Global Banking & Capital Markets

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1 Global Banking & Capital Markets Key themes from the 4Q 2016 earnings calls March 2017 Contents 1 US banks outperform European counterparts in 4Q 2016, but full year results reflect weak start in Significant geopolitical and regulatory uncertainties temper growing optimism about the outlook for As expense management remains a key priority, banks continue to invest in five key areas 8 Methodology Top 10 themes: a year-over-year comparison 4Q Q Earnings performance 1 Earnings performance 2 Macro environment 2 Macro environment 3 Expense trends 3 Expense trends 4 Capital 4 Capital 5 Regulatory and compliance 5 Regulatory and compliance 6 Lending trends 6 Credit quality trends 7 Cross-border activities 7 Cross-border activities 8 Innovation 8 Lending trends 9 Credit quality trends 9 Innovation 10 Acquisitions and divestments 10 Acquisitions and divestments

2 Main topics discussed in the 4Q 2016 earnings calls US banks outperform European counterparts in 4Q 2016, but full-year results reflect weak start to 2016 A variety of factors, including macroeconomic uncertainty, geopolitical tensions and divisive politics, combined to make 2016 a challenging year for the industry. In the fourth quarter, while we saw more positive trends in the US, this did not translate globally. Sergio Ermotti, Group CEO, UBS 2016 was broadly characterized as a challenging year for banks around the world. The first quarter was historically weak, especially for banks capital markets businesses. Slow economic growth trends kept interest rates low or negative in most jurisdictions and political uncertainty impacted client activity levels for much of the year. Nevertheless, US banks finished 2016 on a strong note with generally good fourth-quarter results. European bank performance was not as uniformly positive, reflecting ongoing impacts from a range of extraordinary items. Full-year profit trends were mixed, with only seven of the banks included in this analysis generating double-digit return on equity in Notably, all seven of these banks are based in the Americas. In 4Q 2016, only eight banks reported that they generated positive operating leverage (revenues grew more than expenses), reflecting the performance tail winds that emerged late in the year. On a full-year basis, only half of the banks included in this report generated positive operating leverage, again underscoring the drag from the weak first quarter. Common Equity Tier 1 (CET1) ratios slid at about half of the banks included in this analysis when compared to 3Q 2016 levels, although they remained above the current regulatory requirements. The primary driver of the declines was the impact of higher rates on the value of available-for-sale (AFS) securities portfolios, which reduced common equity. Year-over-year loan growth was evident at most banks, with seven banks all Americas based increasing end-of-period loan balances by more than 5%. Banks in all regions pointed to favorable credit quality trends, variously citing reduced nonperforming loan (NPL) ratios, the improved cost of risk and historically low charge-off rates. A few exceptions did emerge, as Deutsche Bank and Commerzbank increased provisions for their shipping portfolios and Unicredit took a massive charge to write off bad loans. Return on average equity (ROAE), FY FY16 FY15 Source: SNL Financial; *Data for DB and ING is return on average common equity (ROACE); **data for Nomura is for last 12 months (LTM) 1 Global Banking & Capital Markets: key themes from the 4Q 2016 earnings calls

3 During the last quarter of 2016, only 7 of the 32 banks included in this analysis reported lower revenues when compared with 4Q Seven banks reported double-digit growth and a few banks highlighted record segment or group revenues for the quarter. CFO Marianne Lake said markets revenue at JPMorgan Chase was the highest on record for a fourth quarter. Bank of America s Global Markets segment reported $3.8b in net income in 2016, which CEO Brian Moynihan characterized as, The most it has earned in the past five years. Canadian Imperial Bank of Commerce and Toronto-Dominion both reported record quarterly revenues in 4Q Société Générale CEO Frédéric Oudéa cited very strong operational performance and the best fourth quarter in the last 10 years actually. US banks, in particular, benefited from a range of revenue tail winds in the fourth quarter, including higher interest rates, the expectation for a pro-growth agenda under the Trump Administration, a stock market rally, and a surge in consumer and business confidence. Strong revenue trends in the Americas drove improved profitability, with 10 of the 11 banks that posted double-digit return on average equity (ROAE) in 4Q 2016 being Americas-headquartered institutions. On a full-year basis, however, the trends were less encouraging. Revenues declined at 19 of 32 banks and no banks generated double-digit growth when compared with Additionally, ROE slid at more than half the banks included in this review, reflecting the drag from the historically weak first quarter. Commerzbank CFO Stephan Engels said, 2016 was clearly a challenging year, due to headwinds from the negative interest rate environment, additional regulatory burdens and an ongoing volatile geopolitical news flow. Full-year results for European banks also reflected the ongoing impacts of legal and restructuring charges. Credit Suisse, Deutsche Bank and Royal Bank of Scotland took significant charges for legal and conduct issues, primarily for settlements with the US Department of Justice for legacy residential mortgage-backed security issues. While Credit Suisse s management stated its belief that it has now resolved its major pre-crisis conduct issues, executives at the other two banks cautioned that litigation impacts will not normalize until Restructuring costs undermined earnings at HSBC Holdings and Commerzbank. A number of banks took material charges to write down nonperforming assets and businesses. Both HSBC and Crédit Agricole booked goodwill impairment charges for European private banking and domestic retail operations, respectively. Commerzbank increased provisions for its shipping loan exposures and Unicredit Group set aside 8.1b to write down NPLs. Société Générale and HSBC reported losses on sales of their businesses in Croatia and Brazil, respectively. As banks look forward to 2017, however, the outlook appears to be brightening. US banks are upbeat about prospects for the year, as reflected in Morgan Stanley CEO James Gorman s comment, There is certainly more reason to be optimistic as we enter 2017 than there was at the beginning of The surge in consumer confidence after the US election, the recent and anticipated Fed rate hikes, the strengthening US economy and potential corporate tax reform are positives for our business. And, while European banks did not benefit from the revenue tail winds that boosted US banks in the last quarter of the year, management appear to be more constructive about the opportunities in Deutsche Bank CFO Marcus Schenk observed that, trends in the operating environment are positive, and HSBC Group Finance Director Iain Mackay professed to be reasonably optimistic. At Barclays, Group CEO Jes Staley declared, In 2017 we can begin to move on from the restructuring of Barclays. We can shift our focus solely to the future and, in particular, to how we can generate attractive, sustainable and distributable returns at a group level for our shareholders. And Credit Suisse CEO Tidjane Thiam noted, Our businesses across both wealth management and investment banking have made a strong start to In January 2017, and so far in February, we have seen significant positive inflows across each of our wealth-management businesses. In global markets we have seen a significant rebound in client activity levels across capital markets and trading. Going forward, we believe that we are well positioned to capture profitable growth opportunities, and benefit from this improved market conditions. Global Banking & Capital Markets: key themes from the 4Q 2016 earnings calls 2

4 Percentage change in revenues from prior periods RBS CS MS RBC GS BARC ING TD STAN CBK DB CIBC INT USB UBS ITAU JPM BAC SANT BNP BK SG BBVA WFC STT CA LLD AXP C UCG HSBC -24% -20% -15% -9% -11% -10% -7% -8% -8% -11% -3% -3% -4% -3% 0% 0% -4% - -4% - - 0% 9% 1 1 5% 10% 9% 9% 8% 7% 6% 9% 6% 5% 5% 4% 4% 3% 3% 1% 1% 0% 1% 4% 1% 3% 16% 17% 23% 29% FY change 4Q change Source: Company reports, EY analysis. 3 Global Banking & Capital Markets: key themes from the 4Q 2016 earnings calls

5 Significant geopolitical and regulatory uncertainties temper growing optimism about the outlook for 2017 At this stage the outcome [of the Basel IV rules] remains uncertain, and it s probably even more uncertain with the elections in the US and the potential posture of the US regarding international negotiations. For me I would say it s 50/50, we could end up with no agreement or there might be an agreement but it s clear that when you compare with the starting point it will be a very different agreement than the [first] one we had. Frédéric Oudéa, CEO, Société Générale While the outlook for 2017 has turned more constructive for the banking industry, there are still a number of geopolitical and regulatory uncertainties that will frame the operating environment and have potential implications for performance in the quarters and year ahead. Chief among these are the timing and terms of the UK s exit from the European Union, the finalization of the socalled Basel IV rules and perhaps the biggest unknown is the impact of the Trump Administration s policy agenda. The outcome of the UK s June 2016 vote to exit the European Union did not result in the predicted economic downturn and bank management has observed that consumer spending has been relatively resilient. However, as RBS Chairman Howard Davies said, Of course, the UK has not yet left the EU, and we don't know the terms of our departure, so the long-term impact remains impossible to predict. Banks based outside the UK continue to monitor developments and are prepared to adjust and possibly move their businesses, if necessary. Morgan Stanley CEO James Gorman specifically noted, Our aspiration is to keep as much of our business [in the UK] as possible. But to the extent we have to comply with the Brexit rules, we ll be putting our headquarters somewhere in Continental Europe and that will have some implications going forward. CET1 ratios, 31 December 2016* Q16 3Q16 Source: Company reports. *Fully loaded Common Equity Tier 1 ratios, with the exception of Nomura, for which the ratio is transitional. Global banks are also waiting for the finalization of the Basel IV rules, which were delayed in early January. Without more clarity of the final shape of these rules, banks plan to maintain capital cushions in excess of known requirements. Patrick Flynn, CFO, ING Groep: On Basel IV, we re watching it as you are, we don t have that much more insight than anybody else. And I think what you see is that the most recent or perhaps close to final proposals from the Basel Committee still would result in increases in capital requirements for most European banks, above the threshold of 10%. We just don t know yet. Stephan Engels, CFO, Commerzbank: The postponement of the BIS announcement shows that Basel IV won t come at any price. As you have probably noticed, there are intense discussions in the Basel committee; therefore we will have to wait for the final outcome, rather than speculate on its impact at this stage. Iain Mackay, Group Finance Director, HSBC Holdings: We ve set out a CET1 ratio target of 1 to 13%, and I think for probably the last 12 to 18 months we ve been pretty clear that the top end of that range is the appropriate place for us to be, certainly until some of the regulatory uncertainty that still persists is resolved in an appropriate manner. Clearly it was a little bit disappointing that we didn t get to final guidance on Basel III revisions or Basel IV in January. Global Banking & Capital Markets: key themes from the 4Q 2016 earnings calls 4

6 Finally, there are many questions and expectations associated with the new Trump Administration in the US. President Trump is widely expected to implement tax reform, pro-growth policies and a more protectionist stance on trade. In addition, hopes are high that parts of the Dodd-Frank Act could be repealed, although this is unlikely to happen quickly and may not provide material relief for the global systemically important banks (G-SIBs) that are part of this analysis. While US banks view President Trump s agenda as broadly positive for their businesses, it may not provide straightforward benefits for banks in other countries. Brian Moynihan, CEO, Bank of America: [This quarter, investors ] questions have ranged from corporate tax reform and what do we think about that, to regulatory changes, economic growth and the impacts of these things and interest rate changes. The optimism for positive change here at Bank of America and among our customers is palpable and has driven bank stock prices higher. Carlos Torres Vila, CEO, BBVA: [There is] no doubt that the situation in the US associated with the election and the messages coming from the new administration have already had an impact on Mexico, through the depreciation of the peso mostly. It is uncertain what the policies will do to Mexico. Of course, they re talking about the North American Free Trade Agreement (NAFTA) maybe being renegotiated. They re talking maybe about tariffs at the border. They re talking about things that will have an impact on trade, potentially, or they could have an impact on foreign direct investment. Takumi Kitamura, CFO, Nomura: Immediately after the [US] election there was talk about the abolition of the Dodd-Frank rule and whether this could be a tailwind to the overall financial industry. But when looked at closely, we don t expect the very stringent regulations targeting large financial institutions to change that much. Maybe for second-tier banks and smaller financial institutions, maybe these people will be impacted by the financial regulation in response to the current excessive regulations, but not so much for large institutions. Bill Winters, Group CEO, Standard Chartered: It s no surprise that when the US terminated its commitment to the Trans-Pacific Partnership, the first thing that the Chinese did, and it was quite welcomed, was the establishment of a regional trade organization. Obviously, it would take some time for that to come into play, but the intent is clear; there s a part of the world that may want to throw up the borders, and there s another part of the world that s going to try to take advantage of that. If things get very messy, and we get into the real trade war zone, there will be offsets in terms of goods and services going to parts of the world where they re not going today, and we ll be there to service that. Tidjane Thiam, CEO, Credit Suisse: There is nervousness around the levels in the markets today and that the markets possibly price a very, very optimistic scenario in terms of the evolution of the US, where basically you would get tax reform and no trade issues and a lot of growth and deregulation in the financial sector. So clients and I m just expressing a personal view here, clients are concerned about those things and look for downside protection. For more information about the changing regulatory environment, please see EY 2017 Global Regulatory Outlook Industry imperatives: how can banks thrive in the new regulatory environment? As expense management remains a key priority, banks continue to invest in five key areas We won t take our eye off the ball in expenses and are committed to investing only in areas where we re going to drive improved returns. Mike Corbat, CEO, Citigroup According to EY 2017 global banking outlook survey a survey of senior executives at almost 300 banks across the globe only 11% of respondents expect their banks financial performance to improve significantly in the next 12 months. While expense management remains one of the primary controllable levers available to banks as they try to boost returns, during the 4Q 2016 earnings season, management acknowledged that cutting costs alone is not sustainable. Barclays Group Finance Director Tushar Morzaria noted, We just can t keep on reducing costs without reinvesting back into [the business.] Broadly speaking, banks are investing in five broad areas. According to the global banking survey, the risk and regulation agenda continues to dominate management attention and spending decisions. This finding was confirmed by management comments during the 4Q 2016 earnings calls. However, discussions about investment spending also revealed that many banks increasingly are focused on investing in growth and optimization initiatives to position themselves for long-term success. U.S. Bancorp CEO Richard Davis explained, The other thing that is sitting underneath [expense] numbers is the remarkable cost of innovation and technology. [The benefit of these investments] will only show itself in the future when you will see which companies really made those investments and are ready to jump to a new kind of real-time payments mobile environment. And those that didn t; and we are one that is. Finally, some banks particularly in Europe continue to invest in restructuring initiatives as they work to complete the reshaping of their businesses. 5 Global Banking & Capital Markets: key themes from the 4Q 2016 earnings calls

7 Investment spending by strategic priority Control Stuart Gulliver, Group CEO, HSBC: On regulatory programs and compliance, the total expenditure was about $3 billion in 2016, which is about $400 million higher than Of this, the spend on global standards was about $1.6 billion in 2016 within that $3 billion number. And probably the expenditure on global standards peaks in Ralph Hamers, CEO, ING Groep: [Our regulatory costs] have increased by just over 200 million to 845 million for the year. Richard Davis, CEO, U.S. Bancorp: Our compliance costs are now [in terms of FTE] over 7,000 people of our 70,000 staff and that is up more than twice what it was a few years ago. Protect Marianne Lake, CFO, JPMorgan Chase: We ve continued to increase our spend in cybersecurity, as we want to protect the bank and customer data. Juan Colombas, Chief Risk Officer, Lloyds Banking Group: Cyber is one of the key risks of the financial industry, I would say of any industry, and we take it very seriously. We have been investing heavily, particularly during the last four years, and we are talking in the high hundreds of millions of [pounds]. Grow Harvey Schwartz, CFO, Goldman Sachs: We finished with $900 million of run rate savings completed in the year. But at the same time, we never stopped hiring. We launched Marcus. We acquired the digital [deposit] platform. And so we stayed very front-footed and we feel well positioned. Jay Hooley, CEO, State Street: We continue to invest in developing products and services that will enable us to meet client needs and drive differentiation. Recent examples include expansion of a suite of environmental, social, and governance (ESG) investment products at SSGA. We recently launched Currenex X2, the next generation institutional foreign exchange trading platform, with enhanced capabilities to help our clients trade more rapidly and with greater functionality. Victor Dodig, CEO, CIBC: To keep ahead of the changing market, CIBC also entered a unique alliance with National Australia Bank and Israel s Bank Leumi. Our arrangement will allow three banks on three different continents to collaborate and share innovation strategies and insights that can improve the banking experience for our clients. Optimize Brian Shea, Vice Chairman and CEO of Investment Services, Bank of New York Mellon: The business improvement process continues to yield the results we want, which is helping offset the global regulatory change cost, enabling us to invest in long-term strategic growth areas and creating operating margin improvement. Séverin Cabannes, Deputy CEO, Société Générale: [IT spending] is about 3.6 billion. And 40% of that is what we call change expense, which is really related to the transformation and the digitalization of the bank. IT spending in terms of digitization is divided in two main streams. The first one is clearly develop new client access to bank services. The second is a transformation of our IT infrastructure and the transformation of our IT processes. We are probably the leading bank in Europe today in terms of cloud, in term of cloudification of all our infrastructure. Jes Staley, Group CEO, Barclays: Our intent is to build Barclays on a foundation of world-class core operations and technology. In the model we envision, core functions for the entire group are standardized across the company, streamlining costs, driving high-quality analytics, and improving customer experience. By creating shared utilities as the foundation of our company, we can generate efficiencies from scale while, at the same time, ensuring that we deliver world-class customer experience, which we believe is key to driving loyalty and long-term growth. Reshape Lars Machenil, CFO, BNP Paribas: For 2017, we anticipate that the group corporate center costs will be more likely to be around 1.7 billion, because we will add 1 billion in transformation costs. Ewen Stevenson, CFO, Royal Bank of Scotland: We expect to incur a further 2 billion [in restructuring costs] over the next three years, of which around 1 billion of this should be expected to be incurred this year. The majority of our restructuring spend has relatively short paybacks through improved processes, better technology. But around 40% of this spend is in relation to [owned] real estate, which has a relatively poor payback. Stephan Engels, CFO, Commerzbank: Total restructuring charges may amount to 1.1 billion. And we currently assume that that will be split evenly between 2017 and Global Banking & Capital Markets: key themes from the 4Q 2016 earnings calls 6

8 Percentage change in revenues and expenses from % Higher revenues, lower expenses Higher revenues, higher expenses CIBC TD RBC 10.0% ING JPM BNP BBVA WFC USB ITAU 5.0% BAC BK BARC LLD MS AXP INT SG STT RBS SANT UCG 0.0% CBK CA -5.0% UBS C DB GS STAN -10.0% CS -15.0% HSBC -20.0% Lower revenues, lower expenses Lower revenues, higher expenses -25.0% -30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% Source: Company reports. Banks on the left side of the yellow line with yellow markers had positive operating leverage (revenues grew at a higher rate than expenses). 7 Global Banking & Capital Markets: key themes from the 4Q 2016 earnings calls

9 Methodology The purpose of this review is to examine the key themes discussed among 32 global institutions operating within the banking and capital markets sector during the 4Q 2016 earnings reporting season. Acronym key AXP American Express Company BAC Bank of America BARC Barclays BBVA Grupo BBVA BK Bank of New York Melon BNP BNP Paribas C Citigroup CA Crédit Agricole CBK Commerzbank CIBC Canadian Imperial Bank of Commerce CS Credit Suisse DB Deutsche Bank GS Goldman Sachs HSBC HSBC Holdings ING ING Groep INT Intesa Sanpaolo ITAU Banco Itaú JPM JPMorgan Chase LLD Lloyds Banking Group MS Morgan Stanley NOM Nomura Holdings RBC Royal Bank of Canada RBS Royal Bank of Scotland SANT Banco Santander SG Société Générale STAN Standard Chartered STT State Street TD Toronto-Dominion UBS UBS Group UCG Unicredit Group USB U.S. Bancorp WFC Wells Fargo EY contacts Bill Schlich Global Banking and Capital Markets Sector Leader william.schlich@ey.com Laura Tayman Banking and Capital Markets Senior Analyst laura.tayman@ey.com EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Global Banking & Capital Markets Sector In today s globally competitive and highly regulated environment, managing risk effectively while satisfying an array of divergent stakeholders is a key goal of banks and securities firms. EY s Global Banking & Capital Markets Sector brings together a worldwide team of professionals to help you succeed a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Sector team works to anticipate market trends, identify their implications and develop points of view on relevant sector issues. Ultimately, this team enables us to help you meet your goals and compete more effectively EYGM Limited. All Rights Reserved. EYG no GBL ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made. ey.com Global Banking & Capital Markets: key themes from the 4Q 2016 earnings calls 8