Global banking and capital markets sector - EY

Global banking and capital markets sector — 1Q 2013 themes | 1

June 2013

Global banking and capital markets sectorKey themes from 1Q13 earnings calls

ContentsScope, limitations and methodology of the review 4

Top 10 key themes: 1Q13 earnings season 6

Key themes overview 9Theme 1.1: More positives than negatives in 1Q13 earnings performance 9

Theme 1.2: Macroeconomic headwinds remain strong, despite hints of improvement 12

Theme 1.3: Strong capital levels on display as banks start to move to Basel III 13

Theme 4: Expense management plans reflect long-term strategic view 16

Theme 5.1: Banks make progress against strategic objectives 20

Theme 5.2: Banks right size global presence in line with strategic plans 22

Theme 7: Balance sheet strategies result in stronger funding and liquidity profiles 24

Theme 8: Regulatory uncertainty persists, driven by national-level proposals 26

Theme 9.1: Credit quality trends vary by region but, in general, remain stable 28

Theme 9.2: Management attribute muted loan growth to low demand, especially on the consumer side 30

Appendix 32Summary of key banking sector themes 33

Select KPIs 36

| Global banking and capital markets sector — 1Q 2013 themes4

Scope, limitations and methodology of the review

The purpose of this review is to determine the key themes discussed during the 1Q13 earnings reporting season among 35 major global institutions operating within the banking and capital markets sector.


The period covered was 1Q13, ended 31 March 2013. Exceptions to this include the following:

• Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD) — period covered was 1Q13, ended 31 January 2013

• Nomura — period covered was 4Q13, ended 31 March 2013

• National Australia Bank (NAB) — period covered was 1H13, ended 31 March 2013

• Macquarie Group — period covered was 2H13, ended 31 March 2013

This review was limited to the examination of transcripts of the earnings conference calls that were held from 28 February 2013 to 14 May 2013. This review did not consider information from other sources, such as news reports, annual reports and company press releases.


Top 10 key themes1Q13 earnings season

In 1Q13, banks continued to operate in a complex environment, highly influenced by historically low interest rates, uneven global growth and macro uncertainties. Even against this backdrop, however, many demonstrated progress on the strategic initiatives they have launched over the last few years to adapt their businesses to the environment.


• Strengthening capital: each of the banks included in this analysis that provided Basel III estimates are already above the 7% requirement, and many are also in line to comply with additional expected buffers.

• Improving funding position: banks are, as described by RBS CEO Stephen Hester, “awash in liquidity.”

• Reducing risks: credit costs and non-performing loan (NPL) ratios are returning to normal levels.

• Controlling costs: banks’ approaches toward costs have shifted from tactical cuts to strategic measures.

• Refocusing on core: many banks have identified the key geographies and businesses that will drive future growth.

Even profit trends appeared to be normalizing to a degree, in spite of the difficult economic backdrop.

However, economic and political factors continue to define the landscape, causing enough volatility and uncertainty to impact client activity levels in both wholesale and retail banking. Persistently low interest

rates are expected to impact net interest income and margins throughout the remainder of 2013 and regulatory issues are far from resolved, with continued fragmentation on a national level.

Management across regions welcomed the encouraging start to the year, but also acknowledged the remaining challenges that lie ahead:

• Michael Corbat, CEO, Citigroup: “Although this was a good start for 2013, the environment remains challenging, and we’re sure to be tested as we go through the year ahead.”

• Sergio Ermotti, CEO, UBS: “While it is too early to declare victory, last quarter we demonstrated that our business model works both in theory as well as in practice. But what’s more important is the way in which we achieved our results. In a good but still volatile and challenging environment, we deployed our risk resources prudently and focused our energies on delivering for our clients.”

The 1Q13 earnings season provided evidence that these banks are operating from an increasingly stronger position. Many of the 35 banks reviewed for this analysis have made meaningful progress in executing on the strategic priorities they have identified in the years since the crisis:


1Q13

Rank Earnings season top 10 themes (arranged from most common to least common) of 35 banks

1.1 Drivers of earnings performance

1.2 Concerns related to the macro-environment

1.3 Capital strength

4 Expense trends/investments in the business

5.1 Strategic progress

5.2 Cross-border activities

7 Funding strategy and liquidity management

8. Regulatory issues

9.1 Credit quality trends

9.2 Lending trends

4Q12

Rank Earnings season top 10 themes (arranged from most common to least common) of 30 banks

1.1 Drivers of earnings performance

1.2 Concerns related to the macro-environment

1.3 Capital strength

1.4 Expense trends/investments in the business

5 Funding strategy and liquidity management

6 Cross-border activities

7 Regulatory issues

8.1 M&A strategies

8.2 Lending trends

10 Industry culture

Note: Themes shaded in gold are new to the list or have reappeared in the top 10 since the previous quarter; themes shaded in dark gray dropped out of the top 10.

1Q13 earnings season: top 10 themes


More positives than negatives in 1Q13 earnings performance

• In North America, American Express CFO Dan Henry said, “We continue to feel positive about our performance.” Goldman Sachs CFO Harvey Schwartz called 1Q13 performance “a solid result” and State Street CEO Jay Hooley was “pleased with our first-quarter financial results.”

• In Europe, Credit Suisse was described as “off to a good start in 2013” by CEO Brady Dougan. UBS CEO Sergio Ermotti characterized 1Q13 as a “strong result” and, at Lloyds, CEO António Horta-Osório highlighted “strong performance in the first quarter with significant progress in many key areas.” Société Générale CEO Frédéric Oudéa said, “We had a good start to the year with a solid first quarter and strong business performance.”

• In Asia-Pacific, ICBC Vice Chairman Kaisheng Yang noted, “There was a great deal to be positive about in the group’s performance in 2012, which also enabled us to start this year in a relatively strong position.” National Australia Bank (NAB) CEO Cameron Clyne said, “Overall, this is a good result, particularly compared to the second half of financial year 2012.”

Notable earnings trends included the following:

• Barclays, Credit Agricole, Credit Suisse, Deutsche Bank, Intesa Sanpaolo, Lloyds, Royal Bank of Scotland, Société Générale, UBS and UniCredit all reversed net losses posted in 4Q12.

• Significant increases in earnings in both 1Q12 and 4Q12 were reported by Bank of America, Barclays, Citigroup, Credit Agricole, Credit Suisse, HSBC, ING, Lloyds, Nomura and Royal Bank of Scotland.

• Royal Bank of Scotland reported its first positive result in six quarters, while Nomura’s earnings represented its best quarterly result in seven years.

• In North America, several banks disclosed record results, either on a group level or for particular divisions.

• Toronto-Dominion reported “record earnings in all of our retail businesses driven by good loan and deposit growth in Canada and the United States, and impressive revenue growth in wealth and insurance.”

• RBC CEO Gord Nixon said that the bank was “off to a strong start in 2013 ... driven by record earnings in personal and commercial banking and wealth management, as well as a strong quarter in capital markets.”

• Wells Fargo reported its eighth consecutive quarter of record earnings per share (EPS).

• JPMorgan Chase reported record net income and record EPS in 1Q13.

Theme 1.1

Positive earnings momentum becomes more widespread. In 1Q13, many of the 35 banks included in this analysis performed better than might have been expected given the continued challenges presented by the operating environment. While not universally positive, earnings reports indicated that banks may have begun to make progress in adapting to the low-growth environment. Management across regions framed comments about 1Q13 performance in a positive light.

“Within my time at Deutsche Bank, this has been the most straightforward quarter I’ve had.”

Stefan Krause, CFO, Deutsche Bank

Key themes overview


• In contrast to recent quarters, there were markedly fewer significant items impacting earnings in 1Q13:

• Janice Fukakusa, CFO, Royal Bank of Canada: “Overall, it was a clean quarter with no items of note.”

• Bertrand Delpit, CFO, Credit Agricole: “As intended through our 2011–2012 adaptation plan, 1Q13 includes no exceptional negative items. ... So, visibility on earnings has been improved even if the macro-environment is more uncertain today.”

• Cameron Clyne, CEO, NAB: “This is a clean set of results. The 2012 results were impacted by UK restructuring costs. Non-cash items impacting this result are reduced both in size and in the number of items.”

• Stefan Krause, CFO, Deutsche Bank: “Within my time at Deutsche Bank, this has been the most straightforward quarter I’ve had.”

• At Royal Bank of Scotland, CEO Stephen Hester described the absence of “funny items” as “helpful at every level.” Group Finance Director Bruce Van Saun elaborated, “Below-the-line items declined sharply from 4Q12, representing a £142 million benefit in the quarter. One of the key drivers was own credit adjustment (OCA). We had a £249 million gain as our spreads widened a little in the quarter. We avoided any material top-ups to conduct costs. ... Restructuring charges were light at just over £100 million, though we expect a full-year charge of around £900 million as we pull through further markets division restructuring in the second half.”

• BNP highlighted its clean quarter with the following headline in the earnings presentation: “No impact of exceptional items on net income this quarter.”

Only two of the banks included in this analysis reported a net loss in 1Q13:

• Commerzbank reported a net loss of €69 million, although it was considerably less than the €702 million loss reported in 4Q12. Management attributed the loss to restructuring charges associated with previously announced headcount reductions and repositioning.

• Bank of New York Mellon reported a loss of US$237 million, driven by an US$854 million charge related to a US Tax Court’s disallowance of certain tax credits. Excluding this ruling, which the bank plans to appeal, net income applicable to common shareholders would have been US$588 million.

Revenue, percent change from previous quarters

-20% -10% 0% 10% 20% 30% 40% 70%

Change from 4Q12 Change from 1Q12

RBS

UCG

CA

STD

ITAU

JPM

WFC

BK

STT

CIBC

GS

BNP

DB

ING

LLD

AXP

BBVA

RBC

BAC

C

TD

HSBC

ICBC

MS

CS

UBS

USB

INT

SG

BCS

CBK

NOM 68%31%

25%19%

24%19%

17%18%

6%11%

8%7%

1%6%

13%6%

26%5%

5%4%

4%-7%

-3%4%

7%3%

7%2%

9%1%

1%1%

0%-1%

-5%-1%

-3%-2%

6%-4%

-6%-4%

5%-5%

13%-5%

-9%0%

5%-14%

-8%-14%

5%-14%

2%-18%

-1%-19%

10%3%

2%19%

-1%1%


1. The percentage change in net income is not shown when a net loss was reported in one or more of the periods compared.

2. Nomura reported ¥94.2 billion in net income in the quarter ending 31 March 2013, a sharp increase from ¥91 million in the quarter ending 31 December 2012.

Net income, percent change from previous quarters

-200% 0% 200% 400% 1000%


RBS

INT

SG

STD

AXP

GS

RBC

TD

WFC

CA

ING

MS

UCG

UBS

CIBC

ITAU

USB

STT

ICBC

DB

HSBC

NOM

BAC

CS

C

BNP

BBVA

258%302%

240%

22%148%

109%142%

JPM 15%33%

218%30%

26%

12%21%

18%

30%12%

8%12%

9%-1%

1%6%

101%2%

1%-1%

-6%-4%

-5%

185%-26%

-44%

205%-45%

-50%

-62%

-139%

7%-22%

22%2%

65%922%

316%545%

59%835%


Macroeconomic headwinds remain strong, despite hints of improvement

• Harvey Schwartz, CFO, Goldman Sachs: “We’re very close still to the epicenter of the crisis, at least in the context of history, right? And so people’s memories are very fresh. And, when you have periods of uncertainty, bumps along the way like events in Europe or big shifts in employment data and economic growth, it doesn’t translate well when you think about CEOs who are making what obviously are the most significant decisions for their organizations strategically.”

• Ed Clark, CEO, Toronto-Dominion: “I don’t think anything has fundamentally changed with respect to the outlook. We’re pleased with the earnings momentum that we have in our businesses, but we continue to face a number of short-term challenges in the operating environment.”

• Alfredo Sáenz Abad, CEO, Banco Santander: “Although with some signs of improvement, the economic context for our business has continued to be complex. There’s been a continued downturn in the Eurozone’s GDP at the beginning of the year, with strong deleveraging continuing in the peripheral countries. Slightly better trends in the US and the UK, due to their stimuli programs, although growth is still very moderate.”

• Antony Jenkins, CEO, Barclays: “I’ve been very clear in my central thesis around the macroeconomic environment that we’re doing business in, and I do think that it’s going to be quite weak for as far as I can foresee. And so we haven’t assumed particularly aggressive income growth in our three-year plan.”

• Sergio Ermotti, CEO, UBS: “At the beginning of the year I spoke about the factors influencing client confidence, including issues in the Eurozone, fiscal issues in the US, and the uncertain geopolitical and economic outlook. While the first quarter showed

what slightly improved confidence can do for markets, unfortunately none of these issues have been resolved. And therefore, the recovery in client confidence remains fragile. This means we must remain realistic.”

• Cameron Clyne, CEO, NAB: “There are clearly some confidence issues in the business community, and you see that through our surveys. We’ve got the persistence of the high dollar. Obviously, the Reserve Bank [of Australia] made a judgment in its recent interest rate decision. There are some positives as well. So I think we’re just sort of reflecting that it’s more of a sort of a ‘muddle through’ type situation.”

• Stephan Engels, CFO, Commerzbank: “Net interest income will still be driven by the overall very low interest rate environment, as we have just seen the further rate cut by the European Central Bank.”

• Stefan Krause, CFO, Deutsche Bank: “We continue to face the distortions caused by the extraordinary monetary policy needed to support global growth, the impact of fiscal consolidation both here in Europe and in the US, and the effect of a very low-yield environment depressing our activities.”

• Richard Meddings, Group Finance Director, Standard Chartered: “In common with the experiences of other Asian franchises, margins have been under notable pressure from the high levels of liquidity in our markets arising from the quantitative easing programs of the West and elsewhere.”

Theme 1.2

The operating environment remains challenging and complex. Management noted that positive 1Q13 profit trends were achieved in spite of the challenging backdrop. Headwinds in the form of weak economic growth prospects, particularly in developed markets, and historically low interest rates are expected to persist throughout 2013 and continue to put pressure on revenues and business opportunities.

“I don’t think anyone will be calling for necessarily a bullish outlook over the next six months.”

Cameron Clyne, CEO, National Australia Bank

Key themes overview


Strong capital levels on display as banks start to move to Basel III

Banks in Australia, Canada, China, Japan and Switzerland have already adapted to the Basel III global capital regime.

• Brady Dougan, CEO, Credit Suisse: “As of January 1 this year, we successfully transitioned to the Basel III capital and risk-weighted asset regulation. We’re among the first of the global banks to achieve Basel III compliance, well ahead of most industry peers.”

• Janice Fukakusa, CFO, Royal Bank of Canada: “Let me briefly comment on our capital, as this is our first year under Basel III. ... Our all-in Basel III Common equity Tier 1 (CET1) ratio at the end of the quarter was 9.3%.”

• Shigesuke Kashiwagi, CFO, Nomura: “We started applying Basel III to our capital ratios from the end of March. Our Tier 1 ratio and Tier 1 Common ratios were both 11.7%. ... Our fully loaded Tier 1 Common ratio is approximately 10% based on our year-end balance sheet.”

• Kaisheng Yang, Vice Chairman, ICBC: “Our capital base has strengthened due to strong profitability and a cash-flow-efficient business. The China Banking Regulatory Commission’s (CBRC) new capital requirements, also referred to as the Chinese version of Basel III, although a little bit stricter than the international Basel III, will further strengthen the bank’s capital position.”

Management at most of the other banks reviewed for this analysis also disclosed estimates of Basel III capital ratios although, in some cases, they also offered caveats about remaining uncertainties related to the implementation and structure of the rules. Comments indicated that banks have established clear road maps to compliance based on their current understanding of the rules.

• George Culmer, Group Finance Director, Lloyds: “Whilst the Financial Policy Committee (FPC) has stated that major UK banks and building societies had an aggregate capital shortfall at end 2012 of around £25 billion, we are awaiting the outcome of the consideration of the FPC’s recommendations by the Prudential Regulatory Authority Board. Given our strongly capital generative core business and continued progress in increasing capital and reducing risks through non-core asset disposals, we, however, continue to be confident in our capital position. And with this strong capital generation, we’re now guiding to a fully loaded core Tier 1 ratio in excess of 9% by the end of 2013 and in excess of 10% by the end of 2014 and so meeting regulatory requirements well ahead of time.”

• Marianne Lake, CFO, JPMorgan Chase: “Our Basel III ratio of 8.9% is up from 8.7% last quarter and reflects the full impact of the rules, as we understand them. ... And we still expect to reach our Basel III Tier 1 Common target of 9.5% by the end of this year, including the capacity to continue share repurchases.”

Theme 1.3

Banks assert their capital strength with confident outlooks for Basel III compliance. In the years since the financial crisis, national and global regulatory bodies have focused on capital strength as a way to measure the soundness of banks and protect against future crises. The banks included in this report have made significant progress in building their capital levels and are well-positioned to comply with both Basel III rules and additional buffers required by domestic regulators.

“Capital strength remains a decisive factor for wealthy individuals and financial institutions worldwide. And

events in Cyprus underline why. Our industry-leading capital position continues to be an important factor in

our success and remains a unique competitive advantage for the bank.”

Sergio Ermotti, CEO, UBS

Key themes overview


• Harvey Schwartz, CFO, Goldman Sachs: “Our estimated Basel III Tier 1 Common ratio was approximately 9%, of course with all the caveats that the rule has not been finalized.”

• Chris Lucas, Group Finance Director, Barclays: “We’ve updated our Basel III ratios based on current expectations. Our latest estimates show a transitional Common equity Tier 1 ratio of 10.8% as at March 31. We continue to make good progress building capital with a fully loaded ratio of 8.4%, up from our earlier disclosure of 8.2% as of the end of December. We continue to believe we are well capitalized.”

• Enrico Cucchiani, CEO, Intesa Sanpaolo: “We are one of the few banks in the world already exceeding targets set by Basel III for 2018-2019, as we enjoy a 10.7% Common equity ratio, up 10 basis points versus Q4 2012.”

• Anshu Jain, Co-CEO, Deutsche Bank: “Capital strength is a core part of Strategy 2015. We began this journey with a Basel III pro forma core Tier 1 capital ratio of below 6%, which was behind the leaders in our peer group. In September, we stated publicly that our aim is to raise that to 10% by first quarter 2015. We listened carefully to many stakeholders, regulators, investors, analysts and commentators as we developed our strategy. And subsequently, the message was clear. Resolving the capital issue had to be our top priority. For two consecutive quarters, we beat the targets we set ourselves. In nine months, we have raised our Basel III Tier 1 ratio from below 6% to 8.8%.”

Basel III Common Equity Tier 1 ratio (CET1), as of 31 March 2013

7.5

8.1

8.2

8.2

8.2

8.4

8.4

8.6

8.7

8.8

8.8

8.9

9.0

9.3

9.3

9.4

9.4

9.6

9.6

9.6

9.7

9.8

10.0

10.1

10.4

10.6

10.7

11.6

11.7

11.8

12.4

4.0 6.0 8.0 10.0 12.0 14.0

CBK

LLD

USB

RBS

NAB

WFC

BCS

CS

SG

TD

DB

JPM

GS

C

RBC

BK

BAC

CIBC

CA

UCG

HSBC

MS

BNP

UBS

ING

STT

INT

MAC

NOM

ITAU

AXP


With Basel III capital compliance looking much more certain, management at 30 of the banks reviewed for this analysis addressed the issue of returning excess capital to shareholders.

• Canadian banks highlighted a continued focus on dividend increases. Toronto-Dominion CEO Ed Clark reiterated the board’s desire to increase the dividend twice a year, while RBC CEO Gord Nixon noted that the 5% dividend hike announced during the quarter marked the fourth increase in two years.

• In the US, the Federal Reserve announced the results of its annual Comprehensive Capital Analysis and Review (CCAR) program in March 2013. Each of the US banks included in this analysis received Fed approval to execute their capital plans. During the 1Q13 earnings season, many provided the details of these plans.

• John Stumpf, CEO, Wells Fargo: “Returning more capital to our shareholders remains a priority, and we’re extremely pleased that we were able to reward them in the first quarter by increasing our common dividend to US$0.25 per share. Our 2013 capital plan enables us to further increase our dividend rate to US$0.30 a share in the second quarter, subject of course to board approval, and also increase our common stock repurchases in 2013 compared to our 2012 repurchase levels.”

• Jay Hooley, CEO, State Street: “As we reported in mid-March, the Federal Reserve did not object to our 2013 CCAR plan, which included our planned capital distribution program. Following the CCAR results, our Board of Directors approved a US$2.1 billion common stock purchase program through March 2014. ... Additionally in February, the Board approved a US$0.02 per share increase in our common stock dividend, which is now US$0.26 per common share, payable to shareholders this month.”

• In other countries, management acknowledged that capital return is a priority but that regulatory requirements will determine when they can start returning capital to shareholders in a meaningful way.

• Brady Dougan, CEO, Credit Suisse: “As we exceed the [Swiss core capital requirement of] 10%, which we hope to do during the middle of this year, we’re clearly going to expect to accrue for and return significant capital to shareholders.”

• Sergio Ermotti, CEO, UBS: “When we achieve a 13% core equity Tier 1 ratio, Basel III fully applied, we will have at least a 50% payout. ... Our goal is to achieve this target by the end of 2014. That’s our target. And I think it’s a credible and realistic way to look at the entire dynamics affecting our business.”

• Stephen Hester, CEO, RBS: “We, first of all, have to get profitable. We have to have our capital levels at a level that regulators are happy with. And we have to get the government to remove its dividend block. If we can accomplish those three things during the course of next year, and obviously they’re not all under our control, then I think you’re going to expect us to want to return cash to shareholders.”

• Frédéric Oudéa, CEO, Société Générale: “It’s a bit premature, but my view is to have a [dividend payout] range between 35% and 50%. ... Once we are on target, and the priority is, again, to build the capital base [to a 9.5% Basel III core Tier 1 ratio], this is the range I have in mind.”

• Anshu Jain, Co-CEO, Deutsche Bank: “We would be committed to returning capital back to shareholders as we meet and exceed the regulatory minimums that we’ve been set.”


Expense management plans reflect long-term strategic view

Theme 4

Cost cutting positioned as a strategic work in progress. With limited expectations that the low-growth revenue environment will abate in the near term, banks continue to seek ways to cut costs without undermining future growth opportunities. Some banks are focused on managing to a specific efficiency ratio, while others are targeting an absolute reduction of run rate expenses. While headcount reductions are still a prominent tactic in cost-cutting efforts, management comments in 1Q13 reflected their desire to achieve expense-related targets strategically and in a way that will support long-term success.

“In the last five or six years post-crisis, market-driven revenues have declined for all the reasons that we all know. We've all been working on adjusting to a lower-

growth environment, which means that we need to get more efficient. We need to be that low-cost producer in the core activity. Yet there's still an enormous need to

invest in the business.”

Jay Hooley, CEO, State Street

• Antony Jenkins, CEO, Barclays: “My view is that the process that we’re in is one that is not just about running a cost program for a three-year period. This is about changing the way we fundamentally run the business, so that we are constantly re-engineering our core processes in a way that provides a better customer or client experience, greater control and lower operating costs. And to do that requires money, but by the time we get to 2015 and 2016, the benefit of past-year savings will go, in large part, to fund the investments that we have to make to continue to deliver the sort of cost saves that we see. And obviously, beyond 2015, our view will be informed by our growth opportunities that we may have and other investments we want to make.”

• Gerald Hassell, CEO, BNY Mellon: “A key priority is our operational excellence initiatives, and we’re on track to achieve the savings we’ve outlined for you. But we’re also looking at these initiatives much more strategically. We’re not limiting ourselves to the traditional approach of incremental cost savings.

Importantly, we have challenged ourselves and are investing in simplifying our core operating model, retiring legacy systems and utilizing technology to dramatically improve our straight-through processing rates and better manage and reduce the risk in our business model.”

• Anshu Jain, Co-CEO, Deutsche Bank: “Historically, cost control has been a challenge for Deutsche Bank, which is why we’re very pleased with the Operational Excellence Program, which is on track. In the first quarter, in line with plan, we made savings of around €200 million and booked cost-to-achieve (CtA) of around the same amount. ... We are pleased to report the decline in non-interest expenses because it does reflect our renewed focus on cost management and cost discipline at the bank. However, we continue to focus our attention on investing in longer-term process and efficiency improvement as part of the Operational Excellence Program.”

Key themes overview


• Bruce Van Saun, Group Finance Director, RBS: “If you look historically at what we’ve done on expenses, going back over the four years leading into 2012, we brought down expenses by 18%. ... Those aren’t just the headline cost programs that get absorbed by investment elsewhere. Those are actual reductions in expenses. And we have a good track record of being able to do this. It’s getting harder, because we’ve picked a lot of the low- and medium-hanging fruit, but we think we have some visibility into how we’re going to be able to achieve this, and it’s important. If the group has shrunk and we’re still in a sluggish environment, we have to keep working at this, get more focused, serve our customers, make targeted investments. We think we can do that and then, as the economy picks up, we can benefit from that and we’ll see a lot of operating leverage and positive jaws.”

• Michael Corbat, CEO, Citigroup: “We’re focused on really trying to manage expenses in terms of business as usual and trying to get more efficiencies into the business. We’ve recently announced that we’ve brought somebody in externally to help us do that. The businesses are going to be focused on that. So we’re mindful of the environment, clearly with an eye towards the expense side of things. But today, we’re not going to talk about any big levers.”

• Tim Sloan, CFO, Wells Fargo: “The focus of the company is to improve our expense efficiency. And so when we say that expenses are too high given the current level of revenue, we think that we want to continue, we can improve our efficiency, which is why we have that range of 55% to 59%. There’s no one magic change that we can make that if we can just get through a certain project that it will get us down to 55%. It’s

really a function of lots of projects all around the company. It’s improving the efficiency of our corporate properties and all of our square footage. It’s using technology to reduce costs in our businesses. ... It’s continuing to make sure that our folks are all in the appropriate locations. And it’s little things; there are literally hundreds of projects going on right now in the company focused on reducing costs.”

• Gord Nixon, CEO, Royal Bank of Canada: “We continue to control costs and drive efficiencies, and we have a number of initiatives under way to continue managing the trajectory of expense against revenue growth. One of these initiatives is our Retail Credit Transformation project, which you’ve heard about in the past, which is close to completion. This significant project has allowed us to automate our end-to-end back office capability so that we can process mortgage applications more efficiently. This has already resulted in significant cost savings, has freed up our sales staff time, and has improved the customer experience. We intend to roll this system out to a number of other consumer credit products over the coming years.”

• Philippe Heim, CFO, Société Générale: “Last year the group delivered on cost reduction, mainly through the restructuring of corporate and investment banking (CIB), for total savings of €550 million. Société Générale is now ready to go further as part of the second stage of its transformation plan, as announced in February of this year. So, we have three main objectives: first, to simplify the group, to accelerate decision-making processes, to alleviate reporting tasks in order to ensure that everybody focuses on clients; second objective, we want to extract cost synergies by adapting the organization; and lastly, we want to increase the operational efficiency of the group.”


Headcount, percent change from 1Q12 Non-interest expenses, percent change from previous periods


BK

CS

BAC

SG

STT

ITAU

CBK

TD

BBVA

WFC

JPM

BNP

ING

LLD

CA

USB

INT

C

AXP

HSBC

UBS

ICBC

DB

STD

UCG

RBC

MS

CIBC

RBS

BCS

NOM

GS 36%

29%10%

13%

13%

7%

7%

5%

2%

1%

0%

0%

0%

3%

-9%

-1%

-1%

-1%

-5%

-6%

-2%

-2%

-2%

-2%

-3%

-3%

-3%

-3%

-4%

-4%

9%

-5%

-5%

-5%

-7%

-7%-6%

-8%

-8%

-9%

-10%1%

1%

1%

-10%

-21%

-25%

-38%

-40% -20% -10% 0% 10% 20% 40%

10%

28%

-5%

-17%

-18%

-2%

-4%-16%

-12%

-4%

-4%

4%

-2%

9%11%

10%

NOM -19%

RBS -15%

HSBC -9%

MS -7%

ITAU -6%

BAC -6%

ING

UBS

MAC

CS

DB

UCG

C

JPM

NAB

GS

-5%

-4%

-4%

-4%

-3%

-2%

-2%

-2%

-2%

-1%

STD

CBK

TD

CIBC

BBVA

WFC

BK

RBC

0%

1%

1%

1%

3%

4%

4%

9%

0%-5%-10%-15% 10%5% 15% 20% 25%-20%-25%

Banks make progress against strategic objectives

Management at some banks stated the belief that they have the right business model and are well-positioned to succeed when operating conditions normalize:

• Ed Clark, CEO, Toronto-Dominion: “Our business has performed very well in the opening quarter of 2013. We continue to face the same headwinds that we battled last year, but my conviction has never been stronger that we have the right business model, the right tools and resources, and most importantly of all, the right people to overcome these challenges and continue to deliver on our vision.”

• John Stumpf, CEO, Wells Fargo: “We’ve achieved 1Q13 results by doing what we have always done, remaining focused on meeting the financial needs of our customers and helping them succeed financially. We accomplished this in an environment that we would all agree wasn’t ideal for generating earnings growth, demonstrating the benefit of our diversified business model.”

• Harvey Schwartz, CFO, Goldman Sachs: “In light of the continued macro uncertainty, we’ve continued to stay focused on managing the firm’s risk exposures, capital usage and our expense base. It has allowed our people to be principally focused on serving our clients. We believe the combination of our operating discipline and our steady investment in our client franchise has us well positioned competitively.”

• Kevin Glass, CFO, CIBC: “We remain positioned as a lower-risk bank, and our strategy continues to deliver consistent and sustainable earnings in each of our businesses.”

At a number of banks, management noted that 1Q13 results confirm that they have identified the right strategies to adapt their business models to the environment:

• Brady Dougan, CEO, Credit Suisse: “We had a very good start to 2013. We posted strong operating results that demonstrate the effectiveness of the strategic measures that we’ve taken over the past few years. We’ve confirmed the potential of our high-returning business model.”

• Stuart Gulliver, CEO, HSBC: “[Our 1Q13] results are good because of the progress we have made in implementing the strategy we set out in May 2011 and our continued focus on capital, costs, and governance. So, whilst macroeconomic uncertainty has created a relatively muted environment for revenue growth, we have increased revenues in key areas.”

• Brian Moynihan, CEO, Bank of America: “We believe first-quarter results demonstrate significant progress towards the goals we have discussed over the past several quarters.” He added, “We still have a lot of work ahead of us as a company. We feel good about where we are and the progress we made this quarter.”

• Morgan Stanley CEO James Gorman reviewed the progress made on “the six comprehensive steps we laid out in January that will drive our return on equity and return on tangible equity.” He said, “Against [the global economic] backdrop, we are confident about the steps we have taken to enhance Morgan Stanley’s business mix, benefiting from leadership positions within institutional securities, demonstrable upside in wealth management and effective capital optimization.”

Theme 5.1

Execution of strategic plans begins to bear fruit. In the years since the global financial crisis, many of the banks included in this analysis have launched strategic reviews or repositioning initiatives to adapt their businesses to the emerging regulatory framework and muted economic environment. While the execution of strategies is at varying stages of completion, the 1Q13 earnings season revealed evidence that banks have made material progress on their adaptation efforts.

“All banks are, in a sense, in some sort of permanent restructuring mode.”

Stephen Hester, CEO, Royal Bank of Scotland

Key themes overview



• Anshu Jain, Co-CEO, Deutsche Bank: “When we launched Strategy 2015 [in September 2012], we identified five key levers: capital, costs, competencies in our core businesses, clients and culture. We are delivering on all of those, in particular on capital, where we are now among the best-capitalized banks in our global peer group. ... Of course, the operating environment will remain volatile. And hence, we remain vigilant in the face of uncertainty.”

• Sergio Ermotti, CEO, UBS: “This is the first time we are reporting results for our new investment bank. I’m pleased to say that we had very strong results in what is typically the best quarter of the year. The business delivered a pre-tax profit of CHF928 million with profits 68% higher than one year ago, despite a 15% reduction in front office staff and a 10% reduction in balance sheet. While the transformation of the business was in its first full quarter, this result is a clear demonstration that our focused business model works.”

• Antony Jenkins, CEO, Barclays: “You will see clear evidence today that having outlined our ‘Transform’ program in February, we are now very focused on implementation and have made good progress in the first part of 2013. As you know, in January, we agreed a single cross-business purpose for Barclays — helping people achieve their ambitions in the right way — and five core values, which underpin it. Since then, we have focused on embedding these across the organization, and I’m pleased with how my colleagues have welcomed the changes including how performance will be measured and rewarded.”

• Stephen Hester, CEO, RBS: “Before anything else, RBS has got to deliver a cleaned-up bank. And I think that the signs that we are nearing the end of that clean-up process — and successfully nearing the end — continue to gather pace: strong increase in capital ratios, seeing the turn in Ireland, impairments generally coming down, balance sheet funding in terrific shape, and so on and so forth. These make us feel cheerful that as we pass the end of 2013 and go through 2014 we will substantially have done that job with, of course, some bumps in the road, but we’ll have done that job.”

• Frédéric Oudéa, CEO, Société Générale: “This quarter reflects our good commercial franchise, and again, the capacity to adapt, particularly through the CIB business. ... We refocused in 2012. ... A lot of work has been done , but we are getting the first fruit, and we are confident to further develop this business model in this new environment.”

• Cameron Clyne, CEO, NAB: “Despite the challenging environment, we’ve made good progress on a number of fronts. Our strategy and technology update in March highlighted the scope of our transformation, which is very comprehensive, right from infrastructure to customer-facing systems and it is well advanced.”


Banks right size global presence in line with strategic plans

Theme 5.2

Reshaping of global footprints reflects strategic priorities. Discussions about cross-border activities reflect the results of strategic reviews and a renewed focus on the core geographies and activities that support strategic positioning. Cross-border strategies discussed in 1Q13 included investing in key regions, maintaining an existing presence in specified growth areas, and exiting from or scaling back in some regions. Notably, some banks were active on both ends of the range, reflecting focused efforts to position their global footprints for the future.

• Banks that discussed continued commitments to non-domestic markets include the following:

• David Mathers, CFO, Credit Suisse: “We clearly have continued to invest in the core [wealth management] businesses in Asia, particularly in Singapore and Hong Kong, and that remains a very important growth market for us.”

• Tom Naratil, CFO, UBS: “When we look at net new money, we’re very pleased with the fact that we’ve got double-digit growth rates exactly where we want them, in Asia Pacific, emerging markets and the ultra-high-net-worth segment.”

• Shigesuke Kashiwagi, CFO, Nomura: “In Asia, although we want to do well as Asia’s global investment bank, we’ve not been able to truly capitalize on the strength of our franchise, competition is intense and the establishment of business relationships requires time. ... And as we consider Asia’s long-term strategy, Hiromasa Yamazaki, the EVP of Nomura Securities, has been sent to Singapore, so this may be somewhat time consuming, but we are working on the expansion of our business and strengthening our franchise.”

• Ángel Cano Fernández, COO, Grupo BBVA: “We want to invest in organic growth in Mexico, Colombia and Chile. And we are investing in regions where we still need to open more branches and increase our number of ATMs.”

• At Banco Santander, CFO José Antonio Álvarez Álvarez confirmed the bank’s geographic diversity:

“55% of our profit comes from emerging markets. Brazil contributes 26%, Mexico 12% and Poland 4%.” CEO Alfredo Sáenz Abad also highlighted the bank’s investment in Poland: “The legal merger [of BZ WBK and Kredyt Bank] took effect in January. The new operating structure has been deployed. ... In two years, Banco Santander has built a subsidiary in Poland with almost 900 branches, which is the third-largest bank by market share in deposits and loans.”

• Iain Mackay, Group Finance Director, HSBC: “The profitability of [India, Singapore, Malaysia and Indonesia] has held up very well. ... Where we’ve seen growth in the first quarter of this year, it’s been principally, not exclusively, but it’s been principally in Hong Kong and the rest of Asia-Pacific, and within those markets, [the four mentioned above] are quite key from a growth perspective. So the businesses are sticking to plan and moving along in that direction.”

• Nicholas Moore, CEO, Macquarie Group: “In terms of where we’re carrying on business globally, Australia is still our most significant presence, 37% of our income from Australia. The Americas is next, particularly the United States, with 33% of our income. Europe and the Middle East is next at 19% of our income, and Asia at 11% of our income. ... You can see the growth taking place in the US. That’s coming through our funds management businesses such as MIRA and Delaware, as well as the success of the energy businesses over the year.”

Key themes overview


• Ed Clark, CEO, Toronto-Dominion: “When you go outside your country, you should always do things that you’re confident about, that you know how to do and that you do well. ... We’ve taken a position that going head-to-head with the Goldman Sachs and the JPMorgan’s of the world, as a capital market strategy in the US, is not a ‘high probability of success’ strategy for us. We think we have a very successful strategy that we’re implementing, which is to go and use our fundamental strength as a retail commercial franchise.”

• Gerald Hassell, CEO, BNY Mellon: “In terms of investing in our businesses, I want to single out a few efforts. First, in investment management, we continue to invest in building out our manufacturing and distribution capabilities, with a particular focus on the Asia-Pacific region.”

• Richard Davis, CEO, US Bancorp: “As it relates to international [merchant acquiring], once we get this beachhead down in Brazil [from our new partnership with Citigroup], there’s a lot of good growth in South America, and if our reputation builds as I believe it will ... we’d expect to see us moving through South America rather like we did moving from West to East across Pan-Europe and then eventually further along, perhaps down into the Pacific Rim. We’re more careful in Asia Pacific because we’re not exactly sure of the politics in some of those environments. ... There are really very few parts of the world I would say we’re not interested in, but we’re going to be careful because of the politics that go along with doing business in countries that we may not have experience in and the partner is going to be more important probably than the country itself.”

• On the other side of the spectrum, a number of banks addressed efforts to scale back in certain regions through exits of selected businesses or rightsizing:

• António Horta-Osório, CEO, Lloyds: “We have made further progress since the quarter end with the agreement to sell our Spanish retail operations to Banco Sabadell, reducing non-core assets by a further £1.5 billion.”

• Stuart Gulliver, CEO, HSBC: “On North America, what I think is worth pointing out is we continue to run the book down. You can see that in the numbers.”

• ING CEO Jan Hommen highlighted progress made in the group’s state-mandated restructuring plan: “We closed the sales of our insurance activities in Hong Kong and Thailand, as well as our ING Vysya Life business. The sales process for Korea and Japan is ongoing. ... We’re getting into a new phase now. You can say we are getting into the final phase of the restructuring here.”

• Lars Machenil, CFO, BNP Paribas: “I don’t think we have a specific Eastern Europe policy. I mean, the regions that we focus on for growth are basically Asia and the US. We have some activities in Eastern Europe that we aim to rationalize. ... Our personal finance activities, we’re very happy that we have basically transferred them into the joint venture with Sberbank. ... In Ukraine, we are extremely prudent. We have been rightsizing this. We have closed 41 branches. But at the same time, we keep on doing prudent business.”

• NAB CFO Mark Joiner discussed the restructure of the UK division: “We announced in April last year the restructure of the UK business in response to the ongoing challenging economic conditions. The CRE portfolio was transferred to NAB Limited in October last year. Other aspects of this restructure are progressing well.” He later added, “I think we’ll just continue to run the assets with a view to long-term value. ... We’ll just continue to run the UK as we have and take questions about it until such point that I don’t have to take questions about it.”


• David Mathers, CFO, Credit Suisse: “We continue to have one of the strongest funding and liquidity positions in the industry. At the end of the first quarter, our Basel III Net Stable Funding Ratio was over 100% and we continue to remain comfortably in excess of the short-term liquidity requirement under Swiss regulation, which as you know uses the similar approach to the Basel III Liquidity Coverage Ratio.”

• Tom Naratil, CFO, UBS: “Our funding and liquidity positions remain strong, with both LCR and NSFR ratios above 100% at quarter-end.”

• Ruth Porat, CFO, Morgan Stanley: “On the LCR, we’re over 125%, and that really is given all that we’ve done terming out the secured book. It’s obviously just a 30-day test and we do triangulate, as we’ve talked about on prior calls, with an outlook over a 12-month period of time in a stress environment.”

• Marianne Lake, CFO, JPMorgan Chase: “We’ve also made progress this quarter and are on track for full LCR compliance this year.”

• Bruce Thompson, CFO, Bank of America: “Our global excess liquidity sources remained very strong at US$372 billion. Long-term debt did increase US$4.1 billion from the fourth quarter of 2012, as we funded the January payment for the Fannie Mae settlement and opportunistically accelerated our 2013 issuance plans. While we issued US$11.5 billion of vanilla parent company debt during the quarter, we still expect our long-term debt to decline over the remainder of 2013 as well as during 2014.”

• Alfredo Egydio Setubal, EVP and Investor Relations Officer, Banco Itau: “We have no problem in terms of funding, with almost R$1.5 billion in total funds. The ratio between our funding and the loan portfolio very comfortable, and, of course, because we are not growing so fast, the private portfolio.”

Balance sheet strategies result in stronger funding and liquidity profiles

Theme 7

Management confirms strong funding and liquidity positions. Forthcoming global regulations focus on banks’ liquidity levels, specifically their Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). In January 2013, the Basel Committee relaxed the LCR rules and delayed their full implementation until January 2019. The ultimate shape and implementation period for the NSFR remains uncertain as of 1Q13. Despite the implementation delays and uncertainties associated with global liquidity ratios, banks have made significant efforts to maintain high levels of liquidity, reduce short-term wholesale funding and increase stable sources of funding, such as deposits. During the 1Q13 earnings season, management comments on this topic indicated that meaningful progress has been made with respect to shoring up liquidity and funding positions.

“The management focus in a very complex environment has given priority to managing liquidity and risk over profit. We made a big effort to attract

deposits. We were conservative in issuances and now we are back to more usual funding.”

Alfredo Sáenz Abad, CEO, Banco Santander

Key themes overview


• Ángel Cano Fernández, COO, Grupo BBVA: “On liquidity, there’s not much to say. It’s getting stronger and stronger. Our ratios are improving; we’re taking advantage of windows to issue debt on the market and repaying the long-term refinancing operation (LTRO) funds to the European Central Bank.”

• Chris Lucas, Group CFO, Barclays: “Our liquidity position remains strong with a pool of £141 billion. We had a LCR of 110% at the end of the quarter based on the latest Basel standards. We aim to fund our retail banking, corporate banking and wealth businesses with customer deposits. This has reduced our term wholesale funding requirements. Given the prefunding we did in 2012 and our strong liquidity position, we did not access the public debt markets in the first quarter this year.”

• Nicholas Moore, CEO, Macquarie Group: “We have a strong funding position; we have a strong capital position. We’ve been able to improve the funding position again this year. Deposits stepped up to AU$37 billion and term funding of almost AU$10 billion was completed. Now, as you know, we are very focused on term funding and high-quality funding. We’ve got term assets on our balance sheet. And what we make sure is we’re funding those term assets with term liabilities.”

• Stephan Engels, CFO, Commerzbank: “Ongoing asset reduction and a strong deposit base limit our funding needs in 2013 and the coming years. We expect unsecured capital market funding to be taken only on an opportunistic basis to support franchise demand, and as a funding diversification. ... We have a continuously strong liquidity position of high quality, reflected in the bank’s liquidity reserve of €97 billion.”

• Lars Machenil, CFO, BNP Paribas: “In the first quarter, we have further increased the surplus of stable funding over the funding needs of our client activity. This increased by another €10 billion in the quarter and now stands at a high €79 billion, equivalent to 111% of the financing needs of our customer activity.”

• Philippe Heim, CFO, Société Générale: “The group’s long-term funding program is well ahead of schedule with a total amount issued of more than €13 billion, representing roughly two-thirds of this year’s program. And thanks to these efforts, our excess of stable resources over our long-term assets has risen further to €58 billion at the end of March. And the group’s liquid asset buffer stood at €135 billion and covered 108% of our short-term. And last but not least, our LCR is above 100% under current assumptions.”

• Mark Joiner, CFO, NAB: “Our funding position continues to strengthen with the Customer Funding Index (i.e., the proportion of core assets that are funded by customer deposits) up 1% to 67%. And relative to peers, our Australian funding gap is at the low end of the range. We issued AU$12 billion of new term funding during the half, with an average tenure of five years. We expect to raise AU$20 billion to AU$25 billion in total term funding for the year.”


Theme 8

• Anshu Jain, Co-CEO, Deutsche Bank: “The regulatory challenge in Europe is fiercer and broader-based, and European Union investment banks are uniquely faced with additional measures, which are either implemented or under discussion. The financial transaction tax, compensation reform under CRD IV, bank levies and new proposed capital requirements for foreign banks operating in the US. We’re hard at work on mitigation plans, which will allow us to adapt our model to a changing environment, as we have done successfully in the face of other challenges in recent years. It’s been noted, not just by us, but by senior regulators and central bankers, that the Balkanization of regulation will create unintended consequences not just for us but for the wider economy.”

• Brady Dougan, CEO, Credit Suisse: “In terms of our regulatory challenges, we see them in a few different categories. The first category includes the Basel III capital requirements, RWA measurements, liquidity, leverage, et cetera. And on that front, I think, the landscape is pretty clearly defined. ... The second category is more around legislative things like Dodd-Frank, et cetera, which are more deeply structural. In many cases, those

don’t impact our home market in Switzerland. They do impact us in parts due to our presence in different countries. ... The third category is the local regulatory issues that are coming up, the US international holding company proposals and similar issues around the world. I think [this category] is a challenge for the industry, and it’s something that we’re going to have to deal with as well.”

• Harvey Schwartz, CFO, Goldman Sachs: “In the end it’s all about the quality of the rulemaking process. These are — and it’s not just Volcker — these are exceptionally complex rules that are obviously incredibly critical, not just to the financial institutions that will live the rules, but really, quite frankly, more broadly in terms of their impact on the capital markets. And, given the complexity, I think it’s quite natural that these [rules] are going to take time to implement.”

The most frequently discussed regulatory issues in 1Q13 included the US Federal Reserve’s proposal to supervise foreign banking organizations in the US, the European financial transaction tax, and the resurgence of the too-big-to-fail debate in the US.

Management expresses concern about the impact of proposed rules on the markets and the broader economy. As banks gain greater clarity on global rules related to capital and liquidity, locally driven rules in the US and Europe are keeping regulatory uncertainty at elevated levels. In 1Q13, management indicated that they are watching the development of new proposals and will adapt their businesses as rules become clearer. At the same time, they warned that fragmented regulations could have unintended impacts on the markets and the global economy in general.

Regulatory uncertainty persists, driven by national-level proposals

“Each time you put a regulation behind you, a new one is put on the table.”

Didier Valet, Head of Corporate & Investment Banking, Société Générale

Key themes overview


• Supervision of foreign banking organizations (FBOs) in the US:

• Morten Friis, Chief Risk Officer, RBC: “The proposal for [foreign bank supervision issues in the US] is still in the review period, so we don’t know what it’s going to look like yet. We’re studying it and we’re providing input to the extent that we can. We believe that the impact will be manageable. Clearly it’s an increase in the overall regulatory burden and the aspects of this that look like another example of ring-fencing are not helpful. But at this stage, we don’t see a significant impact on the overall operations we have there.”

• Antony Jenkins, CEO, Barclays: “The regulation, as you know, is in the process of formulation. The consultation period has just closed. I did meet with Federal Reserve Governor Daniel Tarullo when I was in the US a few weeks ago. It is too early to say, by far, what the specific output of this will be. But my view is that, given all of the changes that we have to make to accommodate the ring fence in the UK, whatever comes out of the US, and CRD IV in Europe, that we will be able to accommodate those within the group structure, and that we’ll be able to implement them over time in a way that allows us to preserve the benefits of the universal banking model for our shareholders.”

• European financial transaction tax (FTT):

• Lars Machenil, CFO, BNP Paribas: “Regarding the FTT that 11 European countries are contemplating, our point of view is that we are very strongly suggesting and pushing that there is a full-sized assessment done of the impact. ... We have also seen that some officials, for example in Germany, have spoken out in a similar sense. So, although I do not think that the tax will disappear, I think it will evolve its shape and form.”

• Frédéric Oudéa, CEO, Société Générale: “The FTT would certainly have a significant impact on the whole industry and for the economy. So I have a feeling that there are more and more voices which are saying it cannot be implemented like it stands. ... So I think there will be some changes.”

• Brady Dougan, CEO, Credit Suisse: “Our research people have spent a lot of time looking at the impact on markets of the financial transaction tax. And there certainly is an impact in the markets when you have selective imposition on different markets, and obviously that will impact on volumes there, et cetera. ... Our general view would be that it will cause some distortions in markets to the extent that it is put in place.”

• The too-big-to-fail issue:

• John Stumpf, CEO, Wells Fargo: “Banks fuel and support economic growth, and we need banks of all shapes and sizes to serve the diverse needs of a diverse economy. All banks add value, and big banks have unique resources and capabilities to help the economy, including coast-to-coast convenience, broad range of products and services, and technology innovations serving large and small customers alike. There are ongoing discussions about the need for more regulation and other changes. We do not need additional legislation aimed at big banks. Important and significant regulatory changes have been made since the financial crisis. And we need to give existing regulations a chance to work, especially now when all our energy should be focused on creating growth and new jobs. No bank should be considered ‘too-big-to-fail,’ and no taxpayer money should ever be used to support a failing institution.”

• Jamie Dimon, CEO, JPMorgan Chase: “I think that the real issue is the banking system has gotten so much stronger in the US, and it’s not just capital, but it is capital, liquidity, oversight. Certain activities that people didn’t like are no longer being done. ... Derivatives are going to clearing houses and the initial wave of the Orderly Liquidation Authority (OLA) and living wills, et cetera — those things should all work. I hope at one point we declare victory and just stop eating our young over this.”

• Richard Davis, CEO, US Bancorp: “I think that this whole ‘too-big-to-fail’ issue is because we have failed as an industry to provide confidence that we really have ring-fenced this problem by six ways to Sunday. ... I’m worried that ‘too-big-to-fail’ is just introducing the idea that we need so many different ways to protect the banks that we’ll become so risk-free that we’ll end up losing our benefits to those of you who invest in us. ... I think the whole thing is a disappointment because we should do a better job of convincing people who are worried that we really do have this ring-fenced.”


Credit quality trends vary by region but, in general, remain stable

Theme 9.1

• Bruce Thompson, CFO, Bank of America: “As we look at the charge-offs and the move in charge-offs, to have almost a 20% decline in charge-offs speaks to the quality of the portfolio and the work that had been done back in late 2008 and early 2009 as it relates to consumer underwriting.”

• John Stumpf, CEO, Wells Fargo: “Our credit losses reflected the benefit of a slowly improving economy and the high-quality loans we’ve been originating over the past few years. Our credit losses in the first quarter declined to 72 basis points, the lowest level since second quarter 2006. And our net charge-offs were down 41% from a year ago.”

• Marianne Lake, CFO, JPMorgan Chase: “Favorable credit performance continued in our wholesale and core consumer portfolios with low levels of delinquencies and charge-offs. As the housing market recovers, losses in the real estate portfolio continue to improve, and this quarter, we saw 30-day-plus delinquencies decline by 14%.”

• Mark Chauvin, Chief Risk Officer, Toronto-Dominion: “I’m pleased to report that this quarter was a very good one from a credit perspective. First, if you look across the enterprise, gross impaired loan formations decreased C$177 million, returning to normal levels after the one-time impact seen last quarter. Total bank provision for credit losses (PCL) was C$360 million, a C$129 million improvement from the previous quarter, resulting in the lowest PCL rate we’ve recorded since 2007.”

• Anshu Jain, Co-CEO, Deutsche Bank: “Strict risk discipline [in the private and business clients division] is paying off. Provision for credit losses was at a record low.”

• Kaisheng Yang, Vice Chairman, ICBC: “At the end of the first quarter, the NPL ratio was 0.87% and the allowance we charged was RMB 12.4 billion. The allowance to NPL ratio was around 290%. ... I believe that we will continue to adopt prudent policies in terms of our management over the credit costs and the allowance to NPL ratio. So in the future, I believe that the allowance to NPL ratio will remain stable.”

• Alfredo Egydio Setubal, EVP and Investor Relations Officers, Banco Itau: “We continue to see the results of our strategy of reducing the risk of the loan portfolio, so the loan loss expense continues to reduce. ... We continue to see a trend of getting much better numbers in [the NPL ratio over 90 days]. The peak was 5.2 in June last year, now we’ve reduced it to 4.5, with both individual and company segments showing improvement.”

• José Antonio Álvarez Álvarez, CFO, Banco Santander: “We think NPL ratios [in Spain] will continue to rise for at least two quarters until the economy is no longer in recession. ... In other geographies, there are varying trends. There is really no change in the UK, where NPLs are stable. Coverage levels are good, and we don’t expect any changes. In the US, performance has been good. There is nothing worth mentioning in Mexico, and the other two points where we need to focus are Brazil and Chile.”

Progress on credit quality continued, but economic weakness prompts vigilance. Credit quality indicators, such as provisions for credit losses, non-performing loan (NPL) ratios and loan impairments, continued to show signs of improvement, or at least stability, at the group level. This reflects banks’ efforts to reduce risk, run off legacy portfolios and provision appropriately. Despite positive credit performance in 1Q13, European banks have a less optimistic outlook for credit quality than their counterparts headquartered elsewhere. Management in Europe indicated that trends vary by region and that they remain watchful of areas experiencing challenging economic conditions.

Key themes overview


• Antony Jenkins, CEO, Barclays: “In general, our outlook for impairment in our big retail businesses is what I would describe as broadly stable. As you know, in the last few years, we’ve seen an improving picture. We’ve been talking about that improvement beginning to slow down and stabilize, which is where we see it now. ... We continue to watch closely the European retail businesses and our South African business where there has been some stress. But I’d say, in the aggregate, we think the picture is broadly stable from where we are.”

• Stuart Gulliver, CEO, HSBC: “Credit quality does vary region to region. So, yes, the US is showing the general improvement in spreads in subprime lending that you’ve seen with the improvement in the property market. The improvement in Europe in commercial banking is because we had specific provisions in 4Q12 against Spanish and Greek corporate loans which haven’t repeated. ... So what I wouldn’t want you to think is this is a generic kind of worldwide improvement. But we’re actually seeing some specific improvements in a number of our books.”

• Jan Hommen, CEO, ING: “Risk costs remain elevated amid a weak climate in Europe, but we saw an improvement compared to the fourth quarter to 81 basis points of average risk-weighted assets. For the coming quarters, our risk costs are expected to remain elevated at around the same levels here.”

• Richard Meddings, Group Finance Director, Standard Chartered: “The increase in consumer bank loan impairment was broadly in line with expectations, although in Korea we saw a more-than-expected increase due to the acceleration in personal debt rehabilitation scheme filings. Loan impairment in Korea may well deteriorate further from here. In the wholesale bank, the impairment charge remains very low. ... As always, we remain watchful of the credit environment, particularly in India and the Middle East.”

• Alessandro Maria Decio, Chief Risk Officer, UniCredit: “In terms of the general situation, we remain extremely careful in the context of evolution of this year. We’re very well aware that the macroeconomic pickup that we were hoping for in Italy is going to be quite likely delayed. ... The thing that is giving us some comfort is that the deterioration of our portfolio is slowing down versus the last two quarters and also from the first quarter of 2012. ... Despite some fears we had driven by rising unemployment, the asset quality of mortgages and consumer loans remains fairly stable compared to the previous quarter. ... But, again, definitely the situation remains difficult and definitely we are keeping a very strong focus on this.”

• Enrico Cucchiani, CEO, Intesa Sanpaolo: “We are now starting to see significant improvements in NPL inflows. NPL net inflow gradually smoothened throughout 2012 and then started to follow a downward path in 1Q13. ... Most notable is the 32% drop in net NPL inflow, the first significant improvement for a long time. This, I would say, shows a clear impact of our proactive management actions along the full credit value chain.”


Management attributes muted loan growth to low demand, especially on the consumer side

Theme 9.2

• Ed Clark, CEO, Toronto-Dominion: “Our Canadian retail bank started the year on a very strong note, supported by good lending growth and stable margins. However, with Canadian households deleveraging, consumer lending growth is slowing across the industry. Business lending growth remained strong, but this provides only a partial offset and the tailwind from credit is diminishing.”

• Tim Sloan, CFO, Wells Fargo: “I wouldn’t jump to any conclusions about loan growth in the industry in the first quarter. If you look at [Federal Reserve] data, for the last few years, the first quarter tended to be a seasonally low quarter. ... I’d take the first quarter decline for the industry and also then add to that the fourth-quarter increase and probably average those together. ... So, again, I think what we’re seeing in the industry is steady loan growth if you average over the last few years at about 1%-ish on a quarterly basis.”

• Richard Davis, CEO, US Bancorp: “My guidance for next quarter, which is as far as I can see, is somewhere in between the 1% and 1.5% range. If we get the seasonal lift that we expect and we normally see in the springtime, then we’ll be in the middle-to-high end of that range. If we see a

continued cautious nature from our customers, which we’ve now seen for the last few months, then it might be on the low end of that range. But it’ll be somewhere in between. So what I’m saying is, it’s not going to robustly come back on all cylinders and that makes sense to us because there continues to be a withholding by both consumers and businesses in this uncertain environment. ... So longer view, second half of the year, I would hope we start moving into the higher end of the 1% to 2% linked quarter range, but for now, I’m going to say, we’re going to be pretty set in that same kind of range bound, 1% to 1.5% linked quarter until we see some catalyst.”

• José Antonio Álvarez Álvarez, CFO, Banco Santander: “[In Spain], lending shows the continued deleveraging of households and companies, the slow demand from individual borrowers, which was reflected both in consumer lending and mortgages. We’ve continued to lend to businesses, however, at a relatively stable level. And we’re making every effort to increase lending to the business sector and we’ve, in fact, launched a plan, the 10,000 Plan, in order to bring in new loans, mostly with small and medium-sized enterprises (SMEs)”

A deceleration in lending emerges. Sequential growth in end-of-period net loan balances was anemic, reflecting the macroeconomic environment, consumer deleveraging and, in some cases, banks’ preference to use excess liquidity for other priorities. Management comments pointed toward the expectation that lending trends will remain weak in future quarters.

Key themes overview


• Philippe Heim, CFO, Société Générale: “French Networks remains fully committed to serving customers and continuing to assist businesses and individuals with the financing of their projects. But in an environment of economic uncertainty, of course, the demand for financing remained low in 1Q13 and outstanding loans remained roughly stable versus 1Q12.”

• Carlo Messina, CFO, Intesa Sanpaolo: “On the issue of investing the €20 billion in cash liquidity that we have now, the first point of our potential investment is to use the liquidity in order to increase the assets under management. So no push on deposits, but a push on assets under management. Then the second point would be the reimbursement of a portion of the long-term refinancing operation (LTRO), especially the portion that we have with the guarantee of government. And at the end, if we have good demand for loans, it is possible also to use for lending.“

• Bruce Van Saun, Group Finance Director, RBS: “We’re awash in liquidity. ... At this point, we are starting to see a few green shoots in SME loans, but we’re not getting a material pickup just yet in loan growth.” CEO Stephen Hester added that RBS has significant capacity to grow the loan book: “It’s practically unlimited. ... There is no pattern of loan recovery from any past recovery that we couldn’t comfortably absorb. We have an embarrassment of deposits today. So, funding is a no-brainer. ... My worry is more, can we get loans out of the door in terms of customers wanting them, as opposed to whether we can fund them.”

During 1Q13, the UK Government extended the Funding for Lending Scheme (FLS) and launched the Help to Buy mortgage lending scheme. Management at UK banks expressed support for both programs.

• Antony Jenkins, CEO, Barclays: “Funding for Lending is a scheme that we’ve supported. We think it’s important to make sure we’re doing everything we can to support the British economy. But as we’ve said before, we don’t need the liquidity. We’ve got plenty of liquidity. The scheme changes have just been announced, and we’re looking at them quite closely. But I would expect we would continue to support the Funding for Lending Scheme.”

• António Horta-Osório, CEO, Lloyds: “We continue to support the UK economy through a number of government schemes, and we’re pleased with the Government’s decision to extend the Funding for Lending by a year to January 2015. The Government sees Funding for Lending as a key way to help small and medium-sized businesses, which are at the heart of the British economy, and our strategy is aligned to this. ... In SMEs, over the last 12 months, our lending has grown 4% against the markets, which contracted 4%. And so far this

year, we have supported more than 32,000 start-ups. In retail, we continue to be the UK’s largest lender to first-time buyers, providing one in four with mortgages. We remain committed to helping 60,000 customers buy their first home in 2013 and made good progress towards this goal in the first quarter. We also announced recently that we will further support customers through our participation in the Help to Buy scheme that was outlined in the 2013 budget.”

End-of-period loans, percent change from 4Q12

AXP

HSBC

CBK

UCG

C

LLD

CA

CIBC

DB

JPM

USB

WFC

RBS

ING

BNP

BAC

STD

RBC

BBVA

TD

ITAU

CS

UBS

ICBC

BCS

-4.65%

-4.07%

-2.99%

-1.80%

-1.18%

-1.02%

-0.81%

-0.63%

-0.59%

-0.53%

0.03%

0.09%

0.53%

0.54%

0.60%

0.62%

0.65%

0.68%

1.28%

1.36%

1.76%

2.72%

4.07%

4.98%

7.34%

-6.00% -2.00%-4.00% 0.00% 4.00%2.00% 6.00% 8.00%

Appendix



Appendix 1Q13 earnings seasonSummary of key banking sector themes

Top initiatives and issues (arranged from most common to least common)

AXP BAC BBVA BCS BK BNP C CA CBK CIBC CS DB

Drivers of earnings performance 35 √ √ √ √ √ √ √ √ √ √ √ √

Concerns related to the macro-environment

35 √ √ √ √ √ √ √ √ √ √ √ √

Capital strength 35 √ √ √ √ √ √ √ √ √ √ √ √

Expense trends/investments in the business

34 √ √ √ √ √ √ √ √ √ √ √ √

Strategic progress 32 √ √ √ √ √ √ √ √ √ √ √

Cross-border activities 32 √ √ √ √ √ √ √ √ √ √ √

Funding strategy and liquidity management 31 √ √ √ √ √ √ √ √ √ √ √

Regulatory issues 30 √ √ √ √ √ √ √ √ √ √

Credit quality trends 28 √ √ √ √ √ √ √ √ √ √ √

Lending trends 28 √ √ √ √ √ √ √ √ √

Legend

AXP — American Express BAC — Bank of America BBVA — Grupo BBVA BCS — Barclays

BK — BNY Mellon BNP — BNP Paribas C — Citigroup CA — Credit Agricole

CBK — Commerzbank CIBC — Canadian Imperial Bank of Commerce CS — Credit Suisse DB — Deutsche Bank

The tables on the following pages provide a summary of the top 10 themes.




GS HSBC ICBC ING INT ITAU JPM LLD MAC MS NAB NOM

Drivers of earnings performance 35 √ √ √ √ √ √ √ √ √ √ √ √


35 √ √ √ √ √ √ √ √ √ √ √ √

Capital strength 35 √ √ √ √ √ √ √ √ √ √ √ √


34 √ √ √ √ √ √ √ √ √ √ √

Strategic progress 32 √ √ √ √ √ √ √ √ √ √

Cross-border activities 32 √ √ √ √ √ √ √ √ √ √ √

Funding strategy and liquidity management 31 √ √ √ √ √ √ √ √ √


Credit quality trends 28 √ √ √ √ √ √ √ √ √

Lending trends 28 √ √ √ √ √ √ √ √ √ √

Legend

GS — Goldman Sachs HSBC — HSBC Holdings ICBC — Industrial and Commercial Bank of China ING — ING Groep

INT — Intesa Sanpaolo ITAU — Banco Itau JPM — JPMorgan Chase LLD — Lloyds

MAC — Macquarie Group MS — Morgan Stanley NAB — National Australia Bank NOM — Nomura

1Q13 earnings seasonSummary of key banking sector themes




RBC RBS SG STAN STD STT TD UBS UCG USB WFC

Drivers of earnings performance 35 √ √ √ √ √ √ √ √ √ √ √


35 √ √ √ √ √ √ √ √ √ √ √

Capital strength 35 √ √ √ √ √ √ √ √ √ √ √


34 √ √ √ √ √ √ √ √ √ √ √

Strategic progress 32 √ √ √ √ √ √ √ √ √ √ √

Cross-border activities 32 √ √ √ √ √ √ √ √ √ √

Funding strategy and liquidity management 31 √ √ √ √ √ √ √ √ √ √ √


Credit quality trends 28 √ √ √ √ √ √ √ √ √

Lending trends 28 √ √ √ √ √ √ √ √ √

Legend

RBC — Royal Bank of Canada

RBS — Royal Bank of Scotland SG — Société Générale STAN — Standard

Chartered

STD — Banco Santander STT — State Street TD — Toronto-Dominion UBS — UBS AG

UCG — UniCredit USB — US Bancorp WFC — Wells Fargo

1Q13 earnings seasonSummary of key banking sector themes


CompanyMarket value (US$m) Assets (US$m) Capital ratio Basis of capital ratio

American Express $79,958.95 $156,855.00 12.60 Basel I Tier 1 Common ratio

Banco Itau $77,707.64 $468,208.99 11.70 Basel II

Banco Santander $75,108.48 $1,642,255.11 10.67 Basel 2.5 core Tier 1 ratio

Bank of America $144,888.27 $2,174,819.00 10.58 Basel I Tier 1 Common ratio

Bank of New York Mellon $35,063.15 $355,942.00 12.20 Basel I Tier 1 Common ratio

Barclays* $62,296.45 $2,578,260.00 11.00 Basel 2.5 core Tier 1 ratio

BBVA $53,730.57 $811,164.07 11.20 Basel 2.5 core Tier 1 ratio

BNP Paribas $72,992.99 $2,514,865.78 11.70 Basel 2.5 Common equity Tier 1 ratio

CIBC $30,840.85 $392,877.29 9.60 Basel III ‘‘all-in’’ Common equity Tier 1 ratio

Citigroup $156,221.72 $1,881,734.00 11.80 Basel I Tier 1 Common ratio

Commerzbank $5,820.14 $829,393.30 11.50 Basel 2.5 core Tier 1 ratio

Credit Agricole** $23,010.05 $2,670,710.00 11.00 Basel 2.5 core Tier 1 ratio

Credit Suisse $46,195.77 $996,807.25 8.60 Basel III Common equity Tier 1 ratio ‘‘look through’’ basis

Deutsche Bank $48,309.11 $2,604,510.22 12.10 Basel 2.5 core Tier 1 ratio

Goldman Sachs $74,474.95 $959,223.00 12.70 Basel I Tier 1 Common ratio

HSBC $135,803.25 $2,681,356.00 12.70 Basel 2.5 core Tier 1 ratio

Industrial and Commercial Bank of China

$235,580.76 $2,953,467.62 11.00 China Banking Regulatory Commission's regulation governing capital of commercial banks

ING Groep $33,662.82 $1,512,870.78 12.30 Basel 2.5 core Tier 1 ratio

Intesa Sanpaolo $30,554.56 $854,772.25 11.30 Basel 2.5 core Tier 1 ratio

Select KPIs


CompanyMarket value (US$m) Assets (US$m) Capital ratio Basis of capital ratio

JP Morgan Chase $193,595.30 $2,389,349.00 10.20 Basel I Tier 1 Common ratio

Lloyds $64,125.89 $1,362,883.61 12.50 Basel 2.5 core Tier 1 ratio

Macquarie Bank $14,444.46 $156,937.81 11.60 Basel III ‘‘harmonized’’ Common equity Tier 1 ratio

Morgan Stanley $48,728.46 $801,383.00 11.50 Basel I Tier 1 Common ratio

National Australia Bank $74,985.98 $793,540.46 8.22 Basel III Common equity Tier 1 ratio

Nomura $33,158.20 $402,807.37 11.70 Basel III Common equity Tier 1 ratio

Royal Bank of Canada $86,402.50 $837,786.07 9.30 Basel III Common equity Tier 1 ratio

Royal Bank of Scotland $51,570.33 $1,986,444.46 10.80 Basel 2.5 core Tier 1 ratio

Société Générale $29,644.86 $1,596,899.23 10.60 Basel 2.5 core Tier 1 ratio

State Street $29,010.74 $218,189.00 16.10 Basel I Tier 1 Common ratio

Toronto-Dominion $74,447.05 $818,678.48 8.80 Basel III ‘‘all-in’’ Common equity Tier 1 ratio

UBS $68,496.95 $1,278,201.44 10.10 Basel III ‘‘fully loaded’’ Common equity Tier 1 ratio

UniCredit $30,699.72 $1,169,736.69 11.03 Basel 2.5 core Tier 1 ratio

US Bancorp $63,516.71 $355,447.00 9.10 Basel I Tier 1 Common ratio

Wells Fargo $208,148.01 $1,436,634.00 10.38 Basel I Tier 1 Common ratio

Notes: Source for market value and assets is Capital IQ; capital ratio from company reports; market value is as of 15 May 2013

*Exchange rate for assets from oanda.com (1.61533 as of 31 December 2012)

**Exchange rate for assets from oanda.com (1.32148 as of 31 December 2012)


Notes

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