Singapore, 19 June 2015
Welcoming Remarks Mark Young, Head of Asia-Pacific Financial Institutions
Agenda 09:10 09:40 European Banks: Key Rating Drivers In a Post-Asset Quality Review (AQR) and Bank Recovery and Resolution Directive (BRRD) World James Longsdon, Managing Director, Financial Institutions Group 09:40 10:15 Panel Discussion Total Loss Absorbing Capital (TLAC) and Other Global Regulatory Developments and Their Impact on Asian Issuers 10:15 10:20 Video Spotlight on Russian Banks 10:20 10:45 Coffee 10:45 11:15 The Four Rs of U.S. Banking Rates, Regulation, Resolution and Relevance Joo-Yung Lee, Managing Director, Financial Institutions Group 11:15 11:20 Video Spotlight on Chinese Banks 11:20 12:00 Panel Discussion - APAC s Financial System Risks Posed by a Rebalancing China 12:00 12:15 Q&A and views of the audience 2
1. Remaining engaged with the market GBC rolls on New York Frankfurt Paris London Madrid Tokyo Hong Kong Singapore Twitter: #FitchCredit Fitch annual Global Banking Conference has been running for more than two decades GBC events in eight cities worldwide in 2015 An important part of our engagement with market participants globally 3
2. Maintaining a consistent overall rating framework Fitch released updated versions of global FI rating criteria in March Consistent with our long-standing approach to rating banks Refinements and clarifications but no direct rating actions arising A consolidation exercise down to two global master criteria New Financial Market Infrastructure Company methodology Responsive to criteria fatigue 4
3. A stable global ratings portfolio Global Banks Outlook/ Watch 1Q15 (%) 80 70 60 50 40 30 20 10 0 Source: Fitch DM EM Positive Stable Negative Global Banks: Long-Term IDR Outlooks a and Rating Actions (%) 100 80 60 40 20 0 Upgrades (RHS) Stable Outlook/Watch (LHS) Negative Outlook/Watch (LHS) b 1Q15 (667) 4Q14 (672) 3Q14 (673) 2Q14 (673) 1Q14 (679) Downgrades (RHS) Positive Outlook/Watch (LHS) Evolving Outlook/Watch (LHS) (No.) 50 4Q13 (681) 3Q13 (672) 2Q13 (671) 1Q13 (672) a Rating Watch or Outlook is applied selectively to ratings in the CCC, CC and C categories b Number of rated entities Source: Fitch 40 30 20 10 0 5
4. Answering the question re future sovereign support in bank ratings 6
5. Reflecting criteria refinements in recent rating actions 7
6. Signalling our thinking with a variety of research 8
7. Focusing on the global NBFI market Selected New Ratings TPG Specialty Lending, Inc. Synchrony Financial Och-Ziff Capital Management Group LLC Mubadala GE Capital Ltd. Private Export Funding Corporation SMBC Aviation CIT Group, Inc. Amundi Group 9
8. Complementing our work with new tools and analytics 10
9. Meeting the needs of the market Covering the market thoroughly GlobalCapital Bond Awards 2015 Best Ratings Agency in FIG 1. Fitch Ratings 2. Moody s Investors Service Delivering timely, transparent and forward-looking rating actions Signalling our thinking with rigorous and balanced research Being open and balanced in our thinking Engaging with all market participants 3. Standard & Poor s 11
European Banks: Key Rating Drivers In a Post AQR and BRRD World James Longsdon, Co-Head of EMEA Financial Institutions
Agenda Sovereign Support Now a Rare Rating Driver in EU Earnings Cyclical vs Structural Pressures Asset Quality A Key Medium-term Rating Driver Capital Further Strengthening Likely Rating Implications of Resolution Strategies and Debt Buffers 13
Full Implementation of BRRD and Start Of SRM Only 7 Months Away EU Bank Recovery & Resolution Directive provides tools and reduces practical impediments to resolution Single Resolution Mechanism and ECB Supervision will dilute national influence over resolution decisions in Banking Union countries Source: Fitch 14
The Power of BRRD s 8% Rule: Sovereign Support Likely to Trigger Senior Liability Bail-in As % of Adjusted Assets (%) 10 Equity Junior Debt Senior Liabilities Bail-in Threshold 8 6 4 2 0 Adjusted assets = assets - derivative assets Source: Fitch; year-end 2014 15 AIB RBS MPS Lloyds BayernLB Barclays Rabo RZB Erste BOI UBI KBC HSBC Popolare LBBW Commerz UCI Intesa BBVA ABN ING CA Deutsche SEB BPCE Socgen Danske Santander Nordea Caixabank BNPP BPE Pohjola Handels Swedbank Bankia
Most IDRs Unaffected By Sovereign Support Change Downgrades Mainly 1-2 Notches IDR Downgrades (notches) (No) 140 120 100 80 60 40 20 0 No change /1 notch upgrade 26 14 8 5-1 -2-3 -4 Source: Fitch; May 2015 support-related rating actions 16
State Support Now a Rare Ratings Driver: Viability Ratings to the Fore IDR Drivers: End 1Q15 Viability rating State support Pure parental support Support from state supported parents IDR Drivers: 22 May 2015 Viability rating State support Pure parental support 12% 7% 22% 50% 7% 31% 71% Source: Fitch 17
Q1: What is the Main Weakness of Euro Area Banks? A. Asset Quality Despite the AQR, EZ banks remain very vulnerable to a renewed downturn 41% B. Capital Capital levels are still too low relative to global peers C. Profitability Weak returns are structural, not cyclical 18% 19% 22% D. Funding & Liquidity Stronger positions will quickly reverse if sentiment sours A. B. C. D. 18
Economic Outlook 2015: A Closer Look at Europe Real GDP (%) Inflation (%) Unemployment (%) 2014 2015 2016 1.6 1.8 2.0 0.2 1.3 1.5-0.4 0.8 1.0 1.4 2.8 2.4 2.8 2.5 2.3 2014 2015 2016 0.8 0.1 1.6 0.7 0.0 1.0 0.2-0.4 1.0-0.2-1.0 1.0 1.5 0.3 1.3 2014 2015 2016 5.0 4.8 4.6 10.2 10.2 9.8 12.8 13.0 12.5 24.3 22.5 21.0 6.3 5.6 5.5 Source: Fitch Peer Analysis Tool 19
Property Risks Easing Nominal House Price yoy Growth (%) Arrears a, b (%) Gross New Mortgage Lending (% of Previous Year) Mortgage Rates New Lending (%) Country 2014e 2015f 2016f c 2014e 2015f 2016f c 2014e 2015f 2016f c 2014e 2015f 2016f c Status & Outlook d Overall Market Evaluation UK 7.0 2.0 1.4 1.2 118 110 3.1 3.3 Strong/Neutral GER 3.5 3.0 0.5 0.5 105 105 2.8 2.8 Strong NLD 3.0 2.0 0.9 0.9 124 110 3.6 3.4 Strong/Neutral FRA -2.0-2.0 0.1 0.1 75 95 2.7 2.7 Neutral Change vs. 2014 e Europe BEL -1.0-1.0 0.3 0.3 100 90 3.5 3.5 Strong/Neutral DEN 4.0 4.0 0.3* 0.3 100 110 3.3 3.3 Strong IRL 15.0 4.0 17.9 15.9 110 115 4.4 4.4 Neutral ESP 0.0 0.0 1.8 1.7 118 115 3.1 3.0 Neutral/Weak ITA -2.0-1.8 1.5 1.6 110 105 4.0 3.9 Neutral/Weak PRT 0.0 0.0 1.3 1.3 90 100 3.1 3.1 Neutral/Weak GRC -6.0-4.0 5.3 5.2 45 100 3.2 3.4 Very Weak a Fitch Rated RMBS 3 months plus arrears excluding defaults ( * or market-wide arrears / impaired loan ratio market-wide ratio definitions vary) b Markets: UK: prime; France: France retail c Forecast: ranges from (increase) (stable), (decline) d Market status and outlook: ranges on a 7-notch scale from very strong, strong, strong/neutral, neutral, neutral/weak, weak and very weak e Change of Status / Outlook evaluation compared with evaluation a year ago Source: Fitch 20
Still a Tough Revenue Environment Revenues: Normalized at 100 (Index) 120 Benelux FRANCE Germany ITALY Nordics SPAIN UK 110 100 90 80 70 60 2010 2011 2012 2013 2014 Revenues = Net Interest income + Dividend income + Net Fees and Commissions + Other operating income Source: Fitch 21
Asset Quality To Be a Key 2015/16 Rating Driver: Signs Of Improvement; Main Vulnerability In South (%) 40 30 20 10 0-10 -20-30 -40-50 -60 Impaired Loans + Foreclosed Assets/ Gross Loans + Foreclosed Assets (end 2014) % Change in Absolute Impaired Loans + Foreclosed Assets (2014) MPS AIB BPE Popolare Intesa UCI BOI Bankia UBI Caixabank RZB KBC Erste BBVA RBS Socgen BNPP Santander Commerz BPCE CA Rabo ING HSBC Lloyds ABN LBBW BayernLB Deutsche Barclays (%) 40 30 20 10 0-10 -20-30 -40-50 -60 Source: Fitch 22
Risk Radar: High Urgency, Unfavourable Impact Risks Concentrated on Europe Global Financial Institutions March 2015 Impact Unfavorable Impact Favorable Resi Real Estate Normalization Eurozone Deflation High Urgency Conduct Fines Legal Risk Peripheral EMEA Contagion Regulation/ Reg Cap Mgt. Consolidation M&A US Consumer/ Unemployment China Asset Quality Rising Interest Rate Risk Shadow Banking NEW Prolonged Low Oil NEW Cyber Crime Resolution Regimes Low Urgency Source: Fitch 23
Capital: Further Strengthening Likely to Mitigate Identified and Unexpected Risks (%) 30 Fitch Core Capital (FCC) / Risk Weighted Assets [LHA] Net Impaired Loans + Foreclosed Assets / FCC [RHA] 25 20 15 10 5 0 Source: Fitch: year end 2014 (%) 450 400 350 300 250 200 150 100 50 0 24 Swedbank Handelsbanken SEB UBS Danske LBBW Intesa Pohjola UBI Lloyds Rabo ABN Popolare CA Deutsche KBC Caixabank ING Barclays BPCE RBS BayernLB Erste Bankia HSBC CS Nordea BNPP BBVA Socgen BPE UCI RZB Commerz BOI BCP Santander AIB MPS
A World Without Support: HoldCo/OpCo Response G-SIB SPE Illustration (Single Resolution Group) Holding Company (Resolution Entity) Senior Unsecured Tier 2 AT1 External TLAC Equity Intragroup debt Bank A Bank B No Default * Assume senior to intragroup debt Source: Fitch Deposits Covered bonds Other debt * Intragroup debt Tier 2 Equity No Default Internal TLAC 25
A World Without Support: The German Response Other Senior Liabilities and Deposits Senior Unsecured + Schuldschein T2 AT1 No default? Bailed-in Bailed-in Bailed-in CET1 Wiped-out Source: Fitch 26
A World Without Support: The Junior Debt Response As % of RWAs (%) Hybrid and Subordinated Debt Minimum EU pillar 1 total capital requirement 14 12 10 8 6 4 2 Lloyds Rabo BayernLB CS AIB MPS UBS RBS KBC ABN LBBW Barclays BOI Popolare SEB CA Handels Intesa UBI Commerz Erste ING RZB Danske HSBC BCP Deutsche Socgen UCI BPCE Swedbank BBVA Nordea BNPP Caixabank Santander Pohjola BPE Bankia 0 * Source: Fitch ; year end 2014 27
For a Large EU Bank, TLAC/MREL Will Largely Be Met Through A. Structural subordination via a holding company 52% B. A statutory solution the German way C. Building AT1/T2 debt buffers D. A new class of Tier 3 debt between T2 debt and senior debt 26% 18% 4% A. B. C. D. 28
Sovereign Support Unlikely For Most EU Banks Without State Sponsorship Earnings Some Positive Developments But Still Challenging Asset Quality Huge Variation; Signs Of Improvement, But Uneven Capital Some Reaching Steady-State But Most Likely To Strengthen Resolution Strategies Could Influence Ratings Over Time
Annex 1: Ratings Snapshot: North/South Split Persists Distribution (%) Nordics Other Northern Europe Southern Europe CEE 14 12 10 8 6 4 2 0 AAA AA A+ A- BBB BB+ BB- B CCC Source: Fitch 30
Annex 2: Glossary AQR Asset Quality Review BRRD EU Bank Recovery and Resolution Directive IDR Issuer Default Rating VR Viability Rating FCC Fitch Core Capital RWA Risk Weighted Assets TLAC Total Loss Absorbing Capacity G-SIB Global Systemically Important Bank SPE Single Point of Entry AT1 Additional Tier 1 HoldCo Holding Company OpCo Operating Company Schuldschein Private and Unlisted Bilateral Loan Certificate 31
Annex 3: Full Bank Names ABN AMRO Group N.V. (ABN) Allied Irish Banks, plc (AIB) Banca Monte dei Paschi di Siena SpA (MPS) Banco Popular Espanol S.A. (BPE) Bankia, S.A. Bank of Ireland (BOI) Barclays plc Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) Banco Popolare BNP Paribas (BNPP) Banco Santander, S.A. Bayerische Landesbank (BayernLB) CaixaBank, S.A. Credit Agricole (CA) Commerzbank AG (Commerz) Credit Suisse Group AG (CS) Danske Bank AS Deutsche Bank AG Erste Group Bank AG Groupe BPCE HSBC Holdings plc 32
Annex 3: Full Bank Names ING Bank N.V. Intesa Sanpaolo S.p.A. KBC Groep NV Landesbank Baden-Wuerttemberg (LBBW) Landesbank Hessen-Thueringen Girozentrale (Helaba) Lloyds Banking Group plc Nordea Bank AB OP-Pohjola Group Rabobank Group The Royal Bank of Scotland Group plc (RBS) Raiffeisen Zentralbank Oesterreich (RZB) Skandinaviska Enskilda Banken AB (SEB) Societe Generale (Socgen) Svenska Handelsbanken AB (Handelsbanken) Swedbank AB UBS AG UniCredit S.p.A. (UCI) Unione di Banche Italiane Scpa UBI Banca (UBI) 33
Asia-Pacific Audience Poll - Panel 1
Asia-Pacific Audience Poll - Panel 1 Moderator: Justin Patrie, Senior Director, Credit Policy, Fitch Ratings Panelists: Brian Weintraub, Director, Head of Capital and Funding Solutions for Financial Institutions, Asia Pacific, Deutsche Bank Neeraj Seth, Managing Director, Head of Asian Credit, BlackRock James Longsdon, Co-Head of EMEA Financial Institutions, Fitch Ratings Jonathan Cornish, Head of North Asia Financial Institutions, Fitch Ratings 35
TLAC and Other Global Regulatory Developments and its Impact on Asian Issuers 1. Is the TLAC carve out for EM/Chinese banks justified? A. Yes B. No 49% 51% A. B. 36
TLAC and Other Global Regulatory Developments and its Impact on Asian Issuers 2. Which country/territory (notwithstanding establishing a bailin regime) is most likely to remain supportive of failed banks?? 48% A. China B. Hong Kong C. Japan D. Singapore E. All of the above F. None 30% 0% 7% 11% 4% A. B. C. D. E. F. 37
Video Spotlight on Russia Banks 38
Coffee Break
The 4 Rs of U.S. Banking: Rates, Regulation, Resolution, & Relevance Joo-Yung Lee, Head of North America Financial Institutions
The Four Rs of U.S. Banking Rates How Will Rising Rates and Economic Growth Affect U.S. Banks Regulation Are We There Yet Resolution Is TBTF Resolved Relevance How is the Growth of Shadow Banking Affecting Commercial Banks
Rates How Will Rising Rates and Economic Growth Affect U.S. Banks
Rates and GDP Growth Expecting Higher Rates and Stable Economic Growth Fitch U.S. Economic Forecast (%) 12 10 8 6 4 2 Real GDP Growth Inflation Unemployment Short-term Policy Rate Brent Crude (RHS) (USD/barrel) 120 100 80 60 40 20 0 2010 2011 2012 2013 2014 2015f 2016f 0 Source: Fitch Global Economic Outlook 43
Loan Growth Well Below Historical Averages, Commercial & Industrial (C&I) the Exception Loan growth since the end of the recession well below prior recoveries C&I loan growth solid, offset by run-off in home equity, mortgage and construction Strong Price and Terms Competition for C&I, New Entrants Asset quality remains very good expect some deterioration in loan losses Total Loan Growth Post-Recession (End of Recession = 100) 180 160 140 120 100 80 0 1 2 3 4 5 Years Since End of Recession Source: Federal Reserve Mar. 1975 Nov. 1982 Mar. 1991 Nov. 2001 June 2009 C&I Loan Growth Post-Recession (End of Recession = 100) 160 140 120 100 80 0 1 2 3 4 5 Years Since End of Recession Source: Federal Reserve Mar. 1975 Nov. 1982 Mar. 1991 Nov. 2001 June 2009 44
Higher Rates Will Effect Regulatory Capital and Deposit Betas for Large U.S. Banks Implications for Regulatory Capital w/100bps Shock Base Case +100bps Shock Assets Loans 75,000 75,000 MBS 20,000 19,246 Credit Investments (Munis, CMBS, Corp) 5,000 4,843 Total Assets 100,000 99,089 Liabilities Deposits 91,000 91,000 Total Liabilities 91,000 91,000 Capital Common Stock 9,000 9,000 Other Comprehensive Income/Loss 0 (911) Total Capital 9,000 8,089 CET1 9.00 8.16 Change in Cost of Interest-Bearing Deposits vs. Fed Funds (2004 2007) 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Average Cost of Interest Bearing Deposits at 2Q04 (LHS) Peer Group Average Implied Beta, 2004-2007 (RHS) 56.8% 44.1% 1.10% Large Regionals* 53.5% 53.3% 1.28% 1.38% 1.48% Community Mid-Tiers GTUBs** * Excludes Capital One Financial ** Includes Bank of America, Citigroup, and JPMorgan Chase Source: Bank Regulatory Filings 60% 50% 40% 30% 20% 10% 0% 45
Regulation Are We There Yet?
Tiered Regulatory System for U.S. Banks One Size Does Not Fit All Anymore G-SIBs Non-G-SIB Banks over $250bn in Assets Banks between $50-$250bn in Assets Banks under $50bn in Assets Full LCR NSFR* Enhanced SLR CCAR / DFAST GSIB Surcharge TLAC Living Will Volcker Rule AOCI in Reg. Capital Modified LCR NSFR* SLR CCAR / DFAST Living Will Volcker Rule AOCI in Reg. Capital** Modified LCR CCAR / DFAST Living Will Volcker Rule AOCI in Reg. Capital** DFAST Volcker Rule *NSFR not yet proposed **AOCI in regulatory capital impacts banks under advanced approaches or those who opted in. 47
GSIB Surcharge Highlights Tiered Regulatory Approach The Federal Reserve has proposed a secondary GSIB surcharge calculation incorporating reliance on short-term wholesale funding Method 2 likely to result in higher GSIB surcharges than current FSB proposals Reliance on Short-Term Wholesale Funding vs. G-SIB Buffers (ST Fundings to Total Liabilities as of March 31, 2015) 40% 35% 30% 25% 20% 15% 10% 5% 0% Short-Term WSF / Total Liab. FSB GSIB Buffer GS MS C JPM BAC BNY WFC STT Source: Regulatory Reports Short-Term WSF defined as: Fed funds purchased, repurchase agreements, CP, trading liabilities and borrowings with a maturity of less than one year 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 48
What Have Been the Intended and Unintended Consequences from Financial Reform Intended Consequences Better capitalized banks, with stronger liquidity even during periods of economic or financial stress End Too Big to Fail and government support for banks Rigorous stress testing requirements (CCAR) to determine capital distributions Unintended Consequences Reduced market liquidity and higher asset price volatility as bank balance sheets become constrained M&A less likely option for troubled banks in a crisis given recent experience Banks becoming more homogenous as uniform stress testing incents banks to look more alike Cultural change to drive greater respect for laws, rules and regulations Banks becoming more focused on managing regulatory rather than fundamental risks Less risk/volatility in bank earnings Potential slower economic growth 49
Bank Regulation Mostly Finished, A Few Outstanding Items Remaining Net Stable Funding Ratio (NSFR) U.S. regulators have not yet proposed NSFR rules Total Loss Absorbing Capital (TLAC) U.S. regulators have not yet proposed TLAC rules GSIB Buffer U.S. regulators have proposed two methods for calculating GSIB buffer - Method 1 consistent with Basel III - Method 2 incorporates reliance on short-term wholesale funding U.S. GSIBs subject to the higher of Method 1 or Method 2 Method 2 likely to be binding constraint for most of the U.S. GSIBs 50
Resolution Is TBTF Resolved?
Failed Bank Resolution A Two Tier Process For most U.S. bank holding companies and banks, failure handled no differently than pre-crisis Banks under $50 billion in assets mainly subject to traditional resolution procedures Bank holding company subject to U.S. Bankruptcy code (Chapter 7 or 11) Subsidiary banks subject to FDIC Receivership and resolved under least cost 52
Orderly Liquidation Authority (OLA) and Single Point of Entry Consolidates Resolution with FDIC OLA may apply to covered financial companies, i.e. over $50 billion in assets or otherwise designated as systemically important FDIC and FRB jointly recommend to U.S. Treasury that Institution is in default or danger of default; the default would have serious adverse effect on the financial stability of the U.S.; no viable private sector alternative is available to prevent the default; invocation of OLA is appropriate to mitigate such adverse effects 53
Single Point of Entry Empowers FDIC to Take Over Top Level Holding Company and Most Subsidiaries Holding company debt converted to equity at Bridge Bank Receivership Estate Bank Holding Company Bridge Bank Domestic Bank Domestic Broker- Dealer Domestic Bank Domestic Broker- Dealer Foreign Branch Foreign Broker- Dealer Foreign Branch Foreign Broker- Dealer 54
U.S. TLAC Requirements Not Yet Proposed, but at Least FSB Minimum Maybe Higher TLAC Buffers (%) 50 45 40 35 30 25 20 15 10 5 0 Estimated Basel III CET1 H/C Debt + All Hybrids / RWA (%) FSB Proposed Min. TLAC FSB Proposed Max. TLAC Fitch Estimated TLAC BAC BK C GS JPM MS STT WFC Source: Fitch, Federal Reserve Y9LP, Issuer SEC filings and investor presentations 55
What s left to do Living Wills Most have been rejected by Federal Reserve and FDIC Largest U.S. Banks will need to resubmit living wills in July Derivatives Changes to ISDA agreements to more broadly limit termination provisions Internal TLAC for foreign subsidiaries Will need to be prepositioned 56
Relevance How is the Growth of Shadow Banking Affecting the Role of Commercial Banks Going Forward?
Banks Continue to Play Key Intermediary Role Banks still serve an important role in originate and distribute model A lot of the risk remains within the banking system, despite shadow bank growth Loan origination continues to rise amid strong demand by CLOs, bond funds and other players Institutional Leverage Loan Issuance at Highest Levels ($bn) 800 600 400 200 0 2007 2008 2009 2010 2011 2012 2013 2014 1Q15 YTD Year to date. Source: Fitch U.S. Leveraged Loan Default Index, Thomson Reuters LPC, Bloomberg with CLOs as Significant Investors ($bn) 100 75 50 25 0 2005 2006 Source: RBS, Fitch 2007 2008 2009 2010 2011 2012 2013 2014 1Q15 Bond Mutual Funds Have Grown ($bn) Investment Grade High Yield 2,000 1,500 1,000 500 0 2007 2008 2009 2010 2011 2012 2013 2014 Source: Investment Company Institute Factbook, Fitch Driven by Strong Net Inflows through 2013 ($bn) High Yield 50 30 10 (10) (30) (50) 2007 2008 2009 2010 2011 2012 2013 2014 Source: Investment Company Institute Factbook, Fitch 58
However, Bank Regulation Constraining Balance Sheets Corporate Bond Issuance Exceeds Pre-Crisis Levels U.S. Corporate Bond Issuance Remains Strong ($bn) 1,600 1,400 1,200 1,000 800 600 400 200 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Apr-15 Source: SIFMA, Fitch 59
Alternative Investment Funds Replacing Bank Capital PE Firms Are Expanding Credit Capabilities ($bn) Rated PE Firms' Credit FAUM 350 300 250 200 150 100 50 0 2011 2012 2013 2014 Source: Company filings, Fitch Hedge Funds Have Grown at a Rapid Clip ($tn) Hedge Fund AUM 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2008 2009 2010 2011 2012 2013 2014 1Q15 Source: Hedge Fund Research, Fitch and Sitting on Significant Dry Powder ($bn) PE Credit Fund Uncalled Capital 140 120 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Preqin (includes all PE firms tracked by Preqin) ($bn) 25 20 15 10 5 0 BDC Loan Portfolios 2012 2013 2014 2009 2010 2011 2012 2013 2014 May-15 as have Business Development Companies Note: Contains eight BDCs rated investment grade by Fitch Source: Company filings, Fitch 60
Bank Lending to Shadow Banks Creates Feedback Loop if There are Problems in the Shadows Commercial Bank Lends to Shadow Bank Commercial Bank Asset Quality Comes Under Pressure Shadow Bank On- Lends Proceeds to Customers Shadow Bank Unable to Repay Loan to Commercial Bank Customer Defaults on Loans Increase 61
Despite Environmental and Regulatory Pressures, Banks Still Perform Vital Functions Financial Market Intermediation Credit Allocation Banks Custody, Clearing and Payment Systems Maturity Transformation 62
What will have the greatest impact on bank balance sheets and performance A. Rising interest rates It will be different this time 69% B. Impact of regulation Lower structural returns and elevated compliance costs C. Growth of shadow banks Financing migrating to more nimble non-banks D. Asset quality mean reversion Current strong asset quality below long-term trends 16% 9% 6% A. B. C. D. 63
Ratings
Bank Holding and Operating Company Notching Drives Recent Rating Actions U.S. GSIBs - Holding Company and Key Subsidiaries Issuer Current IDR Current VR Current Outlook Previous Previous IDR VR Previous Outlook Bank of America Corporation A a Stable A a- Negative Bank of America N.A. A+ a Stable A a- Negative Merrill Lynch, Pierce Fenner & Smith A+ Stable A Negative Bank of New York Mellon Corporation (The) AA- aa- Stable AA- aa- Stable The Bank of New York Mellon AA aa- Stable AA- aa- Stable The Bank of New York Mellon S.A./N.V. AA- aa- Positive AA- aa- Stable Citigroup Inc. A a Stable A a Stable Citbank, N.A. A+ a Stable A a Stable Citigroup Global Markets, Inc. A+ Stable A Stable Citigroup Global Markets Limited A Positive A Stable Goldman Sachs Group, Inc. A a Stable A a Stable Goldman Sachs Bank, USA A+ a Stable A a Stable Goldman Sachs & Co. A+ Stable A Stable Goldman Sachs International A a Positive A a Stable JPMorgan Chase & Co. A+ a+ Stable A+ a+ Stable JPMorgan Chase Bank N.A. AA- a+ Stable A+ a+ Stable J.P. Morgan Securities LLC AA- Stable AA- Stable Morgan Stanley A a Stable A a- Stable Morgan Stanley Bank N.A. A+ a Stable Stable State Street Corporation AA- aa- Stable AA- aa- Stable State Street Bank and Trust Company AA aa- Stable AA- aa- Stable Wells Fargo & Co. AA- aa- Stable AA- aa- Stable Wells Fargo Bank N.A. AA- aa- Stable AA- aa- Stable Wells Fargo Securities International Limited AA- Positive AA- Stable 65
U.S. has moved towards multi-tiered regulatory framework based on asset size Growth in shadow banking challenges traditional banks, although they will remain vital providers of financial services Rising rates may impact balance sheets and income statements differently than in prior rate cycles U.S. has made notable progress towards a credible big bank resolution framework Bank fundamentals remain healthy and improving supporting a Stable Rating Outlook on the sector
Video Spotlight on Chinese Banks 67
Asia-Pacific Audience Poll - Panel 2
APAC s Financial System Risks Posed by a Rebalancing China Moderator: Justin Patrie, Senior Director, Credit Policy, Fitch Ratings Panelists: Geoffrey Heenan, Resident Representative in Singapore, IMF Jonathan Cornish, Head of North Asia Financial Institutions, Fitch Ratings Andrew Colquhoun, Head of Asia-Pacific Sovereigns, Fitch Ratings Ambreesh Srivastava, Head of South/SE Asia Financial Institutions, Fitch Ratings 69
APAC s Financial System Risks Posed By A Rebalancing China 1. Which of the following is the greatest risk for banks in Asia? A. Rebalancing/Slowing China B. The failure of Abenomics C. Inappropriate policy settings D. Rising US interest rates E. Property market correction F. Complacency (i.e. from management and/or authorities 100% 0% 0% 0% 0% 0% A. B. C. D. E. F. 70
APAC s Financial System Risks Posed By A Rebalancing China 2. Considering direct/indirect economic exposures, which banking system is most vulnerable to a slowing China? 77% A. Australia B. Hong Kong C. Indonesia D. Singapore E. Taiwan 12% 1% 7% 3% A. B. C. D. E. 71
APAC s Financial System Risks Posed By A Rebalancing China 3. How successful have macro-prudential tools been in controlling the build-up of systemic risk in APAC? A. Very successful 54% B. Somewhat successful C. Neutral D. Somewhat negative impact E. Very negative impact 21% 25% 0% 0% A. B. C. D. E. 72
People in pursuit of answers 73
Disclaimer Fitch Ratings credit ratings rely on factual information received from issuers and other sources. Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this presentation is provided as is without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM. 74
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