U.S. Banking Sector: Fundamentals Still Positive, but Rates and Regulation Remain Wildcards. May 9, Live Webcast and Q&A

Transcription

1 U.S. Banking Sector: Fundamentals Still Positive, but Rates and Regulation Remain Wildcards May 9, 2017 Live Webcast and Q&A Copyright 2017 by S&P Global. All rights reserved.

2 Year-to-date bank rating actions Company To From Key Driver of Rating/Outlook Action Date First Horizon National Corp. BBB-/Stable/-- BBB-/Stable/-- Ratings affirmed following plans to acquire Capital Bank Financial Corp. 5/5/2017 East West Bancorp, Inc. BBB/Stable/A-2 BBB/Negative/A-2 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 Astoria Financial Corporation BBB-/Watch Dev/NA BBB-/Stable/NA On announced acquisition by Sterling Bancorp 3/8/2017 BBVA Compass Bancshares Inc. BBB+/Stable/A-2 BBB+/Negative/A-2 Comerica Inc. BBB+/Stable/A-2 BBB+/Negative/A-2 Texas Capital Bancshares Inc. BB+/Stable/-- BB+/Negative/-- Regions Financial Corp. BBB/Positive/A-2 BBB/Stable/A-2 Revised outlooks of five banks with substantial energy loan exposures, as we expect gradual asset quality improvement over the next two years in energy lending. In addition, our outlook revisions to positive on two of the banks acknowledge these favorable trends as well as conservative business growth strategies and improved risk management in recent years. 2/10/2017 Zions Bancorporation BBB-/Positive/A-3 BBB-/Stable/A-3 Source: S&P Global Ratings 2

3 Our 2017 outlook for U.S. banks Revenue Expect revenues to rise moderately on the back of continued increase in market interest rates, mid-single-digit loan growth, and improved capital markets activity partly offset by declining mortgage banking activity. Expenses Expect positive operating leverage. Continued cost cutting efforts, including branch consolidation, headcount reduction and digitization, should limit expense growth. Profitability Profitability should improve due to a pickup in revenue and limited expense increases, offset by higher credit provisions, despite provision declines in Q1. Economic growth, the Fed s actions, and capital markets conditions will be important determinants of earnings. Credit Quality Expect asset quality deterioration will tick up in 2017, leading to continued reserve build. Specific areas of potential risk include: energy, leveraged loans, autos and some pockets of CRE. Capital Capital ratios have likely peaked as banks balance their aspirations for growth and shareholder payouts with maintaining 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 Q1 Results 4

5 Higher capital markets, net interest income boosted revenue 30% Total Revenue Growth Y-o-Y 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 Money Center Broker Dealers Trust Banks Regional Banks Q1 Results (y/y) Broker Dealers: 26% Regional Banks: 6% Trust Banks: 5% Money Center Banks: 4% An increase in capital markets activity, especially FICC, drove higher revenues for most of the large banks in Q1 Moderate loan growth and higher interest rates have contributed to the rise in net interest income We expect mid-single-digit revenue growth in 2017 on NIM expansion, loan growth, and perhaps stronger capital markets Source: S&P Global Ratings; Company Filings 5

6 $ billions FICC and investment banking drive capital markets Y-o-Y Change in Quarterly Capital Markets Revenues Total Capital Markets Revenues 35 50% 40% 30% 20% 10% 0% -10% -20% % 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 FICC Equity Investment Banking Total Capital Markets Revenue 0 Capital markets revenues were strong in Q growing 20%, helped by easy year-over-year comparisons FICC trading and investment banking revenues were key contributors, though equity trading continued to lag For 2017, we project capital markets revenue to rise in the high single digit range Source: S&P Global Ratings; Company Filings. Group Includes BAC, C, GS, JPM, MS 6

7 U.S. banks gained market share in capital markets Market Share of 13 Largest Global Banks RBC SocGen BNPP Nomura UBS CS Barclays DB MS BAC GS Citi JPM % 2% 4% 6% 8% 10% 12% 14% 16% 18% Market Share (%) Strong domestic economic activity within the U.S., while European banks have pulled back from certain segments Source: Company Filings Note: The market share is derived by aggregating the revenue from the 13 largest global banks, and dividing each bank s revenue by the total for this peer group 7

8 NIMs have started to rise following years of contraction 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 Moderately higher rates on loans and securities, coupled with only slightly higher deposit rates drove the NIM improvement We expect that previous rate hikes and additional tightening this year will further benefit NIMs throughout 2017 and 2018 Note: All numbers exclude GS & MS Source: S&P Global Ratings; Company Filings 8

9 Provisions are likely to rise and weigh on profit growth ($ bn) Reserves/Loans and Provision Balances % 38% 36% 34% 32% Bank Profitability % 28% Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 ' % 24% 22% Q2 '14Q3 '14Q4 '14Q1 '15Q2 '15Q3 '15Q4 '15Q1 '16Q2 '16Q3 '16Q4 '16Q1 '17 Median Reserves to Loans (%, left scale) Loan Loss Provisions ($ billions, right scale) Median Pretax Pre-Provision Margin Median Pretax Margin Provisions are likely to rise further, partially offsetting revenue growth The ratio of reserves to loans has likely reached a low Source: S&P Global Ratings; Company Filings All rated banks, excludes MS & GS 9

10 Focus remains on containing operational costs (%) Q1 '09 Q2 '09 Q3 '09 Q4 '09 Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Median Efficiency Ratio For Rated Banks 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 Regional Banks Money Center Banks Banks continue to focus on controlling expense growth, partially by closing branches and limiting growth in headcount However, these savings might be partially offset by increasing technology costs and possible legal expenses We expect positive operating leverage in 2017 from continued cost rationalization Source: S&P Global Ratings; Company Filings 10

11 Broad-based loan growth, though slowing in Q1 80% 60% 40% 20% 0% -20% Regional Banks Cumulative Loan Growth (%) Type: {Q/Q}; [% of Total Loans] Auto: {1%}; [6%] Multifamily: {0%}; [4%] C&I : {1%}; [27%] Commercial Mortgage: {0%}; [10%] Construction: {1%}; [3%] Credit Cards: {-6%}; [11%] First Mortgage: {-1%}; [16%] Home Equity: {-2%}; [6%] Total: {-1%}; [100%] -40% 12/31/ /31/ /31/ /31/ /31/ /31/2016 3/31/2017 Regional banks saw moderate year-over-year loan growth in the first quarter, somewhat slower than previous quarters Note: Figures reflect aggregated call report data from operating bank subsidiaries of rated bank holding companies Source: S&P Global Ratings; Call Reports 11

12 Broad-based loan growth, though slowing in Q1 (cont d) 100% 80% 60% 40% 20% 0% -20% -40% Money Center Banks Cumulative Loan Growth (%) Type: {Q/Q}; [% of Total Loans] Multifamily: {0%}; [3%] Commercial Mortgage: {1%}; [5%] Credit Cards: {-5%}; [12%] C&I : {3%}; [24%] Auto: {-2%}; [4%] Construction: {4%}; [1%] First Mortgage: {-1%}; [23%] Home Equity: {-4%}; [6%] Total: {0%}; [100%] -60% 12/31/ /31/ /31/ /31/ /31/ /31/2016 3/31/2017 Money center banks saw moderate year-over-year loan growth in the first quarter, somewhat slower than previous quarters Note: Figures reflect aggregated call report data from operating bank subsidiaries of rated bank holding companies Source: S&P Global Ratings; Call Reports 12

13 Asset Quality 13

14 Asset quality will likely deteriorate from benign levels 2.0% Non Accruals and NCOs to Total Loans 1.8% 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 NonAccruals/ Total Loans (Gross) Annualized Net Charge-offs/ Avg Loans (Gross) Net charge-offs ticked up during the quarter but remain at low levels. Non accruals have continued to decline. Source: S&P Global Ratings; Company Filings All rated banks, excludes GS & MS 14

15 Reserve build likely to resume despite Q4-Q1 drop 60% Reserve Releases/Pre-tax Profit 9% Aggregate Criticized Loans / Total Loans 50% 40% 8% 7% Money Center Regional Banks 30% 20% 6% 5% 4% 10% 3% 0% 2% -10% 2010Q2 2010Q4 2011Q2 2011Q4 2012Q2 2012Q4 2013Q2 2013Q4 2014Q2 2014Q4 2015Q2 2015Q4 2016Q2 2017Q1 2016Q4 1% 0% We expect a net reserve build for the sector in 2017 with provisions outpacing NCOs at most banks Source: S&P Global Ratings; Company Filings All rated banks; excludes GS & MS 15

16 Annual net charge-offs still below historical levels Loan Category Construction and Development Loans -0.04% -0.06% 0.17% -0.21% 8.02% Closed End Real Estate Loans Secured by 1-4 Family Residential Properties** 0.04% 0.01% 0.15% -0.11% 1.81% Home Equity Lines of Credit 0.22% -0.02% 0.22% 0.00% 3.13% Real Estate Loans Secured by Nonfarm Nonresidential Properties 0.02% -0.01% 0.14% -0.11% 2.02% Commercial & Industrial Loans Credit Cards Other Loans to Individuals Auto loans** Total Loans & Leases 0.31% -0.19% 0.57% -0.26% 2.72% 3.72% 0.20% 4.38% -0.66% 13.21% 1.07% 0.11% 1.03% 0.03% 3.04% 0.83% -0.06% 0.55% 0.28% 0.89% 0.49% -0.03% 0.63% -0.14% 3.00% Note: *Q1 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 After years of robust growth, auto conditions worsening Loan Balance by Lender Type Auto Credit Quality: All Banks 1, ($ bn) (15%) 208 (23%) 230 (26%) (17%) 241 (24%) 244 (25%) 1, (17%) 277 (26%) 252 (24%) Finance Credit Union Captive Auto Bank 2.5% 2.0% 1.5% 1.0% (35%) 337 (34%) 364 (34%) 0.5% Q Q Q4 0.0% Auto Loans day past due to total Auto Loans Auto NPAs (including restructured) to total Auto Loans Auto Net charge-off rate Many lenders have used risk layering by loosening multiple underwriting standards (e.g., lower FICO scores, longer terms, higher LTVs) Note: All data as of Q4 16 Source: S&P Global Ratings; Experian Financial (left chart); Regulatory Filings 17

18 Banks with significant auto concentrations Consumer Auto Exposure of Rated US Banks, 4Q 16 $ 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 2016 Y/Y Change 4Q16 Y/Y Change MEDIAN 139,772 11, % 1.25% 0.17% 2.56% 0.15% Ally Financial Inc. 163,728 59, % 1.34% 0.34% 3.6% 0.4% Santander Holdings USA, Inc. 137,367 26, % 8.08% 1.35% 11.1% 0.9% OFG Bancorp 6, % 2.09% -0.27% 9.4% -3.5% Capital One Financial Corporation 357,158 47, % 1.69% 0.00% 6.1% -0.6% Huntington Bancshares Incorporated 99,714 10, % 0.35% 0.12% 0.8% 0.0% TCF Financial Corporation 21,455 2, % 1.15% 0.30% 0.6% 0.1% Citizens Financial Group, Inc. 150,023 12, % 0.71% 0.19% 1.6% 0.4% Fifth Third Bancorp 142,177 9, % 0.34% 0.14% 0.9% 0.2% Source: S&P Global Ratings; Regulatory Filings 18

19 Many banks have sizable CRE exposures New York Community Bancorp, Inc. CRE Loans as % of Total Loans 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 Multifamily Non-Owner- Occupied Construction & Development 0% 20% 40% 60% 80% 100% Note: Total CRE loans, include s C&D, non-owner-occupied, and multifamily. Does not include owner-occupied CRE or real estate loans in foreign offices; All data as of Q4 16. Source: Regulatory Filings; Federal Reserve (Index rebased to 100 as of Dec. 31, 2004) Commercial Mortgage Debt Outstanding 6.2% 11.7% 9.5% 10.8% 9.6% 52.3% Banks Insurance Companies Federal Agencies Agency CMBS CMBS U.S. Real Estate Prices Individuals & Other RCA Commercial Property Price Index FHFA Home Purchase-Only (SA) Note: SA means seasonally adjusted Source: Real Capital Analytics, FHFA, Bloomberg 19

20 Credit card charge-offs on the rise 6 Quarterly Credit Card NCO's to Credit Card Loans 5 4 (%) 3 2 Synchrony Financial Capital One JPMorgan Discover Financial Services American Express Co. Bank of America Corp Q1 2013Q1 2014Q1 2015Q1 2016Q1 2017Q1 Source: Regulatory filings for all quarters except 2017Q1. Company filings for 2017Q1. Regulatory date unavailable for Synchrony prior to

21 Interest Rate Sensitivity 21

22 NIM modestly higher after three rate hikes (%) Effective Federal Funds Rate Median Rated Bank Yields & Costs (%) Average Loans Average Earning Assets Average Interest-Bearing Deposits Average Interest-Bearing Liabilities Net Interest Margin Q1 '16 Q4 '16 Q1 '17 Source: Regulatory Filings; FRED 22

23 Banks remain favorably positioned for further rate rises Banks Scenarios Large Banks Interest Rate Sensitivity Change in net interest income due to 100-basispoint parallel rise in rates across the yield curve (%) Q1 17 Q4 16 Net interest income/ Revenues (%): LTM Q1 17 Non interest Bearing deposits/total deposits (%): Q1 17 Bank of America Corp. 1 Instantaneous 8.0% 8.2% 49% 35% Citigroup Inc. Instantaneous 4.8% 4.6% 65% 22% Wells Fargo & Co. 2 Varying, over 24 months N.D. N.D. 54% 28% U.S. Bancorp 3 Instantaneous 1.4% 1.5% 55% 25% PNC Financial Services Group Gradual, over 12 months 2.5% 2.6% 55% 30% JPMorgan Chase & Co. Instantaneous 4.9% 5.2% 48% 29% Capital One Instantaneous 0.3% 0.5% 82% 11% BB&T Corp Gradual, over 12 months 2.6% 2.1% 59% 33% SunTrust Instantaneous 1.8% 1.9% 61% 27% Source: Company filings. N.D.--Not disclosed. Sensitivity derived by taking the impact of the interest rate change divided by net interest income over the last 12 months. 1) Bank of America s sensitivity does not include market-related adjustments for bond premium amortization. 2) Wells Fargo discloses the impact of varying degrees of rising short-term (up 25 bps) and long-term interest rates (up 50 bps) on its net income over a 24 month horizon. All other banks report impact on their net interest income. 3) For U.S. Bancorp, the impact of parallel rise indicates a 50-basis-point parallel shift in the yield curve compared with 100 basis point for all other banks. Table includes largest domestically-owned bank holding companies that focus mostly on commercial banking. Most banks remain asset sensitive by their own measure, but we believe these assumptions reflect divergent deposit beta assumptions S&P economists expect the Fed to raise rates three times in 2017 We continue to surveil for rise in duration, higher deposit sensitivity, and high reliance on more costly wholesale funding Source: S&P Global Ratings; Company Filings 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 Cumulative Change (%) Deposit Beta (%) Interest bearing deposits rate sensitivity (20) (40) -1 (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 YE 2016 Deposit Beta is the cumulative percentage change in deposit costs divided by the cumulative change in the effective fed funds rate Source: Regulatory Filings; FRED 24

25 Yield & cost sensitivities in rising rate cycles Yield & Cost Changes: Comparing Current and Historical Cycles (%) Mid 90s Mid 2000s Effective Federal Funds Rate (%) Present Mid 90s Mid 2000s Yield on Total Loans and Leases (%) Present Mid 90s Mid 2000s Yield on Earning Assets (%) Present Mid 90s Mid 2000s Cost of Int-bearing Deposits (%) Present Mid 90s Mid 2000s Present Mid 90s Mid 2000s Present Cost of Funds (%) Net Interest Margin (%) Note: Mid 90s: YE 1993 to Q Mid 2000s: Q to YE 2006 Current Cycle: Q to YE 2016 Starting Rate Ending Rate 25

26 Regulatory Hot Topics 26

27 Regulatory overview Possible Regulatory Changes: Annual Stress Testing Title II/OLA Living Wills The Volcker Rule Basel III Standards Application Regulatory Oversight of Well Capitalized Banks (Choice Act) 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 27

28 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 11.0% 20 A 2.5% 9.5% 1.5% Citigroup 12.8% 26 A 3.0% 10.0% 2.8% JPMorgan Chase 12.4% 20 A 3.5% 10.5% 1.9% Wells Fargo 11.2% 43 S 2.0% 9.0% 2.2% Morgan Stanley 16.6% 70 A 3.0% 10.0% 6.6% Goldman Sachs 12.5% -20 A 2.5% 9.5% 3.0% Bank of New York Mellon 10.0% 30 A 1.5% 8.5% 1.5% State Street 10.9% 0 A 1.5% 8.5% 2.4% *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 continued to work towards reducing size, complexity and interconnectedness (lower L3 assets, OTC notionals and non-operational deposits), we believe it would be difficult to further reduce the GSIB buffers Source: S&P Global Ratings; Company Filings 28

29 Capital sensitivity for large banks Bank Excess capital RAC ratio Impact on RAC ratio of returning excess capital Capital score Current ALAC Ratio Impact on ALAC ratio of returning excess capital Bank of America Corp Adequate Citigroup Inc Adequate The Goldman Sachs Group Inc Adequate JPMorgan Chase & Co Adequate Morgan Stanley Adequate U.S. Bancorp Adequate N/A N/A Wells Fargo & Co Adequate Bank of New York Mellon Corp Adequate State Street Corp Adequate Northern Trust Corp Adequate N/A N/A Total 95.6 *Includes banks approved by Federal Reserve to use advanced approaches for computations of their capital requirements. Advanced approach banks are institutions with assets more than $250 billion or on-balance-sheet foreign exposure of $10 billion or more and must have completed the parallel run qualification phase. Calculated as lowest of the excess amount above the minimum requirement for CET1, SLR, Tier 1 capital, or total capital (on a fully phased-in basis as of Sept. 30, 2016, for all banks except Northern Trust, which discloses on a transitional basis). Minimum requirement for all regulatory capital ratios (except SLR) includes a 50-basis-point buffer. As of June 30, The issuer credit rating for Goldman Sachs and Morgan Stanley includes a transition notch for the expectation that their RAC ratios will be comfortably above the 10% threshold. N/A--Not applicable. 29

30 Capital sensitivity for small banks Bank Tier 1 Leverage ratio* RAC ratio RAC ratio assuming Tier 1 leverage ratio increased to 10% Current RAC score Tier 1 Leverage ratio* Valley National Bancorp Adequate +37% Associated Banc-Corp Adequate +33% People's United Financial Inc Adequate +32% New York Community Bancorp Inc Adequate +27% Webster Financial Corp Adequate +24% Cullen/Frost Bankers Inc Strong +23% Hancock Holding Company Adequate +22% First Hawaiian Bank Strong +21% Texas Capital BancShares Inc Adequate +20% SVB Financial Group Strong +20% American Savings Bank FSB Honolulu HI Strong +16% First Midwest Bancorp Inc Adequate +14% East West Bancorp, Inc Strong +12% UMB Financial Corp Strong +12% S&T Bancorp Inc Adequate +11% Synovus Financial Corp Adequate +11% Note: Data is shown for the smaller banks that are most impacted by the potential regulatory change. *As of Sept. 30, As of June 30, First Hawaiian's RAC is as of Sept. 30, Source: S&P Global Ratings; Company Filings 30

31 Possible changes to the corporate tax rate 40 Effective Tax Rates of the Largest U.S. Banks and Corporates (%) Corporates Banks 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 31

32 GSIBs progress on living will regulatory guidance Firm Bank of America Corp. Bank of New York Mellon Corp. From the resubmissions of the 2015 Living Wills (released on Oct. 4, 2016) Contractually Binding Mechanism (CBM) Citigroup Inc. The Goldman Sachs Group Inc. JPMorga n Chase & Co. Morgan Stanley X X X X X X Triggers X X X X X X X IHC part of Plan X X X X IHC Operational X 1 X 2 State Street Corp. Wells Fargo & Co. Hold Co and IHC: Holdco Liquidity 3 + LTM Revenue / Debt <1 yr. + LTM Op. Expenses + Dividends: FY x 5.70x 1.41x 1.68x 2.05x 2.53x 2.44x 2.13x Source: Regulatory filings (Y-9LP); Company Disclosures Note: 1. BAC IHC operational as of Q JPM IHC operational as of Q BAC, GS, MS, and STT disclose their holding company liquidity. For the remaining banks, we assumed holding company liquidity was cash + government and government agency securities + 25% of other assets that mature within one year + last twelve months revenue (excluding dividends) from subsidiaries 32

33 Capital, Funding, And Liquidity 33

34 S&P Risk Adjusted Capital (RAC) Ratio (%) Common Dividend Payout Ratio (%) Capital payouts to increase for large regional banks S&P RAC Ratio vs. Dividend Payout Ratio 11% 35% 10% 9% 8% 7% 6% 30% 25% 20% 15% 10% 5% 5% % Money Center Bank Simple Avg. Regional Bank Simple Avg. Median Common Dividend payout Ratio Source: S&P Global Ratings; Regulatory Filings All rated banks, excludes GS, MS, Trust Banks 34

35 Funding & liquidity metrics remain supportive Stable Funding Ratio Broad Liquid Assets to Short-Term Wholesale Funding 250% 8.0x 7.0x 200% 6.0x 150% 100% 5.0x 4.0x 3.0x 2.0x 1.0x % Regional Banks Money Center Banks Broker-Dealers Trust Banks 0.0x Regional Banks Money Center Banks Broker-Dealers 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 35

36 Q&A 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+ 5/8/ /31/2016 Source: S&P Global Ratings Includes Puerto Rican banks 38

39 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 Money Center Banks: WFC, BAC, C, JPM Broker Dealers: MS, GS Trust Banks: BK, NTRS, STT Positive Stable Negative Source: S&P Global Ratings Includes Puerto Rican banks 39

40 Consolidated supplementary leverage ratios meet minimum thresholds Holdco. Supplementary Leverage Ratio (%) Double Leverage Ratio (%) Company Q1'17 Q4' 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 40

41 Sub-groups of rated banks Money Center Banks Bank of America Corp. Citigroup, Inc. JPMorgan Chase & Co. Wells Fargo & Co. Trust Banks Bank of New York Mellon Corp. Northern Trust Corp. State Street Corp. Goldman Sachs & Co. Morgan Stanley Broker Dealers American Express Co. BB&T Corp. Capital One Financial Corp. Comerica Inc. Fifth Third Bancorp Huntington Bancshares Inc. KeyCorp M&T Bank Corp. PNC Financial Services Group Regions Financial Corp. SunTrust Banks Inc. U.S. Bancorp Large Regional Banks Wells Fargo & Co. Zions Bancorporation Regional Banks Associated Banc Corp. Astoria Financial Corp. BancorpSouth Inc. Bank of the West Bank of North Dakota BBVA Compass Bancshares, Inc. BMO Financial Corp. BOK Financial Corp. Citizens Financial Group, Inc. Commerce Bancshares Inc. Cullen/Frost Bankers Inc. Discover Financial Corp East West Bancorp. FirstBank Puerto Rico First Citizens BancShares First Hawaiian Bank First Horizon National Corp. First Midwest Bancorp Inc. First Republic Bank Hancock Holding Co. HSBC USA Inc. MUFG Americas Holdings Corporation New York Community Bancorp Inc. OFG Bancorp Popular Inc. Peoples United Financial Inc. Santander Holdings USA, Inc. S&T Bank SVB Financial Group Synovus Financial Corp. Synchrony Financial TCF Financial Corp. Texas Capital Bancshares, Inc. Trustmark Corp. UMB Financial Corp. Valley National Bancorp Webster Financial Corp. Western Alliance Bank 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 41

42 Additional research available Click to see the following research articles, or find more at 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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