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Global Banking & Capital Markets Key themes from 3Q15 earnings calls

November 2015

Global Banking & Capital Markets: key themes from 3Q15 earnings calls 2

Contents Top 10 key themes: 3Q15 earnings season 3

Top 10 themes: a quarter-over-quarter comparison 4

Key themes overview 5

1. Earnings performance: profit trends diverge, but weak revenue growth is evident across the industry 5 2. Macro-challenges: macro environment becomes difficult to manage 7 3. Expenses: efficiency deteriorates amid warnings that cost pressures will persist in coming years 8 4. Capital plans: how much capital is enough for European banks to resume dividend payouts? 10 5. Regulatory and compliance: banks expect capital burden to increase when new rules are finalized 11 6. Cross-border: slower GDP growth forecast does not deter commitment to Asia-Pacific 12 7. Lending: growth trends take hold, although margin compression remains in place 13 8. Innovation: investments in digital become compulsory 14 9. Credit quality: macro uncertainties prompt heightened monitoring of selected portfolios 15 10. Acquisitions and divestments: European banks continue to reshape through business exits and asset sales 16

Appendix 17

Key themes addressed, by bank 17 Key themes addressed, by bank (contd) 18 Select KPIs 19 Scope, limitations and methodology of the review 20

Global Banking & Capital Markets: key themes from 3Q15 earnings calls 3

Top 10 key themes: 3Q15 earnings season “Challenging environments have become the norm, and the work we’ve done to make our firm simpler, smaller, safer, and stronger has given us a resilient and sturdy platform from which to operate.”

Mike Corbat, CEO, Citigroup

Largely constructive first half of the year gives way to negative third quarter. In the years since the financial crisis, banks have become accustomed to managing through significant external headwinds related to regulatory reform, macro-economic issues and disruptive geopolitical events. Despite the industry-wide expectation that challenging conditions will persist, the third quarter operating environment was exceptionally difficult. State Street’s CEO noted that “Global equity markets posted their worst quarter since the third quarter of 2011,” and ANZ CEO Mike Smith observed that “Customer activity stopped, which is quite unusual.”

With the escalation of macro challenges, the question becomes: have banks sufficiently transformed themselves to manage through an environment that is unlikely to improve materially in the foreseeable future? Management comments during the 3Q15 earnings season revealed a range of responses to this question.

• With headwinds particularly impacting fixed income trading, Goldman Sachs remained committed to this business, which has undergone a series of adjustments, as opposed to a large-scale transformation. CFO Harvey Schwartz said, “We will always look for additional opportunities to improve our Fixed Income, Currencies and Commodities (FICC) operations; however, we will also never lose sight of the tremendous value that we can bring to our FICC clients over the long term.”

• At UBS, management asserted that transformation efforts have been completed, and the bank’s new strategy is delivering. CEO Sergio Ermotti stated, “The strategic change we initiated four years ago was driven by our desire to focus on our core strengths and expectations of more demanding regulation. So, having completed our transformation, we have the right business model today, with no need for further radical change to comply with the strict new too-big-to-fail proposals and with the competitive landscape.”

• And finally, Credit Suisse, Deutsche Bank and Standard Chartered all unveiled new plans for dramatic strategic transformations to address what Deutsche Bank CEO John Cryan described as “historic underperformance” and to fulfill Standard Chartered’s aspiration of “being acceptably and then excitingly profitable.”

Note: Please see Appendix for key to company symbols.

Group-level reported return on equity (ROE), 3Q15

-34.8

2.9 5.6 5.7 6.7 7.0 7.0 7.1 7.4 8.0 9.0 9.1 9.6 10.911.211.312.012.614.114.915.918.120.423.326.8

3Q15 3Q14

Source: Company reports; Quarterly ROE data not disclosed at ANZ, BBVA, Crédit Agricole, Intesa Sanpaolo, Lloyds Banking Group, Macquarie Group, NAB, Royal Bank of Scotland, Standard Chartered and Unicredit.

Global Banking & Capital Markets: key themes from 3Q15 earnings calls

4

Top 10 themes: a quarter-over-quarter comparison 3Q15 2Q15

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

Rank* Earnings season top 10 themes (arranged from most common to least common) — 32 banks

1 Quarterly earnings performance 1 Quarterly earnings performance

2 Macro-challenges 2 Macro-challenges

3 Expense trends 3 Expense trends

4 Capital strength and plans 4 Capital strength and plans

5 Regulation and compliance 5 Regulation and compliance

6 Cross-border and location strategies 6 Cross-border and location strategies

7 Lending trends 7 Lending trends

8 Innovation 8 Credit quality trends

9 Credit quality trends 9 Acquisitions and divestments

10 Acquisitions and divestments 10 Innovation

*Note: Please see Appendix for an explanation of the ranking methodology.


5

Key themes overview 1. Earnings performance: profit trends diverge, but weak revenue growth is

evident across the industry

“Broadly speaking, the revenue environment is fairly challenging for us.”

Iain Mackay, Group Finance Director, HSBC

Bank results include record profits for some and steep losses for others. In describing earnings performance, management offered characterizations ranging from “disappointing” and “very poor” to “solid” and “strong.” At Credit Suisse, CEO Tidjane Thiam said, “it was not good quarter.” In contrast, Intesa Sanpaolo CEO Carlo Messina proclaimed, “[We] announced the best results in the history of Intesa Sanpaolo.” ROE* increased at only eight banks when compared to 3Q14, reversing the trend from the previous quarter, when all but seven banks reported higher returns. For the most part, improved returns reflected the positive impact of non-recurring benefits, as opposed to meaningful business growth:

• Legal and conduct charges at Bank of America, Citigroup and HSBC were significantly lower than in 3Q14.

• JPMorgan Chase, State Street and UBS each reported a boost from tax benefits.

• Results at BNP Paribas included a €487 million capital gain from the sale of a 7% stake in Klépierre.

• Société Générale benefited from the revaluation of its own financial liabilities.

Revenue performance was weak across the sector, with only two banks — BBVA and Itaú — generating double-digit growth. More than half of the banks included in this analysis saw revenues decline from 3Q14, reflecting pressure from persistently low interest rates, difficult market conditions and the impact of business exits.

• Jonathan Pruzan, CFO, Morgan Stanley: “In contrast to the first half, the third-quarter backdrop was less constructive. Besides the normal summer seasonality, the quarter was characterized by global equity markets trending lower, volatility metrics increasing, spreads widening, policy uncertainty and periodic bouts of risk aversion.”

• Stephan Engels, CFO, Commerzbank: “Revenues in the core bank decreased by 12% quarter on quarter, predominantly driven by the challenging capital market environment.”

• Shayne Elliott, CFO, ANZ: “Looking at the second half,** clearly income growth was less than we had hoped [due to] the slowdown in the markets business in the last six weeks of the year. That slowdown essentially halved the revenue growth rate for the half.”

Lower legal costs were a positive feature of the quarter, with many global banks reporting steep declines in charges for conduct-related issues. However, this may be a short-lived tailwind, as the resolution and timing of investigations remain difficult to predict.

• Tushar Morzaria, Group Finance Director, Barclays: “Conduct and litigation [costs are] at an elevated level; it’s very hard for us to predict, as it is for anyone else. We’re quite conservative in our estimates, and we’re not really assuming much of a drop-off at all and that it will carry on at the elevated levels that we’ve seen.”

• John Cryan, co-CEO, Deutsche Bank: “Litigation is a difficult topic on which to give much information because you can shoot yourself in the foot very effectively if you compromise your own position. We have built into the plan an amount that we think, in reasonable circumstances, should cover the potential cost, but that’s largely for things we know about and things we could reasonably expect. We are vulnerable to there being some unexpected and relatively significant impacts.”

*Quarterly ROE not disclosed at ANZ, BBVA, Crédit Agricole, HSBC, Intesa Sanpaolo, Lloyds Banking Group, Macquarie Group, National Australia Bank (NAB), Royal Bank of Scotland, Standard Chartered or UniCredit.

**30 September 2015, was the end of second-half and fiscal year 2015 for ANZ.

Percentage change in litigation and conduct-related costs from 3Q14, selected banks

Source: Company reports.

–97%

–92%

–88%

–76%

–68%

–44%

–8%

27%

34%

114%

BAC

RBS

HSBC

C

UBS

LLD

BARC

JPM

DB

GS


6

Percentage change in net income from 3Q14*

Source: Company reports. *Banks are not included for the following reasons: net loss in 3Q14 (Bank of America); net loss in 3Q15 (BBVA); net loss in both

periods (Deutsche Bank); ANZ, NAB, Macquarie Group and Standard Chartered do not disclose quarterly net income.

GS

BK

MS

RBS

NOM

CS

JPM

CHSBC

BARC

LLD

UCG

CBK

RBC

AXP

CA

INT

STT

ING

WFC, USB

SANT

UBS

CIBC

TD

SGBNP

ITAU

-100%

-50%

0%

50%

100%

150%

200%

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

Net

inco

me

Revenues

Higher profits and revenues

Lower profits and revenues Higher revenues and lower profits

Higher profits and lower revenues


7

2. Macro-challenges: macro environment becomes difficult to manage

“We’ve had quite an exceptional quarter in terms of the market evolution. It’s really an exceptional downturn; we have not seen such a movement on a quarterly basis over the last seven years.”

Carlos Torres, COO, BBVA

Global market instability was a significant headwind. During the third quarter, macro challenges intensified on a number of fronts. In July, uncertainty about the resolution of the Greek financial crisis dominated headlines and influenced market sentiment. By August, attention shifted to China, where government interventions to calm the stock market, devalue the yuan and lower benchmark interest rates triggered unprecedented volatility in global stock markets. And, in September, the U.S. Federal Reserve (the Fed) decided to postpone a long-anticipated interest rate hike. These events combined with renewed concerns about slowing global economic growth, falling commodity prices and lingering low interest rates to create what Morgan Stanley CEO James Gorman described as a “very unusual macro environment” and Credit Suisse CEO Tidjane Thiam called “two very disturbed months.”

While global banks’ investment banking operations bore the brunt of the negative environment, particularly in the areas of fixed income trading and equity underwriting, the macro challenges also impacted asset management performance, contributed to ongoing weakness in lending margins and, ultimately, helped keep the low growth revenue environment fully in place.

Percentage change in trading revenues from 3Q14, selected banks

Source: Company reports

Impacts of macro-challenges

Retail banking

• Ralph Hamers, CEO, ING: “We’re already in a longer period of low interest rates, both on the shorter end of the curve and the longer end of the curve. And that puts a bit of pressure on net interest margin (NIM).”

• Mike Pedersen, Group Head of US Banking, Toronto-Dominion: “I am happy with our performance in the circumstances that we’re operating in. It’s difficult in terms of the low rates and the fitful economic expansion.”

Wealth and asset management

• Brian Moynihan, CEO, Bank of America: “Our wealth management business is showing the effects of lower market valuations pressuring revenue.”

• Sergio Ermotti, CEO, UBS: “Transaction activity declined substantially as clients reacted to extreme volatility.”

Equity underwriting

• Harvey Schwartz, CFO, Goldman Sachs: “Equity underwriting revenues were $190 million. This was down substantially compared to the second quarter due to a decrease of industry-wide IPOs and secondary offerings as higher volatility and a decline in prices reduced activity.”

• John Gerspach, CFO, Citigroup: “Equity underwriting revenues were down 43%, reflecting lower industry-wide activity this quarter.”

Sales and trading

• Philippe Heim, CFO, Société Générale: “Fixed income revenues were down by 23%. We kept good momentum in emerging countries on rates and products. We also had good volumes in commodities. However, the structured products suffered from the previously described market conditions and also the wait-and-see attitude we have seen among our clients.”

• Iain Mackay, Group Finance Director, HSBC: “Global banking and markets revenue was down. This was due to the impact of challenging market conditions on rates, which was down by 22%; and credit, which was down by 51%.”

–42%

–33%

–23%

–23%

–22%

–20%

–19%

–16%

–4%

–2%

0%

20%

37%

12%

9%

–6%

9%

23%

19%

0%

31%

8%

12%

21%

–19%

4%

CSGSSG

JPMHSBCNOM

MSC

BACBARC

BNPDB

UBS

Equities FICC


8

3. Expenses: efficiency deteriorates amid warnings that cost pressures will persist in coming years

“More of the regulatory agenda [is] behind us than in front of us. But we still have a large regulatory agenda, and trying to figure out when those costs abate is really challenging. We are very focused on expenses. We’re trying to control those expenses that we can control.”

Jonathan Pruzan, CFO, Morgan Stanley

Cost–income ratios deteriorate across the industry. When compared to 3Q14, expenses rose at 18 of the 32 banks* included in this analysis. In addition, efficiency ratios deteriorated at 20 banks over the same period. While expense performance weakened in the quarter, most banks indicated that they have not relaxed what Intesa Sanpaolo CEO Carlo Messina called a “sustained focus on cost.” Some banks are training their sights on generating positive jaws, or in other words, growing revenues faster than expenses. Others are targeting specific expense run rates. Regardless of their approach to costs, management at many banks acknowledged that significant headwinds to improved expense performance exist in the near term. These include the low-growth revenue environment, costs to achieve new strategies and restructuring initiatives, regulatory and compliance costs and, finally, ongoing investments in innovation and growth programs.

• Deutsche Bank CEO John Cryan unveiled plans to invest up to €3.5b in restructuring initiatives by 2018 to drive annual savings of €1b to €1.5b. However, before the savings are realized, he warned: “We do not expect 2016 and 2017 to be strong years as we do expect them to be burdened by the cost of investments that we have to make and by the cost of resolving many of our legacy and litigation and regulatory matters relating to misconduct.”

• At UBS, CFO Tom Naratil provided a revised target for efficiency: “We expect our cost/income ratio to be around 65% to 75% for the short to medium term, potentially above our target range, as we absorb regulatory costs and macroeconomic headwinds.”

• Credit Suisse CEO Tidjane Thiam pointed out the necessity of investing in the future: “We [will] invest to grow because to be honest, there is cost-cutting fatigue [at this bank]. I’ve done hundreds of interviews since I joined. In every single interview is, ‘Please, where are we going with this cost cutting? Is there a vision? Is there a direction?’ … My commitment to them was I’m a growth person; I want to grow this company. Yes, we are going to take some pain, but this is a growth budget.”

• At Barclays, Group Finance Director Tushar Morzaria detailed the multiyear cost impact of structural reform: “[In 2016], the structural reform implementation costs are expected to rise to around £400m, as we ramp up in both the UK and the US. The final costs of implementation are hard to estimate precisely, but our best estimate is around a further £500m across 2017 and 2018, making a total of around £1b.”

• Wells Fargo CFO John Shrewsberry observed: “Most of the savings [we generate get] absorbed by areas where we’re changing or improving the firm; where we’re spending money on compliance, on risk management, on technology, on innovation. So I’ve got some conviction that we’re not going to move below the higher end of our [efficiency ratio target] range while we’re still in this lower-rate environment.”

*Quarterly expenses and efficiency ratio not disclosed at ANZ, NAB or Macquarie Group.

Cost-income ratios*

44.2

47.2

47.4

49.6

52.5

53.6

53.9

55.3

56.1

56.7

57.0

59.9

61.9

62.5

62.9

63.4

65.0

66.0

67.2

67.9

69.9

70.0

71.0

74.9

76.0

77.3

81.0

83.9

88.7

94.0

107.

0

180.

4

3Q15 3Q14

Source: Company reports.


9

Percentage change in expenses and revenues from 3Q14

BAC

HSBC

C

UBS

BK

MSGS

RBSCS

JPM

BARC

LLD CASANT

INTCBK RBC

WFCSTAN

UCG

AXPSTT

ING

SGNOM

USB TDCIBC

BNP

ITAU

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

-25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%

Expe

nses

Revenues

Lower revenues and lower costs

Lower revenues and lower costs

Higher revenues and lower costs

Higher revenues and higher costs

Source: Company reports; Note: ANZ, Macquarie Group and NAB do not disclose quarterly data; Deutsche Bank excluded because its expense increase of 80% made it difficult to read the rest of the chart; yellow markers indicate that revenues grew faster than expenses.


10

4. Capital plans: how much capital is enough for European banks to resume dividend payouts?

“Our commitment to our capital returns policy is unchanged and we will continue to target a payout ratio of at least 50% of net profit, subject to maintaining a fully applied Basel III CET1 ratio of at least 13% and 10% post-stress test.”

Sergio Ermotti, CFO, UBS

Wide range of dividend policies exists across the industry. For the most part, 3Q15 Common Equity Tier 1 (CET1) ratios remained above regulatory requirements as they are currently understood. In addition, banks appeared to demonstrate a sustained ability to generate capital, despite macro headwinds. As a result, banks in the US, Canada and Australia highlighted plans to return excess capital to shareholders through dividends and share buyback programs. US banks continued to execute the capital plans approved by the Fed in March 2015, while in Canada, CIBC and Royal Bank of Canada announced dividend increases. In Australia, banks reiterated generous dividend payout targets; including 65% to 70% at ANZ, 70% to 75% at NAB and 60% to 80% at Macquarie Group.

In Europe, however, shareholders may have to wait a bit longer for some banks to improve dividend payouts. For example, Deutsche Bank announced that it will not pay a dividend in 2015 or 2016 for the first time in almost six decades. And while other banks appear poised to pay out excess capital, many continued to provide guidance that dividends will only resume once banks have achieved internal targets for capital ratios that give them enough flexibility to meet potentially higher regulatory requirements.

• Tushar Morzaria, Group Finance Director, Barclays: “We are targeting getting [our CET1 ratio] over 12% over time, and at that point, we can talk to you more about the dividend philosophy.”

• Ewen Stevenson, CFO, Royal Bank of Scotland: “We’re still very much centered as a management team on returning to capital distributions in early 2017. … We have to have a very good stress test result. We do expect this year to have made progress. But we do expect it’s going to take us another year to have a very good stress test outcome, which we think will be the trigger to allow us to make capital distributions off the back of 2016 full-year results.”

• David Mathers, CFO, Credit Suisse: “We intend to recommend to our board and to our shareholders that we will pay out at least 40% of the operating free capital generated as a cash dividend over the five-year period. Until we reach the capital target, we will continue to recommend a CHF0.7 per share with a scrip* alternative.”

• Stephan Engels, CFO, Commerzbank: “As I said, 20% is what we want to propose [for this year’s dividend], and I think to start with, that is definitely an okay-ish dividend. With respect to the payout ratio, I think midterm is a little bit further away than next year in general terms. … [The target for the] midterm [payout ratio] is 40%.”

• Carlo Messina, CEO, Intesa Sanpaolo: “Our fully loaded CET1 ratio improved to 13.4%. So we are probably the only bank in Europe that is ready to pay cash to its shareholders and not to ask for cash to its shareholders.”

*With a scrip dividend, the bank issues new shares instead of paying a cash dividend.

**Fully loaded CET1 ratios with the following exceptions: “look-through” CET1 ratio at Credit Suisse and transitional CET1 ratios at American Express and Nomura.

Common Equity Tier 1 (CET1) ratios,** 3Q15

9.3

9.8

9.9

10.1

10.1

10.2

10.5

10.5

10.7

10.7

10.8

10.8

10.8

11.1

11.2

11.3

11.4

11.4

11.5

11.6

11.6

11.7

11.8

12.4

12.4

12.4

12.7

13.1

13.2

13.2

13.4

13.4

13.5

13.7

14.3

BK

BBV

A

SAN

T

RBC TD CS SG

UCG BN

P

WFC

BAC

CBK

CIBC

BARC ST

T

ING

JPM

STA

N DB C

MA

C GS

HSB

C

ITA

U

MS

USB RB

S

NO

M

AXP

AN

Z

CA INT

NA

B

LLD

UBS

3Q15 2Q15Source: Company reports.


11

5. Regulatory and compliance: banks expect capital burden to increase when new rules are finalized

“I fully expect to have to deal with a continuing flow of people tinkering with the capital regime, be it requirements, be it base calculation, be it composition of buffers. That isn’t going to stop.”

George Culmer, CFO, Lloyds Banking Group

Banks anticipate negative capital impacts from evolving regulations. Over the past several years, global banks have adapted their business models to comply with Basel III CET1 and liquidity requirements, leverage ratio requirements at both the global and national levels and various rules related to structural reform. But despite their efforts to date, much remains to be done, especially as rules continue to take shape. During the 3Q15 earnings season, management highlighted a renewed round of adjustment measures driven by leverage requirements and capital surcharges for global systemically important banks (G-SIBs).

• BNP Paribas issued Additional Tier 1 (AT1) capital in August 2015 to shore up its leverage ratio. CFO Lars Machenil said: “[The leverage] ratio benefited from the AT1 issue of US$1.5b that we printed in August and from the continuing reduction of the leverage exposure in our capital market activities.”

• After being assigned to the 4.5% bucket under the Fed’s final rule on G-SIB capital surcharges, JPMorgan Chase moved decisively during the quarter to cut non-operational deposits; the move resulted in a US$156b balance sheet reduction from year-end 2014 levels and lowered its G-SIB buffer to 4%.

European banks are also carefully monitoring the package of rules that have been informally dubbed “Basel IV,” which includes, among other things, the fundamental review of the trading book (FRTB) and internal model reviews. The table below details several banks’ preliminary views on how they will mitigate Basel IV-related impacts. Notably, this was not a topic of concern for banks in the US, Canada or Australia.

Evolving capital requirements

Bill Winters, CEO, Standard Chartered

• “We don’t know what’s going to come out of what’s being called Basel IV. We don’t know the degree to which standardized floors are going to be implemented or applied to business mixes like ours. We’re expecting that it will be adverse in terms of requiring some incremental capital. … We have undertaken, and will continue to undertake, a number of steps to rationalize our group structure, with a view to reducing that capital and liquidity drag.”

John Cryan, co-CEO, Deutsche Bank

• “First, following a series of quantitative impact surveys related to the fundamental review of the trading book, we now have more insight into the proposed changes to capital charges for market risks, which frankly without active remediation would render our trading books unaffordable. Second, we now expect there to be risk floor introduced into our credit risk models that substantially increases the amount of capital we need to hold against a given exposure.”

Frédéric Oudéa, CEO, Société Générale

• “We have basically three years to adapt; knowing that, it seems to me that there is a slight shift of the regulators on emphasizing the need to have a banking sector that is able to finance the economy and not to have a second wave of additional capital requirements.”

Federico Ghizzoni, CEO, Unicredit

• “We are already working on some mitigation. … It’s clear that now, without even waiting for new rules to come, we are readdressing businesses. For example, if we think about medium-term loans, it is clear that a bullet cannot be provided anymore, unless on an exceptional basis, to avoid the impact from IFRS 9. It’s a small example of things that we are trying to do to anticipate some of the negative effect that may come from the so-called Basel IV implementation.”

David Mathers, CFO, Credit Suisse

• “The FRTB changes impact a number of aspects of our fixed income business, especially long dated derivatives … these positions have been prioritized in our plans and will be transferred to the new Strategic Resolution Unit for wind down prior to imposition of the FRTB rules.”


12

6. Cross-border: slower GDP growth forecast does not deter commitment to Asia-Pacific

“In Asia, we’re continuing to increase our institutional and corporate market share, with further growth in key Asian markets. We’ve now completed our footprint in the region, with the opening of branches in Thailand and Myanmar this year.”

Mike Smith, CEO, ANZ

Asia-Pacific (APAC) remains a key strategic priority for many banks. Concerns about the strength of the Chinese economy dominated headlines during the third quarter and were a key factor in the October downgrade of global gross domestic product (GDP) forecasts by the International Monetary Fund (IMF). Many of the world’s largest banks, however, have a large presence in China and the Asia-Pacific region and are counting on these operations to drive revenues and earnings in coming years. Despite the pessimistic economic growth outlook, management at several of these banks noted that the potential for short-term impacts does not alter their long-term expectations and plans for the region.

• John Gerspach, CFO, Citigroup: “The IMF has lowered their growth forecast [for Asia], but they are still forecasting growth. And when you take a look at our Asia consumer revenues, we believe that they will stabilize. They are stabilizing now, and they should stabilize going into the fourth quarter and then into next year, so I don’t think that those two things are inconsistent. I’d like to get more growth out of Asia but with everybody living in a lower GDP environment, getting high levels of growth is going to be difficult.”

• Tom Naratil, CFO, UBS: “It’s important to separate comments that we might have about short-term fluctuations in markets or in client sentiment in APAC versus our long-term bullish view of the region for wealth management. Certainly, if you follow a quarter like the one that we saw, and our outlook statement reflects this, clients do have caution on their minds. However, as we look out in any of our planning, one of the reasons why we’ve been able to develop the number one wealth management business in the region is the fact that we’ve been consistent in our commitment over five decades.”

• Bill Winters, CEO, Standard Chartered: “Do we believe that the opportunity in Asia has gone away as a result of the current period of adjustment in China, ASEAN, South Asia, Middle East, Africa; falling commodity prices; slower export growth; sluggish economy from the West? Absolutely not. And at the core of our thesis for the bank is that we believe, in the medium to long term, [positive] trends are embedded and we will benefit by them. That said, we have to run our business between now and the time that these trends make themselves clear again.”

• Stuart Gulliver, Group CEO, HSBC: “Good progress has been made in targeting growth in Asia. In the Pearl River Delta, we continued to recruit staff to capture growth. We’re also announcing today that we signed an agreement, which is subject to regulatory approval, to establish a majority-owned joint venture securities company in Jinhai, Zhengzhou. If approved, this will be the first majority foreign-owned securities company in mainland China and will potentially allow us to engage in the full spectrum of securities business in the country.”

GDP growth rates and forecasts

Source: IMF World Economic Outlook Database.

-6

-4

-2

0

2

4

6

8

10

12

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

United States World European Union Sub-Saharan Africa China


13

7. Lending: growth trends take hold, although margin compression remains in place

“The gradual pickup in loan demand across the Eurozone continued in the third quarter as portrayed by the 1.7% loan growth of our domestic markets. We actually saw growth in all geographies, driven by Belgian retail and by our specialized businesses.”

Lars Machenil, CFO, BNP Paribas

Positive lending trends appear to be solidifying and sustainable. Loan growth rates hovered in the single digits for most of the banks that reported year-over-year increases in lending, reflecting slow — although still positive — economic growth in a number of countries. Notably, all five of the UK-based banks included in this analysis reported a decline in end-of-period loan balances, driven by progress in running off non-core portfolios.

Even at low rates, loans grew consistently, prompting management at a number of banks to comment on the profitability of different lending categories. Some banks appeared to signal an enhanced focus on driving growth in high-margin segments to improve the profit performance of their lending businesses. Others, such as Wells Fargo, remained more interested in growing customer relationships and core deposits, as they seek to drive net interest income, as opposed to margins.

• Ralph Hamers, CEO, ING: “When we launched the [Think Forward] strategy, we indicated that we wanted to further diversify the balance sheet away from mortgages into other asset categories and preferably through our own asset generating capabilities, and we have made steady progress on that. So you see that, specifically in the challengers and growth markets, we are creating more sustainable balance sheets but diversifying away from mortgages into other higher yielding assets. And that is predominantly now through the growth of our commercial banking business in these countries, but also our SME and consumer finance.”

• Mike Pedersen, Group Head of US Banking, Toronto-Dominion: “The margin did decline a bit more than we expected this quarter, but mostly because we grew faster than we expected, especially in larger commercial loans and in super-prime auto lending. In this environment, with origination margins lower than portfolio margins, if you’re outgrowing the market in lending, you’re subject to more margin pressure, but it’s still good net interest income business.”

• Jérôme Grivet, CFO, Crédit Agricole: “We are in a profound mutation of the [retail] business. So, of course, the net interest margin is under pressure and will probably remain so for coming quarters. … We have a very high level of either renegotiation or repayment of loans, and we are replacing all loans with new loans bearing lower interest rates.”

• António Horta-Osório, Group CEO, Lloyds Banking Group: “The [mortgage] market is growing less than we thought, around 1.5%. … We are growing around 1%, so less than the market, because as I also said, in the context of the NIM, we think that is absolutely the right thing to do in a low growth environment which is competitive; we should preserve NIM. And if the price for that is to grow slightly below the market, we think that’s exactly the right trade-off.”

Percentage change in end-of-period loan balances from 3Q14

–21%

–10%–9%–8%–4%

–1% 0%

1% 1% 2% 3% 4% 4% 4% 4% 5% 6% 7% 8% 8% 8% 8% 9% 9% 9% 10%13%

18%19%23%23%24%

Source: Company reports; loan data not available for BNY Mellon, Goldman Sachs or State Street.


14

8. Innovation: investments in digital become compulsory

“We’ve been heavily investing in technology for the past five or six years. We’re focused on leveraging these investments to drive further efficiencies, deliver a differentiated experience and generally make it easier for our clients and employees to do business with us.”

Dave McKay, CEO, Royal Bank of Canada

Digital investments are non-negotiable, even in a low revenue growth environment. Banks are closely watching discretionary spending in the current low revenue growth environment. However, digital investments are now considered to be as compulsory as regulatory compliance spending is. This was not the case even just a few years ago, when digital might have been considered a luxury, as opposed to a necessity, but no longer. Banks urgently need to invest in digital to streamline their operations, eliminate duplicative processes and drive efficiency improvements. At the same time, digital initiatives are expected to improve customer satisfaction, which will presumably increase retention, cross-selling opportunities and, ultimately, profitability.

• Shayne Elliott, CFO, ANZ: “Clearly in a lower growth environment, it’s easier to cut back on investments in strategic initiatives. We have maintained our investment here; [prioritizing] digitization of the customer experience, greater productivity and streamlining. We would expect those investments to continue and potentially increase in the future.”

• Federico Ghizzoni, CEO, Unicredit: ”Our digital journey is not just a nice project to come. It’s something that is already ongoing, something that has seen very strong acceleration in the last 12 months. It is expected to be further enhanced thanks to our €1.2 billion investment program for the next three years. The €1.2 billion is not an additional investment but just a shift from investments considered less of a priority than digital.”

Over the past couple of years, comments on digital initiatives during earnings calls have evolved from reporting on mobile banking applications and the number of active mobile users to increasingly innovative applications of digital technologies.

Innovative digital initiatives discussed in 3Q15

Ralph Hamers, CEO, ING

• “In October, we launched a strategic partnership with Kabbage, a leading US-based technology platform that provides automated lending to SMEs. ING and Kabbage together will soon be launching a pilot project in Spain to provide loans to small businesses. … The goal of the pilot in Spain is to learn more about better ways to serve small businesses with lending capacity, and clearly we’re excited to bring this technology to our customers here in Europe.”

Gerald Hassell, CEO, BNY Mellon

• We’ve created what we call MyDashboard, which improves employee productivity as part of our digitization strategy. The MyDashboard provides our managers with a convenient snapshot of key data on their employees, such as expenses, performance measurement status, training and other key metrics. The capability was recently named best new digital project for financial services as part of the Gartner Financial Services Cool Business Awards.”

Victor Dodig, CEO, CIBC

• “In addition to developing in-house, industry-leading mobile banking apps for smartphones and tablets, we’ll also enter into strategic partnerships where appropriate. In April, we announced our strategic alliance with MaRS Discovery District, and this allowed us to be the first Canadian bank to allow a banking app for the Apple Watch. We’re also the first Canadian bank to enter into a strategic partnership with suretap, a mobile wallet offered by some of Canada’s leading wireless carriers for Android and BlackBerry devices.”

David Mathers, CFO, Credit Suisse

• “We successfully launched the digital private bank in Singapore, but we’ve also identified a number of digital opportunities through our global innovation lab, and that will contribute both to our improved client service but also to increased efficiency.”

Carlos Torres, CFO, BBVA

• “I would finally highlight the open platform project, which has lots of potential to add additional business. It’s really about connecting our new state-of-the-art banking platform that you know we invested heavily in the past, and that is really a competitive advantage to provide services to third parties leveraging that platform. We have connected with Dwolla and are now in the process of connecting with Simple Bank, and that will be the start of that open platform strategy.


15

9. Credit quality: macro uncertainties prompt heightened monitoring of selected portfolios

“The cost of risk [in Global Banking and Investor Solutions] was below the average over the cycle, but it’s slightly up. And this is partly linked to the oil and gas exposure. … We have a very careful provisioning policy on that sector.”

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

Overall, credit quality remains strong, although pockets of concern have emerged. While expectations for GDP growth have moderated, most regions are still growing, albeit at slower rates. This provides a supportive backdrop for continued credit quality improvements, and in general, trends remain strong across most portfolios and metrics. However, banks are prudently monitoring certain exposures for signs of deterioration in response to falling commodity prices and sharper-than-expected declines in GDP in certain emerging market economies.

• Tom Naratil, Group CFO, UBS: “Notwithstanding the continued low levels of credit loss expenses, we’re closely monitoring developments in the Swiss economy, where we remain mindful that the continued strength in the Swiss franc could have a negative effect on the economy and exporters in particular, which may impact some of the counterparties in our domestic lending portfolio.”

• Wilfred Nagel, Chief Risk Officer, ING: “On the risk costs, what we’re seeing is the typical pattern at the end of a recession. On one hand, new provisions are lower; on the other hand, the old problem loans get resolved one way or the other, and that means both write-offs and releases go up, which then leads to a lower net addition to the provisions. It’s therefore likely that 2015 is going to be below 2014 by a more considerable margin than we had earlier guided on. At the same time, I would caution that uncertainty does remain. ... You still have a lot of uncertainty around Ukraine, Russia and the energy market. So there is plenty of scope for some noise in these numbers.”

• Iain Mackay, Group Finance Director, HSBC: “When you look across overall asset quality in the main regions in which we operate, the quality remains very stable. There is in this environment, as you’d expect, a heightened scrutiny and review of assets. … But what we’ve moved to watch-and-worry lists within the quarter has remained fairly stable.”

• José Antonio Álvarez, CEO, Santander: “On credit quality, we don’t see any particular concern or problem [across] all the geographies. I would refer specifically to Brazil, where given the economic situation you see non-performing loans going up [slightly]. … We expect some head winds [in Brazil due to the] economic situation, but as we said to you at the Investor Day, the cost of credit is going to go up, but not significantly.”

• Jérôme Grivet, CFO, Crédit Agricole: “In oil and gas, what I can say is that, for the time being, we haven’t seen any major or significant individual [exposure] that deserves a specific provision. So again, we are managing the quality of the portfolio like we always have, to be frank, which is to concentrate on the best-of-class customers.”

• John Shrewsberry, CFO, Wells Fargo: “We believe the energy services sector will incur greater challenges in the near term as it adjusts to lower commodity prices, and this view is reflected in our reserving process.”

Basis point change in nonperforming loan (NPL) ratio* from 3Q14, selected banks

–290

–240–50–48–42

–30–30–20–20–19–17–14

–5–3–2

210

RBSLLDBBVANABBACWFCBNPINGCAJPMUSBCANZCIBCRBCTDITAU

Source: Company reports; *metrics include NPL ratio, net impaired loan ratio, non-accrual loans/total loans.


16

10. Acquisitions and divestments: European banks continue to reshape through business exits and asset sales

“We made further progress this quarter on business sales, derivative unwinds, and sales of securities and loans. We completed the sale of the UK secured lending business. And as you know, we announced the sale of our Portuguese retail business.”

Tushar Morzaria, Group Finance Director, Barclays

European banks continue to dispose of legacy assets. Based on management comments during the 3Q15 earnings season, asset sales in North America appeared to be winding down, with only a few banks discussing exits that occurred during the quarter. In contrast, European and Australian banks were much more active in this area, partially reflecting high-profile strategic announcements by Credit Suisse, Deutsche Bank and Standard Chartered, as well as NAB’s efforts to refocus on its domestic business.

• Credit Suisse struck an exclusive deal with Wells Fargo allowing it to recruit advisors from its US Private Banking business, which is being sold as part of new CEO Tidjane Thiam’s strategic overhaul: “Please don’t think that because we sold the private bank we have in the US, that we have lost interest in the US. … We are interested in it. We have a credible strategy to get a share of that, and we will.”

• Deutsche Bank announced that it would exit onshore operations in 10 countries, launch an IPO of Postbank and close 200 German branches. When asked which assets would be disposed, CFO Marcus Schenk said, “We would prefer to tackle these without [an announcement], and we will let you know when we’ve sold something. That’s the target. Now whether that always works or whether things leak out earlier, I think it’s better — in particular when you sell in the context of an M&A transaction — to tell the market when you’ve done it and not when you plan to do something.”

• At NAB, Group Executive of Finance and Strategy Craig Drummond provided details on the “significant repositioning” the firm has undertaken: “We are announcing a 20-year partnership today and a sale of 80% of our life insurance business to Nippon Life. … In relation to the Clydesdale Bank IPO, we are very well progressed on that IPO. … The Great Western Bancorp sale was finalized in August. … In relation to UK CRE, as you will recall we did a £1.2 billion transaction in the first half.”

• Standard Chartered Group CEO Bill Winters talked through his strategic plan for the bank and provided the following details on business repositioning: “In terms of peripheral businesses, we’ve either sold, primarily sold and in a couple of cases closed, over 20 businesses year to date. We have an ongoing set of relatively small sales or closures, but we’re prepared to take the difficult steps. We have closed some important businesses that we didn’t think could be completed safely and soundly on an economic basis, including our SME business in the Middle East, in the UAE in particular. And finally, we’ve got $5 billion of peripheral businesses, or subscale businesses, that we intend to exit.”

Asset sales, 3Q15

ANZ • Esanda dealer finance (closed)

BARC

• UK secured lending business (completed)

• Portuguese retail business (closing 1Q16)

BK • Germany-based boutique, Meriten (closed)

C • US$31b of previously announced

asset sales including Japanese retail and cards businesses and OneMain Financial (closing 4Q15)

CBK • CRE portfolio (closed)

• Ship restructuring platform in Ship Finance (closed)

HSBC • Brazil business (deal remains on track)

RBS • 16% stake in Citizens Bank (20.9% stake remaining)

SANT • Stake in Banco Caixa Geral Totta de Angola (closed)

UCG • Austrian retail activities (announced)

• Italian leasing business (announced)


17

Appendix Key themes addressed, by bank 2Q15 earnings season

Key theme # AN

Z

AX

P

ITA

U

SAN

T

BA

C

BK

BA

RC

BN

P

CIB

C

C

CB

K

CA

CS

DB

GS

BB

VA

HSB

C

Quarterly earnings performance

35 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Macro-challenges 35 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Expense trends 35 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Capital strength and plans 35 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Regulation and compliance 34 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Cross-border and location strategies

33 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Lending trends 31 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Innovation 30 √ √ √ √ √ √ √ √ √ √ √ √ √

Credit quality trends 29 √ √ √ √ √ √ √ √ √ √ √ √ √ √

Acquisitions and divestments 27 √ √ √ √ √ √ √ √ √ √ √ √ √ √

Legend

ANZ — Australia and New Zealand Banking Corp.

AXP — American Express ITAU — Banco Itaú SANT — Banco Santander

BAC — Bank of America BK — BNY Mellon BARC — Barclays BNP — BNP Paribas

CIBC — Canadian Imperial Bank of Commerce

C — Citigroup CBK — Commerzbank CA — Crédit Agricole

CS — Credit Suisse DB — Deutsche Bank GS — Goldman Sachs BBVA — Grupo BBVA

HSBC — HSBC Holdings


18

Key themes addressed, by bank (contd) 2Q15 earnings season

Key theme # ING

INT

JPM

LLD

MA

C

MS

NA

B

NO

M

RB

C

RB

S

SG

STA

N

STT

TD

UB

S

UC

G

USB

WFC

Quarterly earnings performance

35 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Macro-challenges 35 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Expense trends 35 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Capital strength and plans

35 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Regulation and compliance 34 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Cross-border and location strategies

33 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Lending trends 31 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Innovation 30 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Credit quality trends 29 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Acquisitions and divestments

27 √ √ √ √ √ √ √ √ √ √ √ √ √

Legend

ING — ING Groep INT — Intesa Sanpaolo JPM — JPMorgan Chase LLD — Lloyds Banking Group

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

NOM — Nomura Holdings

RBC — Royal Bank of Canada RBS — Royal Bank of Scotland

SG — Société Générale STAN — Standard Chartered

STT — State Street TD — Toronto-Dominion UBS — UBS Group UCG — UniCredit Group

USB — U.S. Bancorp WFC — Wells Fargo


19

Select KPIs

Operational metrics

(% Y-o-Y growth) KPIs Share price

Text legend: Better than average Worse than average

Ass

et

Com

p co

st

Non

-com

p co

st

Rev

enue

s/

empl

oyee

(U

S$00

0)

Cost

/em

ploy

ee

(US$

000)

Cost

-inco

me

ratio

Ope

ratin

g m

argi

n

Net

inte

rest

m

argi

n

Cost

of e

quity

Ret

urn

on

aver

age

equi

ty

Thre

e- m

onth

ch

ange

One

-yea

r ch

ange

Best performer 20.6% -18.4% -31.2% 138.0 25.3 49.6% 50.4% 6.3% 5.5% 34.2% -5.1% 38.7%

Worst performer -16.2% 22.6% 30.1% 30.9 111.8 102% -1.7% 1.0% 25.5% -33.3% -25.9% -30.5%

Average 1.5% 0.9% 0.1% 75.6 54.1 70.6% 29.4% 2.3% 10.6% 8.5% -12.4% -4.8%

AXP 0.2% -6.0% 5.8% NA NA 76.3% 23.7% 6.3% 8.7% 23.4% -5.4% -15.2%

BBVA 20.6% 22.6% 20.8% 30.9 28.2 91.2% 8.8% 2.7% 10.7% -6.5% -15.4% -15.1%

STD 6.4% 5.6% -12.4% 62.2 31.0 49.9% 50.1% 2.6% 10.5% 7.9% -25.9% -30.5%

BAC 1.4% -2.6% -14.7% 96.1 63.4 66.0% 34.0% 2.1% 9.4% 7.1% -9.5% -9.0%

BK -2.3% -2.7% -11.2% 73.9 52.4 70.9% 29.1% 1.0% 14.5% 8.5% -7.2% 1.5%

BARC -9.5% -4.4% 30.1% NA NA 67.6% 32.4% 4.2% 8.4% 3.9% -8.4% 6.4%

BNP 3.7% NA NA 61.2 41.2 67.2% 32.8% NA 11.6% 7.8% -5.3% 6.2%

CIBC 12.9% 4.7% 9.2% 63.3 39.2 61.9% 38.1% 2.0% 5.5% 19.1% -5.1% -5.2%

C -3.9% -13.0% -19.1% 79.3 46.8 59.0% 41.0% 3.0% 10.0% 7.8% -10.9% -5.6%

CBK -5.5% 0.9% 4.1% 49.7 38.0 76.4% 23.6% 1.0% 9.0% 3.2% -19.9% -13.2%

CA -3.5% NA NA NA NA 69.9% 30.1% NA 10.6% 7.2% -25.0% -8.8%

CS -10.1% -8.7% 2.9% 120.1 99.3 82.7% 17.3% 1.1% 10.6% 6.9% -11.5% -11.1%

DB 0.6% 3.7% 2.7% 81.5 82.9 102% -1.7% 1.0% 9.6% -33.3% -14.9% -8.5%

GS 1.3% -16.1% 8.0% NA NA 70.2% 29.8% NA 9.1% 6.5% -17.2% -6.9%

HSBC -6.6% NA NA 60.7 34.8 57.3% 42.7% NA 9.4% 10.8% -12.6% -21.4%

ING 3.1% NA NA NA NA 56.1% 43.9% NA NA 10.8% NA NA

INT 5.4% NA NA 51.1 25.3 49.6% 50.4% NA 10.4% 6.2% -5.6% 38.7%

ITAU 15.2% 21.4% 7.8% 64.2 47.4 73.9% 26.1% NA 25.5% 34.2% -14.1% -16.3%

JPM -4.3% -6.5% 3.5% 96.7 65.7 68.0% 32.0% 2.2% 12.9% 11.2% -10.4% 0.9%

LLD -4.5% NA NA NA NA 74.2% 25.8% 1.6% 7.6% 5.7% -13.5% -0.2%

MS 2.4% -18.4% 15.5% 138.0 111.8 81.0% 19.0% NA 8.5% 5.5% -20.0% -8.7%

NOM 0.4% 6.3% 5.0% NA NA 94.1% 5.9% NA 17.2% 6.9% -19.0% 10.7%

RBC 18.7% 0.9% -11.3% 95.0 56.9 59.9% 40.1% 1.7% 5.8% 16.5% -8.4% -8.9%

RBS -16.2% 7.7% -15.5% 53.4 53.5 100% -0.3% 2.1% 10.3% 7.3% -13.2% -14.0%

SG 4.7% NA NA 47.8 29.9 62.5% 37.5% NA 11.0% 8.2% -7.3% 3.5%

STT -10.0% 10.3% -2.0% 82.2 61.3 74.5% 25.5% 1.0% 11.2% 10.9% -13.2% -6.6%

TD 17.0% 5.1% -0.3% 78.6 47.6 60.6% 39.4% 2.0% 6.0% 14.2% -10.1% -2.8%

USB 6.3% 9.3% 2.7% NA NA 56.0% 44.0% 3.0% 13.0% 13.2% -7.1% -0.7%

UBS -6.2% 2.7% -31.2% 124.2 110.1 88.7% 11.3% NA 10.5% 15.2% -14.9% 3.9%

UCG 2.1% -2.4% 0.6% 46.8 29.7 63.4% 36.6% NA 9.5% 4.4% -10.6% -6.5%

WFC 7.0% 1.2% 1.3% 82.5 46.8 56.7% 43.3% 3.0% 11.2% 12.4% -9.8% -1.5%

Source: SNL Financial. Notes: 3Q15 numbers for Canadian banks are from May–July 2015; operating margin = (net revenue-operating exp.)/net revenue; all numbers are non-annualized (except RoAE and NIM).


20

Scope, limitations and methodology of the review The purpose of this review is to examine the key themes discussed among 35 global institutions operating within the banking and capital markets sector during the 3Q15 earnings reporting season.

The identification of the top 10 themes is based solely on an examination of the transcripts and associated presentation materials of the earnings conference calls held from 26 August 2015 to 11 November 2015.

The period covered is 3Q15, which ended 30 September 2015. Exceptions include the following:

• Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank, for which the 3Q15 period ended 31 July 2015

• Nomura Holdings, Inc., for which the covered period was 2Q16

• Macquarie Group Limited, for which the covered period was 1H16

• Australia and New Zealand Banking Group Limited (ANZ) and National Australia Bank (NAB), for which the covered period was 2H/FY15

Banks were selected based on their size and the availability of earnings conference call transcripts. Every effort was made to include a global sample of banks in the review. Exceptions include the following:

• Mitsubishi UFJ Financial Group, Inc.; Mizuho Financial Group, Inc.; and Sumitomo Mitsui Financial Group, Inc. were excluded from the analysis because of the lack of transcript availability.

• Bank of China Limited and Industrial and Commercial Bank of China Ltd. were excluded because of the timing of their 3Q15 results reporting.

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EYG no. EK0404 BMC Agency BACS 1003185 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

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