2Q13 Global Themes Report_final (27 August 2013)

8/13/2019 2Q13 Global Themes Report_final (27 August 2013)

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Global banking andcapital markets sector Key themes for 2Q13 earning calls

August 2013



Global banking and capital markets sector

Contents

Scope, limitations and methodology of the review 1 Top 10 key themes: 2Q13 earnings season 2 Key themes overview 4

Theme 1.1: Drivers of earnings performance — year-over-year revenue growth lags net income gains 4 Theme 1.2: Macroeconomic environment — signs of growth in developed economies are tempered bymoderating trends in emerging markets 6 Theme 1.3: Capital position — compliance with Basel III Common Equity Tier 1 requirements appearsassured 7 Note: See Appendix for legend. 7 Theme 1.4: Expense trends — savings achieved from expense reduction plans are reinvested in thefranchise 8 Theme 5.1: New regulatory proposals — global and national leverage ratio proposals elicit strongresponses 10 Theme 5.2: Cross-border activities — cross-border strategies remain unchanged 12 Theme 7: M&A strategies — banks have little appetite for inorganic growth 13 Theme 8.1: Lending trends — positive loan growth is more evident in North America 14 Theme 8.2: Credit quality trends — credit performance reflects economic conditions 15 Theme 8.3: Strategic progress — banks look towards the future as legacy issues are resolved 16

Appendix 17 Summary of key banking sector themes 17 Summary of key banking sector themes (cont.) 18 Select key performance indicators 19



Global banking and capital markets sector 1

Scope, limitations and methodology of

the review

The purpose of this review is to examine the key themes discussed during the 2Q13 earnings

reporting season among 32 major global institutions operating within the banking and capital markets

sector.

This review was limited to the examination of transcripts of the earnings conference calls held from 23 May2013 to 8 August 2013. The review did not take into consideration information from other sources, such asnews reports, annual reports and company press releases.

The period covered was 2Q13, ended 30 June 2013. Exceptions include the following:

• CIBC, RBC and Toronto-Dominion Bank, for which the period covered was 2Q13, ended 30 April 2013.• Nomura Holdings, for which the period covered was 1Q14, ended 30 June 2013.

Banks were selected based on their size and the availability of earnings call transcripts. Every effort was madeto ensure a global sample of banks was included in the review:

• Mizuho and Mitsubishi UFJ Group Bank were excluded from the analysis due to the lack of transcriptavailability.

• Bank of China and Industrial and Commercial Bank of China (ICBC) were excluded due to the timing of the2Q13 results reporting.

• Macquarie Group and National Australia Bank were not included because they did not report quarterlyearnings for the period ended 30 June 2013.




Top 10 key themes: 2Q13 earnings season

During the 2Q13 earnings season, management at global banks offered evidence that they may have put theworst of the post-crisis period behind them as they continued to make progress in positioning their banks for

a normalized environment. Comments reflected a view towards the future as banks continued to move past

legacy issues and strengthen internal operations.

Most of the banks included in this report reported stabilization in a number of key areas:

• Expense reduction programs either have been completed or are on track to meet targets, allowingmanagement to shift their focus from strict cost-cutting to careful expense management as they investsavings in franchise-strengthening initiatives.

• According to disclosures of estimated Basel III Common Equity Tier 1 ratios, most banks either are alreadypositioned to comply with Basel III capital requirements or have a clear path to compliance. Given strength onthis measure, many banks are looking towards resuming normalized dividend and payout policies.

• Significant progress has been made on de-risking, as banks continue to reduce non-core portfolios, reshape

or re-size businesses with high capital requirements and strengthen their balance sheets.• Banks have identified core businesses, activities and regions. Activities related to acquisitions, asset sales and

cross-border expansion — or retreat — reflect their refined focus.

• Credit quality metrics continued to improve — and, in some cases, returned to pre-crisis levels — driven byconservative underwriting standards, prudent provisioning policies and efforts to run off legacy portfolios.

Despite this progress, not all industry headwinds have dissipated. Banks continue to face challenges asregulators propose new and controversial rules and macroeconomic conditions remain dynamic:

• Global and national regulators have turned their focus to banks’ leverage ratios. The Basel Committee, the UKPrudential Regulatory Authority and US regulators released separate leverage ratio proposals in advance ofthe 2Q13 earnings season, generating significant discussion about the impacts of yet another non-harmonized, capital-related measure.

• The macroeconomic environment remained complex, as the US recovery gained momentum in 2Q13 and

glimmers of improvement appeared in other developed countries, such as the UK and France. At the sametime, while economic growth in certain emerging markets continued to outpace developed markets, signs ofslowed growth emerged. The impacts of both dynamics were evident in the 2Q13 earnings season. Bankscommented on the short-term challenges associated with both the normalization of US monetary policy andadjusted expectations for emerging markets businesses.

• Finally, meaningful revenue and loan growth remained elusive in 2Q13, underscoring the fact that whilebanks might be well-positioned, the operating environment remains difficult and may not normalize accordingto expectations.

While commenting on the outlook for his own bank, Standard Chartered CEO Peter Sands captured theindustry’s position at the end of the second quarter when he stated, “We enter the second half with a blend ofoptimism and caution. Our businesses have good momentum. Our balance sheet is in great shape. Our marketsare full of opportunities. But at the same time, there's volatility in financial markets and uncertainty ineconomic prospects and the regulatory context keeps on changing. So we will keep focused on what we can

control: costs, risks, our balance sheet — keep focused on our clients and customers and keep focused ondriving superior and sustainable returns to our shareholders.”




Top 10 key themes: 2Q13 earnings season

2Q13 1Q13

Rank

Earnings season’s top 10 key themes

(arranged from most common to least

common)— 32 banks

Rank

Earnings season’s top 10 key themes

(arranged from most common to

least common)— 35 banks

1.1 Drivers of earnings performance 1.1 Drivers of earnings performance

1.2 Macroeconomic environment 1.2 Macroeconomic environment

1.3 Capital position 1.3 Capital position

1.4 Expense trends 4 Expense trends

5.1 New regulatory proposals 5.1 Strategic progress

5.2 Cross-border activities 5.2 Cross-border activities

7Merger and Acquisition (M&A)strategies

7Funding strategies and liquiditymanagement

8.1 Lending trends 8 Regulatory issues

8.2 Credit quality trends 9.1 Credit quality trends

8.3 Strategic progress 9.2 Lending trends

Note: Theme shaded in gold is new to the list this quarter; theme shaded in dark gray dropped out of thetop 10.




Key themes overview

Theme 1.1: Drivers of earnings performance—

year-over-year revenue growth lags net income gains

Net income grew on an annual basis at most banks. When compared to 2Q12, net income increased at 23 ofthe 30 banks that reported earnings on a quarterly basis.* Notably, revenues did not keep pace with earnings,since 13 banks reported a decline in revenues from the same quarter in the prior year.

Banks are seeking to achieve what Citigroup CEO Michael Corbat described as “strong, high-quality earnings”that are “well balanced across our products and geographies.“ In 2Q13, however, some of the primary driversof earnings growth included reduced expenses, lower credit costs, asset sales and runoff of non-core portfolios.It is unlikely that these factors will be sustainable sources of net income growth in future quarters.

• The earnings tailwind from improving credit quality is likely to dissipate in the foreseeable future, as

JPMorgan Chase CFO Marianne Lake observed when she forecast that the bank would likely get to a “morenormal charge-off rate and therefore reserve balance … over the course of the next several quarters.”

• Asset sales will generate one-off, unrepeatable benefits.

• The earnings drag caused by non-core portfolios will diminish as banks make further progress on reductionand run-off efforts. In fact, some banks have reduced non-core assets to such a degree that they will stopreporting on them separately. An example is Lloyds, about which Group Finance Director Mark Culmer stated,“Given accelerated progress, we are now targeting non-core assets of less than £70 billion by the end of2013, one year earlier than previously expected. … It's our intention to cease separate non-core reporting atthe end of this year.”

• Expense benefits will stabilize as banks reach their optimal run-rate levels, although further earnings boostsmay materialize as legal-related charges normalize at some point in the future.

Sustainable revenues in core business lines, such as investment banking and lending, are highly influenced by

macroeconomic trends. Despite signs that economies in Europe and the US are recovering or stabilizing,positive developments did not translate into meaningful revenues across the banking sector in 2Q13. Of thebanks that did report an increase in revenues from 2Q12, only nine posted double-digit growth. Investmentbanking, particularly debt and equity underwriting, was the most common driver.

• James Gorman, CEO, Morgan Stanley: “Revenues in all of our major businesses were up double digits yearover year, with Institutional Securities excluding DVA up 40% and Investment Management up 48%.”

• Gerald Hassell, CEO, BNY Mellon: “The headline for the quarter was strong revenue growth across all of ourbusinesses without exception.”

• Revenue growth at Citigroup was driven by its Securities and Banking division, specifically by investmentbanking activities and fixed-income trading.

• Goldman Sachs reported a 30% jump in revenues, driven by debt and equity underwriting and its ownsecurities investments.

• JPMorgan Chase’s revenue growth was primarily attributed to debt and equity underwriting activity andstrong trading performance, which, according to CEO Jamie Dimon, was the result of years of building out its

client flow businesses.

• At Royal Bank of Canada, the Insurance and Investor and Treasury Services segments provided the greatesttailwind to overall revenue growth. Management also highlighted “particular strength in Canadian Banking.”

• Nomura’s revenues reflected strength in its Japanese retail business. CFO Shigesuke Kashiwagi said, “Retailnet revenue was ¥166.3 billion, up 20% from last quarter. Income before income taxes grew 42%,representing the best quarter since we started disclosing quarterly results in the year ended March 2002.”Retail net revenues at Nomura increased 101% from 2Q12.

• UBS reported record revenue in Wealth Management Americas and its best second-quarter performance inequities trading in three years. The bank also posted improved investment banking revenues from 2Q12.

• Credit Suisse’s revenue was attributed to improved client activity in Private Banking and Wealth Managementand strong investment banking performance.

*Standard Chartered and Lloyds Banking Group reported net income on a half-yearly basis.




Net income and revenue, percentage change from 2Q12

Notes: See Appendix for legend. RBS reported a net loss in 2Q12. LLD reported net income on a half-yearlybasis, but revenues on a quarterly basis.

-96%

-78%

-75%

-50%

-39%

-31%

-5%

2%

5%

5%

8%

8%

18%

19%

26%

31%

42%

42%

59%

60%

63%

63%

78%

101%

105%

111%

121%

754%

991%

-1%

-10%

-1%

2%

-16%

-20%

-2%

4%

-2%

4%

2%

-3%

6%

0%

12%

14%

12%

11%

22%

-3%

1%

3%11%

30%

-5%

15%

-1%

-7%

17%

1%

-1%

BCS

CBK

INT

DB

ING

HSBC

BNP

TD

USB

AXP

CIBC

ITAU

STT

WFC

RBC

JPM

CS

C

MS

CA

UCG

BACBK

GS

BBVA

UBS

SG

STD

NOM

LLD

RBS

Revenue Net income




Theme 1.2: Macroeconomic environment— signs of growth

in developed economies are tempered by moderating trends

in emerging markets“There are signs of improvement in the UK and in the Eurozone. And the US

economy continues to grow reasonably well. It does, however, seem to have been forgotten

in the last few weeks that faster-growing markets also experience business cycles.”

Stuart Gulliver, Group CEO,HSBC

Economic improvements in developed markets are welcomed but lead to short-term impacts. During 2Q13,management commented on improving economic conditions in the US and certain European countries andaddressed concerns about slowing growth rates in emerging markets. Because the revenue-generating client

volumes in many banks’ businesses, including lending, investment banking and trading, are highly influenced bymacroeconomic health, the banking sector is looking forward to the end to the low-growth cycle.

• Ángel Cano Fernandez, President, Grupo BBVA: “The world is growing at two quite different speeds. In thedeveloped economies, we are seeing that there is still a complex environment with, above all, a difficultsituation in Europe. … Looking at the emerging markets, we see that they are very buoyant, albeit there hasbeen a slightly lower growth rate in some of the emerging economies. But they are still going to be sustainingworld GDP growth for the next few years, as we see it.”

• António Horta-Osório, CEO, Lloyds: ”From the beginning of the year, I told you that I think the economy isrecovering. And I can now tell you I think the signs are even stronger. I do not expect a very quick or strongrecovery. But the signs are much stronger in terms of breadth of the recovery and direction of the recovery.”

• Enrico Cucchiani, CEO, Intesa Sanpaolo: “The Italian political situation is stabilizing. The government that isnow in power is seeking the right balance between fiscal discipline and growth. Consumer and business

sentiment are showing the first signs of improvement in Italy, apparently on a trend that is even better than inother Eurozone countries. In the US, higher interest rates and an ebullient economy make medium- and long-term appreciation of the US dollar likely; this will have a positive impact on Eurozone and Italian exports.”

• Brian Moynihan, CEO, Bank of America: “The economy continues to improve across all areas. That benefitsour company across multiple fronts. But most important, with an improving economy, it strengthens andcreates opportunity for the people, companies, and investors that we serve, and that opportunity willcontinue to provide opportunity for to us capture.”

Despite the welcome news of stronger economic growth in the West, the “dynamic” environment is likely topresent certain new challenges for banks, particularly as it relates to the normalization of monetary policy. InJune 2013, based on improving US economic indicators, Federal Reserve Chairman Ben Bernanke suggestedthat the Federal Reserve might taper its bond-buying activities under its third round of quantitative easing(QE3) by mid-2014. Market speculation about the details and impacts of the Federal Reserve’s move drovelong-term interest rates higher during the second half of 2Q13. While higher interest rates are expected to bebeneficial for revenues over the long-term, the sudden increase had a number of immediate impacts on banks,underscoring the challenges presented by the complex macroeconomic environment.

• Marianne Lake, CFO, JPMorgan Chase: “Higher long-term rates and wider spreads drove a significantreduction in the unrealized gains in our securities portfolio, or a reduction in accumulated othercomprehensive income, which did impact Basel III capital negatively.”

• Brady Dougan, CEO, Credit Suisse: “The transition to higher interest rates led, in the latter part of the secondquarter, to increased market volatility and reduced client activity, and this market volatility continued in July,although more recently we've seen signs of stabilization in our major markets. In the longer term, thetransition to higher rates will benefit our business, both our global Private Banking & Wealth Managementfranchise and our client-focused, capital-efficient investment bank.”

• Stefan Krause, CFO, Deutsche Bank: “For the Investment Bank, April and May saw strong markets across fixedincome and equities and good levels of client activity. However, the Fed's tapering comments in mid-May ledto a broad sell-off in June across most asset classes. And, as a result, June market conditions were

substantially more challenging. June was characterized by a general re-pricing of credit and lower levels ofliquidity, especially in areas of fixed-income trading.”




Theme 1.3: Capital position— compliance with Basel III

Common Equity Tier 1 requirements appears assured

With visibility into how they will comply with Basel III capital targets, banks look to return capital toshareholders. Disclosures of Basel III Common Equity Tier 1 (CET1) ratios* by global banks demonstrated thatthey are well positioned to comply with national and global capital requirements as they are currentlystructured. Having achieved this position, banks in all regions discussed their plans to return capital toshareholders through dividends and share buyback programs. US banks continued to execute the capital plansapproved by the Federal Reserve in March 2013 and, in one case, received approval to supplement thepreviously endorsed plan. Management at Canadian banks confirmed their existing policies and payout targets,while European executives hinted that meaningful dividends could return as soon as 2014.

• Brady Dougan, CEO, Credit Suisse: “We've been fairly clear that we hoped to get to the 10% Swiss core capitalratio sometime the middle of this year.Obviously, we were pleased that we exceededthat pretty materially at the end of the

second quarter. We think that puts us in astrong place from a capital point of view. Wehad always said that having reached that, wewould be expecting to make materialdistributions to shareholders.”

• Sergio Ermotti, CEO, UBS: “We will notchange our dividend policy until we reach our13% target, which is still expected to happenin 2014. For the time being, we will continuewith a progressive dividend policy.”

• Mark Culmer, Group Finance Director, Lloyds:“As a result of the significant progress madein strengthening the balance sheet and oursubstantial improved statutory financialperformance, we now expect to commencediscussions with our regulators in the secondhalf of this year on the timetable andconditions for dividend payments.”

• Frédéric Oudéa, CEO, Société Générale: “[Thedividend policy] will be for the board todecide. But I stick to the idea of a 25% payoutratio for this year. And effectively, from 2014onwards, a range between 35% and 50%. …The developments that are taking place arepositive for an increase of the payout ratiogoing forward.”

• James Gorman, CEO, Morgan Stanley: “We

recently received a non-objection from theFederal Reserve to return 1% of our Tier 1capital and will execute on the buyback in theforthcoming quarters.”

*Basel III CET1 ratios are estimates, except for banks of Canada, Japan and Switzerland.

Note: See Appendix for legend.

Basis of calculation

G-SIB

required

buffer

Total CET1

requirement CET1 ratioAXP Standardized approach 0.0 7.0 12.2

NOM B3 Tier 1 common 0.0 7.0 11.9

UBS Fully loaded 1.5 8.5 11.2

INT Fully loaded 0.0 7.0 11.0

STT Advanced approach 1.0 8.0 10.9

STAN Not specified 1.0 8.0 10.6

BNP Fully loaded 2.0 9.0 10.4

ING Fully loaded 1.0 8.0 10.2

HSBC Estimated end point CRDIV CET1 2.5 9.5 10.1

C Advanced approach 2.5 9.5 10.0

CA Not specified 1.0 8.0 10.0

DB Fully loaded 2.5 9.5 10.0

MS Not specified 1.5 8.5 9.9

BK Advanced approach 1.5 8.5 9.8UCG Fully loaded 1.0 8.0 9.7

CIBC All-in basis 0.0 7.0 9.7

BAC Advanced approach 1.5 8.5 9.6

LLD Fully loaded 0.0 7.0 9.6

CS Fully loaded 1.5 8.5 9.5

SG Fully loaded 1.0 8.0 9.4

GS Advanced approach 1.5 8.5 9.3

JPM Advanced approach 2.5 9.5 9.3

RBC CET1 ratio, all-in basis 0.0 7.0 9.1

BBVA Fully loaded 1.0 8.0 9.0

STD Fully loaded (as of 12/31/13) 1.0 8.0 9.0

TD All-in basis 0.0 7.0 8.8

RBS Not specified 1.5 8.5 8.7

USB Standardized approach 0.0 7.0 8.6

WFC Not specified 1.0 8.0 8.5

CBK Fully loaded 0.0 7.0 8.4

BCS Fully loaded 2.0 9.0 8.1

Basel II I Common Equity Tier 1 (CET1) ratios, as of 2Q13*




Theme 1.4: Expense trends— savings achieved from

expense reduction plans are reinvested in the franchise

“The Operational Excellence program is not primarily a cost-cutting exercise. ... We

are aiming to strengthen our operational and controls environment by increasing flexibility

and process discipline. In turn, this will help us to eliminate duplication and create

efficiencies that will then lead to sustainable cost savings.”

Stefan Krause, CFO,Deutsche Bank

Management highlighted progress on cost-cutting targets but noted that overall expenses may increase as

they reinvest in their franchises. The expense reduction plans that have been launched over the past two yearshave either been completed or are on track to reach their targets in the foreseeable future. Despite this

achievement, management indicated that non-interest expense levels may not reflect an absolute declinebecause savings are reinvested in the business. Specific investments that were highlighted in the 2Q13 earningsseason included improvements to the customer experience, channel and branch innovations, talent,simplification and integrated technology platforms.

• Harvey Schwartz, CFO, Goldman Sachs: “Given the dynamic nature of the marketplace, it’s natural for peopleto become somewhat short-term focused. However, everyone at Goldman Sachs remains keenly aware thatour success will be measured over years as opposed to weeks or months. To that end, we are going tocontinue to invest in deepening and expanding our client franchise. … We will continue to invest in our people,recruiting and retaining a group of professionals who are committed to providing solutions to our clients anddriving value for our shareholders.”

• Ed Clark, CEO, Toronto Dominion: “We remain focused on the rate of expense growth across the bank and arepursuing initiatives that will permanently improve productivity. We continue to target core expense growth ofless than 3% for 2013. … We are making progress on managing expense growth.”

• Chris Lucas, Group Finance Director, Barclays: “We have incurred significant restructuring costs, especially in

Europe Retail and Business Banking and the Investment Bank, and we'll be investing in the second half inorder to build long-term competitive advantage. Both restructuring and investment are essential to achievingour 2015 targets, but this will impact our numbers in the intervening period.”

• Stephan Engels, CFO, Commerzbank: “In the light of a comparably moderate economic environment and withrespect to a balanced cost income ratio, we follow a reasonable investment approach controlled by the bank'sinvestment committee. All investments are released and scaled on an initiative-by-initiative basis while closelytracking the return of these activities. During the months to come, we expect investments to increase, whilestringent cost management will broadly ensure compensating effects.”

• Frédéric Oudéa, CEO, Société Générale: “We need to invest in certain businesses. It makes sense. We need togive the businesses the opportunity to compete. And we'll make some savings to stabilize total costscompared to 2012.”





-9%

-6%

-2%

14%

3%

-2%

-10%

-2%

-17%

-5%

2%

-2%

1%

-2%

-1%

1%

4%

-7%

1%

-6%

18%

-6%

5%

7%

12%

6%

1%

-2%

8%

5%

5%

-34%

-18%

-15%

-11%

-8%

-5%

-4%

-4%

-3%

-3%

-2%

-2%

-2%

-1%

-1%

-1%

-1%

0%

0%

1%

1%

1%

2%

2%

2%

3%

3%

4%

4%

4%

5%

NOM

BAC

BCS

GS

CIBC

BNP

INT

SG

HSBC

LLD

ING

UCG

STT

CBK

WFC

C

RBC

BK

STD

RBS

UBS

CA

CS

BBVA

MS

JPM

AXP

USB

TD

ITAU

DB

Total non-interest expenses, percentage change from previous quarters

Change from 1Q13 Change from 2Q12




Theme 5.1: New regulatory proposals— global and national

leverage ratio proposals elicit strong responses

New leverage ratio proposals are a prominent topic at US and European banks’ calls. In June and early July2013, a flurry of leverage ratio proposals were separately released by the Basel Committee, the UK PrudentialRegulatory Authority and a trio of US regulators (the Federal Reserve, the Federal Deposit InsuranceCorporation and the Office of the Comptroller of the Currency). The proposals dominated the 2Q13 earningsseason, with management offering their views of the rules and providing preliminary estimates of leverageratios. Analysts asked numerous questions about the proposed rules as they sought to understand the potentialimpact on capital management, the severity of the US’s 5% leverage requirement compared to the 3% ratioproposed under Basel III and implications for specific business lines. Notably, leverage ratio estimates werebased on a wide range of calculations, which makes comparisons across banks virtually impossible. As observedby Intesa Sanpaolo’s Carlo Messina, “We are not sure that all competitors are using the same rules.”

• John Gerspach, CFO, Citigroup: “What we’ve seen so far are proposals. I don’t think we’ve actually had achance to read through every aspect of it. And I would expect that, as usual, we’ll engage in a robust and

healthy dialogue with the various regulators on these topics.”• Jamie Dimon, CEO, JPMorgan Chase: “We have an interest in a safe and sound system, so we’re not against a

leverage ratio, but we’re not for a hugely unbalanced competitive playing field.”

• Stefan Krause, CFO, Deutsche Bank: “As most agree, leverage obviously fails to assess the quality of thebalance sheet as well as the firm's ability to fund itself. Leverage, in our view, forces banks to run a verydifferent business. One of the obvious consequences is the need to originate higher-yielding assets andtherefore, by definition, taking on more risk.”

• Shigesuke Kashiwagi, CFO, Nomura: “In June, the Basel III leverage ratio was announced and the detailsabout the standards have not been announced yet. So it’s still too early to calculate the exact figures. …Through the consultation period, the details of the standards will be disclosed, and we will conduct moreaccurate calculations and announce the leverage ratio based on these new standards when the time comes.”

• Iain Mackay, Group Finance Director, HSBC: “Until we get the banking industry to be, frankly, just a lot moretransparent about what's going inside the risk-weighted asset models, one can perhaps appreciate the

regulators’ desire to look at it on a different basis. Our own view would be that banging out a standardizedmeasure is simply banging out another measure. It doesn't really help risk management within the bankingsector. … [A leverage ratio is] a great backstop measure for the economy. You might even argue that it's agood backstop measure for an individual institution, but it's not particularly risk sensitive; in fact, it's not risksensitive at all.”

• Bertrand Delpit, CFO, Crédit Agricole: “In terms of the leverage ratio, there are many definitions, so it'salready quite bold to give [an estimated] figure here. So I did it based on CRD IV. I am not going to update it totake into account the Basel Committee’s new proposal because they can change it week after week.”

• Frédéric Oudéa, CEO, Société Générale: “There are now probably four or five or six different definitions thathave being thrown out. ... We should push for a regulation that encourages bank managers to look at the riskto take in the balance sheet. Leverage ratio as a backstop: fine. Leverage ratio as the backbone for theregulation: I think it will be a recipe for catastrophe. “

“We welcome the opportunity to contribute to the debate and comment on the

leverage ratio refinements proposed by the Basel Committee, as the impact of further

regulatory measures should be considered carefully. We believe it is important that

regulators ensure the quality of both the numerator, or the capital base, and the

denominator, or total exposure. Balance sheet size matters, but quality must not be

overlooked.”

Sergio Ermotti, CEO,UBS




Basis of calculation Estimate

BAC US supplementary leverage ratio (holding company) 4.9-5.0

BBVA Basel III fully loaded 4.8BCS CRD IV 2.5

BK US supplementary leverage ratio (holding company) “low 4s“

BNP Basel III fully loaded 3.4

C US supplementary leverage ratio (holding company) 4.9

CA CRD IV 35

CBK Basel III phase-in 4

CS Swiss phase-in 4.8

DB Adjusted fully loaded CRD IV 3

GS US supplementary leverage ratio (holding company) “comfortable“

HSBC BIII fully loaded 4.1-4.2

ING CRD IV “>3.5“

INT Not specified “well above 4“

JPM US supplementary leverage ratio (holding company) 4.7

LLD Basel III fully loaded 4.2

MS US supplementary leverage ratio (holding company) 4.2

NOM BIII “best effort basis … about 3“

RBS Basel III fully loaded 3.4

SG CRD IV “above 3“

STAN Basel III fully loaded 4.6

STD IMF criteria 6.8

STT US supplementary leverage ratio (holding company) 5.4

UBS Swiss fully loaded 2.9

UCG BIII “Already in compliance“WFC US supplementary leverage ratio (holding company) “Exceeds requirements“

Estimated leverage ratio disclosures as of 2Q13





Theme 5.2: Cross-border activities— cross-border

strategies remain unchanged

“So, no change in commitment [to our growth market strategy]. … In terms of the strategic

approach of the firm, [we are] very, very committed to and very focused on those markets.”

Harvey Schwartz, CFO,Goldman Sachs

Banks execute on previously announced cross-border plans and activities. Banks are continuing to pursueinvestments and expansion in markets in which they have sufficient scale to succeed or which have been definedas strategically important regions.

• Dan Henry, CFO, American Express: “China is an important market for us, and we’re focused on the partnersthat we have and the product launches that will take place.”

• Michael Corbat, CEO, Citigroup: “You saw us take some actions in the first quarter in terms of continuing torefine parts of our Consumer portfolio. … We obviously saw the numbers come out of China early thismorning in terms of the slight slowdown, the 7.5% versus the 7.6%, [and the economy is] a bit slower inMexico. But I don’t think those things have caused us to rethink where we are.”

• Shigesuke Kashiwagi, CFO, Nomura: “Nomura management is really committed to turn around our overseasoperation to bring it back to the normal sustainable profitability and to achieve ¥50 billion in pre-tax incomeby March 2016. … The US operation has been performing pretty nicely during the last year. … We have to fixthe European operation.”

• José Antonio Alvarez Alvarez, EVP of Financial Management, Banco Santander: “We get 56% of our profitsfrom emerging markets, of which 25% is Brazil, 12% is Mexico, and Chile and Poland are 6% and 5%,respectively. In mature markets, we have the US and UK with12% and 13%, respectively; Spain represents 8%and Germany 5%.”

• Stuart Gulliver, Group CEO, HSBC: “There has been a slowdown in the fast-growing markets in recentquarters. Even emerging markets go through business cycles, and this has impacted our revenue and profitgrowth. So the reality is that those markets continue to grow relatively quickly, and HSBC remains wellpositioned with strong market shares across these fast-growing economies.”

• Peter Sands, Group CEO, Standard Chartered: “One of the things that differentiates us is the network. It's not just the fact that we are present in so many countries and have been for a very long time, but it's the way wework across borders, collaborating to support our clients as they trade and invest within Asia, Africa and theMiddle East, and to and from Asia, Africa and the Middle East. … For most banks, the vast majority of theircross-border business is between their home countries and their international networks. More than any other,we are multi-nodal, facilitating trading investment across multiple corridors across our network.”




Theme 7: M&A strategies— banks have little appetite for

inorganic growth

Asset sales continue as banks work to reshape their businesses, but management remains largelyuninterested in acquisitions. During 2Q13, a number of banks discussed asset sales as they continue to rundown non-core businesses and align operations and geographies with core strategies. Management noted thatthey will continue to pursue such divestments, but only at prices that generate value.

• David Mathers, CFO, Credit Suisse: “We have exited a significant number of small, non-core and loss-makingmarkets, and we've divested a number of businesses no longer relevant to our strategy.”

• Sergio Ermotti, CEO, UBS: “We have established a seven-quarter track record of consistent, rapid, economicrisk-weighted asset reduction. Regarding a potential acceleration, rapid sales that sacrifice capital or createthe illusion of shareholder value enhancement are not part of our agenda. … For sure, speed is important, butlong-term value creation remains paramount.”

• Stephan Engels, CFO, Commerzbank: “The successful sale of our UK Commercial Real Estate portfolio of €5billion [was] one of the largest transactions in Commercial Real Estate loans in Europe in the past years. …

The transaction as a whole has had no notable impact on capital while clearly improving our risk profile. … Weare successfully delivering on reducing risks, and we will continue to take advantage of market opportunitieswhile optimizing our shareholders’ value.”

• Ángel Cano Fernandez, President, Grupo BBVA: “The reason behind the sale [of our Panama bankingbusiness] has been published. It’s pretty clear. It was impossible to generate critical mass in order to beleaders because that’s our aspiration in any country. And the multiple that we got from the sale wassomething that made it very easy to come to this decision.”

• Stuart Gulliver, Group CEO, HSBC: “We continue to reshape HSBC. … We have announced the disposal orclosure of 11 non-strategic businesses since the beginning of this year. That brings the total transactionsannounced since 2011 to 54.”

With one notable exception, few banks talked about acquisition transactions, and appetite for inorganic growthremained low. Morgan Stanley bucked this trend, completing the acquisition of the Wealth Management jointventure from Citigroup in a transaction that marked the achievement of its long-held ambition and allowed

Citigroup to reduce non-core assets significantly.

• Ed Clark, CEO, Toronto Dominion: “We would not want to run our capital down to a point where we have toissue shares for a small acquisition. ... In today’s market, we don’t see any large acquisitions that are ofinterest to us.“

• Carlo Messina, General Manager, Intesa Sanpaolo: “On domestic consolidation, I can only reiterate what I saidbefore, [there is] no desire from our side to participate in the bailout of any domestic player.”

• Javier Marín Romano, CEO, Banco Santander: “We need to consider all the circumstances in order to decidewhether an offer for either Novacaixagalicia or Catalunya Bank [in Spain] would make sense.“

• Richard Davis, CEO, US Bancorp: “We’ve had no approaches of any significance. We’re not approachinganyone. Like you, I read about the small banks continuing to cobble together to find some critical mass, whichmakes total sense to me, because the cost of compliance and regulatory costs are easier with a larger base,but really no approaches. I mean, it couldn't be more dormant. And our interest couldn't be lower either.”

“We are not shopping for large acquisitions. You know my drill. As long as [analysts] insist

that I am below book value, it is very unlikely that things are going to happen.”

Lars Machenil, CFO,BNP Paribas




Theme 8.1: Lending trends— positive loan growth is more

evident in North America

“Lending is not falling off to protect capital. It is falling off because, basically, demand has

fallen significantly.”

Ángel Cano Fernandez, President,Grupo BBVA

In general, North American lenders reported better loan growth trends than their European counterparts. In2Q13, meaningful loan growth failed to materialize for all but a few lenders, reflecting varied economicconditions across regions. Stronger growth trends were evident in the US and Canada, while Eurozone countriesposted weaker lending performances. Banks with lending operations in emerging markets reported that theywere moderating expectations for coming quarters. Management across regions expressed the desire to grow

loan balances but cited muted demand and strict underwriting standards as barriers to extending credit.• Tim Sloan, CFO, Wells Fargo: “Our commercial loan growth has been pretty strong — it’s the tenth

consecutive quarter that wholesale lending has grown, and it’s certainly in certain segments and industrieswithin the wholesale portfolio. But my guess is it’ll be a quarter or so before we start to see a big pickup.”

• Bruce Van Saun, Group Finance Director, Royal Bank of Scotland: “We have a liquidity buffer of £158 billion.…We probably have room to take [that buffer] down £20 billion to £25 billion with time. So that is probably theamount that is sitting there in cash, ready to fund increased loan demand as that materializes.”

• Javier Marín Romano, CEO, Banco Santander: “What we want to do in Spain is grow in clients. So we need togrow deposits, we need to grow credit. … We're not going to relax our practices with respect to risk, which hasbeen stable over time. So once the economy recuperates, and there is more demand for credit, definitely, wewill grow. … But this will not be done at the cost of relaxing our risk standards.”

• Alfredo Egydio Setubal, Investor Relations Director, Banco Itaú: “For the rest of the year we are changing our

expectation from 11% to 14% [loan] growth to 8% to 11% growth. This is more realistic, considering that wehave still some adjustments to make in the car financing portfolio and the slower pace of economic growth.”

• Federico Ghizzoni, CEO, Unicredit: “On the lending side, we have a problem in Italy for sure, but there is alsoan issue in Germany and in Austria. So we hope, first of all, to see economic recovery everywhere, and wehope to see customer demand coming back. … Any opportunity for lending is, for us, an opportunity, providedthat we have good risk and we have also good pricing. Because we're not prepared to lend at any cost.”

While North American lenders reported stronger loan growth trends than counterparts in other regions, it isnot clear that this will be sustainable given that rising interest rates are expected to impact mortgage lending.

• Marianne Lake, CFO, JPMorgan Chase: “The environment in late May and June drove mortgage rates upsignificantly, around 100 basis points. … If mortgage rates stay at or above current levels, the market couldbe reduced by an estimated 30% to 40%.”

• Richard Davis, CEO, US Bancorp: “[Mortgage lending] will be down unless rates were to turn. … But it willdefinitely be down, and we're projecting the second half of the year to be less than the first half.”


-12%-11%-10%-9% -8%

-6% -5% -4% -4% -4% -4%-2%

-1% -1%

0% 0%3% 3% 4% 4% 5% 6% 6%

8% 9% 9%

14%End of period net loans, percentage change from 30 June 2012




Theme 8.2: Credit quality trends— credit performance

reflects economic conditions

“Our strong risk management and prudent provisioning has resulted in a further

substantial reduction in the impairment charge and significantly improved asset quality

ratios, as well as a continued reduction in impaired loans and prudent increase in the

coverage ratio.”

Mark Culmer, Group Finance Director,Lloyds Banking Group

Credit quality performance is in line with management expectations and economic growth trends. In 2Q13,management assessments of credit quality ranged from excellent to stable to resilient, reflecting the economicconditions in banks’ operating regions. In the US and Canada, “strong” and “outstanding” credit-quality metrics

have improved steadily over the last several quarters, driven by a strengthening US economy and banks’conservative approaches to underwriting new loans in the years since the crisis. In Europe, credit performancewas mixed, with UK banks reporting improvements and certain Eurozone-based banks reporting elevated riskindicators in line with expectations.

• Bruce Thompson, CFO, Bank of America: “Credit quality across the board, and particularly as you look atearly stage delinquencies, is quite strong.”

• John Stumpf, CEO, Wells Fargo: “Our credit performance was outstanding, benefiting from our conservativeunderwriting and improving economic conditions.”

• Iain Mackay, Group CFO, HSBC: “We saw declines in the majority of our regions, notably in North America,where loan impairment charges fell by $1.1 billion. This primarily reflected improvements in US housingmarkets, and the continued runoff of our US Consumer and Mortgage Lending portfolio and lowerdelinquency levels. These factors were partly offset by an increase in Latin America.”

• Alfredo Egydio Setubal, Investor Relations Director, Banco Itaú: “The non-performing loans (NPLs) between15 days and 90 days have decreased … It’s good to see that our policy of reducing the risk of the creditportfolio, which we started more than 18 months ago, continues to show a very positive trend in terms ofquality and in terms of decreasing the provisions for loan loss.”

• Stephan Engels, CFO, Commerzbank: “We provisioned €190 million for the Core Bank in 2Q13. As statedbefore, this increase is in line with our expectations and previous guidance.”

• Jan Hommen, CEO, ING: “Risk costs were elevated in the second quarter, reflecting the weak macroeconomicenvironment. … We expect our risk cost will stay elevated in line with the weak economic environment we stillsee in Europe.”

• Enrico Cucchiani, CEO, Intesa Sanpaolo: “In Italy, in the second quarter, the banking sector has registeredsigns of mild improvement in NPL formation. However, I believe it is too soon to claim a clear trend reversalbecause we are still going through a period of prolonged and deep recession. In any case, it’s important tonote that there is a significant time lag between real economy recovery and credit quality improvement.”

• Javier Marín Romano, CEO, Banco Santander: “We have no surprise on the NPL ratio, [which was] 16 basispoints more than the first quarter, coming from 4.76 to 4.92. The NPL entries were the same as in the first

quarter and below the quarterly average for the past two years. We see new NPLs in some countries likeSpain or Brazil basically coming down.”




Theme 8.3: Strategic progress— banks look towards the

future as legacy issues are resolved

Management expressed confidence that strategic actions will bring future success. During 2Q13,management across regions affirmed that the strategic decisions made in the past several years — which rangefrom maintaining to significantly reshaping business models — were the right ones for their respective banks.Retail-focused banks in North America attributed earnings growth to their long-standing, low-risk diversifiedbusiness models. While net income growth for many of these banks was in the single digits, managementhighlighted their “consistent” and “predictable” nature. Banks with capital markets operations reported on theprogress they have made in adapting their business models. While some are in the early stages of adaptationand others have completed strategic plans, all confirmed they are on the correct path to deliver sustainableprofits in coming quarters and years, even if benefits were not yet visible in 2Q13 results.

• Brady Dougan, CEO, Credit Suisse: “Switzerland was an early mover in defining its regulatory framework andrules, which required us to accelerate the transformation of our business. As a result, we were one of the firstglobal banks to reach full Basel III compliance. We are now able to spend the majority of our time and effort

focused on advancing our client franchise rather than implementing changes to our business model.”• Brian Moynihan, CEO, Bank of America: “We have built our company over the last several quarters to

maintain stability while continuing to make progress and to withstand the volatility that we saw at the end ofthis quarter while delivering for our customers and shareholders, and that came through.”

• Gord Nixon, CEO, Royal Bank of Canada: “The strength and complementary nature of our diversified businesscontinues to contribute to our earnings power. Even as the Canadian Banking industry is facing slowergrowth, we remain confident in our ability to successfully execute on our strategy, extend our leadershipposition and invest for long-term growth.”

• Tom Naratil, CFO, UBS: “Our focused business model works. It fits our clients’ needs and plays to ourstrengths. Our model is also clearly different relative to the industry, making comparisons less meaningful. …By concentrating on our strengths in capital-light businesses, we have created an efficient model designed todeliver return on attributed equity in excess of 15%.”

• Chris Lucas, Group Finance Director, Barclays: “We’ve made a strong start to our Transform program, which

will help us deliver our 2015 targets, though it also impacts our financial performance in the interveningperiods. Despite a challenging operating environment, the underlying performance of the business continuesto build momentum.”

• Stephen Hester, CEO, Royal Bank of Scotland: “We are getting quite close to delivering a bank that will allow[incoming CEO Ross McEwan] to focus on the future, rather than on the past, and to drive the operationalimprovements that, together with an improving economy, are the next thing that we need.”

• James Gorman, CEO, Morgan Stanley: “We've been on a long journey to generate stronger, more sustainable,long-term returns with businesses that balance each other in volatile markets. With the acquisition of 100% ofWealth Management, that business model is solidly in place.”

“The results of this quarter are the results not just of one quarter but of the long-term and

determined transformation that started a few years ago. … The top priority is, of course, to

pursue this transformation, the adaptation of the business model, and I think that this firsthalf’s results are very encouraging for us. And may I say that the most important thing to

me as the CEO is to have in mind and to feel that six years after the beginning of the

financial crisis, we have teams with the appetite and motivation to pursue this

transformation and to deliver growth, and I'm convinced that we have a business model that

can deliver growth.”

Frédéric Oudéa, CEO,Société Générale




Appendix

Summary of key banking sector themes2Q13 earnings season

This table provides a summary of the top 10 key themes.

Top initiatives and

issues (arranged

from most common

to least common)

AXP ITU STD BAC BK BCS BNP CIBC C CBK CA CS DB GS BBVA HSBC

Drivers of

earnings

performance 32 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Macroeconomic

environment 32 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Capital position 32 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Expense trends 32 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

New regulatory

proposals 30 √ √ √ √ √ √ √ √ √ √ √ √ √ √

Cross-border

activities 30 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

M&A strategies 27 √ √ √ √ √ √ √ √ √ √ √ √ √ √

Lending trends 26 √ √ √ √ √ √ √ √ √ √ √ √ √ √

Credit quality

trends 26 √ √ √ √ √ √ √ √ √ √ √ √ √ √

Strategic

progress 26 √ √ √ √ √ √ √ √ √ √ √ √ √ √

Legend

AXP — American Express ITAU — Banco Itaú STD — Banco Santander BAC — Bank of America

BK — BNY Mellon BCS — Barclays BNP — BNP ParibasCIBC — Canadian ImperialBank of Commerce

C — Citigroup CBK — Commerzbank CA — Crédit Agricole CS — Credit Suisse

DB — Deutsche Bank GS — Goldman Sachs BBVA — Grupo BBVA HSBC — HSBC Holdings




Summary of key banking sector themes (cont.)

2Q13 earnings season

This table provides a summary of the top 10 key themes.

Top initiatives and

issues (arranged from

most common to

least common)

ING INT JPM LLD MS NOM RBC RBS SG STAN STT TD UBS UCG USB WFC

Drivers of

earnings

performance 32 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Macroeconomic

environment 32 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Capital position 32 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Expense trends 32 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

New regulatory

proposals 30 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

Cross-border

activities 30 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

M&A strategies 27 √ √ √ √ √ √ √ √ √ √ √ √ √

Lending trends 26 √ √ √ √ √ √ √ √ √ √ √ √

Credit qualitytrends 26 √ √ √ √ √ √ √ √ √ √ √ √

Strategic

progress 26 √ √ √ √ √ √ √ √ √ √ √ √

Legend

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

MS — Morgan Stanley NOM — Nomura Holdings RBC — Royal Bank of Canada RBS — Royal Bank of Scotland

SG — Société Générale STAN — Standard Chartered STT — State Street TD — Toronto-Dominion

UBS — UBS AG UCG — Unicredit Group USB — US Bancorp WFC — Wells Fargo




Select key performance indicators

Company

Market Value

(US$m) Assets (US$m)

Capital

ratio Basis of calculation of capital ratio

American Express 81,594.48$ 151,933.00$ 12.5 Basel I Tier 1 common ratio

Banco Itau 64,890.74$ 437,305.51$ 11.7 Basel II

Banco Santander 78,802.19$ 1,590,013.65$ 11.1 Basel 2.5 Core Tier 1 ratio

Bank of America 160,609.75$ 2,123,320.00$ 10.8 Basel I Tier 1 common ratio

Bank of New York Mellon 36,815.26$ 360,505.00$ 13.2 Basel I Tier 1 common ratio

Barclays 56,779.73$ 2,329,558.48$ 11.1 Basel 2.5 Core Tier 1 ratio

BBVA 54,523.41$ 804,033.80$ 11.3 Basel 2.5 Core Tier 1 ratio

BNP Paribas 81,757.14$ 2,419,678.91$ 12.2 Basel 2.5 Common Equity Tier 1 ratio

CIBC 30,360.15$ 394,877.68$ 9.7 Basel III Common Equity Tier 1 ratio (all-in basis)

Citigroup 160,747.26$ 1,883,988.00$ 12.2 Basel I Tier 1 common ratio

Commerzbank 10,134.63$ 828,031.20$ 12.1 Basel 2.5 Core Tier 1 ratio

Credit Agricole 24,954.81$ 2,320,318.49$ 11.3 Basel 2.5 Core Tier 1 ratio

Credit Suisse 46,341.34$ 971,981.78$ 9.5 Basel III Common Equity Tier 1 ratio (fully loaded)

Deutsche Bank 46,685.31$ 2,482,780.63$ 13.3 Basel 2.5 Core Tier 1 ratio

Goldman Sachs 78,469.07$ 938,456.00$ 13.5 Basel I Tier 1 common ratio

HSBC 212,216.85$ 2,645,316.00$ 12.7 Basel 2.5 Core Tier 1 ratio

ING Groep 40,358.69$ 1,486,640.23$ 11.8 Basel 2.5 Core Tier 1 ratio

Intesa Sanpaolo 31,402.90$ 842,099.45$ 11.7 Basel 2.5 Core Tier 1 ratio

JPMorgan Chase 214,246.98$ 2,439,494.00$ 10.4 Basel I Tier 1 common ratio

Lloyds 79,961.51$ 1,332,592.14$ 13.7 Basel 2.5 Core Tier 1 ratio

Morgan Stanley 54,704.38$ 802,691.00$ 11.8 Basel I Tier 1 common ratio

Nomura 28,648.99$ 422,739.80$ 11.9 Basel III Common Equity Tier 1 ratio

Royal Bank of Canada 89,274.52$ 861,362.64$ 9.1 Basel III Common Equity Tier 1 ratio (all-in basis)Royal Bank of Scotland 56,219.84$ 1,848,512.81$ 11.1 Basel 2.5 Core Tier 1 ratio

Societe Generale 34,136.53$ 1,630,265.84$ 11.1 Basel 2.5 Core Tier 1 ratio

Standard Chartered Bank 56,845.33$ 649,957.00$ 11.4 Basel 2.5 Core Tier 1 ratio

State Street 32,244.29$ 227,300.00$ 14.9 Basel I Tier 1 common ratio

Toronto-Dominion 77,701.83$ 820,531.99$ 8.8 Basel III Common Equity Tier 1 ratio (all-in basis)

UBS 73,535.13$ 1,192,991.48$ 11.2 Basel III Common Equity Tier 1 ratio (fully loaded)

UniCredit 31,910.77$ 1,156,492.69$ 11.4 Basel 2.5 Core Tier 1 ratio

US Bancorp 69,657.52$ 353,415.00$ 9.2 Basel I Tier 1 common ratio

Wells Fargo 234,418.09$ 1,440,563.00$ 10.7 Basel I Tier 1 common ratio

Source: Capital IQ and company reports.Notes: Market value as of 1 August 2013; assets as of 30 June 2013 for US, European and Japanese banksand 30 April 2013 for Canadian banks.



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2Q13 Global Themes Report_final (27 August 2013)

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