Global Banking & Capital Markets

Transcription

1 Global Banking & Capital Markets Key themes from 4Q 2015 earnings calls March 2016

2 Contents Top 10 key themes: 4Q15 earnings season 3 Top 10 themes: a quarter-over-quarter comparison 4 Key themes overview 5 1. Earnings performance: 2015 profits ranged from record highs to disappointing lows 5 2. Macro challenges: market volatility escalates as banks report earnings 7 3. Expenses: as operating environment deteriorates, a few banks finally take further action on costs 8 4. Capital plans: dividends under focus in Europe Regulatory and compliance: banks express concern about TLAC compliance Credit quality: are banks provisions sufficient to weather lower-for-longer oil prices? Cross-border activities: global reshaping is driven by factors other than GDP prospects Lending trends: banks focus on prudent volume growth amid concerns about the global economy Innovation: FinTech investments highlighted as banks turn to external sources for new ideas Acquisitions and divestments: activity driven by efforts to run down non-core units 16 Appendix 17 Key themes addressed, by bank 17 Select KPIs, percentage change from 4Q14 19 Scope, limitations and methodology of the review 20 2

3 Top 10 key themes: 4Q15 earnings season 2015 presented both challenges and opportunities. The challenges were more acutely felt in the back half of the year, as concerns about global growth intensified. These factors negatively impacted the broader opportunity set for our clients, and as a consequence, for the Firm. Harvey Schwartz, CFO, Goldman Sachs Escalating concerns about the trajectory of global economic growth raise questions about the banking industry s outlook for Over the course of 2015, the operating backdrop for the global banking industry changed dramatically. The constructive conditions that characterized most of the first half of the year dissipated over the summer months and were replaced by persistent concerns about falling oil prices, stock market instability and indications that economic growth in China and other emerging markets (EM) was slowing. Not surprisingly, banks results reflected the macro challenges and in 2015 return on equity (ROE) fell at nearly half the banks included in this analysis when compared to In addition, revenue growth was anemic and expenses stayed stubbornly high. And, while many banks offered evidence that they have meaningfully de-risked their balance sheets and significantly improved their solvency, the key question at the start of 2016 remains: What will drive future growth? During the fourth quarter earnings season, it was apparent that there are no easy answers for this question, particularly given the outlook. As observed by Citigroup CEO Mike Corbat: The early days of 2016 have shown that the environment hasn t gotten and isn t likely to get any less challenging. Group-level reported ROE, full-year Note: Please see Appendix for key to company symbols Source: Company reports; Annual ROE not disclosed at Citigroup, Crédit Agricole, Intesa Sanpaolo, Royal Bank of Scotland and Unicredit; Nomura not included because the period ending 31 December 2015 was 3Q16; data for Lloyds Banking Group represents Return on Required Equity. 3

4 Top 10 themes: a quarter-over-quarter comparison 4Q15 3Q15 Rank* Earnings season top 10 themes (arranged from most common to least common) 32 banks Rank* Earnings season top 10 themes (arranged from most common to least common) 35 banks 1 Quarterly earnings performance 1 Quarterly earnings performance 2 Macro challenges 2 Macro challenges 3 Expense trends 3 Expense trends 4 Capital strength and plans 4 Capital strength and plans 5 Regulation and compliance 5 Regulation and compliance 6 Credit quality trends 6 Cross-border activities 7 Cross-border activities 7 Lending trends 8 Lending trends 8 Innovation 9 Innovation 9 Credit quality trends 10 Acquisitions and divestments 10 Acquisitions and divestments *Note: Please see Appendix for an explanation of the ranking methodology. 4

5 Key themes overview 1. Earnings performance: 2015 profits diverged The last quarter of 2015 was the most challenging we have experienced in several years. Sergio Ermotti, CEO, UBS Mixed earnings trends emerge, with more negative results evident in Europe. While management at the banks included in this report almost universally described the last quarter of 2015 as challenging, profit trends across the industry varied widely. Of the 31 banks* that disclosed quarterly earnings figures, net income declined at 14 when compared with 4Q14. Notably, 10 of the banks that reported lower 4Q15 earnings are headquartered in Europe. In addition, each of the six banks that reported net losses for 4Q15 are European banks, and four are based in the UK. For the full year, nine banks reported lower profits in 2015 than in the previous year and four European banks posted annual net losses. Several banks did very well in 2015: JPMorgan Chase, Royal Bank of Canada and U.S. Bancorp reported record net income for Bank of America s net result of US$15.9 billion was described as the highest net income we ve had in a long time. Citigroup reported its highest annual profit since And earnings at Commerzbank and UBS were each at their highest point since At the other end of the spectrum, however, four banks reported net losses for 2015: At Credit Suisse and Deutsche Bank, 2015 performance was their worst since Standard Chartered s poor and disappointing performance marked its first annual net loss since 1989 and Royal Bank of Scotland turned in its eighth consecutive full-year net loss. In line with recent reporting periods, results were strongly influenced by legal charges. Bank of America, BNP Paribas, Citigroup, Morgan Stanley and UBS benefited from a steep drop in litigation costs in Conversely, net earnings were negatively Percentage change in litigation and conductrelated costs from 2014, selected banks impacted by legal costs at Deutsche Bank and Goldman Sachs and additional provisions for mis-sold payment protection insurance (PPI) at several UK banks. Notably, management at some banks in 431% both the US and Europe appeared cautiously optimistic that their crisis-era legal issues may be nearing an end: John Cryan, Co-CEO, Deutsche Bank: We do expect litigation in 2016 to be below the 2015 level and we do anticipate settling some significant cases during the year. Jon Pruzan, CFO, Morgan Stanley: We believe that the most significant items related to the credit crisis are largely behind us. Weak revenue performance was also a feature of 2015 results. Only Banco Itaú, BBVA, BNP Paribas and Commerzbank reported double-digit growth, and revenues fell at 11 banks when compared with Revenues are expected to remain stagnant in 2016, reflecting near-zero or negative interest rates in many countries, the impact of market instability and the loss of income associated with business exits. Tushar Morzaria, Group Finance Director, Barclays: We ve guided towards meaningful negative income in 2016 as we wind down asset sales and business sales. Mike Bell, CFO, State Street: The year-to-date weakness in equity markets will adversely affect total revenue. A 10% decline in global equity markets is expected to result in approximately 2% of downward pressure on our total revenue. Laurent Goutard, Head of Retail Banking, France, Société Générale: The pace of net banking income growth [in French retail] observed in 2015 is not fully sustainable in 2016 due to the low interest rate environment. *Standard Chartered does not disclose quarterly earnings data. GS DB BARC RBS LLD SG JPM HSBC UBS CS C BAC BNP MS -11% -58% -66% -73% -93% -98% -100% Source: Company reports. 160% 70% 63% 55% 50% 3% 5

6 Percentage change in full-year net income from 2014* CBK 299% BAC ING 229% 221% C INT 119% 136% UBS MS 75% 71% SG 49% CA BK ITAU SANT JPM CIBC RBC HSBC TD BBVA USB 22% 22% 15% 13% 12% 12% 11% 3% 2% 1% 0% WFC STT AXP UCG BARC GS LLD 0% -2% -12% -16% -27% -28% -36% Source: Company reports. *Banks are not included for the following reasons: net loss in 2015 (Credit Suisse, Deutsche Bank, Standard Chartered); net loss in both periods (Royal Bank of Scotland); the period ending 31 December 2015 was 3Q16 for Nomura; BNP Paribas net income increase from 507m in 2014 to 7.0b in 2015 was too large to display meaningfully as a percentage. 6

7 2. Macro challenges: market volatility escalates as banks report earnings Usually January would be the most lucrative month [for the wholesale business.] However, globally everybody is reducing risk. Therefore, it is fair to say the market for wholesale remains slow. Shigesuke Kashiwagi, CFO, Nomura Holdings Challenges that characterized the third quarter continued through the last three months of the year. Oil prices continued to decline, stock market instability persisted and worries about global gross domestic product (GDP) growth prospects remained firmly in place through the fourth quarter. Many of these challenges had been anticipated and banks results were largely in line with lowered expectations. However, the operating environment deteriorated sharply in January 2016 just as the US banks kicked off the 4Q15 earnings season. Global stock markets plunged, oil prices dipped below US$30 per barrel and both the World Bank and the International Monetary Fund downgraded their global GDP forecasts, prompting concerns that weakness in emerging markets could spread and spark a new credit crisis. Management addressed the escalating anxiety caused by the macro challenges, but their cautious tone did little to alleviate market pessimism. Howard Davies, Chairman, Royal Bank of Scotland: The next few months will be challenging for all banks. Global markets have been, and continue to be, nervous and volatile. The EU referendum adds further idiosyncratic uncertainty in the UK and Ireland. Marianne Lake, CFO, JPMorgan Chase: The pipeline coming into 2016 in M&A was good, solid, up, in fact. Obviously, volatility can dampen the confidence of Boards and CEOs. Dialogues are pretty active, and we think the types of deals that we ll see in 2016 will look different. But I think, in the first couple of weeks, it s not been particularly strong, and we do need to see some of the stability come back, I think, for us to really see that conversation start to pick up. Sergio Ermotti, CEO, UBS: No matter how you look at it, risk aversion is still very high. Clients know they should invest more, but cash helps them sleep better at night. And while the long-term outlook remains sound, they are questioning the predictability of tomorrow. Roberto Egydio Setubal, CEO, Banco Itaú: For 2016, we see a [more] negative GDP growth scenario. We believe that given this scenario, delinquency will be increasing, for consumers especially, given the higher level of unemployment and also in the small and medium [enterprise] (SME) market. Jon Pruzan, CFO, Morgan Stanley: In the first two weeks we have seen a significant rise in volatility across markets and asset classes and an intense focus on the China economy, market and currency, as well as declining oil prices. We have had a reasonable start in sales and trading, as clients have been engaged as they try and navigate this period of volatility and keep their risk positions close to home. M&A has remained active. We are cautious, however, as prolonged volatility is not conducive to M&A activity. The underwriting calendar has been challenged. The capital markets pipeline is healthy, but market volatility could delay new issues coming to market. And on the retail side, clients remain cautious. John Cryan, Co-CEO, Deutsche Bank: It s very difficult to give any sort of comforting precision in relation to outlook. The markets do remain somewhat challenging and uncertain. MSCI World index performance, 1 October 2015 to 4 March 2016, rebased 6 Jan: World Bank downgrades global GDP forecast 16 Dec: US Federal Reserve raises interest rates for the first time in almost 10 years 15 Jan: US oil prices dip below US$30; S&P 500 and MSCI World index both down 8% from 31 Dec close 19 Jan: IMF downgrades global GDP forecast 1-Oct-15 1-Nov-15 1-Dec-15 1-Jan-16 1-Feb-16 1-Mar-16 7

8 3. Expenses: as operating environment deteriorates, a few banks finally take further action on costs We are increasing the pace of the cost-savings program. We have done this largely because of the deterioration in the environment, because we need as revenues are under pressure to cut costs even faster. Tidjane Thiam, CEO, Credit Suisse Banks began to reassess cost initiatives and targets. When compared to 2014, expenses declined at only 9 of the 31 banks* included in this analysis. Notably, lower legal charges substantially drove reduced costs at three of these banks Bank of America, Citigroup and Morgan Stanley. In addition, fewer than half the banks generated positive jaws over the same period, despite an industry-wide focus on growing revenues faster than expenses. While this led to questions about what more can be done to materially improve the expense trajectory, management at most banks continued to point to the ongoing efficiency headwinds of low revenue growth, elevated regulatory and compliance costs and the need to invest in innovation and growth programs. However, during the 4Q15 earnings season, management at a growing number of banks (although, arguably too few) acknowledged the realities of the current operating environment and either pushed out efficiency target deadlines or announced new expense reduction targets. Jeff Campbell, CFO, American Express: As we moved through 2015 and gained more clarity on [the Costco] portfolio sale, as well as our revenue growth outlook, it became clear that we needed to accelerate and expand our cost reduction efforts to right size our cost base with the evolving business environment. Stephan Engels, CFO, Commerzbank: We continue to face severe headwinds from the negative interest rate and regulatory environment. This is why our core bank targets of a net ROE of more than 10% and a cost-income ratio of 60% are currently not within reach. António Horta-Osório, Group Chief Executive, Lloyds Banking Group: Today we are reaffirming our strategic targets for our return on equity and cost-to-income ratio, although, due to the additional tax surcharge and the interest rate environment, we now expect the timing of these targets to be deferred one and two years, respectively. James Gorman, CEO, Morgan Stanley: We have launched a major company-wide initiative called Project Streamline, an effort led by our CFO Jon Pruzan and COO Jim Rosenthal, which is designed to identify and implement significant infrastructure expense reductions by the end of We ve set a new target [efficiency] ratio of 74% in 2017, which translates into $1 billion in expense reductions over the next two years. Kirt Gardner, CFO, UBS: One of the reasons we re slightly behind our CHF1.4 billion [year-end 2015 net cost reduction] target is because we ve encountered an increased level of permanent regulatory demand than we anticipated a couple of years ago when we launched the program. We would expect to achieve the CHF1.4 billion sometime around the middle of this year, and we re still committed to the CHF2.1 billion by the end of Cost-income ratios* Source: Company reports *Nomura excluded because the period ending 31 December 2015 was 3Q16 and full-year data is not yet available. 8

9 Percentage change in expenses and revenues from 2014 Higher revenues and lower costs Higher revenues and higher costs 20% ITAU 15% UBS CBK SG BBVA BNP 10% ING CA SANT BAC C MS TD CIBC LLD INT RBC WFC STT BARC UCG HSBC JPM USB BK AXP GS DB 5% Revenue 0% -5% CS -10% RBS -15% STAN Lower revenues and lower costs Lower revenues and higher costs -20% -30% -20% -10% 0% 10% 20% 30% 40% 50% Expenses Source: Company reports; Note: Nomura excluded because the period ending 31 December 2015 was 3Q16 and full-year data is not yet available; banks on the left side of the line (with yellow markers) had positive jaws; i.e., revenue growth rate exceeded the expense growth rate. 9

10 4. Capital plans: dividends under focus in Europe Rewarding shareholders with sustainable dividends is a priority for [us]. This year, we will pay 2.4 billion in cash dividends for 2015, over twice as much [as in 2014] and around 400 million more than our business plan commitment. Carlo Messina, CEO, Intesa Sanpaolo Some European bank shareholders received good news on dividends as others continue to wait. During the 4Q15 earnings season, banks across regions continued to highlight their ability to build and maintain sufficient levels of regulatory capital despite the challenging operating environment. Banks in the US and Canada have been able to share their success on this front with shareholders in the form of dividends and share buybacks and management at each of the North American banks included in this analysis spoke of their plans to increase payouts. Victor Dodig, CEO, CIBC: We re just going to keep [increasing the dividend by] C$0.03 a quarter until we get to the upper end of our [target payout] range, which is 50%. We re at 45.5% now. James Gorman, CEO, Morgan Stanley: We increased our common dividend by 50% and our buyback from US$1 billion to US$2.5 billion. We intend to further increase capital returns to shareholders in the years ahead, subject, of course, to regulatory approval. In Europe, however, banks have not made consistent progress on dividends. UBS and Lloyds announced that they would reward shareholders with a special dividend, and Commerzbank announced that it would pay a dividend for the first time in five years. However, Barclays cut its dividends to fund its reshaping efforts, Credit Suisse maintained a highly cautious stance on its payout plans and the topic of shareholder returns was not even addressed at Deutsche Bank. Sergio Ermotti, CEO, UBS: Our Board intends to recommend an ordinary dividend of CHF0.60 per share, and a special dividend of CHF0.25 per share, which will be paid in May, following approval at our annual general meeting. We view the ordinary dividend as a reflection of our strong operating performance, while the special dividend reflects the substantial upward revaluation of our deferred tax assets in Ralph Hamers, CEO, ING Groep: We are moving away from a payout ratio, [which is] the way we ve guided over the last two years. I think there s more clarity now around capital levels; more clarity about the underlying performance for us as well. Therefore, we have changed to an absolute level of dividends, and the statement is that we aim to grow the dividend over time. António Horta-Osório, Group Chief Executive, Lloyds Banking Group: I am, therefore, delighted to announce that, following the resumption of dividend payments in 2014, the Board has recommended a final ordinary dividend of 1.5p per share, bringing the total ordinary dividend for the year to 2.25p per share. In addition, in line with our commitment to return surplus capital, the Board has also recommended a special dividend of 0.5p per share. Jes Staley, CEO, Barclays: To give us the flexibility to aggressively accelerate our exit of non-core activities, we have decided to adjust our dividend. It is our intention to reduce our dividend to 3p in 2016 and This will help us accelerate the rundown of non-core. Once we have made the reductions in non-core, and have clarity on the remaining conduct issues, we should be in a position to pay out a significant portion of our earnings over time. Common Equity Tier 1 (CET1) ratios,* 4Q Source: Company reports. 4Q15 3Q15 *Fully loaded CET1 ratios with the following exceptions: look-through CET1 ratio at Credit Suisse and transitional CET1 ratios at American Express and Nomura. 10

11 5. Regulatory and compliance: banks express concern about TLAC compliance On January 14, the Basel Committee published a final paper on the revised minimum capital requirements for market risk. From our first review, we appreciate the recalibration has reduced some punitive elements. However, a lot of work is now before us as the rules will have to be implemented in national legislation by January Marcus Schenck, CFO, Deutsche Bank Evolving regulations are expected to drive funding costs up. In recent months, global regulators published a series of communications on rules aimed at global systemically important banks (G-SIBs). Major releases included the following: 30 October 2015: The Federal Reserve released a Notice of Proposed Rulemaking (NPR) on total loss-absorbing capacity (TLAC) for the eight US G-SIBs. According to the NPR, the banks will have to issue a combined $120 billion in long-term debt to meet the new requirements. 1 9 November 2015: The Financial Stability Board issued international standards for TLAC to be applied to G-SIBs. 14 January 2016: The Basel Committee published the final version of its fundamental review of the trading book (FRTB). According to the explanatory note accompanying the release, the revised market risk standard would result in a median increase of 27% in the total capital requirement for market risk. 2 During the 4Q15 earnings season, management observed that the final FRTB rule was not as punitive as the proposed version and provided initial and somewhat mimimized estimates related to its impact on risk-weighted assets (RWA). Uncertainties over the TLAC requirements appeared to cause more concern, however, particularly related to banks ability to issue sufficient compliant debt against the current market backdrop and the expectation that it will drive funding costs higher. Evolving capital requirements John Gerspach, CFO, Citigroup: Our risk-weighted assets (RWA) coming out of market risk currently are US$77 billion. It s roughly 6% of the total RWA. So while this proposal could have a significant impact on our market risk RWA we re talking about 6% of our total RWA. FRTB Jérôme Grivet, CFO, Crédit Agricole: We don t have a precise estimate of what it would represent for us. But considering the level of capital market activity that we have, it s going to be probably a much smaller impact with us than it is with many of our competitors. But we are not in a position yet to give you precise information on that. Tushar Morzaria, Group Finance Director, Barclays: One of the proposals the market has focused on relates to market risk-weighted assets. Based on an initial analysis, we estimate an increase to RWAs of around 10 billion, which is before management actions and further non-core rundown. John Shrewsberry, CFO, Wells Fargo: While the NPR is out, there is a little ambiguity about what s eligible and what s not. And so that will slow down issuance during the NPR period, so that none of us issues something that turns out not to be either conforming or grandfathered. TLAC Iain Mackay, Group Finance Director, HSBC: At the risk of stating the obvious, right now wouldn t necessarily be our preferred time to be in the market issuing large amounts of debt. From a TLAC perspective, it s senior debt. So our expectation is that probably over the course of the next few weeks we ll investigate going out into the market with some senior debt to meet our TLAC requirements. We still price broadly speaking inside or very much in line with the best of our peer group in this category. Were we to issue today, it would obviously be a little bit more expensive than it was going back a couple of months. Kirt Gardner, CFO, UBS: As we meet our too-big-to-fail requirements through additional AT1 and TLAC issuance, that is going to cause, of course, an increase in our total funding cost. 1 Notice of Proposed Rulemaking, Federal Register, federalregister.gov/articles/2015/11/30/ /total-loss-absorbingcapacity-long-term-debt-and-clean-holding-company-requirements-for-systemically#h-34, accessed February Explanatory note on the revised minimum capital requirements for market risk, Basel Committee on Banking Supervision, bis.org/bcbs/publ/d352_note.pdf, accessed February

12 6. Credit quality: are banks provisions sufficient to weather lower-forlonger oil prices? There s been an up-tick in cost of risk during the quarter to 37 basis points. The reason behind that increase mainly has to do with the fact that we ve reduced the internal rating of some customers, especially in the energy segment, which required additional provisions. Jaime Sáenz de Tejada, CFO, BBVA Oil prices are expected to hover near $30 for the rest of the year, raising concerns about banks provisioning. During the 4Q15 earnings season, banks across regions faced sharp questions about the health of their oil and gas portfolios and whether they have set aside sufficient reserves to cover a potential spike in impairments. In response, management detailed exposures and stress testing processes for energy portfolios. Notably, European banks generally reported a lower cost of risk for full-year 2015, in contrast to US-based peers, most of which reported increased provisions. Paul Donofrio, CFO, Bank of America: Our stress analysis of the energy portfolio includes various sustained low oil prices over extended periods. As an example, if we held oil prices at US$30 per barrel for nine quarters, we estimate our potential losses on the energy portfolio would be roughly US$700 million. Stephan Engels, CFO, Commerzbank: Our oil and gas exposure is less than 1% of the Group s total exposure and more than 75% of that exposure is investment grade. We view this portfolio as unproblematic. Iain Mackay, Group Finance Director, HSBC: We took just over US$400 million of loan impairment charges in relation to the oil and gas sector in the fourth quarter. Most of that charge was collectively assessed, reflecting our expectation that energy prices will stay low throughout We ve modeled this to a price of US$30 a barrel. In all, the sector accounted for approximately US$500 million of loan impairment charges in Percentage change in provisions for credit losses from 2014, selected banks -2% -3% -4% -6% -8% -15% -16% -18% -26% -37% -39% -46% -48% 39% 27% 22% 6% 6% 3% 2% Ralph Hamers, CEO, ING Groep: The NPL ratio of our lending to the broader oil and gas industry is still low. It is at 1.8% and has not deteriorated in the fourth quarter. That s despite a further weakening of oil prices. But we cannot rule out that we won t be hit in the future by incidents affecting our wholesale banking loan book. WFC CS BAC ITAU JPM TD C SG BNP BARC HSBC SANT RBC USB ING DB CIBC INT BBVA CBK RBS LLD Source: Company reports. Philippe Heim, CFO, Société Générale: [We] conducted a stress test on this exposure. We used as an assumption an oil price standing of US$30 per barrel, and with this oil price for the full year, this will not cause us to review our cost of risk target for 2016 as previously described. 75% 74% Oil prices, US$, 1 January February Jan-15 2-Apr-15 2-Jul-15 2-Oct-15 2-Jan-16 Cushing, OK WTI Spot Price FOB (Dollars per Barrel) Europe Brent Spot Price FOB (Dollars per Barrel) Source: US Energy Information Agency. 12

13 7. Cross-border activities: retreat from non-core markets is driven by factors other than GDP prospects We are large, but we are a simple bank. We do not operate in every market nor do we aspire to do so. We do retail and commercial banking in nine countries in Europe and North and South America. In every single one of those we have critical mass. Ana Botín, Group Executive Chairman, Banco Santander Banks are willing to reduce their global footprint, but not in response to economic growth forecasts. On 6 January 2016, the World Bank lowered its global economic growth forecast for the third consecutive year. The International Monetary Fund issued a similar downgrade on 19 January Banks with a significant presence in challenged markets acknowledged that they were monitoring macroeconomic headwinds, but gave no indication that slower growth prospects in the medium-term would lead them to exit countries. Instead, reshaping decisions appeared to be driven by factors such as an increased regulatory burden, a lack of scale and a sharper focus on core business priorities. Sergio Ermotti, CEO, UBS: You have to put things into perspective. We have been in Asia for 50 years; we have been in China for more than 10 years as a local domestic licensed presence. Clearly, we have to manage the next few quarters of volatility in China, but the trend remains intact and that s why we will put more resources into China. Jes Staley, CEO, Barclays: It is our intention, subject to required shareholder and regulatory approvals, to reduce our interest in Barclays Africa Group Limited to a non-controlling, non-consolidated position over the next two to three years. This has been a very difficult decision to make. Barclays has been in Africa for over 100 years. We have some excellent franchises across the continent, with a great management team and dedicated colleagues. But we face a regulatory environment where we carry 100% of the financial responsibility for Barclays Africa and yet receive only 62% of the benefits. Roberto Egydio Setubal, CEO, Banco Itaú: We see Latin America as a good opportunity for Itau. Our experience is that we can perform quite well in this market. So we believe that we should increase our presence in all the countries in Latin America. Currently, we have presence in Argentina, Chile, Uruguay, Paraguay and Colombia. We believe that we can increase our presence in Chile, Colombia and Argentina. John Gerspach, CFO, Citigroup: When you take a look at our emerging market consumer exposures around the world, we continue to feel good about the underlying credit quality overall. And again, that s driven by our target client strategy. [We sold] the Credicard portfolio in Brazil. We ve exited other portfolios in other countries. We reshaped the portfolios in India, in Mexico, in Korea. And there are also a lot of good regulatory controls that exist in Asia that may dampen our revenue prospects from time to time but actually form a pretty good basis then for a solid credit story. Bill Winters, CEO, Standard Chartered: If we reach the conclusion that the Asian, Middle East and African markets simply don t offer the medium- to long-term prospect that we thought they did at the time that we set out our strategy, of course we would reconsider the strategy. But we see no evidence right now that suggests that that s the proper medium- and long-term conclusion, however difficult the very short term is. GDP growth rates and forecasts US World Euro area China EM and developing economies Source: IMF World Economic Outlook, January 2016 update. 13

14 8. Lending trends: banks focus on prudent volume growth amid concerns about the global economy A bank is supposed to be there for clients in good times and bad times. So, to the extent we can responsibly support clients, we re going to. Jamie Dimon, CEO, JPMorgan Chase As concerns over credit quality escalate, banks highlight prudent approach to lending. Management comments during the 4Q15 earnings season indicated that banks are not interested in growing loans at the expense of sacrificing credit quality. While higher loan volumes could boost net interest income and provide a much-needed tailwind for overall revenues, escalating concerns about the uncertain macro environment call for a more balanced approach to growth. Kirt Gardner, CFO, UBS: Importantly, we maintained our lending discipline. I think we easily could have gone back out to the market and actually we could have been aggressive in our lending, and we could have offset some of the deleveraging [in Asia-Pacific]. But that s not consistent with our focus on quality and not consistent with what we think is right for our clients and our shareholders. António Horta-Osório, Group Chief Executive, Lloyds Banking Group: In 2015 we delivered growth in our targeted customer segments within our prudent risk appetite. Key highlights include another 5% increase in lending to SMEs against the backdrop of a market which only last year turned positive. In mortgages, however, we have taken the conscious decision to protect margin; growing our open book by around 1% vs. a market that grew by around 2.5%. We believe that this is the right approach as the leader in what is, at the moment, a low-growth market and also where growth is predominantly coming from buy-to-let. Jeff Campbell, CFO, American Express: We grew our lending business faster than the market, while maintaining our industry-best credit performance. We ll continue to target new lending prospects and deepen relationships with current customers. Dave McKay, CEO, Royal Bank of Canada: We saw clients switch over to secure lines of credit and into mortgage products to take advantage of better rates, which also contributed to our mortgage growth. We continued to lend prudently, working directly with our clients to manage their debt. Les Matheson, CEO of Personal and Business Banking, Royal Bank of Scotland: We ll be aiming to grow our [mortgage] volume at roughly the same rate that you saw us grow it last year, and you shouldn t expect us to change our stance on pricing. We re going to be doing that through the way in which we re selling the product through making sure that we re delivering good service; we re not going to be reducing our pricing in any way. Percentage change in end-of-period loan balances from 31 December % 0% 1% 3% 3% 4% 4% 4% 5% 5% 5% 6% 14% 16%18% 11% 8% 8% 8% 8% 9% -1% -9% -8% -7% -6% -4% -5% -17% Source: Company reports; loan data not available for BNY Mellon, Commerzbank, Goldman Sachs or State Street. 14

15 9. Innovation: FinTech investments highlighted as banks turn to external sources for new ideas Over the coming years, domestic markets will focus on more digitalization combined with more customization for all customer segments. [We will] develop comprehensive service offers such as our recently launched Arval Active Link and enrich our offers through innovation and partnerships with FinTechs. Jean-Laurent Bonnafé, CEO, BNP Paribas Banks turn to external partners to drive innovation. During the 4Q15 earnings season, banks offered details on the gains that they are seeing in numbers of active mobile banking customers. Marianne Lake, CFO, JPMorgan Chase: We added nearly 600,000 households, and our active mobile customer base continues to grow, up 20% to roughly 23 million customers, the largest of the major US banks. António Horta-Osório, Group Chief Executive, Lloyds Banking Group: We now meet around 55% of our customers banking needs digitally. We have the UK s largest digital bank, increasing our market share of new business to 21% in the year and now have 11.5 million online and 6.6 million mobile banking customers. However, simply having a mobile app or a rising base of active mobile customers no longer qualifies a bank as an innovation leader. In order to take their strategies to the next level, banks are increasingly turning to external sources of inspiration and support, including FinTech firms and blockchain consortiums. This is in line with the findings presented in EY s December 2015 FinTech Adoption Index: As FinTech makes customers lives easier, traditional providers will need to step up their efforts to serve customers just as effectively. Traditional financial services firms can learn from how FinTechs think about the customer proposition and how they are harnessing technology to deliver value and convenience. Innovative digital initiatives discussed in 4Q15 Victor Dodig, CEO, CIBC: The rapid pace of change in the industry, especially from FinTech and disruptors, is forcing all of us at CIBC to continue to innovate for our clients as they adopt new technologies and look for secure, easier, more flexible ways to do their day-to-day banking. We recognize that we can t build everything ourselves, and that s why we re open to collaborating with high-quality third parties where appropriate. FinTech investments Blockchain Carlos Torres Vila, CEO, BBVA: We have a strategic priority to build new digital businesses. We want to do that primarily [by] leveraging and accessing external innovation, and the year has been a good one in that respect as well. We have invested in some new ventures and we have purchased SpringStudio, the design firm. We have invested in Atom a 29.5% stake in the UK s first mobileonly bank. We also established partnerships with companies like Dwolla, Prosper and OnDeck, and we are participating in blockchain initiatives. Ralph Hamers, CEO, ING Groep: We have also indicated in our strategy that we are in need of developing new lending capabilities, particularly in the areas of SME financing and consumer financing. When we launched this strategy two years ago, we also indicated that we didn t want to go about, for example, SME lending by building a branch next to every church in every village, because that s a very expensive way to build a platform to do SME lending. So we had to look at alternative ways to do so. Now clearly, if we can t develop those ourselves or if we see a good practice out there, and we ve seen one called Kabbage in the US, then we want to engage with this practice. That s what we did with Kabbage. So we took an equity investment as a more strategic player, not as a venture capital firm, because that s not how we play, it has to fit our strategy. Federico Ghizzoni, CEO, Unicredit: I m pleased to say that with Anthemis Group, a leading venture capitalist specializing on FinTech, [we] will invest up to 200 million, placing our group in a leading position among the most innovative global banks. Gerald Hassell, CEO, BNY Mellon: We are spending a lot of time and energy on blockchain technology and where it can be applied. We have two pilot programs actively engaged internally. We re a participant in a couple of consortiums on blockchain technology. Interestingly, we re hosting a blockchain technology day [on 1 February] with our own technologists and outsiders exploring all of the different opportunities that we see and others see. Frédéric Oudéa, CEO, Société Générale: Regarding Global Banking and Investor Services (GBIS), where I still consider that digital will be less disruptive in terms of relationship with the clients, we are working on new technologies, exploring technologies such as blockchain and, of course, trying to personalize more product offerings for investors, as well as corporates. 15

16 10. Acquisitions and divestments: activity driven by efforts to run down non-core units We ve made strong progress in selling and running down assets that don t support our strategy. Ross McEwan, CEO, Royal Bank of Scotland Banks make further progress in disposing of non-core assets. During the 4Q15 earnings season, only a few banks discussed specific acquisitions, perhaps reflecting a reduced appetite for inorganic growth amid an uncertain economic backdrop. Ample evidence of reshaping through asset sales was available, as banks continued to exit businesses that no longer create value. Mike Corbat, CEO, Citigroup: We had a substantial decrease in Citi Holdings assets during the quarter, largely driven by the closing of the sale of OneMain and consumer franchises in several countries. Jon Pruzan, CFO, Morgan Stanley: Commodity results were down quarter over quarter, primarily driven by our oil merchanting business. We closed the sale of this business on November 1. Given the sale of our two large physical oil businesses, we would expect to see less seasonality in our first quarter FIC results going forward. Jes Staley, CEO, Barclays: Since I started three months ago, we have taken further steps to simplify the Group. We have made substantial progress in exiting European retail banking, selling our Italy and Portuguese businesses, while we continued to evaluate selling our French business. We have closed trading and banking operations in nine countries. And we ve put our cards business in Southern Europe up for sale. We ve sold our wealth management business in the United States, and now we also intend to do so in Asia. Acquisitions, 4Q15 Stuart Gulliver, Group CEO, HSBC: We ve agreed to sell our business in Brazil, and that deal remains on track. However, we do not now intend to sell our Turkish business. After our investor update in June, we received a number of offers for the business in Turkey, none of which would have been in the best interests of shareholders. We therefore decided to retain and restructure our Turkish operations, maintaining our wholesale business and refocusing our retail network. This will provide better value for shareholders and continue to allow our clients to capitalize on our international footprint. John Cryan, Co-CEO, Deutsche Bank: We ve made progress on a number of our various sale processes. We ve announced an important sale contract signing with PICC in relation to Hua Xia Bank. And we ve also sold our Alex Brown business, which, as Marcus said, would complete in about the third quarter. Shigesuke Kashiwagi, CFO, Nomura Holdings: During the current fiscal year, we have also disposed of non-core assets and dealt with legacy issues. BK BNP (Arval) RBC USB Atherton Lane Advisers, Silicon Valley, CA GE Fleet Services in Europe City National Bank, Los Angeles, CA Fidelity Investments Reward Card portfolio 16

17 Appendix Key themes addressed, by bank 4Q15 earnings season Key theme # AXP ITAU SANT BAC BK BARC BNP CIBC C CBK CA CS DB GS BBVA HSBC Quarterly earnings performance Macro challenges Expense trends 32 Capital strength and plans Regulation and compliance Credit quality 30 Cross-border activities Lending trends Innovation 24 Acquisitions and divestments 22 Legend AXP American Express ITAU Banco Itaú SANT Banco Santander BAC Bank of America BK BNY Mellon BARC Barclays BNP BNP Paribas CIBC Canadian Imperial Bank of Commerce C Citigroup CBK Commerzbank CA Crédit Agricole CS Credit Suisse DB Deutsche Bank GS Goldman Sachs BBVA Grupo BBVA HSBC HSBC Holdings 17

18 Key themes addressed, by bank (continued) 4Q15 earnings season Key theme # ING INT JPM LLD MS NOM RBC RBS SG STAN STT TD UBS UCG USB WFC Quarterly earnings performance 32 Macro challenges 32 Expense trends 32 Capital strength and plans Regulation and compliance Credit quality 30 Cross-border activities Lending trends Innovation 24 Acquisitions and divestments 22 Legend ING ING Groep INT Intesa Sanpaolo JPM JPMorgan Chase LLD Lloyds Banking Group MS Morgan Stanley NOM Nomura Holdings RBC Royal Bank of Canada RBS Royal Bank of Scotland 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 18

19 Select KPIs, percentage change from 4Q14 Text legend: Better than average Worse than average Assets Compensation cost Noncompensation cost Revenues/ employee (US$000) Cost/ employee (US$000) Operating margin Net interest margin Cost of equity Return on average equity Three- month change One-year change Best performer 18.7% -28.5% -52.6% % 4.2% 5.5% 18.2% 8.4% 27.5% Worst performer -22.4% 21.6% 67.2% % 1.0% 25.5% -51.4% -10.3% -31.8% Average -0.5% 1.4% 2.9% % 2.3% 10.6% 3.0% 0.3% -6.1% AXP 1.3% -24.8% 9.1% NA NA 17.3% NA 8.7% 17.1% -6.2% -25.2% BBVA 18.7% 21.6% -7.9% % NA 10.7% 8.9% -10.2% -12.2% STD 5.8% 4.8% 3.7% % NA 10.5% 1.1% -3.1% -31.8% BAC 1.9% -2.1% -4.5% % 2.2% 9.4% 5.2% 8.0% -5.9% BK 2.2% 4.4% -41.2% % 1.0% 14.5% 7.2% 5.3% 1.6% BARC -17.5% -2.4% 49.1% NA NA -1.0% 4.2% 8.4% -12.8% -10.3% -10.1% BNP -4.0% NA NA % NA 11.6% 3.0% -0.4% 6.0% CIBC 11.7% 18.2% -13.0% % 2.0% 5.5% 14.6% -4.9% -8.7% C -6.0% -6.2% -31.1% % 3.0% 10.0% 6.0% 4.3% -4.4% CBK -4.4% 0.9% -9.6% % NA 9.0% 2.9% 1.6% -12.8% CA -3.8% NA NA NA NA 32.2% NA 10.6% 6.7% 6.1% 1.1% CS -10.9% 20.1% 18.9% % NA 10.6% -51.4% -4.7% -11.0% DB -4.8% 4.1% 42.0% % NA 9.6% -12.5% -6.4% -9.8% GS 0.6% 5.3% 64.2% NA NA 14.7% NA 9.1% 3.5% 3.7% -7.0% HSBC -8.5% NA NA % NA 9.4% -2.2% 7.5% -11.9% ING 1.2% -0.6% -1.9% % 1.5% NA 8.1% NA NA INT 4.7% NA NA % NA 10.4% 0.1% -2.2% 27.5% ITAU 13.2% 14.1% 15.0% % NA 25.5% 18.2% 0.2% -12.0% JPM -8.6% -2.4% -8.5% % 2.2% 12.9% 8.8% 8.3% 5.5% LLD -5.6% NA NA NA NA -7.0% NA 7.6% -5.5% -2.8% -3.6% MS -1.8% -28.5% -52.6% % NA 8.5% 4.9% 1.0% -18.0% NOM -1.4% -0.7% -2.8% NA NA 14.5% NA 17.2% 5.1% -1.3% -18.0% RBC 14.2% 5.8% -16.4% % NA 5.8% 16.5% 0.5% -7.6% RBS -22.4% -3.6% 67.2% NM 2.2% 10.3% -18.8% -4.1% -23.4% SG 2.0% NA NA % NA 11.0% 4.7% 6.8% 21.7% STT -10.6% -3.4% -11.5% % 1.1% 11.2% 10.9% -1.3% -15.5% TD 15.0% 4.1% 5.5% % 2.0% 6.0% 11.1% 3.1% -2.3% USB 4.8% 6.3% -5.9% NA NA 45.6% 3.1% 13.0% 12.9% 4.0% -5.1% UBS -11.3% 3.0% 3.4% % NA 10.5% 6.7% 8.4% 14.2% UCG 1.9% -2.4% 0.6% % NA 9.5% 1.7% -7.8% -3.7% WFC 6.0% -1.1% 0.7% % 2.9% 11.2% 11.6% 5.9% -0.8% Source: SNL Financial. Notes: 4Q15 numbers for Canadian banks are for the period ending 31 October 2015; operating margin = (net revenue - operating expense)/net revenue; all numbers are non-annualized (except RoAE and NIM). 19

20 Scope, limitations and methodology of the review 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 4Q15 earnings reporting season. The identification of the top 10 themes is based solely on an examination of the transcripts and associated presentation materials of the earnings conference calls held from 2 December 2015 to 1 March The period covered is 4Q15, which ended 31 December Exceptions include the following: Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank, for which the 4Q15 period ended 31 October 2015 Nomura Holdings, Inc., for which the covered period was 3Q16 Banks were selected based on their size and the availability of earnings conference call transcripts. Every effort was made to include a global sample of banks in the review. Exceptions include the following: Mitsubishi UFJ Financial Group, Inc.; Mizuho Financial Group, Inc.; and Sumitomo Mitsui Financial Group, Inc. were excluded from the analysis because of the lack of transcript availability. Bank of China Limited and Industrial and Commercial Bank of China Ltd. were excluded because of the timing of their 4Q15 results reporting. Macquarie Group, Australia and New Zealand Banking Corporation (ANZ) and National Australia Bank (NAB) did not hold interim earnings calls for the period ending 30 December

21 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 Global Banking & Capital Markets 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. Global Banking & Capital Markets 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. We work to anticipate market trends, identify the implications and develop points of view on relevant sector issues. Ultimately it enables us to help you meet your goals and compete more effectively EYGM Limited. All Rights Reserved. EYG no Gbl CSG #: SW 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