Not your father s banks A special report by the Portfolio Advisory Group U.S. Equities. RBC Wealth Management. For important disclosures, see page 8.

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1 RBC Wealth Management Not your father s banks A special report by the Portfolio Advisory Group U.S. Equities Click here for author s contact information. All values in U.S. dollars and priced as of May 22, 2018, market close, unless otherwise noted. Disseminated: May 23, :45ET; Produced: May 23, :21ET For important disclosures, see page 8. May 2018

2 2 Not your father s banks Not your father s banks We like how the investment story for the U.S. banks is coalescing as they have appealing valuations and runway ahead with clear tailwinds, while the potential pitfalls are unlikely to derail the narrative. Ben Graham benjamin.graham@rbc.com In today s post-great Recession world, banks finally appear poised to be a well-reasoned investment, in our opinion. While we recognize banks have performed well over the last few years, it appears to us that the risk/ reward backdrop remains favorable for the coming years as well. Visibility into earnings growth is clear, catalysts are on the horizon, and downside risk appears well contained. In this report, we will walk through how the group fits into its own historical context, set the table for catalysts ready to play out in 2018 and 2019, weigh the potential risks, define the investment thesis, and conclude with our preferred ideas. Valuation normalization: The early innings Starting with valuations and their historical context, price-to-book (P/B) ratios and price-to-earnings (P/E) ratios are exiting a period of extremes triggered by the financial crisis. In the 15 years prior to the crisis, the banking industry traded as high as 3.8x book value before dropping to 0.3x during the depths of the recession. Valuations spent much of the next decade languishing at roughly 1.0x book value as investors remained wary of the group. In the last 18 months, valuations have started to trend higher but remain well below long-term averages and prior peaks. Bank valuations on a P/B ratio, an extremely important metric for the industry, remain well below longterm medians, potentially highlighting further expansion ahead. Rising valuations still have further to climb S&P 500 Bank industry P/B ratio 4x 3.8x 3x 2x 1x 0x 0.3x x 0.70x 0.60x 0.50x 0.40x 0.30x 0.20x 0.10x 0.00x Median P/B ratio (1.81x) P/B ratio Source - RBC Wealth Management, FactSet; data through 5/22/18 Given the current P/B multiple shown in the chart above, we would argue that the sector s outperformance is in the early-to-middle innings. Since November 2016, banks have outperformed the S&P 500 by more than 20 percentage points, 48.5% to 27.0%. We believe further outperformance and multiple expansion are likely based on below-average valuations and upcoming catalysts.

3 3 Not your father s banks As the short end of the yield curve rises with rate hikes from the Fed, banks stand to benefit due to their positive relationship with short-term rates. Catalysts into 2020 Chief among the catalysts to higher bank share prices is interest rate normalization. Banks make money in two primary ways, net interest income (NII) and growing the loan base. NII is simply the earnings derived from the lower interest a bank pays on the deposits it holds and the higher interest it earns on loans made. The percentage point difference is termed the net interest margin (NIM). As rates rise, or normalize, NII should grow and NIM should expand. Rising short-term rates are a boon to banks S&P 500 Banks Index and the U.S. 2-year Treasury yield Correlation: % 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% S&P 500 Banks Index (LHS) U.S. Govt. 2-Year Treasury yield (RHS) Source - RBC Wealth Management, Bloomberg; data as of 5/23/18 at 13:35ET Based on measures we track the relationship of bank share prices to interest rates and the historical performance of these stocks in previous periods of rising rates we believe interest earned on loans will grow more rapidly than interest paid on deposits. This phenomenon is termed an expanding NIM and is one of the cleanest ways for banks to increase their profitability. Strengthening NIMs are in the early stages of a reversal Bank industry net interest margins (NIMs) NIMs appear to be on the cusp of a broader move higher with the normalization of the rate environment as the Fed reverses ultralow interest rate policies. 5% 4% 3% -1 Std. Dev.: 3.35% +2 Std. Dev.: 4.69% +1 Std. Dev.: 4.24% Average: 3.80% 3.17% -2 Std. Dev.: 2.90% 2% Source - RBC Wealth Management, St. Louis Federal Reserve Economic Data (FRED); quarterly data through Q4 2017

4 4 Not your father s banks In addition to NIM expansion, another catalyst is accelerating corporate loan growth. As U.S. tax reform embeds itself in the capital allocation process for corporations, management teams at most financial firms are anticipating corporate lending to follow. The decline in the federal corporate tax rate from 35% to 21% is likely to free up capital for many firms. Additionally, accelerated depreciation expense should make more capital projects look attractive to corporations. Given the capital planning process often requires 3 6 month lead times, Q is when corporate loan growth should start hitting bank financial statements. In fact, this loan growth is already appearing. Recent data from RBC Capital Markets and the Fed shows total loans growing at a 4.7% y/y rate. Commercial and industrial (C&I) loans are up 3.7% y/y and total consumer loans are up 5.5%. These are positive trends for banks. Weekly data shows a clear acceleration in loan growth in recent months. Loan growth is accelerating in 2018 Total loan growth across all U.S. banks 5% 4% 3% 2% Oct '17 Dec '17 Feb '18 Apr '18 Source - RBC Wealth Management, RBC Capital Markets, Federal Reserve Board; data through 5/11/18 The next catalyst is the potential for deregulation to help unlock excess levels of equity on bank balance sheets. In the aftermath of the financial crisis, we saw an understandable period of regulatory tightening given the excessive risk-taking in the run-up to the crisis. Regulators demanded banks to hold higher levels of equity in order to protect the banking system, but 10 years later, it appears that banks and regulators are ready to allow equity levels to slowly inch lower. This is acceptable, in our view, and should lead to increased share buybacks, rising dividends, and improving returns on equity, all positives for the sector. Anticipated and widespread approvals from the Comprehensive Capital Analysis and Review (CCAR) process in June should provide the regulatory greenlight for these institutions to increase their dividend and buyback programs. Our opinion is that a period of interest rate normalization and an upcoming cycle of corporate loan growth will improve banks earning

5 5 Not your father s banks power and help provide ongoing multiple expansion in the future. We also see an easing regulatory environment and a return of capital to shareholders as positive for the group. This is not 2006, but risks do exist Proof that 2018 is not 2006 can be seen in the fundamentals underlying bank balance sheets and the very different set of concerns facing the industry today. However, that doesn t mean the banking system is without risk. In the near term, we see three risks to ongoing outperformance from the group. First, economic activity outside the realm of expectations may prove challenging for bank performance. This could unfold via more sluggishthan-anticipated economic growth or a pickup in inflation beyond current expectations. While difficult to forecast, we think current valuations are discounting appropriate degrees of this risk. Second, anticipated loan growth may not materialize in the back half of 2018 and into Currently, as we ve already demonstrated, loan growth is emerging. However, until this growth matures we must acknowledge that there remains a small risk it will not come to fruition. Furthermore, as with all lenders there will always be credit risk. By that we mean the inability of a borrower to pay back borrowed money. At this time, we view this risk as low given current charge-off trends. In previous cycles, current levels of charge-off rates saw several years pass before the end of the cycle. Loan losses appear contained as charge-off rates remain low Fed charge-off rates, all loans and business loans (C&I) 4% 3% 2% All loans C&I loans 1% 0% Source - RBC Wealth Management, St. Louis Federal Reserve Economic Data (FRED); quarterly data through Q Third, we could see NIM compression related to the banks competing away the benefits of measured rate hikes from the Fed. The result would be NIMs that do not expand, which would prove harmful to earnings in the near term. At the RBC Capital Markets Financial Institutions conference in March, several management teams said it would be silly for the industry to do this given the challenging rate environment of the past decade. However, the risk does exist. Cumulatively, all of these shorter-term risks appear confined to the realm of lower probabilities, but it would be inappropriate to say any of them are impossibilities.

6 6 Not your father s banks The final word We believe banks remain a well-thought-out investment at this time after weighing all the factors. The foundation of our thesis begins with reasonable valuations and is further supported by a series of upcoming catalysts that include rising interest rates driving improvements in profitability, corporate loan growth that is already appearing and need only continue, and easing regulatory burdens that should unlock bank balance sheets and enable the deployment of excess capital. The potential pitfalls, in our view, are unlikely to derail the narrative because of the scale in which the catalysts outweigh the risks. After analyzing the individual components of investing in U.S. banks, we believe the industry presents an attractive risk/reward opportunity at these levels. RBC Capital Markets Outperform- or Top Pick-rated banks The table below represents the entirety of Outperform- and Top Pick-rated banks from our partners in RBC Capital Markets, spanning the large- and midcap universe. RBC Capital Markets Outperform- or Top Pick-rated banks Company name Ticker Price (5/23/18) Mkt. cap ($B) Yield Rating Price-tobook ratio Price-toearnings ratio NTM* Primary geographic exposure Bank of America Corp BAC $30.37 $ % Outperform 1.24x 11.29x U.S. BB&T Corporation BBT $55.10 $ % Outperform 1.46x 13.31x FL, TX, PA Popular, Inc. BPOP $47.08 $ % Outperform 0.72x 10.37x Puerto Rico Citigroup Inc. C $69.82 $ % Outperform 1.05x 10.22x World Cadence Bancorporation Class A CADE $29.83 $ % Outperform 1.67x 13.95x AL, FL, TX Cathay General Bancorp CATY $42.74 $ % Outperform 1.73x 12.88x CA, NY, IL Comerica Incorporated CMA $98.97 $ % Outperform 1.88x 14.09x TX, CA, MI, FL Fifth Third Bancorp FITB $31.27 $ % Outperform 1.40x 11.09x OH, MI, FL Great Western Bancorp, Inc. GWB $43.76 $ % Outperform 1.38x 13.90x Midwest, CO, AZ Huntington Bancshares Inc. HBAN $15.14 $ % Outperform 1.60x 11.96x OH, MI, PA JPMorgan Chase & Co. JPM $ $ % Outperform 1.60x 12.00x World KeyCorp KEY $20.18 $ % Outperform 1.54x 11.41x U.S. Morgan Stanley MS $53.87 $ % Outperform 1.36x 11.04x World M&T Bank Corporation MTB $ $ % Outperform 1.71x 14.32x NY, PA, Mid-Atlantic Northern Trust Corporation NTRS $ $ % Outperform 2.42x 16.10x Global PNC Financial Services Group, Inc. PNC $ $ % Top Pick 1.44x 13.59x Mid-Atlantic, Midwest, Southeast SVB Financial Group SIVB $ $ % Outperform 2.95x 18.76x CA, NY SunTrust Banks, Inc. STI $68.99 $ % Outperform 1.34x 12.73x Mid-Atlantic, Southeast Texas Capital Bancshares, Inc. TCBI $99.40 $ % Outperform 2.15x 15.43x TX TCF Financial Corporation TCF $26.05 $ % Outperform 1.47x 14.29x CO, MI, MN, WI U.S. Bancorp USB $50.62 $ % Outperform 2.03x 12.13x Midwest, West Western Alliance Bancorporation WAL $61.70 $ % Outperform 2.68x 14.46x AZ, CA, NV Wintrust Financial Corporation WTFC $95.25 $ % Outperform 1.62x 15.70x IL, IN, WI Zions Bancorporation ZION $58.00 $ % Outperform 1.41x 14.34x UT, CA, CO, TX Mean $ % x 13.31x -- Median $ % x 13.45x -- Source - RBC Wealth Management, RBC Capital Markets, FactSet; data as of 5/23/18 at 13:35ET; *NTM = next twelve months

7 7 Not your father s banks Preferred ideas Within RBC Capital Markets universe of banks rated Outperform or better, there are six names that strike us as most differentiated from peers. From largest to smallest, based on market cap: JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), PNC Financial Services Group, Inc. (PNC), BB&T Corp. (BBT), M&T Bank Corp. (MTB), and Comerica Inc. (CMA). The differentiators that lead us to prefer these names include: JPMorgan: The first-class management team, strong balance sheet, performance through the financial crisis, and potential to increase shareholder returns are all attractive. Bank of America: The years-long transition out of the financial crisis appears to be nearing completion and it appears Bank of America is about to enter a season of harvest. A microcosm of its efforts can be seen in the significantly higher quality of its credit card portfolio today. As the growing pains cease, the bank is poised to return greater levels of capital to shareholders and remains one of the more interest-rate-sensitive banks within the peer group. PNC: Exposure to the corporate loan growth theme is attractive, as over 65% of revenues are on the commercial side with a favorable geographic footprint. The not insignificant stake in Blackrock is a secular opportunity leveraged to the ongoing adoption of ishares-branded exchange-traded funds, and PNC is near the top of its peer group in terms of greatest beneficiaries to a rising rate environment. BB&T: The performance through the Great Recession was demonstrably better than peers. Its geographic footprint is favorable as the bank is exposed to some of the fastest growing economies in the U.S. Florida and Texas. BB&T was active on the M&A front in recent years at better valuations than are available now, and the dividend has been paid annually since M&T: The firm s top-tier management and industry-leading returns of capital to shareholders, further evidenced by a track record of surviving the Great Recession without cutting the dividend, provide a backdrop of stability. Additionally, credit standards are consistently better than peers, and M&T has a successful track record of M&A. Comerica: The balance sheet remains asset-sensitive and should continue to benefit from future rate increases. The business mix is tilted to commercial loans, the likely theme of corporate loan growth should be a boon for this company, and capital return is expected to remain strong as the company remains well positioned for CCAR. To determine whether the banks theme is a good fit for your portfolio, we believe this conversation is best to have with your RBC financial advisor in order to gauge appropriate exposure and risks.

8 8 Not your father s banks Disclosures and disclaimers Author Ben Graham, Research Associate benjamin.graham@rbc.com; RBC Capital Markets, LLC Analyst certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report. Important disclosures In the U.S., RBC Wealth Management operates as a division of RBC Capital Markets, LLC. In Canada, RBC Wealth Management includes, without limitation, RBC Dominion Securities Inc., which is a foreign affiliate of RBC Capital Markets, LLC. This report has been prepared by RBC Capital Markets, LLC., which is an indirect wholly-owned subsidiary of the Royal Bank of Canada and, as such, is a related issuer of Royal Bank of Canada. With respect to the companies that are the subject of this publication, clients may access current disclosures of RBC Wealth Management and its affiliates by accessing our web site at DisclosureLookup.aspx?EntityID=2 or by mailing a request for such information to RBC Wealth Management Research Publishing, 60 South Sixth Street, Minneapolis, MN References to a Recommended List in the recommendation history chart may include one or more recommended lists or model portfolios maintained by RBC Wealth Management or one of its affiliates. RBC Wealth Management recommended lists include the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Dividend Growth (RL 8), the Guided Portfolio: ADR (RL 10), and the Guided Portfolio: All Cap Growth (RL 12), and former lists called the Guided Portfolio: Large Cap (RL 7), the Guided Portfolio: Midcap 111 (RL 9), and the Guided Portfolio: Global Equity (U.S.) (RL 11). RBC Capital Markets recommended lists include the Strategy Focus List and the Fundamental Equity Weightings (FEW) portfolios. The abbreviation RL On means the date a security was placed on a Recommended List. The abbreviation RL Off means the date a security was removed from a Recommended List. Distribution of ratings For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy, Hold/Neutral, or Sell - regardless of a firm s own rating categories. Although RBC Capital Markets, LLC ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis. Distribution of Ratings - RBC Capital Markets, LLC Equity Research As of March 31, 2018 Inv estment Banking Serv ices Provided During Past 12 Months Rating C ount Percent C ount Percent Buy [Top Pick & Outperform] Hold [Sector Perform] Sell [Underperform] Explanation of RBC Capital Markets, LLC Equity rating system An analyst s sector is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst s view of how that stock will perform over the next 12 months relative to the analyst s sector average. Ratings Top Pick (TP): Represents analyst s best idea in the sector; expected to provide significant absolute total return over 12 months with a favorable risk-reward ratio. Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over 12 months. Underperform (U): Returns expected to be materially below sector average over 12 months. Restricted (R): RBC policy precludes certain types of communications, including an investment recommendation, when RBC is acting as an advisor in certain merger or other strategic transactions and in certain other circumstances. Not Rated (NR): The rating, price targets and estimates have been removed due to applicable legal, regulatory or policy constraints which may include when RBC Capital Markets is acting in an advisory capacity involving the company. Risk Rating: The Speculative risk rating reflects a security s lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limited operating history that result in a higher expectation of financial and/or stock price volatility. Valuation and Risks to Rating and Price Target When RBC Capital Markets, LLC assigns a value to a company in a research report, FINRA Rules and NYSE Rules (as incorporated into the FINRA Rulebook) require that the basis for the valuation and the impediments to obtaining that valuation be described. Where applicable, this information is included in the text of our research in the sections entitled Valuation and Risks to rating and price target, respectively. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of RBC Capital Markets, LLC, and its affiliates, a portion of which are or have been generated by

9 9 Not your father s banks investment banking activities of the member companies of RBC Capital Markets, LLC and its affiliates. RBC Capital Markets has fundamental research of (pricing as of 5/23/18 at 13:35ET): Bank of America Corporation (BAC; Outperform; $30.37) BB&T Corporation (BBT; Outperform; $55.10) Comerica Incorporated (CMA; Outperform; $98.97) JPMorgan Chase & Co. (JPM; Outperform; $111.76) M&T Bank Corporation (MTB; Outperform; $180.31) PNC Financial Services Group, Inc. (PNC; Top Pick; $149.32) Preferred ideas risks Bank of America: Future outperformance is contingent upon a steady rise in interest rates, the expectation for lower regulation in the next two years, GDP increasing ~3% per year, and credit quality remaining relatively stable. We also expect trading revenues to remain strong. Any deviation from our expectations could represent a risk to our view. BB&T: Future outperformance is contingent upon a steady rise in interest rates, the expectation for lower regulation and corporate tax rate in the next two years, GDP increasing to 3-4% per year or higher, and credit quality remaining relatively stable. Any deviation from our expectations could represent a risk to our view. Comerica: Material margin pressure or less than expected loan growth are primary factors that would impede the company from future outperformance. Any credit deterioration, particularly in energy, is a risk that could pressure future returns. JPMorgan: Future outperformance is contingent upon a steady rise in interest rates, the expectation for lower regulation in the next two years and GDP growing ~3% per year or higher, and credit quality remaining relatively stable. We also expect trading revenues, particularly FICC revenues, will not continue to decline as they have in the past few years. Any deviation from our expectations could represent a risk to our view. M&T: Future outperformance is contingent upon a steady rise in interest rates through year-end 2018, the expectation for lower regulation in the next two years, real GDP growth of 3% per year or higher, and credit quality remaining relatively stable. Any deviation from our expectations could represent a risk to our view. PNC: Future outperformance is contingent upon a steady rise in interest rates, the expectation for lower regulation in the next two years, GDP increasing to 3% per year or higher, and credit quality remaining relatively stable. Any deviation from our expectations could represent a risk to our view. Other disclosures Prepared with the assistance of our national research sources. RBC Wealth Management prepared this report and takes sole responsibility for its content and distribution. The content may have been based, at least in part, on material provided by our third-party correspondent research services. Our third-party correspondent has given RBC Wealth Management general permission to use its research reports as source materials, but has not reviewed or approved this report, nor has it been informed of its publication. Our third-party correspondent may from time to time have long or short positions in, effect transactions in, and make markets in securities referred to herein. Our third-party correspondent may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any company mentioned in this report. RBC Wealth Management endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having regard to local time zones in overseas jurisdictions. In certain investment advisory accounts, RBC Wealth Management will act as overlay manager for our clients and will initiate transactions in the securities referenced herein for those accounts upon receipt of this report. These transactions may occur before or after your receipt of this report and may have a short-term impact on the market price of the securities in which transactions occur. RBC Wealth Management research is posted to our proprietary Web sites to ensure eligible clients receive coverage initiations and changes in rating, targets, and opinions in a timely manner. Additional distribution may be done by sales personnel via , fax, or regular mail. Clients may also receive our research via third-party vendors. Please contact your RBC Wealth Management Financial Advisor for more information regarding RBC Wealth Management research. Conflicts Disclosure: RBC Wealth Management is registered with the Securities and Exchange Commission as a broker/ dealer and an investment adviser, offering both brokerage and investment advisory services. RBC Wealth Management s Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on our website at Conflicts of interests related to our investment advisory business can be found in Part II of the Firm s Form ADV or the Investment Advisor Group Disclosure Document. Copies of any of these documents are available upon request through your Financial Advisor. We reserve the right to amend or supplement this policy, Part II of the ADV, or Disclosure Document at any time. The authors are employed by one of the following entities: RBC Wealth Management, a division of RBC Capital Markets, LLC, a securities broker-dealer with principal offices located in Minnesota and New York, USA; and by RBC Dominion Securities Inc., a securities broker-dealer with principal offices located in Toronto, Canada. The Global Industry Classification Standard ( GICS ) was developed by and is the exclusive property and a service mark of MSCI Inc. 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10 10 Not your father s banks the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. Disclaimer The information contained in this report has been compiled by RBC Wealth Management, a division of RBC Capital Markets, LLC, from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Wealth Management, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC Wealth Management s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation to clients, including clients who are affiliates of RBC Wealth Management, and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law neither RBC Wealth Management nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Wealth Management. In the U.S., RBC Wealth Management operates as a division of RBC Capital Markets, LLC. In Canada, RBC Wealth Management includes, without limitation, RBC Dominion Securities Inc., which is a foreign affiliate of RBC Capital Markets, LLC. This report has been prepared by RBC Capital Markets, LLC. Additional information available upon request. Copyright RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC. All rights reserved.