Please note that this session was held at a particular point in time (Wednesday, August 12th, 2020, 4pm-5pm EDT), and in light of the rapidly evolving COVID-19 situation, it is possible these discussions are no longer accurate after that date.

WEBINAR: COVID-19 AND IMPACT ON THE US FINANCIAL SYSTEMReports from Brazil and Australia

August 12th, 2020

CONFIDENTIALITYOur clients’ industries are extremely competitive, and the maintenance of confidentiality with respect to our clients’ plans and data is critical. Oliver Wyman rigorously applies internal confidentiality practices to protect the confidentiality of all client information.

Similarly, our industry is very competitive. We view our approaches and insights as proprietary and therefore look to our clients to protect our interests in our proposals, presentations, methodologies, and analytical techniques. Under no circumstances should this material be shared with any third party without the prior written consent of Oliver Wyman.

© Oliver Wyman

3© Oliver Wyman

WEBINAR AGENDA

1 Epidemiological update

2 Macroeconomic outlook

3 Perspectives from Brazil

4 Perspectives from Australia

5 Q&A

4© Oliver Wyman

OUR PANELISTS

Til SchuermannPartner & Co-Head, Risk & Public Policy

Helen LeisPartner, Health & Life Sciences

Nuno MonteiroPartner, Financial Services

Nicholas TonkesPartner, CFA & CIS

EPIDEMIOLOGICAL UPDATE

01Helen LeisPartner, Health & Life Sciences

6© Oliver Wyman

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

3/1 3/8 3/15 3/22 3/29 4/5 4/12 4/19 4/26 5/3 5/10 5/17 5/24 5/31 6/7 6/14 6/21 6/28 7/5 7/12 7/19 7/26 8/2 8/9 8/16 8/23

RECENT HOTSPOTS IN THE SOUTH AND WEST ARE BEGINNING TO SHOW SIGNS OF SLOWING CASE GROWTH WHILE PARTS OF THE MIDWEST HEAT UPActive cases per million by stateAs of August 9th, 2020

Forecast launch

Missouri

FloridaCalifornia

TexasIllinois

Indiana

New York

Example states

7© Oliver Wyman1. “Fully reopened” defined as when a majority of high risk businesses, including bars, movie theaters, or gyms, have been reopened with indoor service. This chart does not account for regulatory restrictions that may or may not be in place in those businesses, including mask wearing or capacity constraints. 2: Florida has considered reclosure of a number of risky venues, including bars, gyms, & restaurants, but ultimately decided to only reclose bars; thus, Florida is still considered “fully reopened”

Legend:

0% or less26–50%101+%

51–100%

Fully reopened1

% Change in newdaily cases (2 weeks)

Partially reopened

Circle size: # of active cases1–25%

Northeast/Mid-AtlanticModerate Risk• Generally hit hard by initial outbreak• Cautiously reopening after case decline,

though many (NY, NJ, DE) have paused reopening plans

• Pockets of Northeast (NJ, CT, MA, RI) are showing signs of outbreak, with 2 week case growth >50%

South/WestHigh Risk• 9 of 10 states with highest active cases are in

South (CA is 3rd)• Case growth appears to be slowing, but may

be a result of limited testing - Several states (MS, AL, FL, NV, AZ, SC, TX, GA, and AR) have positive test rates of >10%

• Alternative explanations for slowing growth in following slides

Rural StatesModerate-High Risk• All fully reopened and fared well for

multiple weeks• Though some case counts are still low,

hotspots like Idaho now in top 10 active cases/capita

• Despite low active case counts, - AK, NE, SD, MT, WY, and ND have all been growing for over a month with little signs of slowing down

MidwestModerate–High Risk• Cases continue to rise across most of

the region• IL, MO, OH, WI are all in the top 20

states by active cases, signaling potential shifting of epicenter

• Many states (MO, KS, IA, IN, KY, WI, MN, OH) have concerning rise in positive test rates >5%

Partially reclosed (afterreopening)

FL2

Data as of:8/4

Testing capacity insufficientto capture true case growth

Testing rates >10% indicate capacity issue, suggesting confirmed case growth is limited by tests, not true caseload in region

DUE TO HIGH ACTIVE CASE COUNTS AND LIMITED TESTING, RISK IS STILL HIGH IN THE SOUTH AND WEST, WHILE NEAR TERM RISK HAS INCREASED IN THE MIDWEST

8© Oliver Wyman

HOWEVER, WHILE THE MIDWEST HAS SHOWN SIGNS OF RISING CASES, THE NEAR TERM OUTLOOK IS NOT AS SEVERE AS IT WAS IN THE SOUTH IN JULYKey COVID metrics in Midwest (currently) vs. South (1 month ago)

Midwest (as of 8/9) South (as of 7/9)

States included in set IL, IN, IA, KS, KY, MI, MN, MO, OH, WI

AL, AR, FL, GA, LA, MS, OK, SC, TN, TX

Median mobility 86% of baseline 90% of baseline

Median 2 week case growth 11% 100%

Median active cases per 1M 1810 2400

Median tests per 1M 1940 1920

Median % positive tests 7.5% 11.8%

% of states with mask mandates 80% 10%

• Case growth is much less severe, allowing Midwestern states more time to respond to renewed outbreaks

• Testing is stronger in the Midwest, with similar capacity but lower active cases and % positive rates, though some states (MO, KS, IA) are currently at high risk from testing capacity strain

• Mask mandates and social mobility are also stronger in the Midwest, hopefully dampening severity of the outbreak

9© Oliver Wyman

EVEN IF HOTSPOT CASES ARE TRULY DECLINING, STATES WILL STILL HAVE TO DEAL WITH RISING DEATHS FOR THE FORESEEABLE FUTUREThe effects of the sharply rising case rates throughout the summer are still being felt in plateauing/declining hotspots

• Though new daily hospitalization growth has appeared to slow down in recent days, the lengthy lag between diagnosis and outcome ensures that hospitalizations are on the rise even in states with clear new case declines

• This trend is mirrored in deaths (with a longer time lag), as new daily death rate tended to increase throughout July in hotspot states, even as case rates stabilized

• Health systems will be dealing with capacity strain for a month or longer after cases peak – this strain will be exacerbated in regions with plateauing (not declining) new daily case rates– Plateauing case rates may lead to even higher death rates as a

result of sustained demand for beds, ventilators, PPE, or healthcare labor reducing quality of care for the population as a whole; states should strive for clear declines in case rates before relaxing restrictions

New cases per 1m

AugMay Jun

600

Jul0

200

400

There is a ~3-4 week lag between new cases and associated deaths; deaths in hotspots spiked ~1 month after cases started rising. Lag is longer now than in early pandemic due to increased testing catching cases earlier

1. New hospitalization data not available in TexasFlorida Texas

New hospitalizations per 1m1

May

10

Jun Jul

20

Aug

15

05

25

New deaths per 1m

4

JunMay

6

Jul Aug0

2

Spike begins

Spike begins

Spike begins

10© Oliver Wyman

7-day % positive testing rate

• Though some states appear to be improving (AZ, TX), their positive rate is still high enough to limit true understanding of outbreak scope

• There are currently 14 states with a >10% positive rate, including 7 hotspots that appear to have declining case rates:– AL, AZ, FL, ID, KS, SC, TX

• While declining case rates and % positives are encouraging, those case rates should be taken with a grain of salt until positive rates are well below 10% in current hotspots

4%

22%

05/312%

07/2606/21

6%

8%

08/02

10%

12%

18%

14%

16%

20%

24%

26%

28%

06/07 06/14 06/28 07/1207/05 07/19 08/09

IdahoFloridaAlabama

ArizonaKansasSouth Carolina

TexasArkansas

MissouriMississippi

% positive rate risk threshold

Inadequate % positive rates

AZ

MS

FLAL

ID

SCTX

KS

MOAR

WE DO NOT YET KNOW IF CASE GROWTH HAS TRULY STABILIZED; POSITIVE TEST RATES >10% INDICATE A TESTING CAPACITY ISSUE AND LIMIT ABILITY TO ASSESS GROWTH

11© Oliver Wyman

Successful responses to COVID rely on quick and accurate testing; Until this issue is resolved, regional and federal responses will necessarily be less effective

THE MAJORITY OF STATES CURRENTLY DO NOT HAVE ADEQUATE TESTING CAPACITY TO ADDRESS EXISTING CASE GROWTHNew cases per thousand (including undetected cases) by tests per thousand for each stateAs of August 9th, 20201

0.20

4.8

0.15

0.6

0.30

1.40.2 0.4 4.00.0

0.05

0.10

2.40.8 7.21.0 1.2 5.01.6 1.8

0.35

4.62.0

0.45

2.2 2.6 2.8 3.0

0.40

3.2 3.4 3.60.00

3.8

0.25

4.2 4.4

Iowa

District of Columbia

Illinois

Tennessee

Maryland

Connecticut

Idaho

Colorado

Utah

New

cas

es p

er th

ousa

nd (7

-day

rolli

ng a

vera

ge)

Alaska

Alabama

Arkansas

Kansas

ArizonaCalifornia

Delaware

Florida Georgia

Indiana

MichiganOhio

Mississippi

Montana

North CarolinaNorth DakotaNebraska

New Hampshire New Jersey

New Mexico

Maine

OklahomaMissouri

PennsylvaniaNew York

Rhode Island

South Carolina

Texas

Vermont

Wisconsin

West VirginiaMassachusetts

Louisiana

Nevada

1. Quadrants determined using the average of state-level new tests per thousand (7-day rolling average) and average of state-level new cases per thousand (7-day rolling average)

Handling the surgeAbove average testing, above average cases

Strongest capacityAbove average testing, below average cases

Managing with less infrastructureBelow average testing, below average cases

Inadequate capacityBelow average testing, above average cases

New tests per thousand (7-day rolling average)

12© Oliver Wyman

ALTERNATIVES TO COVID-19 CLINICAL PCR TESTING ARE EMERGING THAT HAVE THE POTENTIAL TO ALLEVIATE CAPACITY CONCERNS (ONCE SCALED)

Type of test Description Potential future benefit Firms with FDA Emergency Use Authorization (EUA)

Antigen TestingQuickly detects protein fragments on or within the virus; Rapid diagnosis and relatively cheap

Produce results more rapidly and cheaply than PCR tests; are more amenable to POCuse

• Becton Dickinson (BD) • Quidel

At-Home CollectionAllows for tissue sampling at-home or in a non-supervised/clinical setting; analysis still happens in laboratories

Cheap collection at scale to reduce bottleneck at testing sites; if combined with high throughput processing, possible to rapidly turnaround results for large swaths of populations

• Assurance Scientific Laboratories

• Color Genomics• Compass• Everlywell• Fulgent Therapeutics• Kaiser Permanente Mid-Atlantic

States

• Kroger Health• LabCorp• P23 Labs• Phosphorous• Quest Diagnostics• RUCDR Infinite Biologics

CRISPR Utilizes CRISPR machinery to detect COVIDgenetic material from tissue sampling

Fast, precise diagnostic capabilities; if developed for POC use, highly increase scale and speed of testing

• Sherlock Bioscience • UCSF Health Clinical Laboratories

High Throughput Processing

Processes large amounts of samples with relatively short turnaround

Sample processing at larger scale than other diagnostics

• Color Genomics• Illumina

• Quest Diagnostics

POC Molecular Testing

Allows for diagnostic testing at or near the point of care, without delay from sending samples to a laboratory

Substantially decrease turnaround time for results

• Abbott• Atila Biosystems• Cepheid

• Mesa Biotech• Privapath Diagnostics

Experimental technology is also being developed that may increase the scope and timeliness of testing – these new technologies include rapid detection from saliva, breathalyzers, soundwave detection, or gold nanoparticles. These technologies should not be considered as anything more than experimental without further study.

13© Oliver Wyman

REOPENING SCHOOLS IS A CRITICAL AND HOTLY DEBATED ISSUE – IT LIKELY CAN BE DONE SAFELY ONLY WHEN COMMUNITY SPREAD IS LOW

• America’s economic system can not function fully without schools, placing economic pressure on reopening• Pediatric welfare also depends on in-person learning

Reopening schools should be a top priority, but must be done safely – reopening only when community spread is low is the best way to limit further disruption

• Low community spread mitigates risk from reopening schools – The U.S. CDC’s official stance is that COVID-19 transmission in schools is not a significant risk when overall

community spread is low2, and independent experts agree7

• However, reopening schools without low community spread or adequate precautions can be significantly disruptive:– The United States has started to reopen schools in the midst of still rising cases, leading to almost immediate

disruption, including quarantine of hundreds of students and staff in newly reopened districts– Some districts have been forced to reclose temporarily after only days of in-person operations

1. U Chicago, 2. CDC, 3. NYT, 4. NYT, 5. ABC News, 6. IPS News, 7. NPR

Despite previously reported lower severity of illness in children, recent studies suggest that kids can become infected and transmit the virus at rates similar to adults, especially in children >10

14© Oliver Wyman

SCHOOLS NEED TO LIMIT THE RISK OF TRANSMISSION ACROSS ALL PHASES OF REOPENING

• When to reopen– Community spread should be low– Thresholds should be clearly defined and

communicated to enable effective planning– Generally, epidemiologists agree upon a 5%

positive rate as an adequate threshold for reopening8

• For whom to reopen– Several studies suggest transmission is less

common among children <106, though those aged 10-19 may be more likely to transmit compared to adults7

– Hybrid schedules or prioritizing the return of younger children may limit risk while focusing on age groups for which distance learning is not as effective

– Reopening schools for vulnerable populations should also be prioritized

Planning for reopening Executing reopening Continuing operations

1. NPR; 2. Center for American Progress; 3. NY Gov; 4. Gothamist; 5. Star Tribune; 6. Stat News; 7. CDC; 8. NYT; 9. CFR

• Limit importation: The first priority should be to stop cases from entering the school– Health screening paired with testing (health

screening alone unlikely to effectively diagnose infection)

– Strict policies on symptomatic individuals or close contacts staying home

If the virus makes it into a school…• Limit transmission: The school environment should

be as safe as possible, including:– Proper ventilation and air quality – Social distancing to the extent possible (enabled

by hybrid schedules)If the virus does transmit within a school…• Limit impact: Interactions should be limited so that

a transmission event does not effect the entire school/community– Consistent student cohorts with limited

interaction between cohorts may limit impact

• When to reclose: Schools and the relevant authorities should have a clearly defined response to any positive cases within the student body or staff that includes:– Defined threshold of positive cases at which the

school recloses– Clearly defined plan or policy for when to reopen – Testing policies allowing for rapid diagnosis

• How much to reclose: Plans should consider extent and duration to reclose and clearly communicate those specifications

• Continuing services while reclosed: Authorities should prepare for extensive periods of distance learning, focusing on the continuity of instruction and other services

Many school plans currently have gaps in testing infrastructure and proper air ventilation/filtration

MACROECONOMIC OUTLOOK

02Til SchuermannPartner, Risk & Public Policy

16© Oliver Wyman

U.S. Real GDP Growth Forecasts – Q3 2020 to Q4 2021QoQ annualized growth rate, by select economic analysts1

Key observations from estimates

• Q2 2020 was the worst quarter on record

• Forecast updates for Q3 2020 have been moving lower (or flat) over the last month, but still with significant uncertainty in forecasts

• Key indicators to track include:– Cycle of opening and closing in

regional economies– Reliance on “smart” mitigation

strategies (e.g., mass testing, analytics)

25

20

0

5

15

10

30

JPMFRBATL (Aug 7)

JPM

CBO

UBS

DB

GS

BACDB

TD

GS

MS

JPM

CBO

CBO

JPM

DB

MS

BACTD

GS

MSJPM CBO

UBSDBTD MS

UBSCBO UBSUBS

Annu

aliz

ed g

row

th ra

te (%

)

TD

TDGS

MSGSUBS

CBO

GS

MS

FRBNY (Aug 7)

DB

TDDB

1. JP Morgan (July 31), Goldman Sachs (July 12), Morgan Stanley (July 17), Toronto Dominion (June 17), UBS (July 29), Bank of America (July 31), Deutsche Bank (July 28), CBO (July 2)2. JP Morgan (April 24), Goldman Sachs (April 29), Morgan Stanley (April 27), Toronto Dominion (April 20), UBS (April 29), Bank of America (April 17), Deutsche Bank (April 28), CBO (April 24)3. JP Morgan (July 17), Goldman Sachs (July 12), Morgan Stanley (July 17), Toronto Dominion (June 17), UBS (July 29), Bank of America (July 24), Deutsche Bank (July 28), CBO (July 2)

1Q202 2Q203 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21Avg -4.8% -33.1% 17.2% 6.5% 5.5% 4.7% 5.3% 4.4%Max -2.3% -29.0% 28.0% 9.2% 8.0% 6.5% 10.7% 10.4%Min -9.9% -35.0% 10.6% 4.5% 3.9% 3.1% 3.0% 2.7%Act. -5.0% -32.9%

3Q20 4Q20 1Q21 2Q21 3Q21 4Q21

THE US ECONOMY IS EXPERIENCING A SEVERE SHOCK: GDPThe escalation of the COVID-19 crisis has resulted in unprecedented volatility in forecasts

Last updated: 8/10/2020

17© Oliver Wyman

U.S. Unemployment Forecasts – Q1, Q2, Q3, and Q4Quarterly unemployment rate, by select economic analysts1

Key insights

• Unemployment claims filed since start of the COVID-19 lockdown have wiped out the last eleven years of job gains2, 3

• Most unemployment forecasts assume a steady recovery for 2H20 and 2021 and appear not (yet) to account for the possibility of subsequent waves of lockdown

• Unemployment estimates will likely be quite volatile for a while

• Congressional Budget Office forecasts a slower employment recovery than most major banks

Institutional forecast CBO forecast Actual

15

0

5

10

CBOTDJuly

June

Une

mpl

oym

ent r

ate

(%)

DB

JPM

CBO

CBODB

GS

JPM

GSTD TD

CBO

TD

JPMDBMoody’s

GS

GS

TD JPM

CBODB JPM

Moody’s

DBGS

April

TD TD

JPMJPMGS

GS

TD

UBS

GS

CBODB

UBSCBO

CBO

DBDB

May

2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 2020 2021

1. Goldman Sachs (July 12), JP Morgan (July 31), UBS (July 29), Deutsche Bank (July 28), Toronto Dominion (June 17), CBO (July 2), Moody’s (June 22); U.S. Bureau of Labor Statistics. 2. U.S. Bureau of Labor Statistics. 3. Tracking unemployment forecasts against unemployment reports may be misleading – unemployment reports only record jobless workers actively searching for employment

Last updated: 8/10/2020

3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 2020 2021Avg 10.9% 9.3% 8.5% 7.9% 7.3% 6.8% 9.6% 7.8%Max 14.1% 10.5% 9.4% 8.6% 8.0% 7.6% 10.8% 8.9%Min 9.2% 7.9% 7.5% 7.3% 6.8% 6.3% 8.5% 7.0%Act. 10.2% (Jul)

THE US ECONOMY IS EXPERIENCING A SEVERE SHOCK: UNEMPLOYMENTThe escalation of the COVID-19 crisis has resulted in unprecedented volatility in forecasts

18© Oliver Wyman

THE ECONOMIC IMPACTS APPEAR TO BE CORRELATED WITH THE STRINGENCY OF GOVERNMENT RESPONSEReal GDP Growth vs. Oxford Stringency Index All figures Q2 2020 except as noted below

Austria

Belgium

Canada

China, Q1Czech Republic

France

Germany

Hong Kong, Q1

IndonesiaItalyMexico

Portugal

Singapore

South Korea

Spain

Sweden

Taiwan

United KingdomUnited States

-

10

20

30

40

50

60

70

80

90

-70 -60 -50 -40 -30 -20 -10 0

Oxf

ord

Strin

genc

y In

dex,

Qua

rter

ly A

vera

ge

GDP Growth, QoQ% annualized

Key observations

• In general, greater government response in the form of behavior restrictions (“stringency”) corresponded to more adverse immediate economic impact

• However, economic impacts on a specific country likely a combination of other factors beyond government response

• Improved adherence to public health guidance now could allow for more robust recovery later….

Sources: Oxford University, Oxford Economics/Haver Analytics

More stringent

REPORT FROM BRAZIL

03Nuno MonteiroPartner, Risk & Public Policy

20© Oliver Wyman

COVID-19 in Brazil: Confirmed, Estimated Active, and NewAugust 11th

Source: Oliver Wyman Pandemic Navigator (https://pandemicnavigator.oliverwyman.com), World Bank data; BCB Séries temporais;

IN BRAZIL, COVID-19 CASES ARE STILL GROWING CONSIDERABLY, WITH ESTIMATED PEAK OF ACTIVE CASES EXPECTED TO BE REACHED IN AUGUST

Credit market growth and GDP are strongly correlated

As the crisis spreads through the real economy, credit will be a central piece to amplify or smooth the recession

Credit balance - real YoY growthGDP - real YoY growth

Market consensus expects GDP for 2020 to contract at least -5.0% vs. the +2–3% at the

beginning of the year

Government quickly anticipated year-end target risk free rate (SELIC) decrease, and went below historical

lows to stimulate credit availability by lenders

20142000 2002 2004 20102006 20122008 2016 2018 2020-15%

-10%

-5%

0%

15%

5%

10%

20%

25%

30%

21© Oliver Wyman

Credit volume outstandingin BRL BN

Interest rates% a.a.

20182010

1,500

2008 201220062000 2002 2004 2014 2016 2020 20220

500

1,000

2,000

Corporate Consumer

0

10

20

30

50

40

2013 20212012 2014 20202015 2016 2017 2018 2019ConsumerCorporate Base rate

COVID-19 CRISIS ARRIVES DURING THE SLOW AND LONG-WAITED RECOVERY AND WILL IMPACT CREDIT AND NPL VOLUMES

• COVID-19 crisis arrives in the arrives during a slow and long-awaited recovery, which is particularly concerning for Retail lenders– Likely NPL increase in vintages that were already originated in growth mode– Little room to maneuver and avoid/ mitigate credit losses

• Despite surging demand for cash from Retail clients, we expect (and start to observe) little appetite from lenders in supplying the much needed credit

• Individual lenders and the government will have to work together to provide aid and fuel the economy – with the required guard-rails to maintain the stability of the system

Non-Performing Loans% of total loans

0

8

6

2

4

20142013 20172012 2015 2016 2018 2019 2020 2021

SME Corporate1 Consumer2 TrendTrend

1. Pessoas Jurídicas, Brazilian term for “legal entities”, includes Corporates, SMEs and individual micro-entrepreneurs (MEI); 2. Pessoas Físicas, Brazilian term for natural person or individual Source: Series temporais (Central Bank of Brazil) for total credit (incl. earmarked); Relatório de economia bancária, 2018 (Central Bank of Brazil); Oliver Wyman analysis on illustrative trends

Early signs of increase in unemployment and business bankruptcies, as suppressive measures

take place, indicate NPLs likely to grow in response

Credit was recovering from 2015’s slowdown, but despite an increased demand from SMEs and individuals it is likely that credit supply will reduce

Interest rates expected to increase as investor confidence falls and NPLs grow

Trend

22© Oliver Wyman

Credit demand surge

Credit supply shock

Government stimulus

Individuals and firms face a cash crunch as a result of the efforts to limit the spread of the virus, leading to a strong increase in the need for credit

With higher uncertainty and complexity in the macro scenario and the emerging real economy crisis, investor confidence goes down and shift capital to safe havens, reducing appetite to lend

To provide a safety net to the economy, Government launches stimulus packages that aim to mitigate effects of the crisis and bridge the mismatch of credit demand and supplyCrisis in the real economy

HOW THE DYNAMICS OF RETAIL CREDIT WILL CHANGE IN BRAZIL?Understanding how the COVID-19 crisis will change Retail credit is critical for lenders to address the upcoming challenges, calibrating the credit supply with a changing demand and adequately responding to government stimulus

COVID-19 crisis has been severing the flow of goods and people, hindering economies and is in the process of delivering a global recession

23© Oliver Wyman

CREDIT DEMAND SURGEIndividuals and SMEs will be strongly impacted by this crisis, and will need credit to fulfill their short-term cash flow imbalance during the crisis

# of companies in MM1

Feedback loop between cash crunch on SMEs and individuals – one reinforces the other

1.9

0.9

19.2

9.8

6.6 55.1

20.2

18.2

93.5

Leve

l of i

mpa

ct

Informal employer/self-employer

Informal employee from private sector/family biz

Formal employee

Small business and entrepreneurs represent 90% of total CNPJs, 27% of GDP and 44% of total payroll

Informal sector represents 41% of employed population

Individual (MEI)

Micro

Small

Medium and large-

+

1. Data Sebrae as Mar 2020; 2. IBGE as Dec 2019

# of individuals in MM2

24© Oliver Wyman

Credit value chain Key challenges emerging from the crisis

Client acquisition = Favors the large

Surge in number of clients seeking credit, favoring large banks that serve as a “first stop shop”, which results in adverse selection for other players

Credit decision = Less accurate

Change in customer profile, mix, and the new macroeconomic scenario mean that credit models and policies used during “business as usual” are much less accurate in predicting credit performance – lenders needs a COVID-19 playbook

Funding= More expensive

Higher uncertainty and complexity causes investor confidence to go down and shifts capital to safer assets, increasing funding costs, with strong impact for fintechs and smaller lenders who are Balance Sheet-constrained

Collections = Less effective

Increase in delinquent volume is driven by constraints in the capacity to repay (rather than unwillingness to pay from borrowers), which makes debt collection efforts ineffective – particularly in a moment where “hard” collection is not advised

Customer service = More digital

Strong, broad-service digital channels are even more necessary now, given unavailability/sanitary risks of brick-and-mortar channels, associated with potential operational challenges to call centers

CREDIT SUPPLY SHOCKIncreased credit risk during the crisis is the aggregate factor that strongly contributes to the credit supply shock, but challenges and complexity emerge for all links in the credit value chain

25© Oliver Wyman

Covid-19 impact on Corporate credit portfolio

Originations: Dec/19 to Jun/20 Indexed Dec/19=100

Arrears and defaults: Dec/19 to Jun/20% of balance

1,8%

1,6%

1,4%

1,5%

1,7%

1,9%

2,0%

2,1%

2,2%

2,3%

2,4%

2,5%

2,6%

2,7%

1,4%

2,4%

1,9%

2,1%

1,8%

2,1%

2,3%

2,2%

2,3%2,3%

2,1%

2,6%

2,4%

2,0%

Defaults

Arrears 15-90 days

Balance: Dec/19 to Jun/20Indexed Dec/19=100

-80%

-100%

-60%

-40%

-20%

0%

20%

80%

40%

60%

100%

200%

220%

-25%

15%

CC factoringTotal Overdrafts

Factoring Working capital ACC1

Export financing

Other

5%

-25%

-20%

0%

-15%

-10%

-5%

10%

15%

20%

25%

30%

35%

40%

9%12%

Peak in May driven by FX

(ACC1 and Export

Financing)

1. “Adiantamento de contrato de câmbio” – FX contract anticipation. Source: Banco Central do Brasil; Bank earnings releases

FIRST SIGNS OF COVID-19 IMPACT IN THE CORPORATE CREDIT PORTFOLIOJune 2020 data already showed a considerable impact on the corporate portfolio, with a peak due to FX in March, followed by a relevant decrease in all lines except working capital

Covid-19 effects on credit quality still not

realized – decrease due to government stimuli and lower origination

26© Oliver Wyman

Covid-19 impact on Consumer credit portfolio

Source: Banco Central do Brasil; Bank earnings releases

3,4%

3,2%

3,0%

4,0%

3,6%

3,8%

4,2%

4,4%

4,6%

4,8%

5,0%

5,2%

5,4%

5,6%

4,3%

4,8%

4,6%

5,0%

4,4%

5,3%

4,9%5,1%

5,2%

4,9%

5,5%

4,6%

5,6%

4,0%

Arrears 15-90 days

Defaults

-5%

-35%

-20%

-30%

-10%

-25%

0%

-15%

5%

-17%

-22%

Total Personal loans

Overdrafts Credit cards

Others

FIRST SIGNS OF COVID-19 IMPACT IN THE CONSUMER CREDIT PORTFOLIO For consumers, there was a fall on credit volumes driven mostly by credit cards, due to lower transaction levels; effects in credit quality still not realized

-18%

-6%

-14%

-8%

-12%

-16%

0%

-10%

-4%-2%

2%4%6%8%

10%12%

2%

-1%

Covid-19 effects on credit quality still not

realized – decrease due to government stimuli and lower origination

Originations: Dec/19 to Jun/20 Indexed Dec/19=100

Arrears and defaults: Dec/19 to Jun/20% of balance

Balance: Dec/19 to Jun/20Indexed Dec/19=100

27© Oliver Wyman

Financial margin with clientsR$ BN

ProvisionsR$ BN

8

6

2

7

11

3

5

4

9

10

12

6,7

10,4

1T20

3,9

2,7

4,1

5,4

1T18 3T18 1T19 3T19

3,4

6,5

ItaúSantanderBradesco BB

% changeQ1’20 / Q4’19

69%

15%

69%

9

7

13

11

8

14

10

12

15

16

17

18

19

1T19

15,3

11,3

7,5

1T18 3T18 3T19

13,0

9,2

17,0

8,5

1T20

% changeQ1’20 / Q4’19

0%

-4%

-6%

34%

-21%

Source: Banco Central do Brasil; Bank earnings releases

FIRST SIGNS OF COVID-19 IMPACT ON BANK PROVISIONS AND MARGINSLarge financial institutions have already anticipated some of the expected increase in losses in their provisions

28© Oliver Wyman

0% 5%

1%

3%

15%10% 20%

2%

0%

4%

5%

6%

7%

Sustainable ROE reduction (%)

E1CE

T 1

Depl

etio

n (%

)

E2

E3 E4E5

"Smart & Lucky“ scenario "Winter Return“ scenario

BRAZILIAN BANKS LIKELY TO WITHSTAND SHOCK, WITH HIGH SPREADS SUFFICIENT TOSUSTAIN CAPITAL RATIOS DESPITE SHARP REDUCTION IN ROE

5%

7%

10%

0%

5%

20%15%

1%

2%

3%

4%

6%

Sustainable ROE reduction (%)

CET

1 De

plet

ion

(%)

E3

E1

E2

E4

E5

Above Threshold Below Capital Conservation Buffer

Source: Worldbank, Banks’ public fillings, Oliver Wyman analysis

Projected impact of pandemic scenarios for major banksStarting point

~6%

~18%

~23%

Net

inte

rest

inco

me

(%)

Reg

ulat

ory

capi

tal

(%)

Ret

urn

on e

quity

(%

, bef

ore

tax)

REPORT FROM AUSTRALIA

04Nicholas TonkesPartner, Risk & Public Policy

30© Oliver Wyman

MACRO IMPACT: OLIVER WYMAN DEVELOPED 5 POTENTIAL SCENARIOS – OUTCOME LIKELIHOODS HAVE EVOLVED OVER RECENT MONTHS

Observations

Source: AMP, ANZ, CBA, Fitch, JP Morgan, Morgan Stanley, NAB, Oxford Economics, UBS, Westpac

Average forecasts (fortnightly)1 09/03 23/03 06/04 20/04 04/05 18/05 01/06

GDP growth YoY % 0.1 -1.2 -4.1 -5.0 -5.0 -5.1 -4.2

Unemployment rate % 5.8 6.3 8.3 8.4 8.5 8.2 8.0

• Continued downgraded of macro forecasts from March and April as the pandemic spread and lockdown measures intensified

• Economist initially anticipated a V-shape recovery (quick elimination of the virus) as baseline and U-shape (longer elimination) as the downside scenario

• Following considerations of potential further outbreaks, seasonality effect and gap from herd immunity, Vw & VW-shape recoveries emerged as likely options replacing the V-shape

• The recent flattening of the curve, increase in testing & tracing capacity, and rapid economic reopening have increased the likelihood of a Vw shape recovery

• This in turn, is also reflected in the slight improvements in macroeconomic forecasts

Scenarios and likelihoods March April May June

0V shape recovery

1U shape recovery

2Vw shape recovery

3VW shape recovery

4L shape recovery

70% 0% 0% 0%

30% 20% ~0% ~0%

0% 35% 60% 70%

0% 0% 0% 0%

0% 45% 40% 30%

31© Oliver Wyman

• 6–12 months: Phased reopening of the economy by sector/region

• 12–18 months: International arrivals/immigration resumes

• GDP YoY drops 10% and unemployment peaks at 12% in 2020 driven by prolonged restrictions, with rapid recovery in 2021

• HPI drops 20% in 2020 as unemployment peaks and foreign demand reduces, followed by gradual recovery in 2021–22

• 3–4 months: Rapid reopening of the economy • 4–18 months: Additional wave(s) of virus addressed by

smart containments• 12–18 months: International arrivals/immigration

resumes• GDP YoY drops 7% and unemployment peaks at 10% in

2020, with slower recovery in 2021 due to outbreaks• HPI drops 10% in 2020 as consumer uncertainty is offset

by return to employment, recovery in 2021–22

• 3–4 months: Rapid reopening of the economy• 4–18 months: Additional wave(s) of virus beyond health

system capacity, requiring additional lockdowns• 12–24 months: International arrivals/immigration

resumes• GDP YoY drops 10% and unemployment peaks at 12% in

2020, with slow recovery in 2021–22 due to further outbreaks

• HPI drop of 25% in 2020 due to high unemployment peak and consumer uncertainty, slow recovery in 2021–22

Scenario 1Elimination over longer period 2020–21 (U shape)

Scenario 2Additional outbreaks contained in 2020 (Vw shape)

Scenario 3Additional outbreaks over 2020–21 (VW shape)

MACRO IMPACT: DIFFERENCE BETWEEN SCENARIO 2 AND 3 IS DRIVEN BY THE EFFECTIVENESS OF CONTAINMENT MEASURES IN SUPRESSING FURTHER OUTBREAKS

Likelihood: ~0% Likelihood: ~70% Likelihood: ~30%

Economic impact

Recovery shape

32© Oliver Wyman

MACRO IMPACT: IMPACTS ARE HEAVILY INFLUENCED BY THE COVID-19 R0, DRIVEN BY PATHOLOGICAL & PUBLIC HEALTH CHARACTERISTICS

0

4,000

3,000

1,000

2,000

5,000AC

TIVE

CAS

ES (#

)

5

-15

-10

-5

0

10

2020 Q22020 Q1 2020 Q3 2020 Q4 2021 Q1 2021 Q42021 Q2 2021 Q3 2022 Q1 2022 Q2 2022 Q3 2022 Q4

GDP

GRO

WTH

(%)

YoY growth QoQ growth

2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 2021 Q2 2021 Q3 2021 Q4 2022 Q1 2022 Q2 2022 Q3 2022 Q4

Anticipated government responseInitial outbreak 12+ months suppression/ containment Return to BAU/

New normalFull lockdown

Ban public events

School closure

Social distancing

Self isolation

• The intensity of subsequent lockdowns required is driven by the R0 (reproductive rate of the virus)

• R0 is highly sensitive to the pathological characteristics of Covid-19 (e.g. seasonality, herd immunity) and public health characteristics (e.g. scale & sophistication of testing/tracing)

• There is still high uncertainty around the future effectiveness of containment measures despite ongoing effort

• Resurgence of Covid-19 is more likely during winter due to the potential seasonality effect of the virus

• Further advancements in public health tools is likely to lead to more controlled outbreaks

YoY GDP worsens from 7% to 12% if a further lockdown is required this year

Vw-shape VW-shape

Vw-shape baseline and VW-shape pessimistic scenarios

33© Oliver Wyman

Australian GVA by Industry, H1-20 impact of COVID-19 $BN

SECTOR IMPACT: IMPACT ON THE ECONOMY VARIES BY SECTOR, WITH RESILIENCE IN SOME KEY SECTORS SUCH AS MINING, CONSTRUCTION AND PROF. SERVICES

143

Mining

Fin services

Construction

Public Admin

Admin & Support Services

Health Care & Social Assistance

Prof. Services

Education and Training

Agriculture

Manufacturing

69

Transport & Warehousing

Retail Trade

Wholesale Trade

Rental & Real Estate Services

Electricity & other services

112

Accom. & Food

Info Media & Telecom

Other Services

Arts & Recreation Services

200

172

146

137

34

104

93

93

81

74

57

48

45

44

39

16

Large (200+ employees)

SME (<200 employees)

<50% 50%–70%

>90%70%–90%

H1-20 industry activity w.r.t pre-COVID levels

ABS - Australian System of National Accounts, 2018-19, Gross Value Added (GVA) by Industry, OW analysis

Subsector impacts vary e.g. Industrial CRE benefitting from increase in e-commerce at the expense of Retail CRE

Healthcare sector has been significantly

impacted by the replacement of high margin elective care with lower margin

COVID care

34© Oliver Wyman

SECTOR IMPACT: THE PACE AND EXTENT OF RECOVERY ALSO DIFFERS BY SECTOR, LASTING CHANGES EXPECTED IN HEAVILY IMPACTED SECTORS…Sector recoveries (based on Vw-shape baseline scenario)

H2-22H1-20 H2-20 H2-21H1-21 H1-22

Inflection point

Lifting of restrictions in June and reopening of interstate borders in September drives sector recovery

Gradual recovery to new normal as international

borders open and consumer confidence recovers

Temporary reinforcement of restrictions during

second outbreak

<50% 50%-70% >90%70%-90%Industry activity w.r.t pre-COVID levels

Real estateHealthcare

Retail Trade

ConstructionAccom. & food

Mining

35© Oliver Wyman

Impact of COVID-19 by stateGross value added $BN, (% of contribution from services sectors)

STATE IMPACT: IMPACT AND RECOVERIES DIFFER ACROSS AUSTRALIA, DRIVEN BY SECTOR SKEW TO SERVICES AND FOREIGN DEMAND

1. Underemployment rate increase from March to April, measure used over unemployment rate due to JobKeeper programme artificially lowering the impact on unemployment rateSources: ABS - Australian System of National Accounts, 2018-19, Gross Value Added (GVA) by Industry, Parliament of Australia, AUSTrade, Victoria University’s Mitchell Institute

Impact measure

$235 BN(56% services)

$90 BN(83% services)

$308 BN(76% services)

$508 BN(88% services)

$379 BN(88% services) $27 BN

(78% services)

QLD swift recovery when interstate borders open due to high interstate tourism

19% of tourism expenditure from foreign sources37% education expenditure from foreign sources4.0% in underemployment rate

NSW recovery prolonged by high reliance on foreign demand compared to other states27% of tourism expenditure from foreign sources44% education expenditure from foreign sources4.6% in underemployment rate

WA non-service sector resilience (incl. mining, agri)

reducing impacts13% of tourism expenditure

from foreign sources27% education expenditure

from foreign sources4.9% in underemployment rate

SA14% of tourism expenditure

from foreign sources33% education expenditure

from foreign sources5.2% in underemployment rate

VIC recovery prolonged by high reliance on foreign demand compared to other states37% of tourism expenditure from foreign sources

46% foreign education expenditure foreign sources5.7% in underemployment rate

High

Low

Moderate

36© Oliver Wyman

MAJOR BANKS HAVE INCREASED PROVISIONING (+40% ON AVERAGE) TO ACCOUNT FOR THE IMPACT OF COVID-19 AND DEFERRED / REDUCED DIVIDEND PAY-OUTSImpact of COVID-19 on collective provisioning $M

Banks responses

1. Westpac results includes AUSTRAC chargesSource: Bank annual and interim reports, media reports

Bank Report date

COVID overlayCOVID overlay/ Pre-

COVID CPH1-20 CP post

COVIDWeighted Base Severe

27 April 807 363 3,827 22% 4,401

30 April 1,031 849 3,002 30% 4,501

4 May 1,581 291 3,717 44% 5,182

8 May 582 441 941 61% 1,541

13 May 1,500 Not published 31% 6,400

Impairment charge as % of GLA

0.160.38

0.13

0.53

0.13

0.62

0.200.49

0.16

0.80138%

308% 377% 145%+400%

1

3Q20 update figures used, reflective of

COVID impactsH2-19 H1-20

• Decision to payout dividend at 30c per share (vs. 83c in 2019 final)

• 51% decline in profits to $1.4 BN• $3.5 BN capital raising to boost Tier 1 Capital to

11.2%

• Decision to defer dividend (vs. 80c paid in 2019 final)

• 60% decline in profits to $1.4 BN

• Decision to defer dividend (vs. 80c paid in 2019 final)

• 70% decline in profits to $993 MM

• Decision to payout dividend at $1.80 per share (vs. $2.50 in 2019)

• 8% decline in profits to $2.7 BN

• Dividend payments to be reviewed as part of the usual year-end process

37© Oliver Wyman

9%6%

15%

23%

18%3%

26%

COVID-19 RELATED PAYMENT DEFERRALS ARE SIGNIFICANT IN SIZE ACROSS ALL MAJOR BANKS

Deferred home loans by LVR

Source: Banks’ latest interim reports; 1. Loan deferred are approved figures for NAB, Westpac, and requested figures for ANZ and CBA; assumption that vast majority of deferrals will be approved; 2. Total loans for business excludes corporates and institutional banking and non-Australian entities; 3. Total includes institutional and non-Australian loans

BankReport date

Loans deferred1 ($B) Total loans ($B)

Home Business Total Home Business2 Total3

27 April 27 17 44 302 174 619

30 April 36 8 44 264 54 661

4 May 39 8 47 497 122 720

13 May 50 15 65 480 141 770

Loan deferred as a % of total loan value

9%7%7%

12%14% 14%

7% 8% 7%9%

13%

8%

Home loans Business loans Total loans

33%

14%

38%15%

Deferred business loans by sector

8%

38%

40%

14%

61-80%<60% >90%81-90%

11%

20%

13%

4%31%

8%10%

Retail & wholesaleProperty

Accom/Food

Healthcare

Manufacturing Agri

Construction

Other

38© Oliver Wyman

ALL MAJOR BANKS HAVE STARTED MOBILIZING THEIR “CUSTOMER IN DIFFICULTY” PROGRAMME AMID CONCERNS EQUITY VALUES WILL BE DEPLETEDCOVID-19 relief provided by Australian banks1

As of 12 June

772,616Total number of COVID-19 loan deferrals (480,727 mortgages and 215,441 business loans)

$234 BNTotal value of loans deferred

$118 BNNew business lending

Banks responses

Benchmarking of number of loans deferred2

K

70105 105

1443442 31

71

104147 136

215

Business Mortgages

For some business owners, the smartest thing for them to do is to wind it up now, and walk away with some equity…We have begun resourcing "workout" and restructuring specialists and would be proactively contacting businesses to help them arrive at the right solution

Mark Hand, Head of retail and business banking

We recognise that customers may require alternative temporary assistance measures to help them get back on their feet sooner…We are temporarily allowing existing home loan customers to apply for a one-year interest only extension or switch if they are currently making principal and interest repayments without requiring a serviceability assessment

Angus Sullivan. CBA Group Executive

We are adding 500 staff to our support team to help with the check-in process and will call customers instead of using digital communications “to gain a deeper understanding of their situation”

Rachel Slade, Chief Customer Experience Officer

Eligible customers making interest-only payments will be able to extend that IO period for up to 12 months, while customers making principal and interest payments will be able to make the switch to interest-only payments for the same period

1. Australian Banking Association, bank loan deferrals commenced 22nd March 2020; 2. Banks’ latest interim reports

39© Oliver Wyman

Til SchuermannTil.Schuermann@oliverwyman.com

THANK YOU; POST-WEBINAR LOGISTICS; Q&A

Contact us

Helen LeisHelen.Leis@oliverwyman.com

Nuno MonteiroNuno.Monteiro@oliverwyman.com

Nicholas TonkesNicholas.Tonkes@oliverwyman.com

40© Oliver Wyman

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Information furnished by others, upon which all or portions of this report are based, is believed to be reliable but has not been independently verified, unless otherwise expressly indicated. Public information and industry and statistical data are from sources we deem to be reliable; however, we make no representation as to the accuracy or completeness of such information. The findings contained in this report may contain predictions based on current data and historical trends. Any such predictions are subject to inherent risks and uncertainties. Oliver Wyman accepts no responsibility for actual results or future events.

The opinions expressed in this report are valid only for the purpose stated herein and as of the date of this report. No obligation is assumed to revise this report to reflect changes, events, or conditions, which occur subsequent to the date hereof.

All decisions in connection with the implementation or use of advice or recommendations contained in this report are the sole responsibility of the client. This report does not represent investment advice nor does it provide an opinion regarding the fairness of any transaction to any and all parties. In addition, this report does not represent legal, medical, accounting, safety, or other specialized advice. For any such advice, Oliver Wyman recommends seeking and obtaining advice from a qualified professional.