Nomura European Banks Outlook 2011

European Banks Outlook 2011

PAN-EUROPEAN BANKS

North/south divide persists

We favour French, Scandi and UK commercial banks in 2011

December 16, 2010

Sector view Remains Bullish

EU banks: Attractive valuation, but high volatility We believe the sector valuation is low both in absolute (1.3x TBV/7.5x 2012E) and particularly relative terms after recent macro-related underperformance and new capital regulations (which we expect to be imminently further relaxed) can and will be met through retained earnings. While we ultimately believe politicians will conclude that saving the euro is less costly than sacrificing it, we expect uncertainty to generate high sector volatility, which should prove to be a good buying opportunity.

Underweight investment banks, which should stay de-rated With investment banks suffering the biggest negative impact from Basel 3, market structure changes and further taxation, we think the outlook for pro forma ROEs appears not much better than the COE, particularly for banks in tough regulatory regimes such as Switzerland and the UK. As a result, unless comp costs significantly reduce (and there is no sign of this in 2011), it appears right that these stocks should trade around 1x TBV.

North/south divide for commercial banks We believe peripheral euro area concerns are genuine for some southern European banks, as the impact of austerity on growth and credit quality, as well as the cost and availability of funding, generates greater earnings risk. However, for many northern European banks whose exposure is primarily through government bonds and second-order exposures such as interbank loans, the risks are over-discounted, in our view. With many good northern European franchises traded at a little over 1x TBV, we have a preference for northern over southern European commercial banks.

• French banks: We see an attractive risk/reward, with BNP Paribas our top pick. We upgrade Credit Agricole from Reduce to Neutral.

• Investment banks: We are underweight versus commercial banks, favouring UBS over Credit Suisse, which we downgrade to Neutral from Buy.

• Italian banks: While the least risky of southern European economies, we see few catalysts, preferring Intesa over UniCredit.

• Nordic banks: We remain overweight the region on better growth and capital, with DNBNOR and Swedbank our top picks.

• Spanish banks: We remain underweight as more capital is needed, but we believe trading opportunities could arise for Santander.

• UK banks: We believe Lloyds offers good upside potential, but we cannot justify the valuation for RBS. We are positive on Asia in the longer term but fear a near-term correction. We prefer HSBC over Standard Chartered.

• CEE banks: We prefer Russia and Poland over Turkey. Our top picks are Sberbank, PKO BP and Bank Pekao. We rate Garanti a Reduce.

Research analysts

European Banks

Jon Peace [email protected] +44 20 7102 4452

Robert Law [email protected] +44 20 7102 2715

Domenico Santoro [email protected] +44 20 7102 2375

Maciej Szczesny, CFA [email protected] +44 20 7102 2504

Daragh Quinn [email protected] +44 20 7102 8333

Raul Sinha [email protected] +44 20 7102 9136

Chintan Joshi [email protected] +44 20 7102 6597

Prathmesh Dave [email protected] +44 20 7102 8530

Tathagat Kumar [email protected] +44 20 7102 9177

Moreno Fasolo [email protected] +44 20 7102 1435

Nomura International plc

See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non-US affiliates are not registered or qualified as research analysts with FINRA in the US.

EQUITY RESEARCH

EMEA

Relative rating: For details of Nomura’s relative rating system see text at the end of this publication

Nomura | EMEA European Banks Outlook 2011 December 16, 2010

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Table of contents

Executive summary 3

EU banks: Low valuation, high volatility 5

Politicians will ultimately save the euro 9

Banks will not dilute to meet Basel 3 12

Investment banks to stay de-rated 14

Credit quality a peripheral earnings risk 16

Funding a key differentiator for 2011 18

European recommendations for 2011 21

French banks: Attractive risk reward led by BNP Paribas 23

Underweight IBs vs commercial banks: we favour UBS over CS, BARC over DBK 30

Italian banks: We prefer Intesa over UniCredit 40

Nordic banks: Overweight the region, DNB and SWED our top picks 46

Spanish banks: How much additional capital could be required in Spain 55

Spanish banks: Santander still a macro call on Spain 59

UK domestic banks: We favour Lloyds over RBS 64

UK/Asian banks: We prefer HSBC over Standard Chartered 69

CEE banks: Prefer Russia and Poland over Turkey 76

The Revenue Book 79

Note: The revenue book is a compilation of national banking data.

Appendix A-1 145


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Executive summary Rating changes in this note We downgrade Credit Suisse from Buy to Neutral, reducing our price target from CHF 56 to CHF 48 owing to a cautious outlook for investment banks, particularly those in more aggressive regulatory regimes. We upgrade Credit Agricole to Neutral, from Reduce, with an unchanged price target of EUR 13 after recent underperformance, as we see a good risk/reward in French stocks. We view the valuation of Credit Agricole as an adequate offset for the more leveraged capital position.

EU banks: Low valuation, high volatility We believe that the sector valuation is low both in absolute (1.3x TBV/7.5x 2012E) and particularly relative terms after recent macro-related underperformance. We believe banks will meet the demands of new Basel 3 capital regulation through retained earnings rather than rights issues, meaning this valuation is ‘real’ rather than ‘pre-dilution’. Our underlying macro premise for 2011 is that politicians will ultimately act to save the euro as the cost of preserving it is less than the cost of a break-up. As politicians act slower than the market and initially resist radical steps, we expect this to lead to significant sector volatility, which should create attractive buying opportunities (although calling the turning points in real time will be a challenge). We believe peripheral euro area concerns are genuine for some southern European banks, as the impact of austerity on growth and credit quality generates earnings risk. However, for many northern European banks whose exposure is primarily through government bonds, the risks are currently over-discounted; hence, we retain a Bullish stance with a bias for northern European banks. We further acknowledge that with absolute valuation upside capped by weak growth, global investors may prefer US or emerging market banks.

Politicians will ultimately save the euro The solution to the euro area’s problems are not clear, but in the same way that we argued in 2010 that regulators would favour economic growth over diluting the banking sector, in 2011 we believe politicians will ultimately conclude that saving the euro and bailing out the periphery (through increasing the European Financial Stability Facility, significantly increased ECB bond buying or the introduction of pan-European bonds) is less costly than default or a euro area break-up given the unpredictable “network effects”. This is possible because aggregate EU15 debt/GDP as well as the fiscal deficit is lower than the US, and necessary because European banks are too interconnected to fail, with cross-border exposures a multiple of shareholders’ equity. The slow speed and uncertain nature of political response creates high sector volatility and buying opportunities for lower-risk northern European names. Among southern states, we see Italy as the best placed.

Banks will not dilute to meet Basel 3 We do not predict a flood of equity issuance to comply with Basel 3, although some banks may chose to raise capital for specific reasons (eg, to repay government debt or to finance an acquisition). We believe almost all listed banks can meet required capital levels by 1 January 2013 (well ahead of the 2019 deadline) through retained earnings (at the cost of minimal dividends). This task should be made easier if the Basel Committee revises lower its RWA calculations as expected (potentially before year-end). Book value multiples are therefore ‘real’ (ie, not pre-dilution), which is supportive of the valuation case for the sector. We believe the Systematically Important Financial Institutions – SIFI (or institutions deemed “too big to fail”) – issue will be dealt with via a menu of options (more common equity, contingent convertible instruments (cocos) or bail-in debt) such that many countries will not demand more equity than the 7% minimum (although banks will wish to have their own buffer). Despite G20 aims, this creates clear regulatory arbitrage, particularly for investment banks operating in more stringent countries. While regulators will decide whether banks are required to issue equity through setting the national minimum capital standards, we continue to believe the market will form its own view of the appropriate level of capital based on an individual bank’s business mix (investment banks requiring more). We expect more leveraged banks continuing to trade at a discount to less leveraged stocks, but we believe this discount will narrow through 2011 as investors become more comfortable with higher capital levels.


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Investment banks to stay de-rated Not only do investment banks suffer the biggest negative impacts under Basel 3 (with often a doubling in RWAs), they also suffer the greatest challenges from changes to market structure (eg, swaps clearing and prop trading restrictions) and further taxation (wholesale liability taxes). These impacts are hard to quantify, but simplistically, unless investment banks are successful in significantly increasing margins or business mix, or pushing compensation costs lower (unlikely in 2011), pro forma ROEs appear to be not much more than the COE. As a result, it would appear right that these stocks should trade in a range around tangible book. Regulatory arbitrage potentially produces a significant headwind for Swiss and, to a lesser extent, UK investment banks, and a benefit for German and French investment banks. Swiss banks could also remain under pressure until the depth and the pricing of the coco market is established.

Credit quality a peripheral earnings risk NPL and provision trends show that credit quality concerns are easing except in economies where we think there is a high risk of double dip (eg, Greece, Ireland, Portugal and Spain). The costs of austerity and cleaning up the banking systems in these economies generates higher earnings risk and, as a result, our EPS forecasts tend to be more below consensus in southern European economies than northern European ones.

Funding a key differentiator for 2011 Funding is arguably a bigger issue than credit quality for the sector in 2011. The ECB wants to withdraw excess liquidity and have member states guarantee bank debt if necessary (adding to the burden of debt/GDP). The divergence perceptions of the liquidity and solvency of northern and southern European sovereigns is having a similar effect on the issuance and cost of debt of their banks. Those banks operating in lower-risk countries (eg, Germany) and with lower funding costs (eg, Nordics) have a clear advantage both in terms of net interest margin and valuation (discount rate). We note that a recovery in bank debt issuance in June 2010 was a catalyst for the end of the first phase of the sovereign crisis, and we believe investors will closely watch this in 2011.

The north/south divide remains a key theme for 2011 The north/south divide was a key theme of ours for 2010, and we believe it will remain a dominant theme not just in 2011 but for many years to come given the lengthy periods of adjustments necessary to bring debt back down to stable levels. Our thesis is that banks in more leveraged southern European economies will see slower loan growth (given private sector deleveraging), weaker margins (owing to a higher cost of funds) and weaker credit quality trends (either a slower normalisation, or in the worst case a double dip). As a result, we believe their earnings will continue to underperform those of their northern European counterparts. At some stage, we believe this may be more adequately reflected in valuations, but as of today we think the differences are insufficient. We would use macro-related volatility in 2011 to buy northern European banks such as BNP Paribas, Lloyds, DNBNOR and Swedbank.

• •French banks: We see an attractive risk/reward, with BNP Paribas our top pick. We upgrade Credit Agricole from Reduce to Neutral.

• •Investment banks: We would be underweight versus commercial banks, favouring UBS over Credit Suisse (CS), which we downgrade to Neutral from Buy.

• •Italian banks: While, in our view, Italy is the least risky of the southern European economies, we see few catalysts, preferring Intesa over UniCredit.

• •Nordic banks: We remain overweight the region on better growth and capital, with DNBNOR and Swedbank our top picks.

• •Spanish banks: We remain underweight as more capital is needed, but we believe trading opportunities could arise for Santander.

• •UK banks: We believe Lloyds offers good upside potential, but we cannot justify the valuation for RBS. We are positive on Asia in the longer term but fear a near-term correction. We prefer HSBC over Standard Chartered (STAN).

• •CEE banks: We prefer Russia and Poland over Turkey. Our top picks are Sberbank, PKO BP and Bank Pekao. We rate Garanti bank a Reduce.


5

EU banks: Low valuation, high volatility

Summary

We believe the sector valuation is low both in absolute (1.3x TBV/7.5x 2012E) and particularly relative terms after recent macro-related underperformance. We believe banks will meet the demands of new Basel 3 capital regulation through retained earnings rather than rights issues, meaning this valuation is ‘real’ rather than ‘pre-dilution’. Our underlying macro premise for 2011 is that politicians will ultimately act to save the euro as the cost of preserving it is less than the cost of a break-up. As politicians act slower than the market and initially resist radical steps, we expect this to lead to significant sector volatility, which will create attractive buying opportunities with hindsight (although calling the turning points in real time we acknowledge is a challenge). We believe peripheral euro area concerns are genuine for some southern European banks, as the impact of austerity on growth and credit quality generates earnings risk. However, for many northern European banks whose exposure is primarily through government bonds and second-order exposures such as inter-bank loans, the risks are currently over-discounted; hence, we retain a Bullish stance with a preference for northern European banks. We further acknowledge that with absolute valuation upside capped by weak growth, global investors may prefer US or emerging market banks.

The absolute and relative valuation of EU banks is low

In the chart below, we plot the absolute price/tangible book value of EU banks, the iTraxx senior financials (inverted) and the performance of the banks sector relative to the market year to date. In absolute terms, the sector has remained very range bound in 2010 between 1.1x and 1.5x TBV as regulatory and macro concerns have offset an undemanding valuation. Approaching tangible book, valuation has offered some support in aggregate for the sector. However, with a forecast normalised ROTE of just 14.2% in 2012, very weak medium-term growth in western Europe and a historical cost of equity of 10%, investors have rightly, in our opinion, been unwilling to pay significantly more than 1.5x for the sector in aggregate.

Fig. 1: EU banks P/TBV, relative performance and iTraxx EU banks made new relative (not absolute) lows in late November

Source: Datastream, Nomura estimates

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The three lines had tracked fairly closely until end-August when the absolute and relative performances strongly diverged. Initially, this was because of concerns about dilution following a number of large rights issues (eg, Deutsche Bank, Standard Chartered) plus heavy RWA increases from investment banks under new Basel 3 disclosure. Subsequently, a second round of sovereign concerns further undermined the relative performance of the sector, even as the broader market maintained its rally. Today European banks trade at 1.3x TBV or 0.9x stated book value (55% of the market multiple compared with a 20-year average of 85%) and a normalised (2012) P/E of 7.5x (73% of the market multiple, compared with a 20-year average of 84%). As we discuss in subsequent sections of this report, we believe banks will address the demands of new Basel 3 capital regulations from retained earnings rather than capital increases and, given this, we see valuations as real and, therefore, attractive, rather than pre-dilution. As the final Basel revisions (eg, on risk-weighted assets) are revealed, we expect the market to become more comfortable with capital levels and for the dilution discount to unwind.

We believe peripheral euro area concerns, however, will persist. Our underlying macro premise for 2011 is that politicians will ultimately act to save the euro as the cost of preserving it is less than the cost of a break-up. As politicians act slower than the market and initially resist radical steps, we expect this to lead to significant sector volatility, which should create attractive buying opportunities with hindsight (although calling the turning points in real time, we acknowledge is a challenge). We believe peripheral euro area concerns are genuine for some southern European banks, as the impact of austerity on growth and credit quality generates earnings risk. This could last for many years given the timeframes needed to stabilise and reduce debt/GDP to sustainable levels.

However, for many northern European banks whose exposure is primarily through government bonds and second-order exposures such as inter-bank loans, we believe the risks are currently over-discounted. As a result, we would maintain a bullish stance overall on the banks sector with a clear preference for northern European banks over southern European banks (although we are prepared to trade the sector volatility). As we see investors gradually placing more weight on normalised P/E valuations in 2011 and less on price/TBV as capital positions stabilise, we would highlight the attractive valuation of French banks compared with domestic Spanish banks.

Fig. 2: European banks 2012E P/Es (market cap weighted average) Insufficient differentiation, in our view, between northern and southern Europe

Source: Nomura estimates

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Bank styles: De-geared P/E may gain favour versus P/TBV

In bear markets (shaded) low P/B stocks and banks with low earnings momentum tend to underperform high P/B stocks and those with high earnings momentum (ie, quality franchises win). In more normalising markets, investors tend to go for “value” and tend to place more of a weight on P/E than on price/book.

Fig. 3: Correlation of bank P/B and earnings momentum with equity markets Quality stocks outperform in bear markets, value stocks in more normal markets

Note: Chart compares performance of top quartile metric versus bottom quartile metric for FTSE300 banks

Source: Datastream

Looking into 2011, as credit costs in most economies continue to normalise and as investors become more comfortable with Basel 3, we believe investors will again look to place more emphasis on P/E. However, with banks showing very different capital positions under Basel 3, we believe some attention will still be paid to gearing, even if this decreases with time. In the chart below, we show both normalised (ie, 2012E) and de-geared P/E (adjusting for pro forma Basel 3 core Tier 1 levels at 3Q10A). We would highlight the attractive position of the French banks after the sovereign crisis, the valuation of UBS versus CS, and how the large-cap Spanish banks present investors with a dilemma over risk and reward.

Fig. 4: Normalised (2012E) and de-geared P/E ratios

Note: De-geared using 8% target CT1 for European banks and 10% for UK, Swiss and Scandi banks Source: Nomura estimates

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High earnings momentum vs. Low earnings momentum Low P/BK vs. High P/BK DJ Euro Stoxx

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Investors may, however, prefer global banks

For investors who can look outside Europe, we recognise that other regions may prove more attractive: for example, in 2010 Asian banks rose by 15% led by Indonesia (up 56%), while European banks fell 10% led by Ireland (down 54%). US banks still only trade on a small P/E multiple premium to European banks despite being arguably further through the credit/capital cycle.

In our 2011 ‘Global Strategy Outlook’ (5 December 2010), we highlighted that while we were overweight Financials globally, our preference was with banks in countries where policy will continue to be supportive and where valuations are lowest – the US and Japan.

At an individual country level, we are bullish on the banks in Japan, China, Singapore, Malaysia and in the US (brokers and asset gatherers). Individual country outlooks are available for interested readers.

Fig. 5: Global banks 2010 YTD performance Local currency

Source: Datastream

Fig. 6: Global banks Price/book Stated (not tangible)

Source: Datastream

Fig. 7: Global banks P/E Based on current mid-cycle earnings

Source: Datastream

Fig. 8: European versus US normalised P/E Based on 2012 forecast earnings


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Politicians will ultimately save the euro Summary

The solution to the euro area’s problems are not clear, but in the same way we argued in 2010 that regulators would favour economic growth over diluting the banking sector, in 2011 we believe politicians will ultimately conclude that saving the euro and bailing out the periphery (through increasing the European Financial Stability Facility, significantly increased ECB bond buying or the introduction of pan-European bonds) is less costly than default or a euro area break-up given the unpredictable “network effects”. This is possible because aggregate EU15 debt/GDP as well as the fiscal deficit are lower than in the US, and necessary because European banks are too interconnected to fail, with cross-border exposures a multiple of shareholders’ equity. The slow speed and uncertain nature of political response creates high sector volatility and buying opportunities for lower-risk northern European names. Among southern states, we see Italy as the best placed.

Euro area: good in parts; too interconnected to fail

Aggregate EU15 debt/GDP as well as the fiscal deficit are lower than in the US. The problem lies with the distribution of debt and discipline within the euro area, which like the proverbial curate’s egg is good in parts. If the political will is there for the core to subsidise the periphery, we believe the market should see the euro area as solvent.

Fig. 9: Government debt/GDP and fiscal deficits Bubble size is determined by CDS (Finland = 32, Greece = 872)

Source: Datastream

The solutions to the euro area’s problems are not clear. Options include a bail-out of the periphery by the core (either through direct subsidy from the EFSF or monetisation of debt through ECB purchases) or a managed government default and/or exit from the euro. Despite opposition from core electorates, we believe that ultimately politicians will favour a bail-out over a default because the euro area is “too interconnected to fail”. Domestic banks tend to hold a multiple of their own shareholders’ equity in government bonds. Any material government default or devaluation tends to bankrupt the banking system as asset values tumble while liabilities stay unchanged. Limiting the collapse to a single country is prevented by the high cross-border exposure of European banks. In the following table, we show European banks’ cross-border assets as a percentage of tangible shareholders’ equity (based on BIS and OECD data). Much like national bonds, the exposures sum to a multiple of shareholders’ equity. Bailing out the peripheral euro area is in the interest of core euro area banks. Even US banks have more than 100% of their shareholders’ equity invested in Europe. It is no surprise that the US recently expressed its strong support for the IMF providing more money to the EFSF.

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Fig. 10: European bank cross-border exposure as a percentage of shareholders’ equity Shaded boxes represent countries where exposure is over 25% of shareholders' equity

Source: BIS, OECD

Peripheral risks: A long-term concern; Italy best positioned

An additional challenge we see in Europe is the weak state of some national banking systems. Despite the “reassuring” result of the July 2010 stress tests, the Irish banks needed bailing out before the end of the year (prompting the CEBS to state that it would rerun the stress tests including with liquidity tests early in 2011). Where banking markets are under-capitalised with respect to the bad assets still on their balance sheets and debt markets are unwilling to finance the risk (with even the ECB looking to reduce liquidity), governments may have to step in to guarantee the bank debt, as in Ireland, which can add significantly to debt/GDP. This is why the performance of bank stocks has shown such high correlation with debt markets in 2010.

Fig. 11: Government debt/GDP if bank liabilities are assumed Guaranteeing the bank sector can bankrupt the government, as seen in Ireland

Source: Datastream

While we are optimistic that a solution will be found for the peripheral euro area, without significant haircuts being imposed on the private sector (at least for all but the smallest states) the form today is unclear. It could include a significant increase in the size of the EFSF/ESM such that even a country as large as Spain could rely on it for funding for several years (currently the EFSF would only finance Spanish bond issuance through to mid-2012, which is far from long enough to stabilise debt/GDP levels). Alternatively, the ECB could significantly increase its peripheral bond buying, monetising the debt, or Europe could issue E-bonds, where the joint guarantee should lower financing costs.

Bank system Country of exposure TotalExposure/SHE Austria Belgium France Germany Greece Ireland Italy NL Portugal Spain Sweden Switz UK /SHEAustria - - 10% 58% 4% 5% 25% 14% 2% 8% 2% 14% 25% 167%Belgium 4% - 91% 29% 3% 45% 43% 36% 8% 31% 2% 2% 67% 360%France 6% - - 74% 16% 12% 116% 34% 11% 45% 4% 15% 86% 420%Germany 22% 9% 50% - 9% 35% 39% 38% 9% 46% 10% 14% 118% 400%Greece 0% 0% 5% 14% - 1% 1% 9% 0% 2% 0% 2% 45% 81%Ireland 7% 8% 26% 43% 11% - 56% 18% 7% 37% 3% 9% 273% 500%Italy 32% 1% 9% 69% 1% 4% - 6% 1% 7% 1% 3% 11% 145%Netherlands 6% 72% 54% 103% 3% 13% 29% - 4% 48% 3% 11% 80% 427%Portugal 1% 1% 16% 8% 19% 7% 7% 20% - 45% 1% 5% 14% 142%Spain 2% 2% 9% 13% 0% 5% 11% 6% 25% - 1% 2% 124% 199%Sweden 3% 6% 22% 136% 1% 7% 3% 17% 1% 7% - 7% 69% 279%Switzerland 7% 8% 43% 69% 2% 12% 8% 26% 2% 8% 6% - 126% 317%UK 2% 6% 58% 38% 3% 28% 14% 30% 5% 23% 5% 8% - 221%US 1% 3% 16% 15% 0% 4% 2% 8% 0% 3% 2% 5% 45% 103%

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11

Whatever the solution though, it will involve a subsidy from the core to the periphery of the euro area, which will be unpopular with electorates. For this reason, politicians will act slower than the market wishes in the hope of avoiding the inevitable, creating high volatility as bond markets force governments into action. With hindsight, we believe these will prove strong buying opportunities, particularly for northern European banks where earnings risk is lower, but we acknowledge that at the time calling the turning point will be difficult with valuation only a limited guide.

We believe the peripheral euro area will be a long-term concern for the market. Even if the austerity packages are successfully passed and financing costs reduced, it will take some years before debt/GDP levels are stabilised and many more years to reduce these to more manageable levels. Periods of stress and relief tend to focus around government bond auctions. Greece and Ireland have the highest level of short-term debt but already have support packages in place. Spain has significant refinancing needs in April, while Italy has a fairly constant level of issuance throughout the year.

Fig. 12: Government debt maturity profile Greece and Ireland have already negotiated support packages

Source: Eurostat

Fig. 13: Sovereign issuance 2011 (coupon + redemption) April is a key month for Spanish bond redemptions

Source: Eurostat

While banks in the southern European states of Portugal, Ireland, Italy, Greece and Spain tend to trade together, we would emphasise that it is the smaller states that are perceived as the highest risk. Spain has comparatively low public sector debt/GDP, but high private sector debt and a weak banking market make for a large contingent liability. Italy also has a relatively high amount of public and private sector debt that is domestically held, which helps the financing. Italy also has a smaller fiscal deficit, a relatively stronger growth outlook and lower financing costs (spread over bunds this is currently 1.5% versus 2.4% for Spain, 3.2% for Portugal, 4.9% for Ireland and 8.8% for Greece). We therefore see Italy as the least risky among southern European states, although we do not see valuations or the interest rate environment as supportive of Italian banks.

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12

Banks will not dilute to meet Basel 3

Summary

We do not predict a flood of equity issuance to comply with Basel 3, although some banks may chose to raise capital for specific reasons (eg, to repay government debt or to finance an acquisition). We believe that almost all listed banks can meet required capital levels by 1 January 2013 (well ahead of the 2019 deadline) through retained earnings (at the cost of minimal dividends). This task should be made easier if the Basel Committee revises lower its RWA calculations as expected (potentially before year-end). Book value multiples are therefore real (ie, not pre-dilution), which is supportive of the valuation case for the sector. We believe the SIFI (too big to fail) issue will be dealt with via a menu of options (more common equity or cocos or bail-in debt) such that many countries will not demand more equity than the 7% minimum (although banks will wish to have their own buffer). Despite G20 aims, this creates clear regulatory arbitrage, particularly for investment banks operating in more stringent countries. While regulators will decide whether banks are required to issue equity through setting the national minimum capital standards, we continue to believe the market will form its own view of the appropriate level of capital based on an individual bank’s business mix (investment banks requiring more). We predict more leveraged banks continuing to trade at a discount to less leveraged stocks, but we believe this discount will narrow through 2011 as investors become more comfortable with higher capital levels.

Basel 3 impact: favours retail over investment banks

In the chart below, we illustrate the change in core Tier 1 ratio moving from Basel 2 to Basel 3. This incorporates the pre-mitigation increases in RWAs, as well as the fully phased capital deductions (for securitisations, deferred tax assets, minority interests among others). Although mitigation strategies and utilisation of deferred tax assets (DTAs) should improve the impact with time, investment banks fare much worse than retail banks (by virtue of a near doubling in RWAs), with a negative impact of up to 8% for UBS compared with less than 1% for many retail banks.

Fig. 14: Fully phased change in core Tier 1 ratio from Basel 2 to Basel 3 Note US banks still operate under Basel 1

Source: Company reports

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In the chart below, we show the pro forma Basel 3 core Tier 1 at 3Q10 (fully phased for deductions). In addition, we show the benefit claimed by investment banks from mitigation strategies, eg, from selling toxic assets or securitisation tranches, and the benefit of just over two years of retained earnings to the end of 2012.

Fig. 15: Pro forma Basel 3 capital ratios Fully phased at 1 January 2013


We observe that with the exception of Credit Agricole (which will need to rely on the promised support of the regional banks through what the company described as a “creative solution”, all these banks will exceed the global minimum standard of 7.0% by 1 January 2013 even on a fully phased basis (the deduction in practice phasing in over five years to 2019).

This supports our assertion that the sector can meet new capital regulations through retained earnings rather than through a flood of rights issues. Current bank book value multiples are therefore real (ie, not pre-dilution), which is supportive of the valuation case for the sector.

Inevitably, banks will wish to maintain a small buffer over the minimum in order to avoid any unexpected loss eating into the ability to pay dividends or compensation. Furthermore, countries where bank assets are very large compared with GDP (see Figure 9) are likely to demand additional measures; however, one outcome of the November 2010 G-20 meetings was that the SIFI issue (too big to fail) will be dealt with via a menu of options (more common equity or cocos or bail-in debt). Precise details are expected in late 2011.

This means that while some countries such as Switzerland and, likely in our view, the UK are targeting a minimum 10% core Tier 1 for their banks, many others such as France, Germany and Italy may target not more than 7%. As we discuss in a subsequent section, despite G20 aims, this creates clear regulatory arbitrage, particularly for investment banks operating in the more stringent countries.

While regulators will decide whether banks are required to issue equity through setting the national minimum capital standards, we continue to believe the market will form its own view of the appropriate level of capital based on an individual bank’s business mix (investment banks requiring more). We predict more leveraged banks will continue to trade at a discount to less leveraged stocks, but we believe this discount will narrow through 2011 as investors become more comfortable with higher capital levels.

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14

Investment banks to stay de-rated

Summary

Not only do investment banks suffer the biggest negative impact under Basel 3 (with often a doubling in RWAs), they also suffer the greatest challenges from changes to market structure (eg, swaps clearing and prop trading restrictions) and further taxation (wholesale liability taxes). These effects are hard to quantify, but simplistically unless investment banks are successful in significantly increasing margins or business mix, or pushing compensation costs lower (unlikely in 2011), pro forma ROEs appear to be not much more than the COE. As a result, it would appear right that these stocks should trade in a range around tangible book. Regulatory arbitrage potentially produces a significant headwind for Swiss and, to a lesser extent, UK investment banks, and a benefit for German and French investment banks. Swiss banks could also remain under pressure until the depth and the pricing of the coco market is established.

Pro forma ROEs under Basel 3

Fig. 16: Investment bank pro forma ROE under Basel 3

Source: Company reports, Nomura estimates

In the table above, we have illustrated the potential impact on ROTE of Basel 3. In 2006 (on what was probably at the time an unrealistically light economic capital allocation), the wholesale divisions of the investment banks above claimed an average ROTE of 30%.

Based on our 2012 forecasts (which in aggregate we believe are not very different from consensus), and on the assumptions that (1) each 5% mitigation of RWAs costs 1% of pre-tax profit (a questionable assumption, but one for which we have received little guidance); and (2) capital is allocated at 8-10% of RWAs depending on geography, we estimate a pro forma ROTE in 2012 of a little over 13%, arguably not much more than the cost of equity for these divisions.

While some costs of new regulation in some businesses have been passed on to customers through wider margins, high competition has limited the effect. Shareholders have absorbed the vast majority of the cost of the new regulation as price/tangible book multiples have tumbled.

The challenge for investment banks is to try to shift the business mix into higher RoRWA flow businesses without competing away the returns, or to share more of the burden of the regulatory costs with employees in order to lift the ROTEs into the 15-20% range, which investors would find more acceptable. For 2011, this latter development looks unlikely as numerous banks have commented that competition for talent is intense. Furthermore, the deferment of compensation into 2012 and beyond through changes to payment mix will weigh on the ability to reduce these costs significantly in future years.

Overall, therefore, the fact that many of the global pure investment banks trade at around 1x tangible book value should not be a surprise. Banks that currently deliver a higher RoRWA (eg, BNP, GS) or which benefit from regulatory arbitrage (eg, DBK) have a better chance of delivering a better headline ROTE.

Wholesale Division BARC BNP CS DBK RBS SG UBS C GS JPM MS AverageIB pretax profit 2010E 4,443 5,775 4,079 6,133 3,252 2,696 2,813 11,283 12,255 10,369 4,933IB pretax profit 2012E 4,816 6,129 4,881 6,270 2,972 3,749 4,612 14,509 14,992 12,105 7,329

IB RWA 3Q10A 194,300 188,480 153,053 200,916 213,750 115,500 126,200 481,440 399,600 440,000 260,800IB RWA post Basel 3 gross 344,300 258,480 328,053 478,916 343,750 257,540 321,200 na 705,600 840,000 500,800IB RWA post Basel 3 net 294,300 258,480 268,053 325,916 328,750 244,500 221,200 807,415 605,600 660,000 400,800Mitigation (15%) 0% (18%) (32%) (4%) (5%) (31%) na (14%) (21%) (20%)

Mitigation profit loss (3%) 0% (4%) (6%) (1%) (1%) (6%) (4%) (3%) (4%) (4%)Capital allocation 10% 8% 10% 8% 10% 8% 10% 9% 9% 9% 9%Tax rate used 30% 30% 25% 34% 30% 30% 25% 32% 33% 35% 32%

IB Reported ROE 2006A 41% 25% 16% 24% 37% 46% 29% 29% 33% 18% 30% 29.8%IB Proforma ROTE 2010E 10% 20% 11% 15% 7% 10% 9% 10% 15% 11% 9% 11.4%IB Proforma ROTE 2012E 11% 21% 13% 15% 6% 13% 15% 13% 18% 13% 13% 13.7%


15

The costs of regulatory arbitrage (bear case for Swiss banks)

Despite the stated intentions of the G20, there is bound to be strong regulatory arbitrage under Basel 3 given the inability to agree common standards for SIFIs (or institutions deemed “too big to fail”). Countries such as Switzerland and the UK, where banking assets to GDP are very large, prefer banks to carry additional common equity, targeting a minimum core Tier 1 of at least 10% in the case of Switzerland (and we assume the UK will set a similar target). Others such as Germany and France have indicated that they prefer to deal with SIFIs through better supervision, contingent convertibles and/or bail-in debt, meaning their banks can operate much closer to the global minimum core Tier 1 requirement of 7%. As a result, a bank operating in a 10% core Tier 1 regime must earn a net profit more than 40% higher than an identical bank operating in a 7% core Tier 1 regime in order to deliver the same ROE.

The Swiss banks benefit from a lower corporation tax rate and, furthermore, Switzerland has not proposed a wholesale liability tax as many other European countries have agreed to implement. This goes some way to offsetting the reduced ROE from a higher capital requirement. However, as we show in the illustration below, we believe the higher capital requirement more than offsets these advantages and the advantage of a higher ROA from the synergies of running an integrated investment/private bank.

Fig. 17: Illustration of ROEs based on different capital allocations Swiss tax and synergy benefits more than offset by higher capital requirements

Source: Nomura research

Swiss banks also need to issue up to 9% of RWAs in contingent convertible instruments (cocos), a market that barely exists today. If such a market does not appear in the next decade, even more common equity must be held, which would not make it economic to domicile an investment bank in Switzerland. Until the market becomes deeper, some investors could be more cautious on the Swiss banks.

The costs of these cocos are difficult to determine today. Credit Suisse believes the 3% of high-trigger cocos that convert to common equity at a 7% core Tier 1 should not cost much more than the current hybrid, which yield a very high 750bp over senior debt as much of it was issued at the peak of the crisis. Credit Suisse adds that the 6% of low-trigger cocos that convert to common equity at a 5% core Tier 1 will replace Tier 2 capital (yielding 100-350bp over senior debt) and that the future cost of senior debt should be lower than in the past given the greater equity buffer. While the price of other coco issues such as Lloyds suggests this belief might be a little optimistic, the fact that staff are likely to receive these instruments in lieu of share-based payments should help limit the overall cost.

Switzerland Germany

Assets 1,000,000 1,000,000

Wholesale funding 40% 40%

RWAs 400,000 400,000

Core Tier 1 ratio 10% 7%

Required tangible equity 40,000 28,000

Pretax ROA - ordinary 1.00% 1.00%

Pretax ROA - synergy 0.10% 0.00%

Pretax profit 11,000 10,000

Tax - ordinary 22% 34%

Tax - wholesale 0.00% 0.05%

ROE 21% 23%


16

Credit quality a peripheral earnings risk

Summary

NPL and provision trends show that credit quality concerns are easing except in economies where there is a high risk of a double dip (eg, Greece, Ireland, Portugal and Spain). The costs of austerity and cleaning up the banking systems in these economies generate higher earnings risk and, as a result, our EPS forecasts tend to be more below consensus in southern European economies than northern European ones.

Macro outlook

In the charts below, we show GDP and unemployment forecasts by country, each a key leading indicator for future credit quality. Across Europe, there is a wide range of GDP forecasts for 2011, from strong growth in some Scandi and CEE countries (which is already leading to interest rate rises) through to a double-dip recession in Greece and Portugal. Growth in some southern European countries, such as Portugal and Spain, is sufficiently close to zero that the impact of increased austerity measures could conceivably see these countries also dip back into recession. This outlook is mirrored in the outlook for unemployment, which in general is expected to be persistently high in southern European economies compared with northern European economies.

Fig. 18: GDP forecasts by country Sorted by cumulative GDP growth 2010-11

Source: Datastream

Fig. 19: Unemployment forecasts by country Sorted by unemployment in 2011

Source: Datastream

NPL and provision trends

As shown in the following charts, after a strong acceleration in NPLs as a percentage of loans during 2H08 and 2009, the rate of increase has levelled into 2010, particularly for northern European economies. As a result, we believe provisions for the sector will continue to trend downwards in 2011-12, with northern European banks seeing a quicker normalisation than southern European banks.

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Fig. 20: NPLs/total loans Inflows moderating, especially in N Europe


Fig. 21: Forecast provisions N Europe expected to normalise faster than S Europe


Earnings risk

The costs of austerity and cleaning up the banking systems in southern Europe generates higher earnings risk and, as a result, our EPS forecasts tend to be more below consensus in southern European economies than northern European ones.

Fig. 22: Nomura 2011 EPS forecasts versus consensus Compared with IBES consensus

Note: For Lloyds, we believe our 2012 earnings estimate of 9.6p is a more relevant measure given the trend of normalising credit costs.


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18

Funding a key differentiator for 2011

Summary

Funding is arguably a bigger issue than credit quality for the sector in 2011. The ECB wants to withdraw excess liquidity and have member states guarantee bank debt if necessary (adding to the burden of debt/GDP). The divergent perceptions of the liquidity and solvency of northern and southern European sovereigns are having a similar effect on the issuance and cost of debt of their banks. Those banks operating in lower-risk countries (eg, Germany) and with lower funding costs (eg, Nordics) have an advantage both in terms of net interest margin and valuation (discount rate). We note that a recovery in bank debt issuance in June 2010 was a catalyst for the end of the first phase of the sovereign crisis, and we believe investors will closely watch this in 2011.

North/south divide in funding

Fig. 23: EU bank bond redemptions (EUR bn equivalent) EUR 1.4trn of refinancing need in 2011-12

Source: Dealogic, Nomura research

Fig. 24: EU bank bond supply (EUR bn equivalent) EUR 720bn supply in 2010E versus EUR 760bn redemptions

Source: Dealogic, Nomura research

Unlike their corporate counterparts, European banks have persistently high refinancing requirements, with an estimated EUR 1.4trn of redemptions in the next two years. Supply in 2010 (across all instruments and currencies) of EUR 720bn compared with EUR 760bn of redemptions, with some peripheral issuers (Ireland/Portugal/Greece) unable to tap the public capital markets all year. The market is wary of a funding cliff of maturing government-guaranteed bank debt, which peaks at EUR 131bn in 1Q12 with EUR 80bn also due in 2Q12.

Fig. 25: M/M change in banks’ use of ECB repo operations

Source: ECB, Nomura research

Fig. 26: Periphery bank reliance on ECB funding

Source: ECB, Nomura research


19

ECB repo operations are thus still vital to funding periphery bank balance sheets, particularly for Greek and Irish banks. Smaller Spanish and Italian banks have had some notable capital market success in the covered bond space in 2010, helped by decent relative value and regulatory developments (covered bonds are the only bank debt eligible for liquidity ratios under Basel 3 and covered bonds favourable to AAA corporate bonds for insurance companies under Solvency II).

For some of the peripheral issuers (Spanish and Italian), this has been the only capital market open to them for much of 2010 and in the view of our credit analysts, this is likely to be the only market for some time, although much depends on sovereign developments in 2011. In the chart below, we compare the volume issuance of northern versus southern European banks, and an (imperfect) indication of the relative cost shown by a market-cap-weighted CDS.

Fig. 27: North/south divide in debt issuance Renewed issuance in June catalysed sector recovery

Source: Dealogic

Fig. 28: North/south divide in funding costs Market-cap-weighted CDS

Source: Datastream

North/south divide in funding

Taking this to a bank-specific level, in the following chart we illustrate CDS as an (imperfect) measure of relative funding cost, as well as the relative position of each bank’s CDS within the 52-week range (a low score therefore indicating an improved perception of risk).

We would highlight the high correlation between the sovereign and banking CDS with Nordic and Swiss banks among the lowest, and Spanish and Italian banks among the highest (Greek, Portuguese and Irish banks are well off the scale, with CDS much in excess of 800). This underpins our relative preference for northern over southern European banks in general.

We would also highlight the improved risk perception of Swedish, UK and investment banks compared with peers, a function of their relatively stable sovereigns. Of note, we believe is how much Deutsche Bank benefits from the perception of a stable sovereign and indeed a sovereign guarantee despite its low headline capital ratios.

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Modelling the differences in funding cost and availability is challenging as CDS are an imperfect proxy for funding costs, and lower cost options such as covered bonds may be available as a cheaper alternative, eg, for Nordic banks. However, we think banks with high loan/deposit ratios (indicative of greater wholesale funding) and a high CDS are more likely to see margin-related earnings risk, and the stock prices are certainly more correlated with developments in debt markets.

Fig. 30: Loan/deposit ratio 2010E and CDS Italian banks adjusted for retail bonds


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European recommendations for 2011

Summary

The north/south divide was a key theme of ours for 2010, and we believe it will remain a dominant theme not just in 2011, but for many years to come given the lengthy periods of adjustments necessary to bring debt back down to stable levels. Our thesis is that banks in more leveraged southern European economies will see slower loan growth (given private sector deleveraging), weaker margins (owing to a higher cost of funds) and weaker credit quality trends (either a slower normalisation, or in the worst case a double dip). As a result, we believe their earnings will continue to underperform those of their northern European counterparts. At some stage, we believe this may be more adequately reflected in valuations, but as of today we believe the differences are insufficient. We would use macro-related volatility in 2011 to buy northern European banks such as BNP Paribas, Lloyds, DNBNOR and Swedbank.

Key theme: The north/south divide

There is a distinct north/south divide in Europe in the health of economies and banking systems. The former can be measured by indicators such as public or private debt/GDP (ie, leverage), external financing (where a high figure puts a country at the mercy of foreign creditors), fiscal deficits (which require austerity programmes to reduce them), GDP growth, unemployment and bond financing costs. The latter can be measured by lending growth (lacklustre across all Europe), funding capability and cost, non-performing loans (NPLs) and Tier 1 capital ratios. Yet despite some differentiation in share price YTD, on a market-cap-weighted basis, we find northern European banks (in Norway, Sweden, the UK, Germany, France and Switzerland) trade on only a small price/tangible book premium versus southern European banks (Spain, Portugal, Italy, Greece and including Ireland). Over time, we expect earnings and valuations to continue to diverge.

Fig. 31: The north / south divide We believe northern European banks should enjoy more of a premium

Note: North macro data are a simple average of Norway, Sweden, Switzerland, Germany, France and the UK. South data are a simple average of Italy, Spain, Ireland, Portugal and Greece. Debt/GDP comprises public forecast for 2011 plus private debt for 2008. Fiscal deficit and GDP growth are 2010/11 cumulative. Unemployment is 2010 forecast and CDS is as of 8 December 2010. Banks data are market-cap-weighted average. NPLs are as at end-2009 and Tier 1 is 2010 forecast. Price/TBV is as of 9 December, 2010. The northern population is the average of Norway, Sweden, Switzerland, Germany, France and the UK. The southern population is an average of Italy, Spain, Portugal, Ireland and Greece. Source: Datastream, OECD, Central banks, Nomura research

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Recommendations

• French banks: We see an attractive risk/reward, with BNP Paribas our top pick. We upgrade Credit Agricole from Reduce to Neutral.

• •Investment banks: We would be underweight versus commercial banks, favouring UBS over Credit Suisse (CS), which we downgrade to Neutral from Buy.

• •Italian banks: While, in our view, Italy is the least risky of the southern European economies, we see few catalysts, preferring Intesa over UniCredit.

• •Nordic banks: We remain overweight the region on better growth and capital, with DNBNOR and Swedbank our top picks.

• •Spanish banks: We remain underweight as more capital is needed, but we believe trading opportunities could arise for Santander.

• •UK domestic banks: We believe Lloyds offers good upside potential, but we cannot justify the valuation for RBS. We are positive on Asia in the longer term but fear a near-term correction. We prefer HSBC over Standard Chartered (STAN).

Fig. 32: European bank valuations CEE banks: we prefer Russia and Poland over Turkey. Our top picks are Sberbank, PKO BP and Bank Pekao; we rate Garanti Bank Reduce


EUROPE Rec P/E P/BVP/TBVDiv Yld M.Cap Rec P/E P/BVP/TBVDiv Yld M.Cap15-Dec-10

CurrentTarget+/- % 10E 11E 12E 10E 10E 10E (€ mn) Current Target+/- % 10E 11E 12E 10E 10E 10E (€ mn)Erste Bank Neutral 33.99 35.0 3 17.4 11.7 9.3 1.2 2.0 1.2 12,854 Danske Neutral 144.70 158.0 9 19.9 9.5 7.2 0.9 1.2 0.8 13,567Raiffeisen Reduce 41.68 37.0 -11 24.3 10.5 7.4 1.1 1.4 0.6 8,150 DNB Buy 78.50 101.0 29 10.3 10.1 8.6 1.2 1.3 4.9 16,210Austria 20.0 11.3 8.5 1.2 1.7 1.0 21,004 Nordea Reduce 73.40 69.0 -6 12.4 10.7 9.9 1.3 1.5 3.4 32,531Dexia n/c 3.01 n.a n.a 7.9 7.9 6.3 0.6 0.6 1.3 5,561 SEB Reduce 55.10 49.0 -11 26.1 11.5 10.9 1.2 1.5 3.2 13,109ING Neutral 7.73 9.0 16 9.4 8.1 7.2 0.6 0.7 29,603 Swedbank Buy 94.30 117.0 24 15.9 11.2 10.1 1.2 1.4 3.1 9,846KBC n/c 29.16 n.a n.a 6.2 6.0 5.1 0.9 0.9 2.9 10,437 SHB Neutral 214.80 250.0 16 12.8 12.0 10.7 1.6 1.7 4.0 14,406SNS Reaal n/c 3.27 n.a n.a 6.8 4.2 3.0 0.2 0.2 0.9 939 Nordics 15.3 10.8 9.6 1.3 1.4 3.3 99,668Van Lans n/c 30.96 n.a n.a 18.9 10.2 8.7 0.9 0.9 2.4 917 BCP Buy 0.63 0.8 19 16.7 11.6 8.1 0.6 0.7 3.0 2,967BeNelux 7.9 6.2 5.4 0.7 0.7 0.9 47,457 BES Neutral 3.04 4.3 41 7.6 8.8 6.8 0.6 0.6 4.6 3,550BNPP Buy 51.85 72.0 39 7.6 6.5 5.8 0.9 1.2 4.3 62,124 BPI Reduce 1.50 1.7 13 7.3 9.8 7.7 1.0 1.0 5.5 1,350Credit Ag. Neutral 10.67 13.0 22 10.6 6.1 4.8 0.5 1.0 4.2 25,614 Portugal 11.0 10.0 7.5 0.7 0.7 4.2 7,867Natixis Reduce 3.73 3.6 -3 8.1 7.4 6.7 0.7 0.9 6.7 10,847 Banesto Buy 6.46 8.3 28 7.7 7.6 6.8 0.8 0.8 6.5 4,443Soc Gen Buy 42.10 55.0 31 8.4 6.3 5.5 0.8 1.0 4.0 31,421 Bankinter Reduce 4.37 4.5 3 11.0 12.0 9.5 0.8 0.9 4.6 2,068France 8.4 6.4 5.6 0.8 1.1 4.4 ##### Popular Reduce 4.18 4.5 8 35.6 12.4 8.9 0.6 0.7 6.5 5,754Aareal n/c 21.68 n.a n.a 21.0 11.1 7.8 0.7 0.7 927 Sabadell Reduce 3.21 2.9 -10 11.0 14.3 9.8 0.7 0.8 5.0 4,052CBK Neutral 5.90 6.4 9 5.1 16.1 6.6 0.6 0.9 6,968 Spain - domest 18.8 11.5 8.6 0.7 0.8 5.9 16,318DBK Reduce 40.16 45.0 12 11.5 7.2 6.8 0.8 1.1 1.7 37,324 BBVA Neutral 7.99 12.5 56 6.7 5.8 4.7 0.9 1.2 5.6 35,882Postbank Neutral 20.83 24.0 15 19.3 10.5 7.4 0.8 1.1 4,558 SAN Neutral 8.37 11.0 31 8.6 7.0 6.1 0.9 1.4 7.2 69,698Germany 11.5 8.8 6.8 0.8 1.1 1.3 49,776 Spain 9.4 7.3 6.0 0.9 1.3 6.5 1,21,898Alpha Bank Buy 4.46 6.1 37 74.1 18.1 6.1 0.6 0.6 2,383 EFG Intl Reduce 13.10 12.0 -8 n.a 11.9 7.7 1.3 2.4 1,491Eurobank Neutral 4.37 6.0 37 n.a 21.8 6.0 0.6 0.7 2,354 Julius Baer Buy 43.91 44.0 0 17.2 14.6 12.5 2.0 3.5 0.9 7,042NBG Neutral 6.95 9.0 29 13.3 7.3 6.0 0.7 0.9 6,645 Sarasin Neutral 40.25 40.0 -1 16.4 14.5 11.6 1.9 2.1 2.1 1,611Piraeus Reduce 3.45 3.6 4 n.a 22.2 7.7 0.4 0.5 1,160 Vontobel Reduce 34.20 33.0 -4 13.9 10.6 8.8 1.6 1.7 3.5 1,725Greece 21.1 13.4 6.2 0.6 0.8 12,541 Swiss Pvt. Bank 14.4 13.7 11.3 1.9 2.9 1.3 11,870AIB n/c 0.44 n.a n.a n.a n.a 6.3 0.2 0.2 474 CS Group Neutral 39.00 48.0 23 8.3 6.9 5.9 1.3 1.8 3.8 35,902BKIR Neutral 0.41 0.3 -23 n.a n.a n.a 0.5 0.5 2,146 UBS Buy 16.14 22.0 36 8.0 7.7 6.1 1.3 1.6 47,986Ireland 1.1 0.4 0.4 2,621 Switzerland 8.9 8.1 6.7 1.4 1.8 1.6 95,757BP Milano Neutral 2.83 3.2 13 16.7 8.8 6.0 0.3 0.4 3.3 1,175 Barclays Neutral 272.00 300.0 10 11.2 8.5 7.3 n.a 0.8 1.8 39,062Popolare Reduce 3.51 3.2 -9 13.7 7.4 5.0 0.2 0.5 2.3 2,245 Lloyds Group Buy 69.34 80.0 15 119.0 14.0 7.2 n.a 1.1 55,671Intesa Neutral 2.21 2.6 18 10.3 8.3 6.4 0.5 1.0 3.7 26,187 RBS Reduce 41.34 41.0 -1 46.8 12.6 8.2 n.a 0.8 53,129Mediobanca Buy 6.96 9.0 29 14.9 10.7 8.5 0.9 0.9 2.4 5,993 UK - domestic 64.6 12.0 7.6 0.9 0.5 1,47,862MPS Reduce 0.90 0.9 0 53.3 12.3 7.7 0.4 0.8 6,041 HSBC Neutral 671.70 725.0 8 14.0 11.7 9.6 n.a 1.7 3.4 1,39,400UBI Banca Neutral 7.07 7.5 6 21.0 10.3 7.9 0.4 0.8 4.2 4,519 Stan Chart Reduce 1750.50 1690.0 -3 13.4 13.4 12.2 n.a 2.3 2.4 48,413UC Group Neutral 1.70 1.9 12 19.0 9.4 6.6 0.5 0.9 1.5 32,765 UK 36.2 12.1 9.1 1.4 2.0 3,35,675BPER Neutral 9.85 10.7 9 17.9 10.3 7.2 0.8 0.9 1.6 2,499 Cont Europe 11.7 8.3 6.8 0.9 1.2 3.3 6,71,555Credem Buy 4.62 5.3 15 13.1 10.1 8.0 0.8 1.0 3.3 1,536 Pan Europe 19.9 9.6 7.5 0.6 1.3 2.9 10,07,230Italy 18.3 9.4 6.8 0.5 0.9 2.4 82,959

Price Price


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French banks: Attractive risk/reward led by BNP Paribas Jon Peace [email protected] +44 20 7102 4452

Summary

As large liquid holders of European government bonds, the French banks have traded as a group with a high correlation to southern European banks despite generally having a small direct retail exposure outside of Italy (the exception is Credit Agricole, which has retail operations in Greece and bank stakes in Spain and Portugal). With our thesis that European government bonds will be bailed out at the cost of greater austerity for over-leveraged states (hence, weaker profits for local retail banking operations), we believe French banks offer some of the best risk/reward trade-off in the sector for 2011, trading at around 1x TBV for mid-teen normalised ROTEs. With valuations having shown a significant compression, our preferred stock is BNP Paribas, which benefits from good risk management, strong capital and hidden value from the Fortis acquisition. We also rate Société Générale as a Buy given its low valuation, improving risk profile and undervalued exposure to the CEE region. In this report, we upgrade Credit Agricole from Reduce to Neutral with an unchanged price target, having underperformed the sector by over 10% in the past six weeks on capital and sovereign concerns. We believe that even on a de-geared basis, the shares now offer reasonable value and that with creative solutions from the regional banks, an equity capital raising could be avoided.

Investment theses

BNP Paribas BNP Paribas is primarily a retail bank operating in the core euro area countries, giving it more limited exposure to sovereign risk than the peripheral euro area economies. Following the acquisition of Fortis, BNP ranks as the largest deposit taker in the euro area, which gives it a funding advantage evidenced by one of the lowest CDS in the sector. While investment banking has been an important near-term contributor, at just 20% of normalised earnings (excluding financing), the risk from normalising FICC trading and increased regulation is manageable, in our view.

BNP trades on 5.7x our normalised 2012 earnings estimate of EUR 9.00, a sharp discount to the sector average of 7.5x. As we estimate a Basel 3 pro forma core Tier 1 on 1 January 2013 of 10.6% (excluding organic RWA growth and dividends), we believe that BNP should benefit from a re-rating as the leverage discount reduces. Our 2012 EPS forecast is some 7% ahead of consensus, in part because we believe analysts continue to underestimate the earnings power of the core businesses within the corporate centre. The shares trade on a price/tangible book of 1.0x (inclusive of up to EUR 5 of hidden value from Fortis) versus a sector average of 1.3x. We believe this is good value versus a target normalised ROE of around 15% (hence, ROTE of around 18%).

Société Générale

Société Générale (SocGen) similarly is primarily a retail bank with operations in the core euro area countries, with some additional exposure to higher-growth CEE countries (16% of normalised earnings, particularly in the Czech Republic, Romania and Russia). While SocGen does have a subsidiary in Greece, the EUR 4bn loan book is small and well provisioned. Losses on toxic assets caused significant P&L volatility in 2009, but in 2010, SocGen has seen a sharp rebound in profitability, which should continue into 2011 as credit costs continue to normalise. The hiring of Blackrock to perform an independent audit on the marks of the toxic assets in June 2010 was seen as a turning point in the risk profile of the stock.

SocGen trades on just 5.4x normalised 2012E earnings and 1.0x TBV compared with sector averages of 7.5x and 1.3x, respectively. Given that we believe SocGen can deliver a ROTE of 14.9% in 2012, this represents a good entry point. Although SocGen is not as well capitalised as BNP, we see recent market concerns about the risk of


24

raising additional capital as misplaced given good core profitability and the ability to make strategic disposals (such as the custody business). In addition, France remains a ‘soft touch’ regulator, which should not ask for a SIFI/“too big to fail” premium through additional common equity requirements.

Credit Agricole Credit Agricole SA is the listed minority (44% float/employee held) of Credit Agricole group, the largest retail bank by market share in France. Versus its largest domestic peers, it is overweight in French retail and asset gathering (each 30% of normalised profit) and underweight in corporate and investment banking (17% of normalised profit) and international retail (7% of normalised profit, including branches in Italy and Greece, and stakes in Bankinter in Spain and BES in Portugal). Agricole has been affected by its above-average exposure to Greece (troubled subsidiary Emporiki has generated large losses on its c.EUR 30bn balance sheet) and under new management impairments could again be taken, but, in our view, investors now have a better idea of potential losses in their forecasts.

The bank has always and continues to trade at a modest discount to the domestic peer group (4.8x 2012E earnings versus France 5.6x and the Banks sector 7.5x and 1.0x TBV versus France 1.1x and sector 1.3x). This reflects primarily the high leverage of the business, with a pro forma Basel 3 core Tier 1 on 1 January 2013 of just 6.9% even with a moderately favourable RWA treatment for the regional banks. However, Agricole will be able to rely on creative solutions from the regional banks (eg, RWA reinsurance) in order to meet its Basel 3 capital requirements without necessarily resorting to a capital increase (although we could not totally rule one out) and the guarantee from the regional banks allows Agricole to fund at one of the lowest rates in the sector despite its high leverage. After recent underperformance saw its de-geared 2012E P/E drop to 7.3x, a discount to the sector, we upgrade the shares to Neutral (from Reduce) ahead of the investor day from the new CEO in March 2011.

France a northern European economy

The north/south divide has been a key theme of ours in 2010, and given diverging economic trends and current valuations, we believe this will also be an important theme in 2011. While France’s public sector debt, fiscal deficit and unemployment are towards the higher end of northern European economies, its key measures are better than southern European averages. A comparatively low level of private sector debt and an absence of significant stress in funding markets have led to healthy loan demand, on a par with the Scandinavian banks.

Fig. 33: N Europe domestic lending growth France on a par with Scandinavia

Source: ECB

Fig. 34: S Europe domestic lending growth Italy the best but growth still weak

Source: ECB

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Southern European government bond exposures moderate

French banks have shown a high correlation with southern European banks in 2010 despite, in our view, being lower risk because their exposure is primarily through government bonds. With our thesis that European government bonds will be bailed out at the cost of greater austerity for over-leveraged states (hence, weaker profits for local retail banking operations), we believe French banks offer some of the best risk/reward trade-off in the sector for 2011.

According to CEBS data, total exposure to peripheral government debt as a percentage of tangible shareholders’ equity stands at c.70% for Credit Agricole, 65% for BNP Paribas and 40% for SocGen, less than many large-cap peers, with the majority of exposure relating to the relatively lower-risk Italy.

Fig. 35: Peripheral sovereign bond exposure as percentage of tangible shareholders’ equity French bank exposures moderate, particularly outside of Italy

Source: CEBS, Nomura estimates

In terms of direct retail operations, Agricole has the highest-risk exposure through its stake in Emporiki with a balance sheet of around EUR 30bn. While heavy provisions have already been booked and losses are expected to continue until 2012, we believe that forecasts are now more realistic. Agricole also has exposure to Italy, having bought retail networks from Intesa, and holds stakes in Bankinter in Spain (currently with an unrealised loss) and BES in Portugal.

BNP Paribas also has around EUR 160bn of exposure to Italy by way of its acquisition of BNL. With the Italian economy arguably in the best shape among southern European states, credit costs have stabilised, and we expect these to decline in 2011. BNP also has some exposure to Spain through consumer finance operations, which also have led to an elevated cost of risk, although in a group context, again we see this as manageable.

SocGen has a small exposure to Greece through its Geniki subsidiary, although the EUR 4bn balance sheet is a fraction of the size of Credit Agricole’s exposure. Other direct-lending exposures are small.

Leverage over-discounted in multiples, particularly for BNP

Although France is a ‘soft’ regulator, which emphasises better regulation and risk management over more common equity, the French banks have traditionally traded at a modest discount to the sector, which reflects their higher leverage (lower core Tier 1 ratios). Over the 20 years pre-crisis to June 2008, the French banks traded on average at 83% of the Bank sector multiple.

Today the discount is wider, with the French banks trading on 5.6x 2012E normalised earnings, or 75% of the market multiple. We believe this is too wide for the sector both in a historical context and relative to current capital levels. As we illustrate below, on a de-geared basis (target 8% core Tier 1 for European banks and 10% for UK, Swiss and Scandi banks), we believe the French banks offer good relative value.

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We believe this is particularly the case for BNP Paribas, which reported a particularly good pro forma Basel 3 core Tier 1 at 7.3% at 3Q10A, improving to 10.6% on 1 January 2013 (ex organic RWA growth and dividends). On this basis, we believe there is a good argument for a re-rating of the stock.

Fig. 36: French banks P/E relative to Banks sector 20-year average is 83% of the sector multiple, current 75%

Source: Datastream

Fig. 37: De-geared 2012 P/E ratios Based on 8% target CT1 for euro banks and 10% for UK/Swiss/Scandi


Earnings catalysts for individual stocks

Looking beyond the above-average correlation with southern European and regulatory developments, we would identify the following stock-specific catalysts for the French:

BNP Paribas (earnings upgrades): BNP is one of the stocks where we are most ahead of consensus. We believe the market underestimates the persistency of the market share gains in investment banking and is underestimating the core earnings in the corporate centre. Furthermore, BNP bought Fortis at around half book value. While some of the purchase-accounting adjustments are visibly accreted back, and others are unlikely to return (goodwill), there is the potential for further write-ups on other loans and securities, which in total could sum to almost EUR 5bn, or EUR 4 per share.

Société Générale (strategic M&A): Following the merger of its asset management business with Amundi, Société Générale has hinted at a number of potential strategic disposals including its custody business and its futures brokerage JV NewEdge. These high-multiple disposals could be used to finance high-multiple acquisitions. In particular, expanding the 16% of normalised earnings from CEE could help improve the stock rating given the high investor appetite for emerging market franchises.

Credit Agricole (restructuring and intra-group subsidy): Under a new CEO in 2010, Agricole plans to follow a mid-December business plan for the mutual group with a more detailed plan for the listed subsidiary in March 2011. The most important development for the stock will be disclosure of the capital subsidies to be provided from the regional banks to Credit Agricole SA to support its Basel 3 capital ratios. However, this is also an opportunity to restructure some of the group’s stakes, perhaps rationalising minority holdings in Iberia and the Middle East in order to focus more on Italy.

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French bank models

Fig. 38: BNP Paribas model

Source: Company data, Nomura estimates

Fig. 39: BNP Paribas sum-of-the-parts valuation


BNP Paribas

Group (EURmn) 2009A 2010E 2011E 2012E

Revenues 40,212 44,467 45,154 47,318

Costs (23,167) (25,636) (26,017) (27,142)

Gross operating proft 17,045 18,831 19,138 20,176

Provisions (8,369) (4,840) (4,156) (3,425)

Equity method earnings 155 204 174 182

Pretax profit excl. extraordinaries items 8,831 14,195 15,156 16,933

Extraordinary items 169 (127) 402 477

Pretax Profits 9,000 14,068 15,558 17,410

Tax (2,526) (4,365) (4,435) (5,026)

Minorities (642) (1,282) (1,347) (1,414)

Net profit (before pref divs) 5,832 8,421 9,776 10,970

Net profit (after pref divs) 5,504 8,121 9,476 10,670

Customer loans 678,766 721,607 764,904 810,798

Customer deposits 604,903 625,851 663,402 703,206

Shareholders equity 61,456 67,775 74,562 82,124

Total assets 2,057,698 2,192,293 2,082,679 2,165,986

Shares outstanding (mn) 1,181.6 1,195.4 1,195.4 1,195.4

Diluted EPS (EUR) 5.20 6.85 8.00 9.00

Dividend per share (EUR) 1.50 2.25 2.60 3.00

Return on equity 10.6% 12.6% 13.3% 13.6%

Return on tangible equity 14.1% 15.9% 16.6% 16.6%

Tier 1 ratio 10.1% 11.2% 11.1% 11.2%

Tangible book value per share 40.86 44.86 50.54 56.86

Divisional profit before tax

Domestic Retail Banking 1,484 1,798 1,905 2,134

BNL 524 442 796 1,033

BeLux Retail Banking 131 729 1,034 1,046

BancWest (197) 587 726 883

Personal Finance 426 870 1,381 1,780

Europe Mediterranean (204) 118 195 284

Equipment Solutions 148 415 462 548

Wealth and Asset Management 714 953 1,010 1,143

Insurance 553 754 759 820

Securities Services 196 173 208 246

Financing 634 2,898 2,738 2,849

Advisory & Capital Markets 4,232 2,877 3,097 3,280

Residual Division 359 1,454 1,250 1,365

KPIs

Equity & Advisory Revenues 1,920 2,335 2,709 2,979

Fixed Income Revenues 8,001 5,693 5,408 5,408

Financing Revenues 3,576 4,532 4,623 4,808

BNP Paribas Norm. Norm. Norm. DCF DCF val

Division 2010E 2011E 2012E ROE CoE P/B mult. val per share

French Retail 1,259 1,333 1,494 21.2% 10.9% 2.0 9.8 14,521 12.15

BNL 292 525 682 11.4% 10.9% 1.1 9.5 6,280 5.25

BNPP Fortis 510 723 732 17.0% 9.8% 1.8 8.6 7,633 6.39

BancWest 382 472 574 14.3% 11.2% 1.4 9.7 5,528 4.62

Personal Finance 631 991 1,272 25.9% 12.7% 2.4 9.7 13,758 11.51

Emerging Retail 82 135 194 5.3% 9.8% 0.2 4.4 235 0.20

Equipment Solutions 267 300 356 14.0% 9.8% 1.5 11.2 4,179 3.50

Wealth & Asset Management 667 707 800 41.1% 10.9% 5.1 12.8 10,183 8.52

Insurance 528 531 574 9.8% 9.2% 1.1 11.6 5,550 4.64

Securities Services 121 145 172 44.2% 11.2% 5.0 11.8 2,167 1.81

Financing 2,029 1,917 1,995 16.2% 11.8% 1.5 9.1 16,650 13.93

Advisory & Capital Markets 2,014 2,168 2,296 16.7% 12.9% 1.3 8.8 12,710 10.63

Corporate Centre (incl. prefs) 57 251 470 11.4% 9.4 4,260 3.56

Private equity portfolio 564 625 475 3,000 2.51

Minorities (unallocated) (1,282) (1,347) (1,414) 11.4% 9.4 (14,013) (11.72)

Excess capital (6,076) (5.08)

Total 8,121 9,477 10,671 86,566 72.42


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Fig. 40: Société Générale model


Fig. 41: Société Générale sum-of-the-parts valuation


Societe Generale

Group (EURmn) 2009A 2010E 2011E 2012E

Revenues 21,801 26,289 27,544 29,131

Costs (15,766) (16,319) (17,165) (17,907)


Provisions (5,848) (3,973) (2,553) (2,333)


Pretax profit 202 6,121 7,935 8,997


Tax 308 (1,775) (2,301) (2,609)

Minorities (430) (405) (535) (575)

Net profit before prefs 678 3,939 5,134 5,853

Customer loans 373,399 400,673 432,426 448,575



Total assets 1,021,701 1,167,250 1,259,756 1,306,801

Shares outstanding (mn) 718.8 718.8 718.8 718.8

Diluted EPS (EUR) 0.46 5.00 6.65 7.65


Return on equity 0.9% 9.7% 11.7% 12.1%

Tier 1 ratio 10.7% 10.5% 10.2% 9.1%


Divisional net profit 2009A 2010E 2011E 2012E

French Networks 1,007 1,271 1,436 1,589

International Retail 459 566 902 1,016

Retail Financial Services 26 353 665 729

Asset Management (10) 98 150 179

Private Banking 206 132 147 169

SG SS & Brokers 6 65 98 118

C&IB - Core 3,516 2,423 2,429 2,628

C&IB - Legacy Assets (2,853) (488) (126) (18)

Corporate Centre (1,679) (482) (567) (556)

KPIs

FICC revenues 3,907 2,802 2,690 2,690

Equity revenues 3,431 2,532 3,038 3,342

Fin & Advisory revs 2,510 2,687 2,902 3,047

Legacy asset revenues (2,820) (132) (100) 0

Societe Generale Norm. Norm. Norm. DCF DCF val


French Networks 1,271 1,436 1,589 20.2% 10.9% 1.9 9.6 15,650 21.58

International Retail 566 902 1,016 21.5% 12.9% 2.0 9.1 9,216 12.71

Specialised Financing & Insurance 353 665 729 12.0% 11.8% 1.0 8.5 6,470 8.92

Asset Management 98 150 179 28.8% 10.9% 3.4 11.8 2,195 3.03

Private Banking 132 147 169 25.2% 10.4% 3.0 12.0 2,087 2.88

SG SS & Brokers 65 98 118 14.7% 10.9% 1.5 10.0 1,323 1.82

Corporate & Investment Banking 1,935 2,303 2,610 15.1% 13.2% 1.2 7.7 16,572 22.85

Corporate Centre (excl. equity gains) (812) (935) (929) 12.4% 8.6 (8,035) (11.08)

Private equity portfolio (3) 35 40 804 1.11


Total 3,606 4,801 5,520 40,181 55.41


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Fig. 42: Credit Agricole model


Fig. 43: Credit Agricole sum-of-the-parts valuation


Credit Agricole

Group (EURmn) 2009A 2010E 2011E 2012E

Revenues 17,894 20,500 21,368 22,584

Costs (12,143) (13,110) (13,565) (14,093)


Provisions (4,688) (3,978) (2,707) (2,000)

Equity method earnings 848 1,342 1,364 1,575

Pretax profit 1,911 4,754 6,460 8,065

Extraordinary items (254) (588) 0 0

Tax (211) (1,337) (1,733) (2,207)

Minorities (319) (478) (508) (546)

Net profit 1,127 2,351 4,220 5,312

Customer loans 362,348 376,200 398,772 422,698



Total assets 1,557,342 1,619,636 1,684,421 1,751,798

Shares outstanding (mn) 2,320 2,402 2,402 2,402

Diluted EPS (EUR) 0.50 1.00 1.75 2.20


Return on equity 2.6% 5.1% 8.8% 10.4%


Common Equity T1 ratio (incl. Eq MI) 4.9% 5.4% 5.9% 6.7%

Tier 1 ratio 9.5% 9.8% 10.1% 9.9%


Divisional net profit

French Retail Banking 1,304 1,605 1,777 2,034

International Retail Banking (458) (961) 158 532

Specialised Financial Services 456 513 882 1,168

AM, Insurance & Private Banking 1,358 1,558 1,732 1,927

Financing 285 1,194 1,058 1,072

Investment Banking (incl. discont ops) (605) (223) 62 263

Corporate Centre (1,213) (1,335) (1,450) (1,684)

Credit Agricole Net profit Norm. Norm. Norm. DCF DCF val


French Retail Banking 1,605 1,777 2,034 18.9% 10.9% 1.8 9.8 16,429 6.84

International Retail Banking (961) 158 532 9.6% 12.1% 0.8 8.2 3,216 1.34

Specialised Financial Services 513 882 1,168 22.6% 13.2% 1.8 8.4 7,578 3.16

AM, Insurance & Private Banking 1,558 1,732 1,927 18.8% 9.5% 2.3 12.7 20,263 8.44

Financing 1,194 1,058 1,072 12.3% 13.2% 0.9 7.6 6,755 2.81

Investment Banking (223) 62 263 4.9% 10.9% 0.3 7.7 1,553 0.65

Corporate Centre (1,335) (1,450) (1,684) 11.4% 10.3 (15,710) (6.54)


Total 2,351 4,220 5,312 31,236 13.01


30

Underweight IBs vs commercial banks; we favour UBS over CS, BARC over DBK Jon Peace [email protected] +44 20 7102 4452 Robert Law [email protected] +44 20 7102 2715

Summary

Basel 3 will weigh heavily on pro forma profitability of the investment banks, cutting the ROEs by more than half from peak levels to around 13% in 2012. Other market structure changes, such as derivative trading/clearing and wholesale liability taxes, will also weigh disproportionately on the investment banks. Until greater visibility is seen, valuations for pure investment banks of around 1x TBV might not be inappropriate, and we believe investors could prefer commercial banks near term. As a result, we downgrade Credit Suisse to Neutral from Buy (reduced PT CHF 48, from CHF 56), and we prefer UBS over CS owing to the hidden value of tax loss carry-forwards. We prefer BARC over DBK given the relative valuation even adjusting for tougher UK regulation. After a difficult two quarters characterised by significant volatility and weak client volumes, the fourth quarter still looks to be a little mixed given a return of sovereign risk, though we see 2011 revenues as a little better than 2010, as a cyclical rebound in M&A and ECM activity and a better performance in equities offset a continued normalisation in FICC.

Investment theses

Barclays We believe Barclays may be confined to a trading range and that a genuine re-rating is unlikely, until current industry profitability issues are resolved. Nevertheless, at the current price of 273p, we think the shares seem near the bottom of the likely range and see some limited recovery potential. At this level, the shares trade on 0.8x end-2010 diluted TBV and 8.5x our estimate of normalised EPS.

Barclays faces the same challenges as the investment banking industry as a whole, in achieving an attractive group RoE, given the regulatory pressure on the industry and the relative size of BarCap in a group context. Even post mitigating actions, BarCap will represent 60% of group RWAs. Assuming a similar Q4 to Q3, BarCap is currently generating top-line revenue of £13bn a year. Using a 33% pre-tax margin, this would be equivalent to profits of £4.2bn, or an RoE as low as 9%, assuming a 10% CT1, loading the UK levy on to the division and apportioning central costs. This will limit the overall group RoE, unless the company can improve the returns at its core business. We estimate that BarCap PBT would have to be raised by at least £2.5bn to achieve a 15% RoE on regulatory capital. Assuming BarCap profits near its 2010 level, we estimate normalised EPS of 32p for Barclays as a whole. This would represent a 10% RoE on a tangible basis.

With a new CEO about to take over, and given the strategic challenges facing the group, there are real uncertainties over future direction, we would argue more so than at other UK banks. Comments the new CEO makes with the full-year figures in early 2011 could be an important indication for the shares. Press reports note that the group is interested in growing its wealth businesses and to view Africa as an important opportunity; however, neither of these can be regarded as likely to be transformational in the short term at least. The market needs to be convinced that the group will seek to extract greater value out of the resources allocated to BarCap and has a convincing plan.

Overall group capital appears less of a concern than appeared to be the case earlier in the year. The pro forma Basel III CT1 ratio of c.8% is similar to most other global investment banking groups, if lower than other UK banks. Although the ratio is likely to have to be increased, we believe Barclays can achieve this organically, as other peers will seek to do. One further issue is the ongoing Lehman Brothers-related litigation. This has the potential for negative sentiment and ongoing uncertainty for an extended period, until it is ultimately resolved.


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Deutsche Bank We recognise that Deutsche Bank’s leading investment bank is performing well versus peers in Q4, but overall performance in 2010 was in line with peers so we believe this will be just a moderate short-term catalyst. The retail and asset-gathering businesses delivered 9M 2010 profits at just a fraction of 2011 targets, leaving the targets vulnerable to any potential further deterioration in the capital markets environment. With hindsight, Deutsche Bank paid a high price to secure the acquisition of Postbank. The market remains rightly sceptical as to whether the claimed level of synergies can be achieved given the challenges in reducing the Postbank staff and branches. We see limited reasons why the franchise might re-rate to offset the dilution considering the size and the quality of the franchise acquired, as well as the fact that Deutsche Bank already enjoys a low cost of funding.

For Deutsche Bank, the stated P/E of 6.7x 2012E (sector 7.5x) and price/TBV of 1.1x (sector 1.3x) appear interesting relative to a normalised (2012E) ROTE of almost 15%. However, when considering the business mix and the capital levels (pro forma fully phased Basel 3 core Tier 1 of 3.9% at 3Q10A), we do not see the valuation as compelling. Even allowing for the fact that German regulators should allow Deutsche Bank to run with a lower target level of capital than peers, and that we expect leverage discounts to decline in 2011 (particularly as Deutsche Bank can fund cheaply relative to peers), on a de-geared basis, we see better valuation elsewhere in the global sector. Particularly for European value investors, even after adjusting for a tougher domestic regulator, we believe Barclays looks more attractive at 0.8x book (for an 8.5% fully phased Basel 3 CT1 at 3Q10A).

Credit Suisse Credit Suisse (CS) underperformed peers in 2010 as trading revenues, private banking margins and book value growth proved weaker than expected. Looking to 2011, we believe each of these should show some improvement, but that valuation and capital could cap upside especially relative to domestic peer, UBS.

In new disclosure, we estimate a pro forma fully phased core Tier 1 of just 5.0% for CS in 3Q10, rising to 9.5% in 2012 (assuming no dividend and no organic RWA growth). By contrast, we estimate figures of 8.2% and 14.7% for UBS, respectively (figures that could be improved upon by more aggressive recognition of deferred tax assets). The market also remains concerned by the appetite for and cost of contingent convertible instruments (cocos), which must form 9% of core capital by 2019. Although we expect some issuance in 2011 (to specialist hedge funds and to staff), we believe it will take some time before the market is fully comfortable with this instrument.

The long-term valuation is reasonably attractive for CS, with a de-geared P/E in line with the sector average despite an attractive business mix and with a P/TBV of 1.8x justified by a high ROTE. However, we argue in this report that in recovering markets, investors may prefer lower P/TBV stocks, especially as it will take CS some time to build capital levels in line with Swiss regulatory demands. As a result, we downgrade the stock to Neutral with a CHF 48 target.

UBS In an environment of weak revenue growth, we believe restructuring stories should deliver superior earnings momentum. The UBS business plan calls for EPS of CHF 3.00 in 2012, against current consensus of CHF 2.12. We believe FICC trading, wealth management gross margins, and cost control and asset gathering profitability are areas where analysts could be too cautious in the long run.

UBS has the strongest Basel 2 core Tier 1 and capital generation in the European sector, and we estimate a Basel 3 fully phased pro forma core Tier 1 of over 14% by 1 January 2013, which puts it in a favourable position versus CS and versus tough domestic banking regulation. We do not believe the stated aim of not paying dividends "for some time to come" will weigh on the shares given a lack of payout elsewhere in the sector.

UBS is one of the lowest-rated banks in the sector on a P/E basis. While the stated price/TBV of 1.6x is a premium to the sector on 1.3x, we believe this is justified by the business mix, which should deliver a high-teen ROTE. Furthermore, we believe there is


32

substantial hidden value in the unrecognised DTAs, which at CHF 21bn are worth CHF 5.5 per share or more than half the tangible book value. Even if we recognise the benefit over 20 years at a 10% discount rate, we estimate this is worth CHF 2.4 per share or around one-quarter of the tangible book, taking the adjusted P/TBV from a sector premium to a sector discount.

We believe Basel 3 will hurt profitability…

In the table below, we have illustrated the potential impact on ROTE of Basel 3. In 2006 (on what was probably at the time an unrealistically light economic capital allocation), the wholesale divisions of the investment banks above claimed an average ROTE of 30%.

Based on our 2012 forecasts (which in aggregate we believe are not very different from consensus), and on the assumptions that: (1) each 5% mitigation of RWAs costs 1% of pre-tax profit (a questionable assumption, but one for which we have received little guidance); and (2) capital is allocated at 8-10% of RWAs depending on geography, we estimate a pro forma ROTE in 2012 of a little over 13%, arguably not much more than the cost of equity for these divisions.

Fig. 44: Investment bank pro forma ROE under Basel 3 Pro forma ROE of 13% little more than the cost of equity


… and other market structure changes also weigh on IBs…

Not only do investment banks suffer the biggest negative impact under Basel 3 (with often a doubling in RWAs), they also suffer the greatest challenges from changes to market structure (eg, swaps clearing and prop trading restrictions) and further taxation (wholesale liability taxes).

These effects are hard to quantify as the regulations both in terms of Dodd-Frank in the US and in terms of MIFID 2 in Europe are still evolving, and again we expect regulatory arbitrage globally on a number of issues. Exchange trading and centralised clearing of OTC derivatives are likely to have the biggest impact on the sector globally, with the largest operators estimating around a 10% decline in FICC trading revenues. Barclays and Deutsche Bank proportionately have the biggest rates operations in Europe.

Wholesale liability taxes have been proposed in a number of geographies and at a number of rates in order to provide restitution for the past financial crisis and/or to make a reserve against future crises. These necessarily tax the business models of investment banks. While we would not be surprised to see greater standardisation in Europe, current rates differ greatly, with the UK targeting taxes of GBP 2.5bn from its banks, while Switzerland does not have a comparable mechanism.

Taken together, unless investment banks are successful in significantly increasing margins or business mix, or pushing compensation costs lower (unlikely in 2011), pro forma ROEs appear to be not much more than the COE.

Wholesale Division BARC BNP CS DBK RBS SG UBS C GS JPM MS AverageIB pretax profit 2010E 4,443 5,775 4,079 6,133 3,252 2,696 2,813 11,283 12,255 10,369 4,933IB pretax profit 2012E 4,816 6,129 4,881 6,270 2,972 3,749 4,612 14,509 14,992 12,105 7,329

IB RWA 3Q10A 194,300 188,480 153,053 200,916 213,750 115,500 126,200 481,440 399,600 440,000 260,800IB RWA post Basel 3 gross 344,300 258,480 328,053 478,916 343,750 257,540 321,200 na 705,600 840,000 500,800IB RWA post Basel 3 net 294,300 258,480 268,053 325,916 328,750 244,500 221,200 807,415 605,600 660,000 400,800Mitigation (15%) 0% (18%) (32%) (4%) (5%) (31%) na (14%) (21%) (20%)

Mitigation profit loss (3%) 0% (4%) (6%) (1%) (1%) (6%) (4%) (3%) (4%) (4%)Capital allocation 10% 8% 10% 8% 10% 8% 10% 9% 9% 9% 9%Tax rate used 30% 30% 25% 34% 30% 30% 25% 32% 33% 35% 32%

IB Reported ROE 2006A 41% 25% 16% 24% 37% 46% 29% 29% 33% 18% 30% 29.8%IB Proforma ROTE 2010E 10% 20% 11% 15% 7% 10% 9% 10% 15% 11% 9% 11.4%IB Proforma ROTE 2012E 11% 21% 13% 15% 6% 13% 15% 13% 18% 13% 13% 13.7%


33

… therefore valuations around 1x TBV might be appropriate

While some costs of new regulation in some businesses have been passed on to customers through wider margins, high competition has limited the effect. Shareholders have absorbed the vast majority of the cost of the new regulation as price/tangible book multiples have tumbled.

The challenge for investment banks is to try to shift the business mix into higher RoRWA flow businesses without competing away the returns, or to share more of the burden of the regulatory costs with employees in order to lift the ROTEs into the 15-20% range, which investors would find more acceptable. For 2011, this latter development looks unlikely as numerous banks have commented that the competition for talent is intense. Furthermore, the deferment of compensation into 2012 and beyond through changes to payment mix will weigh on the ability to reduce these costs significantly in future years.

Overall, therefore, the fact that many of the global pure investment banks trade at around 1x tangible book value should not be a surprise.

Fig. 45: Capital-adjusted valuations – P/TBV versus ROTE Normalised is 2012 earnings

Note: Degearing based on 10% CT1 for Swiss and UK, 8.5% for US, 8% for DBK Source: Nomura estimates

Fig. 46: Capital-adjusted valuations – P/E Normalised is 2012 earnings


GS

MSBAC

C

JPM CSUBS

BARC

DBK

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

8% 10% 12% 14% 16% 18%

Deg

eare

d P

/TB

V 2

010E

Degeared normalised ROTE

Cheap

Expensive

5.0

6.0

7.0

8.0

9.0

10.0

DB

K

M S

tan

ley

Citi

B o

f A

Go

ldm

an

Barc

lays

JP

Mo

rgan

CS

Gro

up

UB

S

Deg

eare

d n

orm

ali

sed

P/E

Degeared normalised P/E Normalised P/E


34

Q4 will be a little mixed…

After a difficult two quarters characterised by significant volatility and weak client volumes, the fourth quarter again looks to be a little mixed as a return of sovereign risk and high rates volatility weighs on client activity in FICC. While Q4 normally sees a lower comp cost accrual, this may be constrained by strong hiring and deferred comp.

Of note, we believe sovereign risk, muni concerns and yield curve volatility have constrained trading profits in FICC. Equity market prices are up Q/Q and Y/Y with volumes also better than prior quarter and volatility declining on both periods. ECM activity has shown the normal acceleration into year-end, although both M&A and DCM activity are down Q/Q and Y/Y.

Fig. 47: Capital markets data 4Q10 to date Q4 trends still a little mixed

Source: Dealogic, Datastream, Bloomberg, ICAP, Eurex

… though we believe revenues should rise in 2011

Fig. 48: Capital markets revenue forecasts Figures adjusted for marks where disclosed

Source: Company reports, Nomura estimates

As shown in the table above, we also believe 2011 will be a better revenue year than 2010, with average revenues up 9% as a recovery in equity trading helps offset a continued normalisation in FICC from many operators.

QoQ YoY

Investment Banking Date Q/(Q-1) Q/(Q-4) Description

M&A volume 09-Dec (13%) (34%) Change in Dealogic quarterly completed volumes

ECM volume 09-Dec 77% 9% Change in Dealogic quarterly volumes

DCM volume 09-Dec (24%) (6%) Change in Dealogic quarterly volumes

QoQ YoY

Equities Date Q/(Q-1) Q/(Q-4) Description

CashCash equity prices 09-Dec 6% 7% Change in end of period FTSE All World index price

Cash equity volumes 09-Dec 4% (4%) Change in quarterly average volumes on SPX & DJES (QTD)Derivative

Equity derivative volumes 30-Nov 9% 1% Change in quarterly volume traded on EUREX (QTD)

Equity volatility 09-Dec (3.3) (2.2) Absolute Change in avg quarterly level of VIX/VSTOXX indicesPrime / propHedge fund performance 09-Dec 2% 4% Change in HFR Index NAV

QoQ YoY

FICC trading Date Q/(Q-1) Q/(Q-4) Description

Rates

Interest rate 09-Dec 0 0 Absolute Change in Fed Funds in bps

Yield curve 09-Dec 52 -10 Absolute Change in bps in US 10Y-2Y spread in bps (QTD)

Rate volatility (proxy for margins) 09-Dec 28% 1% Change in MOVE index (QTD)Credit

Corporate bond volumes 09-Dec 4% 8% Change in 60 day average of FINRA TRACE

Credit spreads 09-Dec (15) 37 Abs chg in bps in Moodys BAA bond yield over 10 yr TsyFX & Commodities

FX derivative volume 09-Dec 15% 23% Change in spot FX avg daily volumes at ICAP (QTD)

FX volatility 09-Dec 1% (8%) Change in volatility index quarterly average

FX margins 09-Dec (17%) (39%) Change in quarterly average Bid/Ask spreadsCommodity prices 09-Dec 11% 16% Change in S&P GSCI Index (QTD)Commodity volatility 09-Dec 0.9% (1.3%) Change in 3M realised volatility of S&P GSCI Index

Total FICC EquitiesCapital Markets Q4/Q3 10E/09A 11E/10E 12E/11E Q4/Q3 10E/09A 11E/10E 12E/11E Q4/Q3 10E/09A 11E/10E 12E/11EUBS 50% 5% 26% 15% 55% 29% 28% 9% 55% (7%) 22% 15%

C 9% (19%) 15% 5% 11% (16%) 7% 2% 8% (25%) 28% 9%

GS 2% (25%) 15% 4% (10%) (29%) 2% 4% 16% (24%) 35% 5%

SG 12% (29%) 13% 8% 7% (31%) 7% 5% 17% (26%) 20% 10%

MS 4% (7%) 4% 13% (17%) (17%) (19%) 9% 16% 10% 7% 19%

CS 13% (21%) 2% 1% 9% (32%) (5%) 0% 20% (19%) 8% 0%

BNP 18% (19%) 1% 3% 11% (29%) (5%) 0% 34% 22% 16% 10%

BARC (19%) (33%) 0% 0% (16%) (37%) 0% 0% 14% (16%) 0% 0%

DBK 3% (13%) (5%) (1%) 1% (20%) (10%) (5%) 9% 13% 7% 5%

Average 9% (16%) 8% 5% 5% (18%) 0% 3% 20% (10%) 15% 8%


35

We prefer UBS over CS

We downgrade Credit Suisse to Neutral from Buy and reduce our price target to CHF 48, from CHF 56. In part, this reflects new disclosure around Basel 3 where we estimate a pro forma fully phased core Tier 1 of just 5.0% for Credit Suisse in 3Q10, rising to 9.5% in 2012 (assuming no dividend and no organic RWA growth). By contrast, we estimate figures of 8.2% and 14.7% for UBS, respectively (figures that could be improved upon by more aggressive recognition of deferred tax assets). The market also remains concerned around the market appetite for and cost of cocos, which must form 9% of core capital by 2019. Although we expect some issuance in 2011 (to specialist hedge funds and to staff), we believe it will take some time before the market is fully comfortable with this instrument.

In part, this also reflects relative valuation where on a de-geared basis (based on a 10% target Basel 3 CT1), we see UBS trading on a more attractive normalised (2012E) P/E and also with a more attractive de-geared ROTE versus P/TBV. We believe UBS should benefit from the hidden value of unrecognised deferred tax assets, which at CHF 21bn are worth CHF 5.5 per share undiscounted or around half the tangible book value. We also believe UBS could benefit from earnings upgrades as management’s 2012 targets are around 40% ahead of consensus.

We prefer BARC over DBK

We believe the more fixed-income-driven European investment banks are far from highly priced in absolute terms but do not offer significant upside potential in relative value terms.

Barclays appears to have similar challenges to Deutsche, which we regard as its most obvious European peer, but has a lower valuation and a stronger capital position. At 273p, the shares are near the bottom of their recent trading range, and we see some limited recovery potential. At this level, the shares trade on 0.8x end-2010 diluted TBV and 8.5x our estimate of normalised EPS. The pro forma Basel III CT1 ratio is 7.8% and the company has indicated it plans to continue to build capital organically.

For Deutsche Bank, the stated P/E of 6.7x 2012E (sector 7.5x) and price/TBV of 1.1x (sector 1.3x) appear interesting relative to a normalised (2012E) ROTE of almost 15%. However, when considering the business mix and the capital levels (pro forma fully phased Basel 3 core Tier 1 of 3.9% at 3Q10A), we do not see the valuation as compelling. Even allowing for the fact that German regulators should allow Deutsche Bank to run with a lower target level of capital than peers, on a de-geared basis, we see better valuation elsewhere in the global sector. Particularly for European value investors, even after adjusting for a tougher domestic regulator, we believe Barclays looks more attractive at 0.8x book (for an 8.5% fully phased Basel 3 CT1 at 3Q10A).


36

Investment bank models

Fig. 49: Barclays model


Barclays financial information and forecasts

£m FY 2009 FY 2010E FY 2011E FY 2012ENet Interest Income 11,918 13,024 13,421 13,912Fees and commissions 8,418 8,535 8,905 9,251Principal transactions 7,057 7,300 7,235 7,246Other 2,561 1,339 1,441 1,554Total Non-Interest Income 18,036 17,175 17,581 18,050Total Operating Income 29,954 30,199 31,001 31,963Net insurance claims 831 837 891 949Net Operating Income 29,123 29,362 30,111 31,014Total Operating Expenses 16,715 18,706 18,894 19,301Profits Before Credit Impairments 12,408 10,656 11,216 11,713Credit Impairment 8,071 5,732 4,640 3,852Income from JV's / Associates 34 40 41 42Pre-exceptional pre-tax profit 4,371 4,964 6,618 7,903Exceptional Items 7,271 133 0 0Profit Before Tax 11,642 5,097 6,618 7,903Tax 1,354 1,331 1,860 2,305Minorities and prefs 895 980 1,031 1,075Attributable Profit 9,393 2,786 3,727 4,523Ordinary Dividend 113 535 609 822Retained Profit 9,280 2,252 3,118 3,701Per Share dataEPS Reported (p) 86.3 23.5 30.6 37.1EPS - Effective (p) 23.6 24.3 31.9 37.5DPS (p) 2.5 5.0 5.0 9.4

NAV/Share (tangible, diluted) 324 339 367 400

Divisional BreakdownUK Retail Banking 752 805 933 916Barclaycard 806 770 982 1,212Western Europe Retail Banking 119 -85 -127 32Barclays Africa 85 146 161 177GRB Total 1,762 1,635 1,948 2,336Barclays Capital 2,650 4,272 4,645 4,645Barclays Corporate 193 -531 260 1,021

UK & Ireland 673 747 750 1,052Continental Europe -83 -976 -376 -1New Markets -433 -348 -150 0

Barclays Wealth 166 159 167 175Investment Management 23 80 80 80

CIBWM Total 3,032 3,980 5,152 5,921ABSA 582 624 769 896Head Office and Other -557 -827 -803 -803PBT before non operating items 4,819 5,412 7,066 8,351Non Operating Items 6,823 -315 -448 -448PBT 11,642 5,097 6,618 7,903


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Fig. 50: Credit Suisse model


Fig. 51: Credit Suisse sum-of-the-parts valuation


Credit Suisse

Group (CHFmn) 2009A 2010E 2011E 2012E

Revenues 33,294 31,787 33,430 35,706

Costs (24,711) (24,028) (23,673) (24,457)


Provisions (506) 81 (105) (108)

Pretax profit 8,077 7,840 9,652 11,141


Tax (1,835) (1,672) (2,611) (3,014)

Minorities & pref divis 182 (516) (200) (200)

Net profit to shareholders 6,593 5,633 6,841 7,927

Share based payments (390) (343) (350) (350)

Net profit 6,203 5,290 6,491 7,577

Customer loans 237,180 225,625 257,253 270,076



Total assets 1,031,427 1,078,062 1,131,965 1,188,563


Diluted EPS (CHF) 5.13 4.40 5.40 6.30

Dividend per share (CHF) 2.00 1.50 1.60 1.90

Return on equity 16.9% 14.7% 17.5% 18.0%


Tier 1 common 10.0% 10.2% 10.2% 9.5%

Tier 1 ratio 16.3% 16.6% 15.4% 13.6%


Divisional pretax profit

Wealth Management 2,898 2,579 3,696 4,834

Corporate & Retail Banking 753 915 871 911

Asset Management 35 360 579 829

Investment Bank 6,845 4,079 4,808 4,881

Corporate Centre (incl. MI) (2,103) (628) (500) (515)

KPIs

FICC trading revenues 10,455 7,258 7,258 7,258

Equity trading revenues 7,469 5,947 6,542 6,869

Advisory & u/w revenues 3,124 3,765 4,078 4,282

IB cost/income ratio 65.1% 76.2% 72.8% 73.0%

Wealth Mgmt new new money 5.1% 6.2% 5.5% 6.0%

Wealth Mgmt gross margin 1.31% 1.20% 1.25% 1.28%

Wealth Mgmt AUM 802,800 841,559 929,922 1,032,214

WM cost/income ratio 70.3% 73.2% 66.4% 61.5%

Credit Suisse Net profit Norm. Norm. DCF DCF val

Division 2009A 2010E 2011E g P/B mult. val per share

Wealth Management 2,202 1,960 2,809 3.5% 12.5 11.6 42,507 35.89

Corporate & Retail Banking 580 705 670 1.5% 1.1 9.2 4,584 3.87

Asset Management (ex PE gains) 391 (105) 134 3.5% 0.9 10.6 7,007 5.92

Investment Banking 4,655 2,774 3,269 3.5% 0.9 7.8 19,084 16.11

Corporate Centre (incl. MI) (1,260) (418) (691) 3.2% 8.6 (7,803) (6.59)

Private Equity (365) 375 300 3,800 3.21


Total 6,203 5,290 6,491 57,185 48.29


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Fig. 52: Deutsche Bank model


Fig. 53: Deutsche Bank sum-of-the-parts valuation


Deutsche Bank

Group (EURmn) 2009A 2010E 2011E 2012E

Revenues 27,670 30,591 35,225 36,057

Costs (20,120) (22,884) (25,372) (25,754)


Provisions (2,631) (1,340) (1,404) (1,289)

Equity method earnings 284 (1,783) 371 385

Pretax profit 5,203 4,585 8,520 9,099

Extraordinary items 0 0 0 0

Tax (243) (1,991) (2,892) (3,086)

Minorities 14 (20) (75) (103)

Net profit 4,974 2,573 5,553 5,911

Customer loans 258,105 449,758 476,744 505,348



Total assets 1,500,664 2,176,313 2,219,839 2,308,632

Shares outstanding (mn) 679.5 987.6 987.6 987.6

Diluted EPS (EUR) 6.93 3.49 5.55 5.90


Return on equity 14.8% 6.0% 10.7% 10.4%


Tier 1 ratio 12.6% 11.9% 10.8% 9.2%

Core Tier 1 ratio 8.7% 8.8% 8.3% 7.2%


Divisional pretax profit

Private & Business Clients 458 780 1,667 2,183

Asset & Wealth Management 193 195 892 1,086

Corporate & Investment Banking 4,313 6,569 6,373 6,260

Corporate Centre (incl. extraord) 239 (2,959) (413) (429)

KPIs

Fixed income trading revenues 9,882 10,521 9,995 9,495


Advisory & underwriting revenues 2,192 2,268 2,428 2,610

Deutsche Bank Norm. Norm. Norm. DCF DCF val


Private & Business Clients 741 1,050 1,365 19.1% 10.5% 2.0 11.4 17,508 17.73

Asset & Wealth Management 131 589 717 27.1% 8.1% 3.7 13.6 10,283 10.41

Corporate & Investment Banking 4,336 4,207 4,132 13.2% 11.5% 1.2 10.3 24,028 24.33

Corporate Centre (2,636) (292) (303) 11.2% 10.7 (3,159) (3.20)


Total 2,572 5,553 5,911 44,505 45.06


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Fig. 54: UBS model


Fig. 55: UBS sum-of-the-parts valuation


UBS

Group (CHFmn) 2009A 2010E 2011E 2012E

Revenues 24,296 32,445 36,111 40,811

Costs (24,039) (24,713) (25,507) (27,409)

Gross operating proft 257 7,732 10,604 13,402

Provisions (1,832) 62 (115) (119)


Pretax profit (1,537) 7,887 10,589 13,382

Extraordinary items 89 175 0 0

Tax 443 2 (2,118) (2,810)

Minorities (610) (403) (500) (500)

Net profit (2,736) 7,661 7,971 10,072

Customer loans 306,828 308,011 323,412 339,583



Total assets 1,340,538 1,467,812 1,497,168 1,527,111


Diluted EPS (CHF) (0.75) 2.00 2.10 2.65

Diluted EPS (CHF) - adjusted (0.75) 2.00 2.10 2.65

Dividend per share (CHF) 0.00 0.00 0.00 0.75

Return on equity (4.1%) 17.0% 15.1% 16.3%

Return on tangible equity (5.8%) 22.3% 18.7% 19.5%

Tier 1 ratio 15.4% 16.7% 16.3% 16.6%

Proforma TBVPS 7.91 10.18 12.29 14.97

Divisional pretax profit 2009E 2010E 2010E 2010E

Wealth Management 2,280 2,427 2,958 3,599

Retail & Corporate 1,629 1,849 2,061 2,211

Wealth Management Americas 31 (55) 391 988

Global Asset Management 437 482 818 1,146

Investment Banking (6,083) 2,813 4,761 5,838

Corporate Centre 258 545 (400) (400)

KPIs

FICC trading (ex. own debt) (547) 5,850 7,500 8,200


Advisory & UW revenues 2,465 2,054 2,670 3,471

IB cost/income ratio nm 79.0% 69.5% 67.5%

WM net new money (10.5%) (1.2%) 3.0% 5.0%

WM gross margin 0.91% 0.91% 0.96% 1.00%

WM AUM 825,000 804,708 861,037 938,530

WM cost/income ratio 69.9% 67.2% 63.0% 60.0%

UBS Norm. Norm. Norm. DCF DCF val


Wealth Management 2,428 2,367 2,843 102.3% 11.4% 11.9 12.1 32,375 8.53

Retail & Corporate 1,850 1,649 1,747 49.5% 13.2% 4.2 8.7 14,216 3.74

Wealth Management USA (55) 313 781 23.9% 10.9% 2.5 10.7 7,265 1.91

Global Asset Management 483 654 905 195.6% 12.1% 21.2 11.3 9,982 2.63

Investment Banking 2,813 3,808 4,612 19.8% 14.9% 1.4 7.5 22,027 5.80

Corporate Centre (incl. MI) 142 (820) (816) 14.0% 8.4 (6,426) (1.69)

Excess capital 4,839 1.27

Total 7,660 7,971 10,072 84,278 22.20


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Italian banks: We prefer Intesa over UniCredit Domenico Santoro [email protected] +44 20 7102 2375

Summary and investment theses

In the context of our cautious stance on Italian banks, we tend to prefer IntesaSP (Neutral, TP EUR 2.6) to Unicredit, which we recently downgraded from Buy to Neutral (TP EUR 1.9). Admittedly, this is based more on operational grounds rather than geographical ones (considering that Unicredit’s business mix is less Italian-centric given its greater exposure to CEE and Germany than IntesaSP). We believe IntesaSP’s solid balance sheet is better placed to capture any opportunities from improved macro conditions (via increasing volumes), while Unicredit’s sub-optimal capital allocation would need a few adjustments before the company can benefit from any business re-launch. Taking into account Unicredit’s capital evolution under Basel 3, we think Unicredit’s capital is a bit stretched (at end-2013). This might require an additional deleveraging effort of the less profitable business (CIB), with inevitable pressure on revenues. Capital at IntesaSP though looks fine. Furthermore, after the last events, the new CEO (Federico Ghizzoni) needs to gain the trust of investors, and this might take some time. When de-leveraging our valuation multiples for excess capital, we see IntesaSP trading at a 10% discount versus Unicredit on a 2012E P/E basis, which we would gain exposure to via IntesaSP’s saving shares (a conversion is likely, in our view). The main risk to our base case scenario is a quicker disposal of unprofitable Unicredit’s assets (in CEE), which would be positive for capital and sentiment.

Italy: not the worst... but not the best

As we wrote in our recently published report on Italian banks (‘In the name of capital: More constructive on Italy, less on Italian banks and their capital’, 15 December 2010), we tend to have a more constructive view on Italy versus other peripheral countries (Spain in particular).

Despite its high debt/GDP ratio (118%), Italy did not have to contend with booming domestic private debt, its budget remains broadly under control and households earmark a significant proportion of their savings for the purchase of sovereign bonds (50% of the total domestic debt is held internally versus 40% for Spain, 30% for Ireland and 15% for Portugal).

Despite earnings having generally bottomed out, we believe Italian banks will continue to struggle in a low-rate and challenging environment. Competition and increasing cost of funding are pushing down interest margin, while liquidity constraints limit the distribution capability of value-added products (with Italian banks favouring the placement of own bonds rather than AuM products on the retail network). Furthermore, despite the fact that credit quality is getting better, the considerable stock of watch-list loans might create additional NPLs inflow, keeping LLPs at a high level for a while. For these reasons, we see Italian banks struggling to reach their cost of capital in the next biennium (8% in 2011 and 10% in 2012 versus14% and 15%, respectively, for continental Europe); and consequently, we also see the persistence of the current discount to PTB (0.8x versus 1.2x for continental Europe).

In this context, we believe regulators will prefer to favour economic growth over diluting the banking sector. From a capital standpoint, however, even with the lower leverage and a much more traditional business model of Italian banks (versus European banks), we take the view that they do not look well placed in a pan-European context. In the absence of any capital action, especially for the small operators (BMPS in primis), we see their valuations continuing to reflect this risk; hence, we have a cautious stance on the sub-sector of small Italian banks.

IntesaSP remains the best-in-class in a European context when it comes to liquidity, restructuring track-record and balance sheet quality. Even recognising the virtues of the investment case, our Neutral rating is mainly based on valuation, which admittedly might cap


41

the shares performance (PTB 2010E 1.0x versus 9% ROTB). We see IntesaSP as the main beneficiary of rising rates in Italy, a scenario that needs to materialise to push the stock further up. A catalyst for the shares might be the upcoming industrial plan, which could re-emphasise the cost-cutting potential (consensus estimates for 2011-12 embeds growing costs versus management’s commitment to decreasing costs). On the negative side, the excessive exposure to Italy might prompt M&A deals, which might erode capital.

Our recent downgrade of Unicredit was mainly based on the group’s low profitability. We are of the opinion that an imperfect capital allocation across the group will continue to emphasise this issue even when net provisions (currently abnormally high for Unicredit) normalise a bit. Management presented in London on 2 December 2010. The new strategy put forward is that of reallocating capital, generated increasingly in CEE countries, while financing less profitable regions (Italy in primis) with dividends from CEE associates. Despite being the right long-term strategy, we think it is unlikely this effort will significantly improve profitability in the short term. In this respect, we are of the opinion that a more transformational reconfiguration of the group, mainly via downsizing the presence in unprofitable activities (retail in Germany, a number of CEE countries and CIB) would be better suited. It is our opinion that, after the resignation of a long-standing CEO (Alessandro Profumo), investors will continue to wonder about the shareholder foundation’s commitment to value creation and probably wait for better results before gaining faith again in Unicredit’s story.

IntesaSP/Unicredit: the difference in large print

Our preference for IntesaSP is both operational and capital related rather than based on geographical considerations. Admittedly, given Unicredit’s geographical business mix, its presence in Italy is a bit diluted when compared with that of IntesaSP. This is because of its greater exposure to fast-growing CEE countries (21% of total RWAs, 31% of total GOP), its presence in Germany (14% and 4%, RWAs and GOP, respectively) and Austria (14% and 5%, RWAs and GOP, respectively). On the other side, IntesaSP is more ‘Italian’, which might not be perceived positively by investors, especially in a period of increasing risk aversion toward peripheral countries. Italian government bonds represent 245% of the total TBV of IntesaSP versus 101% in the case of Unicredit. Furthermore, IntesaSP’s presence in CEE and the Mediterranean area (10% of total RWAs, 15% of GOP) is also biased toward less interesting countries (Hungary, Slovakia and Slovenia represent altogether 67% of its total ex-Italy RWAs), whereas fast-growing countries like Poland, Turkey, Russia and the Czech Republic represent 59% of total RWAs in CEE for Unicredit.

Fig. 56: IntesaSP Breakdown of GOP by division


Fig. 57: Unicredit Breakdown of GOP by division


We believe, however, that the difference is noticeable when it comes to capital. We consider the balance sheet structure of IntesaSP a bit more relaxed than Unicredit’s. In our opinion, this should allow the former to reap potential opportunities that any improved macro scenario should bring.


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In terms of capital, assuming a pay-out for the next two years of 35% and 5% average RWA growth, we estimate a generation of 25bp pa for IntesaSP (our EPS estimates for IntesaSP are 5% below consensus in 2011 and 2% above for 2012). According to our dynamic model, the negative impact from Basel 3 is 40bp in 2011 and 50bp in 2012 (mainly from the insurance business and DTA deductions). Taking all this into consideration, core tier 1 should stand at 8.2% and 8.3%, respectively, in 2012 and 2013. This is in line with our estimated capital requirement for the company of 8.2% (a level of core tier 1 that we consider optimal for a bank with IntesaSP’s risk profile). It is worth remembering also that IntesaSP is still calculating RWAs under the Basel 2 foundation, and it will benefit by 25bp when the migration to Basel 2 advanced occurs.

Fig. 58: IntesaSP Capital required by division in 2012 (EUR m)


Fig. 59: Unicredit Capital required by division in 2012 (EUR m)


In terms of capital for Unicredit, accounting for 90bp of negative impact deriving from Basel 3 (mainly because of RWA inflation, ie, market risk and CRVA) and assuming a 35% pay-out ratio (5% average growth in RWAs), we estimate a core tier 1 of 8.0% and 8.2% in 2012 and 2013, respectively (our EPS estimates are 7% below consensus for 2011 and 2% for 2012). We are of the opinion that this level is a bit stretched for a bank like Unicredit (for which we estimate an optimal level close to 9%), thereby concluding on a capital shortfall of approximately EUR 4bn. A capital increase for Unicredit is unlikely, after having raised EUR 7bn over the past two years. Cutting dividends, or alternatively RWAs, might seem a more viable option. Considering the well-known Foundations’ constraints, we would be surprised by any dividend cut. Deleveraging RWAs in businesses like CIB, where the return is poor, seems a more likely option, again highlighting potential pressure on revenues.

Fig. 60: Evolution of core tier 1 under Basel 2 and Basel 3 EUR m unless otherwise stated


IntesaSP RWAsOptimal

core tier 1Capital

requirement

Italian Retail 137,400 0.08 10,992

Eurizon capital 900 8.0% 72

CIB 132,400 8.5% 11,254

Public finance 17,800 7.0% 1,246

International subsidiari 34,400 9.0% 3,096

Banca Fideuram 4,200 8.0% 336

Corporate centre 27,800 7.0% 1,946

Total 354,900 8.2% 28,942

Unicredit RWAsOptimal

core tier 1Capital

requirement

Retail 71,401 8.0% 5,712

CIB 245,566 9.5% 23,206

Asset Management 1,913 8.0% 153

Private Banking 4,796 8.0% 384

CEE 98,578 9.0% 8,872

Corporate Centre 31,223 7.0% 2,186

Total 453,478 8.9% 40,512

2012e UCG ISP 2013e UCG ISP

Core tier capital 1 Basle II 43,994 32,602 Core tier capital 1 Basle II 47,090 35,445

RWAs Basle II 495,006 387,971 RWAs Basle II 519,756 403,490

Core tier 1 Basle II (%) 8.9% 8.4% Core tier 1 Basle II (%) 9.1% 8.8%

Core tier capital 1 Basle III 43,340 31,822 Core tier capital 1 Basle III 46,140 34,192

Impact from Basle III -654 -780 Impact from Basle III -950 -1,253

RWAs Basle III (including market risk) 540,006 398,671 RWAs Basle III (including market risk) 564,756 414,190

Impact (%) 8.3% 2.7% Impact (%) 8.0% 2.6%

Core tier 1 Basle III (%) 8.0% 8.0% Core tier 1 Basle III (%) 8.2% 8.3%

Total impact -0.9% -0.4% Total impact -0.9% -0.5%

Optimal common equity (%) 8.9% 8.2% Optimal common equity (%) 8.9% 8.2%

Capital deficit -4,720 -869 Capital deficit -4,123 228


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Turning to valuation, based on our estimates, we see Unicredit trading at a 16% premium on deleveraged P/E 2011E versus IntesaSP, and a 10% premium based on 2012E.

The current discount to PTB (ISP 1.0x and UCG 0.8x in 2012E) respective to their European counterparties is justified, in our view, by profitability prospects that in both cases do not look exciting. When considering deleveraged P/E ratios (see table below) the discount on IntesaSP appears too severe. This might be because of the current perception of IntesaSP being more exposed to Italian sovereign risk than Unicredit. We are of the opinion that if the pressure on Italian sovereign risk eases somewhat, IntesaSP should be the main beneficiary.

Fig. 61: Valuation matrix Book and earnings ratio


Lastly, we would exploit any IntesaSP upside versus Unicredit via IntesaSP’s saving shares. The discount (versus the ordinary shares) has narrowed significantly, since the peak reached during the recession (35%). This is because savings shares (different from ordinary ones) have a guaranteed dividend. According to Basel 3, saving shares would not be counted as core capital by the regulator in the same way as ordinary shares are, and we estimate a negative impact of 25bp on IntesaSP’s core tier 1 when Basel 3 comes into force. Given this negative element associated with the saving shares, we think expectations regarding a conversion of the saving shares would help in continuing to close the gap between the two classes of shares. We see this as the best instrument to exploit IntesaSP at the moment.

Fig. 62: Saving shares versus ordinary discount Discount (%)

Source: Datastream

ISP UCG

ROTBV 11e 11.5% 8.5%

ROTBV 12e 13.6% 11.1%

PTB 11e 0.94 0.80

PTB 12e 0.86 0.73

P/E 2011e 8.2 9.4

P/E 2012e 6.3 6.6

P/E de-leveraged 2011e 8.6 10.2

P/E de-leveraged 2012e 6.4 7.1

-40.0%

-35.0%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

Nov

200

5

Fe

b 2

006

Ma

y 2

006

Au

g 20

06

Nov

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6

Fe

b 2

007

Ma

y 2

007

Au

g 20

07

Nov

200

7

Fe

b 2

008

Ma

y 2

008

Au

g 20

08

Nov

200

8

Fe

b 2

009

Ma

y 2

009

Au

g 20

09

Nov

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9

Fe

b 2

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Ma

y 2

010

Au

g 20

10

Nov

201

0

Saving vs. ordinary shares (discount)


44

Italian bank models

Fig. 63: Unicredit estimates 2011-12 EUR m unless otherwise stated, priced at 13 December


Ratings / Share Price:

Stock Rating: Neutral Absolute performance Rel. Sector performance

Target Price: 1.9 (EUR) 1 month -2% 1 month 2%

Current Share Price: 1.7 (EUR) 3 months -14% 3 months -4%

Market Cap: 32,784 (EURm) 12 months -23% 12 months 1%

Float: 95% Reuters: CRDI.MI Bloomberg: UCG IM

P&L (EURm) 2008 2009 2010E 2011E 2012E

Net Interest Income 18,373 17,304 15,789 16,590 17,937

Fees & Commission Income 9,093 7,781 8,675 9,022 9,564

Trading Income (1,969) 1,803 1,450 1,650 1,650

Other Income 1,379 684 730 778 836

Total Operating Revenues 26,877 27,572 26,644 28,040 29,986

Staff Costs (9,918) (9,098) (9,370) (9,404) (9,539)

Other Costs (6,774) (6,227) (6,244) (6,093) (6,195)

Total Operating expenses (16,692) (15,324) (15,614) (15,497) (15,735)

Net Operating Income 10,185 12,248 11,031 12,543 14,251

Loan Loss Charge (3,700) (8,313) (6,915) (5,733) (4,863)

Capital gains, write offs of assets and generic provisions (1,327) (892) (1,029) (677) (677)

Pre-tax Profit 5,158 3,043 3,087 6,133 8,712

Tax (627) (1,009) (1,482) (2,453) (3,485)

Minorities (518) (332) (360) (410) (460)

Other adjustments - - - - -

Net Attributable Profit 4,012 1,702 1,245 3,270 4,767

Adjusted Profit 4,415 1,930 1,728 3,497 4,994

P&L Measures

Revenue Growth, y-o-y % n/a 2.6% -3.4% 5.2% 6.9%

Cost Growth, y-o-y % n/a -8.2% 1.9% -0.7% 1.5%

Operating Income Growth, y-o-y % n/a 20.3% -9.9% 13.7% 13.6%

Net Interest Margin / RWA (%) n/a 3.6% 3.5% 3.6% 3.7%

Cost / Income (inc-depn) 62% 56% 59% 55% 52%

Tax Rate (%) 12% 33% 48% 40% 40%

Balance Sheet (EURm) 2008 2009 2010E 2011E 2012E

Customer loans 612,480 564,986 559,336 587,303 628,414

Goodwill 20,889 20,491 20,808 20,808 20,808

Total Assets 1,045,612 928,760 959,431 988,687 1,031,694

Customer deposits 388,831 381,623 366,623 384,954 404,202

Other non-equity liabilities 598,540 484,246 524,933 533,087 553,225

Stated Shareholders Equity Capital 54,999 59,689 64,549 67,320 70,941

Minorities 3,242 3,202 3,326 3,326 3,326

Total liabilities 1,045,612 928,760 959,431 988,687 1,031,694

Risk Weighted Assets 512,532 452,320 452,223 468,931 495,006

Customer Loans, % y-o-y n/a -7.8% -1.0% 5.0% 7.0%

Stated Shareholders Equity Capital, % y-o-y n/a 8.5% 8.1% 4.3% 5.4%

Risk Weighted Assets, % y-o-y change n/a -11.7% 0.0% 3.7% 5.6%

Asset Quality

Gross NPLs / Gross Customer loans 4.5% 5.5% 6.5% 7.2% 7.5%

NPL Coverage 64% 61% 60% 61% 63%

LLC/Net Loans (bp) 60 147 124 98 77

Per share data (EUR) 2008 2009 2010E 2011E 2012E

EPS (stated) 0.30 0.10 0.06 0.17 0.25

EPS (adjusted) 0.33 0.11 0.09 0.18 0.26

DPS 0.00 0.03 0.03 0.06 0.09

BV/ Share (stated) 4.1 3.6 3.3 3.5 3.7

BV/ Share (adjusted) 2.1 2.0 2.0 2.1 2.3

No Shares at Yr End (m) 13,390 16,804 19,322 19,322 19,322

Stock market / Profitability ratios 2008 2009 2010E 2011E 2012E

PE (stated) 5.7 16.8 26.4 10.0 6.9

PE (adjusted) 5.2 14.8 19.0 9.4 6.6

Div Yield 0.0% 1.8% 1.5% 3.5% 5.1%

P/BV (stated) 0.4 0.5 0.5 0.5 0.5

P/BV (adj) 0.8 0.8 0.9 0.8 0.7

RORWA n/a 0.4% 0.3% 0.7% 1.0%

ROA n/a 0.2% 0.1% 0.3% 0.5%

ROE (stated) n/a 3.2% 2.7% 5.2% 7.0%

ROE (adjusted) n/a 5.7% 4.5% 8.5% 11.1%

Capital Ratios 2008 2009 2010E 2011E 2012E

Tier 1 Ratio (%) 6.8% 8.6% 9.6% 9.7% 9.8%

Core Tier 1 Ratio (%) 6.0% 7.6% 8.6% 8.7% 8.9%

RWA/Assets (%) 49% 49% 47% 47% 48%


45

Fig. 64: IntesaSP estimates 2011-12 EUR m unless otherwise stated, priced at 13 December


Ratings / Share Price:

Stock Rating: Neutral Absolute performance Rel. Sector performance

Target Price: 2.6 (EUR) 1 month 0% 1 month -4%

Current Share Price: 2.17 (EUR) 3 months -11% 3 months -1%

Market Cap: 25,713 (EURm) 12 months -28% 12 months -6%

Float: 85% Reuters: ISP.MI Bloomberg: ISP IM

P&L (EURm) 2008 2009 2010E 2011E 2012E

Net Interest Income 11,518 10,486 9,843 10,479 11,423

Fees & Commission Income 5,698 5,341 5,629 5,967 6,355

Trading Income (53) 1,122 572 752 752

Other Income 678 531 622 646 693

Total Operating Revenues 17,841 17,480 16,667 17,845 19,223

Staff Costs (5,713) (5,587) (5,559) (5,615) (5,727)

Other Costs (4,138) (3,872) (3,783) (3,708) (3,680)

Total Operating expenses (9,851) (9,459) (9,342) (9,322) (9,407)

Net Operating Income 7,990 8,021 7,324 8,523 9,816

Loan Loss Charge (2,566) (3,706) (3,106) (2,972) (2,665)

Capital gains, write offs of assets and generic provisions (2,616) (417) 93 (701) (701)

Pre-tax Profit 2,808 3,898 4,312 4,850 6,450

Tax (108) (960) (1,423) (1,746) (2,322)

Minorities (147) (133) (113) (123) (133)

Other adjustments - - - - -

Net Attributable Profit 2,553 2,805 2,776 2,981 3,995

Adjusted Profit 3,926 3,046 2,735 3,385 4,399

P&L Measures

Revenue Growth, y-o-y % n/a -2.0% -4.7% 7.1% 7.7%

Cost Growth, y-o-y % n/a -4.0% -1.2% -0.2% 0.9%

Operating Income Growth, y-o-y % n/a 0.4% -8.7% 16.4% 15.2%

Net Interest Margin / RWA (%) n/a 2.8% 2.7% 2.9% 3.0%

Cost / Income (inc-depn) 55% 54% 56% 52% 49%

Tax Rate (%) 4% 25% 33% 36% 36%

Balance Sheet (EURm) 2008 2009 2010E 2011E 2012E

Customer loans 395,189 374,033 381,514 400,589 428,631

Goodwill 19,694 18,838 18,838 18,838 18,838

Total Assets 636,113 624,844 632,822 653,165 683,069

Customer deposits 217,498 210,814 231,895 243,490 255,665

Other non-equity liabilities 368,581 360,259 346,419 353,129 367,785

Stated Shareholders Equity Capital 48,954 52,681 53,304 55,219 58,161

Minorities 1,100 1,090 1,203 1,326 1,459

Total liabilities 636,133 624,844 632,822 653,165 683,069

Risk Weighted Assets 383,072 361,648 355,486 368,296 387,971

Customer Loans, % y-o-y n/a -5.4% 2.0% 5.0% 7.0%

Stated Shareholders Equity Capital, % y-o-y n/a 7.6% 1.2% 3.6% 5.3%

Risk Weighted Assets, % y-o-y change n/a -5.6% -1.7% 3.6% 5.3%

Asset Quality

Gross NPLs / Gross Customer loans 3.2% 4.2% 4.9% 5.2% 5.1%

NPL Coverage 70% 67% 66% 67% 69%

LLC/Net Loans (bp) 65 99 81 74 62

Per share data (EUR) 2008 2009 2010E 2011E 2012E

EPS (stated) 0.20 0.22 0.22 0.23 0.31

EPS (adjusted) 0.31 0.24 0.21 0.26 0.34

DPS 0.00 0.08 0.08 0.08 0.09

BV/ Share (stated) 3.8 4.1 4.2 4.3 4.6

BV/ Share (adjusted) 1.7 2.1 2.2 2.3 2.5

No Shares at Yr End (m) 12,782 12,782 12,782 12,782 12,782

Stock market / Profitability ratios 2008 2009 2010E 2011E 2012E

PE (stated) 10.9 9.9 10.0 9.3 6.9

PE (adjusted) 7.1 9.1 10.1 8.2 6.3

Div Yield 0.0% 3.7% 3.8% 3.8% 4.3%

P/BV (stated) 0.6 0.5 0.5 0.5 0.5

P/BV (adj) 1.3 1.0 1.0 0.9 0.9

RORWA n/a 0.8% 0.8% 0.8% 1.1%

ROA n/a 0.4% 0.4% 0.5% 0.6%

ROE (stated) n/a 5.3% 5.2% 5.4% 6.9%

ROE (adjusted) n/a 11.3% 9.9% 11.5% 13.6%

Capital Ratios 2008 2009 2010E 2011E 2012E

Tier 1 Ratio (%) 7.1% 8.4% 9.1% 9.3% 9.5%

Core Tier 1 Ratio (%) 6.3% 7.1% 7.8% 8.1% 8.4%

RWA/Assets (%) 60% 58% 56% 56% 57%


46

Nordic banks: Overweight the region, DNB and SWED our top picks Chintan Joshi [email protected] +44 20 7102 6597

Investment thesis

In a deleveraging Europe, we believe Swedish and Norwegian banks offer a positive outlook for 2011, with the possibility of growth outperformance, high capital ratios, mid-teen ROEs, high dividend yields and a potential return of excess capital down the line. Banks are leveraged investments versus economies and the Nordic economies are among the healthiest in Europe. We believe that given the growth and sovereign concerns in peripheral Europe, Nordic banks should be in an overweight position, although there may be near-term risk if we experience a “risk on” move owing to recent outperformance. We are more optimistic about the prospects of Sweden and Norway as opposed to Denmark and Finland, and our top picks in this subsector reflects this bias. We discussed the key macro drivers in our report “Still overweight in a European context”,15 October 2010.

We prefer DnBNOR for its exposure to a strong Norwegian economy, domestic and conservative focus, high dividend yield, gearing to a global recovery through its shipping book, potential return of capital and low re-geared (using a 10% CT1 benchmark under Basel 3 in 2012) valuations.

Similarly, we prefer Swedbank for its exposure to growth from the Swedish household and SME sectors, improving Baltic macro and banking outlook, potential to benefit from rate hikes, improvement in funding costs from refinancing expensive funding, convergence of funding costs relative to peers and low re-geared (using a 10% CT1 benchmark under Basel 3 in 2012) valuations.

Fig. 65: Nordic Banks valuation

Source: Company data, Datastream, Bloomberg, Nomura estimates

Market positioning seems to be on the long side

Speaking to investors recently, we believe positioning has been on the long side in these names and therefore there is a short-term risk of underperformance when the market is in a “risk-on” mode. However, we believe there are many investors who are not only underweight equities but also financials within equities, which would mean there is new money that could enter the Nordic banks, especially on any weakness.

With limited exposure to peripheral European countries, the Nordic banks’ performance has been positively correlated to peripheral European spreads through 2010. With sovereign concerns likely to be persistent at least in the initial part of 2011, we believe that Nordic banks can continue to hold their outperformance and extend gains in the face of the negative headline risks. Similarly, Nordic banks saw 2010 earnings estimates being upgraded by 30% relative to the top 16 large-cap banks in Europe, which again drove outperformance. We expect the more benign macroeconomic outlook relative to the sector and better growth prospects will continue to drive outperformance.

Valuations as of Regeared Regeared

Norm P/E Norm P/E 10yr avge Degeared P/TB P/TB P/TB Regeared COE impl Implied Price Bloomberg

2012 2012 PE - avg P/E 2010 2010 2012 ROTE 2012 P/TBV - act P/TBV 10-Dec Ticker

Nordic BanksBuy DNB 8.5 7.1 9.4 (2.2) 1.25 1.30 1.08 15.7% 1.81 39% 77.60 DNBNOR NO

Swedbank 9.9 7.2 10.8 (3.5) 1.36 1.52 1.17 17.2% 2.02 33% 92.55 SWEDA SS

Neutral Danske 7.2 7.1 14.4 (7.3) 1.20 1.20 0.96 14.1% 1.59 32% 143.70 DANSKE DC

SHB 10.6 9.0 11.2 (2.2) 1.68 1.87 1.45 17.6% 2.09 12% 212.80 SHBA SS

Reduce Nordea 9.6 9.1 11.3 (2.2) 1.49 1.52 1.26 14.4% 1.63 8% 72.35 NDA SS

SEB 10.2 9.0 11.4 (2.4) 1.42 1.49 1.22 14.1% 1.59 7% 53.40 SEBA SS

Nordic Banks Avge 9.3 8.1 11.4 (3.3) 1.40 1.48 1.19 15.5% 1.79 22%

Large-Cap Banks Avge 7.1 7.9 12.6 (4.7) 1.30 1.26 1.01 15.5% 1.54 22%

Europe ex Swiss/Asia 6.6 7.6 12.3 (4.7) 1.07 1.08 0.88 12.7% 1.38 25%

Note: For re-gearing excess capital is 10% Core Tier 1 under Basel 3 in 2012

Note: Implied P/TBV is based on a COE/g of 10%/3%

Note: Excess capital is reduced from capital in Degeared ROTE calculation and reduces the degeared share count

10-Dec-10


47

Fig. 66: Nordic banks’ 2010 performance Compared with S European spreads and 2010 consensus earnings – all indexed to 100


Superior credit growth outlook

Europe is currently gripped by strong deleveraging trends. With Spain, Italy and, arguably, the UK showing lacklustre prospects for credit growth, and Germany continuing its decade-long deleveraging cycle, we think the large Nordic countries (barring Denmark) stand out in terms of their potential to increase leverage – a key driver of banks’ performance over the next few years, in our opinion. We see a strong correlation between credit growth and macroeconomic growth. Similarly, we see a strong correlation between low initial private sector debt and prospective credit growth, and therefore prefer to own banks in those countries where private sector leverage is below average. In this regard, Sweden, Norway and Finland are well placed, in our view, with average or below-average private sector leverage, while Denmark appears to be poorly placed with the highest level of private sector leverage as of 2008, as per IMF data. For further discussion, see our report “Still overweight in a European context”.

Return of excess capital not before 2012 and likely in 2013

Given the magnitude of the crisis that the global economy has faced, we would expect regulators to be extremely conservative when it comes to returning excess capital. We would not expect a return of capital until we have seen an exit from loose fiscal and monetary policies in Europe and the US, and thereafter some stabilisation of global growth prospects. We do not expect this until 2012 and, therefore, depending on the speed of the global recovery, expect that return of capital would be allowed only after 2012.

However, we do believe Nordic banks are over-capitalised and while there is a short-term risk that regulators may be hawkish, in the medium term we would expect Nordic banks either to return the capital or utilise the excess capital to boost earnings. Under Basel 3, we see core Tier 1 (CT1) ratios averaging c.10.7%, compared with other large-cap banks at c.6.7%.

We expect the Nordic regulators to enforce a near-10% CT1 requirement, as there is a need for counter-cyclical buffers given the divergence of GDP growth and lending growth in most Nordic countries. In the short run, regulators can delay return of capital by extending the transition rules, which would most affect banks that have the highest levels of excess capital. We also see a risk of higher risk weightings for the Nordic mortgage businesses. However, we see this having a limited impact on excess capital – for instance, double risk weightings for mortgages at Swedbank would reduce the CT1 ratio by c.1% but still leave excess capital of 3.5% for 2012E RWAs.

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Fig. 67: European banks’ capital ratios

Note: Assumes no dividends and no organic RWA growth for comparability; Takes management guidance for mitigation (at no assumed cost); Standard Chartered, HSBC, Lloyds and Citi (net) have not disclosed mitigation expectations; RBS mitigation is understated as management largely provided post mitigation numbers; Standard Chartered and Lloyds numbers start from 1H2010 (not 3Q 2010) Source: Company data, Nomura estimates

Re-geared valuations reveals further upside potential

While optically valuations for Nordic banks look high, if we adjust for the excess capital that is evident at the Nordic banks, we find implied price-to-book valuations (based on ROE-G/COE-G) reveal upsides that are in line with the sector assuming common 10% COE and 3% growth estimates for all the large-cap banks. As the table above shows, Nordic banks are trading on a re-geared normalised 2012E P/E of c.8x, which is broadly in line with the sector (held to a 10% CT1 benchmark in 2012 under Basel 3).

However, we would argue that given the better growth prospects of the Nordic banks and the lower sovereign/macro risks, COE should be slightly lower and growth should be slightly higher than at other European banks. This would imply that there is still further outperformance in terms of re-geared valuations. We expect this implied upside will be reflected in market prices as and when we see continued outperformance in Sweden and Norway, and as Nordic banks announce tangible plans around their excess capital. The first steps towards repaying excess capital would be to repay all free cash flows to shareholders.

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49

Swedbank

We see potential upside driven by strength in the Swedish economy and an improving Baltics market.

Preferred Swedish bank

We find Swedbank the most attractive Swedish bank mainly because of its more attractive de-geared valuations. If we hold Nordic banks to a 10% CT1 benchmark in 2012 under Basel 3 and use the excess capital to re-gear the earnings, we find that Swedbank trades on a P/E ratio of a little over 7x. While the re-geared 2010E P/TB is c1.5x, we find implied P/TB valuations provide upside potential of over 30%. This is broadly in line with DnBNOR, our other preferred name among the Nordic banks.

Net interest income rebound stronger

The latest SME consensus figures reveal an 18% or SEK c.2.9bn growth in NII from the 3Q10 annualised NII level up to 2012; however, we find this underestimates some of the moving parts up to 2012, and we predict stronger NII growth of 24% in this period. This is mainly driven by:

• Volumes: Swedbank has been fairly conservative in volume growth over the past four to six quarters and understandably so as it dealt with the Baltic crisis. It gave up new mortgage lending market share in Sweden and its over-group-level loan book actually shrank since peaking in 4Q09. We expect some amount of conservative volume growth up to 2012 as stronger volume growth in retail and LCI is offset by volume contraction in the Baltics. We estimate overall loan growth of a little over 6% by 2012 (compared with the Nordic average of c.9.2%). Assuming constant margins, we estimate this would contribute SEK c.700m.

• Positive refinancing effect: Swedbank currently has state-guaranteed funding of SEK 163bn, 82% of which matures within the next three years. This was issued at expensive levels during the crisis. Refinancing at current market rates would create a positive refinancing effect of 60-80bp as per company guidance. This implies an improvement of SEK 800m to SEK 1,050m by end-2012.

• Rates/margin effect: Of the SEK c.2.9bn increase, SEK 1.5bn-1.7bn can be explained by the above two factors, which means consensus estimates SEK 1.2bn-1.4bn from rates/margins. This compares with Swedbank’s rate-sensitivity guidance of SEK c.1.7bn for a 100bp increase in rates. Currently, the Riksbank estimates policy rates will increase by c.2.25% by the end of 2012 from the current level of 1%. This would imply consensus is grossly underestimating the margin impact if company guidance is to be believed. To put this in perspective, a 2.25% hike in interest rate would result in SEK c.1.8bn higher NII just from interest on free equity. Given that Swedbank has the largest share of retail deposits, we are more optimistic on margin developments. The key risk here is that incoming regulation would have an impact on margins; however, given new regulations will be phased in by 2018, we feel confident that margins are likely to expand to account for the new regulations.

High levels of excess capital

We forecast a CT1 ratio under Basel 2 of c.15% by end-2012. Swedbank had guided to a Basel 3 impact of c.35bp, which would imply that capital ratios would be close to 14.5% by our estimates, despite assuming a 50% pay-out ratio. While it is unclear what benchmark the Swedish regulator will set for Swedbank, we expect a near-10% minimum CT1 ratio. As we outlined earlier, we do not expect the regulator to allow a return of capital in 2011 and see this as more likely in 2013. Also, there is a risk that the regulator may choose to increase the risk weighting of mortgage loans, which is currently c.6%; however, even if we were to double risk weightings in Swedish mortgages, it would reduce the CT1 ratio by c.1%. This would still leave excess capital of c.3.5% under Basel 3, which is SEK c.21.5bn, or 20% of market value.


50

Geared to a Baltic recovery

Swedbank has the highest market share in the Baltics among the Nordic banks. With the Baltics experiencing a sharp ‘V-shaped’ recovery, the prospect of an improvement in earnings for the Baltic division looks likely. While we do not expect pre-provision profits to return to 2008 levels, given that performing loan volumes and activity levels are much lower today, we would expect continued improvement over the coming quarters if the macroeconomic recovery continues on track.

Also, as we see improvements in the economy, asset quality could continue to improve as non-performing loans turn performing and loss-given default improves. With coverage ratios in the Baltic at c.61% for Swedbank (SEB c.65%), we can expect write-backs driven by these factors, which could create some upside on the cost of risk line, although the magnitude of surprise is likely to be much smaller than in the recent past. More likely, in our view, is the potential improvement in pre-provision profits, which is currently 25% below 2008 levels.

Fig. 68: Baltic performance Q409=100

Source: Company data

Fig. 69: Baltic business confidence

Source: Datastream

Changes to estimates and valuations

We upgrade our estimates, which are marginally driven by upgrades to the top line and lower cost of risk. The main revenue item we have upgraded is net interest income. Across the sector, we model 2012 with a normalised cost of risk. However, we would expect Nordic banks to experience credit losses lower than the normalised level, especially if current macroeconomic expectations pan out. Our increase in earnings has driven a SEK 3 increase in our price target, which is now SEK 117.

Fig. 70: Swedbank sum-of-the-parts valuation We upgrade our price targets by SEK 3 to SEK 117


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Sw edBank Term. Term. Term. DCF DCF va l

Division 2009A 2010E 2011E 2012E ROE CoE P/ B mult. va l per share

Reta il 5,533 4,877 5,127 5,635 32.1% 10.1% 4.0 12.6 63,201 54.56

LC&I 3,061 2,293 2,096 2,146 16.0% 10.7% 1.7 9.7 23,600 20.37

Baltics (9,752) (499) 2,211 2,862 10.5% 12.0% 0.8 7.9 23,932 20.66

Ukra ine & Russia (8,425) 249 (99) 34 1.2% 14.6% (0.1) (3.7) 271 0.23

AM (50) 568 606 676 38.6% 10.1% 4.8 12.1 8,083 6.98

Shared Service & Elimina tions (878) (620) (193) (483) 10.1% 10.2 (3,234) (2.79)

Ex cess Capita l 19,653 16.96

135,506 117


51

Fig. 71: Swedbank summary model


SwedBank

Group (SEKmn) 2006A 2007A 2008A 2009A 2010E 2011E 2012E 2013E

Net Interest Income 15,977 19,157 21,702 20,765 15,996 18,216 19,764 21,988

Net Commission Income 8,869 9,880 8,830 8,453 9,404 10,002 10,451 10,940

Net financial income 2,481 1,581 2,250 2,746 2,602 2,092 2,354 2,472

Tota l Revenues 29 ,197 32 ,924 36 ,463 34 ,782 30 ,988 33 ,008 35 ,324 38 ,260

Total Costs 15,139 16,719 18,058 17,848 17,822 18,218 18,741 19,960

Pre Provision Profits 14 ,058 16 ,205 18 ,405 16 ,934 13 ,166 14 ,790 16 ,583 18 ,300

Loan Loss Provisions 205 -619 -4,586 -26,395 -3,812 -2,023 -2,550 -3,579

Opera ting Profits 14 ,263 15 ,586 13 ,819 -9 ,461 9 ,354 12 ,767 14 ,033 14 ,722

Taxes -3,211 -3,450 -2,880 -981 -2,470 -3,015 -3,147 -3,306

N et Attributable Profit 10 ,880 11 ,996 10 ,887 -10 ,511 6 ,868 9 ,748 10 ,869 11 ,400

Customer loans 946,319 1,135,287 1,287,424 1,290,667 1,215,148 1,239,315 1,292,426 1,373,902

Customer deposits 400,035 458,375 508,456 504,424 528,201 560,986 601,138 644,455

Shareholders equity 59,974 68,008 86,230 89,670 95,003 101,317 107,312 113,278

Tota l assets 1 ,352 ,98 9 1 ,607 ,984 1 ,811 ,690 1 ,794 ,687 1 ,847 ,218 1 ,883 ,956 1 ,964 ,692 2 ,088 ,549

Shares outstanding (mn) 515 515 773 1,160 1,158 1,158 1,158 1,158

Earnings per share 21 .1 1 23 .28 14 .08 -9 .06 5 .93 8 .41 9 .38 9 .84

Dividend per share 8.3 9.0 4.5 0.0 3.0 4.2 4.7 4.9

Return on equity 26.2% 25.9% 19.0% (15.1%) 9.1% 11.9% 12.3% 12.1%

Core Tier 1 ratio (Basel II) 5.8% 7.2% 9.5% 12.0% 13.8% 14.6% 15.0% 15.1%

Tier 1 ratio (Basel II) 6.5% 8.5% 10.7% 13.5% 15.1% 17.2% 17.7% 17.7%

Book value per share 116.4 132.0 111.5 77.3 82.0 87.5 92.6 97.8

Tangible book value per share 87.1 92.9 86.22 62.2 68.1 73.6 78.8 83.9

Divsiona l Profits

Swedish Banking 5,639 5,533 4,877 5,127 5,635 5,705

Baltic Banking 2,004 3,061 2,293 2,096 2,146 2,381

Int'nl Banking 2,876 -9,752 -499 2,211 2,862 2,963

SwedMarkets -1,116 -8,425 249 -99 34 96

AM & Insurance 472 -50 568 606 676 723

Shared Service & Eliminations 1,012 -878 -620 -193 -483 -469

KPIs

Cost Income Ratio 55.51% 51.57% 40.69% 40.71% 58.79% 54.91% 52.88% 49.75%

PPP/ Tota l Loans 1 .49% 1.43% 1.43% 1.31% 1.08 % 1.19% 1.28% 1.33%

LLP/ Avg. Loans 0 .02% (0 .06%) (0 .38%) (2 .05%) (0 .30%) (0 .16%) (0 .20%) (0 .27%)

Loan to Deposit Ratio 237% 248% 253% 256% 230% 221% 215% 213%

RWA (Basel II) 726,712 600,238 696,505 603,431 560,099 571,238 595,719 633,273


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DnBNOR

Solid macro outlook, domestic focus, high dividend yield and strong capital position.

Second-lowest-rated Nordic bank

We see DnBNOR as the lowest-rated Nordic bank and the one that has the most upside potential in terms of implied price-to-book multiples. DnBNOR is one of the better-value names in the sector, in our view, and is exposed to superior macroeconomic conditions in a European context, on both current and normalised valuations, especially if you account for the higher capital buffers that the bank currently has.

While DnBNOR now trades on 8.5x 2012E earnings, if we hold it to a 10% CT1 ratio (which compares with an average of c.9% for the sector) and re-gear the earnings multiple, it trades at c.7.1x 2012E earnings compared with the sector on c.8x. We are not arguing for a release of capital anytime soon and believe any release will happen only after we see four to six quarters of consistent economic growth.

However, if we compare DnBNOR or other well-capitalised Nordic banks with European peers, there has to be a reflection of the excess capital in valuations to make it a more like-for-like comparison. In terms of 2010E P/TB multiples, DnBNOR trades in line with the sector average. Its 2010-12 dividend yield ranges from c.4% in 2010E to c.5.5% in 2012E on consensus estimates (ref price NOK 78). This compares with the current dividend yield of c.3% for SX7P Index. While we think current valuations look attractive, the medium- to longer-term investment case for DnBNOR is its exposure to a much better placed Norwegian economy. With superior private and public debt dynamics, debt is not a burden on economic growth but rather a driver.

2012 outlook

DnBNOR is targeting at least a 13% return on equity by 2012 and pre-provision profits in the range of NOK 22bn-25bn. Loan growth assumptions behind 2012 guidance are for c.5% pa growth up to 2012 to achieve the lower end of the NOK 22bn-25bn range and c.7% pa growth to achieve the upper end of this range. This compares with a 9M 2010 annualised growth rate of c.4.4% or c.4.0% if adjusted for currency movements, with the corporate loan growth picking up in the recent quarter.

Leading indicators for growth in 3Q10 and 2011 are positive, but if the lower growth expectations from the US affect Europe, then DnBNOR may struggle to reach the lower end of its target growth range. However, we believe that if Norway struggles with credit growth, then few countries in Europe will outperform Norway in that environment, so we do not necessarily think it will be negative on a relative basis. Also, if we see an improving growth expectation, then that should be positive for earnings momentum at DnBNOR.

Fig. 73: 2012 guidance and current consensus

Source: SME, Nomura estimates

NOK in Mn 2010 2011 2012 Target-Low Target-High

Net Interest Income 23,322 24,805 26,300

Non-Interest Income 15,136 14,523 15,096

Total Income 38,436 39,328 41,396 40,741 46,296

Total Costs -18,593 -18,842 -19,369 -18,741 -21,296

PPP 19,843 20,486 22,027 22,000 25,000

Loan Losses -3,084 -2,292 -2,043 -2,043 -2,043

Profit before tax 16,759 18,194 19,984 19,957 22,957

PAT (attributable) 12,414 13,572 15,085 15,167 17,447

Equity (ex-MI) 105,834 115,712 123,956

ROE (ex-MI, Avg) 12.1% 12.3% 12.6% 12.7% 14.6%Note: We have assumed 24% tax-rate for 2012 and consensus credit losses to work out bottomline targets; Revenue and costs estimated using 46% CI ratio target;Consensus equity is calculated based on consensus earnings and 50% payout ratio.

Fig. 72: GDP outlook Norway/Sweden to outperform

Source: Datastream, Consensus Economics

Real GDP Grow th EIU

13-Dec-10 2010 2011 2012-25

Sweden 4.3% 2.9% 2.6%

Norway 1.5% 2.6% 2.5%

Denmark 1.9% 1.9% 2.3%

Finland 2.3% 2.0% 2.4%

Average 2.5% 2.3% 2.5 %

Germany 3.4% 2.1% 1.6%

France 1.6% 1.5% 1.8%

Ireland -0.7% 1.5% 3.4%

UK 1.7% 2.0% 1.9%

Euro Area 1.1% 1.5 % na

USA 2.7% 2.4% 2.7%

Estonia 2.0% 3.8% 3.5%

Latvia -1.3% 2.9% 3.7%

Lituania 0.4% 2.9% 3.4%

Ukraine 4.3% 4.6% 1.9%

Russia 4.0% 4.3% 3.0%

Poland 3.4% 3.8% 3.0%


53

Strong operating performance and a Norwegian focus

We see a number of strengths in DnBNOR’s operations, which we think continue to be attractive especially when compared with European banks.

Pre-provision profitability DnBNOR has the highest pre-provision profitability among Nordic banks at c1.8% when measured as a percentage of loans. This compares with the Nordic average of c.1.4% and the European average of a little over 2%. With the 2012 cost of risk in the range of c.20-25bp for most Nordic banks, this implies a greater ability to absorb unexpected losses and, hence, lower operational leverage.

Focus on domestic operations DnBNOR realises that global macroeconomic uncertainty means it is not focused on pursuing opportunities outside its domestic markets. With material excess capital, we see this domestic focus as a positive to the eventual return of capital. Also, with GDP growth in Norway and other countries that DnBNOR operates in being fairly robust, we would expect it to show the loan growth that it is currently targeting. In addition, with the takeover of the DnBNORD joint venture, the bank can be more opportunistic with growth in the Baltic/Polish markets.

Cost effectiveness DnBNOR’s target of 46% cost-income ratio looks achievable to us, especially since the cost-income ratio of the marginal/incremental profit is below 35% by our estimates. This would put DnBNOR in line with the best-in-class Swedish bank. We are not too far away from DnBNOR’s targets in our 2012 forecasts and are broadly in line with consensus.

Asset quality risks look manageable We believe asset quality risks in an improving Norwegian and global macro environment are manageable. With the Baltics recovering, we see the key areas of concerns as shipping and leveraged buy-out loan books. The LBO portfolio of a little under NOK 40bn is geared to a macroeconomic recovery and could result in losses if we see the stalling of Norwegian/global growth prospects.

The shipping exposure of under NOK 140bn has performed better than expected. With 20% of the capacity being phased out because of new OECD rules and new capacity coming in quite slowly, the tanker segment has performed better than expected. Dry cargo was another segment where the return of global trade from the troughs of 2008 has helped the segment. However, the container segment continues to be a concern, mainly because of the supply that is coming into this segment and the under-utilisation of current capacity; nevertheless, this is only 9% of the total exposure.

Net interest income We flagged in our post-3Q10 results note that consensus is underestimating NII running into 2012. In the adjacent figure, we try to estimate the NII for 2011-12 under certain assumptions. We have seen deposit margins in retail increase from 23bp to 53bp in the past four quarters driven by a 75bp hike in policy rates. Consensus expects a 100bp hike by end-2011 and a 175bp hike by end-2012. We estimate deposit margins would increase by 30bp by end-2011 and by 40bp cumulatively by end-2012.

We conservatively expect mortgage margins to fall by another 7.5bp and LC&I lending margins to go up by 5bp. Assuming a higher impact from both these factors is unreasonable, in our opinion, given the overall product margins. We find current consensus is underestimating the impact from the various moving parts if we assume that any increase in future funding costs can be passed on to the end consumer. We would argue for a c.1% upgrade on 2011 NII consensus and a c.6.5% upgrade on 2012 NII consensus.

Fig. 74: Pre-provision profits As % of loans


Fig. 75: Cost-income ratios


Fig. 76: NII We see further upside potential


2010 2011 2012DNB 1.8% 1.7% 1.8%Nordea 1.5% 1.5% 1.5%SEB 1.2% 1.4% 1.5%Swedbank 1.1% 1.2% 1.3%Danske 1.2% 1.2% 1.2%SHB 1.1% 1.1% 1.2%

2010 2011 2012SHB 47.9% 47.9% 46.7%DNB 48.1% 48.1% 46.9%Nordea 51.5% 51.3% 50.4%Danske 53.6% 51.6% 50.8%Swedbank 57.5% 55.2% 53.1%SEB 64.5% 61.2% 60.1%

N II Q 210 5744

+ Lending/Deposit Volumes 88

+ Lending/Deposit Spreads 48

+ Addl Int. Day 61

+ O ther 38

N II Q 310 5979

Annualised 23916

For 2011

Retail Deposit M argin @ +30bps 570

M ortgage M argin @ -7.5bps -186

Corporare M argin @ +5bps 86

5% Volume G rowth 607

2011 Proforma 24993

2011 N II Consensus 24805

Diff 0.8%

For 2012

Retail Deposit M argin @ +40bps 1330

M ortgage M argin @ -7.5bps -373

Corporare M argin @ +5bps 171

10% Cumm. Volume G rowth 1878

1% Interest on Free Equity 1084

2012 Proforma 28007

2012 N II Consensus 26300

Diff 6.5%


54

Valuation In our sum-of-the-parts estimates, we value DnBNOR at SEK 101, which is 1.4x 2012E tangible book. We benchmark DnBNOR to a 10% CT1 under Basel 3 in 2012 and see excess capital to the tune of NOK 13.8bn after discounting it for 2.5 years in our sum-of-the-parts valuations.

Fig. 77: Sum-of-the-parts model


Fig. 78: DnBNOR summary financials


DNB (NOK Mn) Term. Term. Term. DCF DCF val

Division 2009A 2010E 2011E 2012E ROE CoE P/ B mult. val per share

Corpora te Ba nk ing 3,616 4,160 4,426 4,916 9.5% 10.1% 0.9 10.0 38,112 26.0

Reta il Bank ing 4,343 4,700 5,093 6,511 20.2% 10.1% 2.3 11.8 66,653 45.5

DnBN OR M arkets 3,357 2,505 2,562 2,848 26.8% 11.3% 2.8 10.6 25,935 17.7

Life & Asset M anagement 843 1,081 828 882 7.1% 10.1% 0.6 8.8 7,990 5.5

DnBN ORD (1,139) (242) (57) 134 9.9% 13.2% 0.7 3.2 (134) (0.1)

Others (2,513) 245 (146) (380) 10.4% 13.1 (3,983) (2.7)

Ex cess Capita l 13,766 9.4

1 48 ,340 101

DnBNOR

Group (NOKmn) 2007A 2008A 2009A 2010E 2011E 2012E 2013E

Net Interest Income 17,866 21,910 22,633 23,285 25,109 27,077 28,804

Net Other Operating Income 13,732 12,438 14,995 15,314 14,630 15,225 16,486

Tota l Revenues 31 ,599 34 ,348 37 ,628 38 ,599 39 ,739 42 ,302 45 ,289

Total Costs -16,449 -18,723 -18,910 -18,554 -19,120 -19,860 -21,017

Pre Provision Profits 15 ,150 15 ,625 18 ,718 20 ,046 20 ,619 22 ,442 24 ,272

Loan Loss Provisions -221 -3,508 -7,711 -3,259 -3,176 -2,910 -2,860

Opera ting Profits 17 ,411 12 ,168 11 ,032 16 ,777 17 ,406 19 ,618 21 ,448

Taxes -2,387 -3,252 -4,086 -5,034 -4,700 -4,708 -5,147

Minorities 241 -293 -1,560 -706 0 0 0

N et Attributable Profit 14 ,780 9 ,209 8 ,586 12 ,449 12 ,706 14 ,910 16 ,300

Customer loans 970,504 1,191,635 1,114,886 1,163,940 1,216,765 1,277,022 1,345,545

Customer deposits 538,151 597,242 590,745 612,787 640,599 681,932 725,342

Shareholders equity (ex MI) 73,314 77,064 98,648 108,296 114,779 123,335 132,181

Tota l assets 1 ,473 ,919 1 ,831 ,699 1 ,823 ,453 1 ,882 ,769 1 ,968 ,219 2 ,065 ,690 2 ,176 ,530

Shares outstanding (mn) 1,332.7 1,332.7 1,628.8 1,628.8 1,628.8 1,628.8 1,628.8

Earnings per share 11 .1 6 .9 5 .3 7 .6 7 .8 9 .2 10 .0

Dividend per share 4.5 0.0 1.8 3.8 3.9 4.6 5.0

Return on tangible equity 24.0% 13.7% 10.8% 12.9% 12.1% 13.2% 13.4%

Core Tier 1 ratio* 6.3% 5.9% 10.7% 11.7% 11.9% 12.3% 12.6%

Book value per share 57.0 61.0 62.3 67.7 70.5 75.7 81.2

Tangible book value per share 49.2 51.5 55.9 62.2 66.6 71.8 77.3

Divsiona l Op. Profits

Corporate Banking 8,129 9,354 5,743 5,943 6,063 6,468 6,467

Retail Banking 4,181 3,242 6,898 6,715 6,977 8,567 9,175

DnBNOR Markets 1,749 3,934 5,331 3,579 3,510 3,747 3,897

Life & Asset Management 2,357 748 1,339 1,545 1,134 1,160 1,825

DnBNORD 470 -666 -4,287 -1,354 -79 177 584

KPIs

Cost Income Ratio -52.1% -54.5% -50.3% -48.1% -48.1% -46.9% -46.4%

PPP/ Tota l Loans 1 .56% 1.31% 1.68% 1.72% 1.69% 1.76% 1.80%

LLP/ Avg. Loans -0 .02% -0 .32% -0.67% -0 .29% -0 .27% -0 .23% -0 .22%

Loan to Deposit Ratio 180% 200% 189% 190% 190% 187% 186%

RW A (Norway Rules - full IRB Estimates) 759,476 919,678 839,385 823,120 860,477 903,090 951,548

* Capital ratios calculated under Norwegian rules pro-forma for full IRB


55

Spanish banks: How much additional capital could be required in Spain? Daragh Quinn [email protected] +44 20 7102 8333

Summary

The funding pressures being felt by Spanish banks remain driven, in our view, by continued concerns over solvency. This is a result of the high level of private sector debt, the bursting of the housing market bubble and the outlook for low growth. Given the continued losses in Ireland and the level of recapitalisation that the banks have seen, there are reasonable concerns about the effectiveness of the European-wide stress test held during the summer (which the Irish banks passed). Given the potential losses being faced in Spain and existing capital/profitability levels, we believe there are additional capital requirements. Importantly, however, these additional capital needs are not evenly spread across the system.

We estimate a potential capital requirement for Spanish banks of between EUR 43bn and EUR 80bn, depending on the severity of losses. However, if the largest savings banks could raise equity directly in the markets (which given the recent reforms is now a possibility), we think the Spanish government would need to inject as little as EUR 24bn (or just 2% of GDP, in addition to the c. EUR 15bn that has already been injected into the system).

Skeletons in the closet – Spanish savings banks and real estate losses

We believe the savings banks remain a key risk for Spain. Although the stress test in Spain only estimated a relatively small capital requirement, we believe this stress test was useful, given the detailed bottom-up estimate of credit losses. In our view, the level of losses and the key assumptions to estimate these, by the Bank of Spain, are reasonably conservative. Where we would have more doubts is the level of cushion that was calculated to absorb these losses and that for some banks, the adverse scenario could be closer to the base-case scenario. In this case, we would not view as probable the market’s willingness to fund these banks over two years, while they run down capital/ profits (the level of operating profit the Bank of Spain estimated the banks could use to offset losses and lower Tier I to 6%) but rather a pre-emptive capital raise would be required.

Fig. 79: Spanish banks stress-test results Credit losses and buffer estimated by the Bank of Spain (July 2010 stress test)

Source: Nomura research, Bank of Spain

-4%-2%1%3%5%7%9%

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56

However, not all Spanish banks are the same, and we believe it is important to make this distinction in determining the potential capital requirements of the sector. We estimate that the additional capital requirement for Spain could be in the range of EUR 43bn to EUR 80bn. This represents c.4-8% of GDP, which coupled with the money already injected would raise the total cost to c.10% of GDP.

Fig. 80: Adjusting for banks that might not rely on the government Adjusting system-wide risk-weighted assets

Source: Nomura research, Bank of Spain * BBVA, SAN, La Caixa **POP,SAB,BKT,BBK

EUR 80bn – high end of losses: To calculate the EUR 80bn, we have excluded BBVA, Santander and LaCaixa from the calculation. This leaves risk-weighted assets (RWA) of EUR 900bn. Using the highest losses in Spain from the stress test, estimated at 15.8% of RWA, this would generate a loss of EUR 142bn for the sector. To offset this, we would deduct EUR 34bn of provisions the banks have already made, one year of operating profit (EUR 13bn) and the EUR 15bn provided by the FROB/deposit guarantee fund.

Fig. 81: Capital required – EUR 80bn Assuming high loss rate (15.8% RWA)

Source: Nomura estimates, Bank of Spain

EUR 43bn – average losses: To calculate the capital requirement of EUR 43bn, we excluded the other listed banks (SAB, POP and BKT, assuming they can raise capital in the markets) and the savings bank, BBK (high level of capital – Tier I 15%). This leaves RWA of EUR 700bn. Using the average loss ratio for the remaining banks (13.2% of RWA) generates losses of EUR 92bn. To offset this, we deduct EUR 27bn in provisions already made by the remaining banks, EUR 7bn (one year of operating profit) and the EUR 15bn from the FROB.

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57

Fig. 82: Capital required – EUR 43bn Assuming average loss ratio (13.2% RWA)

Source: Nomura estimates, Bank of Spain

A closer look – bank by bank

Given the detailed analysis given by the Bank of Spain, we have also estimated the potential shortfall for each bank, assuming the loss ratio calculated by the Bank of Spain is correct. However, to offset these losses, we use a lower buffer than the Bank of Spain. We use, as a buffer to absorb losses, existing provisions, funds already petitioned from the FROB, one year of operating profit and that Tier I capital must be maintained at 8% (and also 10%). This compares with the two years of operating profit, tax and other revaluation gains, and lowering Tier I capital to 6% used by the Spanish central bank.

In the following figure, we highlight the capital deficit for each individual bank under both capital scenarios. The stress test losses for BBVA and SAN were calculated on a global basis, whereas we would only really be concerned with potential additional losses in Spain, therefore we have excluded these banks from this analysis (in any case, we assume any capital requirement could be raised in the market or by cutting dividends). For the remainder of the system, this would imply an additional capital requirement of EUR 52bn for Spanish banks (EUR 73bn if a Tier I of 10% is to be reached). If the listed banks could raise this from shareholders/the market, this would mean the FROB/ Spanish government would have to inject an additional EUR 42bn (or EUR 59bn with Tier I at 10%). The merger between Caja Madrid and Bancaja (provisionally named Jupiter by the Bank of Spain) would account for 27% of this amount, or some EUR 11.5bn.

43

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Fig. 83: Capital deficits


We believe this highlights the importance of the new merged bank of Caja Madrid and Bancaja (and five additional savings banks). If this new financial group, with assets of EUR 348bn, can raise equity from the market, this would significantly lower the amount of additional capital the Spanish government would need to inject into the system. La Caixa also generates a relatively high absolute capital requirement (16% of the total), but given the 80% ownership in its subsidiary, Criteria, we believe it continues to have significant resources available before it would have to raise capital from the government. Excluding La Caixa from the amount of capital required would see the number fall to EUR 36bn. If, in addition, Caja Madrid was able to raise equity from the market, this would reduce the amount needed from the government to just an additional EUR 24bn (or 2% of GDP), on our estimates.

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59

Spanish banks: Santander still a macro call on Spain Daragh Quinn [email protected] +44 20 7102 8333

Summary and investment thesis

We expect Santander’s stock performance to continue to be affected by the outlook for sovereign risk in Spain. However, given the underlying profitability of the group and ability to absorb losses, we expect this volatility to present buying opportunities. We estimate the international businesses of Santander (LatAm, UK, US and Portugal) to be worth EUR 9.0 per share. Valuing the remainder of the Spanish/core business at the same earnings multiple as the Greek banks would be equal to EUR 1.4 per share, or a total group value of EUR 9.4 per share. Valuing these earnings at the same level as domestic Spanish banks would raise the total value to EUR 11 per share. Although we do not use a formal sum-of-the-parts in our valuation methodology, this is the same value we estimate using a group ROE and Gordon Growth Model. We maintain our Neutral rating and price target of EUR 11 per share.

Key issues

Valuation and Spanish sovereign risk Economic conditions in Spain and concerns over peripheral Europe and sovereign risk have been key drivers for Santander’s stock performance for much of the year. Until there is a more robust policy response from the Spanish government and central bank, we believe this will continue to be the case over the coming months. Below, we show the relative performance of Santander versus European banks versus the Spanish 10-year bond and also the relative P/B valuation of Santander relative to the sector. Although Santander has a strong diversified presence outside Spain, the Spanish balance sheet still accounted for 32% of the group total and total Spanish earnings 34% of the group total (as of 9M 2010, although down from 45% for the same period last year). With Santander accounting for c.20% of the Spanish stock market (Ibex-35), we see the outlook for Spain and the perception of sovereign risk as a key driver for relative performance.

Fig. 84: SAN performance versus ES bond yields Spanish 10-year bond yields (%) versus relative performance

Source: Datastream, Nomura research

Fig. 85: Santander performance and relative valuation Relative P/B (100=multiple = the sector) and relative stock performance



60

Sum-of-the-parts and the risks in Spain While we recently downgraded Santander to a Neutral rating (see our report published 4 October 2010, ‘Deleveragin/M&A; downgrading SAN’), there have been windows of opportunity where we think the valuation has been attractive. As we expect to see continued volatility in Santander’s performance, we would see these as potential opportunities given the group’s underlying profitability.

In Figure 49, we highlight some of our key assumptions in the outlook for profitability in Latin America, the US, Portugal and the UK. We estimate these areas will generate c.EUR 8.7bn in net income in 2011, distributing the results of the corporate centre, we estimate this would drop to EUR 7.9bn (for the group we estimate total net income of EUR 10.4bn in 2011). Based on peer multiples across these markets (and the valuation of Santander’s listed subsidiaries – Chile and Brazil), we estimate an approximate valuation of EUR 78bn or EUR 9.0 per share within the group (Santander is trading at EUR 8.32 per share – as at close 13 December 2010).

Fig. 49: Value of international business Earnings based valuation (peer valuation and value of local subsidiaries)

Note: 1: adjusting for corporate centre 2: NAV = locally reported NAV 3: based on current market cap Source: Nomura estimates, company data

At levels below EUR 9.0 per share, we believe this implies negative equity or dilution to equity from the remainder of the group (essentially the Spanish/core business). What are the risks in Spain and what would be the capacity of the group to offset any additional potential losses? We estimate this business generates a pre-provision profit of c.EUR 9bn on a loan book of EUR 320bn.

We estimate net income of EUR 2.9bn in 2011 for the remainder of the group (adjusting for the distribution of the corporate centre profits, as some of losses in the corporate centre are the result of currency hedging for the LatAm/non-euro earnings). These earnings are equivalent to c.EUR 0.3 per share. Valuing these earnings on the same P/E multiple as the Greek banks would equate to EUR 1.4 per share, or up to EUR 2.0 per share valued on the same P/E for domestic Spanish banks (2012E P/E).

Fig. 50: What is the value of the rest of the group? Earnings based valuation


Earnings multipleGreece Spain

EUR bn 1x 4x 6xSpain/core profit (EUR bn) 2.9 2.9 11.8 17.7per share 0.3 0.3 1.4 2.0

Value of Intl. (per share) 9.0Total value per share 9.3 10.3 11.0

Potential upside: Spain/core profit valued asSAN price (EUR per share) Intl only at 1x Greece Spain

7.0 28% 33% 47% 57%7.5 20% 24% 38% 47%8.0 12% 16% 29% 37%8.5 5% 9% 21% 29%


61

How bad could the losses be in Spain? To be on the conservative side and using the loss estimated by the Bank of Spain for savings banks in the recent stress test (9.5% of credit risk), we would expect to see significantly higher losses relative to Santander. This would indicate potential losses of up to EUR 31bn for Santander. Against this, Santander has already made some EUR 11bn in provisions (including generic and provisions against real estate) and generated some EUR 9bn in pre-provision profits, indicating that Santander would be able to write off c.9% of this loan book (using two years of operating profit) before having to use capital or profits from other units.

How I learned to love a potential UK listing and stop worrying about capital Given the recent acquisitions from Santander and the impact of Basel 3, we believe Santander will look to strengthen its capital base. We expect this to be achieved by two of the interim dividends being paid in shares, organic capital generation and also a partial listing of Santander’s UK subsidiary. However, market conditions and the departure of the head of the UK business have seen Santander postpone a potential UK listing into the second half of 2011. Delays to this listing, which could raise between GBP 3bn and GBP 5bn, increase the risk that Santander could consider raising capital at group level; however, were Santander to complete this listing successfully, we believe it would lower significantly the risks of capital being raised at group level.

Fig. 86: Mitigating the impact of Basel 3/acquisitions – 2011 Starting from Q3 Basel 2 capital ratio to end-2011E all in Basel 3 ratio


Is there enough capital in Spain? While we believe Santander is adequately capitalised at group level, there could be some debate on how capital is distributed within the group. The capital levels of the individual subsidiaries suggest the remaining capital at group level is low. However, this does not account for how these subsidiaries are consolidated at group level, ie, accounting and regulatory differences and also the distribution of goodwill/revaluation reserves across the group. Santander has stated that making adjustments for accounting and regulatory difference, the capital assigned to the Spanish business is in excess of 10%. We believe this must also be a number with which the Bank of Spain is comfortable.


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Fig. 87: Capital – subsidiaries versus group Based on 2009 FY numbers

Source: Company data, Nomura research


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Santander model

Fig. 88: Santander model



64

UK domestic banks: we favour Lloyds over RBS Robert Law [email protected] +44 20 7102 2715


In our view, Lloyds’ current pre-impairment profitability already justifies upside in the shares, when impairments normalise, whereas we believe RBS needs to see improvements in pre-impairment profits, in addition to a normalisation in impairments.

Lloyds and RBS have almost identical market capitalisations, Lloyds £47bn and RBS £45bn. However, we would argue that their sustainable level of profitability is very different and that the implied P/E multiple for Lloyds is therefore significantly lower on a normalised basis.

The nine-month pre-impairment profit for RBS was £9.0bn, ex own debt, and we estimate £11.5bn for the full year. By contrast, the first half pre-impairment profit at Lloyds was £7.0bn, and we estimate £13.6bn at the full-year stage. This shows that the Lloyds market cap to pre-impairment profit multiple for Lloyds stands at a 12% discount to RBS. This would be geared by impairments. Lloyds has a loan book of £612bn, compared with £528bn at RBS; however, Lloyds has a significantly higher proportion of residential mortgages in its portfolio. We therefore assume a higher level of impairments on a normalised basis at RBS of £3.7bn (75bp of loans), compared with £3.3bn (58bp) at Lloyds. This would widen the P/E differential to 20%. We estimate a Lloyds normalised P/E of 7.4x our assumption of 9.3p of normalised EPS. By contrast, we estimate an RBS normalised P/E of 9.3x our assumption of 4.4p of normalised EPS.

Our normalised EPS estimates are equivalent to a 15% RoE at Lloyds and 9% at RBS.

RBS is targeting a 15% RoE by 2014. This would require EPS of c.7.5p a 50%+ improvement in the normalised earnings that we currently see. If the group is successful in achieving this pre-impairment growth, we believe there could be similar improvement in the Lloyds earnings, arguably more if the improvement is concentrated in the commercial banking areas, which are the dominant part of the Lloyds group.

In our view, the different pre-impairment returns and RoEs are a function of the different business mixes at RBS and Lloyds, and therefore justify different (and wider) price to book valuations.

Business mix

Lloyds and RBS have very different business mixes, which in our view are likely to lead to different long-term RoEs.

Lloyds is predominantly a traditional commercial banking operation, particularly heavily concentrated in mortgages and savings. Its capital markets activities are relatively small.

By contrast, 34% of the current RBS RWAs are in the GBM division, and we estimate this will rise to 43% under Basel 3. We estimate the effective RoE on the increased capital requirements of the GBM businesses on a normalised basis is currently c.9%. GBM faces the industry challenges in raising its RoE, in addition to the challenges it faces as a government-owned entity.

Assuming that GBM is unable to increase its returns, or that they lag those of the traditional businesses, RBS would need to increase its commercial banking returns above 15% to achieve its overall 15% group RoE target. We would argue that if the traditional banking industry is able to sustain these higher returns, Lloyds with its greater traditional banking mix, would achieve even higher returns.


65

Capital

We believe the recapitalisation measures taken by the UK industry and the authorities have lifted UK bank ratios to among the strongest in Europe and internationally. There is still uncertainty over the levels that the UK authorities will ultimately require, eg, for systemically important banks; however, we believe it is highly unlikely that the industry will require further recapitalisation. As the sector is already satisfying the FSA stress-test requirements, it would be illogical for any new capital targets to be even more onerous in the short term and force capital raising. We believe companies will be able to satisfy increased capital requirements through retentions, rather than having to raise additional capital.

However, we also argue that those expecting capital return are over-optimistic. Capital projections are uncertain and this very uncertainty suggests caution, particularly given the UK and global macro uncertainties and the high leverage levels in many markets. As we discuss below, both Lloyds and RBS have substantial wholesale funding requirements and reducing capital until these have been brought down would seem premature. We believe that no management or regulator is likely to seek/allow capital reduction until these uncertainties have been substantially reduced. Over the longer term, a banking sector that is profitable and an environment of deleveraging will naturally result in free cash flow for banks; however, we view this as a medium-term issue, which we are unwilling to factor into valuations.

Potential negatives

Slowing in the recovery in UK banking profitability The key bull case for the domestic UK banks is that the industry will achieve attractive returns in the future and that valuations are near book value, Lloyds 1.1x TBV and RBS 0.8x. The industry has made attractive returns in the past, except during times of high credit losses. The leading banks are all targeting c.15% RoEs and have strong shares; c.90% of new mortgage origination is in the hands of the largest six banks. After falling during the era of cheap wholesale funding, overall margins have started to recover. The loss-making banks have returned to profitability in 2010, earlier than originally expected.

While we believe this case is likely to be valid in the longer term, there is potential for the pace of recovery to slow and disappoint, particularly after the progress made in 2010. The government’s fiscal tightening (particularly after a period of stimulus) creates real uncertainty for 2011. We continue to have impairments falling, but there must be question marks about this, particularly in the personal sector, if unemployment starts to rise again. The biggest factor for impairments, in our view, remains the trend in CRE, which again is uncertain. Margins have begun to improve, however, both RBS and Lloyds have indicated that the asset spread improvement is slowing and increases in official rates are needed for liability spreads to take up the running. We believe a major factor behind margin improvement in 2010 was the normalisation in short-term wholesale funding spreads for banks; this was a one-time effect. Further margin gain in 2011 is likely to be materially slower and could prompt disappointment.

The combination of margin gain and normalisation of impairments implies there is considerable variation in expectations for the pace of profit recovery and there is scope for downgrades of more optimistic expectations, even if recovery continues.

We would regard both Lloyds and RBS as affected by expectations of the pace of recovery, rather than distinguishing between them.

Funding Both Lloyds and RBS entered the credit crisis with large wholesale funding requirements, which were exposed. Both have medium-term plans to restructure their balance sheets, one objective of which is to reduce the reliance on wholesale funding, particularly the short-term element. During 2010, both made progress in line with and even ahead of plan. The perception is that RBS may have been more aggressive in its actions during 2010, although this is difficult to substantiate from outside.


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However, these plans are both five-year targets. Both remain vulnerable to an extended seizure in wholesale markets in the meantime. Furthermore, it remains to be seen whether the process of restructuring problem assets becomes more difficult in the later years.

The market perception is that Lloyds is more vulnerable to this issue. It had a loans/deposits ratio of 163% at the H1 stage, compared with 126% for RBS. We would accept that pure funding issues would be likely to affect Lloyds proportionately more. However, in the event that any market dislocation involved the wholesale markets generally, which we believe is likely, we would argue that RBS too would be likely to be affected (and Barclays for that matter), owing to the wholesale businesses.

Independent banking commission The outcome of the commission’s investigation and the government’s response to it are both unknowns. We believe the most likely outcome is increased restrictions and requirements on the industry, which hamper it, but do not transform its prospects or value; however, this must be uncertain. Furthermore, until the report is published in September, market speculation is likely to be negative for the banks, rather than positive, as has been the case, so far.

Market attention has switched to competition in UK banking, over the separation of traditional and investment banking businesses. As the market leader in mortgages, with a near 30% share and having acquired HBoS in a controversial transaction, Lloyds is potentially the most affected by any decision to reduce industry concentration.

We would argue that the six or so large providers of banking services are sufficient to foster competition, particularly by comparison with other industries, and that little would be gained by adding another one or two. More contentious, in our view, is the concentration implied by the share of the leading supplier in some products, Lloyds in mortgages and RBS in SME, both shares ultimately reached by acquisitions that the authorities allowed; however, it was precisely to address this that the EU required the disposal of branches and assets. In the Lloyds case, we estimate the eventual branch sale will reduce its mortgage share to 25%. Of course, the commission could advise this is still too high.

In our view, any ultimate damage to Lloyds’ valuation is unlikely to remove the potential upside in the shares represented by a current normalised P/E multiple we estimate at 7.4x.


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UK models

Fig. 89: Lloyds model


Lloyds Banking Group financial information and forecasts Co. guid'ce£m H1 2009A FY2009 H1 2010A YoY FY 2010E FY 2011E FY 2012E FY 2014ENet interest income 6,442 12,726 6,911 7% 13,985 14,279 13,908Non-interest income 5,791 11,875 5,831 1% 10,930 10,211 10,265Total income 12,233 24,601 12,742 4% 24,915 24,491 24,174Insurance claims 294 637 261 511 526 542

Total income net of claims 11,939 23,964 12,481 24,404 23,964 23,631 27,715Expenses 5,718 11,609 5,435 -5% 10,816 10,334 10,355 11,086

(which includes synergies of) 107 534 650 1,387 2,000 2,000

Profit before impairment 6,221 12,355 7,046 13% 13,588 13,631 13,276 16,629Credit Impairment 13,399 23,988 6,554 -51% 12,555 8,610 3,334 3,000Fixed Asset Write-Downs 150 150 150 150 0 0Assocs + JVs -507 -767 -62 -142 -2 -2Fair value gains 0 0 0 0 0EU mandated sales -500 -1,255

Profit before non-operating items -7,685 -12,400 280 -104% 891 5,019 9,440 12,374Fair Value Unwind 3,728 6,100 1,323 2,500 1,000 1,000Restructuring Costs 358 1,096 804 1,000 1,000Other Non-Operating Items 10,265 8,438 497 497 0 0Disposal gains 0 0 0 0 0 0Pre-Tax Profits 5,950 1,042 1,296 -78% 2,888 5,019 10,440Tax -1,203 -1,911 630 1,019 1,501 3,002Minorities 58 126 70 140 140 140Preference Dividends 0 0 0 0 0 0

Attributable Profit 7,095 2,827 596 1,729 3,379 7,298Dividends 0 0 0 0 0 2,055Retained Profit 7,095 2,827 596 1,729 3,379 5,243

EPS - Effective (p) -14.0 7.5 0.2 0.6 5.0 9.6 13.1EPS - Reported (p) statutory IFRS 26.6 4.2 0.9 2.3 5.0 10.7DPS (p) 0.0 0.0 0.0 0.0 2.0 3.0TBVPS (p) 65 58 60 62 67 77Diluted TBVPS (p) 65 56 60 62 67 77

Key ratiosCost/Income ratio (%) 48.8 48.4 43.5 44.3 43.1 43.8RoE (%) -43.0 12.9 0.7 0.9 7.4 12.4Tax Rate -21.1 -214.2 48.6 37.2 29.9 28.8Pay-Out Ratio 0.0 0.0 0.0 0.0 0.0 28.2

Credit quality measuresProvisions/Loans (%) 4.11 3.83 1.07 2.08 1.47 0.66

Write-Offs/Loans (%) 0.48 0.67 0.56 1.13 1.48 2.10Impaired Loans (£m) 49,019 58,833 62,875 64,576 73,132 62,555Impairment Provisions (£m) 20,700 25,988 28,265 31,731 31,678 24,435Impaired Loans/Total Loans (%) 7.51 9.38 10.27 10.68 12.49 12.41Coverage (%) 42.2 44.2 45.0 49.1 43.3 39.1Capital measuresOrdinary Equity Tier 1 Ratio 6.3 8.1 9.0 9.4 10.5 13.4Tier 1 Ratio 8.6 10.4 10.3 10.7 11.8 14.8Shareholders' Funds (£m)-tangible 26,847 37,175 41,029 42,012 45,391 52,694

Risk Assets 482,455 493,307 463,196 455,293 440,763 399,906Total Assets 1,063,129 1,027,255 1,028,125 1,007,255 987,255 967,255Total Loans 652,599 626,969 612,133 604,740 585,755 504,146Total Deposits 369,900 371,200 375,300 386,048 401,490 387,550Loans/Deposits Ratio 176 169 163 157 146 130

Profits BreakdownRetail 73 975 1,912 4,176 5,311 5,148

Insurance 523 1,024 490 1,142 1,245 1,261Wholesale -7,525 -11,600 -721 -1,362 645 3,455Wealth & International -1,098 -3,298 -1,773 -3,198 -1,789 469Group Items 342 499 372 -16 -393 -393Synergies 0 0 0 0 0EU Mandated Sales -500Profit from Continuing Operations -7,685 -12,400 280 741 5,019 9,440Non operating items 13,635 13,442 1,016 1,997 0 1,000

Total 5,950 1,042 1,296 2,738 5,019 10,440


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Fig. 90: RBS model


Royal Bank of Scotland financial information and forecasts

£m FY 2009A Q1 2010A Q2 2010A Q3 2010A FY 2010E FY 2011E FY 2012ENet interest income 13,567 3,534 3,684 3,404 14,507 14,985 15,131Non-interest income 15,858 5,420 4,479 4,513 18,350 17,043 17,157Total Income 29,425 8,954 8,163 7,917 32,857 32,028 32,288Total expenses 17,401 4,430 4,103 4,096 16,866 15,914 15,666General insurance claims 4,357 1,136 1,323 1,142 4,450 3,564 3,386Profit Before Impairments 7,667 3,388 2,737 2,679 11,540 12,550 13,237Impairments 13,899 2,675 2,487 1,953 9,138 6,177 3,721EU Mandated Disposals -191 -598Profit Before Tax and Exceptionals -6,232 713 250 726 2,402 6,182 8,918Goodwill -272 -65 -85 -123 -300 -300 -300Restructuring and Other 4,576 -669 992 -1,982 -2,715 -2,333 -1,000Profit Before Tax -1,928 -21 1,157 -1,379 -613 3,549 7,618Tax -339 106 825 -261 370 1,314 2,419Minorities/prefs 2,018 121 75 28 254 102 252Attributable Profit -3,607 -248 257 -1,146 -1,237 2,132 4,947Dividends 0 0 0 0 0 0 0Profit retained -3,607 -248 257 -1,146 -1,237 2,132 4,947Per share dataEPS Reported -6.4 -0.2 0.2 -1.1 -1.2 2.0 4.6EPS (underlying) -8.7 0.4 0.5 0.4 1.3 3.6 5.0BVPS-diluted 51.3 51.9 52.1 51.8 52.2 54.4 59.8DPS 0.0 0.0 0.0 0.0 0.0 0.0 2.0

Key ratiosRoE Tang Ord Eq -13.9% 0.9% 2.6% 6.7% 8.7%Cost Income Ratio 69.4% 60.0% 60.5% 59.4% 55.9% 54.2%Credit quality measuresProvisions/Customer Loans 2.44 1.87 1.84 1.36 1.76 1.24 0.76Write-Offs/Customer Loans 1.17 0.79 1.99 0.56 1.78 1.86 1.60NPLs 35,913 37,129 37,252 38,812 37,252 37,252 33,424NPLs/Total Loans 6.30% 6.51% 6.44% 6.78% 7.17% 7.48% 6.81%Loan Loss Reserves 15,173 16,827 16,166 17,670 15,311 12,488 8,553Reserves/NPLs 42.2% 45.3% 43.4% 45.5% 41.1% 33.5% 25.6%Capital measuresTier 1 Ratio 14.4% 12.8% 12.5% 12.2% 12.8% 12.7%Ordinary Equity Tier 1 Ratio 10.5% 10.1% 10.0% 9.8% 10.3% 11.0% 11.2%Shareholders Funds 54,866 55,469 56,819 55,971 56,540 58,972 64,938WRAs 438,200 460,700 477,000 475,000 461,598 462,486 547,683Loans 554,654 539,340 528,049 506,034 484,890 477,995Deposits 414,251 420,890 420,639 434,667 447,707 461,138Loans/Deposits Ratio 134 128 126 116 108 104Divisional breakdownGBM 5,709 1,466 750 589 3,252 3,198 2,972GTS 973 233 279 309 1,133 1,242 1,179UK Retail 229 140 276 398 1,270 2,058 1,992UK Corporate 1,125 318 390 422 1,574 1,949 2,148Wealth 420 62 81 74 309 345 380Ulster bank -368 -137 -177 -176 -666 -183 158RBS Insurance 58 -50 -203 -33 -220 155 333US Retail & Commercial -113 40 129 73 315 420 549Central 292 537 49 76 613 0 0EU Mandated Disposals -191 -598Non Core -14,557 -1,559 -1,324 -1,006 -5,177 -2,811 -196Pre-exceptional PBT -6,232 1,050 250 726 2,402 6,182 8,918Credit write-downs and one-offs 4,304 -734 288 -2,105 -3,015 -2,633 -1,300PBT -1,928 316 538 -1,379 -613 3,549 7,618


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UK/Asian banks: Prefer HSBC over Standard Chartered Raul Sinha [email protected] +44 20 7102 9136


We are positive on Asian and emerging markets economic growth over the longer term, which, in our view, is likely to outstrip developed markets and provides an attractive backdrop for banking sector returns. Private sector leverage in most Asian and emerging markets economies is lower relative to developed markets, along with high savings rates that allow low banking sector loans-to-deposits ratios. Accordingly, Asian and emerging markets banks remain less geared to the negative effects of deleveraging across developed markets. Relative to the rest of the European banks sector, we see better long-term growth prospects at HSBC and Standard Chartered. However, in the near term, we have tempered our positive view given relative valuations as well as the prospect of higher inflation, which we believe could be a negative for local peer bank valuations.

Between the two, we prefer HSBC which trades at a discount to Standard Chartered and has defensive attractions in our view. HSBC’s shares command a valuation of 1.7x TBV and 11.6x our estimate of 2011 EPS of the ongoing businesses. The group has a strong balance sheet and now derives the majority of its profits from emerging markets. It looks likely to continue to be defensive in bear markets. However, we would also see only modest upside in more positive markets.

Standard Chartered remains well positioned for the long term, given its unique franchise across Asia, Africa and the Middle Eastern markets. However, we are more cautious in the near term given the backdrop of inflation and tightening in some of its key markets, valuations that reflect its many positives and earnings downgrades. Following the recent trading statement, we see potential downside risk to consensus expectations for 2010 and 2011 and believe ROTE is unlikely to exceed c15% until 2012. Standard Chartered shares trade at 13.6x our 2011 earnings estimate and 2.3x PTBV

Fig. 91: HSBC and Standard Chartered – PE relative to Banks DJ Stoxx

Source: Nomura research, Datastream


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Comparing current profitability trends

Standard Chartered Management’s through-the-cycle target is a mid-to high-teens Return on equity which the group has largely exceeded through the current cycle, even in the last two years where peers have struggled to generate positive returns. However, following on from the rights issue, we see the return on tangible equity at c15% in 2011, down from 19% in 2009, which we believe may constrain a valuation-based re-rating of the shares. A higher return on tangible equity may be possible through even lower impairments, which are running at c40bp. Pre-provision profits growth, which is weighed down by the strong rate of cost growth and investment is unlikely to exceed the low teens in 2011 in our view, after remaining flat in 2010.

Over the longer term, we see the group attractively placed to deliver its target return on equity, as higher interest rates and pay-back of current investments allow stronger revenue growth. In the consumer bank, management has previously indicated an aspiration to achieve revenues of $10bn by 2013, up from c$6.1bn in 2010, which would be driven by a recovery in interest rates and local currencies, particularly the Korean won. In the wholesale bank, management believes that revenues pools are likely to grow 2 to 2.5x GDP growth before market share gains. Given the group’s activities are entirely in faster growth markets in Asia, Africa and the Middle East, we agree with management’s view of sustainable income growth rate of mid to high teens through the cycle. In the near term however, the volatile nature of wholesale revenue growth may imply an outturn at the bottom of this range.

HSBC HSBC has a current ROE target range of 15-19%. This is on stated book and as goodwill represents 20% of reported book, the target effectively represents 19-24% on a tangible basis. We believe that current year PBT in the ongoing businesses appears to be some USD 23bn, EPS of c92. This would be an ROE of 15.4% on a tangible basis. However, using the H2 BSM division revenue this would fall by USD 1.25bn, or earnings of c6 to c86 of EPS, and a tangible ROE of 14.4%. We regard these figures as more reasonable levels of sustainable returns, unless long yields return to mid single digit levels and therefore margins improve. To achieve the minimum level of targeted ROE, HSBC would need to achieve attributable profits of at least USD 20bn in 2010 terms. We estimate this would represent PBT of at least USD 27bn. To achieve its ROE targets, the group needs to improve its core business returns by the equivalent of at least USD 4bn of PBT, or 15-20%. The key area for this upside may come from better revenue growth and higher margins, which are dependent on the interest rate outlook.

HSBC’s revenues have been under pressure from falling asset yields. This has squeezed the margins in the customer business through lower liability spreads. We venture this effect could have reduced revenues by as much as USD 5bn in the traditional banking businesses. At the group level the revenue impact has been delayed by BSM. However, BSM revenues themselves are now falling and the full effects of lower rates are likely to show through in 2011/12.

Consequently, if BSM revenues are normalised for current three-year bond yields, rather than the actual yield on the portfolio, revenues and margins would fall even further – we estimate by USD 2.5bn. This effect would depress reported revenue growth next year. Similarly, if short rates rose, but long rates did not, the BSM revenues would also continue to fall.

There is a perception that HSBC would benefit from higher yields. If there is a general rise in yields and the short end remains positive, we would expect this to be the case. However, if the yield curve flattened at the same time as higher official short rates, the positive effect of higher deposit revenues in the core businesses would be offset by lower BSM. Effectively, the BSM activity is doing its job in protecting the revenue line from lower rates, but it can only defer the impact for so long; current revenues are therefore supported by this effect.


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If yields rise to near the 3% figure implied by current 10-year bonds, we would expect these two factors to roughly offset each other. This implies the current c14% ROE on a tangible basis in the core businesses is a reasonable indication of long-term earnings power, but that in the short term there is downside pressure as the BSM contribution falls, unless official rates rise.

It would take still higher rates to some 5% or so, for the net impact of higher rates and lower BSM to be markedly positive, compared with the 2010 run rate in our view.

Capital strength, consumption and dividends

Standard Chartered Standard Chartered’s rights issue in October 2010 came as a surprise to us and the market, with the group indicating that this was a pre-emptive measure to preserve organic RWA growth in an environment where regulators might accelerate the implementation of higher capital requirements.

The capital raise improved the group’s CT1 ratio to 11% pro forma from an earlier 8.8% as of the H1 2010 stage. On a pro forma Basel 3 basis, we estimate that this implies Standard Chartered’s 2012 CT 1 ratio would be c.10.5%, similar to our estimate on the same basis for HSBC of 10.7%. The group indicated a 100bp cost to CT1 from Basel 3 prudential filters. This includes mid-single-digit billion increases in RWA for market risk and CVA, which comprises roughly 50% of the reduction, with the rest accounted for by risk asset growth.

Given the pace of balance sheet expansion has now accelerated to the high teens in terms of risk-weighted asset growth, capital consumption at Standard Chartered is likely to remain in focus. With a payout ratio of c33% and an ROTE in the mid teens, the group may not be able to sustain high teens risk-weighted asset growth without the help of the scrip take-up within the dividend. Management believes that balance sheet expansion is likely to slow at least to the mid teens, which would alleviate the pressure on capital. However, there are also regulation-related increases to RWAs, including mid-single-digit billion increases in RWA for market risk and CVA, which will further constrain organic capital generation in our view.

HSBC We believe HSBC’s capital position is relatively strong, and that this can support a relatively normal level of dividend distribution even in the short term, in contrast to many large banks, but we would not accept that the group has surplus capital. The core Tier 1 ratio was 10.5% at the end of the third quarter of 2010 on a Basel II basis.

We expect the group CT1 ratio will stay near its current level of somewhat over 10% on a Basel III basis and project a ratio of 10.7% for end-2012 on this basis. We believe a near 10% figure is where the group is aiming towards and is a level regulators are likely to require ultimately. On a pro forma basis currently, we believe the CT1 ratio on a Basel 3 basis would be 9.1%. This would be at the upper end of the range of international competitors, if not yet quite at the level the group may ultimately seek to maintain.

HSBC has not yet provided guidance concerning the potential impact of Basel 3. We estimate that RWAs could increase by some USD 80bn, or 7%, post mitigation. However, HSBC also has RWAs in its run-off portfolios, notably in HSBC Finance, but also in the legacy capital markets books. The Finance Director has indicated these represent 15-20% of current RWAs, ie, some USD 200bn. We estimate the RWAs in the HSBC Finance run-off books are c.USD 100bn, effectively a 150% risk weighting, which would imply a similar figure for the legacy wholesale RWAs. Finally, we expect organic RWA growth to reflect relatively robust volume in the emerging markets businesses and limited growth in the west. We also expect the net effect of these factors will be to add 15- 20% to group RWAs by the end of 2012.

Offsetting the RWA growth are retentions, including the scrip element of the dividend and any proceeds from the proposed China listing. As HSBC’s has remained profitable through the crisis, despite the HSBC Finance losses, it has maintained a more normal level of distribution, even though the pay-out was rebased in 2009. The tangible ROE


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bottomed at 7% in 2009. We expect 12% in 2010, rising to 14% by 2012. The company paid a DPS of c34 in 2009, a near 100% pay-out. As earnings recover, the pay-out ratio should fall; our 2010 DPS estimate of c36 would be a 50% pay-out, but 39% of our estimate of EPS from the ongoing businesses.

Assuming a 14% ROE, high single-digit capital growth would require a pay-out ratio approaching 45%. We therefore see scope for pay-outs to be lifted above our estimates, but only by c10%. It is only when factoring in the management’s effective minimum target tangible ROE of 17-18% and that would justify a materially higher pay-out. However, we do not believe HSBC is likely to discount this level of return in its dividend payments, until interest rate rises have begun to occur. Nevertheless, HSBC is already distributing a meaningful level of DPS, which is covered by earnings, in contrast to many other banks.

Standard Chartered – We remain cautious within a backdrop of downgrades and tightening At its recent pre close trading statement, Standard Chartered indicated a strong trading performance for the year with record income and profits in line with our expectations. However, compared to its last IMS statement, operating trends have weakened in our view. While we believe that Standard Chartered remains well positioned for the long term, we are more cautious in the near term given the background of inflation and tightening in some of its key markets and valuations which reflect its many positives. We also believe that consensus expectations for 2010 and 2011 have potential downside.

Income growth has softened recently, driven by WB client income Income in the second half was indicated to be broadly flat on the first half. At the 3Q IMS statement, the group had indicated that the income run rate was above the run rate of the first half. This appears to be driven primarily by Wholesale, where client income growth has slowed from the high teens at the 3Q IMS to the mid teens now. The Consumer bank top line meanwhile continues to improve.

The group also indicated that net interest margins have fallen fractionally owing to moderate pressure on asset margins across several products and geographies.

Expenses higher than expected owing to investment, cost inflation, regulatory and compliance costs Costs were higher than our expectations, with the management indicating a continued deliberate high level of investment in both businesses as well as increased regulatory and compliance costs and competition for staff. We expect cost growth to exceed income growth for the full year by the same margin as in the first half of the year. Cost income jaws were 8% negative at the first half stage and we had expected this to narrow to c6% negative for FY as per earlier guidance, including the one-off gains in 2009. The statement implied costs are running c$200m higher than our previous expectations. We have now moved our estimate for costs higher for 2010 and 2011, as we expect wage inflation and the continuation of investment programmes to keep cost growth elevated. As a result, we have downgraded our estimates at the pre-provision profits level and now expect no growth in underlying pre-provision profits in 2010, with c12% in 2011.

Consumer bank continues to accelerate the top line Within the divisions, Consumer banking income growth was indicated to be broadly in line with the rate shown at the first half (8.5%), with expenses also significantly higher. The statement indicated that costs for the year would be up in double-digit percentage terms. We now expect 8% income growth and 11% cost growth in CB in 2010.

Wholesale held back by negative jaws, but low impairments could offset the impact on profits WB income was indicated to be in the mid single digits, in line with our expectations, with client income growing at a mid teens rate and contributing 80% of WB. At the 3Q IMS statement, the group had indicated that client income for nine months was up in the high teens implying a slight softening of the run rate. We expect own account income to be below H1 owing to weaker financial markets and ALM, offset by stronger principal finance gains. WB expenses were also ahead of our expectations, although less so than in CB. The group indicated double-digit cost growth for the year with significantly negative jaws. We expect 5% income growth and 12% cost growth for 2010 in WB.


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HSBC – Valuation premium reflects group strengths HSBC’s shares trade at 1.7x TBV and 11.6x our estimate of 2011 EPS of the ongoing businesses. The group has a strong balance sheet and now derives the majority of its profits from emerging markets. It looks likely to continue to be defensive in bear markets. However, we would also see only modest upside potential in more positive markets.

Revenue still constrained by falling yields Balance sheet management revenue has further to fall as the full effects of lower yields work through. Although HSBC is a beneficiary of higher official rates, it is also affected by the yield curve shape; we believe that wider deposit spreads from higher official rates would be offset by yield curve flattening. We think the company would benefit most from higher yields and a positive yield curve.

Sum-of-parts – 70% of the group’s value is in emerging markets Emerging markets represent 55%+ of profits and c45% of RWAs for the ongoing businesses. We would argue these franchises represent two-thirds of group value. Within emerging markets, Hong Kong represents over 20% of group profits, with the value of Chinese assets a further 16% of the group. Hong Kong is likely to grow more slowly than less developed markets, while arguably the stronger growth in China is reflected in using the market value of assets, rather than their share of PBT. Other emerging market presences, such as India, Mexico and Brazil, are much smaller in a group context. The developed market businesses are valued near TBV and some 10x earnings. Our HSBC Finance valuation assumption includes USD 6bn for the ongoing cards operations, offset by USD 6.5bn of negative value for the run-off portfolios.

Fig. 92: Sum-of-the-parts – 70% of the group’s value is in emerging markets


USD million TBV %

FY2010 Attributable

profit % P/E P/B Val'n %

Emerging Markets

Hongkong Bank 21,182 20.3% 6,202 50.3% 16.5 x 4.8 x 102,328 51.8%

Hang Seng Bank 4,770 4.6% 1,087 8.8% 18.0 x 4.1 x 19,561 9.9%

HSBC Middle East 538 4.4% 13.0 x 6,996 3.5%

HSBC Mexico 3,745 3.6% 277 2.2% 13.0 x 1.0 x 3,598 1.8%

HSBC Brazil SA 3,650 3.5% 591 4.8% 13.0 x 2.1 x 7,679 3.9%

33,347 32.0% 8,694 70.6% 16.1 x 4.2 x 140,161 70.9%

Developed

HSBC France 6,831 6.6% 750 6.1% 9.1 x 1.0 x 6,831 3.5%

HSBC Bank Plc 23,886 22.9% 2,106 17.1% 10.2 x 0.9 x 21,497 10.9%

HSBC USA 12,942 12.4% 1,586 12.9% 12.2 x 1.5 x 19,413 9.8%

HSBC Finance Corp 5,431 5.2% -1,586 -12.9% 16.0 x -0.1 x -650 -0.3%

49,090 47.1% 2,856 23.2% 16.5 x 1.0 x 47,091 23.8%

Other entities / balancing 21,851 21.0% 768 6.2% 13.6 x 0.5 x 10,441 5.3%

GROUP 104,288 100.0% 12,318 100% 16.0 x 1.9 x 197,694 100%

GROUP per Share ( c ) 593 71.2 15.8 x 1.9 x 1,123

( p ) 377 45.3 716


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UK/Asian bank models

Fig. 93: HSBC model

Source: HSBC, Nomura estimates


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Fig. 94: Standard Chartered model



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CEE banks: Prefer Russia and Poland over Turkey Maciej Szczsney [email protected] +44 20 7102 2504

Summary

We are negative on Turkish banks given a more pessimistic outlook on margins and loan losses. However, we are positive on Russian banks owing to strong volume growth at Sberbank and we are positive on Polish banks on improving volumes and margins. In the MENA region we would be positive on Qatari and Egyptian banks, Neutral on Saudi banks and conservative on UAE banks. For more details please see our recent EEMEA strategy note of 1 October 2010, Weaker volume growth for EEMEA banks lies ahead.

Fig. 95: Nomura rating versus consensus

Source: Nomura research, Bloomberg

Fig. 96: Nomura forecasts versus consensus

Source: Nomura research, Bloomberg

Turkish banks

We believe Turkish banks face a profitability headwind in 2H 10 and 2011. For most Turkish banks, our forecasts indicate the need for a rather material 10-15% downward adjustment to consensus estimates. We believe the market is overly optimistic on margin and loan-loss charges outlook.

On margin, we now see rather gradual TRL rate rises; hence, we think the negative impact of a duration mismatch will be a less important factor. However, even if margins in 2011 only stood at our 2H 10E level, there would already be a 20-30bp y/y compression. Further, we think additional spread erosion will emerge from competitive factors. We expect most spread competition in the TRL corporate segment. Strong lending growth in 1H 10 also shifted loans/deposits in the system past 80%, which coupled with the central bank's liquidity exit strategy (eg, a recent increase in the mandatory reserve requirement) is pushing up spread competition for deposit funding.

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NB

AD

RIB

L

RJH

I

Sam

ba

SA

BB

QN

B

Do

ha

CB

Q

QIB

Nomura rating Av. market rating

Our ratings versus consensusPositive

Negativ

-50%

0%

50%

Pekao

PK

O

Mille

nniu

m

BR

E

Ko

merc

ni

OT

P

Sberb

an

k

VT

B

Akban

k

Isban

k

Gara

nti

Vakif

Halk

YK

B

Asya

CIB

AD

CB

FG

B

UN

B

NB

AD

RIB

L

RJH

I

Sam

ba

SA

BB

QN

B

Do

ha

CB

Q

QIB

2011E

2012E

Our EPS forecasts versus consensus


77

Finally, we should point out that in 3Q 10 Akbank, Isbank and Garanti, in particular, are set to suffer from diminished returns on CPI-linked bonds.

On asset quality, 1H 10 was a fortunate combination of two trends – falling new NPL formation coupled with high collections of old NPLs. However, since dominant parts of collections are settled within 12-15 months from when a loan becomes non performing, we expect the level of collections to start to decrease. Normalisation of loan-loss charges in the case of Turkish banks will imply a higher cost of credit risk, in our opinion, starting from 2011.

On a stock-specific level we rate Halkbank as Buy. After its year-to-date underperformance, Halkbank's P/E is among the lowest in the Turkish banking system. We forecast earnings ahead of consensus expectations and expect Halkbank to maintain its superior ROE generation, thanks to its high cost efficiency. We also believe the bank will continue to gain market share. Halkbank has a high level of TRL liquidity and limited exposure to CPI-linked bonds.

We rate Garanti bank as Reduce. We think 2010E P/B at 2.2x is too high a multiple for the bank. We see 16% potential downside to 2011E consensus EPS owing to margin erosion and the cost of credit risk moving back to 80bp of gross loans. We are also concerned about the jump in the level of pre-NPL restructured loans in 2Q 10, for which the bank holds no specific provisions. Finally, in 3Q 10, Garanti is likely to be among the most affected banks by diminishing returns from CPI-linked bonds. The sale of GE's minority stake in the bank also remains unresolved.

Russian banks

We believe our Buy rating on Sberbank is the best counter-weight for our negative view on Turkish banks. Even though we are aware that it is very much a consensus call, Sberbank is our preferred way for investors to gain exposure to the fast growth in Russian banking volumes (CAGR 18% for loans and deposits) that we envisage for the next five years. In our view, the bank is over-provisioning. We also believe the strong margin compression we witnessed in 1H 10 is likely to calm as management has been repricing time deposits downward. As loan-loss charges drop and margins stabilise, Sberbank's ROE should quickly rise over 20%, which would make the current 2010E P/BV multiple of 2.0x not overly demanding, in our view. Long term, Sberbank also offers cost efficiency improvement potential. In the short run, we think approval of management's stock option programme and the potential launch of the GDR programme would act as positive catalysts for the stock.

Polish banks

We remain positive on Polish banks. We believe Polish banks will continue to deliver positive revenue momentum thanks to continuous margin recovery but also volume growth pick-up. First, we think Poland is likely to be one of the initial EEMEA countries to raise interest rates, which thanks to the floating-rate nature of Polish banks' balance sheets should result in margin boost. In addition, we expect corporate lending demand to recover, supported by EU structural-fund-related investments, the upcoming Euro 2012 football championships and overall low penetration of corporate lending (corporate loans/GDP of just 20%). Since new loans still carry spreads above pre-credit-crunch level, we expect stronger lending activity also to bring a positive margin effect of 20- 30bp. In addition, we believe asset quality is past its trough and loan-loss charges are likely to be on a declining trend. We highlight that Polish banks are very well provisioned, although this may not be evident at first glance as Polish NPL classifications are among the most rigorous in the region. While banks in other countries show loans overdue by 90 days as NPLs, in Poland the NPL ratio also includes many other cases (like corporate borrowers that are making losses). For example, of the 7.1% NPL ratio reported by PKO BP on unconsolidated basis in 1H 2010, only 3.3% are loans overdue by 90 days.


78

Consequently, reported NPL coverage of 43% rises to 92% if adjusted to make the methodology match that used in other countries. Overall, we do not believe Polish banks will have to go through a period of elevated loan-loss charges.

On a stock-specific level we rate PKO BP as Buy. While PKO BP's 2010E P/BV of 2.5x perhaps leaves limited room for re-rating, we are attracted by the bank's ability to generate total return through BVPS growth. After missing out on a potential merger with BZ WBK, we believe management focus will revert to organic volume growth. PKO BP should also see its margin expand, particularly in a rising interest rate environment. We also think loan-loss charges have peaked and there is potential upside to earnings from the lower cost of credit risk. Moreover, in December, PKO BP is likely to pay out its conditional dividend of PLN 1.90 per share.

We continue to like Bank Pekao (Buy) in Poland. We believe Pekao is as well positioned to see its margin expanding. It is also becoming more active in the lending market, and this could turn sentiment towards the name, which in the past has generally been perceived as a bank that constantly loses market share. The bank also offers an option on the revival of the mutual fund market in Poland. A high level of Tier 1 should translate into a prolonged period of high dividend payouts, an important component of the bank's total return. Our view on Pekao is non-consensus, given that no other Polish bank has as many 'sell' ratings from the market.

MENA banks

On our MENA universe, we remain positive on Qatari banks. We believe Qatari banks’ profitability is likely to recover faster than MENA peers. Given healthy volume growth and a noticeable asset-quality improvement. Qatari banks also benefit from relatively appealing valuations, with price multiples below Saudi and Egyptian peers. Finally, the high dividend yields that Qatari banks offer add to their attractiveness, we believe. CBQ and Doha Bank remain our preferred stocks in Qatar.

We continue to see value in CIB in Egypt and maintain our Buy rating: Consensus appears to believe the bank has reached its fair value and become expensive. We agree that CIB's valuation might look demanding. However, we believe it deserves largely to trade at such a premium. In our estimate, the stock should deliver superior profitability with ROEs at ~ 30% in the next few years. In addition, we believe CIB is geared to strong potential earnings growth driven by high volume growth and margin expansion. Lastly, we see CIB as the best proxy to the Egyptian economy.

We are Neutral on Saudi banks; Riyad Bank is our only Buy: We continue to believe the Saudi banks’ solid fundamentals and the benign economic environment in which they operate are likely to be supportive for high long-term returns (~15% five-year CAGR); however, in the mid-term, we do not see strong catalysts for stock price increases.

We remain conservative on UAE banks: We believe the strong recent rally triggered by the Dubai World announcement in September needs solid fundamentals to support current valuations. For us, UAE banks still have some challenges ahead. Profitability is likely to remain under pressure amid high loan-loss charges, which should accelerate in 3Q and 4Q this year.


79

The Revenue Book We highlight the country-level trends in important revenue drivers of the banking sector across Europe in our Revenue Book.

A two-track economic recovery in Europe has affected European banks in a similar manner. The divergent trajectories of northern and southern European banks are seen in lending growth and margin trends as well.

Among the countries showing good lending growth are Norway, Sweden and France, all in northern Europe. On the other hand the southern European countries of Greece and Spain, in which Ireland is also classified, have seen negative lending growth in recent months. We believe this north-south divide is likely to remain unchanged in 2011 southern Europe continues to remain in de-leveraging mode and their residents are having to further reduce their debt burden to deal with austerity measures initiated by their governments. Lending growth in northern Europe isn’t likely to be spectacular either. However, given the relatively better growth these economies are experiencing, consumers may moderately increase their borrowing. Corporates in northern Europe are also likely to borrow more, in keeping with the GDP growth momentum.

The revenue book for each country has volume charts and margin charts.

The volume charts show how lending growth has evolved in a country both in terms of outstanding amounts as well as the amount of new lending. Deposit growth is also shown in the volume charts section, again broken down by outstanding amounts and new business.

The margin charts show the trends in lending and deposit margins at the country level.


80

Euro area Macroeconomic data

Fig. 97: GDP growth percent y/y change

Source: ECB, Datastream, Nomura research

Fig. 98: Unemployment rate percent


Balance sheet structure (latest month)

Fig. 99: Lending mix – outstanding loans by customer


Fig. 100: Lending mix – outstanding loans by maturity


Fig. 101: Lending mix – new business by duration


Fig. 102: Deposit mix – excluding overdrafts



81

Volume drivers – euro area

Fig. 103: Loan growth – outstanding amounts y/y change


Fig. 104: Loan growth – new business volumes y/y change


Fig. 105: Household loan growth – outstanding amounts y/y change


Fig. 106: Deposit growth y/y change


Fig. 107: Loan-deposit ratio


Fig. 108: Sight deposits as % of loans


-6%-4%-2%0%2%4%6%8%

10%12%14%16%

Jul-0

4

Dec

-04

May

-05

Oct

-05

Mar

-06

Aug

-06

Jan-

07

Jun-

07

Nov

-07

Apr

-08

Sep-

08

Feb-

09

Jul-0

9

Dec

-09

May

-10

Oct

-10

Total Household Corporates

-35%

-25%

-15%

-5%

5%

15%

25%

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr

-06

Jul-0

6O

ct-0

6Ja

n-0

7A

pr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr

-08

Jul-0

8O

ct-0

8Ja

n-0

9A

pr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr

-10

Jul-1

0O

ct-1

0


-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Jul-0

4

Dec

-04

May

-05

Oct

-05

Mar

-06

Aug

-06

Jan-

07

Jun-

07

Nov

-07

Apr

-08

Sep-

08

Feb-

09

Jul-0

9

Dec

-09

May

-10

Oct

-10

Total Mortgages Other

0%

2%

4%

6%

8%

10%

12%

14%

16%

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr

-06

Jul-0

6O

ct-0

6Ja

n-0

7A

pr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr

-08

Jul-0

8O

ct-0

8Ja

n-0

9A

pr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr

-10

Jul-1

0O

ct-1

0

Total Household

142%

144%

146%

148%

150%

152%

154%

156%

158%

160%

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr

-06

Jul-0

6O

ct-0

6Ja

n-0

7A

pr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr

-08

Jul-0

8O

ct-0

8Ja

n-0

9A

pr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr

-10

Jul-1

0O

ct-1

0

40%

42%

44%

46%

48%

50%

52%

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr

-06

Jul-0

6O

ct-0

6Ja

n-0

7A

pr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr

-08

Jul-0

8O

ct-0

8Ja

n-0

9A

pr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr

-10

Jul-1

0O

ct-1

0


82

Spread drivers – euro area

Fig. 109: Household mortgage spreads bp over 10y bond


Fig. 110: Household mortgage spread, new by duration bp


Fig. 111: Corporate lending spread vs 12m Euribor


Fig. 112: Corporate spreads, new business by size vs 12m Euribor


Fig. 113: Deposits 3m Euribor , bp


Fig. 114: Total customer spread bp


-100

-50

0

50

100

150

200

Jul-0

4

Dec

-04

May

-05

Oct

-05

Mar

-06

Aug

-06

Jan-

07

Jun-

07

Nov

-07

Apr

-08

Sep-

08

Feb-

09

Jul-0

9

Dec

-09

May

-10

Oct

-10

Outstanding N ew

0

50

100

150

200

250

Jul-0

4

Dec

-04

May

-05

Oct

-05

Mar

-06

Aug

-06

Jan-

07

Jun-

07

Nov

-07

Apr

-08

Sep-

08

Feb-

09

Jul-0

9

Dec

-09

May

-10

Oct

-10

< 1yr vs 3m Euribor 1-5 yrs vs 12m Euribor> 10 yrs vs 10yr bond

0

50

100

150

200

250

300

Jul-0

4

Dec

-04

May

-05

Oct

-05

Mar

-06

Aug

-06

Jan-

07

Jun-

07

Nov

-07

Apr

-08

Sep-

08

Feb-

09

Jul-0

9

Dec

-09

May

-10

Oct

-10

Outstanding N ew

0

50

100

150

200

250

300

350

Jul-0

4

Dec

-04

May

-05

Oct

-05

Mar

-06

Aug

-06

Jan-

07

Jun-

07

Nov

-07

Apr

-08

Sep-

08

Feb-

09

Jul-0

9

Dec

-09

May

-10

Oct

-10

< EUR 1m (~ SME) > EUR 1m (~ large corporate)

-300

-200

-100

0

100

200

300

400

Jul-0

4

Dec

-04

May

-05

Oct

-05

Mar

-06

Aug

-06

Jan-

07

Jun-

07

Nov

-07

Apr

-08

Sep-

08

Feb-

09

Jul-0

9

Dec

-09

May

-10

Oct

-10

Sight Term

270

280

290

300

310

320

330

340

350

Jul-0

4

Dec

-04

May

-05

Oct

-05

Mar

-06

Aug

-06

Jan-

07

Jun-

07

Nov

-07

Apr

-08

Sep-

08

Feb-

09

Jul-0

9

Dec

-09

May

-10

Oct

-10

Total customer spread


83

Bank lending survey – euro area

Fig. 115: Change in credit standards


Fig. 116: Factors affecting credit standards


Fig. 117: Changes in demand


Fig. 118: Changes in pricing


Note: Net balance equals difference between % of loan officers saying tightened standards/see increased demand and those easing standards/seeing decreased demand. Average of corporate and households (mortgage and consumer credit).

-20

-10

0

10

20

30

40

50Q

1 2

00

3

Q3

20

03

Q1

20

04

Q3

20

04

Q1

20

05

Q3

20

05

Q1

20

06

Q3

20

06

Q1

20

07

Q3

20

07

Q1

20

08

Q3

20

08

Q1

20

09

Q3

20

09

Q1

20

10

Q3

20

10

Net

bal

ance

of b

anks

Realized Expected

-25

-15

-5

5

15

25

35

45

55

Q1

20

03

Q3

20

03

Q1

20

04

Q3

20

04

Q1

20

05

Q3

20

05

Q1

20

06

Q3

20

06

Q1

20

07

Q3

20

07

Q1

20

08

Q3

20

08

Q1

20

09

Q3

20

09

Q1

20

10

Q3

20

10

Net

bal

ance

of b

anks

Cost of funds or B/ S Competition Economic outlook

-50

-40

-30

-20

-10

0

10

20

30

40

Q1

20

03

Q3

20

03

Q1

20

04

Q3

20

04

Q1

20

05

Q3

20

05

Q1

20

06

Q3

20

06

Q1

20

07

Q3

20

07

Q1

20

08

Q3

20

08

Q1

20

09

Q3

20

09

Q1

20

10

Q3

20

10

Net

bal

ance

of b

anks

Realized Expected

-40

-20

0

20

40

60

80

Q1

20

03

Q3

20

03

Q1

20

04

Q3

20

04

Q1

20

05

Q3

20

05

Q1

20

06

Q3

20

06

Q1

20

07

Q3

20

07

Q1

20

08

Q3

20

08

Q1

20

09

Q3

20

09

Q1

20

10

Q3

20

10

Net

bal

ance

of b

anks

Realized Expected


84

Austria Macroeconomic data



Fig. 120: Unemployment percent




Source: OEB, Nomura research




Fig. 124: Deposit mix –excluding overdrafts


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Q1

2003

Q3

2003

Q1

2004

Q3

2004

Q1

2005

Q3

2005

Q1

2006

Q3

2006

Q1

2007

Q3

2007

Q1

2008

Q3

2008

Q1

2009

Q3

2009

Q1

2010

Q3

2010

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

Q1 2

00

3

Q3 2

00

3

Q1 2

00

4

Q3 2

00

4

Q1 2

00

5

Q3 2

00

5

Q1 2

00

6

Q3 2

00

6

Q1 2

00

7

Q3 2

00

7

Q1 2

00

8

Q3 2

00

8

Q1 2

00

9

Q3 2

00

9

Q1 2

01

0

Q3 2

01

0

26%

21%

47%

53%

0%

10%

20%

30%

40%

50%

60%

H/ hold -mortgages

H/ hold -other H/ hold - total Corporate

18%12%

69%

0%

10%

20%

30%

40%

50%

60%

70%

80%

<1 year 1-5 years > 5 years

[Data not available]

79%

21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Household Corporate


85

Volume drivers – Austria



Fig. 126: Loan growth – new business volumes





Fig. 129: Loan to deposit ratio



-4%

0%

4%

8%

12%

16%

20%

24%

28%

Jan-

06

May-

06

Sep-0

6

Jan-

07

May-

07

Sep-0

7

Jan-

08

May-

08

Sep-0

8

Jan-

09

May-

09

Sep-0

9

Jan-

10

May-

10

Sep-1

0



-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Jul-0

4

Nov-

04

Mar-0

5

Jul-0

5

Nov-

05

Mar-0

6

Jul-0

6

Nov-

06

Mar-0

7

Jul-0

7

Nov-

07

Mar-0

8

Jul-0

8N

ov-

08

Mar-0

9

Jul-0

9N

ov-

09

Mar-1

0

Jul-1

0


-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Jul-0

4

Nov

-04

Mar

-05

Jul-0

5

Nov

-05

Mar

-06

Jul-0

6

Nov

-06

Mar

-07

Jul-0

7

Nov

-07

Mar

-08

Jul-0

8N

ov-0

8

Mar

-09

Jul-0

9N

ov-0

9

Mar

-10

Jul-1

0


105%

107%

109%

111%

113%

115%

117%

Jul-0

4N

ov-

04

Mar-0

5Ju

l-05

Nov-

05

Mar-0

6Ju

l-06

Nov-

06

Mar-0

7Ju

l-07

Nov-

07

Mar-0

8Ju

l-08

Nov-

08

Mar-0

9Ju

l-09

Nov-

09

Mar-1

0Ju

l-10



86

Spread drivers – Austria



Fig. 132: Household mortgage spreads, new by duration bp


Fig. 133: Corporate lending spread Vs 12m Euribor


Fig. 134: corporate spreads, new business by size Vs 12m Euribor


Fig. 135:

Fig. 136: Deposits 3m Eurobor, bp

-200

-150

-100

-50

0

50

100

150

200

Jul-0

4

Nov-

04

Mar-0

5

Jul-0

5

Nov-

05

Mar-0

6

Jul-0

6

Nov-

06

Mar-0

7

Jul-0

7

Nov-

07

Mar-0

8

Jul-0

8

Nov-

08

Mar-0

9

Jul-0

9

Nov-

09

Mar-1

0

Jul-1

0

Outstanding N ew

-100

-50

0

50

100

150

200

250

300

350

Jul-0

4

Dec-

04

May-

05

Oct

-05

Mar-0

6

Aug

-06

Jan-

07

Jun-

07

Nov-

07

Apr-0

8

Sep-0

8

Feb-0

9

Jul-0

9

Dec-

09

May-

10

< 1 yr vs 3m Euribor 1 -5 yrs vs 12m Euribor< 10 yrs vs 10yr bond

0

50

100

150

200

250

300

Jul-0

4

Dec-

04

May-

05

Oct

-05

Mar-0

6

Aug

-06

Jan-

07

Jun-

07

Nov-

07

Apr-0

8

Sep-0

8

Feb-0

9

Jul-0

9

Dec-

09

May-

10

Outstanding

-50

0

50

100

150

200

250

300

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr-1

0Ju

l-10


[Data not available] [Data not available]


87

Fig. 137: Banking system data – Austria

Source: OECD

Austria 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income 4,578 4,749 5,160 5,551 5,945 6,645 6,830 6,534 6,634 6,488 6,332Total revenues 5,843 6,583 7,469 8,179 8,925 9,219 9,584 10,777 11,253 11,382 12,023Expenses (4,000) (4,312) (4,844) (5,310) (5,710) (5,853) (6,239) (7,484) (7,781) (7,897) (8,164)Pre-provision profit 1,843 2,270 2,624 2,869 3,214 3,366 3,345 3,292 3,472 3,485 3,859Provisions 0 (1,077) (1,456) (1,604) (2,115) (1,837) (1,838) (1,685) (1,759) (1,655) (1,709)Profit before tax 1,843 1,194 1,168 1,265 1,099 1,529 1,508 1,607 1,712 1,830 2,150Tax -225.5 -229.43 -220.34 -211.55 -188.95 -198.03 -176.89 (271) (363) (343) (244)Profit after tax 1,617 964 948 1,053 910 1,330 1,331 1,336 1,349 1,488 1,906

Customer loans 124.3 137.0 148.8 160.9 172.9 179.3 186.2 198.9 209.5 222.5 236.8Total assets 262.9 278.4 293.6 310.8 330.0 350.8 369.1 390.9 411.6 434.4 478.8Customer deposits 105.6 114.1 125.4 136.4 147.5 155.9 165.1 171.8 177.8 182.5 192.0Equity 10.3 11.9 13.5 14.7 16.0 17.6 19.2 18.2 17.8 19.6 22.7Tier 1 capital n/a n/a n/a n/a n/a n/a n/a 17.2 18.5 20.1 22.8RWAs n/a n/a n/a n/a n/a n/a n/a 173.4 183.0 197.6 209.5NPLs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

NII/Avge loans n/a n/a n/a n/a n/a n/a n/a 3.4% 3.2% 3.0% 2.8%Cost/income ratio n/a n/a n/a n/a n/a n/a n/a 69% 69% 69% 68%Provision/Avge loans n/a n/a n/a n/a n/a n/a n/a 0.88% 0.86% 0.77% 0.74%NPLs/Total loans n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLoan/deposit 118% 120% 119% 118% 117% 115% 113% 116% 118% 122% 123%Equity/assets 3.9% 4.3% 4.6% 4.7% 4.9% 5.0% 5.2% 4.6% 4.3% 4.5% 4.7%Tier 1 ratio n/a n/a n/a n/a n/a n/a n/a 9.9% 10.1% 10.2% 10.9%ROE n/a n/a n/a n/a n/a n/a n/a 7.2% 7.5% 8.0% 9.0%ROA n/a n/a n/a n/a n/a n/a n/a 0.35% 0.34% 0.35% 0.42%PPP / Avg. Assets n/a n/a n/a n/a n/a n/a n/a 0.87% 0.87% 0.82% 0.85%GDP absolute (Local ccy bn 118.6 126.8 136.2 146.1 154.2 159.2 167.0 174.6 180.1 183.5 190.9Government debt/GDP n/a n/a 93% 95% 92% 94% 89% 82% 74% 64% 54%Private debt/GDP n/a n/a 57% 57% 56% 61% 64% 68% 68% 64% 65%LLPs / Total Loans 0.0% 0.8% 1.0% 1.0% 1.2% 1.0% 1.0% 0.8% 0.8% 0.7% 0.7%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 6,216 6,653 6,945 6,899 6,891 6,966 6,888 7,065 7,391 8,159 ..Total revenues 12,215 13,350 13,887 13,529 13,662 14,200 15,437 16,343 17,890 20,118 ..Expenses (8,426) (8,928) (9,382) (9,470) (9,400) (9,551) (9,829) (10,576) (10,624) (11,081) na

Pre-provision profit 3,789 4,422 4,504 4,060 4,262 4,649 5,608 5,768 7,266 9,037 ..

Provisions (1,552) (1,602) (1,389) (2,151) (1,803) (938) (1,606) 965 (2,111) (10,305) naProfit before tax 2,237 2,820 3,115 1,908 2,459 3,711 4,002 6,733 5,155 (1,268) ..Tax (279) (404) (320) (311) (350) (387) (457) (416) (325) (163) naProfit after tax 1,959 2,416 2,796 1,598 2,109 3,324 3,545 6,317 4,830 (1,431) ..

Customer loans 254.6 274.4 281.7 286.8 291.1 306.4 332.7 357.3 388.6 430.4 naTotal assets 523.3 562.2 583.4 572.3 603.5 649.7 718.1 787.4 886.1 1,047.0 naCustomer deposits 198.2 207.3 218.9 220.4 230.7 240.8 252.5 271.3 304.9 320.7 naEquity 24.1 24.9 27.6 27.6 30.6 33.3 36.7 45.7 59.5 66.3 naTier 1 capital 23.8 24.7 27.4 26.9 29.7 32.1 35.0 41.8 58.3 66.9 n/aRWAs 225.9 240.6 260.8 262.3 270.2 285.9 317.1 350.8 n/a 454.7 n/aNPLs n/a n/a n/a n/a 2.6 2.5 2.3 2.5 3.1 11.2 n/a

NII/Avge loans 2.4% 2.5% 2.5% 2.4% 2.4% 2.3% 2.2% 2.0% 2.0% 2.0% naCost/income ratio 69% 67% 68% 70% 69% 67% 64% 65% 59% 55% naProvision/Avge loans 0.61% 0.61% 0.50% 0.76% 0.62% 0.31% 0.50% (0.28%) 0.57% 2.52% naNPLs/Total loans n/a n/a n/a n/a 0.9% 0.8% 0.7% 0.7% 0.8% 2.6% 4%Loan/deposit 128% 132% 129% 130% 126% 127% 132% 132% 127% 134% naEquity/assets 4.6% 4.4% 4.7% 4.8% 5.1% 5.1% 5.1% 5.8% 6.7% 6.3% naTier 1 ratio 10.5% 10.2% 10.5% 10.2% 11.0% 11.2% 11.0% 11.9% n/a 14.7% n/aROE 8.1% 9.9% 10.7% 5.8% 7.2% 10.4% 10.1% 15.3% 9.2% (2.3%) n/aROA 0.37% 0.45% 0.49% 0.28% 0.36% 0.53% 0.52% 0.84% 0.58% (0.15%) n/aPPP / Avg. Assets 0.72% 0.81% 0.79% 0.70% 0.72% 0.74% 0.82% 0.77% 0.87% 0.93% n/aGDP absolute (Local ccy bn 198.0 207.5 212.5 218.8 223.3 232.8 243.6 257.0 272.0 283.1 274.3Government debt/GDP 48% 38% 36% 32% 31% 30% 28% 25% 25% 44% 64%Private debt/GDP 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%LLPs / Total Loans 0.6% 0.6% 0.5% 0.8% 0.6% 0.3% 0.5% -0.3% 0.5% 2.4% n/a


88

Belgium Macroeconomic data

Fig. 138: GDP growth y/y change






Source: NBB, Nomura research







-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

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Q1 2

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6.0%

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7.5%

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9.5%

Q1

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Q3

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39%

12%

51%49%

0%

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50%

60%

H/ hold -mortgages


20%

13%

67%

0%

10%

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40%

50%

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70%

80%


92%

4% 4%

0%

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100%


72.4%

4.9%

12.5% 10.2%

0.0%0%

10%

20%

30%

40%

50%

60%

70%

80%

H/ hold -sight

H/ hold -term

Corporate -sight

Corporate -term

Repos


89

Volume drivers – Belgium









Fig. 148: Loan-deposit ratio y/y change


Fig. 149: Sight deposits as % of loans y/y change


-30%

-25%

-20%

-15%-10%

-5%

0%

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10%15%

20%Ju

l-04

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-40%

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0Ju

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-10%

-5%

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25%

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4O

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60%

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8Ju

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9Ju

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90

Spread drivers









Fig. 154: Deposits 3m Euribor, bp




-100

-50

0

50

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150

200Ju

l-04

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< 1 yr vs 3m Euribor 1 - 5 yrs vs 12m Euribor> 10 yrs vs 10yr bond

-100

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50100150200250300350400

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Total


91

Fig. 156: Banking system data – Belgium

Source: OECDe

Belgium 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income 6,178 6,603 6,722 6,944 7,432 7,449 7,377 7,591 8,128 7,971 8,385Total revenues 8,179 8,540 8,240 8,758 9,480 10,426 9,997 10,722 11,721 12,670 13,667Expenses (5,274) (5,706) (5,958) (6,136) (6,473) (7,075) (7,170) (7,249) (7,701) (8,100) (8,679)Pre-provision profit 2,905 2,834 2,282 2,622 3,007 3,352 2,828 3,474 4,020 4,570 4,988Provisions (1,679) (1,951) (982) (1,462) (1,864) (1,329) (838) (1,453) (1,436) (1,725) (1,678)Profit before tax 1,225 883 1,300 1,160 1,143 2,023 1,989 2,021 2,584 2,845 3,310Tax (350) (339) (312) (337) (430) (595) (624) (741) (862) (978) (1,130)Profit after tax 875 544 989 823 713 1,428 1,365 1,281 1,723 1,867 2,180

Customer loans 129.4 149.2 158.2 166.9 176.7 187.9 196.9 201.7 213.9 230.4 239.9Total assets 404.5 436.4 463.4 475.0 506.8 562.9 579.4 616.1 670.9 724.0 727.5Customer deposits 133.0 147.8 157.8 168.8 183.7 185.6 192.3 204.6 227.6 255.9 272.0Equity 12.5 14.7 15.7 17.9 20.1 14.3 15.0 15.7 16.9 18.8 22.4Tier 1 capital n/a n/a n/a n/a n/a 14.2 15.0 16.1 17.4 19.5 24.5RWAs n/a n/a n/a n/a n/a 139.8 141.3 148.8 158.5 173.5 189.3NPLs n/a n/a n/a n/a n/a 6.8 8.1 7.8 7.2 6.4 5.9

NII/Avge loans 4.8% 4.7% 4.4% 4.3% 4.3% 4.1% 3.8% 3.8% 3.9% 3.6% 3.6%Cost/income ratio 64% 67% 72% 70% 68% 68% 72% 68% 66% 64% 64%Provision/Avge loans 1.30% 1.40% 0.64% 0.90% 1.08% 0.73% 0.44% 0.73% 0.69% 0.78% 0.71%NPLs/Total loans n/a n/a n/a n/a n/a 3.61% 4.09% 3.87% 3.39% 2.79% 2.47%Loan/deposit 97% 101% 100% 99% 96% 101% 102% 99% 94% 90% 88%Equity/assets 3.1% 3.4% 3.4% 3.8% 4.0% 2.5% 2.6% 2.5% 2.5% 2.6% 3.1%Tier 1 ratio n/a n/a n/a n/a n/a 10.1% 10.6% 10.8% 11.0% 11.2% 13.0%ROE 7.0% 4.0% 6.5% 4.9% 3.8% 8.3% 9.3% 8.3% 10.6% 10.5% 10.6%ROA 0.22% 0.13% 0.22% 0.18% 0.15% 0.27% 0.24% 0.21% 0.27% 0.27% 0.30%PPP / Avg. Assets 0.72% 0.67% 0.51% 0.56% 0.61% 0.63% 0.50% 0.58% 0.62% 0.66% 0.69%GDP absolute 142 154 163 171 180 185 195 208 211 221 230Government debt/GDP n.a. NA 125% 127% 128% 134% 132% 130% 127% 123% 117%Private debt/GDP n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.LLPs / Total Loans 1.3% 1.3% 0.6% 0.9% 1.1% 0.7% 0.4% 0.7% 0.7% 0.7% 0.7%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 7,996 7,525 7,876 8,082 8,224 8,476 8,323 8,097 7,946 9,600 n/aTotal revenues 12,678 14,723 15,349 13,613 14,273 13,200 13,806 18,924 16,865 469 n/aExpenses (8,384) (8,967) (9,608) (9,144) (8,698) (8,799) (8,794) (9,722) (10,581) (10,993) n/aPre-provision profit 4,294 5,756 5,741 4,470 5,575 4,402 5,012 9,202 6,285 (10,523) n/aProvisions (1,096) (953) (1,091) (861) (586) (190) 305 (330) (2,657) (8,772) n/aProfit before tax 3,198 4,803 4,650 3,609 4,989 4,212 5,317 8,872 3,627 (19,295) n/aTax (538) (935) (791) (989) (696) (760) (659) (833) (643) (218) n/aProfit after tax 2,660 3,868 3,859 2,620 4,292 3,452 4,658 8,039 2,985 (19,513) n/a

Customer loans 246.2 277.3 277.1 289.4 299.2 322.9 385.5 424.3 473.7 451.5 n/aTotal assets 713.7 725.1 803.4 792.3 852.1 929.2 1,073.8 1,159.2 1,313.2 1,241.1 n/aCustomer deposits 272.7 286.1 325.8 338.1 360.6 399.1 445.2 463.8 512.3 522.8 n/aEquity 23.1 26.4 30.2 31.2 31.6 30.9 31.3 37.1 56.6 46.8 n/aTier 1 capital 25.8 29.1 30.6 32.7 31.5 32.5 31.2 39.0 61.0 54.5 n/aRWAs 210.1 219.4 215.5 202.1 214.2 226.3 250.4 299.7 405.9 332.2 n/aNPLs 5.0 4.6 4.6 5.1 5.1 5.0 5.1 5.5 5.5 5.6 n/a

NII/Avge loans 3.2% 2.9% 2.8% 2.9% 2.8% 2.7% 2.3% 2.0% 1.8% 2.1% n/aCost/income ratio 66% 61% 63% 67% 61% 67% 64% 51% 63% 2342% n/aProvision/Avge loans 0.45% 0.36% 0.39% 0.30% 0.20% 0.06% (0.09%) 0.08% 0.59% 1.90% n/aNPLs/Total loans 2.01% 1.67% 1.66% 1.75% 1.71% 1.56% 1.33% 1.30% 1.16% 1.25% 1.60%Loan/deposit 90% 97% 85% 86% 83% 81% 87% 91% 92% 86% n/aEquity/assets 3.2% 3.6% 3.8% 3.9% 3.7% 3.3% 2.9% 3.2% 4.3% 3.8% n/aTier 1 ratio 12.3% 13.3% 14.2% 16.2% 14.7% 14.3% 12.5% 13.0% 15.0% 16.4% n/aROE 11.5% 15.6% 13.6% 8.5% 13.7% 11.1% 15.0% 23.5% 6.4% (37.7%) n/aROA 0.37% 0.54% 0.50% 0.33% 0.52% 0.39% 0.47% 0.72% 0.24% (1.53%) n/aPPP / Avg. Assets 0.60% 0.80% 0.75% 0.56% 0.68% 0.49% 0.50% 0.82% 0.51% (0.82%) n/aGDP absolute 238.6 252.2 259.4 268.3 275.7 290.8 302.8 318.2 335.1 345.0 339.2Government debt/GDP 114% 108% 107% 104% 99% 94% 92% 88% 84% 90% 96%Private debt/GDP 81% 78% 76% 74% 74% 71% 74% 82% 91% 94% 98%LLPs / Total Loans 0.4% 0.3% 0.4% 0.3% 0.2% 0.1% -0.1% 0.1% 0.6% 1.9% n/a


92

Denmark Macroeconomic data







Source: Danmarks Nationalbank, Nomura research





Fig. 162: Deposit mix, by customer


-8.0%

-6.0%

-4.0%

-2.0%

0.0%

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6.0%

Q1

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58%

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69%

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30%

40%

50%

60%

70%

80%

H/ hold -mortgages


17%

3%

80%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


50%

12%

38%

0%

20%

40%

60%


57%

14%

20%

9%

0%0%

10%

20%

30%

40%

50%

60%

H/ hold -sight

H/ hold -term

Corporate -sight

Corporate -term

Repos


93

Volume drivers – Denmark













-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%Ju

l-04

Oct

-04

Jan-

05

Apr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr-1

0Ju

l-10


-50%

-25%

0%

25%

50%

75%

100%

Jul-0

4N

ov-

04

Mar-0

5Ju

l-05

Nov-

05

Mar-0

6Ju

l-06

Nov-

06

Mar-0

7Ju

l-07

Nov-

07

Mar-0

8Ju

l-08

Nov-

08

Mar-0

9Ju

l-09

Nov-

09

Mar-1

0Ju

l-10


-20%

-10%

0%

10%

20%

30%

40%

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr-1

0Ju

l-10


-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr-1

0Ju

l-10


380%

390%

400%

410%

420%

430%

440%

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr-1

0Ju

l-10

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

18.5%

19.0%

19.5%

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr-1

0Ju

l-10


94

Spread drivers – Denmark





Fig. 169: Corporate lending spread vs average of 2y, 5y bonds


Fig. 170: Corporate spreads, new business by size vs average of 2y, 5y bonds


Fig. 171: Deposits 3m Cibor, bp




-50

0

50

100

150

200

250

300

350Ju

l-04

Oct

-04

Jan-

05

Apr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr-1

0Ju

l-10

Outstanding N ew

0

60

120

180

240

300

360

420

Jul-0

4

Nov-

04

Mar-0

5

Jul-0

5

Nov-

05

Mar-0

6

Jul-0

6

Nov-

06

Mar-0

7

Jul-0

7

Nov-

07

Mar-0

8

Jul-0

8

Nov-

08

Mar-0

9

Jul-0

9

Nov-

09

Mar-1

0

Jul-1

0

< 1 yr 1 -5 yrs > 10 yrs

300

350

400

450

500

550

600

650

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr-1

0Ju

l-10

Outstanding N ew

0

50

100

150

200

250

300

350

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr-1

0Ju

l-10

Outstanding N ew

-50

0

50

100

150

200

250

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr-1

0Ju

l-10

Sight Term

200

250

300

350

400

450

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr-1

0Ju

l-10

Total


95

Fig. 173: Banking system data – Denmark

Source: OECD

Denmark 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income 24,073 25,776 28,345 34,403 34,462 37,068 38,065 29,339 28,474 28,091 28,601Total revenues 37,857 32,946 32,361 40,131 30,478 46,503 32,615 43,628 41,950 41,169 44,991Expenses (20,135) (21,383) (22,200) (25,112) (24,800) (23,759) (23,650) (23,558) (23,860) (24,362) (26,894)Pre-provision profit 17,722 11,563 10,161 15,019 5,678 22,744 8,965 20,070 18,090 16,807 18,097Provisions (9,416) (8,777) (13,111) (15,113) (17,331) (16,651) (8,924) (7,042) (5,152) (4,088) (4,672)Profit before tax 8,306 2,786 (2,950) (94) (11,653) 6,093 41 13,028 12,940 12,720 13,425Tax (2,572) (522) 238 (331) (189) (2,114) (361) (2,261) (2,107) (1,178) (2,163)Profit after tax 5,734 2,264 (2,712) (425) (11,842) 3,979 (320) 10,767 10,832 11,542 11,262

Customer loans 410.5 456.8 495.8 508.4 480.0 478.3 433.8 440.8 493.3 576.6 609.6Total assets 972.9 1,060.1 1,121.6 1,009.8 937.0 1,041.8 945.7 1,016.8 1,163.9 1,288.6 1,457.0Customer deposits 471.4 496.0 526.6 503.3 499.1 558.8 537.3 566.0 620.2 670.5 700.6Equity 87.9 92.5 88.2 67.6 55.4 57.4 62.2 70.4 80.2 84.3 91.9Tier 1 capital n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aRWAs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aNPLs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

NII/Avge loans 5.9% 5.9% 6.0% 6.9% 7.0% 7.7% 8.3% 6.7% 6.1% 5.3% 4.8%Cost/income ratio 53% 65% 69% 63% 81% 51% 73% 54% 57% 59% 60%Provision/Avge loans 2.29% 2.02% 2.75% 3.01% 3.51% 3.48% 1.96% 1.61% 1.10% 0.76% 0.79%NPLs/Total loans n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLoan/deposit 87% 92% 94% 101% 96% 86% 81% 78% 80% 86% 87%Equity/assets 9.0% 8.7% 7.9% 6.7% 5.9% 5.5% 6.6% 6.9% 6.9% 6.5% 6.3%Tier 1 ratio n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aROE 6.5% 2.5% (3.0%) (0.5%) (19.3%) 7.1% (0.5%) 16.2% 14.4% 14.0% 12.8%ROA 0.59% 0.22% (0.25%) (0.04%) (1.22%) 0.40% (0.03%) 1.10% 0.99% 0.94% 0.82%PPP / Avg. Assets 1.82% 1.14% 0.93% 1.41% 0.58% 2.30% 0.90% 2.05% 1.66% 1.37% 1.32%GDP absolute n/a n/a 840.6 874.4 906.6 911.8 976.9 1,019.5 1,069.5 1,125.6 1,163.6Government debt/GDP n/a n/a 62% 63% 68% 80% 76% 72% 69% 65% 61%Private debt/GDP #VALUE! #VALUE! 51% 43% 40% 35% 30% 31% 31% 32% 35%LLPs / Total Loans 2.3% 1.9% 2.6% 3.0% 3.6% 3.5% 2.1% 1.6% 1.0% 0.7% 0.8%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 29,453 31,168 35,067 35,843 37,123 35,260 37,385 36,502 42,718 52,970 n/aTotal revenues 47,333 56,004 57,811 57,104 61,737 65,501 70,347 80,326 85,471 77,049 n/aExpenses (29,381) (33,346) (30,672) (31,026) (31,813) (32,756) (33,866) (37,283) (42,981) (48,265) n/aPre-provision profit 17,952 22,658 27,139 26,078 29,923 32,744 36,481 43,043 42,490 28,784 n/aProvisions (4,399) (4,853) (6,957) (5,753) (6,369) (2,949) (1,359) (639) (2,788) (35,040) n/aProfit before tax 13,553 17,805 20,183 20,325 23,554 29,796 35,122 42,426 39,702 (6,419) n/aTax (2,479) (3,434) (5,082) (5,835) (7,249) (7,849) (8,184) (8,966) (7,102) 303 n/aProfit after tax 11,074 14,371 15,101 14,489 16,305 21,947 26,937 33,461 32,600 (6,116) n/a

Customer loans 690.4 778.8 889.1 893.9 935.4 1,066.8 1,341.8 1,690.7 2,140.7 2,273.9 n/aTotal assets 1,574.8 1,745.4 1,979.4 2,249.3 2,324.3 2,521.8 3,002.9 3,371.1 4,185.0 4,728.8 n/aCustomer deposits 755.4 760.0 806.0 844.3 932.8 1,034.4 1,178.4 1,290.4 1,618.9 1,678.4 n/aEquity 95.6 116.8 122.1 129.8 138.4 144.5 172.1 215.4 244.1 231.7 n/aTier 1 capital n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aRWAs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aNPLs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

NII/Avge loans 4.3% 4.2% 4.2% 4.0% 4.1% 3.5% 3.1% 2.4% 2.2% 2.4% n/aCost/income ratio 62% 60% 53% 54% 52% 50% 48% 46% 50% 63% n/aProvision/Avge loans 0.64% 0.66% 0.83% 0.65% 0.70% 0.29% 0.11% 0.04% 0.15% 1.59% n/aNPLs/Total loans n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLoan/deposit 91% 102% 110% 106% 100% 103% 114% 131% 132% 135% n/aEquity/assets 6.1% 6.7% 6.2% 5.8% 6.0% 5.7% 5.7% 6.4% 5.8% 4.9% n/aTier 1 ratio n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aROE 11.6% 13.5% 12.6% 11.5% 12.2% 15.5% 17.0% 17.3% 14.2% (2.6%) n/aROA 0.70% 0.87% 0.81% 0.69% 0.71% 0.91% 0.98% 1.05% 0.86% (0.14%) n/aPPP / Avg. Assets 1.14% 1.36% 1.46% 1.23% 1.31% 1.35% 1.32% 1.35% 1.12% 0.65% n/aGDP absolute n/a n/a 840.6 874.4 906.6 911.8 976.9 1,019.5 1,069.5 1,125.6 n/aGovernment debt/GDP 57% 52% 49% 48% 46% 44% 37% 32% 27% 34% n/aPrivate debt/GDP 35% 135% 142% 145% 152% 158% 172% 186% 202% 218% n/aLLPs / Total Loans 0.6% 0.6% 0.8% 0.6% 0.7% 0.3% 0.1% 0.0% 0.1% 1.5% n/a


96

France Macroeconomic data







Source: Banque de France, Nomura research






-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Q1 2

00

3

Q3 2

00

3

Q1 2

00

4

Q3 2

00

4

Q1 2

00

5

Q3 2

00

5

Q1 2

00

6

Q3 2

00

6

Q1 2

00

7

Q3 2

00

7

Q1 2

00

8

Q3 2

00

8

Q1 2

00

9

Q3 2

00

9

Q1 2

01

0

Q3 2

01

0

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

Q1 2

00

3

Q3 2

00

3

Q1 2

00

4

Q3 2

00

4

Q1 2

00

5

Q3 2

00

5

Q1 2

00

6

Q3 2

00

6

Q1 2

00

7

Q3 2

00

7

Q1 2

00

8

Q3 2

00

8

Q1 2

00

9

Q3 2

00

9

Q1 2

01

0

Q3 2

01

0

43%

14%

57%

43%

0%

10%

20%

30%

40%

50%

60%

H/ hold -mortgages



53%

47%

0%

20%

40%

60%

80%

<1 year 1-5 years

58%

20%

12%6% 4%

0%

10%

20%

30%

40%

50%

60%

70%

H/ hold -sight

H/ hold -term

Corporate -sight

Corporate -term

Repos


97

Volume drivers – France



Fig. 181: Loan growth – new business volume y/y change






Fig. 184: Loan – deposit ratio




-5%

0%

5%

10%

15%Ju

l-04

Nov

-04

Mar

-05

Jul-0

5

Nov

-05

Mar

-06

Jul-0

6

Nov

-06

Mar

-07

Jul-0

7

Nov

-07

Mar

-08

Jul-0

8

Nov

-08

Mar

-09

Jul-0

9

Nov

-09

Mar

-10


-30%

-20%

-10%

0%

10%

20%

30%

40%

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr

-06

Jul-0

6O

ct-0

6Ja

n-0

7A

pr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr

-08

Jul-0

8O

ct-0

8Ja

n-0

9A

pr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr

-10


0%

4%

8%

12%

16%

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr

-06

Jul-0

6O

ct-0

6Ja

n-0

7A

pr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr

-08

Jul-0

8O

ct-0

8Ja

n-0

9A

pr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr

-10


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr

-06

Jul-0

6O

ct-0

6Ja

n-0

7A

pr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr

-08

Jul-0

8O

ct-0

8Ja

n-0

9A

pr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr

-10


100%

105%

110%

115%

120%

125%

130%

135%

140%

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr

-06

Jul-0

6O

ct-0

6Ja

n-0

7A

pr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr

-08

Jul-0

8O

ct-0

8Ja

n-0

9A

pr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr

-10

47%

49%

51%

53%

55%

57%

59%

61%

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr

-06

Jul-0

6O

ct-0

6Ja

n-0

7A

pr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr

-08

Jul-0

8O

ct-0

8Ja

n-0

9A

pr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr

-10


98

Spread drivers – France



Fig. 187: Household mortgage spread, new by duration, bp




Fig. 189: Corporate spread, new business by size vs 12m Euribor

Fig. 190: Deposits vs 3m Euribor



-100

-50

0

50

100

150Ja

n-0

3A

pr-0

3Ju

l-03

Oct

-03

Jan-

04

Apr

-04

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr

-06

Jul-0

6O

ct-0

6Ja

n-0

7A

pr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr

-08

Jul-0

8O

ct-0

8Ja

n-0

9A

pr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

N ew

-100

-50

0

50

100

150

200

250

300

350

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr

-06

Jul-0

6O

ct-0

6Ja

n-0

7A

pr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr

-08

Jul-0

8O

ct-0

8Ja

n-0

9A

pr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr

-10

< 1 yr vs 3m Euribor 1 - 5 yrs vs 12m Euribor

0

20

40

60

80

100

120

140

160

180

Jul-0

4

Oct

-04

Jan-

05

Apr

-05

Jul-0

5

Oct

-05

Jan-

06

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

N ew

.[Data not available]

-300

-200

-100

0

100

200

300

400

500

600

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr

-06

Jul-0

6O

ct-0

6Ja

n-0

7A

pr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr

-08

Jul-0

8O

ct-0

8Ja

n-0

9A

pr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Sight Term



99

Fig. 192: Banking system data – France

Source: OECD

France 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income 35,787 36,893 38,077 39,627 38,331 35,440 34,657 33,202 30,991 28,589 26,536Total revenues 44,319 46,125 49,174 53,606 58,155 60,698 55,585 60,970 58,528 61,032 64,460Expenses (31,151) (33,314) (35,593) (37,267) (38,862) (39,302) (39,620) (40,021) (40,913) (41,979) (43,621)Pre-provision profit 13,168 12,811 13,581 16,339 19,293 21,396 15,965 20,950 17,615 19,053 20,839Provisions (4,553) (4,396) (5,705) (6,864) (12,374) (18,124) (15,389) (16,604) (11,976) (9,634) (8,156)Profit before tax 8,615 8,415 7,876 9,476 6,919 3,273 577 4,346 5,639 9,419 12,684Tax (2,238) (2,169) (1,866) (2,257) (2,660) (2,735) (2,101) (2,843) (2,781) (2,895) (2,104)Profit after tax 6,377 6,246 6,010 7,219 4,259 538 (1,524) 1,504 2,858 6,525 10,580

Customer loans 750.7 843.7 924.4 971.8 1,007.0 1,017.9 1,018.6 1,042.7 1,038.6 1,107.3 1,126.6Total assets 1,901.9 2,116.8 2,297.4 2,363.2 2,482.0 2,540.5 2,579.5 2,707.4 2,862.8 3,078.5 3,120.9Customer deposits 451.4 487.9 520.7 565.3 588.9 650.6 698.5 762.8 813.1 916.5 936.0Equity 56.0 66.1 77.6 90.8 99.9 114.1 118.1 119.8 118.0 123.0 127.8Tier 1 capital n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aRWAs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aNPLs n/a n/a n/a n/a n/a 36.7 41.6 40.4 35.2 30.9 27.9

NII/Avge loans 4.8% 4.6% 4.3% 4.2% 3.9% 3.5% 3.4% 3.2% 3.0% 2.7% 2.4%Cost/income ratio 70% 72% 72% 70% 67% 65% 71% 66% 70% 69% 68%Provision/Avge loans 0.61% 0.55% 0.65% 0.72% 1.25% 1.79% 1.51% 1.61% 1.15% 0.90% 0.73%NPLs/Total loans n/a n/a n/a n/a n/a 3.61% 4.09% 3.87% 3.39% 2.79% 2.47%Loan/deposit 166% 173% 178% 172% 171% 156% 146% 137% 128% 121% 120%Equity/assets 2.9% 3.1% 3.4% 3.8% 4.0% 4.5% 4.6% 4.4% 4.1% 4.0% 4.1%Tier 1 ratio n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aROE 11.4% 10.2% 8.4% 8.6% 4.5% 0.5% (1.3%) 1.3% 2.4% 5.4% 8.4%ROA 0.34% 0.31% 0.27% 0.31% 0.18% 0.02% (0.06%) 0.06% 0.10% 0.22% 0.34%PPP / Avg. Assets 0.69% 0.64% 0.62% 0.70% 0.80% 0.85% 0.62% 0.79% 0.63% 0.64% 0.67%GDP absolute n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aGovernment debt/GDP n/a n/a 34% 35% 39% 45% 48% 55% 58% 59% 59%Private debt/GDP n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLLPs / Total Loans 0.6% 0.5% 0.6% 0.7% 1.2% 1.8% 1.5% 1.6% 1.2% 0.9% 0.7%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 29,675 28,827 29,098 32,723 34,301 27,775 28,929 25,363 21,659 30,875 n/aTotal revenues 67,179 73,703 78,789 76,206 79,287 73,653 76,485 100,000 87,324 63,940 n/aExpenses (45,424) (48,651) (48,946) (49,343) (50,746) (46,741) (50,108) (58,021) (60,041) (61,074) n/aPre-provision profit 21,755 25,052 29,843 26,863 28,541 26,912 26,377 41,979 27,284 2,866 n/aProvisions (4,367) (5,657) (8,245) (6,387) (7,039) (3,094) 53 (2,770) (4,849) (12,140) n/aProfit before tax 17,388 19,395 21,597 20,476 21,502 23,818 26,430 39,210 22,434 (9,274) n/aTax (4,510) (3,793) (4,167) (3,201) (4,198) (4,162) (3,160) (5,055) (866) 2,361 n/aProfit after tax 12,878 15,602 17,430 17,275 17,304 19,656 23,270 34,155 21,568 (6,913) n/a

Customer loans 1,189.6 1,291.9 1,382.3 1,398.2 1,451.0 1,346.6 1,580.3 1,766.3 2,069.0 2,176.8 n/aTotal assets 3,470.6 3,512.9 3,672.6 3,669.1 3,855.2 3,777.0 4,690.5 5,395.8 6,352.8 6,930.1 n/aCustomer deposits 960.6 992.6 1,116.7 1,125.0 1,182.0 1,241.7 1,462.8 1,541.2 1,736.5 1,907.5 n/aEquity 161.3 160.5 169.5 180.9 195.2 179.1 185.0 224.5 242.0 275.6 n/aTier 1 capital n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aRWAs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aNPLs 23.9 21.6 22.9 24.5 24.9 21.1 21.1 22.9 24.0 27.2 n/a

NII/Avge loans 2.5% 2.3% 2.2% 2.4% 2.4% 2.0% 2.0% 1.5% 1.1% 1.5% n/aCost/income ratio 68% 66% 62% 65% 64% 63% 66% 58% 69% 96% n/aProvision/Avge loans 0.37% 0.46% 0.62% 0.46% 0.49% 0.22% (0.00%) 0.17% 0.25% 0.57% n/aNPLs/Total loans 2.01% 1.67% 1.66% 1.75% 1.71% 1.56% 1.33% 1.30% 1.16% 1.25% 1.60%Loan/deposit 124% 130% 124% 124% 123% 108% 108% 115% 119% 114% n/aEquity/assets 4.6% 4.6% 4.6% 4.9% 5.1% 4.7% 3.9% 4.2% 3.8% 4.0% n/aTier 1 ratio n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aROE 8.0% 9.7% 10.6% 9.9% 9.2% 10.5% 12.8% 16.7% 9.2% (2.7%) n/aROA 0.37% 0.45% 0.49% 0.47% 0.46% 0.52% 0.55% 0.68% 0.37% (0.10%) n/aPPP / Avg. Assets 0.63% 0.72% 0.83% 0.73% 0.76% 0.71% 0.62% 0.83% 0.46% 0.04% n/aGDP absolute 1,367.1 1,443.0 1,497.5 1,549.5 1,595.6 1,657.6 1,724.1 1,808.1 1,895.3 1,948.0 1,921.3Government debt/GDP 59% 57% 57% 59% 63% 65% 66% 64% 64% 68% 78%Private debt/GDP 82% 85% 88% 86% 88% 90% 92% 98% 105% 108% 109%LLPs / Total Loans 0.4% 0.4% 0.6% 0.5% 0.5% 0.2% 0.0% 0.2% 0.2% 0.6% n/a


100

Germany Macroeconomic data



Fig. 194: Unemployment y/y change


Balance sheet structure


Source: Bundesbank, Nomura research







-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Q1 2

00

3

Q3 2

00

3

Q1 2

00

4

Q3 2

00

4

Q1 2

00

5

Q3 2

00

5

Q1 2

00

6

Q3 2

00

6

Q1 2

00

7

Q3 2

00

7

Q1 2

00

8

Q3 2

00

8

Q1 2

00

9

Q3 2

00

9

Q1 2

01

0

Q3 2

01

0

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

Q2 2

00

3

Q4 2

00

3

Q2 2

00

4

Q4 2

00

4

Q2 2

00

5

Q4 2

00

5

Q2 2

00

6

Q4 2

00

6

Q2 2

00

7

Q4 2

00

7

Q2 2

00

8

Q4 2

00

8

Q2 2

00

9

Q4 2

00

9

Q2 2

01

0

Q4 2

01

0

41%

21%

62%

38%

0%

10%

20%

30%

40%

50%

60%

70%

H/ hold -mortgages


13%10%

77%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


66%

9%

25%

0%

10%

20%

30%

40%

50%

60%

70%


65%

17%13%

6%0%

0%

10%

20%

30%

40%

50%

60%

70%

H/ hold -sight Corporate -sight Repos


101

Volume drivers – Germany





Fig. 201: Household loan growth- outstanding amounts y/y change






Fig. 204: Sight deposit as % of loans


-10%

-5%

0%

5%

10%

15%Ja

n-0

4A

pr-0

4Ju

l-04

Oct

-04

Jan-

05

Apr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

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08

Apr-0

8Ju

l-08

Oct

-08

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09

Apr-0

9Ju

l-09

Oct

-09

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10

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0Ju

l-10


-60%

-40%

-20%

0%

20%

40%

60%

80%

Jul-0

4O

ct-0

4Ja

n-0

5A

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5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr-1

0Ju

l-10


-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

Jan-

04

May-

04

Sep-0

4Ja

n-0

5M

ay-

05

Sep-0

5Ja

n-0

6M

ay-

06

Sep-0

6Ja

n-0

7M

ay-

07

Sep-0

7Ja

n-0

8M

ay-

08

Sep-0

8Ja

n-0

9M

ay-

09

Sep-0

9Ja

n-1

0M

ay-

10

Sep-1

0


0%

2%

4%

6%

8%

10%

12%

14%

Jan-

04

Apr-0

4Ju

l-04

Oct

-04

Jan-

05

Apr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr-1

0Ju

l-10


100%

110%

120%

130%

140%

150%

160%

Jan-

04

Jun-

04

Nov-

04

Apr-0

5

Sep-0

5

Feb-0

6

Jul-0

6

Dec-

06

May-

07

Oct

-07

Mar-0

8

Aug

-08

Jan-

09

Jun-

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Nov-

09

Apr-1

0

Sep-1

0

40%

45%

50%

55%

60%

65%

70%

Jan-

04

Jun-

04

Nov-

04

Apr-0

5

Sep-0

5

Feb-0

6

Jul-0

6

Dec-

06

May-

07

Oct

-07

Mar-0

8

Aug

-08

Jan-

09

Jun-

09

Nov-

09

Apr-1

0

Sep-1

0


102

Spread drivers – Germany

Fig. 205: Household mortgage spreads vs 10y bond




Fig. 207: Corporate lending spreads vs 12m Euribor




Fig. 209: Deposit spreads vs 3m Euribor




0

50

100

150

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250

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Jan-

03

Jun-

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Nov-

03

Apr-0

4

Sep-0

4

Feb-0

5

Jul-0

5

Dec-

05

May-

06

Oct

-06

Mar-0

7

Aug

-07

Jan-

08

Jun-

08

Nov-

08

Apr-0

9

Sep-0

9

Feb-1

0

Jul-1

0

Outstanding N ew

-50

0

50

100

150

200

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300

350

Jan-

03

Jun-

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Nov-

03

Apr-0

4

Sep-0

4

Feb-0

5

Jul-0

5

Dec-

05

May-

06

Oct

-06

Mar-0

7

Aug

-07

Jan-

08

Jun-

08

Nov-

08

Apr-0

9

Sep-0

9

Feb-1

0

Jul-1

0

<1 yr vs 3m Euribor 1-5yr vs 12m Euribor

>10yrs vs 10 yr bund

0

50

100

150

200

250

300

350

Jan-

03

Jun-

03

Nov-

03

Apr-0

4

Sep-0

4

Feb-0

5

Jul-0

5

Dec-

05

May-

06

Oct

-06

Mar-0

7

Aug

-07

Jan-

08

Jun-

08

Nov-

08

Apr-0

9

Sep-0

9

Feb-1

0

Jul-1

0

Outstanding N ew 3m Euribor

0

50

100

150

200

250

300

Jan-

03

Jun-

03

Nov-

03

Apr-0

4

Sep-0

4

Feb-0

5

Jul-0

5

Dec-

05

May-

06

Oct

-06

Mar-0

7

Aug

-07

Jan-

08

Jun-

08

Nov-

08

Apr-0

9

Sep-0

9

Feb-1

0

Jul-1

0


-150

-100

-50

0

50

100

150

200

250

Jan-

03

Jun-

03

Nov-

03

Apr-0

4

Sep-0

4

Feb-0

5

Jul-0

5

Dec-

05

May-

06

Oct

-06

Mar-0

7

Aug

-07

Jan-

08

Jun-

08

Nov-

08

Apr-0

9

Sep-0

9

Feb-1

0

Jul-1

0

Household Corporate

275

295

315

335

355

375

395

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10

Apr-1

0Ju

l-10



103

Bank lending survey – Germany










-40

-30

-20

-10

0

10

20

30

40

50

60

70

200

3 Q

1

200

3 Q

3

200

4 Q

1

200

4 Q

3

200

5 Q

1

200

5 Q

3

200

6 Q

1

200

6 Q

3

200

7 Q

1

200

7 Q

3

200

8 Q

1

200

8 Q

3

200

9 Q

1

200

9 Q

3

201

0 Q

1

201

0 Q

3

Net

bala

nce

of b

an

ks

Realized Expected

-40

-30

-20

-10

0

10

20

30

40

50

60

20

03

Q1

20

03

Q3

20

04

Q1

20

04

Q3

20

05

Q1

20

05

Q3

20

06

Q1

20

06

Q3

20

07

Q1

20

07

Q3

20

08

Q1

20

08

Q3

20

09

Q1

20

09

Q3

20

10

Q1

20

10

Q3

Net

ba

lan

ce

of b

an

ks

Cost of funds Competition Risk perception

-60

-40

-20

0

20

40

60

80

20

03

Q1

20

03

Q3

20

04

Q1

20

04

Q3

20

05

Q1

20

05

Q3

20

06

Q1

20

06

Q3

20

07

Q1

20

07

Q3

20

08

Q1

20

08

Q3

20

09

Q1

20

09

Q3

20

10

Q1

20

10

Q3

Net b

ala

nce o

f b

an

ks

Realized Expected

-30

-20

-10

0

10

20

30

40

50

200

3 Q

1

200

3 Q

3

200

4 Q

1

200

4 Q

3

200

5 Q

1

200

5 Q

3

200

6 Q

1

200

6 Q

3

200

7 Q

1

200

7 Q

3

200

8 Q

1

200

8 Q

3

200

9 Q

1

200

9 Q

3

201

0 Q

1

201

0 Q

3

Ne

t b

ala

nc

e o

f b

an

ks

Realized Expected


104

Fig. 215: Banking system data – Germany

Source: OECD

Germany 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income 33,858 34,184 36,411 41,565 46,091 54,936 62,109 61,575 64,788 66,224 66,834Total revenues 41,754 45,922 49,732 54,751 60,535 71,976 76,891 77,912 81,992 86,659 103,690Expenses (28,427) (29,651) (32,205) (35,677) (39,066) (44,906) (46,750) (49,743) (52,272) (55,551) (59,726)Pre-provision profit 13,327 16,271 17,528 19,073 21,470 27,070 30,141 28,169 29,720 31,108 43,964Provisions (3,481) (7,820) (8,593) (7,162) (8,858) (11,945) (15,292) (10,972) (11,604) (13,179) (13,689)Profit before tax 9,846 8,451 8,934 11,911 12,612 15,125 14,849 17,197 18,116 17,929 30,275Tax (6,118) (4,742) (4,810) (6,946) (7,805) (8,341) (7,217) (8,987) (9,546) (9,166) (14,782)Profit after tax 3,728 3,709 4,124 4,965 4,806 6,784 7,632 8,209 8,570 8,764 15,493

Customer loans 921.5 983.5 1,075.3 1,211.3 1,326.7 1,528.2 1,635.1 1,781.3 1,938.5 2,109.1 2,259.1Total assets 1,660.5 1,784.8 1,974.2 2,148.3 2,338.0 2,787.2 2,971.5 3,262.0 3,621.7 4,043.7 4,465.9Customer deposits 886.3 942.3 1,027.8 1,123.7 1,203.8 1,423.4 1,457.4 1,535.1 1,680.1 1,823.8 1,953.2Equity 61.2 68.2 74.9 82.7 95.8 111.3 126.0 136.8 147.2 164.5 174.2Tier 1 capital n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aRWAs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aNPLs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

NII/Avge loans 3.7% 3.6% 3.5% 3.6% 3.6% 3.8% 3.9% 3.6% 3.5% 3.3% 3.1%Cost/income ratio 68% 65% 65% 65% 65% 62% 61% 64% 64% 64% 58%Provision/Avge loans 0.38% 0.82% 0.83% 0.63% 0.70% 0.84% 0.97% 0.64% 0.62% 0.65% 0.63%NPLs/Total loans n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLoan/deposit 104% 104% 105% 108% 110% 107% 112% 116% 115% 116% 116%Equity/assets 3.7% 3.8% 3.8% 3.8% 4.1% 4.0% 4.2% 4.2% 4.1% 4.1% 3.9%Tier 1 ratio n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aROE 6.1% 5.7% 5.8% 6.3% 5.4% 6.6% 6.4% 6.2% 6.0% 5.6% 9.1%ROA 0.22% 0.22% 0.22% 0.24% 0.21% 0.26% 0.27% 0.26% 0.25% 0.23% 0.36%PPP / Avg. Assets 0.80% 0.94% 0.93% 0.93% 0.96% 1.06% 1.05% 0.90% 0.86% 0.81% 1.03%GDP absolute n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aGovernment debt/GDP n/a n/a n/a 39% 42% 46% 48% 56% 58% 60% 60%Private debt/GDP n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLLPs / Total Loans 0.4% 0.8% 0.8% 0.6% 0.7% 0.8% 0.9% 0.6% 0.6% 0.6% 0.6%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 70,663 70,171 72,528 78,714 74,856 77,582 80,681 81,677 84,165 83,249 n/aTotal revenues 100,119 109,384 112,507 118,669 102,657 98,237 122,746 120,874 123,877 92,446 n/aExpenses (67,845) (75,150) (78,604) (75,704) (74,536) (72,743) (75,681) (78,064) (78,118) (75,228) n/aPre-provision profit 32,274 34,234 33,903 42,965 28,121 25,494 47,065 42,810 45,759 17,218 n/aProvisions (14,004) (17,128) (22,067) (34,552) (28,440) (17,846) (16,721) (18,359) (20,200) (36,015) n/aProfit before tax 18,270 17,106 11,836 8,413 (319) 7,648 30,344 24,451 25,559 (18,797) n/aTax (8,023) (6,184) (3,218) (3,475) (5,118) (5,134) (9,280) (5,103) (5,644) (1,128) n/aProfit after tax 10,247 10,922 8,618 4,938 (5,437) 2,514 21,064 19,348 19,917 (19,925) n/a

Customer loans 2,397.9 2,627.6 2,718.9 2,658.0 2,624.7 2,621.7 2,746.7 2,859.3 3,093.3 2,987.3 n/aTotal assets 4,933.3 5,425.5 5,714.6 5,612.0 5,505.3 5,702.8 5,905.5 6,134.7 6,608.5 6,444.5 n/aCustomer deposits 2,152.6 2,303.5 2,451.8 2,398.0 2,423.8 2,545.6 2,639.1 2,735.6 2,967.6 2,994.9 n/aEquity 197.9 217.7 233.2 248.3 246.0 232.7 244.8 260.4 272.8 296.5 n/aTier 1 capital n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aRWAs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aNPLs 0.0 0.0 0.0 0.0 136.5 128.5 109.9 97.2 83.5 n/a n/a

NII/Avge loans 2.9% 2.8% 2.7% 2.9% 2.8% 3.0% 3.0% 2.9% 2.8% 2.7% n/aCost/income ratio 68% 69% 70% 64% 73% 74% 62% 65% 63% 81% n/aProvision/Avge loans 0.58% 0.68% 0.83% 1.29% 1.08% 0.68% 0.62% 0.65% 0.68% 1.18% n/aNPLs/Total loans 0.0% 0.0% 0.0% 0.0% 5.2% 4.9% 4.0% 3.4% 2.7% … …Loan/deposit 111% 114% 111% 111% 108% 103% 104% 105% 104% 100% n/aEquity/assets 4.0% 4.0% 4.1% 4.4% 4.5% 4.1% 4.1% 4.2% 4.1% 4.6% n/aTier 1 ratio n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aROE 5.2% 5.3% 3.8% 2.1% (2.2%) 1.1% 8.8% 7.7% 7.5% (7.0%) n/aROA 0.21% 0.21% 0.15% 0.09% (0.10%) 0.04% 0.36% 0.32% 0.31% (0.31%) n/aPPP / Avg. Assets 0.65% 0.66% 0.61% 0.76% 0.51% 0.45% 0.81% 0.71% 0.72% 0.26% n/aGDP absolute 2,007.1 2,062.8 2,116.1 2,146.5 2,166.7 2,203.6 2,238.4 2,325.6 2,431.7 2,492.3 2,404.9Government debt/GDP 61% 60% 59% 60% 64% 66% 68% 68% 65% 66% 73%Private debt/GDP 116% 119% 118% 117% 115% 113% 112% 109% 105% 108% 112%LLPs / Total Loans 0.6% 0.7% 0.8% 1.3% 1.1% 0.7% 0.6% 0.6% 0.7% 1.2% n/a


105

Greece Macroeconomic data


Source: Bank of Greece, Nomura research



Balance sheet structure









-6.0%

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30%

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H/ hold -mortgages


37%

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H/ hold -sight

H/ hold -term

Corporate -sight

Corporate -term

Repos


106

Volume drivers – Greece

Fig. 222: Loan growth – outstanding volumes y/y change


Fig. 223: Loan growth– new business volumes y/y change


Fig. 224: Household loan growth – outstanding y/y growth


Fig. 225: Deposit growth y/y growth


Fig. 226: Loan to deposit ratio




-15%

-10%

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35%Ju

l-04

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5Ju

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6Ju

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6Ju

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95%

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9Ju

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25%

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65%

Jul-0

4O

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107

Spread drivers – Greece





Fig. 230: Corporate lending vs 12m Euribor r




Fig. 232: Deposits 3m Euribor




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108

Fig. 234: Banking system data – Greece

Source: OECD

Greece 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income n/a 248 379 599 524 604 589 986 1,086 1,441 1,935Total revenues n/a 614 857 1,286 1,242 1,444 1,822 1,998 2,300 2,851 3,470Expenses n/a (459) (549) (660) (758) (906) (1,084) (1,284) (1,569) (1,801) (2,056)Pre-provision profit n/a 155 308 626 484 538 738 714 730 1,049 1,415Provisions n/a (65) (105) (188) (105) (131) (170) (122) (299) (414) (457)Profit before tax n/a 90 203 438 379 407 568 592 431 635 958Tax n/a (11) (42) (71) (123) (135) (160) (169) (163) (189) (356)Profit after tax n/a 79 161 367 255 272 408 423 268 447 602

Customer loans n/a 6.7 7.1 7.7 8.6 9.9 11.3 14.0 18.4 22.2 30.1Total assets n/a 21.6 24.9 29.6 35.6 41.5 45.0 50.1 58.3 69.6 82.8Customer deposits n/a 17.7 20.2 23.5 27.7 32.6 33.8 36.8 43.9 54.8 64.5Equity n/a 0.7 1.0 1.4 1.6 1.9 2.2 2.4 2.6 3.5 5.0Tier 1 capital n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aRWAs n/a n/a n/a n/a n/a n/a n/a 17.7 25.7 33.2 40.2NPLs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

NII/Avge loans n/a 3.7% 5.5% 8.1% 6.4% 6.5% 5.6% 7.8% 6.7% 7.1% 7.4%Cost/income ratio n/a 75% 64% 51% 61% 63% 59% 64% 68% 63% 59%Provision/Avge loans n/a 0.96% 1.52% 2.54% 1.29% 1.42% 1.61% 0.96% 1.84% 2.04% 1.75%NPLs/Total loans n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLoan/deposit n/a 38% 35% 33% 31% 30% 33% 38% 42% 40% 47%Equity/assets n/a 3.1% 3.9% 4.7% 4.6% 4.6% 4.9% 4.8% 4.5% 5.1% 6.0%Tier 1 ratio n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aROE n/a 11.7% 19.5% 31.1% 16.8% 15.4% 20.0% 18.3% 10.7% 14.5% 14.2%ROA n/a 0.37% 0.69% 1.34% 0.78% 0.71% 0.94% 0.89% 0.49% 0.70% 0.79%PPP / Avg. Assets n/a 0.72% 1.32% 2.29% 1.48% 1.40% 1.71% 1.50% 1.35% 1.64% 1.86%GDP absolute n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aGovernment debt/GDP n/a n/a 71% 73% 78% 98% 96% 97% 99% 97% 95%Private debt/GDP n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLLPs / Total Loans n/a 1.0% 1.5% 2.5% 1.2% 1.3% 1.5% 0.9% 1.6% 1.9% 1.5%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 2,517 3,432 3,889 3,897 4,594 5,003 5,706 6,885 7,592 8,169 n/aTotal revenues 6,001 6,186 6,080 5,369 6,215 6,553 7,577 9,514 10,565 9,828 n/aExpenses (2,497) (3,296) (3,551) (3,659) (3,895) (4,299) (4,156) (4,975) (5,562) (5,895) n/aPre-provision profit 3,503 2,890 2,529 1,709 2,320 2,254 3,421 4,539 5,003 3,933 n/aProvisions (672) (510) (510) (644) (853) (1,099) (1,184) (1,575) (1,337) (2,886) n/aProfit before tax 2,831 2,380 2,019 1,065 1,467 1,155 2,237 2,964 3,666 1,047 n/aTax (587) (611) (564) (300) (393) (569) (458) (916) (671) (384) n/aProfit after tax 2,244 1,769 1,455 765 1,074 586 1,779 2,048 2,995 663 n/a

Customer loans 37.9 60.7 72.4 86.2 99.0 112.7 134.0 146.3 174.3 191.9 n/aTotal assets 103.6 138.6 151.8 164.2 173.8 184.1 223.7 272.8 336.3 415.9 n/aCustomer deposits 70.1 88.1 97.5 102.7 113.2 135.6 145.8 181.6 219.0 251.5 n/aEquity 10.2 12.4 14.1 10.9 11.9 9.0 12.7 18.2 21.9 21.0 n/aTier 1 capital n/a n/a n/a n/a n/a 11.3 11.9 16.4 20.7 21.6 n/aRWAs 56.9 74.3 88.1 98.4 106.9 117.5 137.2 172.5 220.7 247.4 n/aNPLs n/a n/a n/a n/a 6.9 7.9 8.4 7.9 7.8 9.6 n/a

NII/Avge loans 6.6% 7.0% 5.8% 4.9% 5.0% 4.7% 4.6% 4.9% 4.7% 4.5% n/aCost/income ratio 42% 53% 58% 68% 63% 66% 55% 52% 53% 60% n/aProvision/Avge loans 1.77% 1.03% 0.77% 0.81% 0.92% 1.04% 0.96% 1.12% 0.83% 1.58% n/aNPLs/Total loans n/a n/a n/a n/a 7.00% 7.00% 6.30% 5.40% 4.50% 5.00% n/aLoan/deposit 54% 69% 74% 84% 87% 83% 92% 81% 80% 76% n/aEquity/assets 9.9% 8.9% 9.3% 6.6% 6.8% 4.9% 5.7% 6.7% 6.5% 5.0% n/aTier 1 ratio n/a n/a n/a n/a n/a 9.6% 8.7% 9.5% 9.4% 8.7% n/aROE 21.9% 15.6% 11.0% 6.1% 9.4% 5.6% 16.4% 13.2% 14.9% 3.1% n/aROA 2.17% 1.46% 1.00% 0.48% 0.64% 0.33% 0.87% 0.82% 0.98% 0.18% n/aPPP / Avg. Assets 3.38% 2.39% 1.74% 1.08% 1.37% 1.26% 1.68% 1.83% 1.64% 1.05% n/aGDP absolute n/a 136 146 157 172 186 195 211 226 239 238Government debt/GDP 94% 103% 104% 102% 97% 99% 100% 98% 96% 99% 115%Private debt/GDP n/a n/a 57% 60% 64% 70% 79% 84% 93% 95% 92%LLPs / Total Loans 1.8% 0.8% 0.7% 0.7% 0.9% 1.0% 0.9% 1.1% 0.8% 1.5% n/a


109

Ireland Macroeconomic data



Fig. 236: Unemployment



Fig. 237: Lending mix – outstanding loans by customers

Source: Central Bank of Ireland, Nomura research







Note: New lending data not released by central bank after May 2010

-12.0%

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15%

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25%

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35%

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45%

50%

H/ hold -sight

H/ hold -term

Corporate -sight

Corporate -term

Repos


110

Volume drivers – Ireland







Fig. 244: Deposit volumes y/y change






-30%

-20%

-10%

0%

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-50%

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Jan-

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Apr-0

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-07

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-30%

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Jan-

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-20%-15%-10%

-5%0%5%

10%15%20%25%30%

Jan-

04

May-

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150%

170%

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270%

Jan-

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Sep-0

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15%

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40%

Jan-

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Sep-0

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Sep-0

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Sep-0

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Sep-0

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10


111

Spread drivers – Ireland





Fig. 249: Corporate lending spreads – outstanding volumesvs 12m Euribor


Fig. 250: corporate lending spreads – new business vs 12m Euribor


Fig. 251: Deposit spreads 3m Euribor, bp




-200

-150

-100

-50

0

50

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150Ja

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Sep-0

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Sep-0

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8M

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Sep-0

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Sep-0

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10

Outstanding N ew

0

50

100

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250

Jan-

04

May-

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Sep-0

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Sep-0

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Sep-0

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Sep-0

7Ja

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Sep-0

8Ja

n-0

9M

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Sep-0

9Ja

n-1

0M

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10

< 1 yr vs 3m Euribor 1 -5 yrs vs 12m Euribor

0

50

100

150

200

250

300

350

400

Jan-

04

May-

04

Sep-0

4Ja

n-0

5M

ay-

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Sep-0

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ay-

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7Ja

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8M

ay-

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Sep-0

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0M

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10

Outstanding N ew

0

50

100

150

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400

Jan-

04

May-

04

Sep-0

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n-0

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Sep-0

6Ja

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Sep-0

7Ja

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9Ja

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10


-300

-200

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0

100

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400

Jan-

04

May-

04

Sep-0

4Ja

n-0

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Sep-0

5Ja

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6M

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06

Sep-0

6Ja

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7M

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07

Sep-0

7Ja

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8M

ay-

08

Sep-0

8Ja

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9M

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09

Sep-0

9Ja

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10

Sight Term

100

150

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250

300

350

Jan-

04

May-

04

Sep-0

4Ja

n-0

5M

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05

Sep-0

5Ja

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6M

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06

Sep-0

6Ja

n-0

7M

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07

Sep-0

7Ja

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8M

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08

Sep-0

8Ja

n-0

9M

ay-

09

Sep-0

9Ja

n-1

0M

ay-

10

Total


112

Fig. 253: Banking system data – Ireland

Source: OECD

Ireland 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income .. .. .. .. .. .. .. 2,144 2,205 2,726 3,258Total revenues .. .. .. .. .. .. .. 3,055 3,249 4,119 5,177Expenses n/a n/a n/a n/a n/a n/a n/a (1,811) (1,871) (2,402) (2,690)Pre-provision profit .. .. .. .. .. .. .. 1,244 1,378 1,718 2,487Provisions n/a n/a n/a n/a n/a n/a n/a (117) (115) (157) (213)Profit before tax .. .. .. .. .. .. .. 1,082 1,269 1,684 2,487Tax n/a n/a n/a n/a n/a n/a n/a (309) (364) (450) (649)Profit after tax .. .. .. .. .. .. .. 773 905 1,235 1,839

Customer loans n/a n/a n/a n/a n/a n/a n/a 44.0 51.9 85.9 100.0Total assets n/a n/a n/a n/a n/a n/a n/a 79.8 94.6 155.4 191.8Customer deposits n/a n/a n/a n/a n/a n/a n/a 44.9 49.1 75.6 83.7Equity n/a n/a n/a n/a n/a n/a n/a 5.3 6.3 8.8 11.5Tier 1 capital n/a n/a n/a n/a n/a n/a n/a 5.1 6.2 8.1 10.9RWAs n/a n/a n/a n/a n/a n/a n/a 47.9 58.2 81.6 98.8NPLs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

NII/Avge loans n/a n/a n/a n/a n/a n/a n/a 4.9% 4.6% 4.0% 3.5%Cost/income ratio n/a n/a n/a n/a n/a n/a n/a 59% 58% 58% 52%Provision/Avge loans n/a n/a n/a n/a n/a n/a n/a 0.27% 0.24% 0.23% 0.23%NPLs/Total loans n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLoan/deposit n/a n/a n/a n/a n/a n/a n/a 98% 106% 114% 120%Equity/assets n/a n/a n/a n/a n/a n/a n/a 6.7% 6.7% 5.7% 6.0%Tier 1 ratio n/a n/a n/a n/a n/a n/a n/a 10.7% 10.7% 9.9% 11.1%ROE n/a n/a n/a n/a n/a n/a n/a 14.5% 15.5% 16.3% 18.0%ROA n/a n/a n/a n/a n/a n/a n/a 0.97% 1.04% 0.99% 1.06%PPP / Avg. Assets n/a n/a n/a n/a n/a n/a n/a 1.56% 1.58% 1.37% 1.43%GDP absolute (Local ccy bn n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aGovernment debt/GDP n/a n/a 93% 95% 92% 94% 89% 82% 74% 64% 54%Private debt/GDP n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLLPs / Total Loans n/a n/a n/a n/a n/a n/a n/a 0.3% 0.2% 0.2% 0.2%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 4,684 5,425 6,129 7,098 6,713 7,516 9,135 10,924 12,797 .. ..Total revenues 7,436 8,869 9,309 11,281 10,819 12,796 14,656 16,861 18,132 .. ..Expenses (3,842) (4,446) (5,183) (5,772) (5,488) (6,350) (6,831) (8,015) (8,697) na na

Pre-provision profit 3,593 4,423 4,126 5,509 5,330 6,446 7,825 8,846 9,435 .. ..

Provisions (267) (406) (636) (621) (436) (271) (417) (409) (797) na naProfit before tax 3,479 4,172 3,480 4,888 4,894 6,175 7,408 8,437 8,638 .. ..Tax (804) (1,016) (520) (896) (995) (1,223) (1,385) (1,482) (1,410) na naProfit after tax 2,675 3,157 2,960 3,992 3,899 4,952 6,023 6,956 7,228 .. ..

Customer loans 156.5 181.7 213.6 270.7 290.5 355.2 497.7 601.6 655.8 na naTotal assets 317.8 370.2 430.6 548.8 621.9 748.3 1,084.4 1,231.1 1,346.8 na naCustomer deposits 127.7 145.2 166.7 179.8 183.3 211.4 261.9 333.3 352.4 na naEquity 19.3 23.3 28.3 31.4 32.2 37.3 43.1 52.5 56.6 na naTier 1 capital 19.4 23.1 27.9 29.4 30.3 37.7 46.8 58.7 65.7 n/a n/aRWAs 159.1 193.6 231.4 191.1 220.1 308.2 404.5 493.4 566.8 n/a n/aNPLs n/a n/a n/a n/a 2.6 2.8 3.5 4.2 5.2 n/a n/a

NII/Avge loans 3.0% 3.2% 3.1% 2.9% 2.4% 2.3% 2.1% 2.0% 2.0% na naCost/income ratio 52% 50% 56% 51% 51% 50% 47% 48% 48% na naProvision/Avge loans 0.17% 0.24% 0.32% 0.26% 0.16% 0.08% 0.10% 0.07% 0.13% na naNPLs/Total loans n/a n/a n/a n/a 0.9% 0.8% 0.7% 0.7% 0.8% 3% 4%Loan/deposit 123% 125% 128% 151% 158% 168% 190% 180% 186% na naEquity/assets 6.1% 6.3% 6.6% 5.7% 5.2% 5.0% 4.0% 4.3% 4.2% na naTier 1 ratio 12.2% 12.0% 12.1% 15.4% 13.8% 12.2% 11.6% 11.9% 11.6% n/a n/aROE 13.9% 14.8% 11.5% 13.4% 12.3% 14.3% 15.0% 14.6% 13.3% n/a n/aROA 0.84% 0.92% 0.74% 0.82% 0.67% 0.72% 0.66% 0.60% 0.56% n/a n/aPPP / Avg. Assets 1.13% 1.29% 1.03% 1.13% 0.91% 0.94% 0.85% 0.76% 0.73% n/a n/aGDP absolute (Local ccy bn 90.4 104.8 116.9 130.3 139.8 149.1 162.1 176.8 189.8 181.8 163.5Government debt/GDP 48% 38% 36% 32% 31% 30% 28% 25% 25% 44% 64%Private debt/GDP 102% 106% 110% 109% 115% 134% 161% 182% 199% 218% 230%LLPs / Total Loans 0.2% 0.2% 0.3% 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% n/a n/a


113

Italy Macroeconomic data



Fig. 255: Unemployment

Source: Banca d’Italia, Nomura research


Fig. 256: Lending mix – outstanding loans by customers







-8.0%

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-4.0%

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Q1

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24%

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H/ hold -mortgages


26%

13%

61%

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74%

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Sight Term Repos


114

Volume drivers – Italy












-4%

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-07

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8

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9

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-10

Total Deposits ex-repo "Sight deposits"

110%

116%

122%

128%

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140%

146%

152%

Jul-0

4O

ct-0

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130%

133%

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Jul-1

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115

Spread drivers – Italy





Fig. 268: Corporate lending spreads vs 12m Euribor








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Outstanding New

0255075

100125150175200225250275

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< 1 yr 1 - 5 yrs > 10 yrs

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0

Outstanding New

-80-40

04080

120160200240280320360

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0


-200-150-100

-500

50100150200250300350

Jul-0

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Jan-

06

Apr

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116

Fig. 272: Banking system data – Italy

Source: OECD

Italy 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income 21,400 23,886 28,591 30,889 36,436 37,287 35,239 38,478 38,059 35,986 36,446Total revenues 28,061 30,512 36,662 39,643 43,884 50,564 45,207 47,962 50,334 50,300 56,037Expenses (17,690) (19,114) (22,657) (25,632) (28,802) (30,742) (30,939) (32,446) (33,583) (34,580) (34,184)Pre-provision prof it 10,370 11,399 14,005 14,012 15,082 19,822 14,267 15,516 16,751 15,720 21,852Provisions (4,027) (4,554) (5,311) (5,010) (6,930) (9,288) (10,186) (9,989) (9,138) (10,142) (7,534)Profit before tax 6,343 6,845 8,693 9,002 8,152 10,534 4,081 5,527 7,614 5,578 14,319Tax (2,760) (3,182) (3,441) (3,825) (4,053) (6,746) (2,947) (4,360) (4,361) (4,186) (6,737)Profit after tax 3,583 3,663 5,252 5,176 4,099 3,787 1,134 1,167 3,253 1,392 7,582

Customer loans 285.3 344.6 412.1 471.3 526.8 550.4 558.9 579.1 584.0 632.5 676.9Total assets 695.7 814.2 921.4 1,052.4 1,221.5 1,311.5 1,342.9 1,384.1 1,458.6 1,558.0 1,607.8Customer deposits 315.5 350.2 413.5 451.7 470.3 508.9 512.7 519.0 529.0 491.5 491.4Equity 37.0 43.6 53.0 68.8 82.9 87.5 93.9 93.5 95.5 101.0 108.7Tier 1 capital n/a n/a n/a 68.0 75.7 82.0 84.0 85.2 87.2 92.8 104.2RWAs n/a n/a n/a n/a 737.9 740.1 743.1 797.0 794.4 864.6 939.3NPLs n/a n/a n/a n/a n/a n/a n/a n/a n/a 55.8 57.1

NII/Avge loans 7.5% 7.6% 7.6% 7.0% 7.3% 6.9% 6.4% 6.8% 6.5% 5.9% 5.6%Cost/income ratio 63% 63% 62% 65% 66% 61% 68% 68% 67% 69% 61%Provision/Avge loans 1.41% 1.45% 1.40% 1.13% 1.39% 1.72% 1.84% 1.76% 1.57% 1.67% 1.15%NPLs/Total loans n/a n/a n/a n/a n/a n/a n/a n/a n/a 8.8% 8.4%Loan/deposit 90% 98% 100% 104% 112% 108% 109% 112% 110% 129% 138%Equity/assets 5.3% 5.4% 5.8% 6.5% 6.8% 6.7% 7.0% 6.8% 6.5% 6.5% 6.8%Tier 1 ratio n/a n/a n/a n/a 10.3% 11.1% 11.3% 10.7% 11.0% 10.7% 11.1%ROE 9.7% 9.1% 10.9% 8.5% 5.4% 4.4% 1.3% 1.2% 3.4% 1.4% 7.2%ROA 0.52% 0.49% 0.61% 0.52% 0.36% 0.30% 0.09% 0.09% 0.23% 0.09% 0.48%PPP / Avg. Assets 1.49% 1.51% 1.61% 1.42% 1.33% 1.57% 1.07% 1.14% 1.18% 1.04% 1.38%GDP absolute (Local Ccy, bn n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aGovernment debt/GDP n/a n/a 95% 98% 105% 116% 121% 121% 121% 118% 115%Private debt/GDP n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLLPs / Total Loans 1.4% 1.3% 1.3% 1.1% 1.3% 1.7% 1.8% 1.7% 1.6% 1.6% 1.1%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 36,759 42,209 48,963 48,449 48,299 47,872 50,302 50,185 54,585 59,008 48,718Total revenues 58,208 66,017 69,734 67,496 69,420 69,806 74,034 83,869 85,402 78,682 76,478Expenses (35,340) (36,977) (38,611) (40,413) (42,354) (42,324) (44,329) (47,877) (49,567) (50,689) (48,340)Pre-provision prof it 22,867 29,040 31,123 27,083 27,066 27,482 29,705 35,992 35,835 27,993 28,139Provisions (6,462) (6,388) (12,473) (11,167) (11,235) (6,806) (7,069) (5,792) (3,778) (16,139) (17,083)Profit before tax 16,406 22,652 18,649 15,916 15,831 20,677 22,636 30,200 32,057 11,854 11,056Tax (6,483) (8,585) (7,416) (6,022) (4,737) (5,631) (6,184) (7,792) (8,413) (1,340) (3,628)Profit after tax 9,923 14,067 11,233 9,894 11,094 15,046 16,452 22,408 23,644 10,514 7,428

Customer loans 750.7 857.4 924.1 977.0 1,037.6 1,095.1 1,191.8 1,320.4 1,450.3 1,522.5 1,492.0Total assets 1,717.0 1,895.8 1,956.5 2,141.2 2,267.3 2,433.6 2,676.5 2,988.8 3,317.2 3,424.1 3,440.5Customer deposits 503.4 506.9 534.5 565.0 593.2 625.9 674.6 709.2 726.2 na naEquity 118.3 128.8 133.5 146.0 156.9 163.3 191.7 203.0 266.5 269.1 285.0Tier 1 capital 115.0 124.1 131.2 138.3 149.3 159.7 186.4 190.6 224.7 145.2 162.1RWAs 1,047.2 1,181.5 1,226.8 1,234.7 1,279.1 1,336.5 1,516.6 1,662.0 1,835.2 1,912.3 1,826.7NPLs 54.1 47.6 42.4 43.3 48.2 51.4 43.6 45.2 45.1 39.9 56.0

NII/Avge loans 4.9% 5.2% 5.5% 5.1% 4.8% 4.5% 4.4% 4.0% 3.9% 3.9% 3.3%Cost/income ratio 61% 56% 55% 60% 61% 61% 60% 57% 58% 64% 63%Provision/Avge loans 0.86% 0.79% 1.40% 1.17% 1.12% 0.64% 0.62% 0.46% 0.27% 1.06% 1.14%NPLs/Total loans 7.2% 5.6% 4.6% 4.4% 4.6% 4.7% 3.7% 3.4% 3.1% 2.6% 3.8%Loan/deposit 149% 169% 173% 173% 175% 175% 177% 186% 200% na naEquity/assets 6.9% 6.8% 6.8% 6.8% 6.9% 6.7% 7.2% 6.8% 8.0% 7.9% 8.3%Tier 1 ratio 11.0% 10.5% 10.7% 11.2% 11.7% 12.0% 12.3% 11.5% 12.2% 7.6% 8.9%ROE 8.4% 11.4% 8.6% 7.1% 7.3% 9.4% 9.3% 11.4% 10.1% 3.9% 2.7%ROA 0.58% 0.78% 0.58% 0.48% 0.50% 0.64% 0.64% 0.79% 0.75% 0.31% 0.22%PPP / Avg. Assets 1.33% 1.61% 1.62% 1.32% 1.23% 1.17% 1.16% 1.27% 1.14% 0.83% 0.82%GDP absolute (Local Ccy, bn 1,125.9 1,191.8 1,248.6 1,295.2 1,336.2 1,390.0 1,429.9 1,486.8 1,546.0 1,567.6 1,520.3Government debt/GDP 114% 109% 109% 106% 104% 104% 106% 106% 103% 106% 116%Private debt/GDP 71% 76% 78% 80% 84% 85% 89% 95% 101% 105% 111%LLPs / Total Loans 0.9% 0.7% 1.3% 1.1% 1.1% 0.6% 0.6% 0.4% 0.3% 1.1% 1.1%


117

Netherlands Macroeconomic data






Fig. 275: Lending mix – outstanding amounts by customer

Source: DNB, Nomura research

Fig. 276: Lending mix – outstanding amounts by maturity




Fig. 278: Deposit mix


-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Q1

2003

Q3

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0.0%

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5.0%

6.0%

Q1 2

00

3

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00

3

Q1 2

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4

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4

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5

Q3 2

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5

Q1 2

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6

Q3 2

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6

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7

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7

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8

Q3 2

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8

Q1 2

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9

Q3 2

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9

Q1 2

01

0

Q3 2

01

0

43%

9%

52%48%

0%

10%

20%

30%

40%

50%

60%

H/ hold -mortgages


25%

7%

69%

0%

10%

20%

30%

40%

50%

60%

70%

80%


63%

14%

23%

0%

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60%

70%


68%

7%

20%

5%0%

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40%

50%

60%

70%

80%

H/ hold -sight

H/ hold -term

Corporate -sight

Corporate -term

Repos


118

Volume drivers – Netherlands

Fig. 279: loan growth – outstanding amounts y/y change




Fig. 281: Household loan volumes y/y change


Fig. 282: Deposit volumes y/y change




Fig. 284: Sight deposits as % of Loan


-10%

-5%

0%

5%

10%

15%

20%

25%Ju

l-04

Oct

-04

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05

Apr-0

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-60%

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Jul-0

4O

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-15%

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4

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8

Sep-0

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9

Jul-0

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May-

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Oct

-10


-20%-15%

-10%-5%0%

5%10%15%

20%25%30%

Jul-0

4O

ct-0

4Ja

n-0

5A

pr-0

5Ju

l-05

Oct

-05

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Apr-0

6Ju

l-06

Oct

-06

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Apr-0

7Ju

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Oct

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Apr-0

8Ju

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9Ju

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0Ju

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140%

145%

150%

155%

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165%

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175%

180%

Jul-0

4O

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Apr-0

6Ju

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0Ju

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35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

Jul-0

4O

ct-0

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-05

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Apr-0

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l-07

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l-09

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Apr-1

0Ju

l-10

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-10


119

Spread drivers – Netherlands

Fig. 285: Household mortgage spread, outstanding amountbp over 10y bond








Fig. 289: Deposit spread vs 3m Euribor




-40-20

020406080

100120140160180

Jul-0

4O

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Outstanding N ew

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Jul-1

0O

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< 1 yr vs 3m Euribor 1-5 yrs vs 12m Euribor> 10 yrs vs 10yr bond

-50

0

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Jul-0

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Outstanding N ew

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0

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-400

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Sight Term

150

170

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290

Jul-0

4O

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Total


120

Fig. 291: Banking system data – Netherlands

Source: OECD

Netherlands 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income 7,503 7,837 8,308 9,226 10,081 10,810 11,859 12,268 13,744 16,023 18,993Total revenues 10,171 11,143 11,601 13,115 14,225 16,314 16,631 18,386 21,451 26,518 31,776Expenses (6,869) (7,286) (7,992) (8,853) (9,563) (10,859) (11,152) (12,372) (14,433) (18,353) (22,511)Pre-provision profit 3,302 3,857 3,609 4,261 4,662 5,455 5,479 6,013 7,018 8,165 9,265Provisions (635) (700) (1,094) (1,510) (1,490) (1,418) (1,101) (1,076) (1,316) (1,661) (2,586)Profit before tax 2,667 3,157 2,515 2,751 3,172 4,037 4,378 4,938 5,702 6,504 6,679Tax (712) (768) (655) (756) (901) (1,213) (1,279) (1,488) (1,521) (1,787) (1,916)Profit after tax 1,954 2,389 1,860 1,995 2,271 2,823 3,098 3,450 4,181 4,717 4,764

Customer loans 169.8 227.5 311.0 331.8 358.4 388.6 378.3 412.9 475.1 582.7 684.6Total assets 313.1 402.7 509.4 529.9 569.7 618.9 627.1 682.1 781.4 984.7 1,211.2Customer deposits 155.6 191.8 231.7 242.9 263.6 280.8 335.9 356.0 390.8 465.9 556.7Equity 13.2 17.6 20.4 21.6 22.9 25.4 28.9 31.2 35.7 41.6 46.5Tier 1 capital n/a n/a 21.2 22.2 23.4 25.8 27.5 30.0 33.9 44.2 49.5RWAs n/a n/a 260.3 277.7 297.6 309.5 334.9 367.1 445.6 525.9 548.8NPLs n/a n/a n/a n/a n/a 14.0 15.5 16.0 16.1 16.3 16.9

NII/Avge loans 4.4% 3.9% 3.1% 2.9% 2.9% 2.9% 3.1% 3.1% 3.1% 3.0% 3.0%Cost/income ratio 68% 65% 69% 68% 67% 67% 67% 67% 67% 69% 71%Provision/Avge loans 0.37% 0.35% 0.41% 0.47% 0.43% 0.38% 0.29% 0.27% 0.30% 0.31% 0.41%NPLs/Total loans n/a n/a n/a n/a n/a 3.61% 4.09% 3.87% 3.39% 2.79% 2.47%Loan/deposit 109% 119% 134% 137% 136% 138% 113% 116% 122% 125% 123%Equity/assets 4.2% 4.4% 4.0% 4.1% 4.0% 4.1% 4.6% 4.6% 4.6% 4.2% 3.8%Tier 1 ratio n/a n/a 8.1% 8.0% 7.9% 8.3% 8.2% 8.2% 7.6% 8.4% 9.0%ROE 14.8% 15.5% 9.8% 9.5% 10.2% 11.7% 11.4% 11.5% 12.5% 12.2% 10.8%ROA 0.62% 0.67% 0.41% 0.38% 0.41% 0.48% 0.50% 0.53% 0.57% 0.53% 0.43%PPP / Avg. Assets 1.05% 1.08% 0.79% 0.82% 0.85% 0.92% 0.88% 0.92% 0.96% 0.92% 0.84%GDP absolute n.a. n.a. 244 257 268 276 290 305 320 342 363Government debt/GDP n.a. n.a. 77% 77% 77% 78% 76% 76% 74% 68% 66%Private debt/GDP NA NA NA NA NA NA NA NA NA NA NALLPs / Total Loans 0.4% 0.3% 0.4% 0.5% 0.4% 0.4% 0.3% 0.3% 0.3% 0.3% 0.4%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 21,961 23,387 24,902 26,695 27,992 29,272 30,085 31,220 30,013 31,108 n/aTotal revenues 38,253 44,243 45,667 43,936 46,163 50,085 55,602 62,290 65,590 33,906 n/aExpenses (25,965) (31,130) (31,787) (31,086) (30,945) (33,748) (37,021) (42,042) (41,021) (32,968) n/aPre-provision profit 12,288 13,113 13,880 12,850 15,218 16,338 18,581 20,248 24,569 938 n/aProvisions (2,148) (1,831) (3,552) (5,112) (3,627) (2,078) (1,462) (2,636) (3,033) (14,310) n/aProfit before tax 10,140 11,282 10,328 7,738 11,591 14,260 17,119 17,612 21,536 (13,372) n/aTax (2,769) (3,127) (2,302) (1,936) (3,137) (3,531) (3,586) (3,489) (1,851) 2,456 n/aProfit after tax 7,371 8,155 8,026 5,802 8,454 10,729 13,532 14,123 19,685 (10,916) n/a

Customer loans 824.3 965.0 1,033.5 1,068.2 1,109.0 1,207.1 1,579.1 1,593.0 1,693.1 1,766.2 n/aTotal assets 1,372.3 1,621.2 1,761.9 1,783.9 1,928.9 2,198.4 2,813.8 3,055.4 3,318.2 2,994.7 n/aCustomer deposits 629.8 730.7 817.3 837.4 907.4 1,004.1 1,182.9 1,253.5 1,307.5 1,331.8 n/aEquity 56.7 65.1 67.7 66.5 71.6 76.9 75.1 101.0 131.5 97.5 n/aTier 1 capital 57.9 65.0 68.4 69.8 74.5 84.0 97.4 98.1 127.9 109.3 n/aRWAs 653.0 722.8 833.5 800.4 830.0 898.6 1,037.4 1,111.6 1,507.4 1,088.9 n/aNPLs 16.6 16.1 17.1 18.7 19.0 18.9 21.1 20.7 19.6 22.1 n/a

NII/Avge loans 2.7% 2.6% 2.5% 2.5% 2.6% 2.5% 2.2% 2.0% 1.8% 1.8% n/aCost/income ratio 68% 70% 70% 71% 67% 67% 67% 67% 63% 97% n/aProvision/Avge loans 0.26% 0.20% 0.36% 0.49% 0.33% 0.18% 0.10% 0.17% 0.18% 0.83% n/aNPLs/Total loans 2.01% 1.67% 1.66% 1.75% 1.71% 1.56% 1.33% 1.30% 1.16% 1.25% 1.60%Loan/deposit 131% 132% 126% 128% 122% 120% 133% 127% 129% 133% n/aEquity/assets 4.1% 4.0% 3.8% 3.7% 3.7% 3.5% 2.7% 3.3% 4.0% 3.3% n/aTier 1 ratio 8.9% 9.0% 8.2% 8.7% 9.0% 9.3% 9.4% 8.8% 8.5% 10.0% n/aROE 13.0% 13.4% 12.1% 8.6% 12.2% 14.5% 17.8% 16.0% 16.9% (9.5%) n/aROA 0.54% 0.54% 0.47% 0.33% 0.46% 0.52% 0.54% 0.48% 0.62% (0.35%) n/aPPP / Avg. Assets 0.90% 0.88% 0.82% 0.72% 0.82% 0.79% 0.74% 0.69% 0.77% 0.03% n/aGDP absolute 238.6 252.2 259.4 268.3 275.7 290.8 302.8 318.2 335.1 345.0 339.2Government debt/GDP 114% 108% 107% 104% 99% 94% 92% 88% 84% 90% 96%Private debt/GDP 48% 56% 61% 66% 71% 78% 85% 90% 108% 115% 123%LLPs / Total Loans 0.3% 0.2% 0.3% 0.5% 0.3% 0.2% 0.1% 0.2% 0.2% 0.8% n/a


121

Norway Macroeconomic data






Fig. 294: Lending mix – outstanding volumes by customer

Source: Norges Bank, Nomura research

Fig. 295: Lending mix – outstanding volume by maturity


Fig. 297: Deposit spreads 3m Euribor

-3.0%

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H/ hold -mortgages





122

Volume drivers – Norway

Fig. 298: Lending growth, outstanding amounts


Fig. 299: Lending growth, new business volumes





Fig. 302: Loan deposit ratio


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123

Spread drivers

Fig. 304: Household mortgage spreads, new by duration vs 10y bond










200210220230240250260270280290300

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124

Fig. 310: Banking system data – Norway

Source: OECD

Norway 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income 18,633 21,136 20,215 19,182 20,733 22,847 23,593 22,464 22,928 23,024 25,402Total revenues 24,953 28,591 25,370 22,786 26,288 31,623 29,115 30,405 30,998 31,974 33,305Expenses (17,438) (17,265) (17,933) (20,051) (15,859) (15,942) (19,149) (21,047) (21,541) (22,043) (22,659)Pre-provision profit 7,515 11,326 7,437 2,735 10,429 15,681 9,966 9,358 9,457 9,931 10,646Provisions (8,882) (9,876) (11,655) (21,632) (11,670) (8,822) (1,124) 792 1,016 153 (1,092)Profit before tax (1,367) 1,450 (4,218) (18,897) (1,241) 6,859 8,842 10,150 10,473 10,084 9,554Tax (279) (570) (273) (200) (404) (917) (1,168) (1,263) (1,598) (1,670) (1,647)Profit after tax (1,646) 880 (4,491) (19,097) (1,645) 5,942 7,674 8,885 8,875 8,414 7,907

Customer loans 427.5 459.6 474.8 451.6 468.6 461.8 540.2 553.0 632.2 750.0 839.7Total assets 583.0 604.7 614.6 578.1 610.7 586.4 695.2 708.4 843.2 952.1 1,056.5Customer deposits 327.5 355.1 372.3 376.1 409.7 402.3 506.3 497.0 534.6 541.4 575.0Equity 22.8 26.2 23.8 16.8 21.5 33.9 45.1 51.7 58.6 65.2 73.0Tier 1 capital n/a n/a n/a 21.7 28.9 39.8 44.8 51.6 58.4 64.4 71.3RWAs n/a n/a n/a 471.0 475.6 469.7 472.0 509.1 592.3 692.3 762.3NPLs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

NII/Avge loans 4.4% 4.8% 4.3% 4.1% 4.5% 4.9% 4.7% 4.1% 3.9% 3.3% 3.2%Cost/income ratio 70% 60% 71% 88% 60% 50% 66% 69% 69% 69% 68%Provision/Avge loans 2.08% 2.23% 2.49% 4.67% 2.54% 1.90% 0.22% (0.14%) (0.17%) (0.02%) 0.14%NPLs/Total loans n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLoan/deposit 131% 129% 128% 120% 114% 115% 107% 111% 118% 139% 146%Equity/assets 3.9% 4.3% 3.9% 2.9% 3.5% 5.8% 6.5% 7.3% 6.9% 6.8% 6.9%Tier 1 ratio n/a n/a n/a 4.6% 6.1% 8.5% 9.5% 10.1% 9.9% 9.3% 9.4%ROE (7.2%) 3.6% (18.0%) (94.2%) (8.6%) 21.4% 19.4% 18.4% 16.1% 13.6% 11.4%ROA (0.28%) 0.15% (0.74%) (3.20%) (0.28%) 0.99% 1.20% 1.27% 1.14% 0.94% 0.79%PPP / Avg. Assets 1.29% 1.91% 1.22% 0.46% 1.75% 2.62% 1.56% 1.33% 1.22% 1.11% 1.06%GDP absolute (Local Ccy, bn) 652.1 695.8 736.3 775.7 797.3 838.3 878.8 943.4 1,033.0 1,119.2 1,140.4Government debt/GDP 78% 82% 85% 89% 91% 93% 94% 96% 98% 100% 103%Private debt/GDP 151% 150% 144% 134% 130% 125% 119% 115% 113% 117% 128%LLPs / Total Loans 2.1% 2.1% 2.5% 4.8% 2.5% 1.9% 0.2% -0.1% -0.2% 0.0% 0.1%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 27,078 30,169 33,068 34,446 35,480 34,757 35,850 39,190 42,774 51,883 53,102Total revenues 36,519 42,305 44,628 43,516 47,439 48,518 52,432 56,156 61,749 64,103 77,012Expenses (21,647) (25,187) (27,117) (27,708) (28,343) (28,622) (28,264) (30,182) (32,364) (35,072) (37,687)Pre-provision profit 14,872 17,118 17,511 15,808 19,096 19,896 24,168 25,974 29,385 29,031 39,325Provisions (645) 587 (4,302) (7,693) (6,806) 693 1,963 2,898 1,667 (7,100) (10,368)Profit before tax 14,227 17,705 13,209 8,115 12,290 20,589 26,131 28,872 31,052 21,931 28,957Tax (2,680) (4,274) (2,232) (2,588) (2,802) (5,564) (6,489) (6,926) (7,930) (6,006) (8,798)Profit after tax 11,547 13,431 10,977 5,527 9,488 15,025 19,642 21,946 23,122 15,925 20,159

Customer loans 923.1 1,054.5 1,160.3 1,241.0 1,349.2 1,450.0 1,726.4 2,034.2 2,394.4 2,591.2 2,370.8Total assets 1,175.2 1,334.5 1,451.4 1,568.7 1,725.1 1,805.3 2,137.7 2,624.9 3,118.8 3,784.1 3,698.4Customer deposits 644.9 706.8 778.9 842.9 867.7 938.5 1,056.1 1,236.8 1,423.5 1,524.9 1,560.3Equity 83.9 93.7 98.1 98.6 103.7 110.6 122.1 140.2 160.7 175.2 195.0Tier 1 capital 76.2 85.0 93.7 95.6 101.5 109.9 127.7 141.9 48.3 171.3 188.5RWAs 818.1 931.1 967.2 1,005.3 1,045.1 1,125.2 1,337.9 1,637.7 394.9 1,993.2 1,802.2NPLs n/a n/a n/a n/a 21.6 14.5 12.1 12.2 12.0 20.7 26.1

NII/Avge loans 2.9% 3.1% 3.0% 2.9% 2.7% 2.5% 2.3% 2.1% 1.9% 2.1% 2.1%Cost/income ratio 59% 60% 61% 64% 60% 59% 54% 54% 52% 55% 49%Provision/Avge loans 0.07% (0.06%) 0.39% 0.64% 0.53% (0.05%) (0.12%) (0.15%) (0.08%) 0.28% 0.42%NPLs/Total loans n/a n/a n/a n/a 1.6% 1.0% 0.7% 0.6% 0.5% 0.8% 1.1%Loan/deposit 143% 149% 149% 147% 155% 155% 163% 164% 168% 170% 152%Equity/assets 7.1% 7.0% 6.8% 6.3% 6.0% 6.1% 5.7% 5.3% 5.2% 4.6% 5.3%Tier 1 ratio 9.3% 9.1% 9.7% 9.5% 9.7% 9.8% 9.5% 8.7% 12.2% 8.6% 10.5%ROE 13.8% 15.1% 11.4% 5.6% 9.4% 14.0% 16.9% 16.7% 15.4% 9.5% 10.9%ROA 0.98% 1.07% 0.79% 0.37% 0.58% 0.85% 1.00% 0.92% 0.81% 0.46% 0.54%PPP / Avg. Assets 1.27% 1.36% 1.26% 1.05% 1.16% 1.13% 1.23% 1.09% 1.02% 0.84% 1.05%GDP absolute (Local Ccy, bn) 1,240.4 1,481.2 1,536.9 1,532.3 1,593.8 1,743.0 1,945.7 2,159.6 2,271.6 2,543.2 2,408.3

Government debt/GDP 105% 108% 111% 112% 115% n/a n/a n/a n/a n/a n/aPrivate debt/GDP 131% 124% 131% 138% 139% 138% 143% 146% 161% 166% 174%

LLPs / Total Loans 0.1% -0.1% 0.4% 0.6% 0.5% 0.0% -0.1% -0.1% -0.1% 0.3% 0.4%


125

Portugal Macroeconomic data


Source: Datastream , Nomura research


Source: Datastream , Nomura research


Fig. 313: Lending mix – outstanding volumes by customer

Source: Banco de Portugal

Fig. 314: Lending mix – outstanding volumes by maturity






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H/ hold -sight

H/ hold -term

Corporate -sight

Corporate -term

Repos


126

Volume drivers – Portugal



Fig. 318: Loan growth - new business volumes y/y change










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127

Spread drivers – Portugal

Fig. 323: Household mortgage spread bp 10y bond


Fig. 324: Household mortgage spread, new by duration Bp


Fig. 325: Corporate lending spread Vs 12m Euribor


Fig. 326: corporate spreads, new business by size Vs 12m Euribor


Fig. 327: Deposit spread 3m Euribor




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128

Fig. 329: Banking system data – Portugal

Source: OECD

Portugal 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income 1,471 1,954 2,730 3,311 3,473 3,507 3,431 3,421 3,416 3,912 4,222Total revenues 1,792 2,334 3,365 4,084 4,414 4,616 4,404 4,499 4,959 5,737 6,478Expenses (914) (1,093) (1,401) (1,834) (2,360) (2,593) (2,720) (2,922) (3,188) (3,445) (3,590)Pre-provision profit 878 1,242 1,964 2,250 2,054 2,022 1,683 1,578 1,771 2,292 2,888Provisions (574) (755) (1,157) (1,182) (1,134) (941) (759) (602) (632) (747) (1,227)Profit before tax 303 486 807 1,068 919 1,081 925 976 1,139 1,544 1,661Tax (20) (116) (194) (279) (199) (228) (198) (199) (237) (313) (330)Profit after tax 283 370 613 789 721 853 726 777 902 1,231 1,331

Customer loans 18.1 19.2 23.8 29.7 40.2 44.2 46.1 51.7 58.3 69.8 89.6Total assets 43.6 51.4 58.7 74.6 95.7 123.3 139.6 155.0 161.2 189.6 212.6Customer deposits 32.2 37.6 40.1 48.7 60.4 67.6 73.7 81.3 87.2 95.9 101.6Equity 4.2 5.3 6.4 8.6 10.4 11.7 12.6 12.8 14.8 17.0 22.0Tier 1 capital n/a n/a n/a n/a n/a 7.1 8.1 8.5 9.3 10.2 13.5RWAs n/a n/a n/a n/a n/a 55.3 60.6 68.5 80.6 97.2 111.7NPLs n/a n/a n/a n/a n/a n/a n/a n/a n/a 3.3 3.2

NII/Avge loans 8.1% 10.5% 12.7% 12.4% 9.9% 8.3% 7.6% 7.0% 6.2% 6.1% 5.3%Cost/income ratio 51% 47% 42% 45% 53% 56% 62% 65% 64% 60% 55%Provision/Avge loans 3.17% 4.05% 5.38% 4.42% 3.24% 2.23% 1.68% 1.23% 1.15% 1.17% 1.54%NPLs/Total loans n/a n/a n/a n/a n/a n/a n/a n/a n/a 4.77% 3.6%Loan/deposit 56% 51% 59% 61% 67% 65% 63% 64% 67% 73% 88%Equity/assets 9.6% 10.3% 11.0% 11.6% 10.9% 9.5% 9.0% 8.2% 9.2% 9.0% 10.3%Tier 1 ratio n/a n/a n/a n/a n/a 12.9% 13.3% 12.4% 11.5% 10.5% 12.1%ROE 6.8% 7.8% 10.4% 10.5% 7.6% 7.7% 6.0% 6.1% 6.6% 7.8% 6.8%ROA 0.65% 0.78% 1.11% 1.18% 0.85% 0.78% 0.55% 0.53% 0.57% 0.70% 0.66%PPP / Avg. Assets 2.01% 2.62% 3.57% 3.38% 2.41% 1.85% 1.28% 1.07% 1.12% 1.31% 1.44%GDP absolute (Local ccy, b n/a n/a n/a n/a n/a n/a n/a 81 86 93 101Government debt/GDP n/a n/a 55% 58% 52% 56% 59% 61% 60% 56% 52%Private debt/GDP n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLLPs / Total Loans 3.2% 3.9% 4.9% 4.0% 2.8% 2.1% 1.6% 1.2% 1.1% 1.1% 1.4%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 4,595 4,698 5,106 5,073 4,944 4,951 5,121 5,887 6,555 7,264 n/aTotal revenues 6,624 7,031 7,275 7,108 8,084 7,711 9,491 10,441 11,276 11,483 n/aExpenses (3,876) (4,156) (4,153) (4,369) (4,359) (4,236) (5,666) (5,708) (6,171) (6,225) n/aPre-provision profit 2,748 2,874 3,122 2,739 3,725 3,475 3,825 4,733 5,105 5,258 n/aProvisions (951) (257) (998) (820) (1,615) (1,674) (1,772) (1,719) (1,823) (3,815) n/aProfit before tax 1,797 2,618 2,125 1,919 2,111 1,801 2,053 3,014 3,282 1,443 n/aTax (262) (306) (301) (233) (262) (146) (208) (536) (576) (540) n/aProfit after tax 1,535 2,312 1,823 1,686 1,849 1,655 1,845 2,478 2,706 903 n/a

Customer loans 115.5 140.2 157.5 168.4 170.9 176.2 199.9 218.3 248.4 278.9 n/aTotal assets 242.2 262.3 284.7 290.8 311.3 300.7 325.5 352.6 392.5 434.2 n/aCustomer deposits 113.5 122.5 129.6 129.0 132.5 136.9 144.8 150.2 160.1 177.8 n/aEquity 26.0 29.6 33.7 35.7 38.0 36.5 34.8 38.9 41.0 40.5 n/aTier 1 capital 14.1 15.9 17.0 17.7 18.9 17.6 17.2 19.0 18.0 18.3 n/aRWAs 135.7 165.3 179.4 187.3 198.2 203.4 217.7 231.9 273.2 257.5 n/aNPLs 3.0 3.0 3.4 3.7 3.9 3.5 3.7 3.6 4.0 6.1 n/a

NII/Avge loans 4.0% 3.7% 3.4% 3.1% 2.9% 2.9% 2.7% 2.8% 2.8% 2.8% n/aCost/income ratio 59% 59% 57% 61% 54% 55% 60% 55% 55% 54% n/aProvision/Avge loans 0.82% 0.20% 0.67% 0.50% 0.95% 0.96% 0.94% 0.82% 0.78% 1.45% n/aNPLs/Total loans 2.60% 2.14% 2.16% 2.21% 2.26% 1.96% 1.87% 1.65% 1.61% 2.17% 3.2%Loan/deposit 102% 114% 121% 131% 129% 129% 138% 145% 155% 157% n/aEquity/assets 10.7% 11.3% 11.8% 12.3% 12.2% 12.1% 10.7% 11.0% 10.4% 9.3% n/aTier 1 ratio 10.4% 9.6% 9.5% 9.5% 9.6% 8.6% 7.9% 8.2% 6.6% 7.1% n/aROE 5.9% 8.3% 5.8% 4.9% 5.0% 4.4% 5.2% 6.7% 6.8% 2.2% n/aROA 0.63% 0.92% 0.67% 0.59% 0.61% 0.54% 0.59% 0.73% 0.73% 0.22% n/aPPP / Avg. Assets 1.13% 1.14% 1.14% 0.95% 1.24% 1.14% 1.22% 1.40% 1.37% 1.27% n/aGDP absolute (Local ccy, b 114 122 129 135 139 144 149 155 163 166 164Government debt/GDP 51% 51% 53% 56% 57% 58% 64% 65% 64% 66% 77%Private debt/GDP 113% 131% 139% 141% 140% 141% 146% 157% 169% 179% 192%LLPs / Total Loans 0.8% 0.2% 0.6% 0.5% 0.9% 1.0% 0.9% 0.8% 0.7% 1.4% n/a


129

Spain Macroeconomic data







Source: Banco de Espana







-5.0%

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19%14%

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H/ hold -sight

H/ hold -term

Corporate -sight

Corporate -term

Repos


130

Volume drivers – Spain

Fig. 336: Lending growth – outstanding volumes y/y change


Fig. 337: Lending growth – new business volumes y/y change










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131

Spread drivers – Spain







Fig. 345: Corporate lending spread, new business by size vs 12m Euribor


Fig. 346: Deposit 3m Euribor , bp




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132

Fig. 348: Banking system data – Spain

Source: OECD

Spain 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income 13,120 14,498 15,850 17,651 18,093 18,819 19,709 19,149 19,319 19,781 20,224Total revenues 16,273 17,592 19,387 21,791 22,698 25,368 25,093 24,914 26,332 27,956 29,763Expenses (10,455) (10,720) (11,837) (12,750) (13,700) (15,133) (14,980) (15,751) (16,370) (17,177) (18,036)Pre-provision profit 5,818 6,872 7,550 9,040 8,998 10,235 10,113 9,164 9,962 10,778 11,728Provisions (2,182) (1,872) (2,283) (2,865) (3,599) (8,168) (5,078) (3,450) (3,622) (3,394) (3,689)Profit before tax 3,636 5,001 5,266 6,176 5,399 2,067 5,035 5,712 6,342 7,384 8,037Tax (948) (1,391) (1,438) (1,498) (1,315) (1,371) (1,184) (1,290) (1,361) (1,524) (1,574)Profit after tax 2,688 3,609 3,828 4,678 4,083 696 3,850 4,422 4,980 5,860 6,464

Customer loans 143.0 168.6 189.1 224.4 245.1 259.2 292.0 314.7 340.3 383.7 437.0Total assets 330.1 381.4 421.3 473.7 522.0 620.8 664.9 722.1 758.5 810.5 871.8Customer deposits 211.2 242.4 267.9 289.9 305.1 334.3 363.2 405.2 428.9 452.3 469.1Equity 27.2 30.9 35.1 44.9 47.7 51.3 57.3 57.8 59.9 63.2 67.3Tier 1 capital n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aRWAs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aNPLs 4.9 5.3 7.3 10.6 16.1 23.1 20.5 18.0 14.7 11.2 8.7

NII/Avge loans 9.2% 9.3% 8.9% 8.5% 7.7% 7.5% 7.2% 6.3% 5.9% 5.5% 4.9%Cost/income ratio 64% 61% 61% 59% 60% 60% 60% 63% 62% 61% 61%Provision/Avge loans 1.53% 1.20% 1.28% 1.39% 1.53% 3.24% 1.84% 1.14% 1.11% 0.94% 0.90%NPLs/Total loans 3.5% 3.1% 3.9% 4.7% 6.6% 8.9% 7.0% 5.7% 4.3% 2.9% 2.0%Loan/deposit 68% 70% 71% 77% 80% 78% 80% 78% 79% 85% 93%Equity/assets 8.3% 8.1% 8.3% 9.5% 9.1% 8.3% 8.6% 8.0% 7.9% 7.8% 7.7%Tier 1 ratio n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aROE 9.9% 12.4% 11.6% 11.7% 8.8% 1.4% 7.1% 7.7% 8.5% 9.5% 9.9%ROA 0.81% 1.01% 0.95% 1.05% 0.82% 0.12% 0.60% 0.64% 0.67% 0.75% 0.77%PPP / Avg. Assets 1.76% 1.93% 1.88% 2.02% 1.81% 1.79% 1.57% 1.32% 1.35% 1.37% 1.39%GDP absolute (Local Ccy, bn) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aGovernment debt/GDP n/a n/a 43% 43% 46% 57% 60% 63% 67% 66% 64%Private debt/GDP n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLLPs / Total Loans 1.5% 1.1% 1.2% 1.3% 1.5% 3.2% 1.7% 1.1% 1.1% 0.9% 0.8%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 20,417 22,183 27,798 27,869 28,856 30,243 30,598 36,380 43,391 47,192 ..Total revenues 29,898 34,534 38,426 39,909 41,415 43,892 45,811 57,814 67,676 70,113 ..Expenses (18,867) (21,072) (21,337) (22,612) (22,487) (25,401) (23,448) (25,092) (27,879) (30,210) n/aPre-provision profit 11,031 13,461 17,091 17,296 18,927 18,492 22,362 32,723 39,797 39,902 ..Provisions (2,235) (3,658) (7,332) (7,098) (7,199) (5,810) (6,278) (9,024) (10,567) (19,505) n/aProfit before tax 8,796 9,801 9,757 10,197 11,728 12,681 16,085 23,698 29,230 20,397 ..Tax (1,875) (1,517) (1,171) (947) (2,287) (1,947) (2,585) (4,575) (4,118) (1,903) n/aProfit after tax 6,919 8,285 8,588 9,250 9,441 10,734 13,500 19,124 25,112 18,495 ..

Customer loans 494.6 575.9 641.1 716.3 818.5 960.0 1,217.6 1,533.2 1,785.8 1,901.6 n/aTotal assets 961.0 1,076.8 1,194.9 1,288.2 1,447.3 1,655.3 2,067.5 2,420.5 2,836.8 3,096.3 n/aCustomer deposits 529.2 615.0 705.3 752.1 805.9 875.4 1,058.5 1,279.9 1,452.9 1,576.8 n/aEquity 71.2 89.0 98.9 109.1 116.9 141.4 159.4 174.2 199.2 232.8 n/aTier 1 capital 60.1 72.3 78.7 78.7 85.2 100.0 120.9 136.2 159.2 172.2 n/aRWAs 651.2 813.0 891.8 903.8 1,005.4 1,212.7 1,445.3 1,853.7 2,091.4 2,051.4 n/aNPLs 7.4 7.1 7.8 7.8 7.8 7.6 9.8 11.0 16.5 64.1 n/a

NII/Avge loans 4.1% 4.1% 4.6% 4.1% 3.8% 3.4% 2.8% 2.6% 2.6% 2.6% n/aCost/income ratio 63% 61% 56% 57% 54% 58% 51% 43% 41% 43% n/aProvision/Avge loans 0.45% 0.68% 1.20% 1.05% 0.94% 0.65% 0.58% 0.66% 0.64% 1.06% n/aNPLs/Total loans 1.5% 1.2% 1.2% 1.1% 1.0% 0.8% 0.8% 0.7% 0.9% 3.4% 5.1%Loan/deposit 93% 94% 91% 95% 102% 110% 115% 120% 123% 121% n/aEquity/assets 7.4% 8.3% 8.3% 8.5% 8.1% 8.5% 7.7% 7.2% 7.0% 7.5% n/aTier 1 ratio 9.2% 8.9% 8.8% 8.7% 8.5% 8.2% 8.4% 7.3% 7.6% 8.4% n/aROE 9.7% 10.3% 9.1% 8.9% 8.4% 8.3% 9.0% 11.5% 13.5% 8.6% n/aROA 0.72% 0.81% 0.76% 0.75% 0.69% 0.69% 0.73% 0.85% 0.96% 0.62% n/aPPP / Avg. Assets 1.15% 1.32% 1.50% 1.39% 1.38% 1.19% 1.20% 1.46% 1.51% 1.35% n/aGDP absolute (Local Ccy, bn) 580.0 630.0 681.0 729.0 783.0 841.0 909.0 984.0 1,053.0 1,095.0 1,051.0Government debt/GDP 62% 59% 56% 53% 49% 46% 43% 40% 36% 40% 53%Private debt/GDP 90% 98% 101% 106% 113% 125% 146% 167% 188% 201% 211%LLPs / Total Loans 0.5% 0.6% 1.1% 1.0% 0.9% 0.6% 0.5% 0.6% 0.6% 1.0% n/a


133

Sweden Macroeconomic data



Fig. 350: unemployment percent




Source: Riksbank, Nomura research





-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Q1

2003

Q3

2003

Q1

2004

Q3

2004

Q1

2005

Q3

2005

Q1

2006

Q3

2006

Q1

2007

Q3

2007

Q1

2008

Q3

2008

Q1

2009

Q3

2009

Q1

2010

Q3

2010

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Q1 2

00

3

Q3 2

00

3

Q1 2

00

4

Q3 2

00

4

Q1 2

00

5

Q3 2

00

5

Q1 2

00

6

Q3 2

00

6

Q1 2

00

7

Q3 2

00

7

Q1 2

00

8

Q3 2

00

8

Q1 2

00

9

Q3 2

00

9

Q1 2

01

0

Q3 2

01

0

47%

12%

59%

41%

0%

10%

20%

30%

40%

50%

60%

70%

H/ hold -mortgagesH/ hold -other H/ hold - total Corporate



63%

37%

0%

10%

20%

30%

40%

50%

60%

70%

Household Corporate


134

Volume drivers – Sweden











-10%

-5%

0%

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10%

15%

20%Ja

n-0

4

Aug

-04

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5

Oct

-05

May-

06

Dec-

06

Jul-0

7

Feb-0

8

Sep-0

8

Apr-0

9

Nov-

09

Jun-

10



-5%

0%

5%

10%

15%

20%

Jan-

04

Aug

-04

Mar-0

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Oct

-05

May-

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Jul-0

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-5%

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5%

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15%

20%

25%

Jan-

04

Apr-0

4Ju

l-04

Oct

-04

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Apr-0

5Ju

l-05

Oct

-05

Jan-

06

Apr-0

6Ju

l-06

Oct

-06

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07

Apr-0

7Ju

l-07

Oct

-07

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08

Apr-0

8Ju

l-08

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-08

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09

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l-09

Oct

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Jan-

10

Apr-1

0Ju

l-10

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-10


240%

245%

250%

255%

260%

265%

Jan-

04

Aug

-04

Mar-0

5

Oct

-05

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Dec-

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Jul-0

7

Feb-0

8

Sep-0

8

Apr-0

9

Nov-

09

Jun-

10



135

Spread drivers – Sweden





Fig. 363: Corporate lending spread vs 6m T bill



Fig. 365: Deposits 3m Stibor , bp




0

50

100

150

200

250

300

350

Outstanding N ew

-200

-150

-100

-50

0

50

100

150

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250

300

vs Repo vs 6m T-bill vs 10 yr bond

140

180

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Outstanding N ew


-50

-25

0

25

50

75

100

125

150

175

Household Corporate

180

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240

260

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Total


136

Fig. 367: Banking system data – Sweden

Source: OECD

Sweden 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income 27,234 30,266 36,427 38,416 39,302 41,863 39,358 42,420 39,185 35,954 33,789Total revenues 37,328 41,298 48,142 53,705 77,209 87,913 61,209 65,241 67,135 67,114 76,764Expenses (22,749) (25,586) (38,263) (63,139) (94,347) (93,638) (48,985) (46,721) (43,155) (52,057) (53,700)Pre-provision profit 14,579 15,712 9,879 (9,434) (17,138) (5,725) 12,224 18,520 23,979 15,057 23,065Provisions (9,132) (10,705) (7,196) 56,256 29,865 10,439 3,528 2,059 (483) (1,007) (2,024)Profit before tax 5,447 5,007 2,683 46,822 12,727 4,714 15,752 20,579 23,496 14,048 21,042Tax (3,052) (963) (808) (14,164) (1,101) (2,002) (2,649) (4,179) (5,450) (4,133) (3,809)Profit after tax 2,395 4,044 1,875 32,658 11,626 2,712 13,103 16,400 18,046 9,915 17,234

Customer loans 606.3 768.5 896.0 828.3 900.1 745.8 702.3 697.8 729.6 869.2 945.8Total assets 1,063.5 1,287.1 1,567.1 1,502.4 1,518.6 1,454.6 1,456.7 1,585.0 1,861.6 2,145.2 2,410.5Customer deposits 472.6 529.6 612.8 686.3 736.4 779.0 795.7 819.0 859.1 943.6 965.6Equity 74.1 83.7 91.4 82.2 75.1 82.8 82.4 97.3 97.8 122.2 128.8Tier 1 capital n/a n/a n/a 74.1 68.1 76.6 78.6 92.8 92.0 101.7 104.4RWAs n/a n/a n/a 806.9 907.0 786.5 716.0 687.0 793.7 876.1 957.6NPLs n/a n/a 9.9 21.4 63.3 35.4 21.7 16.6 12.0 8.5 10.3

NII/Avge loans 4.5% 4.4% 4.4% 4.5% 4.5% 5.1% 5.4% 6.1% 5.5% 4.5% 3.7%Cost/income ratio 61% 62% 79% 118% 122% 107% 80% 72% 64% 78% 70%Provision/Avge loans 1.51% 1.56% 0.86% (6.53%) (3.46%) (1.27%) (0.49%) (0.29%) 0.07% 0.13% 0.22%NPLs/Total loans n/a n/a 1.1% 2.6% 7.0% 4.7% 3.1% 2.4% 1.6% 1.0% 1.1%Loan/deposit 128% 145% 146% 121% 122% 96% 88% 85% 85% 92% 98%Equity/assets 7.0% 6.5% 5.8% 5.5% 4.9% 5.7% 5.7% 6.1% 5.3% 5.7% 5.3%Tier 1 ratio n/a n/a n/a 9.2% 7.5% 9.7% 11.0% 13.5% 11.6% 11.6% 10.9%ROE 3.2% 5.1% 2.1% 37.6% 14.8% 3.4% 15.9% 18.3% 18.5% 9.0% 13.7%ROA 0.23% 0.34% 0.13% 2.13% 0.77% 0.18% 0.90% 1.08% 1.05% 0.49% 0.76%PPP / Avg. Assets 1.37% 1.34% 0.69% (0.61%) (1.13%) (0.39%) 0.84% 1.22% 1.39% 0.75% 1.01%GDP absolute (Local ccy, bn 1,165.5 1,293.3 1,421.4 1,532.5 1,529.4 1,572.5 1,678.6 1,809.6 1,853.9 1,933.0 2,025.0Government debt/GDP n/a n/a 42% 50% 66% 71% 72% 72% 73% 71% 69%Private debt/GDP 50% 55% 56% 51% 51% 40% 36% 33% 34% 37% 38%LLPs / Total Loans 1.5% 1.4% 0.8% -6.8% -3.3% -1.4% -0.5% -0.3% 0.1% 0.1% 0.2%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 33,095 33,886 39,255 42,473 44,255 40,495 38,335 39,946 51,218 62,712 n/aTotal revenues 70,502 79,379 86,784 73,495 78,491 95,639 90,155 138,702 123,011 135,434 n/aExpenses (52,124) (53,474) (57,212) (52,472) (50,807) (55,641) (58,800) (64,342) (72,322) (78,958) n/aPre-provision profit 18,379 25,905 29,571 21,023 27,683 39,998 31,355 74,360 50,688 56,476 n/aProvisions 2,841 4,174 3,539 (3,791) (3,839) 26,745 9,955 4,232 1,539 (13,763) n/aProfit before tax 21,219 30,078 33,111 17,231 23,843 66,743 41,309 78,592 52,227 42,713 n/aTax (4,796) (7,154) (6,278) (5,008) (6,464) (13,833) (9,290) (8,530) (8,033) (4,571) n/aProfit after tax 16,423 22,924 26,834 12,223 17,378 52,911 32,020 70,062 44,194 38,142 n/a

Customer loans 995.0 1,181.4 1,330.8 1,383.2 1,347.0 1,406.6 1,683.5 1,969.2 2,655.0 2,969.9 n/aTotal assets 2,466.7 2,883.5 3,145.4 3,288.2 3,290.6 3,879.1 4,539.9 5,088.7 6,026.3 7,384.5 n/aCustomer deposits 1,004.6 1,138.0 1,217.4 1,278.9 1,344.6 1,393.2 1,596.9 1,814.3 2,009.4 2,189.4 n/aEquity 141.2 159.3 178.8 171.5 186.3 261.4 257.9 301.7 334.3 359.6 n/aTier 1 capital 128.2 141.0 152.9 148.5 161.0 232.6 236.5 282.3 305.3 366.9 n/aRWAs 1,003.0 1,109.3 1,209.5 1,201.3 1,172.8 1,225.4 1,445.1 1,654.0 2,320.4 2,904.9 n/aNPLs 6.0 7.1 7.4 5.2 3.9 2.8 1.8 2.4 3.0 n/a n/a

NII/Avge loans 3.3% 3.1% 3.1% 3.1% 3.2% 2.9% 2.5% 2.2% 2.2% 2.2% n/aCost/income ratio 74% 67% 66% 71% 65% 58% 65% 46% 59% 58% n/aProvision/Avge loans (0.29%) (0.38%) (0.28%) 0.28% 0.28% (1.94%) (0.64%) (0.23%) (0.07%) 0.49% n/aNPLs/Total loans 0.6% 0.6% 0.6% 0.4% 0.3% 0.2% 0.1% 0.1% 0.1% n/a n/aLoan/deposit 99% 104% 109% 108% 100% 101% 105% 109% 132% 136% n/aEquity/assets 5.7% 5.5% 5.7% 5.2% 5.7% 6.7% 5.7% 5.9% 5.5% 4.9% n/aTier 1 ratio 12.8% 12.7% 12.6% 12.4% 13.7% 19.0% 16.4% 17.1% 13.2% 12.6% n/aROE 11.6% 15.3% 15.9% 7.0% 9.7% 23.6% 12.3% 25.0% 13.9% 11.0% n/aROA 0.67% 0.86% 0.89% 0.38% 0.53% 1.48% 0.76% 1.46% 0.80% 0.57% n/aPPP / Avg. Assets 0.75% 0.97% 0.98% 0.65% 0.84% 1.12% 0.74% 1.54% 0.91% 0.84% n/aGDP absolute (Local ccy, bn 2,025.0 2,138.4 2,265.5 2,348.4 2,443.6 2,544.9 2,661.0 2,769.4 2,944.5 3,126.0 3,213.7Government debt/GDP 64% 53% 54% 52% 52% 51% 50% 45% 40% 38% 42%Private debt/GDP 40% 42% 98% 99% 100% 101% 108% 113% 121% 127% n/aLLPs / Total Loans -0.3% -0.4% -0.3% 0.3% 0.3% -1.9% -0.6% -0.2% -0.1% 0.5% n/a


137

Switzerland Macroeconomic data



Fig. 369: Unemployment (includes estimates values) percent



Source: SNB, Nomura research

Fig. 371: Loan growth - new business volumes






-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Q1

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Q3

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Q1

2004

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Q1

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Q3

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Q1

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Q3

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Q1

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Q3

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Q1

2010

Q3

2010

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

4.4%

4.6%

Q2 2

00

3

Q4 2

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3

Q2 2

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4

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-25%

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35%

45%

55%

Jan-

04

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6

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-07

Mar-0

8

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-20%-15%-10%

-5%0%5%

10%15%20%25%30%35%

Jan-

04

Jun-

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Nov-

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Apr-0

5

Sep-0

5

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6

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Dec-

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May-

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Oct

-07

Mar-0

8

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Apr-1

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51%

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51%49%

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40%

50%

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H/ hold -mortgages


88%

89%

90%

91%

92%

93%

94%

95%

96%

97%

98%

Jan-

04

Jun-

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-04

Apr

-05

Sep-

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Jul-0

6

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May

-07

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Jan-

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Apr

-10


138

Fig. 374: Banking system data – Switzerland

Source: OECD

Switzerland 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income 12,273 13,268 13,687 16,472 18,009 21,253 16,646 16,504 17,334 19,685 21,705Total revenues 23,174 26,986 26,737 33,174 35,310 41,495 36,174 38,115 42,952 49,765 53,747Expenses (13,386) (14,934) (15,939) (17,349) (18,408) (20,183) (20,124) (21,512) (28,407) (31,449) (28,200)Pre-provision profit 9,788 12,052 10,798 15,825 16,902 21,312 16,050 16,603 14,545 18,316 25,547Provisions (4,134) (5,104) (5,561) (10,127) (11,386) (13,270) (10,046) (9,641) (13,090) (13,663) (10,708)Profit before tax 5,654 6,948 5,237 5,698 5,516 8,042 6,004 6,962 1,455 4,653 14,839Tax (1,476) (1,535) (1,313) (1,382) (1,403) (1,752) (1,260) (1,219) (1,185) (1,022) (1,140)Profit after tax 4,178 5,413 3,924 4,316 4,113 6,290 4,744 5,743 270 3,631 13,699

Customer loans 540.8 621.4 670.3 711.4 726.7 738.6 744.5 730.5 784.4 827.8 895.0Total assets 915.8 978.3 1,032.8 1,073.3 1,112.2 1,177.8 1,182.8 1,300.7 1,467.5 1,746.8 2,017.6Customer deposits 467.2 494.0 510.7 534.7 557.1 588.3 613.8 627.2 713.9 793.0 886.8Equity 58.5 63.9 67.3 69.4 72.2 78.0 80.5 82.9 87.6 89.7 91.4Tier 1 capital n/a n/a n/a n/a n/a n/a n/a 87.7 86.3 83.3 90.2RWAs n/a n/a n/a n/a n/a n/a n/a 912.5 937.4 956.5 929.5NPLs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

NII/Avge loans 2.3% 2.3% 2.1% 2.4% 2.5% 2.9% 2.2% 2.2% 2.3% 2.4% 2.5%Cost/income ratio 58% 55% 60% 52% 52% 49% 56% 56% 66% 63% 52%Provision/Avge loans 0.76% 0.88% 0.86% 1.47% 1.58% 1.81% 1.35% 1.31% 1.73% 1.70% 1.24%NPLs/Total loans n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLoan/deposit 116% 126% 131% 133% 130% 126% 121% 116% 110% 104% 101%Equity/assets 6.4% 6.5% 6.5% 6.5% 6.5% 6.6% 6.8% 6.4% 6.0% 5.1% 4.5%Tier 1 ratio n/a n/a n/a n/a n/a n/a n/a 9.6% 9.2% 8.7% 9.7%ROE 7.1% 8.8% 6.0% 6.3% 5.8% 8.4% 6.0% 7.0% 0.3% 4.1% 15.1%ROA 0.46% 0.57% 0.39% 0.41% 0.38% 0.55% 0.40% 0.46% 0.02% 0.23% 0.73%PPP / Avg. Assets 1.07% 1.27% 1.07% 1.50% 1.55% 1.86% 1.36% 1.34% 1.05% 1.14% 1.36%GDP absolute (Local Ccy, bn) 282.7 305.1 330.9 345.6 352.9 360.7 369.6 373.6 376.7 384.0 395.3Government debt/GDP n/a n/a 14% 22% 40% 55% 58% 56% 57% 54% 48%Private debt/GDP 153% 161% 161% 160% 160% 159% 161% 164% 161% 163% 161%LLPs / Total Loans 0.8% 0.8% 0.8% 1.4% 1.6% 1.8% 1.3% 1.3% 1.7% 1.7% 1.2%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 22,719 25,264 25,078 26,716 26,209 23,984 27,953 25,478 26,849 25,937 n/aTotal revenues 60,535 67,749 60,909 58,670 54,814 58,161 72,525 72,329 73,076 48,328 n/aExpenses (33,299) (37,898) (36,555) (34,563) (33,255) (35,181) (38,935) (43,170) (46,040) (39,345) n/aPre-provision profit 27,236 29,851 24,354 24,107 21,559 22,980 33,590 29,160 27,035 8,983 n/aProvisions (8,150) (8,241) (10,894) (13,272) (6,507) (4,600) (4,713) (4,791) (15,152) (39,529) n/aProfit before tax 19,086 21,609 13,460 10,835 15,052 18,380 28,876 24,370 11,883 (30,546) n/aTax (2,844) (3,289) (2,169) (1,845) (2,563) (3,195) (4,606) (4,766) (2,986) (323) n/aProfit after tax 16,242 18,321 11,291 8,990 12,489 15,185 24,270 19,604 8,897 (30,869) n/a

11%Customer loans 915.3 921.6 943.2 939.3 922.7 987.0 1,101.7 1,288.6 1,391.4 1,271.1 n/aTotal assets 2,206.9 2,087.6 2,193.0 2,219.2 2,203.6 2,459.0 2,811.8 3,152.0 3,393.9 3,015.2 n/aCustomer deposits 974.9 871.7 923.9 918.0 959.8 1,031.0 1,197.4 1,361.1 1,498.1 1,371.4 n/aEquity 101.0 125.8 129.6 128.4 130.1 134.2 148.0 153.8 153.9 155.0 n/aTier 1 capital 97.2 123.4 122.0 122.5 125.3 129.1 142.5 153.3 n/a 146.3 n/aRWAs 954.8 972.8 1,020.7 971.2 1,026.0 1,109.0 1,304.0 1,368.1 n/a 1,172.6 n/aNPLs n/a n/a n/a n/a 12.0 8.9 5.5 3.9 4.2 6.4 n/a

NII/Avge loans 2.5% 2.8% 2.7% 2.8% 2.8% 2.5% 2.7% 2.1% 2.0% 1.9% n/aCost/income ratio 55% 56% 60% 59% 61% 60% 54% 60% 63% 81% n/aProvision/Avge loans 0.89% 0.90% 1.17% 1.41% 0.70% 0.48% 0.45% 0.40% 1.13% 2.97% n/aNPLs/Total loans n/a n/a n/a n/a 1.3% 0.9% 0.5% 0.3% 0.3% 0.5% n/aLoan/deposit 94% 106% 102% 102% 96% 96% 92% 95% 93% 93% n/aEquity/assets 4.6% 6.0% 5.9% 5.8% 5.9% 5.5% 5.3% 4.9% 4.5% 5.1% n/aTier 1 ratio 10.2% 12.7% 12.0% 12.6% 12.2% 11.6% 10.9% 11.2% n/a 12.5% n/aROE 16.1% 16.2% 8.8% 7.0% 9.7% 11.5% 17.2% 13.0% 5.8% (20.0%) n/aROA 0.74% 0.85% 0.53% 0.41% 0.56% 0.65% 0.92% 0.66% 0.27% (0.96%) n/aPPP / Avg. Assets 1.23% 1.39% 1.14% 1.09% 0.97% 0.99% 1.27% 0.98% 0.83% 0.28% n/aGDP absolute (Local Ccy, bn) 402.9 422.1 430.3 434.3 437.7 451.4 463.8 490.5 521.1 541.8 535.6Government debt/GDP 46% 44% 43% 42% 45% 44% 42% 40% 35% 34% 44%Private debt/GDP 168% 158% 154% 153% 157% 159% 164% 170% 174% 165% 175%LLPs / Total Loans 0.9% 0.9% 1.2% 1.4% 0.7% 0.5% 0.4% 0.4% 1.1% 3.1% n/a


139

UK Macroeconomic data

Fig. 375: GDP Growth percent y/y change


Fig. 376: Unemployment rate percent




Source: BoE, Nomura research





-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Q1

2003

Q3

2003

Q1

2004

Q3

2004

Q1

2005

Q3

2005

Q1

2006

Q3

2006

Q1

2007

Q3

2007

Q1

2008

Q3

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Q1

2009

Q3

2009

Q1

2010

Q3

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0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Q1

2003

Q3

2003

Q1

2004

Q3

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Q3

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Q1

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Q3

2006

Q1

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Q3

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Q1

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Q3

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Q1

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Q3

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Q1

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Q3

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63%

8%

71%

29%

0%

10%

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40%

50%

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70%

80%

H/ hold -mortgages

H/ hold -other

H/ hold - total Corporate



80%

20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Household Corporate


140

Volume drivers – UK











-10%

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Fig. 397: Banking system data – UK

Source: OECD

UK 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Net interest income 12,877 14,353 14,823 15,503 15,454 16,372 16,606 17,762 20,961 22,797 24,092Total revenues 20,177 23,001 24,196 25,958 26,721 29,485 29,033 31,001 34,455 36,998 39,701Expenses (13,159) (14,894) (15,961) (17,192) (17,621) (18,622) (18,599) (19,757) (21,394) (22,515) (22,433)Pre-provision profit 7,018 8,107 8,235 8,766 9,100 10,863 10,433 11,244 13,061 14,482 17,267Provisions (1,228) (7,269) (4,679) (6,668) (7,298) (5,814) (2,349) (2,304) (1,937) (1,970) (2,823)Profit before tax 5,790 838 3,556 2,098 1,802 5,049 8,085 8,940 11,125 12,512 14,445Tax (2,113) (550) (1,630) (871) (997) (1,847) (2,709) (3,037) (3,893) (3,892) (4,247)Profit after tax 3,677 288 1,926 1,227 805 3,202 5,376 5,903 7,232 8,620 10,198

Customer loans 249.6 304.8 323.3 335.1 347.2 344.2 341.7 381.5 597.3 641.7 663.1Total assets 397.6 468.2 497.9 521.2 617.6 658.2 688.3 768.0 1,050.9 1,176.5 1,229.4Customer deposits 342.7 407.9 435.6 454.2 446.9 462.0 346.0 382.4 584.4 635.7 657.8Equity 23.8 23.8 24.6 24.4 24.5 26.2 29.5 31.3 42.6 47.7 51.0Tier 1 capital n/a n/a n/a n/a n/a n/a n/a n/a n/a 48.7 51.0RWAs n/a n/a n/a n/a n/a n/a n/a n/a n/a 593.6 622.1NPLs n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

NII/Avge loans 5.2% 5.2% 4.7% 4.7% 4.5% 4.7% 4.8% 4.9% 4.3% 3.7% 3.7%Cost/income ratio 65% 65% 66% 66% 66% 63% 64% 64% 62% 61% 57%Provision/Avge loans 0.49% 2.62% 1.49% 2.03% 2.14% 1.68% 0.68% 0.64% 0.40% 0.32% 0.43%NPLs/Total loans n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aLoan/deposit 73% 75% 74% 74% 78% 75% 99% 100% 102% 101% 101%Equity/assets 6.0% 5.1% 4.9% 4.7% 4.0% 4.0% 4.3% 4.1% 4.1% 4.1% 4.2%Tier 1 ratio n/a n/a n/a n/a n/a n/a n/a n/a n/a 8.2% 8.2%ROE 15.4% 1.2% 8.0% 5.0% 3.3% 12.6% 19.3% 19.4% 19.6% 19.1% 20.7%ROA 0.92% 0.07% 0.40% 0.24% 0.14% 0.50% 0.80% 0.81% 0.80% 0.77% 0.85%PPP / Avg. Assets 1.77% 1.87% 1.70% 1.72% 1.60% 1.70% 1.55% 1.54% 1.44% 1.30% 1.44%GDP absolute 478.5 525.3 570.3 598.7 622.1 654.2 693.0 733.3 781.7 830.1 879.1Government debt/GDP n/a n/a 33% 34% 39% 45% 48% 51% 51% 50% 47%Private debt/GDP 98% 111% 113% 111% 110% 108% 108% 113% 117% 117% 116%LLPs / Total Loans 0.5% 2.4% 1.4% 2.0% 2.1% 1.7% 0.7% 0.6% 0.3% 0.3% 0.4%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Net interest income 25,864 27,063 29,618 32,207 33,578 34,494 37,715 40,001 42,407 54,674 n/aTotal revenues 43,643 47,640 52,956 58,435 65,439 79,358 88,854 96,897 90,807 84,819 n/aExpenses (23,812) (26,459) (31,310) (36,593) (38,712) (50,761) (54,129) (55,977) (49,881) (92,765) n/aPre-provision profit 19,832 21,180 21,646 21,842 26,727 28,597 34,725 40,920 40,925 (7,947) n/aProvisions (2,862) (3,123) (4,189) (5,719) (5,959) (5,318) (7,360) (8,977) (9,259) (33,711) n/aProfit before tax 16,970 18,058 17,457 16,123 20,769 23,279 27,365 31,943 31,666 (41,658) n/aTax (5,145) (5,498) (5,471) (5,427) (5,986) (6,533) (7,991) (9,203) (7,182) 4,162 n/aProfit after tax 11,824 12,560 11,986 10,696 14,782 16,747 19,374 22,740 24,484 (37,496) n/a

Customer loans 721.0 871.2 929.6 1,068.0 1,173.9 1,452.6 1,624.4 2,005.4 2,531.0 2,738.1 n/aTotal assets 1,314.5 1,630.7 1,779.2 1,945.5 2,098.7 2,870.4 3,327.8 3,651.1 5,150.7 6,972.1 n/aCustomer deposits 674.8 808.8 857.8 920.9 991.5 1,156.6 1,256.1 1,533.9 1,950.2 2,080.9 n/aEquity 56.3 84.0 91.6 91.3 96.6 102.6 108.4 135.2 274.5 293.8 n/aTier 1 capital 55.5 60.8 67.1 76.2 83.1 91.5 103.2 131.9 128.2 165.8 n/aRWAs 661.4 796.9 878.8 969.4 1,042.9 1,188.5 1,353.1 1,701.1 1,614.6 1,850.1 n/aNPLs n/a n/a n/a n/a 29.3 27.6 16.2 18.0 22.8 43.8 n/a

NII/Avge loans 3.6% 3.4% 3.3% 3.2% 3.0% 2.6% 2.5% 2.2% 1.9% 2.1% n/aCost/income ratio 55% 56% 59% 63% 59% 64% 61% 58% 55% 109% n/aProvision/Avge loans 0.40% 0.39% 0.47% 0.57% 0.53% 0.40% 0.48% 0.49% 0.41% 1.28% n/aNPLs/Total loans n/a n/a n/a n/a 2.5% 1.9% 1.0% 0.9% 0.9% 1.6% n/aLoan/deposit 107% 108% 108% 116% 118% 126% 129% 131% 130% 132% n/aEquity/assets 4.3% 5.2% 5.1% 4.7% 4.6% 3.6% 3.3% 3.7% 5.3% 4.2% n/aTier 1 ratio 8.4% 7.6% 7.6% 7.9% 8.0% 7.7% 7.6% 7.8% 7.9% 9.0% n/aROE 21.0% 17.9% 13.6% 11.7% 15.7% 16.8% 18.4% 18.7% 12.0% (13.2%) n/aROA 0.90% 0.85% 0.70% 0.57% 0.73% 0.67% 0.63% 0.65% 0.56% (0.62%) n/aPPP / Avg. Assets 1.51% 1.44% 1.27% 1.17% 1.32% 1.15% 1.12% 1.17% 0.93% (0.13%) n/aGDP absolute 928.7 976.5 1,021.8 1,075.6 1,139.8 1,203.0 1,254.1 1,325.8 1,398.9 1,448.4 1,395.9Government debt/GDP 44% 41% 38% 37% 39% 41% 42% 44% 45% 52% 68%Private debt/GDP 118% 129% 134% 138% 143% 151% 160% 171% 188% 210% 213%LLPs / Total Loans 0.4% 0.4% 0.5% 0.5% 0.5% 0.4% 0.5% 0.4% 0.4% 1.2% n/a


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145

Appendix A-1

Analyst Certification

We, Jon Peace, Robert Law, Domenico Santoro, Maciej Szczesny, Daragh Quinn, Raul Sinha, Chintan Joshi, Prathmesh Dave, Tathagat Kumar and Moreno Fasolo, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or 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.

Industry Specialists are senior employees within Nomura who are responsible for the sales and trading effort in the sector for which they have coverage.

Issuer Specific Regulatory Disclosures

Mentioned companies

All share prices mentioned are closing prices unless otherwise stated

Ticker Price Price date Stock rating Sector rating

CS Group CSGN VX CHF 39.00 December 14, 2010 Neutral Bullish

Crédit Agricole ACA FP EUR 10.66 December 14, 2010 Neutral Bullish

Swedbank SWEDA SS SEK 94.30 December 14, 2010 Buy Bullish

BNP Paribas BNP FP EUR 51.85 December 14, 2010 Buy Bullish

Bank Pekao PEO PW PLN 185.70 December 14, 2010 Buy Bullish

Barclays BARC LN 272p December 14, 2010 Neutral Bullish

Deutsche Bank DBK GR EUR 40.16 December 14, 2010 Reduce Bullish

DnB NOR DNBNOR NO NOK 78.50 December 14, 2010 Buy Bullish

Garanti Bank GARAN TI TRY 8.26 December 14, 2010 Reduce Bullish

HSBC Holdings plc HSBA LN 672p December 14, 2010 Neutral Bullish

Intesa Sanpaolo ISP IM EUR 2.21 December 14, 2010 Neutral Bullish

Lloyds Banking Group LLOY LN 69p December 14, 2010 Buy Bullish

PKO BP PKO PW PLN 44.65 December 14, 2010 Buy Bullish

Royal Bank Of Scotland RBS LN 41p December 14, 2010 Reduce Bullish

Santander SAN SM EUR 8.37 December 14, 2010 Neutral Bullish

Sberbank SBER RU USD 86.00 March 25, 2010 Buy Bullish

Société Générale GLE FP EUR 42.10 December 14, 2010 Buy Bullish

Standard Chartered plc STAN LN 1750p December 14, 2010 Reduce Bullish

UBS UBSN VX CHF 16.14 December 14, 2010 Buy Bullish

Unicredit Group UCG IM EUR 1.70 December 14, 2010 Neutral Bullish

Rating and target price changes

Ticker Old stock rating New stock rating Old target price New target price

CS Group CSGN VX Buy Neutral CHF 56.00 CHF 48.00

Crédit Agricole ACA FP Reduce Neutral EUR 13.00 EUR 13.00

Swedbank SWEDA SS Buy Buy SEK 114.00 SEK 117.00


146

Important Disclosures Conflict-of-interest disclosures Important disclosures may be accessed through the following website: http://www.nomura.com/research/pages/disclosures/disclosures.aspx . If you have difficulty with this site or you do not have a password, please contact your Nomura Securities International, Inc. salesperson (1-877-865-5752) or email [email protected] for assistance. Online availability of research and additional conflict-of-interest disclosures Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have 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, a portion of which is generated by Investment Banking activities. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research report in which their names appear. Distribution of ratings (Global) Nomura Global Equity Research has 1878 companies under coverage. 48% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this rating are investment banking clients of the Nomura Group*. 37% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 54% of companies with this rating are investment banking clients of the Nomura Group*. 13% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 16% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 September 2010. *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 price target 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. 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 'RS-Rating 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 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://www.nomura.com/research);Global Emerging 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 Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Price Target - Current Price) / Current Price, subject to limited management discretion. In most cases, the Price Target 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 'RS' or 'Rating 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 the subject 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 entity identified 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 positive


147

absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, 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 six months. 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 next six 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 additional research 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: Bloomberg World 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't think 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 the intrinsic 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 this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied 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 positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Price targets Price targets, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any price target 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 the company's earnings differ from estimates.


148

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Nomura European Banks Outlook 2011

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Transcript of Nomura European Banks Outlook 2011