Creating Value in Banking 2004 051304

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WINNERS IN THE AGE OF THE TITANS

PREFACE

Banking is changing rapidly as the industry consolidates and financial markets become more globaland competitive. We believe that financial executives should focus rigorously on creating valueimproving profitability and growthif their companies are to benefit from the industrys rapid con-centration.

Building competitive advantage and creating superior value must be managements primary goals.Since its founding more than 40 years ago, The Boston Consulting Group (BCG) has analyzed thedrivers of value creation for clients across industries. In recent years, we have published annual stud-ies that analyze the worlds top-performing companies in order to build an understanding of leading

players. Winners in the Age of the Titans: Creating Value in Banking 2004 , our second annual studyof global banks, analyzes shareholder value creation in banking, including universal banks and spe-

cialist financial-services companies.

For details of this reports approach, please see the Appendix, which examines our sample and meth-odology.

Walter Sinn Ranu Dayal David Pitman

Gerold Grasshoff Thomas Herbeck

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NOTES TO THE READER

About the Authors

Walter Sinn is a vice president and director in the Frankfurt office of The Boston Consulting Group.Ranu Dayal is a vice president and director in the firms New York office. David Pitman is a vice

president and director in BCGs Sydney office. Gerold Grasshoff is a manager in the firms Berlinoffice. Thomas Herbeck is a manager in BCGs Frankfurt office.

Acknowledgments

Wed like to thank several peopleincluding many from the Financial Services and Corporate Fi-nance and Strategy practice areaswho were involved in preparing this report. In particular, the au-thors would like to thank Robert Lauter.

For Further Information

For further information on the report and to learn more about BCGs value-management capabilitiesin financial services, please contact:

Europe Americas Asia-PacificWalter Sinn Ranu Dayal David PitmanVice President and Director Vice President and Director Vice President and DirectorBCG Frankfurt BCG New York BCG Sydney+49 69 9150 2188 +1 212 446 2986 +61 2 9323 5661

[email protected] [email protected] [email protected]

Related Studies

Investment Banking and Capital Markets, Fourth Quarter 2003 Edition, BCG Report March 2004

The Path to Value Creation: Global Corporate Banking 2003, BCG Report November 2003

Back to Fundamentals, BCG Value Creators Report 2003

Succeed in Uncertain Times: A Global Study of How Todays Top Corporations Can Generate ValueTomorrow, BCG Value Creators Report 2002

Breakups Are Not the Only Solution, BCG Conglomerates Report 2002

Dealing with Investors Expectations: A Global Study of Company Valuations and Their StrategicImplications, BCG Value Creators Report 2001

Disclaimer

The Boston Consulting Group is a general management consulting firm that is a global leader inbusiness strategy. Founded in 1963, the firm now operates 60 offices in 37 countries.Although BCGhas a substantial financial-services consulting business, this report, which we now publish annually,is not intended to provide investment advice to any party. Any investment decision should be madeonly after independent review and analysis. For further information, please visit our Web site at

www.bcg.com. If you have questions or comments about Winners in the Age of the Titans: CreatingValue in Banking 2004, please contact us at [email protected].

BCG Page 4
mailto:[email protected]:[email protected]:[email protected]://www.bcg.com/mailto:[email protected]:[email protected]://www.bcg.com/mailto:[email protected]:[email protected]:[email protected]


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EXECUTIVE SUMMARY

Market values for banks recently rose to high levels, exceeding the

peaks of 2000 and 2001. To reach these unprecedented valuations, the banking industry clearly outperformed the overall market during the fiveyear period between 1999 and 2003. Banks showed their strongest per-formance yet in 2003, when their total shareholder return (TSR) was 45

percentsubstantially above shareholder returns for the overall market. Astock market appreciation of more than $1.3 trillion in banks total marketcapitalization was backed by improved fundamental performance. Butmarket expectations for banks future performance increased even faster.In fact, changing market expectations drove volatility in bank valuations.

Banks Performed Strongly

in 2003TSR

19992003

37.8%

1.5%6.4%

44.8%

2003

Banking All industries

Banks Performed Strongly

in 2003TSR

19992003

37.8%

1.5%6.4%

44.8%

2003

Banking All industriesBanking All industries

2003 2002 2003

Banks Profitability Increasedin 2003

Average after-tax ROE

1999-2003

15.1%13.0%

14.4%

2002 20032003 2002 2003

Banks Profitability Increasedin 2003

Average after-tax ROE

1999-2003

15.1%13.0%

14.4%

2002 2003

Higher profitability and growth improved fundamental values. An in-

crease in average return on equity after tax (ROE) from 13 percent to 14.4percent from 2002 to 2003, together with a doubling of the organic growthrate to almost 7 percent, drove fundamental values in banking in absoluteterms to unprecedented levels. Companies with extraordinary profitabilitycan be found in nearly every country; only two countries, Germany andJapan, experienced a significant profitability squeeze, with banks thereoperating on average with negative ROE in 2003.

Growth and consolidation were high on the agenda as more competi-

tors used the growth lever and as a few U.S.-dominated global banking

titans emerged. The five largest banks raised their market cap by 18 per-

cent per year between 1999 and 2003, increasing their share in worldwidebanking from 13 percent to more than 16 percent by the end of 2003. Withthe megamergers of Bank of America/FleetBoston and JP MorganChase/Bank One, two new banking titans are joining the still-exclusivecompany of Citigroup and HSBC, with market caps of more than $120 bil-lion and an average size of more than $180 billion. By their presence alone,these giants will have significant impact on future consolidation worldwide.

The Concentration of MarketCapitalization Increased

16%17%

13%

1998 2002 2003

Five largest companies share of totalbanking market capitalization

Dec. 31, 1998

The Concentration of MarketCapitalization Increased

16%17%

13%

1998 2002 2003

Five largest companies share of totalbanking market capitalization

Dec. 31, 1998

Investment Banking Was the Top-Performing Business

1999-2003 2003 20032002

13.0%

53.4%

43%

35%

51%

40%

Total shareholder

return

Expectation

premium

Investment bankingBanking

Investment Banking Was the Top-

Performing Business

1999-2003 2003 20032002

13.0%

53.4%

43%

35%

51%

40%

Total shareholder

return

Expectation

premium

Investment bankingBankingBanking

Investment banking outperformed other segments. With an average an-nual shareholder return of 13 percent between 1999 and 2003and one of53 percent in 2003investment banking was the best-performing banking

business. Three main drivers underpinned this excellent performance: suc-cessful cost-cutting programs, strong fixed-income activity, and expecta-tions for the recovery of equity and advisory businesses.

U.S. and U.K. banks dominate the performance rankings. True company performance is measured by risk-adjusted relative total shareholderreturn (RRTSR), i.e. by adjusting TSR for risk and for the varying impactof domestic markets. Lehman Brothers, HSBC, and Citigroup led the rank-ings during the five year period. Fundamentals drove stock market per-

formance. Top performers combined above-average profitability of 18 per-cent with strong annual organic growth rates of 14 percent.

The Top Five Companies(1999 2003)

11.7%

10.1%

10.1%

8.6%

8.5%

Ranking by RRTSR

LehmanBrothersHSBC Holding

CitigroupBank of NovaScotiaBarclays

The Top Five Companies(1999 2003)

11.7%

10.1%

10.1%

8.6%

8.5%

Ranking by RRTSR

LehmanBrothersHSBC Holding

CitigroupBank of NovaScotiaBarclays

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I. THE STATE OF THE BANKING INDUSTRY

Business Confidence Improved Substantially

At the beginning of 2003, there was considerable caution about the state of the world economy andeven fear of deflation. In the second half of 2003, fiscal and monetary stimuli in many parts of theworld contributed to a clear pickup in economic activity and a marked improvement in business con-fidence.

Banks performed exceptionally well in 2003. The banking sector greatly benefited from the recov-ering economy. In fact, the totalmarket capitalization of the global

banking industry during 2003 in-

creased by 42 percent to $4.5 tril-lion, exceeding the previous all-time high of $4.2 trillion in January2001. In terms of returns to share-holders (taking capital gains anddividends into account), bankingstocks significantly outperformedthe markets: they appreciated by44.8 percent compared with the av-erage industry return of 37.8 per-cent. (See Exhibit 1.)

Exhibit 1. Banks Performed Exceptionally Well in 2003

Total market capitalization($trillions)

Total shareholder return (%)(1)

+0.3% -9.1% -11.3% +42.2%+16.5%

3.38

3.94 3.953.59

3.18

4.53

1999 2000 2001 2002 2003

BanksAll industries

1998 1999 2000 2001 2002 2003

32.5

5.1

-12.9

15.4

-15.3 -16.2

-10.9

-16.8

44.8

37.8

EOY

+6.0% +1.5%+6.4%

(1) Includes capital gains and dividends.Sources: T.F. Datastream; BCG analysis.

Exhibit 1. Banks Performed Exceptionally Well in 2003

Total market capitalization($trillions)

Total shareholder return (%)(1)

+0.3% -9.1% -11.3% +42.2%+16.5%

3.38

3.94 3.953.59

3.18

4.53

1999 2000 2001 2002 2003

BanksAll industries

1998 1999 2000 2001 2002 2003

32.5

5.1

-12.9

15.4

-15.3 -16.2

-10.9

-16.8

44.8

37.8

EOY

+6.0% +1.5%+6.4%

(1) Includes capital gains and dividends.Sources: T.F. Datastream; BCG analysis.

Over the past five years, banking outperformed the overall market. Like many industries, bank-ings impressive one-year perform-ance in 2003 is partly explained bya lackluster 2002. Nevertheless, theunderlying strength of banking isdemonstrated by the fact that be-tween 1999 and 2003, the industrygenerated a total shareholder return

(TSR) of approximately 6.4 per-centfour times better than theglobal average and exceeded onlyby oil and gas, engineering and ma-chinery, and chemicals, which areless vulnerable to short-termmovements in the economy. (SeeExhibit 2.)

Exhibit 2. Banking Stocks Outperformed the Average of All Industries Over Five Years

Total shareholder return,

2003(1)Total shareholder return,

19992003(1)

1.5%

0.6%

-0.2%

2.3%

0.8%

1.5%

11.4%

-5.6%

1.8%

3.4%

6.8%

2.0%

6.4%

6.9%

-4.4%

37.8%

20.7%

29.8%

31.9%

32.6%

33.7%

35.4%

35.4%

36.0%

39.5%

40.5%

42.6%

44.8%

56.3%

66.2%

Oil and gas

Chemicals

Automotive

Transportation

Electricity

Utilities

Retail

Pharmaceuticals

Insurance

Media and entertainment

Telecommunications

Information technology

World

Engineering and machinery

Banking

(1) Includes capital gains and dividends.Note: All data were calculated after conversion to U.S.$.Sources: T.F. Datastream; BCG analysis.

Exhibit 2. Banking Stocks Outperformed the Average of All Industries Over Five Years

Total shareholder return,2003(1)

Total shareholder return,19992003(1)

1.5%

0.6%

-0.2%

2.3%

0.8%

1.5%

11.4%

-5.6%

1.8%

3.4%

6.8%

2.0%

6.4%

6.9%

-4.4%

37.8%

20.7%

29.8%

31.9%

32.6%

33.7%

35.4%

35.4%

36.0%

39.5%

40.5%

42.6%

44.8%

56.3%

66.2%

Oil and gas

Chemicals

Automotive

Transportation

Electricity

Utilities

Retail

Pharmaceuticals

Insurance

Media and entertainment

Telecommunications

Information technology

World

Engineering and machinery

Banking

(1) Includes capital gains and dividends.Note: All data were calculated after conversion to U.S.$.Sources: T.F. Datastream; BCG analysis.

Stock market appreciation in 2003 was backed by improved fundamentalsbut market expec-

tations rose even faster. Market capitalization is composed of a fundamental value and an expecta-tion premium. In fact, the $1.3 trillion increase in banking market cap in 2003 was driven equally by

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improving fundamentals and rising expectation premiums. However, growth in expectations wasmore significant: while funda-mental values grew 30 percentcompared with 2002, the expecta-tion premium grew by 60 percent,from $1.1 trillion to $1.8 trillion.As a result, at the end of 2003,expectation premiums slightlyexceeded 2000 levels. (See Ex-hibit 3.)

This analysis offers powerfulmessages about bank valuationsover the past five years. It shows

that changing expectations aboutthe future performance of the sec-tor had a substantial impact on thechange in market capitalization during the 2001/2002 downturn and the recent upswing in 2003. Italso corrects the perception that there was a fundamental crisis in the banking sector that drove theapproximately $800 billion loss of market capitalization between 2000 and 2002. With fundamentalvalues at record levels, confidence in banking is definitely back.

Exhibit 3. The Increase of Market Capitalizat ion in Banking in 2003 Was Backed Up by ImprovedFundamental Performance

Legend

x%

Market capitalization

Absolute expectation

premium= market cap minus

fundamental value

Fundamental value

based on analysis ofcompany fundamentals

Expectation premium in

% of market cap

Expectation premium (banking worldwide)

1999 2000 2001 2002 2003(1)

40.2%34.9%41.6%39.9%49.4%

$trillions

1.9 1.61.5

1.1

1.8

2.02.4

2.1 2.12.7

3.9 4.03.6

3.2

4.5

(1) If historic data for 2003 were not available, calculation was based on IBES consensus forecasts.Sources: T.F. Datastream; BCG analysis.

Exhibit 3. The Increase of Market Capitalizat ion in Banking in 2003 Was Backed Up by ImprovedFundamental Performance

Legend

x%

Market capitalization

Absolute expectation

premium= market cap minus

fundamental value

Fundamental value

based on analysis ofcompany fundamentals

Expectation premium in

% of market cap

Expectation premium (banking worldwide)

1999 2000 2001 2002 2003(1)

40.2%34.9%41.6%39.9%49.4%

$trillions

1.9 1.61.5

1.1

1.8

2.02.4

2.1 2.12.7

3.9 4.03.6

3.2

4.5

(1) If historic data for 2003 were not available, calculation was based on IBES consensus forecasts.Sources: T.F. Datastream; BCG analysis.

Higher profitability and recovering growth improved fundamental performance in 2003 . In-creasing profitability and growing while profitability is above the cost of equity are the primary waysto increase TSR. Both value levers are captured by the performance metrics added value on equity

(AVE) and the change (delta) in added value on equity (DAVE). AVE is the difference between af-ter-tax profits and the opportunity costs of alternative investments of equity capital. Dividing bothquantities by equity yields the economic spreadin other words, the difference between return onequity (ROE) and the cost of equity (COE).

In 2003, value creation in world bankingmeasured by AVEwas driven mostly by profitablegrowth rather than increasing

profitability. Although ROE rosefrom 13.0 percent to 14.4 per-

cent, most of this increase wasoffset by the rising cost of eq-uity, with the result that the eco-nomic spread increased by only0.3 percent. Banks thereforemaintained their spread whilegrowing their invested equity

base by 17.4 percent, almostdouble that of the previous year,resulting in a 16.3 percent in-crease in AVE. (See Exhibit 4.)

Exhibit 4. Fundamental Value Creation in 2003 Was Based on Increased Profitability and Growth

Added value on equity ($ billions)

Profitability and cost of equity Growth (3) of equity in banking ($ trillions)

14.4%13.0%

14.0%17.5%16.7%

10.9%9.8%9.5%9.3%11.3%

1999 2000 2001 2002 2003 1999 2000 2001 2002 2003

ROE(1)

COE

(2) (2)

57

123

7369 72

1999 2000 2001 2002 2003

78.4% -40.9% -22.3% 27.6%

(1) After tax.(2) If historic data for 2003 were not available, calculation was based on IBES consensus forecasts.(3) Organic and external growth.Sources:T.F. Datastream; BCG analysis.

1.281.51

1.621.78

2.0918.0% 7.3% 9.6% 17.4%

Exhibit 4. Fundamental Value Creation in 2003 Was Based on Increased Profitability and Growth

Added value on equity ($ billions)

Profitability and cost of equity Growth (3) of equity in banking ($ trillions)

14.4%13.0%

14.0%17.5%16.7%

10.9%9.8%9.5%9.3%11.3%

1999 2000 2001 2002 2003 1999 2000 2001 2002 2003

ROE(1)

COE

(2) (2)

57

123

7369 72

1999 2000 2001 2002 2003

78.4% -40.9% -22.3% 27.6%

(1) After tax .(2) If historic data for 2003 were not available, calculation was based on IBES consensus forecasts.(3) Organic and external growth.Sources:T.F. Datastream; BCG analysis.

1.281.51

1.621.78

2.0918.0% 7.3% 9.6% 17.4%

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Solid underlying growth in profitably invested equity drove the rebound in market capitalization.This growthhas led to renewed confidence in the sector reflected in a large increase in the expecta-tion premium. The challenge in the future will be to justify growing expectations with strong funda-mental performance.

Increasing confidence in banking reinforced improved fundamentals.

Continued strong performance is necessary to justify growing expectations.

Growth and Consolidation Reappeared on the Agenda

Accelerating growth is at the top of the CEO agenda. Stock markets reward change, which is gen-erated either by an increase in ROE or by profitable growth. The lever with the greatest impact onvalue creation is organic growth. Adjusting overall equity growth rates for mergers and acquisitionsand the impact of currency fluctuation shows organic growth rates of 6.7 percent in 2003, almostdouble the 3.5 percent organic growth rate in 2002. (See Exhibit 4.) However, these figures are stillfar below the 2000 organic growth rate of 18 percent and do not match the average annual organicgrowth rate of 9 percent between 1999 and 2003. Developing new products and services only afterdeveloping a deep understanding of customers and clients is vital to improving growth as the industryconsolidates rapidly.

Market capitalization is increasingly concentrated. The share of global bankings market value,represented by the five biggest

banks, has increased from 12.9

percent to 16.1 percent in the pastfive years. The top five banks bymarket value in 2003 have ex-

panded their market cap, on aver-age, by 17.9 percent per year overthe past five yearsmore thantwice as fast as their mid-capcompetitors. (See Exhibit 5.) Inthe small-cap segment, apprecia-tion was still better. This increasecan be attributed partly to small

banks being perceived as takeovertargets, which adds a premium totheir value.

Exhibit 5. The Concentration of Market Capitalization in the Banking Industry Is Increasing

Concentration of marketcapitalization

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

% of total market capitalization

% of total listed companies

Dec.

2003

Dec. 1998

Share of fivebiggest companies

12.9% 16.1%

Dec. 311998

100%

Dec. 312003

100%

Growth of average market cap,19992003

Mergers and acquisitions drive the market capitalization increase of five biggest companies

Biggest at Dec. 31, 2003

1-5 2150 51-100 >100

17.9%

6.2% 5.2%

8.5%

Sources:T.F. Datastream; BCG analysis.

6-20

7.4%

Exhibit 5. The Concentration of Market Capitalization in the Banking Industry Is Increasing

Concentration of marketcapitalization

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

% of total market capitalization

% of total listed companies

Dec.

2003

Dec. 1998

Share of fivebiggest companies

12.9% 16.1%

Dec. 311998

100%

Dec. 312003

100%

Growth of average market cap,19992003

Mergers and acquisitions drive the market capitalization increase of five biggest companies

Biggest at Dec. 31, 2003

1-5 2150 51-100 >100

17.9%

6.2% 5.2%

8.5%


6-20

7.4%

New banking titans are changing the consolidation game. The continued consolidation of the larg-est banks is creating a new era: the age of the banking titans. With the megamergers of Bank ofAmerica/FleetBoston and JP Morgan Chase/Bank One added to established giants Citigroup andHSBC, there are now four banking titans, each with market caps of more than $120 billion and anaverage size of $180 billion. (See Exhibit 6.)

To create value from mergers and acquisitions, it is imperative to realize the necessary cost and reve-

nue synergies. The primary sources for value creation have traditionally been cost synergies from re-

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ducing the geographic overlap ofretail branches. This has been thedriving force for the large dealsamong regional players in the late1990s and for most of the con-tinuing domestic mergers and ac-quisitions.

The megamergers that created thetwo latest banking titans lackgeographic overlap in their retail

branch systems and, thus, the cor-responding cost reduction poten-tial. They therefore have to real-

ize cost synergy savings in otherareas, such as corporate centerfunctions and IT. Such synergies, however, tend to be smaller and harder to realize. The standardiza-tion and harmonization of productsand the resulting processing, operations, and product manage-ment synergiesoffer more cost-saving potential. Revenue synergies from increasing sales of exist-ing products to an expanded customer base or improved pricing strategies tend to be even harder torealize and are usually smaller in scale. Nevertheless, it is possible to create shareholder value fromM&A without branch overlaps. For example, top-performing banking titan HSBC has successfullyraised profitability while following a cross-border expansion strategy, without the benefit of geo-graphic overlaps.

Exhibit 6. The Biggest Banks Are Becoming Even Bigger

0

40

80

120

160

200

240

280

0 10 20 30 40 50 60 70 80 90 100

Citigroup

Wells Fargo

The Royal Bank of Scotland

UBSBarclays

BNP

Paribas

Santander Central Hispano

Mitsub. Tok. Finl. Gp.

Deutsche Bank

National Australia Bank

Socit Gnrale

UniCredito Italiano

Royal Bank of CanadaNomura Holdings

Commonwealth Bank of Australia

Mitsuho Financial Group

Banca Intesa

ANZ Banking GroupToronto-Dominion Bank

Sanpaolo IMI

Banco Popular EspaolHVB Group

Market

capitalization($billions)

Ranking by market capitalization

Commerzbank

Crdit Agricole

Credit SuisseBBVA

Sources: T.F. Datastream; BCG analysis.

Bank of America/Fleet Boston

JP Morgan Chase/Bank One

Bank of Nova Scotia

HSBC Holdings

HBOS

Lloyds TSB

Exhibit 6. The Biggest Banks Are Becoming Even Bigger

0

40

80

120

160

200

240

280

0 10 20 30 40 50 60 70 80 90 100

Citigroup

Wells Fargo

The Royal Bank of Scotland

UBSBarclays

BNPParibas

Santander Central Hispano

Mitsub. Tok. Finl. Gp.

Deutsche Bank

National Australia Bank

Socit Gnrale

UniCredito Italiano

Royal Bank of CanadaNomura Holdings

Commonwealth Bank of Australia

Mitsuho Financial Group

Banca Intesa

ANZ Banking GroupToronto-Dominion Bank

Sanpaolo IMI

Banco Popular EspaolHVB Group

Market

capitalization($billions)

Ranking by market capitalization

Commerzbank

Crdit Agricole

Credit SuisseBBVA


Bank of America/Fleet Boston

JP Morgan Chase/Bank One

Bank of Nova Scotia

HSBC Holdings

HBOS

Lloyds TSB

We expect the banking titans, by their presence alone, to exert influence on the strategy of otherglobal players. Focusing on operations that are subscale compared with the titans and following sloworganic growth strategies are unlikely to guarantee independence anymore. The tremendous acquisi-tion power of the banking titanswith the smallest of the four almost double the size of the largestspecialistscreates tremendous imbalances. A new challenge for top management is to successfullysurvive in the age of banking titans.

We foresee three main potential consolidation scenarios. In the first scenario, the titans would take anactive part in European and Asian consolidation and primarily target leading national champions inmajor banking markets in those regions. In the second scenario, the titans would focus more on con-solidation in the U.S. market, where there is less risk and where synergies are easier to realize. In the

third scenario, domestic and regional players would take the lead in driving European and Asian con-solidation. For Europe, this would certainly produce further consolidation in national markets (espe-cially in Germany and Italy), but it would also increase the probability of large cross-border dealswithin the region. There are, moreover, significant barriers to entry in many major banking markets.These may make it hard for the titans to flex their muscles in certain national markets.

M&A transactions picked up in Asia-Pacific and Europe. U.S. companies led the merger boom ofthe late 1990s. That boom suffered a considerable slowdown in the United States when the countryseconomy faltered. Global M&A activities outside the United States, however, continued to grow, al-

beit more slowly than in the United States.

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Consolidation among banks inEurope and Asia-Pacific is nowincreasing. Smaller banks withoutdefensible niches and businessmodels are likely to become ripecandidates for mergers and acqui-sitions. Overall, the number oftransactions across regions is pick-ing up rapidly. North American

banks in particular have acquiredother players outside the UnitedStates and Canada, making theirshare of inter-regional deals jumpfrom 6 percent in 2002 to 12 per-

cent in 2003. (See Exhibit 7.) Citi-groups purchase of KoreanKorAm bank for about $2.7 billion is just one recent example.

E

So

E

So

xhibit 7. The Number of M&A Transactions in Banking Is Increasing

0

100

200

300

400

19 91 1 99 2 1 99 3 1 994 1 99 5 1 99 6 19 97 1 99 8 1 99 9 2 000 2 00 1 2 00 2 2 003

0

400

800

1200

1600

Trans-actions

withinrespective

region

Volumeof deals($billions)

Numberof deals

North America Europe As ia Pac if ic

WithinNorth America

Within Europe

WithinAsia-Pacific

0%

2%

4%

6%

8%

10%

12%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Trans-actionsacrossregions

Numberof cross-

regionaldeals

European banks

North American banksAsian-Pacific banks

urces: T.F. SDC; BCG analysis.

xhibit 7. The Number of M&A Transactions in Banking Is Increasing

0

100

200

300

400

1 99 1 1 992 1 993 1 99 4 1 99 5 1 99 6 19 97 1 99 8 1 99 9 2 000 2 001 2 00 2 2 003

0

400

800

1200

1600

Trans-actions

withinrespective

region

Volumeof deals($billions)

Numberof deals

North America Europe As ia Pac if icN orth America Eu ro pe Asia Pacif ic

WithinNorth America

Within Europe

WithinAsia-Pacific

0%

2%

4%

6%

8%

10%

12%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Trans-actionsacrossregions

Numberof cross-

regionaldeals

European banks

North American banksAsian-Pacific banks

urces: T.F. SDC; BCG analysis.

In the dawning age of the titans the following questions are gaining more and more importance.

How should you sustain competitive advantage in the age of the banking titans?

At what level of market capitalization does the number of predators threatening you decreasesignificantly? And, conversely, at what level do you become a predator yourself?

What sort of deal, either as an acquirer or as target, would provide a measurable bottom-lineimpact on your company and thus create additional value for shareholders?

How can you best prepare for playing an active role in banking consolidation?

Investment Banking Outperformed Other Segments

Sensitivity to market movements depends considerably on business focus. We classify banks ei-

ther as universal banks offering a broad range of products in retail and corporate banking, or as

members of five specialized banking segments. These segments are asset managers, consumer fi-

nance companies, investment banks, mortgage finance companies, and transaction banks. (For defini-

tions of these segments, please see the Appendix.) These groups have distinct differences in their

business models, which means they operate withdifferent risk-return dynamics and tradeoffs. TSRshould not be compared without taking this fact into account.

Two extremes illustrate the point. On the one hand, investment banks and asset managers, whose

revenues depend on prospering capital markets, show a high degree of sensitivity to market move-

ments. On the other hand, companies in mortgage financing are much more stable with respect to

market movements: they tend to underperform in upswings and outperform in downturns. (See Ex-

hibit 8.)

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Investment banks outperformed all other segments, with a 13 percent TSR between 1999 and

2003. Equity markets staged agradual recovery in 2003, with a

pronounced upturn in the lastquarter. Investment banks werethe best-performing segmentand generated a TSR of 53.4

percent in 2003 and 13 percent between 1999 and 2003. Evenafter allowing for the volatilityof investment banking, this isstill a remarkable return. Uni-versal banks followed, generat-ing a 46.3 percent TSR. Mort-

gage finance companies trailed,with a TSR of 19.6 percent in2003 and 4.6 percent over thefive year period. Such companies benefited least from the market surge.

Exhibit 8. Investment Banking Showed the Best Shareholder Performance Between 1999 and 2003

Total shareholderreturn,

2003 (%)


19992003 (%)

6.44.6

2.72.1

5.46.5

13.0

Average marketsensitivity,

1999-2003

1.10.8

1.61.21.21.1

1.6

Investmentbanks

Universalbanks

Consumerfinance

companies

Transactionbanks

Assetmanagers

Mortgagefinance

companies

AverageBanks


44.8

19.6

35.335.5

35.7

46.3

53.4

Exhibit 8. Investment Banking Showed the Best Shareholder Performance Between 1999 and 2003


2003 (%)


19992003 (%)

6.44.6

2.72.1

5.46.5

13.0

Average marketsensitivity,

1999-2003

1.10.8

1.61.21.21.1

1.6

Investmentbanks

Universalbanks

Consumerfinance

companies

Transactionbanks

Assetmanagers

Mortgagefinance

companies

AverageBanks


44.8

19.6

35.335.5

35.7

46.3

53.4

As highlighted earlier, the increase in market capitalization in 2003 is backed by fundamentals, butexpectations for future performance have risen even faster. Individual segments reveal a more differ-entiated picture: while the in-crease in market cap for in-vestment banking owes mainlyto rising expectations, market

expectations for mortgage fi-nance companies decreasedconsiderably. In other words,given the challenges that seg-ment currently facesmargin

pressures and rising interestratescapital markets do notconsider the current profitabilityand growth figures for mortgagefinance sustainable over a long

period. (See Exhibit 9.)

-30

-20

-10

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70

Exhibit 9. Investment Banks Gained the Most Benefit from Increasing Market Expectations

Market expectation versusshareholder performance, 2003

Total shareholder return, 2003 (%)

Valuationlevel

(expec-tationpremium2003(1),in %)

Transactionbanks

Asset managers

Consumerfinancecompanies Universal

banks

Investmentbanks

20 yearbankingaverage

Mortgagefinancecompanies

-30

-20

-10

0

10

20

30

40

50

60

70

-30 -20 -10 0 10 20 30 40 50 60 70

Valuationlevel


Valuation level(expectation premium 2002, in % )

Change of market expectation,2002 versus 2003

Increasing

expectations

Decreasingexpectations

Transaction

banksInvestmentbanks

Consumerfinance

companies

Universalbanks

Assetmanagers

(1) If historic data for 2003 were not available, calculation was based on IBES consensus forecasts.Note: All data were calculated after conversion to U.S.$.Sources:T.F. Datastream; BCG analysis.

Mortgage

financecompanies

-30

-20

-10

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70

Exhibit 9. Investment Banks Gained the Most Benefit from Increasing Market Expectations

Market expectation versusshareholder performance, 2003

Total shareholder return, 2003 (%)

Valuationlevel


Transactionbanks

Asset managers

Consumerfinancecompanies Universal

banks

Investmentbanks


Mortgagefinancecompanies

-30

-20

-10

0

10

20

30

40

50

60

70

-30 -20 -10 0 10 20 30 40 50 60 70

Valuationlevel


Valuation level(expectation premium 2002, in % )

Change of market expectation,2002 versus 2003

Increasing

expectations

Decreasingexpectations

Transaction

banksInvestmentbanks

Consumerfinance

companies

Universalbanks

Assetmanagers

(1) If historic data for 2003 were not available, calculation was based on IBES consensus forecasts.Note: All data were calculated after conversion to U.S.$.Sources:T.F. Datastream; BCG analysis.

Mortgage

financecompanies

Investment banks excellent performance was driven mainly by exceptional fixed-income activ-

ity. The 53 percent total return to shareholders for investment banks in 2003 was driven by healthyfixed-income business and a pickup in general capital-markets activity. The leaders of the investment

banking industry, which are covered in BCGs quarterly Investment Banking Report, reported 2003revenues that amounted to their second-best year ever. Gross margins improved from 25.5 percent in2002 to 32.3 percent in 2003, slowly returning to levels considered normal before the market declineof 2001.

BCG Page 11


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A closer look reveals that there are three drivers of investment bankings improved performance:

1. Successful Cost-Cutting Programs. Widespread cost cutting in the past three years contrib-uted to the bottom line. From April 2001 to February 2003, about 80,400 securities employees(nearly 10 percent of the industry) lost their jobs. For instance, Merrill Lynch, which at theend of 2000 employed 72,000 people, cut its staff to 48,100 and reduced bonuses. Further-more, investment banks reduced communications and technology costs, as well as advertis-ing, travel, and office expenses.

2. Strong Fixed-Income Activity. Falling interest rates, widening credit spreads, and the prospectof an economic recovery boosted fixed-income revenues and profits. Out of the total $49 bil-lion of profits earned in 2003, trading in debt-related products accounted for $31 billion.

3. Expectations on Equity and Advisory. Equity trading and M&A advisory remained stable dur-

ing the first three quarters of 2003 but surged in the fourth quarter, with a positive outlook for2004 driving up expectations of future performance of investment banks. While the return ofconfidence in the stock market may herald a further upswing in the equities and advisory

businesses, significant improvements are needed to compensate for a potential decline infixed-income activity. Note that corporate finance revenues have to increase by more than 50

percent in order to make up for a 20 percent decline in fixed-income trading revenues.

Lehman Brothers stands out among the investment banks that performed exceedingly well. Its recentsuccess is based on forward-looking management, a winning mix of businesses, and tight control ofcosts. The firms strong fixed-income franchise, in particular, has helped it prosper over the past 12to 18 months, as debt markets have thrived in the continued low interest-rate environment. Lehmans

seasoned management also used the firms strong currencyits stock market valueto buy Neuber-ger Berman, an established asset manager, thereby broadening its mix of businesses.

Lehmans strategy allowed it to increase after-tax profit by 45 percent, to almost $1.7 billion. It hasoutperformed the national stock market for five years in a row, putting an average 29 percent in an-nual returns into the pockets of shareholders and making Lehman the top-performing companyamong the 100 largest banks worldwide.

Remember that the higher returns of most specialists are usually paid by higher risk.

Be aware of the very different segment-specific market expectations.

Learn from investment banks: their highly responsive senior managers show that quick and radi-cal cost alignment in a market downturn pays off.

BCG Page 12


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Strong Performance Existed Across Countries

Half of big banks $4.5 trillion

market cap is concentrated inthe United States and the United

Kingdom. More than 80 percentof all market capitalization in

banking worldwide is concentratedin just ten countries. Even amongthose countries the distribution isquite skewed. Out of the top 15largest banks 12 are from theUnited States and the UnitedKingdom. (See Exhibit 10.)

Major markets in banking

showed large differences from

the shareholder point of view.France, Canada, and Australia arehome to the top-performing banksover the five year period, with im-

pressive average annual TSRabove 16 percent. Germany, thetop-performing nation with ashareholder return above 80 per-

cent in 2003, shows a slightlynegative TSR on a five year basis.(See Exhibit 11.)

11.1%

23.7%

9.0%2.9%

6.6%2.5%

3.2%

41%

Australia

UnitedKingdom

ContinentalEurope

JapanRest of

Asia-Pacific

Rest ofworld

Canada

UnitedStates

Exhibit 10. Geographic Distribution of Market Capitalization in Banking Was Quite Skewed


7.9

2.6

3.1

3.2

3.3

3.6Italy

France

Switzerland

Spain

Germany

Rest of Europe

Share of market in worldwide banking, 2003

11.1%

23.7%

9.0%2.9%

6.6%2.5%

3.2%

41%

Australia

UnitedKingdom

ContinentalEurope

JapanRest of

Asia-Pacific

Rest ofworld

Canada

UnitedStates

Exhibit 10. Geographic Distribution of Market Capitalization in Banking Was Quite Skewed


7.9

2.6

3.1

3.2

3.3

3.6Italy

France

Switzerland

Spain

Germany

Rest of Europe

Share of market in worldwide banking, 2003

Improving expectations drove

the exceptional increase in Ger-

many and Japans market cap in

2003. Meanwhile, the improvedperformance of Australia, Switzer-land, and the United Kingdom wasdriven largely by improved fun-

damentals. In Germany, increasingmarket capitalization and decreas-ing fundamental value might seem

paradoxical. In fact, German bankscleaned up their balance sheets in2003, reducing average profitabil-ity but resulting in decreasing fun-damental value. Meanwhile, ex-

pectations of a consolidation inGerman banking substantially in-creased market capitalization. (SeeExhibit 12.)

Exhibit 11. Main Countries in Banking Showed Large Differences from Shareholder Point of View



19992003(1)

6.4%

7.1%

8.5%

5.6%

16.5%

18.5%

18.0%

-0.6%

-1.7%

4.5%

-0.1%

44.8%

35.1%

38.5%

49.6%

51.0%

56.8%

56.8%

60.8%

62.8%

64.3%

80.2%

United Kingdom

Canada

Italy

France

United States

Australia

Switzerland

Germany

World

Spain

Japan

(1) Includes capital gains and dividends.Note: All data were calculated after conversion to U.S.$.Sources:T.F. Datastream; BCG analysis.

Exhibit 11. Main Countries in Banking Showed Large Differences from Shareholder Point of View



19992003(1)

6.4%

7.1%

8.5%

5.6%

16.5%

18.5%

18.0%

-0.6%

-1.7%

4.5%

-0.1%

44.8%

35.1%

38.5%

49.6%

51.0%

56.8%

56.8%

60.8%

62.8%

64.3%

80.2%

United Kingdom

Canada

Italy

France

United States

Australia

Switzerland

Germany

World

Spain

Japan

(1) Includes capital gains and dividends.Note: All data were calculated after conversion to U.S.$.Sources:T.F. Datastream; BCG analysis.

Exhibit 12. The Increase in Market Capitalization in Banking Was Driven Mainly by RisingMarket Expectations

(1) Including capital gains and dividends.(2) If historic data for 2003 were not a vailable, calculation was based in IBES consensus forecasts.Sources:T.F. Datastream; BCG analysis.

Currentvaluationlevel(expectationpremium,2003(2))

Market expectationsversus shareholder performance(1)

20%

30%

40%

UnitedStates

SwitzerlandItaly

70%

Spain

France

30% 40% 60% 70% 80% 90%

Australia

Germany60%

10%

Recent upswing(TSR 2003)

50%

50%

Canada

Japan

Share of rising expectations in increase ofmarket cap 2003(2)

CountryIncrease inmarket cap

Fundamentalvalue [%]

Expectationpremium [%]

70.6%

55.3%

55.0%

53.2%

47.1%

40.4%

39.3%

38.4%

30.6%

72.5%

35.4

20.4

30.7

18.9

8.1

11.3

16.9

38.1

- 7.7

42.7

1.2

19.3

21.5

-2.3

11.7

32.8

24.3

36.4

62.5

80.2

United

States

France

United

Kingdom

Switzerland

Australia

Canada

Spain

Italy

Japan

Germany

UnitedKingdom


Exhibit 12. The Increase in Market Capitalization in Banking Was Driven Mainly by RisingMarket Expectations

(1) Including capital gains and dividends.(2) If historic data for 2003 were not a vailable, calculation was based in IBES consensus forecasts.Sources:T.F. Datastream; BCG analysis.

Currentvaluationlevel(expectationpremium,2003(2))

Market expectationsversus shareholder performance(1)

20%

30%

40%

UnitedStates

SwitzerlandItaly

70%

Spain

France

30% 40% 60% 70% 80% 90%

Australia

Germany60%

10%

Recent upswing(TSR 2003)

50%

50%

Canada

Japan

Share of rising expectations in increase ofmarket cap 2003(2)

CountryIncrease inmarket cap





70.6%

55.3%

55.0%

53.2%

47.1%

40.4%

39.3%

38.4%

30.6%

72.5%

35.4

20.4

30.7

18.9

8.1

11.3

16.9

38.1

- 7.7

42.7

1.2

19.3

21.5

-2.3

11.7

32.8

24.3

36.4

62.5

80.2

United

States

France

United

Kingdom

Switzerland

Australia

Canada

Spain

Italy

Japan

Germany

UnitedKingdom


BCG Page 13


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We distinguish three broad groups of countries when it comes to banking fundamentals . Whencomparing performance and growth, the ten countries can be divided into three major groups withsimilar characteristics. The large group, depicted in Exhibit 13 in the bubble toward the upper rightcorner, has delivered equity growth rates and economic spreads that are generally above the globalaverage. Canada and Switzer-land, however, pushed average

profitability well above thecost of equity and had less suc-cess in creating value throughgrowth. In the second group,France and Italy delivered re-turns below or only just abovethe cost of equity. For them,

the basic focus should be toincrease profitability abovecost of equity before growingany further. The third group,Germany and Japan, still has along way to go and needs tofocus on restructuring.

Exhibit 13. Different Country Groups Have to Focus on Different Value Levers

(1) If historic data for 2003 were not available, calculation was based on IBESconsensus forecasts.

(2) Difference between return on equity and cost of equity.


Country groups and value levers, 2003(1)

Organic growth 2003

Econo-micspread(2)

2003

Focus:profitability

Focus:growth

World

World

Profitability Stars by Country, ROE 2003(1)

14.8

-5.7

-1.2

11.4

8.7

17.8

15.4

17.3

16.2

18.0

UnitedKingdom

UnitedStates

Spain

Canada

Switzerland

Italy

Sallie Mae

Lloyds TSB

Deutsche Bank

BBVA

Country average Profitability star

Australia

France

Germany

BNP Paribas

4.3

0.6

14.5

22.7

34.5

53.4

Japan Nomura Holdings

Unicredito Italiano

Bank of Nova Scotia

ANZ Banking Group

UBS18.8

18.9

16.1

17.1

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-20% -10% 0% 10% 20%

GermanyJapan

UnitedStates

Australia

UnitedKingdom

France

Italy

Canada

SwitzerlandSpain

Exhibit 13. Different Country Groups Have to Focus on Different Value Levers

(1) If historic data for 2003 were not available, calculation was based on IBESconsensus forecasts.

(2) Difference between return on equity and cost of equity.


Country groups and value levers, 2003(1)

Organic growth 2003

Econo-micspread(2)

2003

Focus:profitability

Focus:growth

World

World

Profitability Stars by Country, ROE 2003(1)

14.8

-5.7

-1.2

11.4

8.7

17.8

15.4

17.3

16.2

18.0

UnitedKingdom

UnitedStates

Spain

Canada

Switzerland

Italy

Sallie Mae

Lloyds TSB

Deutsche Bank

BBVA

Country average Profitability star

Australia

France

Germany

BNP Paribas

4.3

0.6

14.5

22.7

34.5

53.4

Japan Nomura Holdings

Unicredito Italiano

Bank of Nova Scotia

ANZ Banking Group

UBS18.8

18.9

16.1

17.1

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-20% -10% 0% 10% 20%

GermanyJapan

UnitedStates

Australia

UnitedKingdom

France

Italy

Canada

SwitzerlandSpain

Of course, averages do not tell us everything: in almost every country, there are large banks that com-fortably exceed average profitability. (See Exhibit 13.) Sallie Mae led our profitability ranking withan impressive after-tax ROE of 53 percent. For a closer look at country markets, we haven chosen to

spotlight Australia because it is the most successful country by TSR in 2003 in the dynamic Asia-Pacific region.

Australia is growing through prosperous consumer and mortgage businesses. At the countrylevel, Australia has turned in the most impressive TSR results. Between 1999 and 2003, the four ma-

jor Australian banks (ANZ Banking Group, Commonwealth Bank of Australia, National AustraliaBank, and Westpac) achieved a combined TSR of 11.3 percent per year and increased their collectiveAVE by 17.5 percent. Four factors have underpinned their success.

First, the banks made remarkable progress in terms of efficiency. Cost-to-income ratios have fallenby 4.4 percent per year for ten years. Relentless efficiency improvement programs have focused on

automation, process reengineering, overhead productivity, and outsourcing, as well as a sizeable mi-gration from physical to electronic transactions. (Less than 10 percent of transactions are carried outin branches today.) In addition, the fee-interest mix has shifted dramatically as banks have repriced

products and services to remove cross-subsidies.

Second, strong growth in consumer credit has been fueled by low interest rates and a buoyant localeconomy. These factors produced a 22 percent annual growth in household debt and a six year boomin the property market, but they have also given rise to third-party mortgage brokers and originators,whose competitiveness has almost halved the industrys mortgage profitability since the late 1990s.Despite this, and signs that the property market has now stalled, we estimate that home lending stillrepresents around 20 percent of the big banks domestic profits.

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Third, banks have acquired new income streams, such as wealth management; in so doing, they havebroadened the definition of the market from banking to financial services. This growth was in part theresult of federal government regulations that specify minimum contributions to private-pensionfunds.

Fourth, performance management practices have been modernizedimproving the internal transpar-ency of where and how value is being created; enhancing the focus on accountabilities, rewards, andrecognition; and developing a performance culture.

In the short term, the Australian banks have room to make further progress on costs and performancemanagement practices. In the longer term, growth will inevitably become even more central to theirvalue-creation aspirations, bringing special challenges that stem from unique structural factors. Suchfactors include the industrys relatively high concentration; the governments four pillars policy,which constrains local big-bank mergers; and Australias small-economy status, which has tradition-ally made cross-border transactions and growth difficult. In the future, these factors are likely to leadthe major Australian banks to review their portfolios of businesses across segments, products, andgeographies.

It will be difficult, if not impossible, for most countries to repeat 2003s high double-digit TSR.

Superior profitability is possible in almost every country.

In country groups with low profitability, such as Germany and Japan, banks should exclusively

focus on improving ROE.

Growth will be the key value lever in the years to come.

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II. THE PATH TO VALUE CREATION

It is important to understand the real drivers of value creation at top-performing banks. First, we con-sider external (stock market) performance; then we examine internal (fundamental) performance.

Stock Market Stars

Lehman Brothers, with a 29

percent annual return, put the

most money into the pockets of

shareholders, including capital

gains and dividends. Amonglarge-cap banks, the 50 largest

banks worldwide, Lehman Broth-ers was the company that deliv-ered the highest TSR between1999 and 2003, whereas Fleet-Boston ranked number one for2003mainly because of the an-nouncement of its forthcomingmerger with Bank of America.(See Exhibit 14.)

Socit Gnrale

Citigroup

Bank of Nova Scotia

ANZ Banking Group

Royal Bank of Scotl.

Bank of Montreal

HSBC Holdings

Hang Seng

19992003

Lehman Brothers

Nomura Holdings

D ividends Value atend ofperiod

Value atstart ofperiod

Capitalgain

Exhibit 14. Top Ten Performers by Total Shareholder Return

TSR measures capital gainsand dividends

JP Morgan Chase

Merrill Lynch

Sumitomo Mits. Fin. Grp.

Banca Intesa

Deutsche Bank

Credit Suisse

Santander Centr. Hisp.

Morgan Stanley

2003

FleetBoston

Top performers by TSR

Dividends

TSR

Note: The sample consists of the 50 largest banking compani es by market cap in 2003.Sources:T.F. Datastream; BCG analysis.

88.1%

60.3%

56.8%

56.0%

55.3%

53.5%

51.3%

48.6%

47.9%

47.9%

29.3%

20.3%

17.8%

17.5%

16.7%

15.9%

15.3%

15.0%

14.7%

14.1% Nordea

Socit Gnrale

Citigroup

Bank of Nova Scotia

ANZ Banking Group


Bank of Montreal

HSBC Holdings

Hang Seng

19992003

Lehman Brothers

Nomura Holdings

D ividend s Value atend ofperiod

Value atstart ofperiod

Capitalgain

Exhibit 14. Top Ten Performers by Total Shareholder Return

TSR measures capital gainsand dividends

JP Morgan Chase

Merrill Lynch

Sumitomo Mits. Fin. Grp.

Banca Intesa

Deutsche Bank

Credit Suisse

Santander Centr. Hisp.

Morgan Stanley

2003

FleetBoston

Top performers by TSR

Dividends

TSR

Note: The sample consists of the 50 largest banking compani es by market cap in 2003.Sources:T.F. Datastream; BCG analysis.

88.1%

60.3%

56.8%

56.0%

55.3%

53.5%

51.3%

48.6%

47.9%

47.9%

29.3%

20.3%

17.8%

17.5%

16.7%

15.9%

15.3%

15.0%

14.7%

14.1% Nordea

We measure company performance by risk-adjusted relative total shareholder return

(RRTSR). TSR measures how successful an investment strategy has been in terms of money earned

for the shareholder. But TSR does not tell the whole story when the question is, how well did a com-

pany perform? For that purpose, it is important to adjust for two effects: the influence of national

stock markets and the risk to which the shareholders have been exposed. To that end, BCG has de-

velopedRRTSR, a performance measure thatcaptures shareholder returns, just as TSR does, and at

the same time normalizes for these two effects.

The first adjustment acknowledges

that stock prices are related to the

overall development of ambient

national marketsan effect thatmanagement has little influence

on. What counts is a companys

stock price performance relative to

the overall market. RRTSR filters

out the impact of the overall stock

market on the specific stock, thus

enabling comparisons among com-

panies in both bull and bear mar-

kets over the same period.

The second adjustment relates tocompany-specific risk. Companies follow different business strategies in different banking segments,

Exhibit 15. Outperforming the Market Is a Difficult Task

0 x 1 x 2 x 3 x 4 x 5 x

001

5

7

13

2322

17

8

2 2

Large-cap (150)

Mid-cap (51100)

0 x 1 x 2 x 3 x 4 x 5 x

Number of years the market outperformed

Outperforming the national stock market 19992003:

the biggest 100 companies in banking

Lehman Brothers

Socit Gnrale

Bear Stearns

Standard Chartered


Exhibit 15. Outperforming the Market Is a Difficult Task

0 x 1 x 2 x 3 x 4 x 5 x

00 1

5

7

13

2322

17

8

2 2

Large-cap (150)

Mid-cap (51100)

Large-cap (150)

Mid-cap (51100)Mid-cap (51100)

0 x 1 x 2 x 3 x 4 x 5 x

Number of years the market outperformed

Outperforming the national stock market 19992003:

the biggest 100 companies in banking

Lehman Brothers

Socit Gnrale

Bear Stearns

Standard Chartered


BCG Page 16


17/29


which in turn translate into various levels of volatility for these companies stocks. Investors gener-ally believe a simple rule: the riskier an investment is, the more return is expected. In other words,company stock performance should be compared on a risk-adjusted basis. RRTSR does just that, al-lowing performance comparisons among companies in high and low volatility segments over time.

Beating the national market over five years is difficult. In fact, out of the largest 100 companies inbanking, only investment banks Lehman Brothers and Bear Stearns, and universal banks Socit G-nrale and Standard Chartered1 beat their national markets five times in five years. (See Exhibit 15.)Lehman produced an exceptional TSR in a relatively weak national stock market. And despite thehigh volatility of the stock, thecompany ranked first in RRTSRfrom 1999 through 2003.

Merrill Lynch

Citigroup

Socit Gnrale

HSBC Holding

19992003

ANZ Banking Group

Exhibit 16. The Top Ten Performers by RRTSR

RRTSR adjusts for risk and theimpact of the national market

2003

Top performers by RRTSR

TSR

RRTSR

Filtering outthe impact ofnational stock

market

Riskadjustment

Fleet Boston

Hang Seng

Bank of Montreal

Bank One

Westpac

Wells Fargo

U.S. Bancorp

Sun Trust

HSBCHolding

Banca Intesa

Note: The sample consists of the 50 largest banking companies by market cap in 2003.


Lehman Brothers

Bank of Nova Scotia

Barclays

Bank of Montreal


21.1%

13.4%

9.2%

9.1%

6.9%

6.7%

5.3%

4.1%

3.9%

3.4%

11.7%

10.1%

10.1%

8.6%

8.5%

8.5%

8.3%

7.8%

7.4%

7.3%Merrill Lynch

Citigroup

Socit Gnrale

HSBC Holding

19992003

ANZ Banking Group

Exhibit 16. The Top Ten Performers by RRTSR

RRTSR adjusts for risk and theimpact of the national market

2003

Top performers by RRTSR

TSR

RRTSR

Filtering outthe impact ofnational stock

market

Riskadjustment

Fleet Boston

Hang Seng

Bank of Montreal

Bank One

Westpac

Wells Fargo

U.S. Bancorp

Sun Trust

HSBCHolding

Banca Intesa

Note: The sample consists of the 50 largest banking companies by market cap in 2003.


Lehman Brothers

Bank of Nova Scotia

Barclays

Bank of Montreal


21.1%

13.4%

9.2%

9.1%

6.9%

6.7%

5.3%

4.1%

3.9%

3.4%

11.7%

10.1%

10.1%

8.6%

8.5%

8.5%

8.3%

7.8%

7.4%

7.3%

The low volatility of HSBC

1

stock triggers a jump in thecompanys performance rank-

ing. HSBC ranked a close secondto Lehman, propelled by an im-

pressive TSR in a weak U.K.stock market with relatively lowcompany-specific volatility. (SeeExhibit 16.) This combination offactors meant that ranking eighthin terms of TSR translated into asecond place in terms of RRTSR.

The creation of shareholder value is the ultimate goal for each company.

Adjusting TSR for the impact of national stock markets and for company-specific risk results in amore accurate measure of company performance: RRTSR.

Consider longer periods (say, five years) to set yourself external targets.

Translate external targets into internal business return targets.

Profitability and Growth Stars

The analysis of external company performance begs the question, how much did fundamental per-formance drive external value creation? To answer that question, we took a closer look at the 100largest banks worldwide to understand what made the top ten performing banks stand out. In additionto the top five from the large-cap segment (Lehman Brothers, HSBC, Citigroup, Bank of Nova Sco-tia, and Barclays), we analyzed the fundamentals of the top five of the mid-cap segment (GoldenWest Financials, Bear Stearns, M&T Bank, Sallie Mae, and South Trust.)

Fundamentals drove average shareholder performance of 20 percent at the top ten. Fundamen-tal value can be calculated in several ways. The most common method is to discount the future cashflows the business is expected to generate. For our purposes, we valued businesses somewhat differ-

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1 HSBC and Standard Chartered, although based in London, are large banks with global operations.


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ently leading to the same results: we took the book value of equity invested in the business and addedthe present value of the sum of future AVE.

The internal measure corresponding to TSR is total business return (TBR). It is calculated in roughlythe same way as TSRexceptthat instead of using market capi-talization, TBR uses fundamen-tal value based on AVE. TBRenables companies to assess thevalue creation of individual

business units in a manner con-sistent with the shareholder per-spective and therefore enablesvalue-based portfolio manage-

ment. Transparency over whereand how value is created inter-nally is critical as managementseeks to allocate scarce re-sourcesfor example, peopleand equityto their best avail-able use, continually balancing

between profitability and growth.

((((

Exhibit 17. Top Ten Banks Show Strong Shareholder Performance Driven Fundamentals

Fundamental performance(1) , 19992003(2)

1) Percentage change in fundamental value, including free cash flows to shareholders (TBR).2) If historic data for 2003 were not available, calculation is based on IBES consensus forecasts.

Note: The sample consists of the 100 largest banks; top ten and bottom ten RRTSR performers from large- and mid-cap size groups.Sources: T.F. Datastream; BCG analysis.

Average total shareholder return, 19992003

19,9%

9.1%

-6.7%

Top tenAveragecompanies

Bottom ten

25.2%

16.0%

-7,6%


Bottom ten

Exhibit 17. Top Ten Banks Show Strong Shareholder Performance Driven Fundamentals

Fundamental performance(1) , 19992003(2)

1) Percentage change in fundamental value, including free cash flows to shareholders (TBR).2) If historic data for 2003 were not available, calculation is based on IBES consensus forecasts.

Note: The sample consists of the 100 largest banks; top ten and bottom ten RRTSR performers from large- and mid-cap size groups.Sources: T.F. Datastream; BCG analysis.

Average total shareholder return, 19992003

19,9%

9.1%

-6.7%


Bottom ten

25.2%

16.0%

-7,6%


Bottom ten

The research shows that the topten performing banks achieved a

TBR of 25.5 percent per yearfrom 1999 to 2003 and drovetheir stock appreciation by anaverage of 19.9 percent per year.(See Exhibit 17.) The correlation

between the two outcomes is notsurprising and illustrates theequivalence of the TSR and TBRmetrics: just as external valuecreation is broadly determined

by the change in market capitali-

zation, so internal value creationis determined by the change infundamental value.

Exhibit 18. Top Performers Are Growing Profitably

After-tax ROE Organic growth of equity

17%

15%

19%

16%

21%

18%

14%

12%14%

16%17%

3%3%

16%15%

1999 2000 2001 2002 2003

18%

15%

15%

8%

12%

23%

14%14%

4%

6%9%9%

11% 10%

-15%

-1%

12%

1999 2000 2001 2002 2003

9%

3%

Top ten

Top ten

Average

19992003(1)(1)

Bottom ten10%

14%

Average

Average19992003(1)

(1)

(1) If historic data for 2003 were not available, calculation was based on IBES consensus forecasts.Note: The sample consists of the 100 largest banks; the top ten and bottom ten RRTSR performers from large- and mid-cap size groups.Sources: T.F. Datastream; BCG analysis.

Average

Bottom ten

Exhibit 18. Top Performers Are Growing Profitably

After-tax ROE Organic growth of equity

17%

15%

19%

16%

21%

18%

14%

12%14%

16%17%

3%3%

16%15%

1999 2000 2001 2002 2003

18%

15%

15%

8%

12%

23%

14%14%

4%

6%9%9%

11% 10%

-15%

-1%

12%

1999 2000 2001 2002 2003

9%

3%

Top ten

Top ten

Average19992003(1)Average

19992003(1)

(1)

Bottom ten10%

14%

Average

Average19992003(1)Average

19992003(1)(1)

(1) If historic data for 2003 were not available, calculation was based on IBES consensus forecasts.Note: The sample consists of the 100 largest banks; the top ten and bottom ten RRTSR performers from large- and mid-cap size groups.Sources: T.F. Datastream; BCG analysis.

Average

Bottom ten

Top performers delivered almost 20 percent ROE and grew by 14 percent per year. The top per-formers appear to do a better job of managing performance and growth simultaneously. The top ten

performers increased or sustained high profitability, with ROE in the high teens, even during themarket downturn and at the same time averaged a 14 percent equity growth over the five year period.By contrast, the bottom ten performers experienced a substantial squeeze in profitability far belowtheir cost of equity and managed to achieve growth of only 3 percent over the five years, including acontraction of 15 percent in 2002. (See Exhibit 18.)

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Poor performers must meet the challenge of creating value or face the possibility of a limited futureas an independent entity. Those that step up to the challenge and manage their way to a more pros-

perous future typically do so by following the so-called Euro-curve path. (See Exhibit 19.) Thispath consists of a three-step process.

The first step is to define thestrategy and align the or-ganization accordingly.Identify those businessesthat are underperformingand do not fit with the stra-tegic or value creation aspi-rations of the company.Unless there is a compelling

strategic rationale for keep-ing these businesses, theymust be seriously consideredfor divestment.

The second step consists ofdeveloping a plan for reju-venating businesses that should be kept but are not earning their cost of equity. Unless they can berestored to a positive economic spread, growth will destroy value. Fixing such businesses usually en-tails some combination of redefined strategy, tough restructuring, cost cuts, and an increase in the

price point of products. These are the challenges many German and Japanese banks currently face

and that usually lead to a shrinking of the business portfolio.

Exhibit 19. Grow -- But Only in Profitable Businesses

Increaseprofitability(ROE)by downsizing

ROE

Cost of equity (range)

Three steps to value creation

Do your homework:increase profitability

(ROE)

Position yourself

2

1Grow byexpandingprofitablesegments

Equity

Go forward: grow byexpanding profitablesegments

3

Sources:BCG value management.

"Euro-curve principle

Exhibit 19. Grow -- But Only in Profitable Businesses

Increaseprofitability(ROE)by downsizing

ROE

Cost of equity (range)

Three steps to value creation

Do your homework:increase profitability

(ROE)

Position yourself

2

1Grow byexpandingprofitablesegments

Equity

Go forward: grow byexpanding profitablesegments

3

Sources:BCG value management.

"Euro-curve principle

The third step is to expand profitable businesses without allowing profitability to fall below the costof equity. The equity allocated to the expanded businesses determines the organic growth rate. U.S.and Australian banks managed this step very effectively over the last five years.

Understand your position in the Euro-curve path.

Grow, but only when and where the business is profitable.

Increasing profitability is the only path for businesses with returns below the cost of equity.

Selected Success Stories

Four companies that lead our ranking enjoy exceptional business performance for very different rea-sons: ANZ Banking Group for increasing profitability, Barclays for sustained profitable growth,Sallie Mae for exceptional profitability andgrowth figures in a niche segment, and HSBC for suc-cessful external growth.

ANZ Banking Group developed a distinct cost advantage. Between 1999 and 2003, ANZ BankingGroup doubled its profits and became one of the worlds most efficient banks, with a cost-to-incomeratio in the mid-40s. The banks performance-improvement program has relied on three elements:

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1. The bank introduced a simplified, disaggregated structure that provided strong, clear lines ofaccountability and autonomy for its 16 major businesses, each of which provided internal andexternal reports.

2. The CEO and centrally driven governance pushed this performance improvement by focusingon efficiency and accountability. This approach has involved strict, top-down target setting;allocation of all central costs to business units, with tight service-level agreements; acompensation system that motivates performance with a steep variable-reward curve; toughquarterly reviews of each business unit, led by the CEO and CFO; and individual performancecontracts.

3. To direct efficiency programs, management has invested in developing a detailedunderstanding of the cost structure of the bank, based on very simple goals for both revenuegrowth and cost reduction.

The outcome of this program has been that even though the bank is smaller than its national competi-tors, it now has a distinct cost advantage, which it has used to become more competitive on price andto return greater profits to shareholders. As a result, ANZ has achieved a 45 percent cost-to-incomeratio and has delivered ROEs of more than 20 percent, making it the most profitable of Australiasmajor banks.

Develop a clear vision for improving your cost-to-income ratio.

Require senior management to make uncompromising commitments to meeting targets.

Adopt a never spend an additional dollar philosophy.

Ensure clear accountability, substantial rewards for performance, and strong sanctions for miss-ing targets.

Maintain a strong belief that there is always more to do.

Barclays delivered sustainable growth. Barclays highlights the opportunities for growth. It nowranks third among the dominant British banking institutions and twelfth internationally by marketcapitalization. Having a highly diversified business model (the group's main activities concentrate on

personal financial services, credit cards, private clients, business banking, and investment banking),Barclays management understood how to generate double-digit growth in almost every field.

A closer look at the credit card business helps explain Barclays success. In 2003, Barclays recruited

a record 1.5 million new customers to reach 10.6 million Barclaycard holders in the United Kingdom.Aggressive marketing strategies such as matching rivals cheapest interest rates and cobrandingcontributed to this increase. Additionally, strong consumer spending, combined with risk-pricing ex-

pertise, led to annual profits of 68 per cardholder (versus 63 in 2002). Barclays is now trying toduplicate this achievement in its international credit-card franchise: Barclaycard International justturned profitable for the first time.

Several factors have contributed to Barclays' success: its credit-card business, its business-bankingfranchise, and effective cost-reduction efforts. In addition, its investment-banking business, BarclaysCapital, which specializes in fixed-income business, has done especially well during years of declin-ing interest rates. On the retail side, Barclays is now working to integrate its retail product lines (cur-

rent accounts, investments, loans, credit cards, mortgages, insurance, pensions, and student and travel

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services). The bank has also been successful at bundling products (particularly with its Openplan of-fering) in an effort to increase customer penetration.

These accomplishments resulted in impressive financial figures. Within the last five years Barclayshas grown more than 12 percent per year while operating at an average economic spread of about 7

percent. That makes it the second-best performing bank on the European stock markets.

Establish a full product line to capture growth opportunities.

Increase cross-selling rates by offering smart product bundles.

Leverage existing business lines into new geographical markets.

Follow an aggressive marketing strategy in core businesses.

Develop a strong brand and team up with other renowned names.

Sallie Mae profited from consumer loans. SLM Corporation, better known as Sallie Mae, is a fast-growing consumer loan provider that operates extremely profitably. The financial institution offersthe student market educational credit products and related services. Such offerings include a strongstudent loan origination that increased its volume of loans by 13 percent in 2003 and had 7 millioncustomers by the end of that year.

Sallie Mae grew its core cash student loan spread from 1.91 percent in 2002 to 2.21 percent in2003. Its after-tax profit increased by 77 percent and reached an all-time high of $1.4 billion. Thecompany manages an impressive $87 billion portfolio of student loans.

Over the last five years, SLM generated an average ROE of 42 percent. In 2003 its ROE increased an

astonishing 53 percent, making the company the most profitable bank among the 100 largest financialinstitutions worldwide. Sallie Mae was valued at $17 billion at the end of 2003. It rewarded share-holders with annual average returns of about 20 percent for the last five years. With or without ad-

justing for risk, Sallie Mae ranks first among consumer-finance companies worldwide.

It is important to note that in 2003 Sallie Mae benefited from a friendly market environment. Demandfor student loans increased temporarily for three reasons: first, compared with previous years, thenumber of teenagers planning to attend college rose; second, because of state budget crises, theamount of money allotted to public schools decreased; and third, the weak economy cut private-school endowments. The capital markets seemed to take into account these effects; otherwise wemight have seen an even higher market appreciation.

Niche markets can hold huge potential.

Double-digit profitability and growth can be achieved simultaneously.

Never stop pushing for higher margins.

Efficiently allocate scarce capital resources.

Take favorable macroeconomic conditions into account.

HSBC adopted a successful string of pearls acquisition strategy. The banking titan HSBCHoldings has grown its worldwide presence with the successive acquisitions of the Republic NationalBank of New York, Crdit Commercial de France, and more recently Household International. It op-erates almost 10,000 branches in 79 countries in Europe, the Middle East, Asia, and the Americas.

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III. RANKINGS OF TOP PERFORMERS

Large-Cap Companies

TSR Risk Market Rank

1 12 Lehman Brothers USA IB 21.0 11.7% ++++ + -- 29.3% 12 1 HSBC Holdings GBR UB 172.7 10.1% +++ ++ -- 15.0% 83 14 Citigroup USA UB 250.4 10.1% ++++ ++ -- 17.8% 34 21 Bank of Nova Scotia CAN UB 25.8 8.6% ++++ +++ ++ 17.5% 45 28 Barclays GBR UB 58.3 8.5% +++ ++ -- 13.2% 136 4 Bank of Montreal CAN UB 20.7 8.5% ++++ +++ + 15.3% 77 40 The Royal Bank of Scotland GBR UB 87.0 8.3% ++++ ++ - 15.9% 68 35 Socit Gnrale FRA UB 38.6 7.8% ++++ ++ - 20.3% 29 22 ANZ Banking Group AUS UB 24.0 7.4% ++++ +++ ++ 16.7% 510 20 Merrill Lynch USA IB 55.3 7.3% +++ + -- 13.4% 11

11 43 Royal Bank of Canada CAN UB 31.4 6.9% +++ +++ ++ 13.3% 1212 30 Morgan Stanley USA IB 62.7 6.8% +++ + --- 12.0% 1713 27 UBS CHE UB 81.0 6.0% ++ ++ -- 6.3% 2614 11 ABN AMRO NLD UB 38.9 5.3% ++ + --- 5.1% 2815 39 Deutsche Bank DEU UB 48.4 5.2% ++ + -- 8.1% 2416 37 MBNA USA CF 31.8 5.2% ++ ++ -- 9.9% 2217 26 American Express USA CF 62.0 5.1% ++ ++ -- 8.0% 2518 31 Nomura Holdings JPN IB 33.5 5.1% +++ -- - 14.1% 1019 3 Hang Seng HKG UB 25.1 4.9% +++ +++ + 14.7% 920 19 Bank of America USA UB 119.5 4.8% +++ ++ -- 10.0% 21

21 5 Westpac AUS UB 21.7 4.7% +++ +++ ++ 12.7% 1622 23 BNP Paribas FRA UB 56.9 4.5% +++ ++ - 10.8% 1823 29 Dexia BEL UB 20.1 4.4% + + --- 1.5% 3624 6 Wells Fargo USA UB 99.6 4.2% +++ ++ - 10.6% 1925 32 Washington Mutual USA MF 36.1 4.0% +++ ++ - 12.8% 1526 33 Commonwealth Bank of Australia AUS UB 28.0 3.6% +++ +++ ++ 10.2% 2027 45 Santander Central Hispano ESP UB 56.5 3.1% + ++ -- 4.5% 3028 25 Credit Suisse CHE UB 43.6 2.5% - + -- -0.3% 4029 2 FleetBoston USA UB 46.0 2.3% + + -- 3.4% 3130 41 Toronto-Dominion Bank CAN UB 21.9 2.3% +++ ++ ++ 13.1% 14

31 49 Fifth Third Bancorp USA UB 33.6 1.9% ++ ++ - 6.1% 2732 44 National Australia Bank AUS UB 33.9 1.5% ++ ++ ++ 8.7% 2333 17 Nordea SWE UB 21.9 1.4% + ++ - 4.6% 2934 13 JPMorgan Chase USA UB 74.8 1.0% - + -- -1.6% 4435 38 HBOS GBR UB 49.9 0.5% + ++ - 1.2% 3836 8 Bank One USA UB 51.0 0.1% + ++ - 0.7% 3937 7 U.S. Bancorp USA UB 57.4 0.1% + ++ - 2.3% 3338 50 BBVA ESP UB 44.1 0.1% - ++ -- -1.7% 4539 15 National City USA UB 20.6 -0.1% + ++ - 2.9% 3240 18 UniCredito Italiano ITA UB 34.0 -0.1% - ++ -- -0.7% 42

41 24 The Bank of New York USA TB 24.1 -0.2% - + -- -2.0% 4642 10 SunTrust USA UB 20.1 -0.9% + ++ - 1.3% 3743 47 BB&T USA UB 21.1 -1.0% + ++ - 2.1% 3544 34 Fannie Mae USA MF 72.9 -1.2% + ++ - 2.1% 3445 16 Wachovia USA UB 61.9 -1.5% - ++ - -1.4% 4346 48 Fortis BEL UB 26.0 -2.1% --- ++ --- -11.9% 4947 9 Banca Intesa ITA UB 25.8 -2.3% -- + -- -8.0% 4848 42 Lloyds TSB GBR UB 44.8 -3.0% -- ++ -- -6.9% 4749 46 Freddie Mac USA MF 40.5 -3.2% - ++ - -0.6% 4150 36 Sumitomo Mitsui Financial Group JPN UB 30.9 -4.1% --- -- - -12.6% 50

2003

Company Performance 19992003RRTSR rank

1999-

2003

RRTSR

p.a.Name

Coun-

try

Seg-

ment

M' cap '03

($b)

TSR

p.a.

From

('98-'02)

To

('99-'03)Delta Company

From

('98-'02)

To

('99-'03)Delta Company

34 15 19 Deutsche Bank 26 49 -23 Freddie Mac

45 29 16 FleetBoston 9 31 -22 Fifth Third Bancorp

25 10 15 Merrill Lynch 24 40 -16 UniCredito Italiano

19 5 14 Barclays 17 32 -15 National Australia Bank

36 23 13 Dexia 11 26 -15 Commonwealth Bank of Australia

Biggest jump downBiggest jump up

RRTSR: Risk-adjusted relative total shareholder return

TSR: Total shareholder return ----(++++) strongly negative (positive)Risk: Volatility of returns ----(++++) very high (low)Market: Stock specific impact by overall market ----(++++) strongly negative (posit ive)

AMAsset manager MF Mortgage financeCF Consumer finance TB Transaction bankIB Investment bank UB Universal bank

BCG Page 23


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Mid-Cap Companies

TSR Risk Market Rank

1 3 Golden West Financial USA UB 15.7 11.6% ++++ ++ + 28.2% 42 28 Bear Stearns USA IB 8.0 9.6% ++++ + -- 20.1% 83 25 M&T Bank USA UB 11.8 7.9% ++++ +++ - 15.1% 164 33 Sallie Mae USA CF 17.0 7.6% ++++ ++ + 20.2% 65 12 SouthTrust USA UB 10.9 6.3% ++++ ++ - 15.3% 156 4 Banco Popular Espaol ESP UB 13.6 6.3% +++ +++ - 10.9% 257 48 United Overseas Bank SGP UB 12.2 5.9% ++++ ++ + 20.1% 78 35 Danske Bank DNK UB 16.7 5.7% +++ +++ + 13.9% 219 18 Standard Chartered GBR UB 19.4 5.6% ++ + -- 9.6% 2710 17 CIBC CAN UB 18.1 5.6% +++ +++ ++ 14.6% 18

11 37 OCBC Bank SGP UB 9.1 5.1% ++++ ++ + 18.1% 912 43 Sumitomo Trust & Banking JPN UB 8.6 5.1% ++++ -- - 17.0% 1113 13 Franklin Templeton Investments USA AM 12.9 5.0% +++ + -- 11.0% 2414 1 Countrywide Financial USA MF 14.0 5.0% ++++ + - 16.2% 1315 44 Kookmin Bank KOR UB 12.6 5.0% ++++ -- + 31.7% 3

16 2 UnionBanCal USA UB 8.4 5.0% +++ + - 14.2% 2017 27 Charter One Financial USA UB 7.7 4.9% +++ ++ - 11.8% 2218 34 State Street USA TB 17.4 4.8% ++ ++ -- 9.3% 2819 23 SEB SWE UB 9.9 4.8% +++ ++ - 11.2% 2320 38 Daiwa Securities Group JPN IB 9.1 4.7% +++ -- - 14.6% 19

21 31 DnB NOR NOR UB 8.7 4.5% ++++ ++ ++ 17.6% 1022 14 Capital One Financial USA CF 14.2 4.4% +++ -- -- 10.1% 2623 39 Nikko Cordial JPN IB 10.9 4.3% +++ -- - 14.7% 1724 24 Svenska Handelsbanken (SHB) SWE UB 14.6 4.0% ++ +++ - 8.3% 2925 10 Marshall & Ilsley USA UB 8.7 3.3% ++ ++ - 7.6% 3026 42 DBS Group SGP UB 12.7 3.3% ++++ + + 16.6% 1227 7 Maybank MYS UB 9.1 2.9% ++++ ++ +++ 15.9% 1428 45 Bank of Ireland IRL UB 13.2 2.6% ++ ++ - 6.2% 3129 6 Synovus Financial USA UB 8.7 2.4% ++ ++ - 6.1% 3230 36 Northern Trust USA TB 10.2 1.7% + ++ -- 2.4% 36

31 8 FreningsSparbanken SWE UB 10.4 1.7% + ++ - 4.8% 3332 22 Banco Ita Holding Financeira S.A. BRA UB 10.8 1.1% ++++ -- ++ 40.0% 133 9 PNC Financial Services USA UB 15.2 1.0% + ++ - 3.9% 3434 11 Standard Bank Group ZAF UB 7.9 0.4% ++++ ++ +++ 20.4% 5

35 40 Mellon USA TB 13.8 0.3% + ++ -- 0.7% 3836 5 Sanpaolo IMI ITA UB 18.9 -0.2% - + -- -3.1% 4237 41 Regions Financial Corporations USA UB 8.3 -0.4% + +++ - 2.1% 3738 50 Allied Irish Banks IRL UB 13.6 -0.4% + ++ - 0.1% 3939 32 Bradesco BRA UB 7.9 -0.5% ++++ -- ++ 32.7% 240 49 Charles Schwab USA AM 16.1 -0.7% -- -- -- -8.5% 46

41 30 KeyCorp USA UB 12.3 -0.8% + ++ - 2.9% 3542 16 Commerzbank DEU UB 11.7 -0.8% -- -- -- -8.5% 4543 20 Resona JPN UB 14.3 -1.1% - -- - -4.4% 4344 21 KBC Bank BEL UB 14.1 -1.3% -- ++ --- -9.1% 4845 26 Almanij BEL UB 9.9 -1.5% -- ++ --- -9.1% 4746 29 Mediobanca ITA IB 8.4 -1.6% - ++ -- -4.8% 4447 19 Comerica USA UB 9.8 -1.8% - ++ - -0.5% 4148 15 Amsouth Bancorp USA UB 8.6 -2.1% - ++ - -0.1% 4049 46 HVB Group DEU UB 12.2 -3.3% ---- -- -- -18.6% 5050 47 Abbey National GBR UB 13.9 -4.1% --- + -- -11.8% 49

2003

Company Performance 1999 2003RRTSR rank1999-

2003

M' cap '03

($b)

RRTSR

p.a.Name

Coun-

try

Seg-

ment

TSR

p.a.

From

'98-'02

To

'99-'03Delta Company

From

'98-'02

To

'99-'03Delta Compan

Creating Value in Banking 2004 051304

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