60314315-Nomura-EU-Bank-Stress-Test-Results-2011-18-7-447460

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Rating: See report end for details of Nomuras rating system.

EU Bank Stress Test Results 2011 PAN-EUROPEAN BANKS EQUITY RESEARCH

Almost all listed banks pass the test

We expect some short-termrelief after market concerns

July 18, 2011

Sector viewRemains Bullish

With EUR50bn of pre-emptive capital raising, just 8 banks failThe 2011 EBA stress test showed that at end-2010, 20 banks would havefailed to keep a minimum 5% CT1 ratio with a capital shortfall of EUR26.8bn. However after EUR50bn of capital was raised in the first four

months of 2011, the list of failures was reduced to eight with a shortfall of ust EUR2.5bn. The failing banks included five in Spain, two in Greece andone in Austria, with just three listed banks failing.

16 banks had a borderline pass with additional action recommendedThe EBA listed 16 banks with a CT1 ratio between 5% and 6% andrecommended that those banks with high exposures to sovereigns under stress should take additional action to strengthen their capital includingdividend restrictions, deleveraging, and capital increases or conversions.This list comprises banks in Spain, Portugal, Greece, Germany and Italy.To take these banks to 6% would require EUR10.7bn of capital.

The result confirms the solvency of Europes major listed banksWhile the number of failures net of capital raised is on the lower end of market expectations, we do believe that the 2011 test and disclosurelevels are more rigorous and credible than in the prior year. Even after applying haircuts to banking book sovereign holdings, the test underlinesthat large cap European banks appear solvent in the event of defaultamong the smaller periphery Eurozone markets, an event which wouldprimarily affect the local banks where plans are in place to inject additionalcapital into the banking systems.

We expect short-term relief given concerns ahead of the testGiven the wild swings in stock prices over the last week ahead of thestress test results, we believe that the comparatively few failures should

bring some short term relief. That said, we do believe that smaller capbanks in Spain, Portugal and Greece will need to continue to raise capitalin line with EBA recommendations. In terms of relative positioning amonglarge cap banks we would highlight the relative strength of Intesa vs.UniCredit, BBVA and SAN vs. domestic peers, BNP and CA Group vs.SocGen and BPCE, Lloyds vs. RBS, and Scandi vs. German banks.

However bigger issues remain for the EurozoneDespite the relief brought from the results and the transparency of thestress test, and the fact that the sector is now trading at just 1.0x TBV, anyshort-term relief rally is likely to be constrained by uncertainty over theform and timing of additional aid for the peripheral Eurozone, as well as

market concerns about the sustainability of debt in Spain and Italy. Whilewe believe that these countries are fundamentally solvent, we continue tolook to the bond market for short-term direction.

Research analysts

European Banks

Jon Peace - NIplc [email protected]+44 20 7102 4452

Robert Law - [email protected]+44 20 7102 2715

Domenico Santoro - [email protected]+44 20 7102 2375

Daragh Quinn - [email protected]+44 20 7102 8333

Nathan Archer - [email protected]+44 20 7102 9636

Prathmesh Dave

[email protected]+44 20 7102 8530

Chintan Joshi - [email protected]+44 20 7102 6597

Omar Keenan - [email protected]+44 20 7102 4341

Tathagat Kumar [email protected]+44 20 7102 9177

See Appendix A-1 for analystcertification and important

disclosures. Analysts employedby non US affiliates are notregistered or qualified asresearch analysts with FINRAin the US.


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Nomura | EU Bank Stress Test Results 2011 July 18, 2011

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Summary of stress test resultsThe 2011 EBA stress test showed that at end-2010, 20 banks would have failed to keepa minimum 5% CT1 ratio with a capital shortfall of EUR26.8bn. However after EUR50bnof capital was raised in the first four months of 2011, the list of failures was reduced toeight with a shortfall of EUR2.5bn. The failing banks included five in Spain, two inGreece and one in Austria, with just three listed banks failing.

The EBA listed 16 banks with a CT1 ratio between 5% and 6% and recommended thatthose banks with high exposures to sovereigns under stress should take additionalaction to strengthen their capital including dividend restrictions, deleveraging, and capitalincreases or conversions. This list comprises banks in Spain, Portugal, Greece,Germany and Italy. To take these banks to 6% would require EUR10.7bn of capital.

Fig. 1: EBA 2011 stress test results under adverse scenario

Source: EBA

In our view the 2011 stress test appears more rigorous than last years exercise. Inaddition, there has been an increased effort at disclosure, with more granular informationon exposures and the loss assumptions made.

The test underlines that the major EU banks appear solvent in the event of defaultamong the smaller periphery Eurozone markets. As the EBA itself indicated, defaults inthese markets would concentrate their effects on the local banks. This would have to becountered by recapitalisation measures directed at individual markets, as the authoritiesalready plan, with the specific sums of recent bail outs allocated to recapitalising thebanks. It does not imply a systemic undercapitalization of the banking system and/or aconsequent vulnerability of the whole system to a EU/global macro deterioration.

The EBA has also conducted a liquidity stress test. The results of this have not been

made public. However, the EBA has set out aggregate figures. These show the 90 bankshave aggregate wholesale/interbank funding of over EUR 8,000bn, 46% of total funding.47% of this matures within one year and one-third within three months. It is likely that thebanking systems with high loans/deposits ratios are most vulnerable to a deterioration of liquidity conditions, notably Spain, Portugal, Ireland and the UK.

The EBA publishes some very interesting data on the dispersion of the PD and LGDassumptions used by banks both in arriving at their 2010 figures and also in their stressed future assumptions used in the test. These are set out on page 25 and followingof the report. The EBA comments that this may be for sound reasons (includingdifferences of geography for example), but it hints that divergences in assumptions mayalso be unjustifiable, by adding that differences exist for assets in similar locations andunder the same regulatory portfolio and that this may require further analysis.


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Spain, Portugal and Greece no more capital is needed?Despite the varied and in some cases potential for severe losses the key message fromthe national regulators appears to be that the banking systems of Spain, Portugal andGreece are well capitalised in an adverse scenario. The Bank of Spain stated no further capital needed, results showed only a small gap at BCP in Portugal to be closedorganically and in Greece EFG Eurobank insists it will not have to raise capital.

While we believe that this stress test has been useful in the level of disclosure andtransparency (particularly in the case of Spain), we still see the need for additionalcapital. We specifically dont see as realistic for many of these banks the possibility tolower capital ratios and in the case of additional losses (be they on Spanish real estateor Greek government bonds) could in fact have to raise them. Of particular note is thatthe IMF has specifically earmarked some EUR 26bn and EUR 12bn to recapitalise theGreek and Portuguese banking systems and we think this is a more relevant indicator of capital needs rather than having passed or failed this stress test.

We believe the results support our view that both BBVA and Santander are in a stronger position vs. domestic peers as the lower contribution from exposure to Spain and thesignificantly higher profitability cushions the capital base. We would continue to see asour base case scenario that additional capital is required for banks in all 3 countries: inGreece driven by the very real risk of a material haircut on Greek government bonds, inPortugal given the recessionary outlook / structural weakness in funding and pensiondeficits and in the case of Spain the risk of additional losses on corporate real estateloans (an issue for domestic Spanish banks).


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Sovereign stress in the banking bookThe 2011 stress test includes a more detailed sovereign stress on trading book assetswith different and larger haircuts applied across a range or maturities as illustrated belowfor peripheral Eurozone debt.

Fig. 2: Haircut assumptions on peripheral Eurozone debt

Source: EBA

However the majority of banks sovereign holdings are in fact carried in the bankingbook. The 2011 test is more rigorous than 2010 in that increased provisions have beenrecognised on these holdings, based on probabilities of default implied by externalratings. This may give a more benign outcome than the trading book haircut based onmarket prices for countries yet to experience significant downgrades. This could in turnhave a material impact on the results of some banks given the high level of peripheraldebt holdings relative to core Tier 1 capital, shown for stocks under our coverage below.

Fig. 3: Peripheral sovereign exposures as a percentage of 2011 CT1 capital

Source: EBA

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However sufficient disclosure has been given by the EBA to recalculate results based onalternative scenarios. In the chart below for the stocks under our coverage we haverecalculated the results based on a haircut scenario rather than a provisioning scenariofor sovereign debt in Portugal, Ireland, Italy, Greece and Spain.

Fig. 4: Selected EU bank stress test results under sovereign haircut scenario

Source: EBA, Nomura research

This analysis suggests that some additional smaller local listed banks in these peripheralmarkets might have failed the stress tests had a haircut rather than a provisioningapproach been taken to peripheral sovereign debt. However the larger banks in Spainand Italy as well as all international listed banks would still pass the stress test, often bya considerable margin. As a result we conclude that the stress test disclosures dodemonstrate that the major listed European banks are solvent and are not vulnerable to

a European or global macro deterioration.

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Comments on specific markets

AustriaOESTERREICHISCHE VOLKSBANK AG failed the stress test with a 4.5% core tier 1 in2012, although this did not include a number of measures already announced recentlyand which will bring additional 200bp (disposal of VolksBank and a stake in RZB).However both Erste Group and Raiffeisein Bank International passed the stress test with

ample margin (core tier 1 respectively at 8.1% and 7.8% in 2012).Although the impact from the adverse scenario on core tier 1 is much lower than the lastyears stress test, we note that this level of core tier 1 includes the state participationcapital (EUR1,220m for EG, and EUR1.75bn for RBI), which is considered core capitalaccording to the definition of the EBA.. Stripping out the contribution from stateparticipation capital only from 2012 core tier 1, which consensually the market does notrecognise as pure equity, core tier 1 in 2012 would be of respectively 6% for RBI and7.1% for EG. Despite both passing the stress test, we believe market view on Austriansweak capitalisation would not change, especially for RBI. This is even after recognisingthe limited exposure to sovereign bonds in the periphery (8% of TBV for EG) and Italy(8% for both RBI and EG), which are almost all booked in banking book in both thebanks balance sheets.

Fig. 5: Austrian banksCore Tier 1

Source: EBA, Nomura estimates

Analysing the stress test vs. last year exercise is only possible for EG, as RBI was not

tested last year (instead it was RZB). We would consider for EG the hypothesisunderlying the exercise as reasonable. This should be also put in the context of the factthat the assumptions in the adverse scenario regarding the sovereign risk in all thecounties in which EG is running its business are more benign that the one in SouthEurope, considering all these countries benefit now from CDS spread below theperiphery. Although retained earnings does not change significantly this year vs. lastyears exercise, the main difference in the final result (-140bp vs. -240bp of last yearsstress test ) mainly derives from a different exit level of RWAs, which we think is relatedthis year to more benign assumptions in terms of loss rate on the retail banking book andGDP growth in the adverse scenario vs. last years assumptions (especially in CEEcountries).

FranceThe French banks place quite well in the stress tests considering the markets concernsabout peripheral exposure and capital adequacy, helped by the fact that it was the better capitalised mutual groups rather than their listed subsidiaries which were the subject of the stress tests again this year.

The core Tier 1 ratios in order under the adverse scenario were 8.5% for CA Group,7.9% for BNP Paribas, 6.8% for BPCE and 6.6% for Societe Generale, compared with asector average of 7.9%. Forecasts look appropriately harsh, with the listed banks eachregistering around half the operating profit and double the credit losses we forecastunder the adverse scenario. Under the baseline scenario we note that expected net profitfor Societe Generale of EUR4.0bn in 2012 is around one-third less than the businessplan. The EBA also assumes a high level of dividend payout, where in practice we wouldexpect the French banks to revert to scrip.

Core tier 1 evolution RBI EG2010 8.1% 8.7%1) 2011 Baseline scenario 8.3% 9.0%2) 2012 Baseline scenario 9.0% 9.5%3) 2011 Adverse scenario 7.6% 8.3%4) 2012 Adverse scenario 7.8% 8.1%4) - 2) -1.2% -1.4%2010 stress test adverse vs. BL scenario -2.4%


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We estimate that if haircuts had been applied to the banking book sovereign exposuresin Portugal, Ireland, Italy, Greece and Spain, the figures above would be reduced by0.7% for BNP Paribas and 0.2% for each of the other banks, keeping them out of theEBAs 5-6% watchlist. Overall we therefore see the stress tests as comforting for theFrench banks, particularly for BNP Paribas which fares well compared with SocieteGenerale and for CA Group which has the resources we believe to weather higher losses at Emporiki without CASA needing to resort to a capital increase.

GermanyThe two listed banks in Germany came towards the lower end of the peer group, but stillavoided the EBAs 5-6% watchlist, with Deutsche Bank (which included the consolidatedPostbank) scoring 6.5% and Commerzbank 6.4% under the adverse scenario. Althoughnone of the Landesbanks failed the test, one (Helaba) pulled out of the test over capitaldefinitions (publishing its own forecast of 6.8% including the conversion of silentparticipations) while two more (NordLB and HSH Nordbank) fell within the 5-6% range. Astatement by BaFin did not explicitly outline additional measures for these banks.

GreeceOut of the 6 Greek banks subject to the EU wide stress test exercise, 2 banks, EFG

Eurobank and ATE bank fell short of the 5% Core Tier 1 benchmark, under the adversescenario including the recognised mitigating factors, requiring an additional EUR 770m tobe raised of which Eurobank require EUR 60m and ATE bank EUR 710m. While webelieve that this shortfall can easily be covered by the now EUR 26bn fund specificallyearmarked to recapitalise the banking system under the IMF bailout program, key toanalyse here would be the underlying assumptions of the stress test.

In our view, while the loss rate assumptions reflect the further deterioration in domesticmacro economic conditions, the insufficiently pessimistic assumptions made in the likelyamount of sovereign debt write-downs will not reassure investors particularly as thehaircut is confined to trading book only. However, taking the losses assumed by the EBAin the trading book, and applying it to the banking book, does not materially change thesituation (as the stress test assumes the accumulation of some EUR 8bn in provisions)

and it would only impact 3 of the 6 banks.

Fig. 6: Core Tier 1 under declared stress test resultStated assumptions


Fig. 7: Core Tier 1 under haircut scenario to banking bookApplying haircut to sovereign exposure in banking book


Note: We have applied the stated trading book haircut to the Greek banks sovereign exposure to Greece,Portugal, Spain, Italy and Ireland and held under the banking book.

We conduct our own stress test, assuming a 50% or 80% loss on Greek govt. bonds andreaching a minimum 10% core capital ratio. The EBA stress test includes 25% write-down on 10 yr Govt. bond whereas they are currently trading at 54% to par. As shownbelow a scenario of 50% haircut would lead to additional capital requirement of EUR12bn and a more stressed scenario of 80% haircut would leave a capital gap of EUR19bn for the Greek banks (this would also crystallise AFS losses in capital ratios as well).

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Fig. 8: Core capital shortfall under 50% haircut scenarioStressing only the HTM/AFS portfolio

Source: Company data, Nomura research

Fig. 9: Core capital shortfall under 80% haircut scenarioStressing only the HTM/AFS portfolio


Note: Analysis done only on the 4 listed Greek banks

We believe the stress test will fail to ease investors concerns with respect to Greekbanks exposure to the sovereign debt and the fact that financial stability fund for banksunder the IMF program has been provisionally increased to EUR 26bn from EUR 10bn

also reflects a reality which is not depicted from the results.

ItalyThe Italians come out better this year compared to last years stress test exercise,admittedly helped by the recent recapitalisation in the sector, but assumptions onsovereign are likely to be considered a limit of this analysis. We would also expect themarket to differentiate based on these results. Both IntesaSanpaolo and UBI Bancaappear to rank well in a pan-European context (respectively core tier 1 at 8.9% and 7.4%in 2012 in the adverse scenario including recent capital increase), while Unicredit andBancoPopolare (the latter is the only one in the critical range according to the EBAcorridor) are weaker. Surprisingly, despite the recent EUR2bn capital increase, BMPScore tier 1 also comes out lighter than expected (6.3%), this due to the exclusion fromthe EBA exercise of the EUR950m fresh capital instrument, which is instead recognisedas core tier 1 by the national regulator .

Although we would tend to consider the hypothesis underlying the exercise as rigorous,even in the context of some more benign assumptions of loss-rates on the banking book,we would expect results on the Italians to be subject to much more criticism vs. lastyears test. Appropriate assumptions on the exposure to national sovereign risk remainsthe failing point of this analysis, considering that Italian banks have increased materiallytheir exposure to Italian government bonds, and a significant part of this portfolio wasmoved to the banking book, which the exercise does not haircut in the same way. For these reasons, the final result comes out optically better vs. last year, which we findcounter-intuitive in a moment of tensions on Italian CDS, also considering that thehypothesis regarding the haircut on the sovereign bonds are in line with the one impliedin current market levels. At this stage, we would expect the negative sentiment on thesub-sector to remain, despite the manoeuvre approved last Friday in the ItalianParliament addressed to give some form of relief to the public debt evolution in Italy.

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Fig. 10: Stress test resultsCore Tier 1 (%)

Source: EBA, Nomura

Although a comparative analysis vs. last year is not always possible because of adifferent set of data, our analysis suggests that, excluding valuation losses on tradingportfolio and haircuts on sovereign bonds, underlying assumptions of the stress test lookconservative. More in detail, cumulative gross operating income over the two year horizon of the exercise looks more conservative compared to last years exercise.Differently, loss rates on retail and corporate banking book are much more benign, butwe think this is the result of portfolio models considering that the baseline scenario startsfrom better macro assumptions compared to last year.

Where we think the results will be criticised regards the sovereign exposure and theunderlying assumptions of the stress test. We flag that the underlying hypothesis in the

adverse scenario on Italian sovereign rates are a touch below the current market level,after last weeks events, which makes already the exercise a bit unrealistic. Furthermore,Italian banks have increased materially the exposure to Italian government bonds sincelast years stress test (on average by 30%), with UBI and BAPO the most active in thissense, and moved part of the portfolio to trading assets (HFT represent 26% of the totalvs. last year 34%). As result, trading losses on the trading book represent in this yearsstress test 1% of the total Italian portfolio (where realistically most of the losses comefrom) vs. 3% last year, a result which was already widely criticised.

Should we apply the haircut also on the sovereign risk in the banking book (see Fig 4),we would expect the impact to be greater on BMPS, with the results to weaken evenfurther the capital adequacy of both BancoPopolare and Unicredit (core tier 1respectively of 5.4% and 6.3%), while IntesaSpa and UBI Banca would rank still well.

Core tier 1 evolution ISP UCG BMPS UBI BAPO2010 7.9% 7.8% 5.8% 7.0% 5.8%1) 2011 Baseline scenario 8.2% 7.6% 5.9% 6.9% 5.9%2) 2012 Baseline scenario 8.8% 7.9% 6.1% 6.9% 6.1%3) 2011 Adverse scenario 7.5% 7.0% 5.1% 6.8% 5.5%4) 2012 Adverse scenario 7.4% 6.6% 4.7% 6.4% 5.0%4) - 2) -1.4% -1.3% -1.4% -0.5% -1.1%2010 stress test adverse vs. BL scenario -1.6% -2.2% -1.4% -0.8% -0.8%

Including capital increase ISP UCG BMPS UBI BAPO1) 2011 Baseline scenario 9.8% 7.8% 7.6% 8.0% 6.6%2) 2012 Baseline scenario 10.4% 8.0% 7.8% 8.0% 6.8%3) 2011 Adverse scenario 9.1% 7.1% 6.8% 7.9% 6.2%4) 2012 Adverse scenario 8.9% 6.7% 6.3% 7.4% 5.7%4) - 2) -1.5% -1.3% -1.5% -0.6% -1.1%

Including capital increase and other mitigations ISP UCG BMPS UBI BAPO1) 2011 Baseline scenario 10.2% 8.4% 10.2% 8.7% 7.1%2) 2012 Baseline scenario 10.8% 8.6% 10.4% 8.7% 7.3%3) 2011 Adverse scenario 9.4% 7.7% 9.4% 8.5% 6.7%4) 2012 Adverse scenario 9.2% 7.2% 8.8% 8.1% 6.2%

4) - 2) -1.6% -1.4% -1.6% -0.6% -1.1%


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Fig. 11: Sovereign exposureEURmn

Source: EBA, Nomura estimates

Digging into results company by company, IntesaSP comes out as the clear winner of this stress test among the Italians, with a core tier 1 much better than expected (9.2% if

including also the disposal of Findomestic and branches to CASA), while Unicreditcomes out a bit weaker. This reflects mainly a lower starting point in terms of core tier 1,as consequence of both the exclusion of Cashes instruments from 2010 core tier 1(EUR3bn, i.e. 60bp), and the effect on RWAs from CRD3 (around EUR50bn), which aretotally neutralised in the case of IntesaSP (EUR12.5bn) by different RWAs assumptions.Furthermore, we believe the final result is also penalised by a less optimistic contributionof earnings, reflecting more conservative loan loss rate assumptions on the retailportfolio book (almost in line with last year exercise). The exercise does not recognisethe 49bp RWAs optimisation reported in Q1 11 (of which 11bp due to removal of the filter on goodwill, which is instead included in the 8.9% core tier 1 of IntesaSP). With thesethoughts in mind, we believe the market read across might be negative for Unicredit, anda recapitalisation would be perceived as still needed.

Among the mid-sized companies. UBI Banca comes out admittedly better than BMPSand BAPO. However, apart from a higher base effect which includes the recent EUR1bncapital increase, we would also flag some different assumptions vs. other banks, mainlydue to a greater contribution of earnings retention (especially vis-a-vis BMPS). Thiswould reflect more benign assumptions in terms of loss rates on the retail banking bookin the adverse scenario (which is reflected also in RWAs evolution), and lower valuationlosses on the trading book, where a significant portion of the Italian Government bondsportfolio is booked (15% of the total vs. 26% average for the sub-sector). In comparison,BMPS assumptions look more conservative, but are penalised by the exclusion of theEUR950m fresh equity instrument issued at the point of the acquisition of Antonveneta(with shares underlying already issued) from 2010 core tier 1.

BancoPopolare is the only Italian bank to fall into the corridor set by EBA (core tier 1 5-

6%), for which additional measures should be taken before February 2012. At this stage,we believe that the conversion of the EUR1bn soft mandatory will be a realistic scenarioif market conditions improve, unless the bank succeeds in finalising the disposal of Agos-Ducato to CASA. In line with last weeks Bank of Italy message to continue to improveefficiency in the sector, BAPO announced on Friday that i t will proceed with the merger of all the subsidiary banks (we expect Creberg and Banca Aletti) into Banco Popolare(BPV, BPN, BPL and CARILPL), and the consequent reorganisation of the franchise interritorial divisions. This would bring additional cost synergies of EUR90m in 2016 (of which EUR50m form the removal of intra-group VAT), with a potential positive impact oncore tier 1 in 2013 of 30bp (net profit target would increase by EUR44m in 2013 toEUR647m, core tier 1 target raised to 7.9%).

Exposure to Sovereign (gross exposure) ISP UCG BMPS UBI BAPOTotal gross sovereign exposure 73,583 92,048 33,759 10,825 12,359 Gross exposure to Italian govies 60,152 49071 32473 10,544 11,770Growth vs. stock pubblished in 2010 stress test (%) -6% 28% 17% 67% 42%As % of TBV 179% 125% 308% 157% 171%of which HFT 15,790 12490 6324 1,552 4,941

% 26% 25% 19% 15% 42%Portgugal Ireland Greece Spain 1,617 2765 494 25 285

Trading income losses due to sovere ign shock (2011 s tress te st) 554 650 201 21 181 As % of Italy gross exposure 0.9% 1.3% 0.6% 0.2% 1.5%Trading income losses due to sovereign shock (2010 stress test) 1,915 1,608 675 70 323 As % of Italy gross exposure 3.0% 4.2% 2.4% 1.1% 3.9%

Gross exposure to Italian govies (as % of 2010 stresst test) 63,681 38,332 27,756 6,303 8,284 of which HFT 22,560 15,961 8,653 881 4,139

% 35% 42% 31% 14% 50%Portgugal Ireland Greece Spain 1,565 1,627 247 25 240


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Fig. 12: Assumptions underlying the stress testEURmn

Source: EBA, Nomura

PortugalThe performance of the Portuguese banks in the stress test was broadly in line with our expectation given the fact that only sovereign holdings in the trading book were stressed.However, Bank of Portugal has decided to set a minimum capital level in a stress testexercise establishing a reference level of 6% and has given a period of 3 months timeframe to the banks below 6% mark to reach that level. So by September 2011, BCP whopassed the test with CT 1 of 5.4% will have to shore up capital or put in place assetdisposal to the tune of EUR 400m. BCP has indicated that they will cover the gap bygeneration of reserves through liability management exercise. In this context, BCP hasinitiated an offer to holders of subordinated liabilities (lower Tier II 2016 issue) andpreference share holders.

In the case of Portuguese banks, a key comparison which needs to be done with regardsto the stress test results is the stricter capital requirement from Bank of Portugal and theadditional capital required by the banks to meet the benchmark. The change in stance onhigher Core Tier 1 came along with the bailout package when the Central bank set a 9%CT1 target for 2011 and 10% for 2012 vs. the previous requirement of 8% and like inGreece, the IMF has established a fund of EUR 12bn earmarked for recapitalisation of financial system. Based on our estimates, the total capital shortfall for BCP would beEUR 700m, EUR 1.1bn in case of BES and BPI will face additional capital requirement of EUR 250m.

Assumptions underlying the stress test ISP UCG BMPS UBI BAPORWAs 2010 332,132 454,850 109,238 94,361 94,878 RWAs 2012 BL scenario 333,210 497,596 110,058 95,759 96,190 RWAs 2012 AD Scenario 359,113 529,847 113,072 97,535 97,926 Average growth vs. 2010 in the adverse scenario 3.8% 3.2% 1.4% 0.9% 0.9%

GOP 2010 7,003 10,864 2,140 1,027 868

Cumulative GOP 2011-12 BL scenario 14,182 21,186 4,565 2,280 1,904 As x of GOP 2010 2.0 2.0 2.1 2.2 2.2 Cumulative GOP 2011-12 AD scenario 12,314 19,267 3,809 2,185 1,605 As x of GOP 2010 1.8 1.8 1.8 2.1 1.8 Cum GOP 2011-12 AD scenario (2010 Stress test) 17,782 20,374 4,350 2,441 2,230

Provisions banking book 2010 3,072 7,084 1,194 757 873 Cumulative provisions banking book 2011-12e BL scenario 5,365 12,991 2,199 1,553 1,599 As x of 2010 1.7 1.8 1.8 2.1 1.8 Cumulative provisions banking book 2011-12e AD scenario 9,883 19,195 3,995 2,325 2,736 As % of RWAs 2.8% 3.6% 3.5% 2.4% 2.8%As x of 2010 3.2 2.7 3.3 3.1 3.1 Cumulative provisions banking book 2010-11e AD (2010 stres 11,793 23,058 4,802 3,037 2,746

Cumulative trading losses 2011-12e AD scenario 1,197 1,131 369 73 398 of which on sovereign book 554 650 201 21 181

Cumulative trading losses 2010-11e AD (2010 stress test) 2,501 2,049 740 78 506 of which on sovereign book 1,915 1,608 675 70 323

Cumulative net profit 2011-12e BL scenario 4,148 4,976 903 225 443 As % of RWAs 1.2% 1.0% 0.8% 0.2% 0.5%Cumulative net profit 2011-12e AD scenario 165- 1,485- 942- 357- 573-As % of RWAs 0.0% -0.3% -0.8% -0.4% -0.6%

Cost of funding 2010 (bp) 159 160 114 84 176 Cost of funding 2012 adverse scenario (bp) 354 360 270 264 319 Delta 195 200 156 180 143


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Fig. 13: Excess capital required for Core Tier I @ 10%Central bank benchmark of Core Tier 1 by 2012


Note: Core Tier 1 is adjusted for the debt swap and rights issue for BCP. For BES adjusted for sale of Bradesco and debtexchange offer

Will the favourable stress test open up funding gateways? This perhaps is the keyquestion for Portuguese banks that are shut from the wholesale markets for a long timeand continue to rely on ECB for liquidity support. We do not see these results bringingany change in the funding environment till the macro and sovereign concerns recede.Given the two years of recessionary economic outlook and with the rating agenciesassigning junk status, funding will be even more difficult to come by. With the Portuguesebanks setting a target of loan to deposit ratio of 120% by 2012 implies increasedpressure on margins and revenues from deleveraging and higher cost of retail funding.

Scandinavia

As expected Scandi banks all passed and scan well on various measures coming out of the stress test. Amongst other factors; 1) Scandis have high starting core tier 1 ratios,well capitalized next to peers in a European context, 2) sovereign exposure to peripheralcountries is very limited, 3) pre-provision profit capacity has recently increased for theNorwegian and Swedish banks and 4) loan books are more defensive reflected in thestress test loan loss rates. Thus the banks end with higher core tier 1 ratios in adversescenarios under the EBA stress tests. It is worth noting that RWAs used are including thetransitional floors. Under full IRB implementation and removal of floors ratios would behigher with lower RWAs. Note that Swedbank core tier 1 would also be 1.8% higher (under Basel 2) with inclusion of Swedbank preference shares, which are fully lossabsorbing and convert to ordinary shares in Q2 2013.

Spain(see appendix for additional data / analysis)

We fully support the Bank of Spains exercise in transparency, which once again is astep ahead of the rest of the countries tested by the EBA (both in terms of disclosure andnumber of banks tested). However, knowing how big the problem is (in this caseexposure to additional property losses), will not always be a solution in itself. Althoughmeasures have been taken (additional provisions, consolidation and higher capitalstandards), we believe additional capital will be needed. The Bank of Spain concludesthat in an adverse scenario, including generic provisions / mandatory convertibles (whichwe believe should be included), Spanish banks do not need to raise additional capital.

Our view would be that for many domestic banks the potential for significant additionallosses on Spanish real estate is more a base case scenario and that in reality the banks

1.2%1.6%

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will not be able to run down core capital to 5.0% but would actually have to raise it. Infact, the Bank of Spains own regulation on capital sets an 8.0% minimum for corecapital. Given the continued challenging economic environment and difficulties inaccessing funding markets, we expect Spanish domestic banks to have to continue tostrengthen capital / provisions.

Fig. 14: When is enough, enough?Spanish banking system buffer vs. 5.0% core capital

Source: Bank of Spain, Nomura research Provisions = generic / specific, PPP= pre-provision profits, tax impact, Capitalbuffer vs. 5.0% and all other mitigating factors

The Bank of Spain, as they did last year, have also published detailed information onloan exposure and level of losses by loan portfolio. We believe this data highlights our current view that the bulk of losses lie in real estate developers (41% of total creditlosses) and that BBVA / SAN are in a relatively strong position vs. the rest of the Spanishbanks. The savings banks also appear to be in the weakest position, with real estatedeveloper losses accounting for 57% of their losses and being in a weaker position tooffset these losses (either from existing capital or capacity to generate profits).

In total the Spanish banks generate losses of EUR 169bn, which equates to an expectedloss ratio of 5.4%. The bulk of these losses are in the credit book or EUR 159bn or a lossratio of 5.1%. To offset these losses there is an aggregate buffer of EUR 240bn, whichincludes EUR 83bn of provisions (generic / specific), EUR 90bn of pre-provision profitand tax benefits and EUR 68bn of capital and other mitigating factors.

83.0

71.6

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Fig. 15: Overview of Spanish stress test results

Source: EBA

The figure below highlights some of the details across the different subgroups and theexposure to the various loan books, expected loss ratio and the contribution to totallosses. We can see from this table that CRE (corporate lending to real estate developersand foreclosed assets) are the key risk area for Spanish banks, accounting for c. 41% of total losses and with a loss ratio of 20%.

Fig. 16: Loan book exposures

Source: EBA

Is this a realistic scenario? As with last year we do see the aggregate losses assignificant. However, while in the stress test there are a number of mitigating factors, wethink that in reality some of these will not be available for the banks (e.g. being able torun core capital down to 5.0% when the Bank of Spains minimum is 8.0%). The figurebelow highlights the capital surplus or deficit vs. a core capital minimum of 5.0% (whereno additional capital is required), 8.0% (where some EUR 8.0bn additional capital isrequired) and 10% (where over EUR 30bn is needed).

EUR bn Spain Intl. banks Mid-sizedbanks Cajas

Credit losses -159.2 -64.6 -19.0 -75.6Sovereign / banks -1.3 -0.4 -0.3 -0.6

Corporate -26.9 -13.9 -3.1 -9.8 CRE -65.9 -12.8 -9.7 -43.4SME -23.3 -8.7 -4.0 -10.6

Mortgages -13.4 -5.8 -1.1 -6.5 Retail -28.4 -23.0 -0.7 -4.7

Trading / equity -9.6 -4.5 -1.2 -4.0

Total losses -168.8 -69.1 -20.2 -79.6

Specific provisions 65.5 24.3 7.6 33.7PPP 79.1 62.0 6.6 10.5Tax 10.7 -2.9 1.8 11.8

Difference +/- -13.6 14.3 -4.2 -23.7

BoS new regulation 14.5 0.0 0.5 13.9Div / other 3.8 2.7 0.9 0.1

Difference +/- 4.7 17.1 -2.8 -9.6Capital required @ 5% 1.6 0.0 0.3 1.2

Generic provisions 17.6 4.6 1.3 11.7

Difference +/- 22.2 21.7 -1.5 2.0Capital required @ 5% 0.1 0.0 0.3 1.2

2012: other lossabsorbing elements 9.2 2.0 3.3 3.9

Difference +/- 31.4 23.7 1.8 5.9Capital required @ 5% 0.0 0.0 0.0 0.0

Surplus vs 5% 71.6 41.9 6.9 22.8

% of totalassets

Expected loss % total loss% of total

assetsExpected

loss% total loss

% of totalassets

Expectedloss

% total loss% of total

assetsExpected

loss% total loss

Sovereign / banks 22% 0.2% 1% 25% 0.1% 1% 18% 0.6% 2% 20% 0.2% 1%

Corporate 22% 4.0% 17% 27% 3.3% 22% 24% 4.1% 17% 6% 5.6% 13%CRE 11% 20.3% 41% 4% 20.0% 20% 16% 18.9% 51% 7% 20.7% 57%SME 9% 8.2% 15% 5% 10.3% 13% 19% 6.6% 21% 5% 7.6% 14%

Mortgages 29% 1.5% 8% 28% 1.3% 9% 21% 1.6% 6% 13% 1.6% 9%Retail 7% 12.8% 18% 10% 14.4% 36% 2% 9.6% 4% 2% 8.6% 6%Total 100% 5.1% 100% 100% 4.1% 100% 100% 5.9% 100% 39% 6.2% 100%

Spain total International banks Mid-sized banks Cajas


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Fig. 17: Surplus / deficit of capital vs. 5.0%, 8.0% and 10.0% minimumAll other conditions unchanged

Source: Bank of Spain, Nomura research Banco March excluded as core capital does not drop below 17% in any scenario

UKThe UK banks appear to be in a relatively strong position, according to the EBA stresstest. This is not surprising, as the FSA has effectively been requiring the UK banks tooperate under a stressed capital requirement, since the onset of the crisis, in addition tomeeting international minimum capital requirements, although the results of individualbank stress tests have not been made public. As the FSA has indicated, the stressedcapital requirement effectively becomes the limiting capital requirement.

This is partly due to their higher starting CT1 ratios of near 10%, compared with thesurvey average figure of 8.9%. However, on a stressed basis, the average UK CT1 ratiowould fall to 7.6%, similar to the average of 7.7%. This illustrates that the UK banks aremore than averagely leveraged to a potential downturn, even if their starting point isstronger, given the recapitalisations undertaken during the crisis.

Most UK banks were found to have sustained CT1 ratios above 7% under a stressedenvironment, with RBS at 6.3%. In particular, the UK banks have relatively limitedexposure to sovereign risks in the smaller peripheral European markets and while theEurozone crisis is perceived to be driven by these markets, they are likely to be relativelyunaffected. As the EBA itself commented, a countrys sovereign funding costs and itsbanking sector funding costs are likely to be closely linked and as long as the UK isperceived to be relatively less affected by the Eurozone solvency issues, the UK banksare likely to be able to continue to fund, when overall markets are relatively open. Takingimpairments up to 40% of sovereign exposure to the three smaller peripheral bankingmarkets would involve fairly trivial additional charges, compared with the sums chargedin the test.

The more interesting question from the stress test results is whether the assumptionswere sufficiently rigorous. We calculate that the tests assumed cumulative 2011-12 PBTreduction equivalent to 143-224bps of counterparty exposures. We would regard this asa relatively stressed environment, but not what could be regarded as a worst case levelof charges in the event of a severe downturn. The additional loss assumptions areequivalent to 1-2 years of peak charges incurred by the banks in the recent downturn.However, for Lloyds, the lost PBT would be equivalent to half of the (admittedly veryhigh) impairment charge taken in 2009. The stress tests effectively emphasize that UKbank solvency depends on the scale of further losses to be incurred against UK booksand the depth and length of any further downturn. We would highlight the CRE area asparticularly important. Have losses really peaked since the downturn, in which casecumulative losses will be significantly less than in the other major recessions of the pastforty years? Or, alternatively, will losses be extended over a much longer period of time,

-5%

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in this downturn, as the effects of deleveraging make the effects of this cycle moreextended than previous downturns?

The results of the individual banks are broadly consistent with our views of vulnerabilityto further credit deterioration. It is no surprise that HSBC appears the most resilient of the major banks to a credit downturn. It is less leveraged to credit than the system as awhole and also has a relatively lower exposure to CRE.

By contrast, we would regard Lloyds and RBS as the most leveraged to a further deterioration in credit, due to their legacy portfolios, notably in CRE. The EBA stress test

results in a lower stressed CT1 ratio at RBS. In part this may be due to the assumptionof average trading profits for the past five years and therefore effectively a repeat of the2008 losses (this also penalises Barclays and HSBC); the Lloyds profits beforeimpairment assumption is very similar to our estimate, whereas for the other banks, thestressed assumption is well below our estimate. We regard Lloyds and RBS as relativelysimilarly exposed to credit deterioration.

Barclays is in an intermediate position. We view the group as being relatively less gearedto credit deterioration, but with a greater leverage to capital markets activities. The loanportfolio weathered the crisis relatively well, in particular, due to a relatively low exposureto CRE. By contrast, the group is more exposed to the wholesale markets, through therelative significance of BarCap.


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Appendix additional data / analysisSpanish banks

The following charts summarise the results of the Bank of Spain stress test, whichincludes additional information regarding exposure of the loan book and loss ratios.While the formal EBA benchmark excludes generic provisions and convertibles after 2012, we believe it is more appropriate to include these in the analysis. In any case itdoes not change our view that domestic Spanish banks will have to strengthen further both capital ratios and provisions. CT1 = core tier I at 2012 excluding all mitigatingfactors, CT2 = capital at 2012 including mitigating factors and recognised measures asof April 30 2011 and CT3 = Bank of Spain recognised core capital including all mitigatingfactors.

Fig. 18: Core capital results for the Spanish banks5.0% = minimum

Source: Bank of Spain, Nomura research Banco March not in scale as core capital in excess of 25%

Below highlights the change in percentage points of the core capital from 2010 reportedlevels to the core capital level before any mitigating factors (i.e. as an indicator of therelative impact of the stress losses on capital).

Fig. 19: % p.p. change in capital ratios following stress testExcludes all mitigating factors

Source: Bank of Spain, Nomura research

0%

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Figure 20 highlights the % loss ratio as a percentage of risk weighted assets (RWA).

Fig. 20: Credit loss as a % RWA

Source: Bank of Spain, Nomura research

Figure 21 below highlights the distribution of credit risk. The data for BBVA and SANreflect group level data. The banks are ranked from left to right based on exposure toreal estate developers (i.e. to the left means greater relative exposure).

Fig. 21: Distribution of credit risk

Source: Bank of Spain, Nomura research *CRE real estate developers and foreclosed assets

Figure 22 highlights the distribution of credit losses by portfolio. Of the total losses c.41% are generated by real estate developer (CRE), although this varies significantlyacross the various banks (the banks are ranked from left to right based on % losses fromCRE). The higher retail losses for BBVA and SAN reflect a stressed scenario for the totalgroup (and therefore higher retail losses from emerging markets).

-16%

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Fig. 22: Distribution of credit losses by type

Source: Bank of Spain, Nomura research *CRE = real estate developers and foreclosed assets

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Appendix A-1

Analyst Certification

We, Jon Peace, Robert Law, Domenico Santoro, Daragh Quinn, Nathan Archer, Prathmesh Dave, Omar Keenan and TathagatKumar, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or allof the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directlyor indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our

compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,Nomura International plc or any other Nomura Group company.


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Important Disclosures Online availability of research and additional conflict-of-interest disclosures Nomura Japanese Equity Research is available electronically for cl ients in the US on NOMURA.COM, REUTERS, BLOOMBERG andTHOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it i s available on NOMURA.COM, REUTERS andBLOOMBERG. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web pagehttp://go.nomuranow.com/research/globalresearchportal or requested from Nomura Securities International, Inc., on 1-877-865-5752. If youhave any difficulties with the website, please email [email protected] for technical assistance.

The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, aportion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions oncommunications with covered companies, public appearances, and trading securities held by a research analyst account.

Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for thesales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarilyresponsible for marketing Nomuras Equity Research product in the sector for which they have coverage. Marketing Analysts may alsocontribute to research reports in which their names appear and publish research on their sector.

Distribution of ratings (US) The distribution of all ratings published by Nomura US Equity Research is as follows: 40% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 10% of companies with thisrating are investment banking clients of the Nomura Group*. 53% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 3% of companies with thisrating are investment banking clients of the Nomura Group*.7% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 0% of companies with thisrating are investment banking clients of the Nomura Group*. As at 30 June 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.

Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with thisrating are investment banking clients of the Nomura Group*. 40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies withthis rating are investment banking clients of the Nomura Group*.11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 14% of companies withthis rating are investment banking clients of the Nomura Group*. As at 30 June 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.

Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008 The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited managementdiscretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriatevaluation methodology such as discounted cash flow or multiple analysis, etc.

STOCKS A rating of ' Buy' , indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ' Neutral' , indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ' Reduce' , indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ' Suspended' , indicates that the rating and target price have been suspended temporarily to comply with applicable regulations

and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transactioninvolving the company. Benchmarks are as follows: United States/Europe : Please see valuation methodologies for explanations of relevant benchmarks for stocks(accessible through the left hand side of the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal );GlobalEmerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology.

SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States : S&P 500; Europe : Dow Jones STOXX 600; Global Emerging Markets (ex-Asia) : MSCI EmergingMarkets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from30 October 2008 and in Japan from 6 January 2009 STOCKS


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Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of ' Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving thesubject company. Securities and/or companies that are labelled as ' Not rated' or shown as ' No rating' are not in regular research coverage of the Nomura entityidentified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies.

SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is ) a positiveabsolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutralabsolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negativeabsolute recommendation.

Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings inEurope, Middle East and Africa, US and Latin America published prior to 27 October 2008) STOCKS A rating of '1' or ' Strong buy' , indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next sixmonths. A rating of '2' or ' Buy' , indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the nextsix months. A rating of '3' or ' Neutral' , indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or ' Reduce' , indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or ' Sell' , indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled ' Not rated' or shown as ' No rating' are not in Nomura's regular research coverage. Nomura might not publish additionalresearch reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein.

SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan : TOPIX; United States : S&P 500, MSCI World Technology Hardware & Equipment; Europe , by sector -Hardware/Semiconductors : FTSE W Europe IT Hardware; Telecoms : FTSE W Europe Business Services; Business Services : FTSE W Europe;

Auto & Components : FTSE W Europe Auto & Parts; Communications equipment : FTSE W Europe IT Hardware; Ecology Focus : BloombergWorld Energy Alternate Sources; Global Emerging Markets : MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price,subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn'tthink the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from theintrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within thishorizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downsideimplied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%.

SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is ) a positiveabsolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutralabsolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negativeabsolute recommendation.

Target Price A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be

impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if thecompany's earnings differ from estimates.


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