60220810 SocGen Stress Test

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Societe Generale (SG) does and seeks to do business with companies covered in its research reports. As a result, investors should beaware that SG may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only asingle factor in making their investment decision. PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE ANALYST(S)CERTIFICATION(S), IMPORTANT DISCLOSURES AND DISCLAIMERS AND THE STATUS OF NON-US RESEARCH ANALYSTS.

18 July 2011

Cross Asset StrategySpecial report

www.sgresearch.com

Less bank stress, sovereignprogress?Credit Research - BanksHank Calenti, CFA(44) 20 7676 [email protected]

Equity Research- BanksPhilip Richards(44) 20 7762 [email protected]

James Invine(44) 20 7762 [email protected]

EconomicsMichala Marcussen(44) 20 7676 [email protected]

James Nixon(44) 20 7676 [email protected]

Rates StrategyVincent Chaigneau(44) 20 7676 7707

[email protected]

Cross Asset StrategyAhmed Behdenna(44) 20 7676 [email protected]

Contents

Summary 3

The Facts 4

Economic standpoint 8

Fixed Income standpoint 11Bank Equity standpoint 13

Bank Credit standpoint 17

Few surprises allow us to say that market reaction should largely be insensitive to thosestress tests from a top down perspective. 8 banks are forced to recapitalise quickly, 16banks by April 2012. However, the test does not reflect current reality, in our view; even ifGIIPS sovereign are further stressed within this test, a 22bn shortfall and a relativelyhealthy average 6.2% core Tier 1 appear. The European banking sector is captive topolitics at the moment. A political error can trigger a freeze in money markets, and aliquidity crisis could quickly turn into a solvency crisis. Only improved governance wouldavoid such a nasty scenario.

The EBA was in a lose-lose situation: too few failures and the test is branded too lenient;

too many failures and some will worry that the system is in worse shape than expected.

Recapitalisation What has been done: Under the adverse scenario, a 2.5bn shortfall is

recognised after 90 banks from 21 countries had been stress tested. The pure sight of the test

forced banks into a beauty contest: some massive 50bn was raised so far this year in core

Tier 1 to reach that amount.

Recapitalisation what will be done: Banks with less than 5% core Tier 1 will be forced

to recapitalise by end 2011. Those between 5% and 6% are highly recommended to do so by

April 2012 (see page 7 for company details). The c. 3,500 datapoints (149 during the 2010

stress tests), should enable analysts to draw their own conclusions on a bank-by-bank basis.

The stress is stressed enough on a macro level: Total losses per year amount to

c. 200bn, equivalent to the loss rates of 2009 repeated in two consecutive years.

GIIPS sovereigns stressed by SG analysts on 40 larger banks : Further stressing GIP

sovereign debt with a 50% haircut, and Spain/Italy with 20%, on top of the test conducted,and we see a 22bn shortfall and a still relatively healthy 6.2% core Tier 1 (see page 7 for

company details).

Politics and governance now take the lead: Peripheral countries need help, and some

form of restructuring should occur. Policy makers should allow for the governance to be at par

with what should be qualified as a solid banking system, if contagion is avoided.


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Everything you wanted to know about stress tests

18 July 2011

Table Of Contents

3 Summary

4 EBA bank stress tests The Facts

6 Headline results

7 Results for the 90 banks which balance sheets have been stressed

8 Economics: Banking on Sovereign Transparency

11 The Fixed Income Angle

13 The Equity Angle

13 Part 1 EBA Stress Tests

14 GIP Sovereign exposures Absolute amounts

14 GIP Sovereign exposures As % common equity (%)

15 Part 2 What if GIIPS sovereign debt had been stressed?

15 Core Tier 1 Ratios 50% haircuts on GIP sovereign exposures, 20% on Italy/Spain

15 Overall results Core tier 1 ratios under four scenarios (%)

17 The Credit Angle Two-way Causality in the stress tests

18 Adverse Scenario Core Tier 1 Capital vs. 5-year Subordinated CDS on 15 July 2011for select EU banks

19 Stressed Sovereign Core Tier 1 Ratios vs. 5-year Subordinated CDS on 15 July 2011for select EU banks


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18 July 2011 3

SummaryScepticism around: the EBA was on a lose-lose situationThe EBA was effectively in a lose-lose situation: too few failures and the test is branded too

lenient; too many failures and some will worry that the system is in worse shape than they had

expected.

Economics: banking on sovereign transparencyThe stress tests confirmed two already well know results. First, the bulk of exposure to the

weakest sovereigns is held by the domestic banks (in both absolute and relative terms).

Taking the example of Greece, of the total exposures to the Greek sovereign reported for the

90 banks taking part in the stress tests almost 60% is held by Greek banks. Second, exposure

of non-domestic banks to, respectively, Greek, Irish, Portuguese and Spanish sovereign risk isrelatively moderate.

The Fixed Income AngleThe stress tests have brought more details on individual exposure to sovereign risk. What

investors still do not know is the extent to which banks, and other investors, will be asked to

contribute to fixing the sovereign crisis.

The Equity Angle Part 1: EBA stress testEquity market reaction to the stress tests is likely to be relatively muted in our view, with few

big surprises despite the huge volume of new disclosure. Market sentiment is likely to remain

focussed on the fall-out of the Greek crisis and how that spreads further afield.

The Equity Angle Part 2: 'Only' 22bn shortfall if GIIPSsovereign debt is also stressedThe tests will inevitably be criticised for such a small number of failing banks (eight) with an

aggregate capital shortfall of just 2.5bn, and the fact that sovereign default is not considered.

By including the possibility of sovereign default across multiple jurisdictions (haircut of 50%

for GIP sovereigns, 20% for Italy/Spain), our analysis suggests 13 banks of a sub-set of 40 of

the larger, quoted banks could fail, with an aggregate capital shortfall of 22bn. The average

core Tier 1 capital would remain at a still relatively healthy 6.2%.

The Credit AngleLike the equity market, credit market reaction to the stress tests is also likely to be relatively

muted in our view, with few easily decipherable surprises discovered within a large volume of

disclosures. We do not envision a flood of new bank debt issuance in the short term for two

reasons. It may be more advantageous to de-lever than raise funds in the international capital

markets. This would clearly have attending feedback into the bank-to-sovereigns and

economy causality.

For more details on the credit angle, please refer to:EU Banks, Stressed but not tested
https://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667eb


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EBA bank stress tests The FactsIntroductionAfter market-close on Friday 15

thJuly, the European Banking Authority published the long-

awaited results of its 2011 stress tests. The tests covered 90 EU banks, representing 65% of

banking sector assets in the EU.

To recap, the tests have a 5% Core Tier 1 (EBA definition, similar to Basel 2.5) pass mark for

two different macro-based scenarios, a baseline and an adverse scenario.

The baseline scenario is based on the Autumn 2010 EC forecast of a gradual recovery in EU

growth and the adverse scenario a more severe scenario designed by the ECB.

An impossible taskThe outcome of the stress tests were never going to do enough to convince sceptics that

European banks have enough capital to withstand a severe downturn, particularly if combined

with one or more sovereign defaults.

That said, we suspect that the market will be surprised by the fact that only nine banks failed

the test. The EBA was effectively in a lose-lose situation: too few failures and the test is

branded too lenient; too many failures and some will worry that the system is in worse shape

than they had expected.

Whose stress test is it anyway?

Although the market is unlikely to give the stress tests credit for it, we suspect that the rash of

capital raisings announced earlier this year were triggered, at least in part, by the looming

stress test.

Without the mitigation measures this year, including capital raising of some 50bn, the EBA

stated that 20 banks would have failed the test. We suspect that seeing those banks fail the

test and then raise capital/restructure would have been taken positively: a real sign that

regulators were getting tough and taking tough decisions. As it is, those capital raisings are

now a distant memory, leaving this stress test to be perceived (perhaps unfairly) as a damp

squib.

But whereas the sector rallied into last years stress tests, share prices have this time been

heading down, whether we look in absolute terms, relative to the European market or relative

to global banks.

So while these tests are not, in our opinion, a powerful trigger for a rally, the sectors valuation

and investor sentiment are both low enough that even a mild positive may help share prices.

We suspect that the market willbe surprised by the fact that onlynine banks failed the test. TheEBA was effectively in a lose-losesituation: too few failures and thetest is branded too lenient; toomany failures and some will worrythat the system is in worse shapethan they had expected.


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18 July 2011 5

European banks performance 120 daysbefore/after stress test (absolute) European banks performance 120 daysbefore/after stress test (rel to euro mkt) European banks performance 120 daysbefore/after stress test (rel global banks)

70

100

130

-120 -96 -72 -48 -24 0 +24 +48 +72 +96 +120

2010 2011

70

100

130

-120 -96 -72 -48 -24 0 +24 +48 +72 +96 +120

2010 2011

70

100

130

-120 -96 -72 -48 -24 0 +24 +48 +72 +96 +120

2010 2011

Source: Datastream, SG Cross Asset Research

We have the raw materials to make a more comprehensive testThe main criticism of the tests centres on the fact that it does not incorporate the possibility of

a sovereign bond default, despite the fact that this is looking increasingly likely. In the analysis

below, we compute our own, tougher, tests on 40 of the 90 banks covered by the EBA

typically the larger, quoted European banks.

In addition to the stress applied by the EBA to the banks private sector loan books, we

write down Greek, Irish and Portuguese sovereign exposures by 50% andthose of Italy

and Spain by 20%.

On that basis, we see 13 of the 40 banks failing the test, with a total deficit of 22bn,

equivalent to 41% of the end-2010 tangible equity of those 13 banks, but just 2% of the end-

2010 tangible equity for all 90 banks in the test.

We suspect that if the EBA stress test had been formulated in that way, with those results,

then the market opinion may well have been more positive.

Does it really matter?Ultimately, of course, even with the stress test results suggesting that the European banks are

in a relatively healthy position and able to withstand likely shocks, no regulatory authority can

everprove that is the case.

A stress test examines what happens to an asset when macro conditions deteriorate butrelies on the bank/regulator estimating how losses will develop as those macro variables

change.

But while macro conditions have been worse than expected, we believe that the worst-

affected banks through the crisis would never have anticipated the losses incurred, even if

they had had perfect foresight on the economic outlook.

Stressing Greek debt by 50%,

and Italian and Spanish debt by

20%... would trigger 13 of thelargest 40 quoted banks failedthe test with 22bn capitalshortfall.


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Headline resultsOn the EBAs adverse scenario 82 banks pass and just 8 banks fail versus the 5% Core Tier 1

pass-mark:

- Five Spanish banks (listed Banco Pastor and four Cajas)

- Two Greek banks (EFG Eurobank and ATEBank),

- Austrian Volksbank

- German Landesbank Helaba (which pulled out of the tests earlier in the week amid

protests against the EBA methodology).

The total capital shortfall of the 8 banks is a mere 2.5bn. This result is almost identical to the

2010 stress test results, when 7 banks failed the tests with a total capital shortfall of 3.5bn

(Hypo Real Estate, ATEbank and five Spanish Cajas). There were a further 16 near -fail

banks with a capital ratio between 5% and 6% in the 2011 tests, which included Banco

Sabadell, Banco Popolare, Banco Popular and Bankinter.

Core Tier 1 ratios on EBA Adverse scenario, versus 5% pass mark

-5%

0%

5%

10%

15%

20%

25%

BANCAMARCH

IRISHLIFE&PERMANENT

OTPBANK

Sydbank

BANQUECAISSED'EPARGNE

DANSKE

Jyske

PKOBANKPOLSKI

OP-Pohjola

RABOBANK

SEB

LandesbankBerlin

DEXIA

BANKOFVALLETTA

CAJASANSEBASTIAN

KBCAIB

HypoRealEstate

Nordea

Swedbank

MONTEDEPIEDAD

Nykredit

DekaBankDeutsche

ABNAMRO

BBVA

DnBNOR

INTESASANPAOLO

GRUPOBBK

WGZBANK

CAJAVITORIAYALAVA

INGSHB

CREDITAGRICOLE

HSBC

SANTANDER

Erste

NOVAKREDITNA

BNPPARIBAS

Raiffeisen

Lloyds

NBGUBI

ALPHABANK

BARCLAYS

CAJAINVERSIONES

LandesbankBaden-Wrt

BayerischeLandesbank

BANKOFIRELAND

SNSBANK

DZBANK

EFFIBANK

BPCE

CAJAZARAGOZA

UNICREDIT

BancoBPI

DEUTSCHE

CAJADEBARCELONA

COMMERZBANK

RBS

MPS

CAIXAGERALDEPSITOS

COLONYA

BANKOFCYPRUS

GRUPOBMN

WestLB

SABADELL

BANCOPOPOLARE

GRUPOBANCACIVICA

CAJAONTINYENT

NorddeutscheLandesbank

HSHNordbank

TTHELLENIC

BCP

BFA-BANKIA

CAIXAGALICIA

BPE

NOVALJUBLJANSKA

MARFIN

PIRAEUS

BANKINTER

BES

EFGEUROBANK

CAIXADECATALUNYA

Volksbank

CAIXAUNIODECAIXES

GRUPOCAJA3

BANCOPASTOR

CAJADELMEDITERRANEO

ATEbank

Near-fail Fail

Source: European Banking Authority, SG Cross Asset Research

The total capital shortfall of the 9banks is a mere 2.5bn. Thisresult is almostidentical to the010 stress test results, when 7banks failed the tests with a totalcapital shortfall of 3.5bn


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Core Tier 1 resultsName 2010 EBA

definition2012 EBAadverse*

Name 2010 EBAdefinition

2012 EBAadverse

BANCA MARCH 22.2% 23.5% LB Baden-Wurttemberg 8.2% 7.1%

IRISH LIFE & PERMANENT 10.6% 20.4% Bayerische LB. 9.3% 7.1%

OTP BANK 12.3% 13.6% BANK OF IRELAND 8.4% 7.1%

Sydbank 12.4% 13.6% SNS BANK 8.4% 7.0%

BANQUE CAISSE D'EPARGNE 12.0% 13.3% DZ BANK 8.2% 6.9%

DANSKE 10.0% 13.0% EFFIBANK 8.3% 6.8%

Jyske 12.1% 12.8% BPCE 7.8% 6.8%

PKO BANK POLSKI 11.8% 12.2% CAJA ZARAGOZA 9.7% 6.7%

OP-Pohjola 12.2% 11.6% UNICREDIT 7.8% 6.7%

RABOBANK 12.6% 10.8% Banco BPI 8.2% 6.7%

SEB 11.1% 10.5% DEUTSCHE 8.8% 6.5%Landesbank Berlin 14.6% 10.4% CAJA DE BARCELONA 6.8% 6.4%

DEXIA 12.1% 10.4% COMMERZBANK 10.0% 6.4%

BANK OF VALLETTA 10.5% 10.4% RBS 9.7% 6.3%

CAJA SAN SEBASTIAN 13.2% 10.1% MPS 5.8% 6.3%

KBC 10.5% 10.0% CAIXA GERAL DEPSITOS 8.5% 6.2%

AIB 3.7% 10.0% COLONYA 11.2% 6.2%

Hypo Real Estate 28.4% 10.0% BANK OF CYPRUS 8.1% 6.2%

Nordea 8.9% 9.5% GRUPO BMN 8.3% 6.1%

Swedbank 8.7% 9.4% WestLB 8.7% 6.1%

MONTE DE PIEDAD 12.5% 9.4% SABADELL 6.2% 5.7%Nykredit 8.8% 9.4% BANCO POPOLARE 5.8% 5.7%DekaBank Deutsche 13.0% 9.2% GRUPO BANCA CIVICA 8.0% 5.6%

ABN AMRO 9.9% 9.2%CAJA ONTINYENT 8.9% 5.6%BBVA 8.0% 9.2% Norddeutsche Landesbank 4.6% 5.6%DnB NOR 8.3% 9.0% HSH Nordbank 10.7% 5.5%INTESA SANPAOLO 7.9% 8.9% TT HELLENIC 18.5% 5.5%GRUPO BBK 10.2% 8.8% BCP 5.9% 5.4%WGZ BANK 10.8% 8.7% BFA-BANKIA 6.9% 5.4%CAJA VITORIA Y ALAVA 12.5% 8.7% CAIXA GALICIA 5.2% 5.3%ING 9.6% 8.7% BPE 7.1% 5.3%SHB 7.7% 8.6% NOVA LJUBLJANSKA 5.2% 5.3%CREDIT AGRICOLE 8.2% 8.5% MARFIN 7.3% 5.3%HSBC 10.5% 8.5% PIRAEUS 8.0% 5.3%SANTANDER 7.1% 8.4% BANKINTER 6.2% 5.3%Erste 8.7% 8.1% BES 6.4% 5.1%NOVA KREDITNA 7.4% 8.0% EFG EUROBANK 9.0% 4.9%BNP PARIBAS 9.2% 7.9% CAIXA DE CATALUNYA 6.4% 4.8%Raiffeisen 8.1% 7.8% Volksbank 6.4% 4.5%Lloyds 10.2% 7.7% CAIXA UNIO DE CAIXES 6.3% 4.5%NBG 11.9% 7.7% GRUPO CAJA3 8.6% 4.0%UBI 7.0% 7.4% BANCO PASTOR 7.6% 3.3%

ALPHA BANK 10.8% 7.4%CAJA DEL MEDITERRANEO 3.8% 3.0%BARCLAYS 10.0% 7.3% ATEbank 6.3% -0.8%CAJA INVERSIONES 8.2% 7.3%

*LB=Landesbank - Source:EBA, SG Cross Asset Research


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18 July 2011

Economics: banking on Sovereign TransparencyAt the macro-economic level, the most pressing risk in the context of the euro area debt crisis

resides in the linkages from sovereigns-to-banks and banks-to-sovereigns. The EBA stress

tests offered an unparalleled level of detail on banks sovereign debt exposures, with over

2,800 data points per bank detailing sovereign exposure with regard to issuer, maturity and

accounting classification (notably giving the split between trading book and bank book).

Combing through the data, we find that - as expected - the bulk of exposure to the weakest

sovereigns is held by the domestic banks. Moreover, the direct sovereign exposure to Greece,

Ireland and Portugal of other euro area banks are relatively low. The greater concern is

potential contagion to other euro area sovereigns and to bank funding conditions stemming

from renewed sovereign tension, which are potentially very substantial.

When euro area leaders meet on Thursday, July 21 for an emergency summit on Greece, they

will do well to keep these channels of contagion in mind in defining the private sector

involvement (PSI) in the new Greek financial assistance program. Poorly defined, the risk is to

see further contagion domino-ing sovereign bond markets and to European banks.

Sovereigns-to-banksThe stress tests confirmed two already well know results. First, the bulk of exposure to the

weakest sovereigns is held by the domestic banks (in both absolute and relative terms). As

seen from the chart below, it is generally true that banks hold a significant share of their

sovereign exposure in the home sovereign. For Greece, the EBA reports total sovereign

exposure at default (EAD) basis to the Greek sovereign at 98.2bn. Of this total amount for the

90 banks taking part in the stress tests, 67% is held by Greek banks. For Ireland and Portugal,

total sovereign EAD and the share held by home banks are reported at, respectively, 52 .7bn

and 61%, and 43.2bn and 63%. Second, exposure of non-domestic banks to, respectively,

Greek, Irish, Portuguese and Spanish sovereign risk is relatively moderate. As seen from the

table below (based on gross sovereign exposure) adding Italian sovereign risk to the equation

increases the stakes, however. This illustrates the danger of the contagion currently spreading

through the euro area bond markets.

Main direct exposure is to the domestic sovereign

0%

20%

40%

60%

80%

100%

AT BE CY D E DK ES FI FR GB GR HU IE IT LU MT NL N O P L PT SE SI

Share of total gross sove reign exposure

to home sovere ign (%, end-2010 EBA stress tests)

Source: EBA, SG Cross Asset Research / Economics

For Greece, the EBA reports totalsovereign exposure at default(EAD) basis to the Greeksovereign at 98.2bn.


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18 July 2011 9

Greece, Ireland, Portugal and Spain are modest, adding in Italy increases the stakesGross sovereign exposure EURbn, end-2010 (selected countries for banks par ticipating in EBA stress tests)

Germany France Netherlands Italy Spain Greece Ireland Portugal UK

Total EURbn 556 504 169 223 350 64 21 31 705

Greece EURbn 8 10 1 1 0 54 0 1 3

% total 1% 2% 1% 1% 0% 85% 0% 5% 0%

Ireland EURbn 1 2 0 0 0 0 12 1 1

% total 0% 0% 0% 0% 0% 0% 60% 2% 0%

Portugal EURbn 4 5 1 0 5 0 0 20 3

% total 1% 1% 0% 0% 2% 0% 1% 62% 0%

Spain EURbn 19 15 2 3 232 0 0 0 12

% total 3% 3% 1% 1% 66% 0% 2% 1% 2%

Italy EURbn 37 53 10 164 7 0 1 1 26

% total 7% 11% 6% 74% 2% 0% 4% 3% 4%


In considering the linkages and the potential dominos from a contagion scenario, it is also

important to take account of other exposures. As seen from the table below, broadening out

to include total exposures to all sectors in the economy, this substantially increases the

numbers.

As does including the full economyTotal exposure, EAD basis, EURbn, end-2010 (selected countries for banks participating in EBA stress tests)

Germany France Netherlands Italy Spain Greece Ireland Portugal UK

Total EURbn 3,755 4,106 1,883 1,895 3,007 339 354 349 4,467

Greece EURbn 18 44 1 1 0 242 0 7 8

% total 0% 1% 0% 0% 0% 71% 0% 2% 0%

Ireland EURbn 45 21 8 1 2 0 191 2 68

% total 1% 1% 0% 0% 0% 0% 54% 1% 2%

Portugal EURbn 18 15 0 2 62 0 1 248 14

% total 0% 0% 0% 0% 2% 0% 0% 71% 0%

Spain EURbn 104 78 4 7 2,174 0 5 20 77

% total 3% 2% 0% 0% 72% 0% 1% 6% 2%

Italy EURbn 103 261 2 1,262 1 0 3 2 37

% total 3% 6% 0% 67% 0% 0% 1% 0% 1%


A more surprising outcome is found on the maturity of holdings, with a far more mixed picture

from institution to institution, breaking somewhat with the general consensus that banks hold

the bulk of exposure in short maturity issues. Adding up the total numbers for euro area

banks, we find that the pool of sovereign debt that could be involved in PSI over the 3-year

horizon, amounts to 34.5bn for Greece (gross exposure, up to and including 3-year maturity),

with the bulk held by euro area banks. Note, these numbers include only the European banks

taking part in the EBA stress tests, which cover around 65% of total assets in the region.

Including all banks would increase the pool for PSI: assuming a simple proportionate increase

we find 53bn.

At present, several proposals for PSI appear to be on the table, ranging from some form of

vehicle to buyback Greek bonds at a discounted price from private investors to various forms

of bond exchanges. In all cases, a writedown seems likely to be on the agenda for private

investors. The bank stress tests have already made some provisions for such a scenario

(please refer to results section), but the risk is to see this exceeded if contagion is not

successfully stemmed.

Adding up the total numbers foreuro area banks, we find that thepool of sovereign debt that couldbe involved in PSI over the 3-yearhorizon, amounts to 34.5bn forGreece (gross exposure, up toand including 3-year maturity),with the bulk held by euro areabanks.


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18 July 20110

While a CDS event can likely be avoided, a downgrade to SD on Greece seems all but

inevitable. This raises the question on ECB collateral. As we have highlighted on previous

occasions, this is primarily an issue for Greek banks. The question remains what the ECB

would do, but at present it seems likely that in such an event the ECB would no longer accept

Greek bonds as collateral and instead offer Emergency Liquidity Assistance (ELA) to the Greek

banks.

A mixed picture on the exposure of maturity to the Greek sovereign

0%

20%

40%

60%

80%

100%

ALL AT B E CY DE DK ES FI FR GB GR IE IT LU MT NL PT SE SI

Maturity structure of gross exposure to Greek sovreign(%, end-2010 (EBA stress tests)

3M 1Y 2Y 3Y 5Y 10Y 15Y

Source: SG Cross Asset Research

An important point to keep in mind is that PSI for Greece is likely to be seen as a blueprint for

Portugal and Ireland, and any other member states that many ultimately need to seek EU/IMFassistance. Poorly defined, the risk is that PSI could trigger a buyers strike in weak sovereign

bond markets and also weigh on bank funding. In the context of the bank stress tests, it is

important to note that funding and a potential liquidity was not explicitly stressed (please refer

toresults section).

Banks-to-sovereigns, and the economyIn discussing the links from sovereigns to banks, it should be recalled that it is a two-way

causality. As such, a weak banking sector can feed back to weigh on the sovereign. This is

especially true if a bank fails to raise sufficient capital in markets or lose access to funding. In

the context of the stress tests, the 2.5bn identified is unlikely to pose any significant problem.

The risk is, however, that this number ultimately proves higher (please refer toresults section).

Linkages to the real economy should not be forgotten either. The euro area debt crisis is no

doubt a negative for consumer and business confidence, and fiscal austerity weighs directly

on activity. In addition, the real economy is linked directly to the banking system via the credit

channel (higher funding costs and lesser supply of capital). Wealth effects also play a role for

both financial and real assets as risk-aversion increases.

Breaking the channels of contagion is thus today the main challenge for euro area

policymakers. Failure to do so would spell a very bleak scenario, far beyond what has been

outlined in the stress tests.

The 2.5bn identified is

unlikely to pose any

significant problem. The

risk is, however, that this

number ultimately proves

higher.


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18 July 2011 11

The Fixed Income AngleThe stress tests have brought more details on individual exposure to sovereign risk.What investors still do not know is the extent to which banks - and other investors - will

be asked to contribute to fixing the sovereign crisis.

From the start, EU officials have treated Greeces and other countries problems as a liquidity

crisis. There was the foundation of the muddle-through strategy: help Greece for a while, and

give them time to convince investors that they are returning to a sustainable debt path. We

have never been fond of that strategy, especially on evidence that time was not being used

wisely (indeed Greece has failed to reassure). As a second plan for Greece is in the working,

EU policymakers are discovering a new impossible trinity. Just consider the three

following pillars: 1) bringing Greece on a sustainable debt path; 2) limitingofficial lending;

3) limiting the damage for the private sector, including the fragile banking sector.

There is no rabbit in the hat: the only way to satisfy those three objectives is through a

credible and effective austerity plan. But the past misachievements and resulting credibility

gap have made the above an impossible trinity. The French plan, by transforming credit risk

into duration risk, clearly focused on making Private Sector Involvement sweet (pillar 3). But

the plan had shortcomings: it failed to bring PSI to the desired 30bn level (so failing pillar 2),

and certainly did not address Greeces debt sustainability issue (pillar 1). Given that even this

Vienna Initiative does not seem sweet enough to avoid a Selective Default, the plan has been

shelved.

Policymakers instead now seem to focus on pillars 1 and 2. This has probably not been

done the hard way yet (haircuts on principal). Greece is set to receive more loans, and we fear

that resources continue to be misallocated. The IMF itself now recognises that only the threat

of wider financial contagion allows the IMF to keep lending to a country with such an unstable

debt situation. Providing more lending may avoid a traumatic near-term shock (Lehman-like),

but not a slow-burning contagion. Policymakers indeed are investigating a tougher treatment

of private investors: The IMF now cautions against offering any incentives for creditor

participation that would negatively impact on Greeces already difficult debt dynamics .

Investors, naturally, are getting worried. Debt swaps will most likely prove bigger and more

costly than a Vienna initiative. We have yet to see the details of the debt swaps. Default fornow may just mean a temporary Selective Default rating. Later on it will most likely involve

haircuts on principal. This is proving extremely stressful for sovereign risk with contagion now

going beyond Ireland, Portugal and Spain. Whether there will be an EU summit in the coming

week is still uncertain. But even if one occurs, there is no instant cure for the troubles of the

eurozone. They may be in abeyance for now. But we continue to see more tensions in

September, at which time investors want to be short risky sovereigns again (see Sovereign

section).

The best we can hope for, fornow, is a respite this summer, onhopes that EFSF will be buying inthe secondary market (or lendingto countries that can use thefunds to buy back their debt).


12/22


18 July 20112

The best we can hope for, for now, is a respite this summer, on hopes that EFSF will be

buying in the secondary market (or lending to countries that can use the funds to buy back

their debt)

The details of the second aid plan to Greece may not be known before late summer. If for now

we can avoid a plan that would be ostentatiously painful for the private sector, we should see

some near-term respite. That, along with signs of a V-shape recovery in Japan, fading

concerns about China's growth and a pick-up in US economic surprise indices, forms the

basis of our small short duration exposure (bias towards a rebound in bond yields in the next

few weeks).

Our biggest near-term fear, however, continues to be the contagion of the crisis towards the

banking sector, given the threat of a heavier private sector involvement. Hence we

recommend hedges that would benefit from bank stress. It is tempting to do so in USD, as

European banks find it more difficult to raise funding in the dollar markets.

Hedging against the adverseeffects of such a crisis is oftencostly.

We critically discuss a number ofprotective strategies andrecommend a 3M/6M LIBORbasis trade in forward space asthe most appropriate hedge (seeFocus US, Keep hope alive).
https://www.sgresearch.com/p/en/3/0/26884/75B431FF4F4E5CA8C12578CE00646758.html?sid=0166959fa9a1bdc641ee7e4129ad2e6bhttps://www.sgresearch.com/p/en/3/0/26884/75B431FF4F4E5CA8C12578CE00646758.html?sid=0166959fa9a1bdc641ee7e4129ad2e6bhttps://www.sgresearch.com/p/en/3/0/26884/75B431FF4F4E5CA8C12578CE00646758.html?sid=0166959fa9a1bdc641ee7e4129ad2e6bhttps://www.sgresearch.com/p/en/3/0/26884/75B431FF4F4E5CA8C12578CE00646758.html?sid=0166959fa9a1bdc641ee7e4129ad2e6bhttps://www.sgresearch.com/p/en/3/0/26884/75B431FF4F4E5CA8C12578CE00646758.html?sid=0166959fa9a1bdc641ee7e4129ad2e6bhttps://www.sgresearch.com/p/en/3/0/26884/75B431FF4F4E5CA8C12578CE00646758.html?sid=0166959fa9a1bdc641ee7e4129ad2e6b


13/22


18 July 2011 13

The Equity Angle, Part 1: EBA stress test Equity market reaction to the stress tests is likely to be relatively muted in our view,

with few big surprises despite the huge volume of new disclosure. Market sentiment is

likely to remain focussed on the fall-out of the Greek crisis and how that spreads further

afield. The tests will inevitably be criticised for such a small number of failing banks

(nine) with an aggregate capital shortfall of just 2.5bn, and the fact that sovereign

default is not considered.

In this section we focus on the outcome for a selection of 40 banks typically the largest,

quoted banks in the EU. The chart below shows Core Tier 1 ratios under the adverse scenario.

The results vary from over 12% for three Nordic banks to 4.9% for EFG Eurobank, the only

bank in our sub-set to fail.

Core Tier 1 Ratios Adverse Scenario

0%

2%

4%

6%

8%

10%

12%

14%

Sy

dban

k

Dans

ke

Jys

ke

SEB

Dex

ia

KBC

AIB

Nordea

Swe

dban

k

BBVA

Dn

BNOR

Intesa

SHB

Cre

ditAgrico

le

HSBC

San

tan

der

Ers

te

BNPPari

bas

Ra

iffe

isen

Lloy

ds

NBG

UBI

Alpha

Ban

k

Barc

lays

Ban

ko

fIre

lan

d

Na

tix

is

Un

icre

dit

BPI

Deu

tsc

he

Ban

k

Commerz

ban

k

RBS

MPS

Sa

ba

de

ll

Popo

lare

BCP

Popu

lar

Piraeus

Ban

kinter

BES

EFG

Euro

ban

k


Updated sovereign exposuresOne clear positive of the stress test exercise is the extra disclosure provided alongside the

results. Aggregate sovereign bond exposures to Greece, Ireland, Portugal, Italy and Spain are

shown below in absolute amounts and as a percentage of common equity. In absolute terms,

the banks with biggest exposures are (in order) Intesa, BBVA, Unicredit, Santander and BNP

Paribas (to the home sovereign in the first four cases).

However, as a multiple of common equity the biggest exposures are AIB, MPS, Piraeus,

Popolare and EFG Eurobank. The Nordic and UK banks stand out as the least exposed banks

to sovereign bond default.


14/22


18 July 20114

GIP Sovereign exposures Absolute amounts (bn)

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Intesa

BBVA

Un

icre

dit

San

tan

der

BNPP

ari

bas

MPS

Dex

ia

Ba

rclays

Comme

rzban

k

NBG

Cre

ditAgrico

le

HSBC

Deu

tsche

Ban

k

Po

po

lare

UBI

RBS

P

opu

lar

EFG

Euro

ban

k

Na

tix

is

P

iraeus

KBC

BCP

Sa

ba

de

ll

AIB

Ire

lan

d

BPI

Alpha

Ban

k

Ban

kinter

BES

Ers

te

D

ans

ke

SEB

Rai

ffe

isen

N

ordea

Jys

ke

Lloy

ds

SHB

Swe

dban

k

Dn

BNOR

Sy

dban

k

Spain

Italy

Portugal

Ireland

Greece


GIP Sovereign exposures As % common equity (%)

0%

100%

200%

300%

400%

500%

600%

700%

800%

AIB

MPS

Piraeus

Popo

lare

EFG

Euro

BPI

BBVA

NBG

Intesa

Sa

ba

de

ll

BCP

Commerz

Ban

kinter

UBI

Popu

lar

Un

icre

dit

Dex

ia

Alpha

Ban

k

San

tan

der

Ire

lan

d

BNPPari

bas

KBC

BES

Barc

lays

Deu

tsc

he

Cre

dAgrico

le

Na

tix

is

RBS

HSBC

Ers

te

Dans

ke

Ra

iffe

isen

Jys

ke

SEB

Nordea

Lloy

ds

SHB

Swe

dban

k

Dn

BNOR

Sy

dban

k

Spain

Italy

Portugal

Ireland

Greece


Incorporating sovereign exposures into the tests

As noted above, the EBA stress tests do not account for the possibility of a sovereign default,

despite the fact this has become an increasingly likely scenario.

In the following section we therefore incorporate into the EBA scenarios:

1. The potential impact of a sovereign default in Greece, Ireland and Portugal, by applying a

50% haircut to sovereign exposures to each country.

2. Apply an additional 20% haircut to sovereign bond exposures to Italy and Spain. We

caveat that this is far removed from our base-case expectation.

In absolute terms, the banks withthe biggest exposures are (inorder) Intesa, BBVA, Unicredit,Santander and BNP Paribas(to the home sovereign in the firstfour cases).

However, as a multiple ofcommon equity those with thebiggest exposures are AIB, MPS,Piraeus, Popolare and EFGEurobank. The Nordic and UKbanks stand out as the least

exposed banks to sovereign bonddefault.


15/22


18 July 2011 15

The Equity Angle, Part 2: What if GIIPS sovereigndebt had been stressed By including the possibility of sovereign default across multiple jurisdictions, our

analysis suggests 13 banks of a sub-set of 40 of the larger, quoted banks could fail, with

an aggregate capital shortfallof 22bn.

Applying 50% haircuts on GIP exposuresThe chart below shows estimates Core Tier 1 ratios based on the EBAs adverse scenario,

incorporating a sovereign default in each of Greece, Ireland and Portugal.

On this basis, 8 of the 40 banks fail the 5% CT1 pass mark, versus just one bank as reported

by the EBA excluding sovereign stresses. Perhaps unsurprisingly, the newly failing banks are

from those countries included within the sovereign default all four Greek banks fail, one Irish

and all three Portuguese banks. The aggregate capital shortfall of the failing banks is

EUR16bn.

Core Tier 1 Ratios 50% haircuts on GIP sovereign exposures

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Sy

dban

k

Dans

ke

Jys

ke

SEB

KBC

Nordea

Swe

dban

k

BBVA

Dex

ia

Dn

BNOR

Intesa

SHB

HSBC

Cre

ditAgrico

le

San

tan

der

Ers

te

Ra

iffe

isen

AIB

Lloy

ds

BNPPari

bas

UBI

Barc

lays

Deu

tsc

he

Ban

k

Un

icre

dit

BPCE

MPS

RBS

Commerz

ban

k

Popo

lare

Sa

ba

de

ll

Ban

kinter

Popu

lar

Ban

ko

fIre

lan

d

BES

Alpha

Ban

k

BCP

BPI

EFG

Euro

ban

k

NBG

Piraeus


Applying 50% haircuts on GIP AND 20% haircut on Italy/SpainexposuresIf we additionally include a 20% haircut on all Italian and Spanish sovereign bond exposures,

13 of the 40 banks fail with an aggregate capital shortfall of 22bn. As well as those failing on

the GIP haircuts, two Italian banks would fail (MPS and Popolare) and the three small Spanish

banks (Sabadell, Bankinter and Popular).

On this basis, 8 of the 40 banksfail the 5% CT1 pass mark, versusjust one bank as reported by theEBA excluding sovereign stresses


16/22


18 July 20116

Core Tier 1 Ratios 50% haircuts on GIP sovereign exposures, 20% on Italy/Spain

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Sy

dban

k

Dans

ke

Jys

ke

SEB

Nordea

Swe

dban

k

KBC

Dn

BNOR

SHB

HSBC

Cre

ditAgrico

le

Ers

te

Ra

iffe

isen

Lloy

ds

AIB

Dex

ia

San

tan

der

Barc

lays

BNPPari

bas

Intesa

Deu

tsc

he

Ban

k

BBVA

BPCE

RBS

UBI

Un

icre

dit

Commerz

ban

k

Popo

lare

Ban

ko

fIre

lan

d

Sa

ba

de

ll

Ban

kinter

Popu

lar

BES

Alpha

Ban

k

MPS

BCP

BPI

EFGEuro

ban

k

NBG

Piraeus


Finally, the chart below shows the overall results for each bank on 3 different scenarios,

ranked by the most severe scenario (scenario 3 below):

1. EBA Adverse scenario

2. EBA Adverse scenario with additional 50% haircut to GIP sovereign exposures

3. EBA Adverse scenario with additional 50% haircut to GIP sovereign exposures and 20%

haircut to Italy/Spain sovereign exposures.

The banks which standout as best performing under the scenarios are all Nordic banks, KBC,

the Austrian banks and large Spanish banks. The middle ground typically includes the French,

UK and large Italian banks, with the most impacted unsurprisingly being the smaller banksfrom the GIIPS countries. Of the larger banks, Commerzbank, RBS and Unicredit are below

average. For RBS this largely reflects the stringent rules applied to securitisation positions,

whereas for Unicredit and Commerzbank it reflects the sovereign haircuts we apply.

Looked at from the opposite perspective, we are surprised by just how resilient some of the

banks are. Despite an economic recession (adverse scenario), a triple sovereign default and

20% haircuts on Italian and Spanish sovereign debt, the average core Tier 1 ratio for our sub-

group is a still relatively healthy 6.2%. Furthermore, most of the larger banks have ratios in

excess of that average.

Overall results Core tier 1 ratios under four scenarios (%)

-5.0%

0.0%

5.0%

10.0%

15.0%

Sydbank

Danske

Jyske

SEB

Nordea

Swedbank

KBC

DnBNOR

SHB

HSBC

C

reditAgricole

Erste

Raiffeisen

Lloyds

AIB

Dexia

Santander

Barclays

BNPParibas

Intesa

D

eutscheBank

BBVA

Natixis

RBS

UBI

Unicredit

C

ommerzbank

Popolare

Ireland

Sabadell

Bankinter

Popular

BES

AlphaBank

MPS

BCP

BPI

E

FG

Eurobank

NBG

Piraeus

Adverse

GIP

GIIPS


Despite an economic recession(adverse scenario), a triplesovereign default and 20%haircuts on Italian and Spanishsovereign debt, the average coretier 1 ratio for our sub-group is astill relatively healthy 6.2%.


17/22


18 July 2011 17

The Credit Angle: Two-way Causality in the StressTests Like the equity market, credit market reaction to the stress tests is also likely to be

relatively muted in our view, with few easily decipherable surprises discovered within

large volume of disclosures.

The focus on the relatively low level of capital required as a result of these tests may cause

market participants to dismiss them. Indeed, during the analysts call on Saturday, 16 July

2011, the Chairman of the EBA himself noted that he is uncomfortable with the 2.5bn of

required capital raising in light of how the sovereign situation has deteriorated and stated that

he believed more strengthening of capital is needed.

If there is any good news concerning this exercise for the credit markets, it is that it is over.

However, we do not envision a flood of new bank debt issuance in the short term for two

reasons. One, the European bank earning season is upon us with attending constraints on the

ability of some to raise funding during the quiet period. As institutions publish their results, we

are likely to see meaningful attempts by the primary funding markets to re-open. Two, credit

market sentiment is likely to remain focussed on the fall-out of the Eurozone and possible US

budget crisis. These will continue to influence the overall cost of capital and drive bank

managements decisions with respect to how to fund their operations. It may be more

advantageous to de-lever than raise funds in the international capital markets. This would

clearly have attending feedback into the bank-to-sovereigns and economy causality.

SovX Index and iBoxx subordinated financials index

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

150

200

250

300

350

400

450

500

Jan-'11 Feb-'11 Mar-'11 Apr-'11 May-'11 Jun-'11 Jul -'11

iBoxx F inancia l Subordinated SovX 30 day lag correlation: SovX vs Sub Fins

Source: SG Cross Asset Research, Markit

Liquidity and funding matter to credit marketsThe European Banking Authority 2011 stress test does not include a stress of liquidity while

funding stress is not really tested, in our view. The framework of this test is largely

concentrated on the asset side of the balance sheet to derive capital requirements, while the

complexity of adding liability stresses to the process are largely absent. However, during theconference call on Saturday, 16 July 2011, the EBA noted that it had recently undertaken a

non-publicly disclosed liquidity stress scenario test and discussed these results with national

We do not envision a flood of newbank debt issuance in the shortterm.

Please see the following report fordetails on traderecommendations:EU Banks: Stressed, but nottested.
https://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667eb


18/22


18 July 20118

regulators. When pressed on this issue during Q&A, the EBA noted that it believed it was not

appropriate to publish the results of this test.

Funding costs are assumed to be driven by credit spreads which are linked to the sovereign inthe stress test, again highlighting the sovereign-to-bank causality. However, these are

modelled within a constrained methodology, as the recent jump to default in the credit

spreads of some countries is clearly not captured in the funding costs exercise. In addition,

the tests permit the re-pricing of loan portfolios to capture 50% of the increase in funding

costs while new loans are assumed to replace maturing loans, in the constant balance sheet

assumption. This could lead to the overstatement of interest revenues and an understatement

of interest expenses in the real world, but clearly as noted (please refer to Does it really

matter) there are limits to what can be modelled.

It is also important to note that these tests are further constrained by the lack of harmonized

definitions across the EU with respect to certain important measures. For example negative

Available for Sale Reserves were subject to prudential filters at national discretion and this

obviously impacts the starting line with respect to available Core Tier 1 capital. In addition, it is

well publicized that the non-inclusion of pro-cyclical loan loss reserves for Spanish banks and

the exclusion of silent participations in the German banks had a detrimental impact on their

respective starting Core Tier 1 levels, despite inclusion at the national level. Theses impacts

can be adjusted for, but focusing on the headline number as a true cross-European

comparison may lead to type two errors, that is, false conclusions.

The adverse scenario & bank credit default swapsAmongst the largest EU banks, the results of the adverse stress case scenario relative to 5-

year subordinated credit default swaps are shown below. There are clear outliers, but for the

most part, the market tends to favour those banks with higher core Tier 1 ratios in an adverse

scenario.

Adverse Scenario Core Tier 1 Capital vs. 5-year Subordinated CDS on 15 July 2011 for select EU banks

Erste

Raiff eisen

Dexia

KBC

BNP Paribas

Credit AgricoleNatixis

Commerzbank

Deutsche Bank

Intesa

MPS

Unicredit

Popolare

UBI

BBVASantander

Sabadell

Bankinter

Popular

Barclays

HSBC

Lloy ds

RBS

Nordea

SHB

SwedbankSEB

DnB NOR

Danske

R = 0.2385

0

100

200

300

400

500

600

700

800

900

1000

4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0%

Source: SG Cross Asset Research, European Banking Authority, Bloomberg

It is also important to note thatthese tests are furtherconstrained by the lack ofharmonized definitions across theEU with respect to certainimportant measures.


19/22


18 July 2011 19

Stressing sovereign exposure & bank credit default swaps As per the test in (please refer to Incorporating Sovereign Exposures), applying the 50%

haircut on sovereign exposures to Greece, Ireland and Portugal, as well as a 20% haircut tosovereign exposures to Spain and Italy, shifts Spanish and Italian banks downwards in the

core Tier 1 equity tables. Relative to 5-year subordinated credit default swaps, we have a

better fit, in terms of correlation, than is seen in the EBA adverse scenario core Tier 1 test

results. However, we caution that this is a static, one-step, assessment with other dynamic

factors that would likely occur in this scenario, such as increased funding costs and other

losses, not accounted for. Nevertheless, from this example, it appears as though the credit

markets are applying a much more stringent test than the EBA to some EU banks.

Stressed sovereign core Tier 1 ratios vs. 5 year subordinated CDS on 15 July 2011 for select EU banks

Danske

SEBNordea

Swedbank

KBC

DnB NORSHB

HSBC

Credit Agricole

Erste

Raiffeisen

Lloy ds

Dexia

Santander

Barclays

BNP Paribas

Intesa

Deutsche Bank

BBVA

RBS

UBI

Unicredit

Commerzbank

Popolare

Sabadell

Bankinter

Popular

MPS

R = 0.556

0

100

200

300

400

500

600

700

800

900

1000

2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0%

Source: SG Cross Asset Research, Bloomberg


20/22


18 July 20110

APPENDIX

ANALYST CERTIFICATIONThe following named research analyst(s) hereby certifies or certify that (i) the views expressed in the research report accurately reflect his orher personal views about any and all of the subject securities or issuers and (ii) no part of his or her compensation was, is, or will be related,directly or indirectly, to the specific recommendations or views expressed in this report: Hank Calenti, CFA, Philip Richards, James Invine

SG RATINGSBUY: expected total return of 10% or more over a 12 monthperiod.

HOLD: expected total return between -10% and +10% over a 12month period.SELL: expected total return of -10% or worse over a 12 monthperiod.

Sector Weighting Definition:The sector weightings are assigned by the SG Equity ResearchStrategist and are distinct and separate from SG research analystratings. They are based on the relevant MSCI.

OVERWEIGHT: sector expected to outperform the relevant broadmarket benchmark over the next 12 months.

NEUTRAL: sector expected to perform in-line with the relevantbroad market benchmark over the next 12 months.

UNDERWEIGHT: sector expected to underperform the relevantbroad market benchmark over the next 12 months.

Equity rating and dispersion relationship48%

40%

13%

50%

39%

48%

0

50

100

150

200

250

Buy Hold Sell

Companies Covered Cos. w/ Banking Relationship

Source: SG Cross Asset Research

MSCI DISCLAIMER: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Withoutprior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated orused to create any financial products, including any indices. This information is provided on an as is basis. The user assumes the entirerisk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling theinformation hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particularpurpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or anythird party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, MorganStanley Capital International and the MSCI indexes are service marks of MSCI and its affiliates or such similar language as may beprovided by or approved in advance by MSCI.

IMPORTANT DISCLOSURESBanco De Sabadell SG acted as joint bookrunner in Banco Sabadell's bond issue (4.5% 11/02/13 EUR).Banco Popolare SG acted as co-lead manager in Banco Popolare's capital raising.Bankia SG is acting as as co-lead manager in Bankia's IPOBarclays SG acted as bookrunner in Barclays's covered bond issue.BBVA SG acted as Joint Bookrunner in BBVA's rights issue.BBVA SG acted as joint bookrunner of BBVA's bond issue.BNP Paribas SG is acting as financial advisor to SFPI, 100% owned by the Belgian State, which holds a 25% stake in Fortis Bank

SA/NVCrdit Agricole SG acted as joint bookrunner in Crdit agricole's covered bond issue.Crdit Agricole SG acted as joint book runner in Credit Agricole's covered bond issue.EADS SG is mandated lead arranger of the loan granted to Republic of Brazil to finance the acquisition of helicopters from

EADS Group.HSBC SG acted as joint manager in HSBC's High Grade Covered bond.HSBC SG acted as co-manager in HSBC's bond issue.HSH Nordbank SG acted as joint book runner in HSH's bond issue (2.5% 28/07/14 EUR).

Intesa Sanpaolo SG acted as co-lead manager in Intesa Sanpaolo's rights issue.Intesa Sanpaolo SG acted as Joint lead manager in Intesa San Paolo's bond issue (3.25% 01/02/13 EUR).Intesa Sanpaolo SG acted as joint lead Manager in Intesa San Paolo's senior bond issue (4% 08/11/18 EUR).Intesa Sanpaolo SG acted as joint bookrunner in Intesa San Paolo's subordinated bond issue (9.5% 01/01/49 EUR).


21/22


18 July 2011 21

Intesa Sanpaolo SG makes a market in Intesa Sanpaolo warrantsLa Caixa (Caja de Ahorros y Pensionesde Barcelona)

SG acted as joint lead manager in La Caixa's bond.

La Caixa (Caja de Ahorros y Pensionesde Barcelona)

SG is acting as joint bookrunner in La Caixa's senior bond issue.

Nordea SG acted as joint bookrunner in Nordea's covered bond issue.PKO Bank Polski SG acted as joint bookrunner in PKO's senior bond issue.Royal Bank ofScotland

SG acted as joint lead manager in RBS's covered bond issue (4% 15/03/16 EUR).

Santander SG acted as joint bookrunner in Santander's covered bond issue (4.625% 21/06/16 EUR).Santander SG acted as joint lead manager in Santander's senior bond issue (4.125% 04/10/17 EUR).SNS REAAL SG acted as joint bookrunner in SNS Reaal's covered bond issue.Swedbank SG acted as joint bookrunner in Swedbank's covered bond issue.UniCredit SG acted as joint bookrunner in Unicredit's bond issue (18/07/12 EUR).UniCredit SG acted as joint lead manager in Unicredito Italiano's senior bond issue (14/09/12 EUR).UniCredit SG makes a market in Unicredito warrants

Director: A senior employee, executive officer or director of SG and/ or its affiliates is a director and/or officer of UniCredit SpA.

SG and its affiliates beneficially own 1% or more of any class of common equity of BBVA, Intesa Sanpaolo.SG or its affiliates act as market maker or liquidity provider in the equities securities of BBVA, BNP Paribas, Banco De Sabadell, BancoPopolare, Banco Popular, Bankinter SA, Commerzbank, Crdit Agricole SA, EADS, ING Group, Intesa Sanpaolo, Santander, UniCredit SpA.SG or its affiliates expect to receive or intend to seek compensation for investment banking services in the next 3 months from BNP Paribas,Bank of Ireland, Commerzbank, Crdit Agricole SA, Dexia, EADS, ING Group, Intesa Sanpaolo, KBC, Royal Bank of Scotland, Santander,UniCredit SpA.SG or its affiliates had an investment client relationship during the past 12 months with BBVA, Banco De Sabadell, Banco Popolare, Bankia,Barclays, Crdit Agricole SA, HSBC, HSH Nordbank, Intesa Sanpaolo, La Caixa (Caja de Ahorros y Pensiones de Barcelona), PKO BANKPOLSKI, Royal Bank of Scotland, SNS REAAL NV, Santander, Swedbank, UniCredit SpA.SG or its affiliates have received compensation for investment banking services in the past 12 months from BBVA, Banco De Sabadell, BancoPopolare, Bankia, Barclays, Crdit Agricole SA, HSBC, HSH Nordbank, Intesa Sanpaolo, La Caixa (Caja de Ahorros y Pensiones deBarcelona), Nordea, PKO BANK POLSKI, Royal Bank of Scotland, SNS REAAL NV, Santander, Swedbank, UniCredit SpA.SG or its affiliates managed or co-managed in the past 12 months a public offering of securities of BBVA, Banco De Sabadell, BancoPopolare, Bankia, Barclays, Crdit Agricole SA, HSBC, HSH Nordbank, Intesa Sanpaolo, La Caixa (Caja de Ahorros y Pensiones deBarcelona), Nordea, PKO BANK POLSKI, Royal Bank of Scotland, SNS REAAL NV, Santander, Swedbank, UniCredit SpA.SGAS had a non-investment banking non-securities services client relationship during the past 12 months with BBVA, BNP Paribas, Banco

Popular, Bank of Ireland, Barclays, Commerzbank, Crdit Agricole SA, Dexia, HSBC, ING Group, Intesa Sanpaolo, KBC, PKO BANK POLSKI,Royal Bank of Scotland, Santander, UniCredit SpA.SGAS had a non-investment banking securities-related services client relationship during the past 12 months with BNP Paribas, BancoPopolare, Barclays, Commerzbank, Crdit Agricole SA, Dexia, HSBC, ING Group, Intesa Sanpaolo, KBC, PKO BANK POLSKI, Royal Bank ofScotland, Santander, UniCredit SpA.SGAS received compensation for products and services other than investment banking services in the past 12 months from BBVA, BNPParibas, Banco Popolare, Banco Popular, Bank of Ireland, Barclays, Commerzbank, Crdit Agricole SA, Dexia, HSBC, ING Group, IntesaSanpaolo, KBC, PKO BANK POLSKI, Royal Bank of Scotland, Santander, UniCredit SpA.SGCIB received compensation for products and services other than investment banking services in the past 12 months from BNP Paribas,Banco Popolare, Banco Popular, Bank of Ireland, Barclays, Commerzbank, Crdit Agricole SA, Dexia, EADS, HSBC, ING Group, IntesaSanpaolo, KBC, PKO BANK POLSKI, Royal Bank of Scotland, Santander, UniCredit SpA.

FOR DISCLOSURES PERTAINING TO COMPENDIUM REPORTS OR RECOMMENDATIONS OR ESTIMATES MADE ON SECURITIES

OTHER THAN THE PRIMARY SUBJECT OF THIS RESEARCH REPORT, PLEASE VISIT OUR GLOBAL RESEARCH DISCLOSURE

WEBSITE AThttp://www.sgresearch.com/compliance.rha or call +1 (212).278.6000 in the U.S.

The analyst(s) responsible for preparing this report receive compensation that is based on various factors including SGs total revenues, a portion ofwhich are generated by investment banking activities.

Non-U.S. Analyst Disclosure: The name(s) of any non-U.S. analysts who contributed to this report and their SG legal entity are listed below. U.S.analysts are employed by SG Americas Securities LLC. The non-U.S. analysts are not registered/qualified with FINRA, may not be associated personsof SGAS and may not be subject to the FINRA restrictions on communications with a subject company, public appearances and trading securities held

in the research analyst(s) account(s): Hank Calenti, CFASocit Gnrale London, Philip RichardsSocit Gnrale London, James InvineSocitGnrale London

IMPORTANT DISCLAIMER: The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell, any securitiesand has been obtained from, or is based upon, sources believed to be reliable but is not guaranteed as to accuracy or completeness. SG does, fromtime to time, deal, trade in, profit from, hold, act as market-makers or advisers, brokers or bankers in relation to the securities, or derivatives thereof, of

persons, firms or entities mentioned in this document and may be represented on the board of such persons, firms or entities. SG does,, from time totime, act as a principal trader in debt securities that may be referred to in this report and may hold debt securities positions. Employees of SG, orindividuals connected to them, may from time to time have a position in or hold any of the investments or related investments mentioned in thisdocument. SG is under no obligation to disclose or take account of this document when advising or dealing with or on behalf of customers. The viewsof SG reflected in this document may change without notice. In addition, SG may issue other reports that are inconsistent with, and reach different
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