BANK SYSTEM STABILISATIONS IN EUROPE

NILS MELNGAILISCO-HEAD FINANCIAL SERVICES EUROPE

2

EUROPEAN BANKS

Critical steps to safeguard future viability:

1. Balance Sheets Honestly evaluate balance sheets

2. Capital Position Improve capital position

3. Core Business Identify core and non-core businesses

4. Cost Base Right-size cost base

5. ERM Place enterprise risk management at the heart of future strategy

6. Relations Proactively manage political and regulatory relations

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WHERE ARE THE VARIOUS COUNTRIES ON THIS JOURNEY?

Critical steps to

safeguard viability

Step 1

Evaluate balance

sheet

Step 2

Improve capital

position

Step 3

Identify core and non-core

Step 4

Right-size cost base

Step 5

Implement ERM

strategy

Step 6

Manage political & regulatory relations

UK

Ireland

Latvia

Greece

Spain

Cyprus

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Restructuring Roadmap

Government Guarantee

Blanket Government guarantee of liabilities

NAMA & IBRC

Establish NAMA to acquire toxic loans (€74bn) and wind-down nationalised IBRC (Anglo / INBS)

Pillar Strategy

Creation of the Pillar Bank strategy (AIB/EBS & BOI) & standalone PTSB

ECB & ELA Reliance on ECB & ELA (now c.€120bn) to ‘plug’ deposit flights

Regulation Robust and intensive regulation

Key Issues Still Remain

Residential Mortgages

Residential mortgage arrears still challenging

Remedy Measures

New mortgage forbearance measures and personal insolvency to try remedy the situation

Deposits Deposits stabilising with focus on weaning off ECB funding

SME Credit SME credit still at key component for employment growth

Reorgani-sations

Bank business model redesign and cost reduction to continue

IRELAND

5

Recent Developments

Sovereign Crisis

Sovereign financial crisis has led to a substantial pressure on the banking system

Deposit Flight

Deposits reduced from €280bn to €235bn in the last three years

First Bailout

First bailout of €110bn from the EU and IMF in May 2011

Second Bailout

Second bailout of €130bn in March 2012

Piraeus Bank & ATE Bank

Takeover of ATE Bank

Piraeus, 4th largest Greek lender, to acquire the healthy assets of the state-controlled Agricultural Bank of Greece

Strategy Piraeus will operate the restructured bank

HFSF Funding

Gap between assets transferred to Piraeus and ATE bank’s liabilities covered by HFSF

Further Capital Injection

HFSF to also provide capital injection for Piraeus following the takeover

GREECE

6

SPAIN

Recent Developments

Large RE Exposure

Financial institutions ‘exposure to real estate is c.35% of GDP

Liquidity Scarcity  

Extremely scarce, heavy reliance on Eurozone funding

State Aid€30bn fund to purchase high quality covered bonds and ABS€63bn securities issued by banks with state-guarantee

AMC Creation Decision to create a nationwide AMC

International Pressure

Pressure on Spain to seek bail-out through new ECB approved bond-buying program

FROB / AMC Creation

FROB Creation of FROB to reorganize the Spanish Banking Industry

Initial Capital of €9bn

Initial capital of FROB amounts to €9bn

Royal Decree Law

Spain approved the broad regulatory framework for its proposed AMC

First 4 Banks to Transfer Assets

BFA, Catalunya, NCG and Banco de Valencia to transfer their impaired assets to AMC

Eurozone Funding of €100bn

AMC to acquire assets at a very heavy discount, with €100bn of European Aid

7

Recent Developments

Huge Exposure to Greece

Disproportionally large, carrying the risks of €23bn in private-sector Greek debt

Oversized Banking System

Banking system 8.9x size of GDP compared to 3.5x EU average

High Level ofConcentration

The financial system is highly concentrated with commercial banks owning 66% of total loans

Dominance of three Largest Banks

The three largest banks account for c. 98% of total domestic commercial bank assets

Bank Rescues

Heavy Losses in 2011

Two largest financial institutions, Bank of Cyprus and Popular Bank, recorded heavy losses in 2011

€3bn Losses from GGB Haircuts

53.5% haircut on the nominal value of the GGB’s resulted in losses of almost €3bn of the two banks, c.20% of GDP

Bank of Cyprus

Bank of Cyprus announced that it would require capital support of €500 million

Cyprus Popular Bank

Cyprus Popular Bank, the most heavily exposed to Greece, needs €1.8 billion

CYPRUS

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DE-COUPLING THE BANKING SYSTEM FROM THE SOVEREIGN SYSTEM

De-coupling the banking system from the Sovereign system in order to enhance control mechanisms and improve conditions.

ECB Bond Buying Program Conditions

Pan-European Bank Supervisor (Banking Union)

Participants (top banks or all banks)

Role of local regulators

ESM equity stakes in banks

Conditions

Valuation of stakes

Retrospective actions

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Nils MelngailisCo-Head Financial Services EuropeLondon EC2M 7EBUnited KingdomDirect: +44 207 715 5202Mobile +44 792 106 4860nmelngailis@alvarezandmarsal.com

Alvarez & Marsal - Ireland20 Harcourt StreetDublin 2IrelandDirect: +353 1 400 7522