U.S. Banking Sector: Which Way Will it Trend?

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1 U.S. Banking Sector: Which Way Will it Trend? November 16, 2017 Live Webcast and Q&A Copyright 2017 by S&P Global. All rights reserved.

2 Recent rating actions Company To From Key Driver of Rating/Outlook Action Date Regions Financial Corp. BBB+/Stable/A-2 BBB/Positive/A-2 Investors Bancorp BBB-/Stable/-- --/--/-- Goldman Sachs BBB+/Stable/A-2 BBB+/Stable/A-2 Established a track record of steady performance and conservative risk management, which is comparable to higher rated regional peers. Ratings reflect good loan performance, improved diversification within loan portfolio, and strong capital ratios. Rapid loan growth, various geographic and loan type concentrations, and below average funding profile somewhat offset its strengths. We removed the UCO designation from the hybrid ratings, which we applied following the publication of our new RAC framework criteria. 11/13/ /7/ /26/2017 Morgan Stanley BBB+/Stable/A-2 BBB+/Stable/A-2 We raised the hybrid ratings by one notch, incorporating improved capital and earnings into the stand-alone analysis. 10/26/2017 OFG Bancorp B/Negative/-- B/Stable/-- Popular Inc. BB-/Negative/B BB-/Stable/B FirstBank Puerto Rico* B+/Negative/-- B+/Stable/-- Astoria Financial Corporation NR BBB-/Stable/-- Heightened uncertainties for the Puerto Rican economy following substantial damage to the island from Hurricane Maria. Ratings affirmed and withdrawn following the company s acquisition by Sterling Bancorp. 10/8/ /2/2017 SunTrust Banks Inc. BBB+/Positive/A-2 BBB+/Stable/A-2 Continued efforts to diversify and reduce risk in its loan portfolio. 9/22/2017 UMB Financial Corp. A-/Negative/A-2 A-/Stable/A-2 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/-- Announced acquisition of USAmeriBancorp Inc. 7/26/2017 Huntington Bancshares Inc. BBB/Positive/-- BBB/Stable /-- BancorpSouth, Inc. BBB-/Stable/-- BBB-/Positive/-- KeyCorp BBB+/Stable/A-2 BBB+/Negative/A-2 Astoria Financial Corporation BBB-/Stable/-- BBB-/Watch Dev/-- 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. We believe the risks of operational, regulatory, and cultural complications associated with the First Niagara acquisition have receded. 7/24/2017 7/12/2017 6/20/2017 Credit Watch removed as we expect the acquisition by Sterling Bancorp to be neutral to ratings. 6/2/2017 Note: Actions reference bank holding companies unless marked with an * Source: S&P Global Ratings 2

3 Our outlook for U.S. banks Improving Neutral Worsening Revenues Expect revenues to rise moderately on the back of recent increases in margins offset by somewhat weaker loan growth. Fee income growth prospects look modest and mortgage volumes continue to be lackluster. Expenses Profitability Credit Quality 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 should improve due to a pickup in revenues 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. We expect credit quality to deteriorate incrementally and reserves to build from current levels, while noting that NPAs and NCOs still remain historically low. Specific areas of potential risk include: energy, leveraged loans, retail, autos and some pockets of CRE. Capital Funding & Liquidity 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. Most banks are 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 Q3 Results 4

5 NIM expansion driving revenue growth 15.0% Total Revenue Growth Y-o-Y 10.0% Q3 Revenue (Y-o-Y) Regional Banks: 7.7% 5.0% Trust Banks: 5.6% 0.0% Money Center Banks: 0.3% -5.0% Money Center Trust Banks Regional Banks At the median, NIMs rose roughly 22 bps compared to the prior year and 6 bps during the quarter for US banks we rate Combined with mid-single-digit annual loan growth, that drove net interest income up by double digits for many banks A decline in capital markets activity slowed the revenue growth of the money center banks Source: S&P Global Ratings; Company Filings 5

6 Loan growth sluggish 7% Yr-on-Yr Loan Growth 6% 5% 4% 3% 2% 1% 0% 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 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 calculated from average loans for rated banks 6

7 NIMs are rising 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 Q3'17 Higher rates on loans and securities have driven NIM improvement, although deposit costs have ticked up as well S&P Global expects a rate hike in December and three more in 2018, which should further support NIM expansion Note: All numbers exclude GS & MS Source: S&P Global Ratings; Company Filings 7

8 (%) NIMs higher after four rate hikes Effective Federal Funds Rate Bank Yields and Costs All Commercial Banks Average Loans & Leases Average Earning Assets Average Interest-Bearing Deposits Q3 '16 Q4 '16 Q1 '17 Q2 '17 Q3'17 Average Interest-Bearing Liabilities Net Interest Margin Deposit betas remain low Source: Regulatory Filings; FRED 8

9 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 2017Q3 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 9

10 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 3Q16 YTD 3Q17 YTD $ billions $ billions Capital markets revenue declined in Q3 Y-o-Y Change in Quarterly Capital Markets Revenues 35 Total Capital Markets Revenues 90 50% 40% 30% 20% 10% 0% -10% YTD Results Total: 1.1% FICC: -6.6% Equity: 0.5% IB: 16.7% % % 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q FICC Equity Investment Banking Total Capital Markets Revenue 0 0 A decline in FICC revenue, partially due to reduced volatility, weighed on revenue growth 3Q16 benefited from volatility following the Brexit vote, making comparisons this year difficult Source: S&P Global Ratings; Company Filings. Group Includes BAC, C, GS, JPM, MS 10

11 Provisions inched higher in 3Q and likely will rise further Reserves/Loans and Provision Growth % 38% 36% Bank Profitability YTD Results Pretax Pre-provisions: 36.8% Δ1.5% Pretax Margin: 32.7% Δ2.0% ROE: 9.1% Δ0.8% 10.0% 9.5% % 32% 30% 9.0% 8.5% % 8.0% % 24% 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 Q3 '17 7.5% 7.0% 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 Q3 '17 Median Reserves to Loans (%, lef t scale) Loan Loss Provisions ($ billions, right scale) Loan growth, hurricanes, and a decline in pockets of consumer credit quality contributed to the rise in provisions We expect the ratio of reserves to loans to rise gradually further 0 Median Pretax Pre-Provision Margin (left scale) Median Pretax Margin (left scale) Median Return on Average Shareholders' Equity (right scale) Source: S&P Global Ratings; Company Filings All rated banks, excludes MS & GS 11

12 Focus remains on containing operational costs 80 Median Efficiency Ratio For Rated Banks YTD Change: Regional Banks: Δ(2.07) Money Center Banks: Δ(0.55) 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 Q3 '17 Regional Banks Money Center Banks Revenue growth has outpaced expense growth for many banks, driving some improvement in efficiency ratios We believe those ratios could improve further as banks continue to focus on cost controls Source: S&P Global Ratings; Company Filings 12

13 Asset Quality 13

14 Asset quality remains at 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 2017Q3 NonAccruals/Total Loans (Gross) Annualized Net Charge-offs/ Avg Loans (Gross) Asset classes most susceptible to deterioration include leveraged C&I, construction, multifamily, auto, and credit cards Source: S&P Global Ratings; Company Filings All rated banks, excludes GS & MS 14

15 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q 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% 0% Credit provisions likely to match net charge-offs in 2018 Source: S&P Global Ratings; Company Filings All rated banks; excludes GS & MS 15

16 Aggregate net charge-offs remain below historical levels Loan Category Construction and Development Loans -0.01% 0.04% % 5.66% Closed End Real Estate Loans Secured by 1-4 Family Residential Properties** 0.02% 0.00% % 1.79% Home Equity Lines of Credit 0.17% 0.04% % 2.90% Real Estate Loans Secured by Nonfarm Nonresidential Properties 0.03% 0.00% % 1.25% Commercial & Industrial Loans 0.34% -0.05% % 2.39% Credit Cards 3.40% -0.33% % 9.78% Other Loans to Individuals 0.88% 0.15% % 3.00% Auto loans** 0.94% 0.25% % 0.94% Total Loans & Leases 0.46% -0.02% % 2.56% Note: *Q3 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 October % Percentage of Banks Tightening Standards for CRE Loans % Net Stronger Demand for CRE Loans Construction and land development Nonfarm nonresidential (CRE) Multifamily Construction and land development Nonfarm nonresidential (CRE) Multifamily % Changes in C&I Lending Standards Vs. Loan Demand % Changes in Credit Card Lending Standards Vs. Loan 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 Net Tightening in Lending Standards On balance, banks tightened standards for CRE and eased standards for C&I Source: Federal Reserve 17

18 Soft loan growth in the third quarter (Money Center Banks) Cumulative Growth: YE 2011 to Q % Money Center Banks Key -- Loan Type: {Q/Q}; [Y/Y] 80% 60% 40% 20% 0% -20% Multifamily:{-1%}; [5%] Commercial Mtg: {0%}; [2%] Credit Cards: {1%}; [2%] Auto: {-1%}; [-4%] Construction: {0%}; [10%] % of total loans at Q3 17 C&I : {0%}; [3%] First Mtg: {1%}; [3%] -40% -60% Home Equity: {-4%}; [-15%] 0% 5% 10% 15% 20% 25% 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 18

19 Soft loan growth in the third quarter (Regional Banks) Cumulative Growth: YE 2011 to Q % Auto: {2%}; [4%] Regional Banks Key -- Loan Type: {Q/Q}; [Y/Y] 60% Multifamily: {-1%}; [2%] Commercial Mtg {0%}; [3%] C&I : {0%}; [1%] 40% 20% 0% Construction: {0%}; [4%] Credit Cards: {5%}; [9%] First Mtg: {0%}; [0%] % of total loans at Q % Home Equity: {-1%}; [-5%] -40% 0% 5% 10% 15% 20% 25% 30% 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 19

20 Banks with sizable CRE exposures New York Community Bancorp, Inc. Investors Bancorp, Inc. Valley National Bancorp S&T Bancorp, Inc. Western Alliance Bancorporation Synovus Financial Corp. People's United Financial, Inc. East West Bancorp, Inc. M&T Bank Corporation First Midwest Bancorp, Inc. Trustmark Corporation Cullen/Frost Bankers, Inc. BOK Financial Corporation Zions Bancorporation Associated Banc-Corp Popular, Inc. Texas Capital Bancshares, Inc. First Republic Bank UMB Financial Corporation MUFG Americas Holdings CRE Loans as % of Total Loans Multifamily Non-Owner-Occupied Construction & Development 0% 20% 40% 60% 80% 100% Multifamily, C&D, 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 Q2 17. Source: Regulatory Filings; Federal Reserve (Index rebased to 100 as of Dec. 31, 2004) Commercial Mortgage Debt Outstanding 6.4% 11.7% 8.6% 11.1% 9.8% $4.2 trillion 52.4% U.S. Real Estate Prices Banks 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, Bloomberg 20

21 Banks with significant auto concentrations Consumer Auto Exposure of Rated US Banks, 2Q 17 $ millions 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 2Q17 LTM Y/Y Change 2Q17 LTM Y/Y Change MEDIAN 134,756 12, % 1.52% 0.22% 2.93% 0.11% Ally Financial Inc. 164,345 59, % 1.52% 0.38% 2.93% 0.15% Santander Holdings USA, Inc. 134,756 27, % 8.74% 1.23% 9.81% 0.18% OFG Bancorp 6, % 1.75% -0.71% 9.26% -1.49% Capital One Financial Corporation 350,593 51, % 1.81% 0.13% 5.40% -0.19% TCF Financial Corporation 22,071 3, % 1.20% 0.27% 0.53% 0.11% Huntington Bancshares Incorporated 101,407 11, % 0.43% 0.19% 0.67% -0.06% Citizens Financial Group, Inc. 151,993 12, % 0.81% 0.22% 1.65% 0.54% Conditions in auto lending and leasing have deteriorated and we expect losses will increase Source: S&P Global Ratings; Regulatory Filings 21

22 Capital & Liquidity 22

23 Capital levels may have peaked 15% Aggregate CET Ratio (%) 14% 13% 12% 11% 10% Money Center Broker Dealers Trust Banks Regional Banks All Banks 9% 8% Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17 Q3 '17 Higher payout ratios and continued loan growth will likely weigh on capital levels Note: Fully-phased calculation for money centers, broker dealers, and trust banks. Transitional calculation for regional banks Source: Bank Regulatory Filings, S&P Global Market Intelligence 23

24 We expect RAC ratios to decline modestly going forward S&P RAC Ratio under 2017 criteria (%) Median Q Median Q Money Center Broker Dealers Trust Banks Regional Banks All Banks To change, turn on or off footer: Inset > Header & Footer > Enter / change text > Click Apply All. 24

25 New Risk-Adjusted Capital (RAC) Ratings Methodology MUFG Americas Holdings Corporation Wells Fargo & Co. PNC Financial Services Group, Inc. (The) UMB Financial Corp. Bank of New York Mellon Corp. BB&T Corp. Northern Trust Corp. State Street Corp. OFG Bancorp Bank of America Corp. American Express Company Capital One Financial Corp. Citigroup Inc. SVB Financial Group Goldman Sachs Group Inc. (The) HSBC USA Inc. First BanCorp Webster Financial Corp. Top U.S. Banks with highest positive impact from RAC criteria change New criteria RAC minus old criteria RAC (bps) Top U.S. Banks with highest negative impact from RAC criteria change (200) (180) (160) (140) (120) (100) (80) (60) (40) (20) 0 New criteria RAC minus old criteria RAC (bps) Note: All data as of year-end

26 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 11.9% 40 A 2.5% 9.5% 2.4% Citigroup 13.0% (12) S 3.0% 10.0% 3.0% JPMorgan Chase 12.5% 0 S 3.5% 10.5% 2.0% Wells Fargo 11.8% 22 S 2.0% 9.0% 2.8% Morgan Stanley 16.3% 30 S 3.0% 10.0% 6.3% Goldman Sachs 11.7% (50) A 2.5%*** 9.5% 2.2% Bank of New York Mellon 10.7% 30 A 1.5% 8.5% 2.2% State Street 11.3% 40 S 1.5% 8.5% 2.8% *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 ***Projected to rise to 3% by year-end 2018 The Fed G-SIB surcharges (which are higher than the global averages) have been phased-in since January 2016 Though U.S. GSIBs 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 26

27 Consolidated supplementary leverage ratios meet minimum thresholds Fully-phased Holdco. Supplementary Leverage Ratio (%) Double Leverage Ratio (%) Company Q3'17 Q2'17 Q2' 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 * Source: S&P Global Ratings; Company Filings Note: *Double leverage ratios could be overstated as a result of non-disclosed IHC data 27

28 Living wills driving liquidity into intermediate holding companies Firm Bank of America Corp. Bank of New York Mellon Corp. Citigroup Inc. The Goldman Sachs Group Inc. JPMorgan Chase & Co. Morgan Stanley State Street Corp. Wells Fargo & Co. From the July 2017 Living Will submissions Contractually Binding Mechanism (CBM) X X X X X X X X Triggers X X X X X X X X IHC part of Plan X X X X X X X IHC Operational X X X X X X X Liquidity transferred to IHC in 3Q16 2Q17 1Q17 2Q17 4Q16 1Q17 2Q17 Hold co and IHC: Liquidity + LTM Revenue Ex Dividends from Subsidiaries/ Debt <1 yr. + LTM Op. Expenses + Dividends: LTM Q x 1.40x* 2.03x 1.13x 1.70x 1.74x 0.73x* 3.40x Note: *STT and BK figures only incorporate hold co liquidity as they did not disclose their IHC liquidity. BAC & GS disclosed consolidated hold co and IHC liquidity. MS disclosed hold co liquidity (no IHC). For C, JPM, and WFC, we assume holding company liquidity is cash + government and government agency securities + 25% of other assets that mature within one year + last twelve months revenue (excluding dividends) from subsidiaries Source: Company Disclosures; Regulatory Filings (Y-9LP) Source: S&P Global Ratings; Company Filings 28

29 Regulatory Hot Topics 29

30 Regulatory overview Possible Regulatory & Legislative Changes: Raise threshold for enhanced prudential standards above $50 bil (including for CCAR) Changes could be made by: Congress Notes: Could lower regulation on several banks (7 banks had assets of $50 bil - $100 bil and 15 had $100 bil - $250 bil) Raise company-run DFAST threshold to $50 bil Congress About 60 banks had assets of $10 bil - $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 Regulators Regulators 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 G-SIB surcharge and calibration of enhanced SLR buffer should be revisited Regulators Could reduce minimum capital requirements Creating "off-ramp" for lessening the regulatory oversight for banks that comply with specified capital requirements 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 Volcker Rule: Exempt banks with less than $10 billion from Volcker; simplify the definition of prop trading 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) Congress Regulators Congress / Regulators Regulators Congress Could lead to more risk-taking for banks that pursue this Would release many banks of $50 bil + from LCR and potentially make the measurement less stringent Would alleviate justification of holding trading inventory and could result in higher inventory 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 30

31 Banks between $50 billion and $250 billion in total assets Bank Total Assets ($ billions) State Street Corporation 236 BB&T Corporation 220 SunTrust Banks, Inc. 208 HSBC USA Inc. 198 American Express Company 169 MUFG Americas Holdings Corporation 155 Citizens Financial Group, Inc. 152 Fifth Third Bancorp 142 KeyCorp 137 Northern Trust Corporation 131 Regions Financial Corporation 124 M&T Bank Corporation 120 Huntington Bancshares Incorporated 102 Discover Financial Services 98 Synchrony Financial 93 Bank of the West 90 BBVA Compass Bancshares, Inc. 86 First Republic Bank 84 Comerica Incorporated 72 Zions Bancorporation 66 SVB Financial Group 51 Data as of Q

32 Changes to SLR can free up capital BK STT JPM WFC GS C MS BAC Fully-phased SLR (%) 6.0% 6.1% 6.6% 7.9% 6.3% 7.2% 6.5% 7.0% Adjusted SLR (%) 7.3% 7.1% 7.6% 9.0% 7.0% 7.8% 7.0% 7.6% Difference (bps) Excess Capital Generated ($ billions)** Excess Capital Generated as % of CET1 capital 18% 14% 13% 12% 9% 8% 7% 7% Projected minimum stressed ratio in CCAR 2017: CET1 (%) 9.1% 6.0% 6.9% 7.4% 6.0% 8.0% 7.9% 6.8% SLR (%) 4.8% 3.6% 3.9% 5.3% 3.1% 4.5% 3.2% 4.3% Note: Required minimum capital ratios in CCAR 2017 were 4.5% and 3.0%, for the CET1 and SLR respectively. Data as of Q2 17 Treasury Department s SLR recommendation includes removal of deposits at central banks, treasury securities, and initial margin for centrally cleared derivatives GSIBs may be able to return additional capital if the recommendation is implemented, but it s too early to tell Instead of returning capital, banks could increase their low-risk repo book, boosting market liquidity Note: Adjusted SLR ratio removes cash at the Federal Reserve, AFS and trading book treasury securities, and initial margin for centrally cleared derivatives (if available). **Excess capital generated is the difference between the adjusted and current SLR, multiplied by the adjusted leverage exposure. Source: S&P Global Ratings; Company Filings 32

33 Possible changes to the corporate tax rate 40 Effective Tax Rates of the Largest U.S. Banks and Corporates % Corporates Banks 5 C COF WFC BAC BBT JPM USB PNC BK STT T GE WMT CVX VZ F AAPL XOM MSFT GM Average 3 year effective tax rates for larger banks was 27% vs. 28% for large corporates *Note: Sorted by three year quarterly average tax rate (high to low); constituents include ten largest banks and corporates by three year average assets Source: S&P Global Ratings; S&P Global Market Intelligence; Company Filings 33

34 $ billions Corporate tax rate cut: we expect profitability to benefit in longer term Banks with significant Net DTLs may record one time gains STT STI USB NTRS CFG FITB PNC BK WFC C BAC COF GS MS AXP KEY Banks with significant Net DTAs may take one time write-downs Net DTAs / Total Regulatory Capital (%) C AXP COF BAC MS GS MTB KEY RF CMA Temporary difference DTA not deducted from capital Temporary difference DTA exceeding 10% threshold deducted from capital DTAs arising from net operating loss and tax credit carryforwards Source Regulatory Filings, Net DTAs/DTLs is calculated by subtracting DTLs from DTAs, Data as of 2Q

35 Q&A 35

36 Thank You Devi Aurora Senior Director and Analytical Manager Financial Institutions Stuart Plesser Senior Director Financial Institutions Brendan Browne, CFA Senior Director Financial Institutions Rian Pressman, CFA Director Financial Institutions Jeffrey Feit Ratings Analyst Financial Institutions Evan Pickover Research Assistant Financial Institutions 36

37 Appendix 37

38 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+ 11/15/ /31/2016 Source: S&P Global Ratings Includes Puerto Rican banks 38

39 Current U.S. bank operating company ratings distribution 35% OpCo 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+ 11/15/ /31/2016 Source: S&P Global Ratings Includes Puerto Rican banks 39

40 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 OpCo Ratings Money Center Banks: WFC, BAC, C, JPM Broker Dealers: MS, GS Trust Banks: BK, NTRS, STT Positive Stable Negative Note: Valley National Bancorp (Credit Watch Negative) is included in negative outlook for the purposes of this chart. Data as of 11/15/17. Source: S&P Global Ratings 40

41 Current bank operating 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 OpCo Ratings Positive Stable Negative Money Center Banks: WFC, BAC, C, JPM Broker Dealers: MS, GS Trust Banks: BK, NTRS, STT Note: Valley National Bancorp (Credit Watch Negative) is included in negative outlook for the purposes of this chart. Data as of 11/15/17. Source: S&P Global Ratings 41

42 Funding & liquidity metrics remain supportive 250% Stable Funding Ratio Broad Liquid Assets to Short-Term Wholesale Funding 7.0x 200% 6.0x 150% 100% 50% FY 2014 FY 2015 FY 2016 Q x 4.0x 3.0x 2.0x FY 2014 FY 2015 FY 2016 Q x 0% Regional Bank Money Center Bank Broker-Dealers Trust Banks 0.0x Regional Bank Money Center Bank Broker-Dealers Trust Banks Though the overall liquidity at both regional and trust banks has deteriorated somewhat in the last few quarters 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 42

43 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 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 Puerto Rico Hancock Holding Company HSBC USA Inc. Investors Bancorp 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 presentation. Data in presentation may exclude certain domestic subsidiaries of foreign banks & certain other banks that do not file Y-9Cs 43

44 Additional research available Click to see the following research articles, or find more at A Hypothetical Rating Path For A U.S. Systemic Bank Before And After A Bail-In Resolution, November 14, 2017 Ratings Component Scores For U.S., Canadian, And Bermudian Banks (September 2017), September 29, 2017 Quarterly U.S. Credit Card Quality Index: First Signs Of Tightening Credit Standards Could Mitigate Impact From Recent Subprime Growth, September 13, 2017 The Mid-Year 2017 Global Credit Outlook For Banks Is Largely Stable, But Uncertainties Abound, September 12, 2017 Credit FAQ: How Will U.S. Banks Fare Amid Rising Rates And Deregulation?, August 21, 2017 Higher Net Interest Margins Will Likely Continue To Drive Profit Growth For U.S. Regional Banks, August 14, 2017 Industry Report Card: Higher Rates Supported U.S. Large Banks' Second-Quarter Profitability Amid Difficult Market- Making Conditions, August 11, 2017 Midyear 2017 Outlook For Canadian Banks: Resilience To Be Tested By Macroeconomic Risks, But Operating Leverage And Structural Features Will Help Offset Them, August 4, 2017 Credit FAQ: A Closer Look At How Proposed Bail-in Regulations May Affect Canadian Bank Ratings, July 14, 2017 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,

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