loan loss reserves / NPLs - - - - -

Average interest bearing liabs - - - - - Growth in NPLs - - - - -Other liabilities 513 520 - - - RWAs 0 0 0 0 0Retirement benefit liabilities - - - - - % YoY change - - - - -Shareholders' equity 8,282 9,911 10,502 11,392 12,846 Core Tier 1 - - - - -Minorities 106 44 45 45 45 Total Tier 1 - - - - -Total liabilities & Shareholders Equity 130,926 157,618 156,153 156,863 159,023


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Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in BNP Paribas, BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Société Générale, Commerzbank, Credit Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC Group, Lloyds Banking Group, Santander, SEB, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular.

Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Société Générale, Credit Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC Group, Lloyds Banking Group, Santander, SEB, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular within the past 12 months.

Analyst Position: The following analysts (and/or their associates or household members) own a long position in the shares of UBS: Kian Abouhossein.

Beneficial Ownership (1% or more): J.P. Morgan beneficially owns 1% or more of a class of common equity securities of Santander, IntesaSanpaolo.

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: BNP Paribas, BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Société Générale, Commerzbank, Credit Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC Group, Lloyds Banking Group, Santander, SEB, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular.

Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: BNP Paribas, BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Société Générale, Commerzbank, Credit Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC Group, Lloyds Banking Group, Santander, SEB, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular.

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: BNP Paribas, BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Société Générale, Commerzbank, Credit Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC Group, Lloyds Banking Group, Santander, SEB, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular.

Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: BNP Paribas, BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Société Générale, Commerzbank, Credit Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Handelsbanken, KBC Group, Lloyds Banking Group, Santander, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular.

Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking BNP Paribas, BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Société Générale, Commerzbank, Credit Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC Group, Lloyds Banking Group, Santander, SEB, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular.

Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from BNP Paribas, BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Société Générale, Commerzbank, Credit Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC Group, Lloyds Banking Group, Santander, SEB, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular.

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from BNP Paribas, BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Société Générale, Commerzbank, Credit Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC Group, Lloyds Banking Group, Santander, SEB, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular.

Broker: J.P. Morgan Securities plc acts as Corporate Broker to Standard Chartered.

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‘J.P. Morgan is acting as financial advisor to Alpha Bank who on October 1st 2012 has entered into exclusive negotiations with Credit Agricole S.A. on the acquisition of Emporiki Bank.’

J.P. Morgan is acting as advisor to Lloyds Banking Group on its announced asset sale under the restructuring plan with the European Commission.

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail [email protected].

Date Rating Share Price (€)

Price Target (€)

22-Nov-07 N 5.00 5.80

15-Sep-11 N 3.20 3.70

26-Jan-12 N 3.98 4.00

27-Mar-12 N 3.01 3.20

20-Apr-12 N 2.55 2.70

28-Nov-12 NR 2.79 --

11-Feb-13 N 2.83 2.90

01-Jul-13 N 2.46 2.17


Price Target (€)

20-Mar-07 OW 6.05 81.00

10-May-07 OW 6.78 84.00

28-Sep-07 OW 5.36 80.00

23-Jan-08 OW 4.30 76.00

19-Mar-08 OW 3.93 70.03

04-Apr-08 OW 4.15 70.02

04-Jun-08 OW 3.87 63.63

27-Jun-08 OW 3.50 56.06

01-Aug-08 OW 3.42 56.10

20-Aug-08 OW 3.20 52.03

07-Oct-08 OW 2.57 40.74

21-Oct-08 OW 1.99 37.65

27-Nov-08 OW 1.58 24.96

17-Feb-09 OW 1.00 20.74

19-Mar-09 OW 1.02 18.98

07-May-09 OW 1.82 23.72

18-May-09 OW 1.67 20.26

05-Aug-09 OW 2.31 25.65

29-Sep-09 OW 2.72 32.96

10-Nov-09 OW 2.52 32.74

12-Nov-09 OW 2.51 32.54

14-Jan-10 OW 2.30 29.50

18-Mar-10 OW 2.15 29.51

10-Jun-10 OW 1.64 28.02

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CaixaBank (CABK.MC, CABK SM) Price Chart

N €2.7

N €3.2 N €2.899

N €5.8 N €3.7 N €4 NR N €2.172

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Break in coverage Nov 28, 2012 - Feb 11, 2013.

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UniCredit (CRDI.MI, UCG IM) Price Chart

OW €70.022OW €56.102OW €37.65OW €18.98OW €25.651OW €32.542OW €28.023 N €10.458

OW €84 OW €70.026OW €56.058OW €40.742OW €20.736OW €20.259OW €32.744OW €29.507 N €14.007N €3.502 N €2.9

OW €81OW €80OW €76OW €63.627OW €52.028OW €24.963OW €23.715OW €32.96OW €29.5 N €21N €20.4N €8.021N €2.895 N €3.31 N €4


Initiated coverage Mar 20, 2007.

mailto:[email protected]


https://mm.jpmorgan.com/disclosures/company

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15-Dec-10 N 1.70 21.00

19-Apr-11 N 1.63 20.40

25-Jul-11 N 1.32 14.01

12-Oct-11 N 1.03 10.46

15-Nov-11 N 0.74 8.02

10-Jan-12 N 2.42 3.50

18-May-12 N 2.42 2.90

23-Aug-12 N 3.15 2.90

07-Jan-13 N 3.96 3.31

13-Aug-13 N 4.60 4.00


Price Target (€)

26-Oct-06 N 12.57 13.90

18-Dec-06 N 13.26 14.50

23-Jan-07 N 13.20 16.30

24-Jan-07 OW 13.20 16.30

05-Mar-07 OW 12.72 16.00

15-May-07 OW 12.59 15.80

26-Jul-07 OW 12.96 16.30

25-Sep-07 OW 12.48 15.20

29-Oct-07 OW 13.64 15.50

08-Nov-07 OW 13.46 16.70

08-Feb-08 OW 10.84 15.50

10-Jun-08 OW 11.62 14.50

12-Nov-08 N 6.34 7.70

06-Feb-09 N 6.08 6.30

06-Apr-09 N 5.86 6.20

29-Apr-09 N 6.96 7.00

24-Aug-09 OW 10.60 11.90

05-Oct-09 OW 10.42 12.40

29-Oct-09 OW 10.96 12.50

22-Jan-10 OW 10.85 12.40

08-Feb-10 OW 9.24 11.80

09-Sep-10 OW 9.80 11.70

29-Oct-10 OW 9.15 10.90

21-Jul-11 N 7.24 7.60

30-Nov-11 N 5.60 6.60

23-Apr-12 OW 4.68 6.90

27-Apr-12 OW 4.92 6.50

26-Jun-12 OW 4.71 6.20

26-Jul-12 OW 4.06 5.20

21-Aug-12 N 5.72 5.00

26-Oct-12 N 5.74 4.90

11-Feb-13 N 5.91 5.80

13-Jun-13 UW 5.28 4.34

01-Jul-13 UW 4.90 4.36

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Santander (SAN.MC, SAN SM) Price Chart

N €16.3OW €15.8OW €15.5 N €6.2OW €12.5 OW €6.2N €4.9

N €14.5OW €16OW €15.2OW €15.5 N €6.3 OW €12.4OW €11.8 OW €10.9 OW €6.5N €5 UW €4.364

N €13.9OW €16.3OW €16.3OW €16.7OW €14.5N €7.7 N €7OW €11.9OW €12.4OW €11.7 N €7.6N €6.6OW €6.9OW €5.2N €5.804UW €4.338


Initiated coverage Oct 26, 2006.

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Price Target (€)

04-Dec-06 OW 5.33 6.30

17-Apr-07 OW 5.97 6.65

20-Jun-07 OW 5.67 6.79

12-Sep-07 OW 5.29 6.78

08-Oct-07 OW 5.58 6.55

23-Jan-08 OW 4.60 6.33

09-Apr-08 N 4.76 5.75

04-Jun-08 N 4.13 5.54

20-Aug-08 N 3.55 4.90

21-Oct-08 N 3.11 4.77

27-Nov-08 OW 2.40 3.11

17-Feb-09 OW 2.10 3.00

07-May-09 OW 2.53 3.05

27-May-09 OW 2.60 3.05

10-Nov-09 OW 2.90 3.80

04-Dec-09 OW 3.00 3.80

01-Mar-10 OW 2.62 3.80

22-Mar-10 OW 2.84 3.80

10-Jun-10 OW 2.02 3.00

15-Dec-10 OW 2.21 3.00

19-Apr-11 OW 2.09 3.05

25-Jul-11 OW 1.75 2.10

16-Mar-12 N 1.56 1.70

18-May-12 N 0.99 1.60

23-Aug-12 N 1.21 1.50

07-Jan-13 UW 1.40 1.02

05-Aug-13 UW 1.41 1.19

Date Rating Share Price (p)

Price Target (p)

08-Feb-07 UW 811 1100

11-Feb-07 UW 802 850

14-Nov-07 UW 734 820

18-Jan-08 UW 663 790

03-Mar-08 UW 688 720

19-Nov-08 UW 615 675

25-Feb-09 UW 429 400

02-Mar-09 UW 428 360

06-May-09 N 518 450

04-Aug-09 OW 636 760

10-Nov-09 OW 692 900

25-Jul-11 OW 608 800

28-Oct-11 OW 555 700

10-Nov-11 OW 497 650

14-Jan-13 OW 676 725

26-Feb-13 OW 713 755

09-May-13 OW 735 800

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated

Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve

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IntesaSanpaolo (ISP.MI, ISP IM) Price Chart

OW €6.783 N €5.539OW €3.11OW €3.05 OW €3.804 N €1.5

OW €6.793 N €5.749N €4.773OW €3.049OW €3.803OW €2.999 OW €2.101 N €1.596

OW €6.3OW €6.65OW €6.551OW €6.328N €4.905OW €2.997OW €3.802OW €3.797 OW €3OW €3.05 N €1.701 UW €1.02UW €1.19


Initiated coverage Dec 04, 2006.

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HSBC Holdings plc (HSBA.L, HSBA LN) Price Chart

UW 720p UW 360p OW 900p OW 650p OW 800p

UW 850p UW 790p UW 400pOW 760p OW 700p OW 755p

UW 1,100p UW 820p UW 675pN 450p OW 800p OW 725p


Initiated coverage Feb 08, 2007.

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months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com.

Coverage Universe: Abouhossein, Kian: Banca Popolare di Milano (PMII.MI), Banco Popolare (BAPO.MI), Credit Suisse Group (CSGN.VX), Deutsche Bank (DBKGn.DE), Goldman Sachs (GS), Julius Baer (BAER.VX), Morgan Stanley (MS), UBS (UBSN.VX)

J.P. Morgan Equity Research Ratings Distribution, as of June 28, 2013

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 44% 44% 12%IB clients* 56% 50% 40%

JPMS Equity Research Coverage 42% 50% 8%IB clients* 76% 66% 55%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst or your J.P. Morgan representative, or email [email protected].

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

Other Disclosures

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All research reports made available to clients are simultaneously available on our client website, J.P. Morgan Markets. Not all research content is redistributed, e-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your sales representative.

Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf

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http://www.optionsclearing.com/publications/risks/riskstoc.pdf


http://www.jpmorganmarkets.com/

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of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a Trading Participant of the Philippine Stock Exchange and a member of the Securities Clearing Corporation of the Philippines and the Securities Investor Protection Fund. It is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MIC (P) 049/04/2013 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Japan: JPMorgan Securities Japan Co., Ltd. is regulated by the Financial Services Agency in Japan. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

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Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-7700847 / [email protected].

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or

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announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised May 4, 2013.

Copyright 2013 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

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