U.S. Banking Sector: Rising NIMs, Payouts and Potential Regulatory Reform. August 14, Live Webcast and Q&A

Transcription

1 U.S. Banking Sector: Rising NIMs, Payouts and Potential Regulatory Reform August 14, 2017 Live Webcast and Q&A Copyright 2017 by S&P Global. All rights reserved.

2 Recent bank rating actions Company To From Key Driver of Rating/Outlook Action Date UMB Financial Corp. A-/Negative/A-2 A-/Stable/A-2 On accelerated growth in commercial real estate and construction lending in the past several years. 8/11/2017 Valley National Bancorp BBB+/Watch Neg/-- BBB+/Negative/-- On announced acquisition of USAmeriBancorp Inc. 7/26/2017 Huntington Bancshares Inc. BBB/Positive/-- BBB/Stable /-- BancorpSouth, Inc. BBB-/Stable/-- BBB-/Positive/-- Expectations of improved franchise strength and business stability following the acquisition of FirstMerit Corp. Outstanding regulatory issues, and high exposure to real estate-related loans. 7/24/2017 7/12/2017 KeyCorp BBB+/Stable/A-2 BBB+/Negative/A-2 Following integration of First Niagara. 6/20/2017 Astoria Financial Corporation BBB-/Stable/-- BBB-/Watch Dev/-- Credit Watch removed as we expect the acquisition by Sterling Bancorp to be neutral to ratings. 6/2/2017 M&T Bank Corporation A-/Stable/A-2 A-/Negative/A-2 Following integration of Hudson City. 5/24/2017 East West Bancorp, Inc. BBB/Stable/A-2 BBB/Negative/A-2 Expectations of solid earnings and asset quality. 4/27/2017 Western Alliance Bank BBB-/Stable/A-3 BBB-/Negative/A-3 Following integration of acquisitions. 4/19/2017 Popular, Inc. BB-/Stable/B B+/Positive/C Improving financial performance, particularly funding. 4/7/2017 Source: S&P Global Ratings 2

3 Our outlook for U.S. banks Revenue Expect revenues to rise moderately on the back of recent increases in market interest rates and mid-singledigit loan growth and continued fee income growth, partially offset by lower mortgage volume. Expenses Expect positive operating leverage. Continued cost cutting efforts, including branch consolidation, headcount reduction and digitization, should limit expense growth. However, investments in technology and continued regulatory-related expenses will be somewhat of an offset. Profitability Profitability should improve due to a pickup in revenue and limited expense increases, offset perhaps by higher credit provisions in the second half of the year. Economic growth, the Fed s actions, and capital markets conditions will also be important determinants of earnings. Credit Quality Capital Despite the still benign levels of NPAs and provisions in the first half, we expect credit quality to deteriorate and reserves to build going forward. Specific areas of potential risk include: energy, leveraged loans, retail, autos and some pockets of CRE. Capital ratios have likely peaked as banks balance their aspirations for growth and shareholder payouts with maintaining required regulatory ratios. We expect dividends and buybacks to generally increase among large and regional banks. Funding & Liquidity Most banks are largely asset sensitive and stand to benefit from rising rates. Still, funding mix could change if deposit growth abates. We will monitor noninterest-bearing deposit outflows and the pace of funding repricing and deposit sensitivity. Source: S&P Global Ratings 3

4 Q2 Results 4

5 Loan growth and NIM expansion driving revenue growth 15% Total Revenue Growth Y-o-Y Q2 Results (y/y) 10% 5% 0% Regional Banks: 7.0% Trust Banks: 5.5% Money Center Banks: 2.5% -5% Money Center Trust Banks Regional Banks Moderate loan growth and NIM expansion driving revenue growth, trends which we expect to continue Regional banks, most of which are asset sensitive, are leading the charge amid higher interest rates Source: S&P Global Ratings; Company Filings 5

6 $ billions 50% 40% 30% 20% 10% 0% -10% -20% Capital markets revenue declined in Q2 Y-o-Y Change in Quarterly Capital Markets Revenues Total Capital Markets Revenues % 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 0 FICC Equity Investment Banking Total Capital Markets Revenue Weaker FICC hurt total revenue growth Lower volatility and tough comparison with Q which was impacted by Brexit were the main drivers Source: S&P Global Ratings; Company Filings. Group Includes BAC, C, GS, JPM, MS 6

7 NIMs have started to rise following years of contraction 3.8 Median Rated Bank NIM % Regionals Money Center 2.0 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17 Higher rates on loans and securities, coupled with only slightly higher deposit rates drove the NIM improvement We think that potential additional rate hikes will further benefit NIMs throughout 2017 and 2018 Note: All numbers exclude GS & MS Source: S&P Global Ratings; Company Filings 7

8 Loan growth rebounded from first quarter 8% 7% 6% 5% 4% 3% 2% 1% 0% Year on year loan growth 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 Loan growth was moderate and rebounded from the lull in the first quarter We expect loan growth to be moderate throughout 2017 and 2018 Note: Growth of average loans for all banks we rate 8

9 Continued broad based loan growth (Regional Banks) Q vs. Q Regional Banks Cumulative Loan Growth (%) 80% 67% 60% 53% 45% 43% 40% 32% 25% 20% 5% 0% 0% 5% 10% 15% 20% 25% 30% 35% -20% -18% Auto Multifamily C&I Commercial Mortgage Construction Credit Cards First Mortgage Home Equity -40% % of Total Loans* Continued broad based loan growth, except for home equity loans Construction and multifamily exhibiting particularly strong growth Note: Figures reflect aggregated call report data from operating bank subsidiaries of rated bank holding companies *All loan types are included in the calculation of % of total loans for all rated banks, though some loan types are not shown in the chart Source: S&P Global Ratings; Call Reports 9

10 Continued broad based loan growth (Money Center Banks) Q vs. Q % Money Center Banks Cumulative Loan Growth (%) 100% 80% 84% 60% 40% 47% 38% 20% 27% 33% 11% 8% 0% 0% 5% 10% 15% 20% 25% 30% -20% -40% -49% -60% Auto Multifamily C&I Commercial Mortgage Construction Credit Cards First Mortgage Home Equity -80% % of Total Loans* Continued broad based loan growth, except for home equity loans Multifamily, commercial mortgage and credit cards fueling growth Note: Figures reflect aggregated call report data from operating bank subsidiaries of rated bank holding companies *All loan types are included in the calculation of % of total loans for all rated banks, though some loan types are not shown in the chart Source: S&P Global Ratings; Call Reports 10

11 Provisions are likely to rise and weigh on profit growth Reserves/Loans and Provision Growth Bank Profitability % % % % % % 28% % 24% 0.5 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17-22% Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17 Median Reserves to Loans (%, lef t scale) Loan Loss Provisions ($ billions, right scale) Median Pretax Pre-Provision Margin Median Pretax Margin Provisions are likely to trend higher, following a pause in recent quarters The ratio of reserves to loans has likely reached a low and we expect it to rebound modestly Source: S&P Global Ratings; Company Filings All rated banks, excludes MS & GS 11

12 Focus remains on containing operational costs Median Efficiency Ratio For Rated Banks % Q1 '09 Q2 '09 Q3 '09 Q4 '09 Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17 Regional Banks Money Center Banks Banks continue to focus on controlling expense growth, partially by closing branches and limiting growth in headcount Savings have been partially offset by increasing technology costs and elevated legal and regulatory expenses However, we expect positive operating leverage from prudent expense growth and potentially moderating regulatory costs Source: S&P Global Ratings; Company Filings 12

13 Asset Quality 13

14 Asset quality will likely deteriorate from benign levels 2.0% 1.8% Non Accruals and NCOs to Total Loans 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 NonAccruals/Total Loans (Gross) Annualized Net Charge-offs/ Avg Loans (Gross) Net charge-offs remain below historical levels, but we anticipate this trend may reverse because of weakness in consumer loan categories, pockets of CRE, or leveraged loans Source: S&P Global Ratings; Company Filings All rated banks, excludes GS & MS 14

15 Reserve build likely to resume 60% Reserve Releases/Pre-tax Profit 9% Aggregate Criticized Loans / Total Loans 50% 8% 7% 40% 30% 6% 5% Money Center Regional Banks 20% 4% 10% 3% 2% 0% 1% -10% 2010Q2 2010Q4 2011Q2 2011Q4 2012Q2 2012Q4 2013Q2 2013Q4 2014Q2 2014Q4 2015Q2 2015Q4 2016Q2 2016Q4 2017Q2 0% We expect net reserve build for 2017, with provisions outpacing net-charge offs at most banks Source: S&P Global Ratings; Company Filings All rated banks; excludes GS & MS 15

16 Annual net charge-offs well below historical levels Loan Category Construction and Development Loans (0.03) (0.17) 5.66% Closed End Real Estate Loans Secured by 1-4 Family Residential Properties** 0.02 (0.02) 0.16 (0.14) 1.79% Home Equity Lines of Credit 0.13 (0.10) 0.23 (0.10) 2.90% Real Estate Loans Secured by Nonfarm Nonresidential Properties (0.09) 1.25% Commercial & Industrial Loans (0.11) 2.39% Credit Cards 3.66 (0.07) 4.38 (0.72) 9.78% Other Loans to Individuals 0.73 (0.34) 1.06 (0.33) 3.00% Auto loans** 0.69 (0.14) % Total Loans & Leases 0.48 (0.01) 0.60 (0.12) 2.56% Note: *Q2 17 net charge-offs estimated by aggregating call report data; **Auto loan data only available from Q1 2011; Closed End Real Estate Loans Secured by 1-4 Family Residential Properties data only available as of 2002 Source: S&P Global Ratings, Regulatory Filings, and the FDIC. 16

17 Federal Reserve Senior Loan Survey July Percentage of Banks Tightening Standards for CRE % Net Stronger Demand for CRE Loans Construction and land development Multifamily Nonfarm nonresidential (CRE) Construction and land development Nonfarm nonresidential (CRE) % Changes in C&I Lending Standards Vs. Loan Demand Changes in Credit Card Lending Standards Vs. Demand Net Tightening in Lending Standards to Large and Midsize Businesses Net Stronger Demand for C&I Loans By Large and Midsize Businesses Net Stronger Demand for Credit Cards Banks tightened standards for CRE, auto and credit cards; C&I unchanged Source: Federal Reserve 17

18 Banks with significant auto concentrations Consumer Auto Exposure of Rated US Banks, 1Q 17 $ mil except ratios, based on regulatory financials Displays only banks with retail auto loans > 10% of total loans and leases Retail Auto Auto / Auto NCOs / Avg. Loans Auto Days Past Due Company Assets Loans Loans & Leases 1Q17 LTM Y/Y Change 1Q17 LTM Y/Y Change MEDIAN 137,655 11, % 1.34% 0.16% 1.92% 0.06% Ally Financial Inc. 162,101 58, % 1.45% 0.39% 2.54% 0.18% Santander Holdings USA, Inc. 135,109 26, % 8.33% 1.16% 8.58% 0.77% OFG Bancorp 6, % 1.95% -0.44% 8.86% -3.75% Capital One Financial Corporation 348,549 49, % 1.69% -0.01% 5.03% -0.11% TCF Financial Corporation 21,848 3, % 1.23% 0.33% 0.41% 0.05% Huntington Bancshares Incorporated 100,046 11, % 0.38% 0.13% 0.71% 0.06% Citizens Financial Group, Inc. 150,690 12, % 0.74% 0.16% 1.29% 0.37% Conditions in auto lending and leasing have deteriorated and we expect losses will increase Source: S&P Global Ratings; Regulatory Filings 18

19 Credit card net charge-offs 6 Credit Card Net Charge-Offs/Average Credit Card Loans 5 Synchrony Financial % American Express Co. Bank of America Corp. Capital One Financial Corp. Citigroup Inc. Discover Financial Services JPMorgan Chase & Co Y 2013Y 2014Y 2015Y 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 Net charge-offs on the rise from benign levels Source: S&P Global Mark Intelligence and Company Regulatory Filings 19

20 Banks with sizable CRE exposures New York Community Bancorp, Inc. Valley National Bancorp Astoria Financial Corporation S&T Bancorp, Inc. Western Alliance Bancorporation Synovus Financial Corp. People's United Financial, Inc. East West Bancorp, Inc. First Midwest Bancorp, Inc. BancorpSouth, Inc. M&T Bank Corporation Cullen/Frost Bankers, Inc. Trustmark Corporation BOK Financial Corporation Zions Bancorporation Associated Banc-Corp Texas Capital Bancshares, Inc. Popular, Inc. First Republic Bank UMB Financial Corporation CRE Loans as % of Total Loans Multifamily Non-Owner-Occupied Construction & Development 0% 20% 40% 60% 80% 100% Multi-family, retail and suburban office are potential troubled spots Note: Total CRE loans, include s C&D, non-owner-occupied, and multifamily. Does not include owneroccupied CRE or real estate loans in foreign offices; All data as of Q1 17. Source: Regulatory Filings; Federal Reserve (Index rebased to 100 as of Dec. 31, 2004) Commercial Mortgage Debt Outstanding Banks 6.3% 11.8% 8.6% 11.0% 9.8% 52.4% U.S. Real Estate Prices Insurance Companies Federal Agencies Agency CMBS CMBS Individuals & Other RCA Commercial Property Price Index FHFA Home Purchase-Only (SA) Note: SA means seasonally adjusted Source: Real Capital Analytics, FHFA, 20

21 Shared National Credit Exam 2017 Problem SNCs remain elevated relative to pre-crisis levels because of leveraged loans and energy Source: Board of Governors of the Federal Reserve System,Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency 21

22 Interest Rate Sensitivity 22

23 NIM modestly higher after three rate hikes % Effective Federal Funds Rate % Average Loans & Leases Average Earning Assets Average Interest-Bearing Deposits Deposit betas remain low Median Bank Yields and Costs Q4 '16 Q1 '17 Q2 ' Average Interest-Bearing Liabilities Net Interest Margin Source: Regulatory Filings; FRED 23

24 1993Q4 1994Q1 1994Q2 1994Q3 1994Q4 1995Q1 1995Q2 1995Q3 1995Q4 1996Q1 1996Q2 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 Cumulative Change (%) Deposit Beta (%) Rate sensitivity of interest bearing deposits (20) (40) (60) Mid 90s Mid 2000s Current Cycle Cumulative change in deposit costs Cumulative change in fed funds rate Deposit Beta Note: Mid 90s: YE 1993 to Q Mid 2000s: Q to YE 2006 Current Cycle: Q to Q Deposit Beta is the cumulative percentage change in deposit costs divided by the cumulative change in the effective fed funds rate Deposit betas increased significantly following the initial rate hikes during the past two rising rate cycles Source: Regulatory Filings; FRED 24

25 Capital 25

26 Capital has continued to rise gradually 12.2 Median Tier 1 Risk Based Ratio % Q4 2016Q1 2016Q2 2016Q3 2016Q4 Q Q Capital has continued to rise, although that trend may reverse Source: Bank Regulatory Filings, S&P Global Market Intelligence 26

27 All eight U.S. GSIBs are above their required regulatory minimums Company Q Tier 1 Common Equity Ratio Basel III Fully Phased-in-- QoQ Change (in bps) Approach US Fed GSIB Surcharge (Method 2*) Basel III Minimum** Current Surplus (deficit) from fully phased in Basel III CET1 Requirement** Bank of America 11.5% 50 A 2.5% 9.5% 2.0% Citigroup 13.1% 30 A 3.0% 10.0% 3.1% JPMorgan Chase 12.5% 10 S 3.5% 10.5% 2.0% Wells Fargo 11.6% 40 S 2.0% 9.0% 2.6% Morgan Stanley 15.9% (70) A 3.0% 10.0% 5.9% Goldman Sachs 12.2% (30) A 2.5% 9.5% 2.7% Bank of New York Mellon 10.4% 40 A 1.5% 8.5% 1.9% State Street 11.0% 10 S 1.5% 8.5% 2.5% *The Method 2 GSIB surcharge framework produces a score for each firm derived from five attributes: size, interconnectedness, complexity, cross-jurisdictional activity and a measure of a firm s reliance on short-term wholesale funding. **Including the Fed GSIB surcharge; A: Advanced Approach, S: Standardized Approach The Fed G-SIB surcharges (which are higher than the global averages) have been phased-in since January 2016 Though U.S. GSIB s have reduced their size, complexity and interconnectedness (lower L3 assets, OTC notionals and nonoperational deposits), we believe it would be difficult to further reduce the GSIB buffers barring regulatory changes Source: S&P Global Ratings; Company Filings 27

28 However, capital now likely to plateau or fall Estimated capital return following CCAR results as a % of 2017 consensus estimated earnings (median = 102%) Regions Financial Corp. 163 The Bank of New York Mellon Corp. 99 Citigroup Inc. 136 Ally Financial Inc. 98 Fifth Third Bancorp 123 M&T Bank Corp. 98 Discover Financial Services 122 Wells Fargo & Co. 93 Zions Bancorporation 116 Bank of America Corp. 91 BB&T Corp. 115 State Street Corp. 90 JPMorgan Chase & Co. 115 KeyCorp 84 American Express Co. 112 CIT Group Inc. 82 SunTrust Banks Inc. 108 U.S. Bancorp 79 Morgan Stanley 107 Huntington Bancshares Inc. 73 The PNC Financial Services Group Inc. 104 Capital One Financial Corp. 71 Comerica Inc. 103 BBVA Compass Bancshares Inc. 54 Citizens Financial Group Inc. 102 Santander Holdings USA Inc. 7 Northern Trust Corp. 102 The Goldman Sachs Group Inc.* NA Shareholder distributions may exceed earnings over the year However, some banks may not pay out as much as allowable under their plans Source: S&P Global Ratings, Company CCAR Disclosures, Bloomberg L.P. *Goldman Sachs has not disclosed its plans for shareholder distributions 28

29 Regulatory Hot Topics 29

30 Regulatory overview Possible Regulatory & Legislative Changes: Annual stress testing Title II/OLA Living wills The Volcker Rule Higher thresholds for enhanced prudential standards and stress testing Regulatory oversight of well capitalized banks Separation of traditional bank and nonbank businesses Asset threshold for stricter regulation and oversight Role and power of the CFPB Tax deductibility of interest Corporate tax rate Stress testing process and assumptions Calculation of SLR, SLR buffer and G-SIB buffers Application and calculation of LCR Mandatory minimum debt ratio included in the TLAC rule 30

31 Treasury report on financial reform In a June report, the Treasury recommended a long list of regulatory reforms pertaining to financial institutions, the CFPB, and the mortgage market. Those recommendations could largely only be enacted by Congress or regulators and the probability of that occurring is unclear. However, if enacted, some of the recommendations could lead to lighter regulation on banks and potentially a reduction in capital and liquidity. That could cause us to: Lower ratings on banks over time that materially weakened their financial management in response to regulatory change. Consider reassessing our view of the industry risk of the U.S. banking system (one component of our ratings on all U.S. banks), which has been supported enhanced regulation in recent years. 31

32 Treasury report implications for capital & stress testing Recommendation made in Treasury report Raise threshold for enhanced prudential standards above $50 bil (including for CCAR) Raise company-run DFAST threshold to $50 bil Reassess CCAR assumptions of continued capital distributions and balance sheet growth SLR: Exclude cash on deposit with central banks, U.S. Treasury securities, and initial margin for centrally cleared derivatives from the denominator G-SIB surcharge and calibration of enhanced SLR buffer should be revisited Changes could be made by: Congress Congress Regulators Regulators Regulators Notes: Could lower regulation on several banks (7 banks had assets of $50 bil- $100 bil and 15 had $100 bil - $250 bil) About 60 banks had assets of $10 bil - $50 bil Dividends and growth respectively caused the CET1 ratio to fall about 0.8% and 0.7% at the median in DFAST We estimate excluding cash at the Fed and Treasuries (AFS & HTM) alone would boost enhanced SLRs by roughly bps Could reduce minimum capital requirements Creating "off-ramp" for lessening the regulatory oversight for banks that comply with specified capital requirements Congress Could lead to more risk-taking for banks that pursue this 32

33 Treasury report additional implications Recommendation made in Treasury report Apply LCR only to G-SIBs and a less stringent standard to internationally-active banks; improve degree of conservatism in cash flow assumptions to reflect historical experience Living Wills: Guidance relating to liquidity and capital that can effectively act as regulatory requirements should be minimized Remove Title II/OLA (recommendation from Choice Act rather than Treasury report) Changes could be made by: Regulators Regulators Congress Notes: Would release many banks of $50 bil + from LCR and potentially make the measurement less stringent Guidance relating to positioning capital and liquidity in the resolution process theoretically can force banks to hold more capital or liquidity than other regulations would require Would weaken the justification for incorporating ALAC uplift in G-SIB ratings 33

34 Q&A 34

35 Appendix 35

36 Current U.S. bank holding company ratings distribution 35% HoldCo Ratings Distribution 30% 25% 20% 15% 10% 5% 0% AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ 8/11/ /31/2016 Source: S&P Global Ratings Includes Puerto Rican banks 36

37 Current bank holding company ratings outlooks Ratings Outlook Distribution 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Money Center Banks 3 1 Regional Banks Trust Banks 3 Broker Dealers 2 Total HoldCo Ratings Positive Stable Negative Money Center Banks: WFC, BAC, C, JPM Broker Dealers: MS, GS Trust Banks: BK, NTRS, STT Source: S&P Global Ratings Includes Puerto Rican banks Data as of 8/11/17 37

38 DFAST burndown 2017 large banks Bank 2016Q4 CET1 Ratio 2019Q1 Change in CET1 Ratio (% point) Asset Growth Net Revenue Estimated Change in CET1 Ratio Due to: Provisions, Sec, Trading & Other Losses Pretax Loss Common + Pref. Dividends Other Bank of America Corp. 12.1% 8.9% -3.2% -0.8% 2.9% -4.8% -1.9% -0.7% 0.3% Citigroup Inc. 14.9% 10.8% -4.1% -1.1% 4.4% -5.2% -0.9% -0.5% -1.5% The Goldman Sachs Group Inc. 14.5% 9.4% -5.1% -0.7% 1.2% -5.8% -4.6% -0.8% 1.0% JPMorgan Chase & Co. 12.5% 9.2% -3.3% -1.0% 4.5% -5.8% -1.2% -1.3% 0.3% Morgan Stanley 17.8% 11.1% -6.7% -1.0% 1.4% -5.5% -4.1% -1.3% -0.4% U.S. Bancorp 9.4% 7.6% -1.8% -0.8% 5.8% -5.4% 0.4% -1.5% 0.2% Wells Fargo & Co. 11.1% 8.8% -2.3% -0.9% 5.3% -5.0% 0.4% -1.8% 0.0% Bank of New York Mellon Corp. 12.3% 12.8% 0.5% -0.8% 6.9% -1.6% 5.2% -1.4% -2.5% State Street Corp. 11.6% 8.7% -2.9% -0.8% 4.2% -2.1% 2.1% -1.7% -2.6% Northern Trust Corp. 11.8% 11.0% -0.8% -0.8% 4.3% -2.6% 1.7% -1.2% -0.4% 38

39 Funding & liquidity metrics remain supportive Stable Funding Ratio Broad Liquid Assets to Short-Term Wholesale Funding 250% 8.00x 200% 7.00x 6.00x 150% 100% 50% 5.00x 4.00x 3.00x 2.00x 1.00x 2016 Q Q Q Q Q1 0% Regional Bank Money Center Bank Broker-Dealers Trust Banks.00x Regional Bank Money Center Bank Broker-Dealers Though the overall liquidity at both regional and trust banks has deteriorated somewhat in the last few quarters Trust Banks Note: Funding & liquidity ratios derived by aggregating the numerators and denominators of the banks in each peer group Source: S&P Global Ratings; Regulatory Filings 39

40 Possible changes to the corporate tax rate 40 Effective Tax Rates of the Largest U.S. Banks and Corporates % 20 Corporates 15 Banks 10 5 Average effective tax rate for both groups was 28% *Note: By asset size as of Dec , tax rates are three year averages Source: S&P Global Ratings; S&P Global Market Intelligence; Company Filings 40

41 Consolidated supplementary leverage ratios meet minimum thresholds Holdco. Supplementary Leverage Ratio (%) Double Leverage Ratio (%) Company Q2'17 Q1' Bank of America Corp Citigroup Inc JPMorgan Chase & Co Wells Fargo & Co Goldman Sachs Group Inc Morgan Stanley Bank of New York Mellon Corp State Street Corp Based on the banks estimated supplementary leverage ratio rules (fully-phased in basis) Source: S&P Global Ratings; Company Filings 41

42 Sub-groups of rated banks Money Center Banks Bank of America Corporation Citigroup Inc. JPMorgan Chase & Co. Wells Fargo & Company Northern Trust Corporation State Street Corporation The Bank of New York Mellon Corporation Morgan Stanley Trust Banks Broker Dealers The Goldman Sachs Group, Inc. Large Regional Banks American Express Company BB&T Corporation Capital One Financial Corporation Comerica Incorporated Fifth Third Bancorp Huntington Bancshares Incorporated KeyCorp M&T Bank Corporation PNC Financial Services Group, Inc. Regions Financial Corporation SunTrust Banks, Inc. U.S. Bancorp Zions Bancorporation Regional Banks American Savings Bank, F.S.B. Associated Banc-Corp Astoria Financial Corporation BancorpSouth Inc. Bank of North Dakota Bank of the West BBVA Compass Bancshares, Inc. BMO Financial Corp. BOK Financial Corp. Citizens Financial Group, Inc. Commerce Bancshares, Inc. Cullen/Frost Bankers, Inc. Discover Financial Services East West Bancorp, Inc. First Citizens Bank & Trust Co. First Hawaiian Bank, Inc. First Midwest Bancorp, Inc. First Republic Bank FirstBank PuertoRico Hancock Holding Company HSBC USA Inc. MUFG Americas Holdings Corporation New York Community Bancorp, Inc. OFG Bancorp People's United Financial, Inc. Popular, Inc. S&T Bank Santander Holdings USA, Inc. SLM Corporation SVB Financial Group Synchrony Financial Synovus Financial Corp. TCF Financial Corporation Texas Capital Bancshares, Inc. Trustmark Corporation UMB Financial Corporation Valley National Bancorp Webster Financial Corporation Western Alliance Bancorporation Large Regional Banks included with Regional Banks throughout in the presentation. Data in the presentation may exclude certain domestic subsidiaries of foreign banks & certain other banks that do not file Y9C s 42

43 Additional research available Click to see the following research articles, or find more at U.S. Banks Pass Stress Test, But Rising Payouts May Weigh On Capital, June 29, 2017 U.S. Banks Are Increasing Their Commercial Real Estate Lending--But At What Risk?, May 5, 2017 Fiscal Austerity In Puerto Rico Will Weigh On Bank Ratings Despite Banks' Improving Financial Performance, April 25, 2017 Global Investment Banks' Revenues Rise Amid Talk Of Regulatory Relief, April 12, 2017 What Financial Regulations May Be Affected By The Trump Administration, And How They Can Affect Ratings, March 20, 2017 Assessing The Final U.S. Total Loss-Absorbing Capacity Rule And Its Impact On Bank Ratings, February 13, 2017 Various Rating Actions Taken On Several U.S. Regional Banks With Large Energy Exposures, February 10, 2017 Funding Has Improved For Most U.S. Banks In Recent Years, But Outliers Deserve Further Consideration, January 23, 2017 Policy Uncertainty And Rising Rates Pose Risks In North America, But Faster Growth May Help, December 5, 2016 An Early Read On How The Trump Administration Could Affect U.S. Financial Services--And Its Credit Profile, November 16, 2016 What The Biggest U.S. Banks' Revised Living Wills Mean For Ratings October 6,

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