European Banks

BERENBERG EQUITY RESEARCH
European Banks
Capital: misunderstood,
misused and misplaced

Nick Anderson
Analyst
+44 20 3207 7838
nick.anderson@berenberg.com

James Chappell
Analyst
+44 20 3207 7844
james.chappell@berenberg.com

12 June 2013

Banking

Eleni Papoula Michelle Wilson Andrew Lowe
Analyst Analyst Analyst
+44 20 3465 2741 +44 20 3465 2663 +44 20 3465 2743
eleni.papoula@berenberg.com michelle.wilson@berenberg.com andrew.lowe @berenberg.com

Eoin Mullany Iro Papadopoulou
Analyst Specialist Sales
+44 20 3207 7854 +44 20 3207 7924
eoin.mullany@berenberg.com iro.papadopoulou@berenberg.com

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For our disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz WpHG) and
our disclaimer please see the end of this document.

Please note that the use of this research report is subject to the conditions and restrictions set forth in the disclosures and
the disclaimer at the end of this document.

European Banks
Banking
3
Table of contents

Capital: misunderstood, misused and misplaced 5
Introduction 6
Executive summary 9
Key charts 13
What is bank capital for? 15
Determining bank capital (with added history) 17
What is wrong with Basel 28
Why equity-to-assets is better 34
What is the right number? 39
Calculating an adjusted equity-to-assets ratio 45
Capital shortfall how large and how to make good? 50
Feedback on our views 67
Valuation 69
Company section 73
Barclays: Capital and leverage still lag peers 74
BBVA: Spain tarnishes Mexican jewel 76
BNP Paribas: Complex conglomeracy increases risks 78
Commerzbank: Capital problems unresolved 80
Crdit Agricole: Leverage and revenue the key issues 82
Credit Suisse: Model still needs to change 84
Danske Bank: Time for a revolution 86
Deutsche Bank: Capital welcome, but still too much leverage 88
DNB: Tough love from the regulator 90
EFG: Building capital 92
Erste: High credit risk 94
Handelsbanken: 20:20 vision 96
HSBC: A management that gets it 98
European Banks
Banking
4

ING: Positive actions point to brighter future 100
Intesa: Preferred Italian bank 102
Julius Baer: High execution risk 104
KBC: Good earnings momentum, but tight capital 106
Lloyds: Priced for a correction; revenues key concern 108
Nordea: Something rotten in the state of Denmark 110
Raiffeisen: New CEO does not alleviate concerns 112
RBS: Financially repressed 114
Santander: It is all about the capital 116
SEB: Focus on growth creates uncertainty 118
Socit Gnrale: Too much leverage and too little revenue 120
Standard Chartered: To change or not to change 122
Swedbank: Class act: the right strategy at the right time 124
UBS: Lots of leverage, but adjusting the model 126
Unicredit: High risk, low return 128
Vontobel: Strongest capital: a blessing and a curse 130
Appendices 132
Contacts: Investment Banking 136
Disclosures in respect of section 34b of the German Securities Trading Act
(Wertpapierhandelsgesetz WpHG) 136

European Banks
Banking
5
Capital: misunderstood, misused and misplaced

The capital debate is back. Left unresolved in the hope that it would
go away, European regulators and politicians have finally reached the
inevitable conclusion that procrastination is no strategy: bank balance
sheets are the problem and more capital is needed. The required ratios
are higher than the market is discounting and they will rise further as
the full consequences of bail-in resolution are understood. Very few
banks are properly capitalised; many fall short of even the bare
minimum. We remain conviction sellers of European banks and note
the very weak performance of Eurozone banks in absolute and
relative terms since OMT was announced. Its as good as it gets.
Why the note? There is a crisis in the regulation of bank capital. The
role of capital is misunderstood. But we note belated recognition by
the authorities that bank balance sheets are the issue. This begs the
question are we approaching Europes Takenaka (Japan) moment?
Basel ratios are not fit for purpose; equity-to-assets is better. The
faults with the Basel approach are legion it confuses what capital is
for, the modelling process is flawed, and it encourages the wrong sort
of behaviour. We prefer equity-to-assets for its simplicity, superior
predictive power, accountability, history, and above all its grounding
in uncertainty (which is what capital is for) rather than risk.
Ideal equity-to-assets ratio is 6-8%. History, the recent crisis and
academia all point to 6-8% as the right ratio for banks. The move to
bail-in resolution and likely adoption of depositor preference will push
ratios to the top of this range over time.
We propose two equity-to-asset ratios. No one ratio is perfect. Our
plain ratio tests a bank for idiosyncratic risk, providing an upper-
bound what-you-see estimate of its capital strength. Our pain
ratio tests a bank for a stressed bankruptcy where systemic risks are
high. As such, it provides a lower-bound what-you-get estimate of
capital.
European banks need at least 350bn to 400bn of new capital.
Our top-down and bottom-up work combined with OECD estimates
point to a material deficit, two-thirds of which is in the Eurozone. The
estimates ignore upside risk from adopting depositor preference.
Options to plug the deficit include contingent capital not CoCos
(which do not work, in our view), but forms of standby capital.
Several catalysts will crystallise the deficit. We note proposals
from regulators and supervisors, and growing political support: the
EC bail-in directive is expected this summer and ECB/EBA balance
sheet reviews are due late spring 2014. Urgency comes from excess
global liquidity, which suggests that the next (leg of the) crisis is not
far away.
The six best capitalised banks in Europe on our pain ratio are:
Standard Chartered (Sell), Swedbank (Buy), DNB (Buy), HSBC (Buy),
Handelsbanken (Hold) and ING (Buy).
The six weakest banks in Europe on our pain ratio are: Credit
Suisse, Crdit Agricole, Deutsche Bank, Santander, Socit Gnrale
and Commerzbank. All are Sell-rated; the first four have pain ratios
below 2%.
A flexor model, allowing the user to vary the definitions of the ratios and also to risk-
weight assets (if wanted!) for the 34 European and US banks in our analysis, is
available upon request.

Rating system: Relative
12 June 2013
Nick Anderson
Analyst
+44 20 3207 7838

James Chappell
Analyst
+44 20 3207 7844

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
iro.papadopoulou@berenberg.com
Barclays plc Sell
Closing price:GBp 309 PT: GBp 160
BBVA SA Sell
Closing price:EUR 6.94 PT: EUR 7.00
BNP Paribas SA Sell
Commerzbank AG Sell
Crdit Agricole SA Sell
Credit Suisse Group AG Sell
Closing price:CHF 27.12 PT: CHF 13.00
Danske Bank A/S Sell
Closing price:DKK 113.50 PT: DKK 82.00
Deutsche Bank AG Sell
(Old: EUR 20.00)
DNB ASA Buy
Closing price:NOK 92.00 PT: NOK 88.00
EFG International AG Buy
Erste Group Bank AG Sell
Svenska Handelsbanken AB Hold
Closing price:SEK 284.20 PT: SEK 250.00
HSBC Holdings plc Buy
ING Groep NV Buy
Intesa Sanpaolo SpA Sell
Julius Br Gruppe AG Hold
KBC Groupe SA Buy
Lloyds Banking Group plc Sell
Nordea Bank AB Buy
Raiffeisen Bank International Sell
RBS plc Sell
Banco Santander SA Sell
(Old: EUR 5.95)
SEB AB Hold
Socit Gnrale SA Sell
Standard Chartered plc Sell
Closing price:GBp 1,480 PT: GBp 1,450
Swedbank AB Buy
UBS AG Buy
Unicredit SpA Sell
Vontobel Holding AG Hold
Closing prices as at 10/06/2013, respective home exchange
European Banks
Banking
6
Summary

Figure 1. Berenberg coverage universe and estimate/price target changes

Note: Relative rating system
Source: Berenberg research
Share New Old New Old Change? FY1 FY2 FY3 FY1 FY2 FY3 FY1 FY2 FY3
Barclays Sell Sell GBp 160.00 160.00 N 0.0% 0.0% 0.0% 27.62 29.80 33.04 27.62 29.80 33.04
BBVA Sell Sell EUR 7.00 7.00 N 0.0% 0.0% 0.0% 0.99 0.83 0.96 0.99 0.83 0.96
BNP Paribas Sell Sell EUR 25.00 25.00 Y 0.3% -3.2% 0.6% 4.64 4.40 4.67 4.62 4.54 4.64
Commerzbank Sell Sell EUR 6.00 6.00 Y -37.3% -48.8% -48.8% 0.34 0.85 0.95 0.55 1.65 1.86
Credit Agricole Sell Sell EUR 3.00 3.00 Y 7.5% 3.2% 18.4% 0.99 0.95 1.05 0.93 0.92 0.89
Credit Suisse Sell Sell CHF 13.00 13.00 N 0.0% 0.0% 0.0% 1.74 1.92 2.16 1.74 1.92 2.16
Danske Bank Sell Sell DKK 82.00 82.00 N 0.0% 0.0% 0.0% 8.71 9.20 9.68 8.71 9.20 9.68
Deutsche Bank Sell Sell EUR 23.00 20.00 Y -4.1% -16.4% -15.1% 2.50 3.17 4.79 2.60 3.79 5.64
DNB Buy Buy NOK 88.00 88.00 N 0.0% 0.0% 0.0% 8.37 9.59 10.01 8.37 9.59 10.01
EFG International Buy Buy CHF 13.50 13.50 N 0.0% 0.0% 0.0% 0.88 1.19 1.44 0.88 1.19 1.44
Erste Group Bank Sell Sell EUR 13.00 13.00 N 0.0% 0.0% 0.0% 1.53 1.70 1.67 1.53 1.70 1.67
Handelsbanken Hold Hold SEK 250.00 250.00 Y 0.1% 0.0% 0.1% 21.38 22.37 23.40 21.36 22.36 23.39
HSBC Holdings Buy Buy GBp 790.00 790.00 Y 0.7% 0.7% 0.7% 96.49 106.36 116.88 95.80 105.60 116.05
ING Groep Buy Buy EUR 8.00 8.00 Y -11.6% -0.7% -0.7% 0.63 0.82 0.92 0.72 0.82 0.92
Intesa SanPaolo Sell Sell EUR 1.00 1.00 Y -0.4% 1.5% 0.6% 0.14 0.15 0.16 0.14 0.15 0.16
Julius Baer Hold Hold CHF 39.00 39.00 N 0.0% 0.0% 0.0% 1.52 1.90 2.32 1.52 1.90 2.32
KBC Groupe Buy Buy EUR 35.00 35.00 N 0.0% 0.0% 0.0% 3.34 3.51 3.61 3.34 3.51 3.61
Lloyds Banking Group Sell Sell GBp 24.00 24.00 Y 650.4% -13.2% -7.9% 3.59 2.81 3.63 0.48 3.24 3.94
Nordea Buy Buy SEK 81.00 81.00 Y 0.1% 0.0% 0.0% 0.81 0.87 0.91 0.81 0.87 0.91
Raiffeisen Bank International Sell Sell EUR 22.00 22.00 N 0.0% 0.0% 0.0% 3.05 3.61 3.56 3.05 3.61 3.56
RBS Sell Sell GBp 190.00 190.00 Y 39.3% -12.6% -6.1% 6.13 15.17 23.91 4.40 17.35 25.47
Santander Sell Sell EUR 3.90 5.95 N 0.0% 0.0% 0.0% 0.51 0.58 0.61 0.51 0.58 0.61
SEB Hold Hold SEK 61.00 61.00 N 0.0% 0.0% 0.0% 5.67 5.93 6.13 5.67 5.93 6.13
Societe Generale Sell Sell EUR 16.00 16.00 Y -24.4% -10.8% 0.1% 2.85 3.69 4.03 3.77 4.14 4.02
Standard Chartered Sell Sell GBp 1450.00 1450.00 N 0.0% 0.0% 0.0% 228.15 239.23 252.82 228.15 239.23 252.82
Swedbank Buy Buy SEK 165.00 165.00 N 0.0% 0.0% 0.0% 13.37 13.92 14.40 13.37 13.92 14.40
UBS Buy Buy CHF 17.00 17.00 Y 43.5% -4.6% -3.6% 0.69 0.90 1.03 0.48 0.94 1.07
Unicredit Sell Sell EUR 2.50 2.50 Y 0.8% 0.4% -0.1% 0.13 0.26 0.34 0.13 0.26 0.34
Vontobel Hold Hold CHF 25.00 25.00 N 0.0% 0.0% 0.0% 1.94 2.04 2.31 1.94 2.04 2.31
Rating Price Target EPS revision EPS OLD EPS
European Banks
Banking
7
Introduction
This is a crisis. A large crisis. In fact, its a 12-storey crisis with a magnificent entrance
hall, carpeting throughout, 24-hour portage, and an enormous sign on the roof, saying This
Is a Large Crisis. A large crisis requires a large plan. Get me two pencils and a pair of
underpants.
Captain Edmund Blackadder, Blackadder Goes Forth, BBC (1989)
There is a crisis in the regulation of bank capital.
Bank capital has become a very complex debate with a wide array of opinions from
academics, regulators, banks, the media and, of course, politicians. We do not claim
to have all the answers but we do believe that the debate over bank capital levels has
lost sight of the purpose of capital.
The sophisticated maths and modelling which underpins Basel II/III calculations
has blinded creditors, markets, regulators and bank managers to what capital really is
for. Anat Admati and Martin Hellwig coined the phrase the bankers new clothes
to describe some of the broader myths that have grown up in the media, among
politicians and even among the bankers themselves around what capital actually is.
In this note, we argue that capital is a simple concept. It is a form of bank financing
that covers unexpected losses or, in more popular parlance, unknown unknowns
or black swans. As with our previous reports, we unashamedly include an
examination of historical banking data and practices back to the 19
th
century. As we
have noted before, this a business with long asset lives and tail risks. It is also an
industry that is 700+ years old.
Those who cannot remember the past are condemned to repeat it.
Spanish/American philosopher George Santayana (1905)
In short, we believe that capital levels remain deficient, not least as they are
calibrated for idiosyncratic risks not systemic uncertainties. And Basel lies at the
heart of the problem. As Rogoff and Reinhart showed in 2008 (see Figure 2),
Periods of high international capital mobility have repeatedly produced
international banking crises, not only famously as they did in the 1990s, but
historically. Excess global liquidity can only compound the problem of highly
mobile capital. Banks remain unprepared for such outcomes.
We are also firmly of the view that fixing capital will not affect the asset side of the
balance sheet. However, until it is fixed, it will impede confidence and therefore the
broader economy (a point belatedly acknowledged by the ECB).
Finally, a note on terms:
Capital and equity. We are somewhat lazy and use these terms
interchangeably. Equity is a sub-set of bank capital but, as demonstrated by
the recent crisis, is the one proven form of loss-absorbing, permanent
capital.
Risk versus uncertainty. We address this in more detail later in the note,
but in short risk is measurable, uncertainty is not. Put another way, if
something is measurable then it is not uncertain.

European Banks
Banking
8
Figure 2. Recipe for banking crisis: just add capital mobility for extra spice
Capital mobility and incidence of banking crises all countries, 1800-2007

Source: Rogoff and Reinhart, This Time is Different (2008)

Figure 3. Note: Eurozone banks are struggling to perform even without capital concerns
Share price performance, Eurozone banks
a) Absolute b) Relative to market

Note: Indices used = Euro STOXX Banks and Euro STOXX
Source: Bloomberg

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European Banks
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9
Executive summary
We need to create full transparency about the risks on banks balance sheets. Such
transparency is a pre-condition for the banking sector to return to lasting health. And a
healthy banking sector is a pre-condition to revitalising bank lending.
Mario Draghi, President ECB (June 2013)
The single supervisor, scheduled to start operating under the European Central Bank in
the summer of 2014, will not only help prevent banks from accumulating excessive risk.
Standing above national authorities, it will increase the pressure on banks to repair their
balance sheets.
Wolfgang Schuble, Minister of Finance, Germany (May 2013)
I am not sure advanced economies in general will find it easy to get out of their current
predicament without creditors acknowledging further likely losses, a significant writing down
of asset values, and recapitalisation of their financial systems...Just as in 2008, there is a
deep reluctance to admit the extent of the undercapitalisation of the banking system in parts
of the industrialised world[The] pretence that debts could be repaid [was comparable to
the 1930s]. We must not repeat that mistake.
Mervyn King, Governor of the Bank of England (October 2012)
What is bank capital for?
Capital is for unexpected losses, while expected losses are expensed
through the income statement (in the form of loan loss provisions). Capital
is there to reassure the banks creditors.
Determining bank capital (with added history)
The amount of capital that a bank needs is a function of: 1) the amount of
risk embedded in the asset side of its balance sheet; and 2) how much of
that risk is transferred away from bank creditors through the financial
safety net.
100+ years of historical data show that the introduction of deposit
insurance lowered bank equity ratios, while the subsequent introduction of
depositor preference increased bank equity ratios.
Formal bank resolution regimes (typically bail-in and often including
depositor preference) lead bank creditors to demand more capital.
The correct valuation of the assets on a banks balance sheet is a
prerequisite of determining the amount of capital the bank needs. Asset
values on balance sheet may diverge from more conservative (true and
fair) values due to significant loan forbearance, inadequate loan loss
provisioning, and material Level 3 assets.
Finally, we note that risk within bank balance sheets, measured by the
volatility of asset values, has been stable for over 100 years. In other
words, increasing equity volatility is a function of falling capital ratios.
What is wrong with Basel
First, some advantages: it encourages risk-based pricing; it encourages
the transfer of risk to those more willing to hold it; and it has encouraged
banks to keep track of risks.
European Banks
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10
The flaws in Basel are many and material. In the note, we list at least 14
disadvantages.
The key critique is that Basel confuses what capital is for: it uses
expected losses to model capital, whereas capital is for unexpected losses
(which by definition cannot be modelled). Put another way, it allows banks
to hold capital only for idiosyncratic failure (not the issue) rather than for
systemic failure (more likely and more damaging).
The modelling process is flawed: the uncertainty of the data is lost in
presentation, risk weights are based on incomplete time series (a maximum
of 25 years), it is a black box/an insiders metric, models are inherently
weak, and it is subject to spreadsheet errors.
It encourages the wrong sort of behaviour by banks. Banks focus on
the number (it is rule-based regulation), not the underlying credit risk (it is
not incentive-based). It leads to RWA optimisation (the two most
dangerous words in finance, in our view) and encourages regulatory and tax
arbitrage. Nor does it penalise growth the most important driver of risk in
banking.
Central banks and regulators are losing faith, so why should anyone else
bother?
Why equity-to-assets is better
Digression risk versus uncertainty: this is core to what is wrong with
Basel. Basel sets capital levels according to measurable risks, but capital is
needed for unmeasurable uncertainties or unknown unknowns.
The systemic problem [in modern finance] lies in the lax control over
errors of judgment. This has arisen because of the mistaken belief that
diversificationcan substitute for the control of bad judgement through
due-diligence and oversight. Amar Bhide, Tufts University.
We see five advantages of the equity-to-assets ratio: better predictability
of future losses than Basel; simplicity (the theory of the second best better
to be roughly right than precisely wrong); accountability (you and I can audit
the number); historical support (150+ years of usage); and, most of all, it is
based on uncertainty not risk.
The key critique of equity-to-asset ratios is that they ignore the riskiness
of assets; thus banks are discouraged from holding liquid assets and
maximise risk per euro of assets held. We have no truck with this a well-
run bank will choose to do the right thing. The issue is incentives not
regulation.
What is the right number?
This is the difficult bit! Capital is very subjective and the ideal amount
varies over time as the confidence of creditors ebbs and flows.
An equity-to-assets ratio of 6-8% seems appropriate based on history, the
recent crisis and academic research.
Other key issues are: should all banks have the same number (no, but
impractical to implement); what is the floor ratio below which no bank can
go under any circumstance bar bankruptcy (all the capital is there to absorb
losses, but a floor above zero is desirable as a margin of error); and where
European Banks
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11
should the capital reside (it should be at subsidiary not group level, in our
view, a major issue for large/complex global banks; eg Santander)?
Should we target a number at all? No, but only as long as banks are free
to fail. Regulation by numbers is a recent phenomenon of the last 40 years
and its success is highly questionable.
Calculating an adjusted equity-to-assets ratio
Our two key principles are to include more not fewer assets, and only
capital of the highest quality.
Our preferred asset adjustments are to include derivatives on a gross
basis (not net), to leave repos in and to bring in off balance sheet liabilities.
Our preferred equity adjustments are to remove intangibles, minorities,
state aid and deferred tax assets. Ideally we would like to make adjustments
for Level 3 asset valuations and insurance assets. However, we are
prevented from doing so by limited disclosure.
We propose two key ratios for unweighted equity-to-assets. 1) The
plain ratio tests a bank for idiosyncratic risk and provides an upper-
bound what-you-see estimate of its capital ratio (assets as per balance
sheet but with derivatives netted; equity net of intangibles and minorities).
2) The pain ratio tests a banks capital strength for a stressed
bankruptcy where systemic risks are high. As such, it provides a lower-
bound what-you-get estimate. Compared to the plain ratio, assets
include gross derivatives and off balance sheet exposures, while equity also
excludes state aid and deferred tax assets.
Capital shortfall how large and how to make good?
European banks need at least 350bn to 400bn of new capital based
on a combination of methods and sources (top-down versus bottom-up,
Berenberg and OECD analyses). Approximately two-thirds of this deficit
resides in the Eurozone banks.
European commercial banks with the strongest plain and pain
equity-to-asset ratios: top six = Standard Chartered, Raiffeisen Bank,
DNB, Swedbank, KBC and HSBC. (If we focus on the pain ratio only,
the top six stays the same bar KBC and Raiffeisen which are replaced by
Handelsbanken and ING. Of the pain ratio top six, three banks have
ratios exceeding 4%: Standard Chartered, Swedbank and DNB.)
European commercial banks with the weakest plain and pain
equity-to-asset ratios: bottom six = Commerzbank, Santander, Socit
Gnrale, Deutsche Bank, Credit Suisse and Crdit Agricole. (If we focus on
the pain ratio only, the bottom six stays the same. Of the pain ratio
bottom six, four banks have ratios falling below 2%: Santander, Deutsche,
Crdit Agricole and Credit Suisse.)
A flexor model (spreadsheet-based), allowing the user to vary the definitions of the ratios
and also to risk-weight key asset classes for the 34 European and US banks in our
analysis is available on request.
European banks with equity-to-assets most sensitive to Level 3 asset
valuations: top six = DNB, Credit Suisse, Deutsche Bank, KBC, Barclays
and BNP Paribas.
European Banks
Banking
12
Shortfall can be made good with permanent capital or contingent
capital. Permanent options include fresh equity, retained earnings (but this
would take 10+ years for Eurozone banks) and asset optimisation.
Contingent options include Finaxioms standby capital and two from history
the UKs reserved liability and US/Canadian double liability. We note
that the use of reserved liability in the UK coincided with an
unprecedented 100 years of financial stability.
Key to making good the deficit is the time period allowed and the
incentives offered to banks.
Catalysts for change. Bank management and market pressure are unlikely
to have much effect. Key is the political/regulatory process. We note a
change in sentiment in the last month, with the ECB coming into line with
the Bank of Englands thinking that the problem is the quality of bank
balance sheets (the recognition of true asset values and appropriate recap
where necessary). The ECB/EBA have announced a balance sheet audit
process to conclude by mid-2014. Coinciding with the move to a formal
bail-in regime in Europe and the likely adoption of depositor preference, we
see capital deficits at European banks increasing in size and being
crystallised.
European Banks
Banking
13
Key charts
Figure 4. Basel does not work; bail-in requires more capital; ECB/EBA balance sheet review could
be Europes Takenaka moment
4.1 Capital ratios pre-crisis (average 2006-08) versus subsequent write-downs/losses (cumulative 2007-09)
a) Basel Tier 1 capital ratio b) Equity-to-assets ratio

4.2 Equity-to-assets ratio, US and Switzerland
a) US (tangible equity) b) Switzerland (equity)

4.3 Share price performance banks versus market, Japan (actual) versus Europe (2005 rebased to 1994)

Source: OECD, Berenberg research, Fed, SNB, DataStream

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All Banks Excluding big banks
Priority insurance
limits raised
Liquidity insurance
introduced
Priority insurance
introduced
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80
90
100
110
120
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Japan Europe
Takenaka plan announced
European Banks
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Figure 5. Usual suspects
Equity-to-asset ratio pain (systemic crisis) versus plain (idiosyncratic risk), selected banks, 31/12/12
(Left hand of bar = pain ratio; right hand of bar = plain ratio; ranked by mid-point)

Note 1: Pain ratio: equity = tangible equity less minorities, state aid, deferred tax assets and IAS19; assets = on B/S incl gross derivatives plus off B/S
Note 2: Plain ratio: equity = tangible equity less minorities; assets = on B/S with derivatives netted
Note 3: Commerzbank pain ratio increases from 2.2% to 2.5% post rights issue
Source: Berenberg research, company data

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
VONN
BAER
CITI
STAN
RBI
GS
DNB
SWEDA
KBC
HSBA
BAC
BBVA
RBS
MS
ISP
JPMC
EBS
UCG
SHBA
INGA
EFGN
LLOY
NDA
SEB
UBSN
DANSKE
BARC
BNP
CBK
SAN
GLE
DBK
CSGN
ACA
'Pain' ratios
'Plain' ratios
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15
What is bank capital for?
All right, but apart from the sanitation, medicine, education, wine, public order, irrigation,
roads, the fresh water system and public health, what have the Romans ever done for us?
Reg in Monty Pythons Life of Brian (1979)
1. Prelude: What have the Victorians ever done for us?
There isa possibility of being over cautious; but in banking that is one of the cardinal
virtues, compared with the opposite evil and mischief of being over credulous.
George Rae, Chairman North and South Wales Bank (1873-98)
Adventure is the life of commerce, but caution, I had almost said timidity, is the life of
banking.
Walter Bagehot, banker, editor of The Economist (1861-77)
Victorian bankers in Britain learned about the purpose and importance of their
balance sheet structure (capital and liquidity reserves) the hard way. As British
economic historian Forrest Capie observed, if a financial crisis is defined as a
disturbance that threatens the payments system, then from 1866 onwards there
was essentially 100 years of financial stability without any financial crises. (The
failure in 1878 of The City of Glasgow Bank was the result of fraud, and Barings
Bank which (first!) failed in 1890 was an investment bank; neither
threatened/involved the payments system, according to Capie.)
Rae and Bagehot were in senior positions in the banking industry from the mid-
1860s onwards and thus played a key role in the rebuilding of the financial system
after the last proper crisis in 1866 (when the major discount house Overend Gurney
failed). Both were closely involved in running banks and both wrote highly
influential books on banking. George Rae wrote The Country Banker in 1885 still in
print today, and viewed by many as the handbook for branch managers and senior
management on how to run a commercial bank. Walter Bagehots Lombard Street was
published in 1873 and is still seen as providing the blueprint for how central banks
should manage crises (both the Bank of England and Federal Reserve quoted freely
from it during 2009).
Capie draws three lessons from banking crises up to 1866 which paved the way for
the relative stability of British banking between 1866 and 1971 (our emphasis in
bold):
[First] the banks had to learn what shape their balance sheet should
have. They did and stuck to it. They did suffer abuse for the next 100 years for being too
conservative[Second] it needed to be clear in advance that liquidity would be available
[from the central bankAnd [third] regulation is not necessarily the solution;
it is just as likely to be the problem.
Forrest Capie, 200 Years of Financial Crises (2012)
2. So what is capital for?
Capital is for unexpected losses while expected losses are expensed through the
income statement (in the form of loan loss provisions). It is there to reassure the
banks creditors.
As Capie observes, banks learned the right shape of their balance sheet. Holding
adequate liquidity against depositor runs was one element; the other was adequate
capital to cover asset losses. Funding a banks balance sheet with the appropriate
European Banks
Banking
16
level of capital is key to the banks stability, durability and longevity. But such a
funding strategy requires the bank to exercise the caution that Rae and Bagehot
learned from the 19
th
century banking crises which came to an end in 1866.
The modern Basel accords say remarkably little on what capital is for. There is
no discussion on this in the 77 pages of Basel III: A global regulatory framework for more
resilient banks and banking systems. The document tells us that banks need high quality
capital and it defines quality capital in a technical sense (common shares and
retained earnings), but it fails to reflect on what it is for. In contrast, the US Federal
Reserve at least acknowledges its purpose:
Bank capital serves as an important cushion against unexpected losses. It creates a strong
incentive to manage a bank in a prudent manner, because the bank owners equity is at
risk in the event of a failure. (Loan loss reserves are generally intended to cover expected
losses.) Thus, bank capital plays a critical role in the safety and soundness of individual
banks and the banking system.
Federal Reserve Bank of San Francisco (2001)
We would also flag Capies third lesson of the Victorian banking crises: that
regulation can also be the problem. As we will discuss later, the best intents of
Basels original capital accord became subsumed by banks gaming and lobbying the
system.
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17
Determining bank capital (with added history)
My momma always said, Life was like a box of chocolates. You never know what youre
gonna get.
Forrest Gump, Forrest Gump (1994)
A well-run bank needs no capital. No amount of capital will rescue a badly-run bank.
Walter Bagehot, Lombard Street (1873)
1. Drivers of bank capital
The amount of capital that a bank needs for unexpected losses is a function of two
variables: the amount of risk embedded in the asset side of its balance sheet, and
how much of that risk is transferred away from bank creditors through the financial
safety net.
Asset risk. This primarily covers credit risk primarily losses/defaults on
loans as well as loss in market value on securities and other financial assets,
both on and off balance sheet. Key influences include the banks credit
standards, the mix of loan book, and the size/diversification of the
bank/loan book. Asset risk would include operational risk as well.
Financial safety net. This covers the extent to which risks are ultimately
borne by those other than the banks creditors. Such safety nets put in place
by the national authorities comprise several elements: deposit insurance
schemes, bank resolution procedures (bail-in versus bail-out), regulation/
supervision, and the central banks lender of last resort role. The safety net
is supposedly augmented by the market discipline exerted by the banks
creditors (depositors, bond holders and equity providers) in which so much
faith has been placed by Basel.
Balance sheet risk and financial safety nets are linked, however. The more the risks
are not borne by the banks creditors (ie the stronger the safety net), the more risks a
bank may choose to take on the asset side of its balance sheet (our emphasis in
bold).
Bank safety nets are difficult to design and administer, because they have the conflicting
objectives of protecting bank customers and reducing banks incentives to engage in risky
activities. In several countries including the US, the financial safety net, structured to reduce
the vulnerability of the financial system, appears to have had quite the opposite result
There is a real danger that regulatory forbearance policies and overly
generous depositor protection increase rather than reduce the excessive
bank risk taking which has been the root cause of many bank failures.
Demirg-Kunt, World Bank and Huizinga, Tilburg University
Balance sheet risk is bank-specific (ie idiosyncratic). The next two sections therefore
focus on the financial safety net (ie systemic issues). The rest of this section focuses
primarily on two elements of a financial safety net deposit insurance schemes and
bank resolution procedures and the degree to which they have influenced how
much capital funds a bank. Regulation, the third key element of a financial safety net,
is covered in the subsequent section in which we look at what is wrong with Basel.

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2a. Deposit insurance schemes
A deposit insurance system is like a nuclear power plant. If you build it without safety
precautions, you know its going to blow you off the face of the earth. And even if you do,
you cant be sure it wont.
L. William Seidman, Chairman, Federal Deposit
Insurance Corporation (FDIC), 1985-91
Depositor protection takes two forms deposit insurance schemes and priority
treatment in bankruptcy.
Deposit insurance schemes, also known as deposit guarantee schemes, exist to
reimburse depositors in the event of a bank failing. The first known scheme was set
up in New York in 1829; the first nationwide scheme is believed to be the USs
FDIC which was established in 1934. According to the International Association of
Deposit Insurers, there were only 12 explicit national schemes by 1974 but 111 by
2011, with a further 41 under consideration. (The UK scheme, for example, was
only introduced in 1982 while Australia only introduced one in 2008 (although it has
had depositor preference since 1945).)
In Figures 42 and 43 in the Appendix, we summarise the main European schemes in
terms of coverage and funding. Even if there is no explicit government backing, we
believe that all schemes have implicit state support for the simple reason that the
cost of true risk-based insurance would be prohibitively expensive. Many of the
existing schemes target a fund equal to only 1% of eligible deposits for this reason
(and the ECs proposal in the new deposit guarantee scheme directive is for only
1.5% of eligible deposits).
By offering explicit protection to the depositor, this transfer of risk means that the
bank itself needs less capital to reassure depositors. Historically, capital ratios were
expressed relative to deposits rather than total assets. George Rae, writing in 1875,
talked of the proportion which your entire capitalbears to your liabilities, while
the FDIC on establishment in 1934 determined that minimal safety required banks
to have net sound capital equal to at least 10 per cent of deposits. This thinking was
prevalent even into the 1960s with an official UK government report of 1967 noting
that: Banks do however tend to consider their [capital] reserve requirementsin
relation to total deposit obligations.
Allied to deposit insurance schemes is depositor preference, whereby depositors
(subject to certain definitions and possibly limits) are given legal priority over a
banks assets ahead of all other unsecured creditors in the event of a bankruptcy.
This is covered in more detail under Bank resolution regimes below.
The impact of schemes can be seen in the history of the US since 1896 (Figure 6),
Switzerland since 1906 (Figure 7) and the UK since 1880 (Figure 8).
US. Prior to the establishment of the FDIC, US banks typically had capital
equal to 15-20% of assets. Following the launch of the FDIC, it settled in
the range of 6-8% from 1945 onwards. The introduction of depositor
preference, however, pushed it from the bottom to the top of that range.
Switzerland. In Switzerland, before the introduction of priority insurance
(depositor preference up to a limit), also in 1934, bank capital was in the
range of 11-14% of assets. It then gradually declined and since the mid-
1950s has been in the range of 6-8% for the Swiss banks excluding the big
banks (ie UBS and Credit Suisse since 2005). More generous depositor
preference terms pushed the ratio back to the top of the range.
UK. The introduction of deposit insurance in the UK (legislated in 1982)
had a similar depressing effect. Having averaged 6% during the 1970s, the
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equity-to-assets ratio declined to c4% by the early 1990s. Note: there is no
depositor preference scheme in the UK.
Figure 6. Introduction of deposit insurance lowered capital levelswhile
depositor preference subsequently raised them
US banks key tangible equity ratios 1896 to date

Note 1: US Federal Deposit Insurance Corporation established 1934; depositor
preference (priority of all depositors in bankruptcy) introduced in 1993
Note 2: Equity defined as tangible common equity
Source: Berenberg research, Federal Reserve, FDIC

Figure 7. More generous depositor preference led to increased capital levels
Swiss banks (excluding big banks) key equity ratios 1906 to date

Note 1: Priority insurance introduced in 1934 (comparable to depositor preference; ie depositor has priority in
bankruptcy subject to limits) with limit of CHF5,000 per depositor; raised to CHF10,000 per depositor in 1971 and
to CHF30,000 in 1997. Liquidity insurance introduced 1984 in which member banks mutually guarantee to pay out
deposits that have priority
Note 2: All banks includes cantonal, regional/savings, Raiffeisen and other banks as well as the big banks. Since
2005, there are only two banks in the big bank group; ie UBS and Credit Suisse
Source: Berenberg research, SNB

0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1
8
9
5
1
9
0
5
1
9
1
5
1
9
2
5
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9
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9
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9
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1
9
6
5
1
9
7
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1
9
8
5
1
9
9
5
2
0
0
5
Equity as % Assets Equity as % Deposits
FDIC
established
introduced
0%
10%
20%
30%
40%
1
9
0
5
1
9
1
5
1
9
2
5
1
9
3
5
1
9
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1
9
6
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1
9
7
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1
9
8
5
1
9
9
5
2
0
0
5
Eqty as % Assets Eqty as % Deposits
Priority insurance
limits raised
Liquidity insurance
introduced
Priority insurance
introduced
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Figure 8. Introduction of deposit insurance lowered capital levels
UK banks equity ratios 1880 to date

Note UK banks had hidden reserves from 1860s to 1969
Source: Billings and Capie, Bank of England
In summary, we observe that historically:
the introduction of deposit insurance has lowered bank equity ratios;
the introduction of depositor preference has increased bank equity ratios.
As alluded to earlier, there is a concern backed by academic research that deposit
insurance schemes increase risk-taking by banks and therefore negate much of the
benefit. As Professor Amar Bhide wrote in 2009: The FDIC freed banks from the
challenge of earning the confidence of depositors. Writing in 1989 in the wake of
the US savings and loan crisis, two US academics (both professors at the University
of Baltimore) reviewed the history of deposit insurance schemes in the US since
their origins in New York in the early 19
th
century. They concluded that such
schemes had had adverse consequences, contributing to the savings and loan crisis.
In short, the history of deposit insurance has been disastrous. State-sponsored deposit
insurance funds have all exhibited the same moral hazard problem that is evident at the
federal level today. The consistent pattern of reckless banking is explained by the perverse
incentives of flat-rate deposit insurance.
Professors Thies and Gerlowski, University of Baltimore
Has anything changed? No. More recent academic research published by the World
Bank in 2000 reached similar conclusions, based on detailed empirical analysis of
schemes in 50 countries through the 1990s.
Deposit insurance is found to be valued by bank creditors, since it leads to lower required
interest rates. The increase in perceived safety for depositors, however, comes at a cost of a
reduction in market discipline.
Demirg-Kunt, World Bank and Huizinga, Tilburg University
The faith in deposit insurance schemes remains, however. Basels Liquidity Coverage
Ratio (LCR) cuts the deposit weighting from 5% to 3% if there is a pre-funded
deposit scheme. Thus banks are incentivised to lobby for and contribute to deposit
insurance schemes despite these concerns.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Published True
Deposit insurance
introduced
Hidden reserves
disclosed
Capital raising
controlled by
government
Corporation tax
introduced
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2b. Bank resolution regimes
Bank resolution regimes are the second key element of a financial safety net. How a
countrys legal code dictates the priority or ranking of creditors in the wind-up of a
bank (triggered when liabilities exceed the value of assets) can have a huge influence
on the risk-taking appetite of a bank and on how much capital it decides to hold.
There are many variations in the potential design of bank resolution regimes. The
one common element is that shareholders are typically wiped out. In most countries,
there is no regime, an issue which came to a head during the current crisis. The
following points/observations are not exhaustive:
No resolution regime (and the too big to fail TBTF issue). This
was the common situation in most countries leading up to the crisis. In this
scenario, the authorities have three choices: use existing generic corporate
bankruptcy legislation, try and sell the firm, or bail-out the failed firm with
taxpayer monies.
The market interpreted the Federal Reserves rescue of LTCM in 1998 as
the endorsement/confirmation of the unspoken TBTF doctrine as official
policy. The market has taken a similar view in most other countries. If a
bank is TBTF, it will always be rescued. If a bank is always rescued, it needs
less capital to reassure its creditors. We note the big regulatory/political
push, especially in the US, to remove this hidden subsidy.
Resolution regimes (and bail-in). If a formal resolution scheme exists,
then it will invariably take the form of a bail-in whereby existing creditors
(depositors, bondholders etc) are forced to take losses according to some
pre-agreed ranking of the creditors. If the creditors are at risk of being
bailed-in, then they will presumably want the bank to hold more capital to
reduce their potential losses.
The amount of extra capital a bank holds under a bail-in regime will depend
on how the creditors are ranked and what losses they may bear.
Depositor preference. Under depositor preference, depositors are given a
preferential claim over the firms assets. In practice, they will rank after
secured creditors (eg central bank, covered bonds). While we view depositor
preference as a sub-set of bail-in, lawyers point to two key differences.
Under bail-in, the regulator should retaina degree of discretion [over] the
extent and the quantum of the bail-in (source: Clifford Chance). And, if
depositor preference combined with insurance is intended to prevent retail
bank runs, then one aim of bail-inis to avoid wholesale runs (that is,
exercise of termination and close-out rights in trading positions) (ibid).
Without getting too involved in the arcana, we would argue in broad terms
that depositor preference requires banks to hold more capital as the
potential losses faced by the residual unsecured creditors can be material.
Indeed, the experience of the US and Switzerland (Figures 6 and 7) suggests
that this is so.
Note 1: depositor preference was introduced in the US in 1993 in the wake
of the savings and loans crisis in order to reduce the risk that the FDICs
deposit insurance scheme could be overwhelmed in the event of a large
bank failing. Were this to happen, the fear was that a taxpayer bail-out
would be required after all. European politicians appear to be arriving at the
same conclusion in the design of the single banking union.
Note 2: unrestricted depositor preference mainly exists in Argentina,
Australia, China, Malaysia, Russia and the US. In Chile, Hong Kong SAR
and Switzerland, depositor preference only applies to insured deposits.
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Treatment of insured versus uninsured depositors. Nuances in bail-in
regimes include whether insured depositors are given priority or rank
equally alongside other unsecured creditors but are then made good by the
insurance fund. Again, this affects the loss borne by other creditors and
therefore the amount of capital needed.
The treatment of uninsured depositors is also important. For an average
European bank, uninsured depositors typically account for 1% of deposit
accounts but c50% of deposits by value. Uninsured by definition, if they are
not given depositor preference (eg Switzerland) and rank pari passu with
other unsecured, senior creditors, then they will favour banks with stronger
capital bases. Note: some regimes give specific sub-sets of uninsured
depositors preference; eg government, charity etc.
Treatment of secured creditors. For the avoidance of doubt and to avoid
future legal disputes, a bail-in regime should also explicitly address the
treatment of secured creditors such as covered bonds. As with depositor
preference, the more creditors you exclude, the greater the losses to be
borne by the remaining creditors (ie the greater their subordination) and the
more likely they are to demand capital. This is the risk with asset
encumbrance and hence why some countries impose limits on the size of
covered bond issuance by a bank (eg Australia imposes an 8% cap on cover
pool assets relative to the banks domestic assets). This risk is likely to
increase as banks, encouraged by their regulators as well as experience,
choose to lend on a secured or collateralised basis and, conversely, are
forced to borrow on a secured or collateralised basis.
The European Commission (EC) has been working on a bail-in directive for some
time. The deadline for the European Union to put the EC directive into law is June
2013. It requires approval from both the European Parliament and national
governments.
As Gunnar Hoekmark, a member of the European Parliament leading work on bail-
in legislation, said in an interview in April: Secured liabilities such as covered bonds
shall not be subject to bail-in. [The bail-in plans exclude debt] backed by assets or
collateral. He went on: [The law must give] high legal certainty. This means
secured liabilities shall be secured and insured depositors shall be protected. Legal
clarity is crucial in order to make the bail-in tool applicable in crisis situations.
The devil, of course, is in the detail. But as the Dutch Finance Minister (and Chair of
the Eurogroup) Jeroen Dijsselbloem made clear in the wind-up of SNS Reaal in
January, bail-in is the future and non-depositor unsecured creditors will face losses.
He repeated his bail-in is the future views following the Cyprus bank rescue in
March.
3. Correct valuation of assets
Of course, determining the amount of capital a bank needs presupposes that the
assets on the balance sheet are correctly valued. There are three principal areas
where reported asset values may diverge from what we might euphemistically call
more conservative values.
Loan forbearance
Loan loss provisions
Level 3 asset values

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3a. Loan forbearance
Loan forbearance is when a bank chooses to restructure a loan (longer repayment
period, lower interest rate etc) rather than foreclose. As we have always argued, it is
an entirely rational act for any bank to follow. Assuming an economic recovery, the
borrower will be able to service/repay their loan again.
The key phrase is assuming an economic recovery. We have also argued that with
the end of a 60-year debt cycle, economic growth will be anaemic (why else have
interest rates been at the zero bound for so long?). With no economic recovery,
forbearance cannot be sustained and eventually a bank must recognise the true
quality of its loans.
Uncertain credit quality and therefore asset values is the number one issue facing
bank managements and bank creditors today, as Jeroen Dijsselbloem recognises.
The first thing that the ECB will have to do is to have an asset-quality review of the main
banks that will be under their supervision, and soon after that all the other banks in
Europe as well. The outcomewe dont know yet, but it might be worryingWhat I do
know is that if we do have the outcome, if its worrying, we need to have a way to deal with
it.
Jeroen Dijsselbloem, Dutch Finance Minister, Chair of Eurogroup (May 2013)
The difficulty of sustaining loan forbearance in the face of anaemic growth has come
to a head in Spain. The Bank of Spain has forced the Spanish banks to disclose how
many of their loans have been restructured. The total was recently disclosed for the
first time 208bn, or 14% of total lending to the private sector. By restructuring
loans, the banks had hoped to keep them out of the non-performing category and
thus reduce provisioning requirements. The Bank of Spain is now forcing the banks
to reclassify most of the restructured loans as sub-standard or non-performing and
therefore increase provisions.
There is a high dispersion across institutions [in the refinancing and rescheduling of loans]
...These differences may be indicative of different business and risk-management models,
though they may also be the result of differences in banks accounting practices.
Bank of Spain, Financial Stability Report (May 2013)
If asset values are overstated due to forbearance, then so are equity values and
banks capital levels. Given uncertain asset values due to forbearance and anaemic
economic growth, we believe that more capital is needed to reassure bank creditors,
all other things being equal.
3b. Loan loss provisions
Another major influence on bank capital is non-performing loans and the extent to
which they are appropriately covered through balance sheet provisions and
collateral. The original Basel I accord (1988) acknowledged the close relationship
between capital and provisions.
Under pressure to build capital ratios, we believe that some banks have allowed non-
performing loan (NPL) coverage ratios (including collateral) to fall. Commerzbank
(Figure 9) is a case in point where the ratio has dropped from 100%. Returning to
100% coverage would reduce Commerzbanks tangible equity by 7%.
With uncertainty over collateral values, prudency dictates that banks should aim for
100% coverage of NPLs (including loan loss provisions and collateral).
European Banks
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Figure 9. Coverage-lite
Commerzbank NPL coverage ratio loan loss provisions plus collateral

3c. Level 3 asset values
The third key influence on a true and fair view of banks asset values is Level 3
assets. Under IFRS, banks are required to hold all financial assets at fair value.
Loans are exempted and can be carried at amortised cost but all other financial
assets must be held at fair value.
Banks and their auditors have three options:
Level 1 = mark-to-market. There is an observable market price, be it a
listed bond or share. In this case, there would be little dispute over the
valuation of the asset. (There is, of course, a whole debate over whether
bank assets should be recorded at fair value or at historical cost. There is a
strong and compelling argument that IAS was a major contributor to the
lack of preparedness of European banks for the crisis.)
Level 2 = mark-to-model. Where there is no market price, a value can be
computed based on a known cash flow from the asset and an observable
discount rate. Examples include real estate and simple options. Again, the
valuation process is not controversial.
Level 3 = everything else. Known affectionately as mark-to-myth, with
no observable inputs let alone market price the bank and its auditors
have by definition a lot of leeway in what is a very subjective valuation
process. Examples include exotic options/derivatives, private equity
investments etc.
At the risk of being cynical, if a bank is short of capital then will it value its Level 3
assets very conservatively, reflecting the subjective nature of the process, or more
generously? There can be little doubt in the answer.
4. The trade-off depositor confidence versus shareholder returns
This debate has been a key issue in banking for at least 200 years. Can a bank
reassure its creditors and at the same time generate a sufficient RoE to attract equity
investment? During the current crisis, the debate has taken centre stage. Crudely,
regulators/politicians want creditor reassurance; bank managements want to be able
to attract equity capital.
For a given RoA, lower leverage (ie more equity relative to assets) implies a lower
RoE. However, the RoA is not a given. If lower leverage reassures creditors then
those creditors may accept a lower return, thus increasing the banks RoA.
60%
70%
80%
90%
100%
110%
Q1
08
Q2 Q3 Q4 Q1
09
Q2 Q3 Q4 Q1
10
Q2 Q3 Q4 Q1
11
Q2 Q3 Q4 Q1
12
Q2 Q3 Q4 Q1
13
European Banks
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We discuss how banks can manage the RoE impact of higher equity-to-asset ratios
later in the report.
5. Other determinants of bank capital
Economies of scale and risk diversification. The reduction in equity-to-
asset ratios through the late 19
th
century up to the 1930s has been attributed
by some commentators to consolidation of the banking industry in various
countries. The more diversified a banks credit portfolio, the lower the
maximum losses it is likely to face and therefore the less capital it needs.
It is likely that the maximum benefits of risk diversification were achieved
some time ago (see Figures 10 and 11). In the UK, for example, the five
largest banks held 31% of deposits in 1900 but by 1920 this had reached
80% (source: Saunders and Wilson (1999)). Consolidation was slower in the
US due to regulatory restrictions on the share of national deposits any one
bank could have (10%). We also note Handelsbankens views on
diversification. It regards the benefits as overstated and believes that
diversification is no substitute for proper credit appraisal.
Figure 10. To infinity and beyond
Banks average assets, (real terms, 2011 prices, linear scale)
a) US commercial banks ($m) b) Swiss banks (CHFm)

Source: FDIC, Federal Reserve, St Louis Fed, SNB, Swiss Federal Statistical Office

0
500
1,000
1,500
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2,500
1895 1915 1935 1955 1975 1995
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500
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1905 1925 1945 1965 1985 2005
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Figure 11. Go large
US commercial banks average assets, $m (real terms, 2011 prices, log scale)

Source: Berenberg research, St Louis Fed, FDIC, Federal Reserve
Recentness of a crisis. The proximity of a recent banking crisis is also
likely to lead banks to hold more capital rather than less, both voluntarily
and under pressure from regulators.
Tax treatment of different capital instruments. Historically, equity was
the only form of bail-in-able bank capital. Financial innovation spurred on
by changing tax legislation prompted the development of other loss-
absorbing instruments. In the UK, for example, corporation tax was
introduced with the Corporation Tax Act of 1965. By making debt interest
tax deductible and thus debt much cheaper, it would have encouraged the
use of debt in preference to equity within bank capital structures.
6. Has asset risk changed over time?
It would appear that the risk within bank balance sheets has been stable over very
long periods of time. In other words, changes in capital levels over time have been
influenced more by the development of the financial safety net, and to a lesser extent
consolidation (early on) and tax treatment of capital instruments (latterly).
This is the important finding made by US academics Anthony Saunders and Berry
Wilson. They calculated asset volatility data of US, Canadian and UK banks balance
sheets by deleveraging equity volatility data derived from share prices. Their analysis
is presented in Figure 12.
While noting certain implicit assumptions in the analysis, they draw two conclusions.
First, the graphs display virtually no secular trend in asset risk over the 100-year period
Second, the figures reveal secular increases in equity volatility over the study period
Given the relatively flat asset volatilities, these trends point to falling capital ratios as
driving increasing equity volatility levels.
A. Saunders and B. Wilson (1999)
1
10
100
1,000
10,000
1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005
FDIC
established
introduced
Glass-Steagall
Act 1933
Glass-Steagall
repealed
Federal Reserve
established;
Pujo Committee
Number of banks
peaks at 30,456
Post 1934 peak
in number of banks
at 14,469
European Banks
Banking
27
Figure 12. Price is what you pay, risk is what you get
Equity and asset volatility bank balance sheets
a) UK

b) Canada

c) US

Note: Equity volatility derived from published share price data; asset volatilities derived by deleveraging equity volatilities using
balance sheet data
Source: A. Saunders and B. Wilson; Impact of consolidation and safety-net support on Canadian, US and UK banks
(1999)
0.05
0.045
0.035
0.025
0.015
0.005
0.04
0.03
0.02
0.01
0.05
0.045
0.035
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EQUITY VOLATILITY
ASSET VOLATILITY
EQUITY VOLATILITY
ASSET VOLATILITY
0.05
0.045
0.035
0.025
0.015
0.005
0.04
0.03
0.02
0.01
0.05
0.045
0.035
0.015
0
0.04
0.03
0.02
0.01
0
EQUITY VOLATILITY
ASSET VOLATILITY
1
8
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3
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ASSET VOLATILITY
EQUITY VOLATILITY
0.14
0.1
0.08
0.04
0.02
0.12
0.06
0.6
0.5
0
0.3
0.2
0.1
0
EQUITY VOLATILITY
ASSET VOLATILITY
1
8
9
3
1
8
9
6
1
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9
9
1
9
0
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1
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1
9
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6
1
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4
1
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4
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1
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7
4
1
9
8
0
1
9
8
9
1
9
9
2
0.4
EQUITY VOLATILITY
ASSET VOLATILITY
European Banks
Banking
28
What is wrong with Basel
A long time ago in a galaxy far, far awayIt is a period of civil war. Rebel spaceships,
striking from a hidden base, have won their first victory against the evil Galactic Empire.
During the battle, Rebel spies managed to steal secret plans to the Empires ultimate
weapon, the DEATH STAR, an armoured space station with enough power to destroy an
entire planet. Pursued by the Empires sinister agents, Princess Leia races home aboard her
starship, custodian of the stolen plans that can save her people and restore freedom to the
galaxy....
Star Wars, Episode IV: A New Hope (1977) opening crawl
Remember, risk-weighting is a way of pretending assets are safer than they are.
Martin Wolf, chief economics commentator, Financial Times
As discussed in the prior section, the amount of capital that a bank needs to hold is a
function of the risk within its balance sheet and the financial safety net thrown
around it. We have already discussed the transfer of risk away from the creditors
through deposit insurance schemes and bank resolution regimes. Here we address
regulation, specifically the Basel accords covering capital.
1. What is good about Basel
To be honest, we struggle to think of anything that is right with the Basel capital
rules.
The overriding aim of the original Basel agreement was noble, being to secure
international convergence of supervisory regulations governing the capital adequacy
of international banks. Against this, the committee set itself two objectives: to
strengthen the soundness and stability of the international banking system and to
have a high degree of consistencyto diminish an existing source of competitive
inequality among international banks.
The problems then began. Basel I ran to 30 pages and there were no supplements.
Its simplicity sowed the seeds of its own demise, in our view. The original accord
noted that much also depends on the quality of a banks assets. Basel II thus
sought to develop significantly more risk-sensitive capital requirements that are
conceptually sound.
The main body of Basel II ran to 347 pages and the Committee proudly stated that it
believes that the revised Framework will promote the adoption of stronger risk
management practices by the banking industry, and views this as one of its major
benefits.
As the financial crisis unfolded within a year of Basel IIs final version being
published, the Committee was forced to make rapid changes. Sticking with the core
principle of Basel II of self-calculation of risk-weights, Basel III attempted to patch
things up by calling for more and better-quality capital, plus rules on other risks,
notably liquidity. Basel III currently runs to somewhere between 600 and 700 pages
(we lose count) and is still expanding.
So what are the positives?
It encourages risk-based pricing, claim promoters of Basel II/III. But
this surely only applies in large, centralised banking models where the
branch manager/officer has become little more than a salesman or
relationship manager. In the few decentralised banking models in operation,
such as Handelsbankens, the branch manager is in charge of his P&L and
European Banks
Banking
29
balance sheet and thus instinctively prices loans to match the likely riskiness
of the future cash flows.
Risk transfer. If banks cannot generate an adequate risk-adjusted return on
an asset, Basel II/III encourages the bank to transfer the asset to an entity
that can earn its required return.
It has encouraged banks to keep track of risk. A surprising claim given
risk management should be the core DNA of a bank, but for some banks at
least, it has taken Basel II/III to encourage them to build the systems to do
so.
Once rules are set, inconsistencies, loopholes and opportunities are there to be
exploited and arbitraged. Basel IV, the next iteration, cannot be that far away.
2. What is wrong with Basel
In this section we do not attempt to critique Basel from a theoretical/technical point
of view (the OECD has done a good job of this in a 2010 paper titled Thinking
Beyond Basel III: Necessary Solutions for Capital and Liquidity). Nor do we address
calculation/methodology issues here (we cover these in a subsequent section,
Calculating an adjusted equity-to-assets ratio). Instead we focus on some basic, practical
flaws with Basel.
If the following seems like a sledgehammer to crack a nut, we make no apologies
we genuinely believe that the self-calculating, risk-weighted approach is not just
deeply flawed but has damaging consequences for bank shareholders.
In no particular order:
How do you model the unexpected? We are truly intrigued by the idea
that banks are expected to model the unexpected. Models are by definition
based on past experience: they predict the future by extrapolating the past.
Basel II and III are built on the very notion that banks can model the
unexpected; this is oxymoronic. Thus at the heart of Basel lies a
fundamental flaw that bank capital can be modelled from expected losses.
The economist Professor John Kay dismisses it as pseudo-science.
Relying on simplistic faith in arguably proven risks and formulas is intrinsic
incompetence. It is not what we know but what we do not know that we must
always address to avoid major failures, catastrophes and panics.
Richard Feynman, Nobel prize-winning physicist
(Indeed, we wonder whether the increasing frequency of financial crises and
the volatility of markets are the very function of the belief that the
unexpected can be captured in a model. The stronger this belief, surely the
greater the surprise when something happens outside of what was
predicted.)
Calibrates capital for an idiosyncratic failure, not a systemic crisis.
The problem of using expected losses to estimate capital for unexpected
losses can be looked at another way. The Basel construct is focused on
ensuring a bank has sufficient capital to protect against idiosyncratic failure
(that the bank fails on its own) rather than a systemic failure or crisis (where
other banks fail or are threatened). The latter is a more realistic scenario in a
global economy, in our view.
Uncertainty of data lost in presentation. The models that are built to
calculate the probability of default (PD) and loss given default (LGD), and
thus the risk weights, are like any other data-mining exercise bound by
European Banks
Banking
30
confidence intervals. A typical 95% confidence interval means that 95% of
observations are expected to fall within a range of values. By mining lots of
data, the bank hopes to narrow the upper and lower bound of the
confidence intervals. But as the financial crisis showed, black swans happen.
Quoting risk weights to one decimal place and capital ratios to two decimal
places is an insult to the statistics profession and the users of banks
accounts. Industry estimates suggest that the PDs can vary by 15% either
side of the reported value. Given a likely bias to underestimation, then the
real value could be 30%+ higher, implying more capital is actually needed.
An infamous FSA benchmarking exercise in 2009, where UK banks were
asked to calculate the capital required for a theoretical portfolio, found their
answers differed by 100-300% for the various exposures! The BIS reached
similar conclusions in a similar exercise in 2012.
Lack of data over time. Let us suppose that the unexpected losses can be
modelled by extrapolating trends from past credit loss experience (the basic
assumption behind all Basel models). For almost every European bank, this
is based on data from the early 1990s onwards; ie little more than 20 years.
As we have noted in previous reports, the debt cycle is perhaps 60-70 years
in duration. Thus banks models are capturing only one-third of the debt
cycle and a very benign stage at that. Consider retail mortgages.
Exceptionally low losses in the last 20 years have been associated with
favourable demographics and supply shortages. What if the ageing of and
decline in the overall population led to material declines in real house
prices? Would losses on retail mortgages remain in the range of 10-20bp?
Rule-based not incentive-based regulation. Basel sets out a series of
rules with which banks must comply. They must hold a certain amount of
capital of a certain quality. We strongly believe that this has encouraged
banks to focus on the number rather than think about the underlying risk of
the credit.
The market is not interested in supervising banks. Basel II was built on
three pillars. The third pillar was focused on the disclosure of information.
By providing additional disclosure on risks and exposures, the thinking went
that the debt and equity markets would help supervisors in policing the
banks. However, if supervisors lack resources to do their job, then the
market lacks incentives to do the supervisors job. Markets are not as
efficient as Basel assumes. Equity markets, for example, are focused on
growth. As we argued in European Banks Growth: just say no (23 November
2012), growth in banking is strongly associated with increased risk. We view
this focus on growth as incompatible with policing banks risk-taking.
Pro-cyclical. Some of the pro-cyclicality of Basel is a function of the fair
value accounting requirements of IAS (a false idol according to a Spanish
economics professor), which affects equity-to-assets as well. But the
calculation of PDs and LGDs (from which is derived the risk weight) relies
on judgements which tend to the bullish in booms and bearish in busts.
Basel III makes proposals to address this but has not yet progressed them.
Insiders metric. Basel II introduced complexity and opacity to bank
regulation. The models are incredibly complicated. Andrew Haldane at the
Bank of England reckons a large bank now needs to make 200m+
calculations to determine its capital needs. How can a supervisor let alone
an outsider (ie the market) check this black box? And what about Basel III
fully-loaded ratios, which all banks are now quoting who can possibly say
that these are true and fair?
European Banks
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31
Consider the position of a large, representative bank using an advanced internal
set of models to calibrate capital. Its number of risk buckets has increased from
around seven under Basel I to, on a conservative estimate, over 200,000 under
Basel II. To determine the regulatory capital ratio of this bank, the number of
calculations has risen from single figures to over 200m. The quant and the
computer have displaced the clerk and the envelope.
Andrew Haldane, executive director, Bank of England
Although the CEOs and directors of banks may not deliberately hold an
insufficiently high level of capital necessary to avoid insolvency, they may be lulled
into believing that they are adequately capitalized if they adhere to the Basel
Committees models (which they are unlikely to understand).
H. Benink and G. Benston, professors of finance at Tilburg/Emory
Universities
It is instructive to recall that the Northern Rock was one of the first banks
to be allowed to use the Basel II IRB (internal ratings based) approach. The
UKs FSA, one of the best staffed and most sophisticated of supervisors
according to the OECD, approved this in June 2007. Northern Rock
subsequently failed and was nationalised in February 2008.
Spreadsheet errors. Of course, even if all of the data were reliable and the
model design valid, it presupposes that a highly complex spreadsheet is
without errors arising from its construction. It is estimated that 90%+ of all
spreadsheets contain errors (source: EuSpRiG). However, only the truly
exceptional are revealed, the most recent being associated with JP Morgans
CIO losses.
Further errors were discovered in the Basel II.5 model, including, most
significantly, an operational error in the calculation of the relative changes in
hazard rates and correlation estimates. Specifically, after subtracting the old rate
from the new rate, the spreadsheet divided by their sum instead of their average, as
the modeler had intended. This error likely had the effect of muting volatility by a
factor of two and of lowering the VaR.
JP Morgan Task Force Report 2012 CIO Losses
RWA optimisation the two most dangerous words in finance. If
ever there were proof that Basel has skewed banks attitudes to risk, it is the
prevalence of RWA optimisation and other euphemisms among banks
strategies for meeting higher capital ratios. If a risk weight is 50%, or
optimised to 35%, in most cases the inherent risk of the asset will still be
the same. As Figure 13 shows, the average risk weights for banks have fallen
globally, but it is hard to imagine that the underlying risks faced by the
banks have fallen by over a third. Put another way, have the PDs fallen by a
third or the LGDs fallen by that amount?
European Banks
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32
Figure 13. Einstein would not approve risk cannot be created or destroyed
Average risk weights RWA as % total assets

Source: OECD
Regulatory and tax arbitrage remains unaddressed. The gaming which
has characterised capital regulation since its inception with the first Basel
accord in 1988 remains unresolved. As the OCED observes: There is a
massive incentive in financial markets to use complete market techniques
to reconfigure credits as capital market instruments to avoid capital charges
and reduce tax burdens for clients...[Further] banks can shift [promises eg
credits] beyond the jurisdiction of bank regulators. Note: complete
markets refer in particular to the ability to short credit through a CDS.
Central banks/regulators are losing faith. We note the increasing
number of regulators which are overriding risk weights. The most notable
examples are retail mortgage risk weights. Sweden, Norway and New
Zealand have all set or are planning to set a minimum floor for such loans.
Swiss banks also face higher capital requirements for retail mortgages than
their models suggest. Elsewhere, UK banks have to slot their commercial
real estate exposures, again overriding their models. If the regulators are
losing faith in Basel, why should anyone else rely on it?
Spirit of Basel lost: Part 1 its all about the number. Both the original
Basel I accord of 1988 and the revised Basel II framework of 2006 were
clear that the framework is designed to establish minimum levels of capital
for internationally active banks. The wording was clear that national
authorities will be free to adopt arrangements that set higher levels of
minimum capital. Somehow it never really happened. In interpreting the
latest version, Basel III, the market and therefore the banks have decided to
reach the new targets as soon as possible (and not by 2019) and ignore what
The Economist called the carefully calibrated scale of capital charges.
Its a race to 10% [core tier 1 ratio] and beyond.
Anshu Jain, co-CEO Deutsche Bank
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US UK Europe
European Banks
Banking
33
More generally, capital ratios, judged in isolation, may provide a misleading
guide to relative strength. Much also depends on the quality of a banks assets
and, importantly, the level of provisions a bank may be holding outside its capital
against assets of doubtful value.
Basel I Accord (July 1988)
Spirit of Basel lost: Part 2 the tail is wagging the dog. The whole
point of the original Basel accord was the international convergence of
supervisory regulations. How can this possibly be the case today with the
wide disparity of risk weights across multiple homogenous lending classes?
Growth is not penalised. As noted in an earlier point, we believe that
growth in banking is strongly correlated with risk, indeed is a driver of risk
(European Banks Growth: just say no, 23 November 2012). The Basel
construct does not penalise growth except in the extreme where it has led to
scale and a bank has become SIFI designated.
3. The Basel track record
In the subsequent section we present more detailed analysis of the predictiveness of
risk-weighted capital ratios versus plain vanilla equity-to-asset ratios. Here, though,
we note the performance of specific European banks following the EBAs infamous
stress tests of July 2011. These tests were based on published, Basel-derived Core
Tier 1 (CT1) ratios including planned mitigation actions and then stressed in an
adverse scenario (which was about as stressful as deciding which vintage of Felton
Road Pinot Noir to drink, in our view).
Figures 40 and 41 in the Appendix repeat the full EBA stress test results for all 91
banks, but we would highlight the following (list not exhaustive).
Banks rated pass which subsequently failed: Dexia (ranked 13
th
with
CT1 under adverse scenario of 10.4%), SNS Bank (ranked 49
th
with CT1 of
7.0%) and Bank of Cyprus (ranked 64
th
with CT1 of 6.2%).
Dexia is the stand-out. At end-2010 it reported a CT1 ratio of 12.1%, which
as noted fell less than 2% points under the adverse scenario. In contrast, its
tangible equity-to-adjusted assets ratio (deferred tax assets and derivatives
excluded) was 1.0% at end-2010!
Banks rated near fail which subsequently failed: TT Hellenic
Postbank, BFA-Bankia and Marfin Popular (near fail defined as stressed
CT1 ratio under adverse scenario of between 5% and 6%).
Bankia was another worrying example. The EBA stress test found Bankia
1.3bn short of a stressed 6% CT1 ratio, but its subsequent rescue in May
2012 required 24bn of new capital! As at end-2010, its tangible equity-to-
adjusted assets ratio was 2.8%; its CT1 ratio was 6.9%. To reach the
European average equity-to-assets of 4.3%, it would have required 4.6bn of
new capital; to reach 5% industry best practice, it would have required 7bn.
While still short of the final recap, equity-to-assets was more indicative of
the scale of the problem.
Banks rated pass which subsequently raised capital: Danske Bank
(placing), KBC Bank (placing), DNB (cut dividend), Santander (multiple
asset sales), National Bank of Greece (rights issue), Alpha Bank (rights
issue), Unicredit (rights issue), Deutsche Bank (placing), Commerzbank
(rights issue).
European Banks
Banking
34
Why equity-to-assets is better
Go on failing. Go on. Only next time, try to fail better.
Samuel Beckett, Irish novelist, playwright and poet
There are known knowns. These are things we know that we know. There are known
unknowns. That is to say, there are things that we know we dont know. But there are also
unknown unknowns. There are things we dont know we dont know.
Donald Rumsfeld, US Secretary of Defense (2001-06)
1. A digression: risk versus uncertainty
The distinction between risk and uncertainty lies, we believe, at the heart of the
debate over the Basel risk-weighted model and the appropriateness of simpler
concepts. Basel sets capital levels according to measurable risks. We believe,
however, that capital is for unmeasurable uncertainties.
Frank Knight, an economics professor at the University of Chicago, argued that
uncertainty and risk had little in common.
Uncertainty must be taken in a sense radically distinct from the familiar notion of risk
The essential fact is that risk means in some cases a quantity susceptible of measurement,
while at other times it is something distinctly not of this character...It will appear that a
measurable uncertainty, or risk proper, as we shall use the term, is so far different from an
unmeasurable one that it is not in effect an uncertainty at all.
Frank Knight, Risk, Uncertainty and Profit (1921)
A modern champion of Knights view is Professor Amar Bhide, currently at Tufts
University and previously on the faculty of Harvard Business School and the
University of Chicagos Graduate School of Business. He has argued passionately in
favour of more primitive finance, contending that modern finances defects
derive from the academic theories and regulatory structures that have evolved since
the 1930s dysfunctional foundations.
At the heart of the problem, Bhide believes, is the triumph of risk over uncertainty.
He notes how two views of uncertainty prevailed up to the 1930s. The
Knightian/Keynesian (and Rumsfeldian!) view believed that uncertainties could not
be reduced to quantifiable probabilities. In contrast, the Bayesian school believed
that all uncertainties were quantifiable. The latter came to dominate because it
allowed the construction of seemingly scientific mathematical models[which]
underpinned basic theories of modern finance.
Faced with unquantifiable uncertainty, sensible investors, bankers or borrowers make
subjective judgments in the holistic manner of a common law judge, considering all the
relevant precedents and features of the case at hand, and anticipating the possibility of
mistake and ignorance. If all uncertainty can be reduced to probability distributions,
however and omniscience ensures that market prices always accurately reflect the risks
case by case judgments are unnecessary. Returns are maximized for the least risk simply by
diversification.
Amar Bhide, Tufts University
Bhide argues in favour of a more primitive regulatory regime and of narrow
banking (crudely, that banks are limited to raising deposits and making loans).
European Banks
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35
The systemic problem lies in the lax control over errors of judgment. This has arisen
because of the mistaken belief that diversification (and well aligned incentives) can substitute
for the control of bad judgment through due-diligence and oversight.
Amar Bhide, Tufts University
2. Why equity-to-assets is better
We see five advantages of the equity-to-assets ratio.
Based on uncertainty not risk
Predictability
Simplicity
Accountability
Historical support
a. Based on uncertainty not risk
An equity-to-assets ratio does not seek precision. In Rumsfeldian terms, it addresses
the unknown unknowns rather than focusing solely on known unknowns. Being
rooted in Knightian uncertainty rather than Bayesian measurable risk, it restores the
role of balanced, human judgement, and does not base itself on diversification.
b. Predictability
Analysis from the OECD and Bank of England (Figures 15 and 16) shows the better
predictability of future losses with the equity-to-assets ratio versus the Basel risk-
based ratio.
The causality of the relationship is unclear. What is clear to us, however, is that
banks that focus on building a strong balance sheet structure (measured by a high
equity-to-assets ratio) rather than complying with Basel capital regulations (where
RWA optimisation is frequently resorted to) tend to incur lower losses and last
longer.
The driver may be that banks which do not attempt to arbitrage the Basel
regulations tend to be more focused on managing the risk in their underlying credit
book. (A good example was CDOs pre-crisis: Basel-focused banks bought AAA
slices as this required little capital and offered an apparently attractive risk-reward;
risk-focused banks questioned whether the asset was AAA in first place.) In other
words, risk-focused banks let the dog wag the tail. We call this biodynamic risk
management in honour of some of the best wines in the world being made
according to some of the strangest beliefs, without recourse to agrochemicals (a
Knightian not Bayesian view of the world).
European Banks
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36
Figure 14. Biodynamic winemaking
Unclear causality is also the case with biodynamic winemaking. Referred to by cynics as
voodoo winemaking, biodynamics is essentially the antithesis of interventionist
grapegrowing/winemaking. Practices include spraying vines with very dilute cow
manure that had been buried for six months in a cow horn in the vineyard! Conventional
agrochemicals are shunned.
The science behind biodynamic practices in the vineyard and cellar remains unproven, if
not deeply flawed. But the fact remains that some of the best wines in the worlds top
wine regions (eg in Burgundy and New Zealand) are made biodynamically. Names
include Domaine de la Romane-Conti, Felton Road.
The most likely explanation is that biodynamic winemakers simply care more and thus
spend more time in the vineyard/cellar addressing causes and underlying problems
rather than treating symptoms.


Figure 15. Biodynamic risk management
Capital ratios pre-crisis versus subsequent write-downs/losses, selected banks
a) Basel Tier 1 capital ratio b) Equity-to-asset ratio

Note: Calculations based on the sample of banks reporting write-downs and credit losses as reported by Bloomberg, excluding US banks (where most
conglomerate losses occurred in off balance sheet vehicles to which Basel capital adequacy did not apply). Write-downs and losses are accumulated from January
2007 until mid-2009. Tier 1 ratios, total assets and common equity are averages of 2006-08 end-of-year data (2007-08 for Japan Tier 1 ratio)
Source: OECD (with data from Bloomberg, DataStream, Worldscope)
The Bank of Englands analysis (Figure 16) is based on a sample of global banks
with assets in excess of $100bn as at the end of 2006, about 100 in all. Not only does
the equity-to-asset ratio appear visually to be a better predictor of failure than the
risk-based Basel ratio, the relationship is also statistically robust. The equity-to-assets
ratio of failed banks was found to be statistically significantly lower (1% significance)
than that of surviving banks (by 1.2% points). For the Basel ratio, the differences
between the ratios of failed and surviving banks is not statistically significantly
different. As Andy Haldane concluded in a speech, regulatory [Basel] capital ratios
do about as well in predicting crises as a coin toss.
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Figure 16. Biodynamic risk management (contd)
Capital ratios major global banks, end-2006 versus subsequent failure/survivorship
a) Basel Tier 1 capital ratio b) Equity-to-asset ratio

Source: Bank of England
c. Simplicity
In economics terms, the equity-to-assets ratio is aligned with the theory of the
second best: it is better to be roughly right than precisely wrong. As per the US
Navy design principle of the 1960s, Keep It Simple, Stupid most systems
perform better if their design is kept simpler rather than made complex. We know
that bank models and balance sheets are incredibly complicated. To seek to manage
or regulate this through complexity (the Basel approach) risks compounding the
problem. The equity-to-assets ratio offers simplicity.
The general theorem of the second best optimum states that if there is introduced into a
general equilibrium system a constraint which prevents the attainment of one of the Paretian
conditions, the other Paretian conditions, although still attainable, are, in general, no longer
desirable[It] states that if one of the Paretian optimum conditions cannot be fulfilled a
second best optimum situation is achieved only by departing from all other optimum
conditions.
R. Lipsey and K. Lancaster, The Review of Economic Studies (1956)
Note: Pareto optimum is where resources are allocated such that no
individual can be made better off without making somebody worse off.
d. Accountability
It is easier for outsiders to calculate and assess a banks equity-to-assets ratio than its
Basel risk-weighted capital ratio. This principle of auditability is hugely important, in
our view, if creditors are to have confidence in the banks capital strength. Of
particular concern with Basel is the number of banks stating a Basel III fully-loaded
ratio as a single data point without any supporting data. Combined with RWA
optimisation to achieve it, it is hard to see such a number having credibility.
e. Historical support
Banks managed their capital structure according to simple equity-to-asset ratios for
at least 150 years. In contrast, Basel I was used for 15 years while Basel II lasted for
seven years. We do not claim that it is perfect, but the equity-to-assets ratio has
stood the test of time and offers a long-term data series as a reference point.
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3. What is wrong with the equity-to-assets ratio
One of the main critiques of the equity-to-assets ratio is that it discourages banks
from holding low-risk, low-return assets including liquid assets. Many Nordic banks,
for example, exploit their high credit ratings versus competitors to take in large
deposits in the US (eg from money market funds) which they immediately place at
the Federal Reserve. The banks earn a very small margin on it, but it is as close to
risk-free as possible given the Federal Reserves standing (and ownership of the
printing presses). In our view, the loss of such business is a small price to pay.
Regarding the pressure on liquid assets, this can either be mitigated by targeting a
liquidity ratio or, as we will discuss in the next section, left unregulated instead rely
on the risk of failure.
Some strengthen the critique by turning it around and arguing that banks will be
encouraged to maximise the risk they take on per euro of balance sheet assets. The
original Basel Accord was borne of the Basel Committees desire to halt the erosion
of capital standards in their banking systems and to work towards greater
convergence in the measurement of capital adequacy. This resulted in the emergence
of a broad consensus on a weighted approach to the measurement of risk, both on
and off the balance sheet (source: BIS, History of the Basel Committee).
This argument is extended by others to say that by discouraging banks from holding
low-return assets such as repos and simple derivatives, it will push up funding and
hedging costs for governments and corporates. But if these were backed by
insufficient capital (and no asset is risk-free), then arguably such assets were under-
priced in the first place.
Another argument is that it makes comparing banks in different jurisdictions or with
different business models difficult. For example, is the risk of a US mortgage where
the borrower can hand the keys back and walk away the same as a UK mortgage
where the borrower cannot walk away from his/her liability?
As we have argued earlier, rules-based regulation has failed. We believe regulation
needs to focus on incentives to ensure that banks do the right thing rather than
focus on gaming/arbitraging the rules.
4. Why not regulate equity-to-assets and Basel capital ratios?
In a sense, this is what the Basel Committee has proposed in Basel III. It has
proposed a leverage ratio (aka equity-to-assets ratio), but primacy remains with the
risk-weighted ratio; the leverage ratio merely serves as a backstop. As we have
argued in previous reports (eg European Banks: Mad, bad and dangerous to know, 28
January 2013), we believe the equity-to-assets ratio should have primacy. (And we
would add the need to dramatically simplify the risk-weight calculation process.)
The OECD also believes in the primacy of the leverage ratio over risk-weighted
capital ratios. Making the leverage ratio the backstop has potentially damaging
consequences.
There is a risk that setting the leverage ratio too low, if combined with the RWA
approach, that regulators will be setting maximum capital requirements and cause portfolio
distortions, as capital arbitrage and risk-bucket transformation operates to ensure that
Basel III does not cause banks to hold more capital than the maximum.
A. Blundell-Wignall and P. Atkinson, OECD Journal, 2010/1

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What is the right number?
There is no rule of thumb method of deciding the size of the capital funds which a bank
needs in order to carry on its business. The guiding principles are that the resources as a
whole must be sufficient to provide absolute security for our depositors and the reserves
sufficient to meet fluctuation in our trading from year to year.
Sir Oliver Franks, Chairman of Lloyds Bank, 1954-62
The mood among investment banks that I talk tois such that they expect that the
regulation is over, they expect that they will be able to keep growing their balance sheets,
that they will be growing bigger than ever. The mood among the regulators I talk with is
more like we havent even started.
Axel Weber, Chairman of UBS, former Bundesbank President
Capital is very subjective the right amount is whatever your creditors/stakeholders
want it to be. Further, you do not need capital in a boom, but you do need it in a
bust by which point it is too late to get it. And as Walter Bagehot observed, a
well-run bank needs no capital.
Nor is the number static. During a crisis, more is generally preferable to less. And as
Axel Weber has remarked, regulators (and by extension, politicians) are in the mood
for more.
Were about to raise capital requirements; we wont back down. There are possibly reasons
[to look into] taking a few further steps on capital requirements.
Anders Borg, Swedish Finance Minister, May 2013
1. What is the right number?
In arriving at a possible right number for the equity-to-assets ratio, we draw on a
number of sources including historical and academic.
a. History
Banking is a long-term business given very long asset lives and tail risks. It is also a
mature industry dating back at least 700 years. Historical data is therefore a good
starting point.
Data compiled by academics (Figure 17) show how average capital ratios have fallen
for European banks over the last 160 years. Averaging about 30% between 1850 and
1880, the ratio settled at c15% during the interwar period. After 1945, it settled into
a range of c5-6%. Note: these estimates are based on published accounts and do not
adjust for conservative provisioning.
The steady reduction during the 20
th
century can be attributed to four factors as
noted earlier: increasing diversification of banks as banking consolidated, a lack of
banking crises (unlike the US, there were few in Europe in the 1930s), the
dominance of large banks operating cartel-like structures in many European banking
markets, and the emergence of an implicit government guarantee of deposits. We
would also add the influence of depositor protection schemes.
We would note, however, that managing (and regulating) banks according to capital
levels is a more recent concept. Historically, the prime management (and central
bank) focus was on liquidity ensuring sufficient liquid assets to meet depositors
calls.
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Figure 17. Capital is so last century
Equity-to-assets ratio, average European commercial banks, 1847-2001

Note: Unweighted average based on 10 countries: Denmark (1847+), Norway (1851+), Germany (1872+), UK
(1880+), Italy (1891+), Netherlands (1900+), Switzerland (1906+), Spain (1923+), Finland (1934+) and
Belgium (1935+)
Source: Harald Benink and George Benston (2005)
The importance of depositor protection schemes can be seen in the US and Swiss
experience, which we present in Figure 18. The adoption of depositor protection in
the 1930s led to a big reduction in the equity-to-assets ratio as the need to protect
depositors was transferred off balance sheet. The ratio subsequently settled at c6-8%
following the Second World War in both countries. However, subsequent
amendments to depositor protection have seen banks generally hold more capital.
Figure 18. Depositor insurance/preference have a material impact on capital levels
Equity-to-assets ratio, US and Switzerland
a) US (tangible equity) b) Switzerland (equity)

Note: Switzerland All banks includes cantonal, regional/savings, Raiffeisen and other banks as well as the big banks. Since 2005, there are only two
banks in the big bank group; ie UBS and Credit Suisse
Source: Berenberg research, Fed, SNB

0%
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All Banks Excluding big banks
Priority insurance
limits raised
Liquidity insurance
introduced
Priority insurance
introduced
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In the UK, we observe a broad period of stability in the equity-to-assets ratio of c8%
from 1910 to 1970. The variation in the ratio before, during and after this period can
be attributed to a number of factors. The reduction from high teens in the 1880s to
8% by the 1910s was largely attributed to the consolidation of the banking industry
(driven by the adoption of joint stock banking from 1826, which paved the way for
branch-based banking, and limited liability banking from 1856). The lower capital
ratios in the 1940s and 1950s resulted from government control of capital raising,
triggered by the financing needs of the Second World War. All UK companies had
to apply to the Capital Issues Committee, which operated from 1939 to 1959, before
raising capital. High marginal tax rates on dividends in the UK and the introduction
of corporation tax in 1965 increased the attractiveness of debt over equity, leading
banks to issue debt capital instruments. The reduction in the ratio below 6% (as
shown in Figure 19) from the 1980s onwards coincided with the introduction of
deposit insurance in the UK.
Figure 19. Equity-to-assets ratio, UK with and without hidden reserves

Note: Published = capital ratio as per annual accounts. True = capital ratio including hidden or inner reserves but
not including loan loss provisions. Hidden reserves were disclosed from 1970 onwards
Source: Billings and Capie (2007), OECD, Bank of England
Note: the published capital levels of UK banks were understated due to the practice
of holding hidden reserves. First established in the 1860s, such reserves were
material from the late 1920s until 1970 when the practice ended. The aim was
fascinating.
Capital was considered so important that the British government and the Bank [of
England] accepted the public interest argument which allowed the concealment of true
profits and true capital until1970. The maintenance ofhidden reserves allowed
banks to smooth their reported profits, reassuring depositors and shareholders by presenting
a picture of financial soundness and prudent and public-spirited behaviour, thereby
contributing to financial stability.
M. Billings and F. Capie, Capital in British Banking (2007)
b. The recent crisis
Andrew Haldane, head of Financial Stability at the Bank of England, estimated that
for the worlds largest bank, the [equity-to-assets] ratio needed to guard against
failure in this crisis would have been above 7%.
c. Academic research
A Bank of England Discussion Paper (Optimal bank capital, 2011) argued that
ultimately loss-absorbing capital should be 16-20% of RWA, with considerable
0%
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Published True
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stress on the phrase loss-absorbing (ie equity). Assuming average risk weights of
between 33% and 50%, then a 20% equity-to-RWA ratio would imply equity-to-
assets of 7-10%, in its opinion.
The Bank of England bases its analysis on data from shocks to incomes for a large
number of countries over a long period to assess risks to banks and how equity
funding protects against those risks. As is obvious from the above, the Bank finds
that the amount of equity capital that is likely to be desirable for banks to use is
very much larger than banks have used in recent years and also higher than targets
agreed under the Basel III framework.
The authors (Miles, Yang and Marcheggiano) also share the refrain of Admati and
Hellwig (authors of The Bankers New Clothes) that requiring banks to fund their
balance sheets with more equity and less debt has no effect on lending. As they
succinctly put it: The change that is needed is on the funding side of banks balance
sheets on their liabilities and not their assets. The idea that banks must shrink
lending to satisfy higher requirements on equity funding is a non-sequitur. We
regard it as astonishing how not just the media but the banking industry itself
(including its lobbyists) confuse the issue or deliberately conflagrate it.
2. Should all banks have the same number?
No! The Basel construct was based on the idea that the risks of each banks assets
were different. While we agree with the concept of differentiation, execution la
Basel was flawed for the many reasons we have already set out.
A different dimension is growth. As we argued in European Banks Growth: just say no
(23 November 2012), we believe that capital ratios should be tiered based on growth
rates. We have long argued that growth is one of the prime drivers of risk within
banks. It is a fact that faster-growing banks take on more risk than slower-growing
ones and generate inferior returns in all but the short term.
But as we also noted, there are practical problems with implementing such a tiered
system including definitions, complexity and gaming by the banks. So we believe
that all banks are not the same and should therefore have different ratios, but
simplicity/history suggest that this may not be feasible.
3. Is 7% the new zero?
Critical to the amount of capital that a bank must hold is how much is considered a
buffer and how much is an inviolate level below which a bank cannot fall under any
circumstance. Following the start of the crisis and based on regulatory/political
discussions, we fear that not all capital is available to absorb losses. Is this a
recognition by regulators of the flawed design of Basel and its basis in expected
losses? Note, in our later top-down estimate of the capital required by European
banks, we use a post-crisis target for the equity-to-assets ratio of 3%, acknowledging
that all of the capital is there to absorb losses.
4. Where should the capital reside?
Another influence on the amount of capital that an individual bank needs to hold is
where the capital is held. Is the capital within the subsidiarys balance sheet or does it
sit with the holding company balance sheet? Two of the major global banks
operating fully subsidiarised (ie federal) models are HSBC and Santander, and for the
latter the lack of capital in the parent company is a major concern. For large banking
groups which have historically been run through strong corporate centres where
most of the capital and liquidity is held (such as the French banks), it is also a
concern. We also note that the UK regulator requires its banks to comply on both a
UK entity and a group basis.
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Modern and complex group structures tend to obscure this issue but it has become
an important regulatory battlefield giving rise to the issue of Balkanisation; ie
regulators forcing banks to be adequately capitalised (and liquid) within local
subsidiaries. This is both to comply with living will rules and to minimise
reputational damage to a countrys banking system and the need for local taxpayers
to fund foreign banks losses. Recent headlines include moves by US regulators to
ensure this as well as an EC/EBA investigation into moves by BaFin, the German
regulator, to do this.
Banks live globally but die locally.
Mervyn King, Governor, Bank of England
Where banks operate locally through branches, they are coming under pressure from
regulators on both sides of the Atlantic to create local subsidiaries.
There is a continued difficulty of regulating overseas branches operating in the UK. We
ought to have subsidiaries rather than branches in the UK. The vast majority of the
wrongdoing was done outside of the UKs supervisory net.
Hector Sants, ex-CEO, UK FSA (January 2013)
5. Should we have a target number at all?
Regulating a banks capital structure is taken as a given by many. The case for
regulation was stated clearly by the former Chairman of the US FDIC in June 2007.
There are strong reasons for believing that banks left to their own devices would maintain
less capital not more than would be prudent. The fact is, banks do benefit from implicit
and explicit government safety nets. Investing in a bank is perceived as a safe bet. Without
proper capital regulation, banks can operate in the marketplace with little or no capital.
And governments and deposit insurers end up holding the bag, bearing much of the risk and
cost of failure. History shows this problem is very realIn short, regulators cant leave
capital decisions totally to the banks. We wouldnt be doing our jobs or serving the public
interest if we did.
Sheila Blair, Chairman, FDIC, 2006-11
Some, in contrast, have argued that there should be no target ratio at all for bank
capital a view with which we sympathise as long as all banks are free to fail.
Indeed, the sceptic would note that the era of more structured and invasive bank
regulation and supervision (1970s to date) coincides with a material pick-up in
banking crises (see Figure 2). The UK, for example, created a Bank Supervision
Department within the Bank of England in 1974 and only established statutory bank
supervision in the 1979 Banking Act. In Canada, banking supervision was
introduced in 1924 but until 1980 there were only seven supervisors.
The Institute of Economic Affairs (IEA; a UK free-market think-tank) has proposed
scrapping capital regulation altogether, arguing that: The whole apparatus of bank
capital regulation which has done so much to make the banking system more opaque
should be abandoned. Blaming banks gaming of the system, the authors argue as
follows.
Capital regulation is relatively recent and led to banks trying to game the rules contributing
to the complexity that was created in the banking system. An analysis of history
demonstrates that capital regulation is not necessary if banks are not underwritten by the
stateThe principle, which should be at the heart of regulatory reform, is that banks
should be wound up in an orderly way if they fail.
Forrest Capie and Geoffrey Wood, IEA
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Andrew Haldane (FPC member, Bank of England) concluded his well-publicised
Jackson Hole speech (The Dog and the Frisbee, 31 August 2012) by asking
whether quantity-based regulation should replace price-based regulation.
Over the past 30 years or so, the regulatory direction of travel has been towards pricing
risk in the financial system, rather than prohibiting or restricting itregulators have
pursued price over quantity-based regulation. That makes sense when optimising in a risky
world. It may make less sense when optimising in an uncertain world. Quantity-based
restrictions may be more robust to mis-calibration. Simple, quantity-based restrictions are
the equivalent of a regulatory commandment: Thou shalt not.
Andrew Haldane, Bank of England
The views of Capie, Wood and Haldane endorse the principles behind the Vickers
and Volcker reform proposals, namely banning activities and/or breaking up the
banking conglomerates.
We note that Handelsbanken, the role model for banking in Europe in our view, has
always sought to hold what it thinks is the right amount of capital to hold given the
risks that it faces. A very Victorian approach to banking, it does not optimise for
regulation.
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Calculating an adjusted equity-to-assets ratio
Keep It Simple, Stupid.
US Navy design principle (1960)
Our preference for the equity-to-assets ratio is based on its simplicity and the ability
with which outsiders can calculate/assess it. That said, we believe there are a few
basic issues to address/adjustments to make in both the numerator and the
denominator. Some of these are straightforward, others are more controversial.
Our overriding principles are:
Assets more not less. Capital is for uncertainty and the uncertainties
over asset values are greatest in a crisis and least in a boom. We therefore
believe in a maximum definition not a minimum in order to cast the
broadest net around a banks exposures and sources of potential losses.
Capital highest quality. Capital must be permanently and instantly
available to absorb losses, especially when a bank fails. Period. This
generally means a smaller rather than a larger number.
1. Asset adjustments
The following are the key debates for adjusting assets in order to arrive at an assets
figure which most closely reflects the boundaries of the risks faced by a bank.
Derivatives to net or not to net? We say no because we care about a
banks gross exposure, as this is where the risk originates. We would
highlight JP Morgans $7bn derivative loss in 2012 which compared to a
$92bn net on balance sheet exposure or a $1.89trn gross exposure at the
end of 2011. IFRS focuses on the intention to settle net in the ordinary
course of business which results in the grossing up of derivatives.
Further, we do not believe that the IFRS grossed-up figure is correct, as
both RBS and Deutsche Bank show that their IFRS/gross on balance
sheet derivative exposure is already netted down by between a third and
50%. Deutsche Bank, for example, nets down its true gross derivative assets
exposure of 994bn to 656bn on its balance sheet, which then nets further
to a mere 9bn.
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Figure 20. Rollercoaster balance sheets
Gross market value (GMV) of G-SIFI bank derivative holdings versus VIX

Source: A. Blundell-Wignall and P. Atkinson, OECD (2012)
Off balance sheet liabilities to include or not? We say yes. This is one
of the least contentious adjustments. Contingent liabilities or commitments
represent clear liabilities for a bank while the credit or guarantee may not
yet have been drawn down on or invoked, in a crisis it might well be.
Repos to deduct or not? We say no. The bulls argue that repos should
be deducted from assets when calculating an equity-assets ratio given that
these are seen as low-risk transactions. As the crisis showed, however, there
were many unforeseen consequences as the loss of confidence in
counterparties led to a drying-up of liquidity. And this is the whole point of
capital. It is for unexpected losses (ie uncertainty) not expected losses (ie
(measurable) risk). Janet Yellen, Vice-Chairman of the Federal Reserve and
heir apparent to Ben Bernanke, has expressed such concerns.
A major source of unaddressed risk emanates from the large volume of short-term
securities financing transactions repos, reverse repos, securities borrowing and
lending transactions, and margin loans engaged in by broker-dealers...and other
shadow banks. The perfect solution may not yet be clear but possible options are
evident: [including] raising bank and broker-dealer capital.
Janet Yellen, Vice-Chairman, Federal Reserve
Consistency with equity adjustments. While relatively trivial given the
financial leverage in a banks balance sheet, any adjustments to equity should
be made equally to assets; for example, deducting intangible assets.
2. Equity adjustments
We define equity as capital permanently and instantly available to absorb losses.
Given this, we would make the following comments on potential adjustments.
Intangibles. We deduct all. Deducting goodwill is non-controversial. We
also deduct other intangibles including capitalised software costs. Such
assets are unlikely to have any disposal value (being bespoke to the bank)
and many were created to circumvent accounting standards and reduce the
goodwill arising on acquisitions.
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Minority interests. We deduct all. Deducting all minority interests is more
conservative given the associated asset figure is not adjusted, but we believe
that this is more appropriate in the event of winding up a bank.
Subordinated debt. We deduct all. This applies only to BNP Paribas and
Socit Gnrale, which both include a form of sub-debt within equity.
State aid. We deduct all in our stressed measure of capital. This includes
silent participations/participation capital. We exclude this on the grounds
that it lacks permanence. In the case of the Austrians, for example, although
it is perpetual and ranks pari passu with ordinary equity in absorbing
losses, there is a stepped coupon on their participation capital. This
creates an incentive for early repayment as the coupon increases with time
and thus cannot be viewed as core capital. This repayment incentive led
Commerzbank, for example, to launch a 2.5bn rights issue and repay its
silent participations in May 2013.
Deferred tax assets (DTAs). We deduct all in our stressed measure of
capital. The test here is simple. Were a bank to be wound up tomorrow,
would those DTAs have any value that can be realised and used to meet the
banks liabilities? In most cases, the answer is no as they reflect timing
differences or an offsetting gain needs to be generated first. We therefore
exclude them.
IAS19. We deduct all in our stressed measure of capital. These refer to the
net pension assets on balance sheet.
Level 3 assets. We would discount valuations. These have an enormous
impact on equity values for some banks. As discussed earlier, the valuation
of Level 3 assets is highly subjective, earning them the moniker mark-to-
myth. While these assets clearly have some value, the subjectivity generates
a concern that during a period of stress or in the event of the bank being
wound up, they are unlikely to achieve balance sheet values. Removing all of
them is clearly too aggressive, but a discount of perhaps 10-25% seems
more appropriate.
Loan loss provisions. Loan losses cover expected losses, while capital is
for unexpected losses. However, some countries have more conservative
provisioning regimes than others and this excess provisioning can be
viewed as a form of capital. Indeed, the original 1988 Basel Accord
acknowledged this point early on. Adding back loan loss provisions gives an
inflated measure of a banks capital. It does, however, make comparison
across jurisdictions more meaningful. In that sense, it is analogous to
EBITDA for industrials.
Insurance treatment. We would make a deduction from equity where a
bank takes insurance risk and is subject to the resultant insurance volatility.
In the ratios we calculate, we make no adjustment for simplicity but we
accept that results in mixed treatment. Where the banks are actually taking
insurance risk (UK, France), this undercapitalises the insurance assets
relative to their own capital and flatters their leverage ratios as insurance
capital needs are higher than the bank ratios. However, where the insurance
risk is unit-linked and there is no exposure for the bank (Sweden), the bank
is effectively penalised and the ratios are artificially low.
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3. To weight or not to weight?
Hmmm. We believe that this is one of the major flaws within Basel sound in
theory, problematic in practice. While we do not favour such an approach, we accept
the argument that a retail mortgage in western Europe with a 50% loan-to-value
does not have the same risk profile as an unsecured loan in an emerging market. We
have included an additional ratio using a simple weighting given the argument that
not all assets face the same risks. Our weighted ratio uses the following simple
weights:
0% for cash/central bank balances;
50% for mortgages;
100% for all other assets.
4. Equity-to-assets ratio
In the following section, we include four ratios for European banks:
Ratio 1: Plain equity-to-assets ratio (Plain ratio) idiosyncratic risk
scenario. This is the more generous ratio providing an upper-bound what-
you-see estimate of a banks capital ratio. It assumes the bank failed as a
result of idiosyncratic risks and that systemic risks are low. Assets are as per
balance sheet with derivatives netted and intangibles deducted. Equity is as
per balance sheet less minorities, subordinated debt (where included) and
intangibles. State aid is not deducted.
Ratio 2: Pain equity-to-assets ratio (Pain ratio) systemic crisis
scenario. This is the less generous ratio providing a lower-bound what-
you-get estimate of a banks capital ratio. As such, it is based on a stressed
bankruptcy where systemic risks are high. Assets are as per balance sheet
with gross derivative positions included and off balance sheet liabilities
added. Equity is as per balance sheet less minorities, subordinated debt
(where included) and intangibles. We also deduct state aid and deferred tax
assets and IAS19 balances. We do not discount Level 3 valuations but do
provide a sensitivity.
Ratio 3 and 4: Weighted equity-to-assets ratio (Weighted ratio). For
both 3 and 4 we use the same asset figure; namely assets as per the balance
sheet with no adjustment to the gross derivative position, off balance sheet
exposures added back and assets weighted as per the above weights. For
equity, in Ratio 3 we use the same definition as per Ratio 1 less state aid. For
Ratio 4 we use the same definition as per Ratio 2 but also add back loan loss
provisions.
European Banks
Banking
49
Figure 21. The good, the bad and the ugly
Equity-to-asset ratios definitions of ratios 1, 2, 3 and 4 compared

Source: Berenberg
Ratio 1 Ratio 2 Ratio 3 Ratio 4
Plain
('idiosyncratic event')
Pain
('systemic failure')
Risk Weights
+ Tangible Equity
Risk Weights
+ Adjusted Tangible Equity
Equity Equity as per B/S Equity as per B/S Equity as per B/S Equity as per B/S
less minorities less minorities less minorities less minorities
less intangibles less intangibles less intangibles less intangibles
less subordinated debt less subordinated debt less subordinated debt less subordinated debt
less state aid less state aid less state aid
less deferred tax assets (DTAs) less deferred tax assets
less IAS 19 balances less IAS 19 balances
plus loan loss provisions
Note: Level 3 as stated
Assets Assets as per B/S Assets as per B/S Assets as per B/S Assets as per B/S
derivatives netted derivatives gross derivatives gross derivatives gross
less intangibles less intangibles/DTAs less intangibles less intangibles/DTAs
plus off B/S commitments plus off B/S commitments plus off B/S commitments
plus loan loss provisions
Simple weights: Simple weights:
0% cash/central bank balances 0% cash/central bank balances
50% mortgages 50% mortgages
100% all other assets 100% all other assets
European Banks
Banking
50
Capital shortfall how large and how to make good?
Camp Freddie: Charlie, I dont think you have the kind of scheme that yields the size
of profit Mr Bridger is accustomed to.
Charlie Croker: But, Freddie, this job is big.
Camp Freddie: Charlie, you wouldnt even know how to spell big.
Charlie Croker: B-I-G. Big.
The Italian Job (1969)
As noted earlier, the required capital ratio is both subjective and subject to change.
The required level of capital is whatever bank creditors want it to be to feel
reassured and this can change at different stages in the short-term business/long-
term debt cycle.
The emerging consensus in the equity market at least and among some regulators
is that banks have sufficient capital; indeed, some now argue that banks are in a
position to return surplus capital. Two years ago, the EBA famously quantified the
deficit among EU banks at a mere 2.5bn.
But others have their doubts. The Bank of Spain is nervous regarding the high levels
of inadequately provisioned restructured loans on bank balance sheets. The German
Finance Minister recently spoke of the pressure on banks to repair their balance
sheets, while his Swedish counterpart talked about taking a few further steps on
capital requirements. And the Dutch Finance Minister is nervous that the result of
the ECBs asset quality review might be worrying.
Given the persistent doubts, the uncertainty that continues to surround asset values,
high levels of forbearance and anaemic economic growth, we believe that banks
remain short of capital and must raise more. If we are wrong great; but at least
confidence will have been restored. Banks can return any surplus capital in three or
four years time once the unknown unknowns have become known knowns.
Banking is all about confidence, so why not remove the issue now once and for all?
1. Quantifying the capital shortfall
To estimate the capital shortfall among the banks, we employ a variety of methods.
The following estimates suggest a capital shortfall of between 350bn and 400bn
for European banks.
Berenberg top-down estimate = 360bn deficit. Updating analysis first
published in UK Banks Financial repression to bear on the sector (29 February
2012), we estimate that European banks are 360bn short of capital. This
top-down estimate is derived on a country-by-country basis. Of this total,
Eurozone banks account for 330bn, with German and French banks
accounting for the majority see Figure 22. Our estimates are based on a
Swedish-style scenario whereby European banks face losses equal to
those experienced by the Swedish financial system in the early 1990s (peak
NPLs of 12% and a loss rate of 50% on the NPLs). The capital deficit is the
amount required to absorb such losses and return the banking system to a
3% equity-to-assets ratio.
European Banks
Banking
51

Figure 22. Significant capital still required to meet Swedish or Japanese scenarios
Scenario analysis for European banks to meet a Swedish or Japanese-style banking crisis

Source: Berenberg research, ECB, SNB, Riksbank
June 2012 All banks
Domestic
banks
All banks
Domestic
banks
All banks
Domestic
banks
All banks
Domestic
banks
% GDP
% Bkg
assets
GOP Yrs to
cover
Equity
required*
% GDP
% Bkg
assets
GOP Yrs to
cover
Equity
required*
Belgium 4.6% 3.4% 1,164 554 3.1x 1.5x 58% 61% 9% 6.0% 40.7 -31 4% 2.6% 17.4 -12
Denmark 4.3% 4.4% 933 815 3.8x 3.3x 67% 67% 22% 6.6% 13.8 -43 9% 2.8% 5.9 -12
Germany 3.6% 3.6% 8,285 7,806 3.1x 3.0x 60% 59% 17% 5.8% 25.0 -408 7% 2.5% 10.7 -150
Ireland 5.9% 7.3% 1,092 373 6.9x 2.3x 42% 65% 15% 6.4% -30.6 -8 6% 2.7% -13.1 6
Greece n/a n/a 409 338 2.0x 1.6x 73% 69% 11% 6.8% 10.1 n/a 5% 2.9% 4.3 n/a
Spain 4.4% 4.5% 4,026 3,713 3.8x 3.5x 68% 66% 23% 6.5% 6.5 -184 10% 2.8% 2.8 -47
France 4.1% 4.2% 6,903 6,661 3.3x 3.2x 54% 55% 17% 5.4% 10.5 -279 7% 2.3% 4.5 -74
Italy 5.4% 5.4% 2,893 2,633 1.8x 1.7x 67% 66% 11% 6.5% 8.0 -107 5% 2.8% 3.4 -10
Netherlands 4.1% 4.2% 2,837 2,534 4.7x 4.2x 69% 71% 29% 7.0% 14.6 -146 12% 3.0% 6.3 -45
Austria 6.4% 6.3% 1,189 874 3.8x 2.8x 71% 69% 19% 6.8% 9.1 -30 8% 2.9% 3.9 4
Portugal 5.7% 6.1% 512 394 3.1x 2.3x 74% 72% 17% 7.1% 5.4 -16 7% 3.0% 2.3 0
Finland 3.6% 6.7% 652 148 3.3x 0.8x 37% 68% 5% 6.7% 14.9 -4 2% 2.9% 6.4 1
Sweden 4.2% 4.1% 1,648 1,640 4.1x 4.0x 72% 65% 26% 6.4% 13.4 -87 11% 2.7% 5.7 -28
UK 4.4% 4.7% 11,354 8,008 6.0x 4.2x 38% 46% 19% 4.5% 9.1 -222 8% 1.9% 3.9 -15
Switzerland 5.4% 6.2% 2,150 1,875 4.6x 4.0x 49% 56% 22% 5.5% 9.5 -41 9% 2.3% 4.1 17
Average 4.7% 5.1% 3.8x 2.8x 60% 64% 17% 6.2% 10.7 -115 7.5% 2.7% 4.6 -26
Total 46,047 38,366 -1,606 -365
Note: Japan scenario Peak NPLs 35% Sweden scenario Peak NPLs 12% GOP = Gross operating profit (ie pre provisions)
(Fiscal cost 25% GDP) Loss rate 40% Loss rate 50% * Assume require 3% equity/assets post losses
Sweden scenario impact Tangible equity/assets Total assets (Ebn) Banking assets/GDP % loans assets Japan scenario impact (Ebn)
European Banks
Banking
52
OECD bottom-up estimate = 400bn deficit. The OECD has come
down strongly in favour of the equity-to-assets ratio, being highly critical of
the Basel ratios. In a report published in December 2012, it estimated the
capital required to lift all Eurozone banks to a 5% equity-to-assets ratio as
being 400bn. This was based on the 200 largest banks using balance sheets
as at September 2012 and included a deficit for the Greek banks of c16bn
since filled. The estimates by country relative to GDP are summarised in
Figure 23. As per our analysis, the largest deficits are in Germany and
France.
Figure 23. OECD estimated Euro-area capital deficit at 400bn
Capital deficit as % GDP, large banks by country

Note: Sample based on 200 largest banks in the Euro-area. Deficit based on individual banks reaching 5% equity-to-assets
ratio. Data based on end-September 2012 balance sheets. Data excludes subsequent capital raising in Greece including
disbursement of ESM monies
Source: OECD
Berenberg bottom-up estimate = c400bn deficit. In Figure 24 we
summarise the aggregate capital deficit for European banks based on four
equity-to-asset ratios (plain for idiosyncratic risk scenarios, pain for
systemic risk scenarios, and two simple risk-weighted versions) for a range
of targets from 3% to 8%. As noted in a prior section, history, academics
and an analysis of the recent crisis suggest a target plain ratio of 6-8%.
Based on a plain ratio of 6% (lower end of the range) and a pain ratio
(ie highly stressed) of 4%, then we estimate that the deficit for European
banks is between 350bn and 460bn, with a mid-point of 405bn. Note:
this estimate just covers the large, listed European banks.
7.8%
7.4%
6.0%
5.6%
5.4%
5.2%
4.2%
3.3%
1.8%
0.6%
0.2%
0.0%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
G
r
e
e
c
e
F
r
a
n
c
e
B
e
l
g
i
u
m
G
e
r
m
a
n
y
N
e
t
h
e
r
l
a
n
d
s
F
i
n
l
a
n
d
E
u
r
o
-
A
r
e
a
I
r
e
l
a
n
d
S
p
a
i
n
A
u
s
t
r
i
a
I
t
a
l
y
P
o
r
t
u
g
a
l
European Banks
Banking
53
Figure 24. Time to load up
Capital deficit/surplus (bn) various equity-to-asset ratios, aggregate European banks


We provide a broad geographic split of the deficits by the main geographies
using the plain and pain ratios in Figure 25. The Eurozone accounts for
around two-thirds of the deficit.
The results for the banks in our coverage universe (plus the US universal/
investment banks for comparison) are summarised in Figures 26 to 29,
including a measure of liquidity. These are based on the pain ratio (left-
hand end of the bar) and plain ratio (right-hand end of the bar), ranked by
mid-point, plain and pain ratios.
Note: a flexor model based on the spreadsheet used to calculate the ratios
and these deficits is available on request. The adjustments to equity and to
assets can be varied, as can the risk weights (if desired). The output is on
both a per bank and a regional basis.
Figure 25. Eurozone banks account for two-thirds of the deficit
Capital deficit/surplus (bn) by unweighted equity-to-assets ratios, aggregate European banks
a) Ratio 1 (Plain ratio) b) Ratio 2 (Pain ratio)


Ratio 1 Ratio 2 Ratio 3 Ratio 4
Plain
('idiosyncratic event')
Pain
('systemic failure')
Risk Weights
+ Tangible Equity
Risk Weights
+ Adjusted Tangible Equity
3% -265 165 -78 -157
4% -60 458 186 108
5% 145 752 450 373
6% 351 1,046 714 638
7% 556 1,339 978 904
8% 761 1,633 1,242 1,169
Europe EU Eurozone UK
3% -265 -245 -98 -133
4% -60 -58 17 -73
5% 145 129 133 -14
6% 351 315 248 45
7% 556 502 364 105
8% 761 688 479 164
Europe EU Eurozone UK
3% 165 128 137 -4
4% 458 388 295 84
5% 752 649 453 173
6% 1,046 909 611 261
7% 1,339 1,169 769 349
8% 1,633 1,430 927 437
European Banks
Banking
54

Figure 26. Usual suspects
Equity-to-assets pain versus plain ratio; individual European and US banks, 31/12/12
(Left hand of bar = pain ratio; right hand of bar = plain ratio; ranked by mid-point)

Note: Commerzbank pain ratio increases from 2.2% to 2.5% post rights issue

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
VONN
BAER
CITI
STAN
RBI
GS
DNB
SWEDA
KBC
HSBA
BAC
BBVA
RBS
MS
ISP
JPMC
EBS
UCG
SHBA
INGA
EFGN
LLOY
NDA
SEB
UBSN
DANSKE
BARC
BNP
CBK
SAN
GLE
DBK
CSGN
ACA
'Pain' ratios
'Plain' ratios
European Banks
Banking
55
Figure 27. Few banks exceed 6% on our plain ratio (idiosyncratic risk basis)
Equity-to-assets pain versus plain ratio, individual European banks, 31/12/12
(Left hand of bar = pain ratio; right hand of bar = plain ratio; ranked by plain ratio)


0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
CITI
GS
VONN
RBI
BAC
MS
STAN
JPMC
BAER
RBS
KBC
BBVA
ISP
DNB
UCG
HSBA
SWEDA
EBS
UBSN
LLOY
BARC
INGA
SHBA
NDA
CBK
EFGN
SAN
SEB
BNP
DANSKE
GLE
DBK
CSGN
ACA
European Banks
Banking
56
Figure 28. Very few banks exceed the 4% pain ratio threshold (systemic crisis basis)
Equity-to-assets pain versus plain ratio, individual European banks, 31/12/12
(Left hand of bar = pain ratio; right hand of bar = plain ratio; ranked by pain ratio)


0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
VONN
BAER
STAN
SWEDA
DNB
HSBA
EFGN
SHBA
INGA
EBS
RBI
KBC
NDA
DANSKE
LLOY
GS
SEB
BBVA
ISP
CITI
RBS
BNP
UBSN
BARC
UCG
JPMC
CBK
GLE
BAC
MS
SAN
DBK
ACA
CSGN
European Banks
Banking
57
Figure 29. Banks with liquid balance sheets also typically have stronger capital ratios
Liquidity ratios cash and central bank balances as % assets, selected banks, 31/12/12

Note: Assets as per ratio 1; ie plain ratio

0% 5% 10% 15% 20%
DNB
SHBA
STAN
SAN
DBK
LLOY
SEB
RBS
BARC
UBSN
SWEDA
CSGN
BBVA
BNP
GLE
NDA
HSBA
EBS
RBI
DANSKE
ACA
CBK
INGA
KBC
UCG
ISP
VONN
BAER
EFGN
GS
BAC
CITI
MS
JPMC
European Banks
Banking
58
Figure 30. Capital ratios at some banks are very sensitive to Level 3 valuation
Tangible-equity-to-tangible-assets ratio sensitivity to Level 3 valuations, individual banks, 31/12/12

Note: Tangible equity defined as reported equity less minorities and intangibles. Tangible assets defined as reported balance sheet assets less intangible assets
and with derivatives netted off

Level 3 Assets
as % Tangible Equity -10% -20% -30% -40% -50%
Barclays 49% -21 -41 -62 -83 -104
BBVA 4% -2 -4 -6 -8 -10
BNP Paribas 42% -16 -32 -48 -64 -80
BoA 26% -16 -32 -48 -64 -81
Citi 15% -12 -23 -35 -46 -58
Commerzbank 13% -5 -10 -14 -19 -24
Credit Agricole 16% -2 -5 -7 -10 -12
Credit Suisse 133% -38 -76 -115 -154 -193
Danske Bank 16% -6 -12 -18 -24 -29
Deutsche Bank 96% -29 -57 -86 -116 -145
DNB 114% -60 -120 -181 -243 -306
EFG International 14% -5 -11 -16 -22 -27
Erste 3% -1 -3 -4 -6 -7
Goldman Sachs 76% -49 -99 -150 -201 -252
Handelsbanken 2% -1 -1 -2 -3 -3
HSBC 11% -6 -12 -17 -23 -29
ING 11% -5 -10 -14 -19 -24
Intesa 8% -4 -9 -13 -17 -22
JP Morgan 62% -36 -73 -110 -147 -185
Julius Baer 0% 0 0 0 0 0
KBC 40% -22 -45 -68 -91 -114
Lloyds 10% -4 -9 -13 -17 -21
Morgan Stanley 55% -33 -67 -101 -135 -169
Nordea 14% -5 -11 -16 -22 -27
Raiffeisen 1% -1 -2 -2 -3 -4
RBS 19% -11 -22 -33 -44 -55
Santander 3% -1 -2 -3 -4 -5
SEB 13% -5 -10 -15 -20 -25
SocGen 18% -5 -11 -16 -22 -27
Standard Chartered 13% -8 -16 -24 -32 -40
Swedbank 0% 0 0 -1 -1 -1
UBS 37% -16 -32 -48 -65 -81
Unicredit 23% -12 -23 -35 -47 -59
Vontobel 0% 0 0 0 0 0
Effect of Level 3 Asset Haircut on TE/TA ratio (bps)
European Banks
Banking
59
Figure 31. Capital generation is most sensitive to the cost of risk but also costs
Capital generation relative to assets sensitivity to key performance metrics (2013 estimates)

Note: For simplicity, 30% tax rate assumed for all banks except calculation of LLC sensitivity of Intesa and Unicredit as LLC are not tax
deductible
2. How to make good the shortfall
Before discussing the options for making good any shortfall in capital, it is worth
putting the scale of the deficit into context. As shown in Figure 32 below, between
end-2009 and end-2012, the tangible equity of the listed European banks in our
coverage universe increased by c200bn, of which 75bn came from Eurozone
banks. Over the next three years, we estimate that tangible equity will increase by
150bn and 75bn respectively. The estimates are based on retained earnings and
only include the capital raises, already announced, from Commerzbank and
Deutsche Bank.
NIM Costs/ATA LLC/ATA RoA Costs -10% NII + 5% LLC - 25%
(bp assets) (bp assets) (bp assets)
Barclays 0.80% 1.27% 0.22% 0.23% 9 3 4
BBVA 2.49% 1.77% 0.87% 0.85% 12 9 15
BNP 1.09% 1.25% 0.21% 0.27% 9 4 4
Commerzbank 0.86% 1.13% 0.26% 0.05% 8 3 5
Credit Agricole 0.72% 0.64% 0.16% 0.12% 4 3 3
Credit Suisse 0.36% 1.16% 0.01% 0.17% 8 1 0
Danske Bank 0.99% 0.78% 0.23% 0.25% 5 3 4
Deutsche Bank 0.73% 1.29% 0.08% 0.12% 9 3 1
DNB 1.22% 0.91% 0.15% 0.59% 6 4 3
EFG International 1.06% 2.56% 0.00% 0.54% 18 4 0
Erste 2.30% 1.91% 0.84% 0.28% 13 8 15
Handelsbanken 1.09% 0.66% 0.07% 0.57% 5 4 1
HSBC 1.35% 1.44% 0.22% 1.19% 10 5 4
Intesa 1.44% 1.35% 0.65% 0.30% 9 5 16
Julius Baer 0.86% 2.80% 0.00% 0.60% 20 3 0
KBC 1.64% 1.59% 0.41% 0.60% 11 6 7
Lloyds 1.16% 1.08% 0.56% 0.04% 8 4 10
Nordea 0.84% 0.77% 0.13% 0.48% 5 3 2
Raiffeisen 2.42% 2.37% 0.73% 0.29% 17 8 13
RBS 0.88% 1.10% 0.41% 0.04% 8 3 7
Santander 2.37% 1.63% 0.95% 0.45% 11 8 17
SEB 0.72% 0.89% 0.04% 0.50% 6 3 1
SocGen 0.93% 1.28% 0.28% 0.23% 9 3 5
Standard Chartered 1.68% 1.63% 0.21% 0.82% 11 6 4
Swedbank 1.12% 0.86% 0.02% 0.80% 6 4 0
UBS 0.50% 1.96% 0.01% 0.15% 14 2 0
Unicredit 1.55% 1.62% 0.78% 0.13% 11 5 19
Vontobel 0.28% 2.85% 0.00% 0.58% 20 1 0
Weighted Average 1.09% 1.27% 0.30% 0.34% 9 4 5
Simple Average 1.19% 1.45% 0.30% 0.40% 10 4 6
Annual Capital Generation If Key Performance Metrics
European Banks
Banking
60
Figure 32. Europe has transformed its capital base before
Tangible equity aggregate listed European and Eurozone banks (bn)

Note: Aggregate of banks covered by Berenberg
In order to make good the capital deficit identified above, banks have the option of
permanent or contingent capital combined with an unspecified time period. We also
discuss the incentives required to encourage compliance.
a. Permanent capital
Classically, banks can either raise fresh equity (eg accelerated book-build or rights
issue) or retain earnings. The impact of retained earnings can be boosted by reducing
or passing the dividend and/or generating capital gains through disposing of assets
(whole businesses or equity stakes).
However, banks, especially Eurozone banks, will struggle to make good their deficits
through retained earnings. As can be seen in Figure 33, the listed European banks
under our coverage are expected to generate 80bn of net income (ie before
dividends) in 2013, of which 30bn comes from Eurozone banks. As noted in
Figure 31, de-costing and de-risking the balance sheet can boost capital generation
relative to assets by c15bp on average.
Note: while the listed banks that we cover do not represent the whole European
sector (there are also the small listed and the unlisted banks), our coverage accounts
for 51% of all Eurozone banks by revenues and 65% of all EU27 banks by revenues.
More importantly, they accounted for all of the net income in their respective
geographies in 2011 and 2012!
0
200
400
600
800
1,000
1,200
2009 2010 2011 2012 2013e 2014e 2015e
Total Europe Euro-Zone
European Banks
Banking
61
Figure 33. Retained earnings will take years to make good the deficit
Net income aggregate of listed European and Eurozone banks (bn)

Note: Aggregate of banks covered by Berenberg
For investment banks, one option to rebuild capital bases quickly is to retain
employee bonuses. We discussed such an instrument Capital Adequacy Buffer
Securities (CABS) in Investment Banks: Time to change the model, 20 July 2012.
A more contentious option is to shrink the balance sheet through running down or
selling the loan book. Unpopular with politicians, it is arguably inevitable given the
end of the debt cycle and planned deleveraging by the private sector. Note also, as
some have pointed out (eg Admati and Hellwig), that capital is a financing decision
and in theory should not affect the asset side of the balance sheet. Only marginally
profitable business may be affected by a change in the funding mix.
Another option used by many banks to meet Basel capital ratios is RWA
optimisation, but this is not an option with an unweighted equity-to-assets ratio by
definition. Figure 34 highlights changes in the average risk weight (RWA/assets) for
the major European banks since Q1 2011; ie just before the EBAs infamous stress
test. We note the following.
Average decrease in average risk weights over the last two years is 5.5%
points on a simple basis and 3.5% points on a weighted basis.
Banks least likely to optimise their RWA were the Swiss banks (where
average risk weights typically increased) and the UK banks. Both the Swiss
and the UK regulators have been at the forefront of over-riding the risk-
weight process.
Banks most likely to optimise their RWA were banks in the periphery
specifically Italy, Spain, Portugal and Ireland.
The most surprising results (positively) were Santander, Commerzbank
and Unicredit which ranked just above the median value; and Deutsche
Bank which ranked in the top quartile.
The most surprising results (negatively) were SEB and Nordea.
0
20
40
60
80
100
120
2009 2010 2011 2012 2013e 2014e 2015e
Total Europe Euro-Zone
European Banks
Banking
62
Figure 34. Hmmmthe bigger the pressure on capital, the bigger the drop
in average risk weights
Average risk weights change Q1 2011 to date, European banks (top 50 listed)

Note: Average risk weight defined as RWA as % total assets on balance sheet
Source: Berenberg research, SNL
b. Contingent capital
Contingent capital is defined as capital not currently on the banks balance sheet but
available at the banks discretion and/or subject to certain criteria being met. To be
effective, the market (and regulator) must believe in its availability.
-30% -20% -10% 0% 10% 20%
Credit Suisse
UBS
RBS
St. Galler KB
Walliser KB
Standard Chartered
Berner KB
BNP
Barclays
Luzerner KB
Deutsche Bank
Pohjola
Deutsche Postbank
Mediobanca
HSBC
CIC
KBC
DNB
Handelsbanken
Unicredit
Santander
Commerzbank
Julius Baer
Komercn banka
SocGen
st. Volksbanken
Raiffeisen
Danske Bank
BBVA
Credit Agricole
Swedbank
BCV
Lloyds
Erste
Monte dei Paschi
Nordea
Intesa
Natixis
BPER
BoI
SEB
AIB
Sabadell
BES
CaixaBank
Bankinter
UBI
Banco Popular
Banco de Valencia
Banco Popolare
European Banks
Banking
63
Contingent Convertibles (CoCos) are one form where debt is converted to equity
subject to certain conditions. We have been critical of these from their inception.
CoCos suffer from a time consistency problem at the point that they need to be
triggered, they are unlikely to be triggered as management fears the consequences of
the trigger. The problems with the trigger are both the level and defining if it has
happened. In some cases, the trigger is based on a CT1 capital ratio below 7%,
which under Basel III is where dividend and bonus payments are restricted and a
bank would be perceived as being in increasingly severe difficulty. Defining the
trigger is also fraught: accounting triggers suffer from the timeliness of the
accounting data; market-based triggers can be affected by volatility and manipulated;
while regulatory triggers are potentially ad hoc in nature and thus uncertain.
We have in mind three other instruments, one proposed and two historical.
Finaxioms standby capital. A UK financial services partnership,
Finaxiom, has developed a form of contingent capital which it describes as
standby capital. It takes the form of an on-demand financial contract.
The contingent capital pledged by an investor is backed by assets provided
by the investor and held in a ring-fenced SPV. The investor promises to
deliver the liquidity upon demand by the bank in return for an annual fee
(equating to a yield of +/- 8% pa) and equity at a pre-agreed discount to the
banks share price or NAV at the time of any call. The trigger is simple it
is at the discretion of the banks management rather than being based on a
capital ratio being breached. The investor keeps the return on his pledged
assets as well as receiving the generous retainer fee. The contract is a five-
year rolling term reviewable annually as to risk profile within agreed
parameters. Our understanding is that it has received regulatory support as
well as interest from both investors and issuers; ie banks and others.
It has echoes of two earlier forms of contingent capital reserved liability in
the UK and double liability in the US and Canada, both prevalent from the
mid-19
th
century to the mid-20
th
century. Both, however, were only
triggered on bankruptcy.
Reserved liability. The UKs Joint Stock Bank Act of 1879 introduced the
concept of reserved liability to address the perceived disadvantages of the
then prevalent unlimited liability. The influential banker George Rae
(Chairman of the North and South Wales Bank) persuaded the government
to adopt a system of reserved liability, whereby any capital not called up
was divided between shares on call at the discretion of the banks directors
and reserve share capital which could only be called in the event of
bankruptcy. In other words, share capital not called up or fully paid.
Reserved liability remained in use in the UK at least into the 1930s. In 1934,
Midland Banks share capital was divided into 12 par stock, of which 2.50
was paid in, 2.50 was callable and 7 was a reserve liability of
shareholders to creditors. Was it effective? We note its use in the UK
coincided with the 100-year absence of financial crises (defined as a threat to
the payments system) between 1866 and the early 1970s.
Double liability. Double liability appeared in North America at about the
same time as reserved liability in the UK. It remained in existence at least
until the 1930s. Under double liability, stockholders in US and Canadian
banks were liable for further losses over and above their equity investment
up to the par value of the stock.
European Banks
Banking
64
In event of the property and assets of the bank being insufficient to pay its debts
and liabilities, each shareholder of the bank shall be liable for the deficiency to an
amount equal to the par value of the shares held by him, in addition to any
amount not paid up on such shares.
Bank Act of 1871, Canada
c. Time period
The time period over which banks can make good any deficit identified is perhaps as
important as the means by which any deficit is filled. If banks had to do so within
one year, it would clearly place enormous strain on the system. If banks were
allowed 10 years, it would lack credibility given the likely reoccurrence of the next
crisis. The answer lies somewhere in between and will vary depending on whether
capital is permanent or contingent.
d. Incentives
We have long argued that bank regulation should be based around incentives not
rules (see European Banks: Mad, bad and dangerous to know, 28 January 2013). Banks will
always game rules, but the right incentives should in theory align bank behaviour
with that desired by their stakeholders. Possible incentive reforms we have discussed
in the past include:
setting a high minimum dividend payout ratio to stop banks growing and
therefore taking on risk;
for investment banks, dividend decisions should be taken at the same time
as variable compensation decisions so that the two are balanced;
less frequent reporting of results (the EC has recently announced that all
corporates can drop quarterly reporting from 2015. Banks take note!);
allowing the bank to fail to encourage the others.
Writing in the Financial Times, a Harvard law professor (Mark Roe) proposed
changing the tax treatment of debt. (In most jurisdictions, interest payments on debt
for all corporates, including banks, are tax deductible.) With debt taxed more and
equity taxed less by such a reform, the incentives inside big banks would better align
with Brown-Vitter, where Brown-Vitters bill in the US argues that banks should
hold much more capital to absorb losses and have less risky debt. As noted earlier,
the reduction in equity ratios in the UK through the 1970s coincided with the
introduction of corporation tax in the mid-1960s, which effectively made debt
financing cheaper relative to equity. Clearly this would affect retail deposits as well as
wholesale debt, but given current interest rates on deposit products are so low, the
impact would be minimal.
3. Addressing the RoE impact
Lower leverage reduces a banks RoE, all other things being equal. In order to
reduce or even eliminate the impact on its economic profit (RoE less cost of equity),
a bank has two choices:
Increase RoA. In theory, a better capitalised bank is a less risky proposition
to depositors and bond holders who are therefore likely to accept a lower
return. We would also look to banks to reduce their asset risk; ie de-risk the
banks balance sheet. As the CEO of Handelsbanken (one of the very few
European banks with a credit culture) repeatedly points out, the only
acceptable target for loan losses is zero. Swedbanks new management team
under Michael Wolf has shown the very clear benefits of adopting such a
European Banks
Banking
65
strategy.
Reduce cost of equity. Linked to increasing RoA, a better capitalised bank
and a bank with a less risky balance sheet is likely to enjoy a lower cost of
equity. For example, the implied cost of equity for European banks between
1 January 2007 and 31 August 2011 was 10.7% but only 9.3% for the
Swedish banks.
4. Catalysts for change
There are several catalysts which may crystallise the capital deficits we believe that
European banks face.
Investor/market pressure. This has been limited to date beyond bringing
forward compliance with Basel III from 2019 to now. As some participants
have observed, if the regulator does not want more capital and management
does not want more capital, why should I ask for more capital?
Bank management voluntarily building capital. Turkeys may not vote
for Christmas, but such a scenario is not impossible given the example of
the Swedish banks, especially Swedbank and Handelsbanken. If a bank were
to see a funding advantage (the argument pushed by the Swedish banks),
then it may chose to build capital ratios beyond what the regulator demands.
However, it remains unlikely certainly peer pressure is unlikely to prompt
it, as the CEO of Danske Bank admitted on the Q1 conference call.
We have a relatively high leveragea low leverage ratio that is but were not so
concerned about that at the moment. We have different ways to operate the bank.
Its not a specific problem for Danske Bank. I think you have that problem
across Europe, where European banks need to discuss what is relevant, what is
the relevant mission, and so on.
Eivind Kolding, CEO Danske Bank (May 2013)
Political/regulatory pressure following bank balance sheet audits. We
believe that this is the most likely driver and note the change in sentiment in
the last month or so, with the ECB now falling into line with the Bank of
Englands thinking.
We need to create full transparency about the risks on banks balance sheets.
Such transparency is a pre-condition for the banking sector to return to lasting
health. And a healthy banking sector is a pre-condition to revitalising bank
lending.
Mario Draghi, President ECB (June 2013)
I am not sure advanced economies in general will find it easy to get out of their
current predicament without creditors acknowledging further likely losses, a
significant writing down of asset values, and recapitalisation of their financial
systems. Only then will it be possible to return to a more normal provision of the
vital banking services so crucial to an economic recovery...Just as in 2008, there is
a deep reluctance to admit the extent of the undercapitalisation of the banking
system in parts of the industrialised world[The] pretence that debts could be
repaid [was comparable to the 1930s]. We must not repeat that mistake.
Mervyn King, Governor of the Bank of England (October 2012)
Both the EBA and the ECB plan to conduct an audit of bank balance sheets
beginning in late 2013 and concluding sometime in H1 2014. The EBAs
motivation is to try to regain credibility for its next set of stress tests (Dexia
European Banks
Banking
66
was ranked the 13
th
strongest bank in the July 2011 stress test, months
before it failed). The ECBs motivation is to understand what risks it is
taking on when it becomes the single supervisor in the Eurozone.
We cannot stress enough the significance of the EBA/ECB balance sheet
audits. As we argued in a recent note (European Banks: Europe the final
countdown, 20 May 2013), this could be Europes Japanese moment. As
shown in Figure 35, Japans Takenaka plan (where banks were forced to
come clean about the state of their balance sheets and to recapitalise them)
marked the end of a 10-year bear market in banks. See UK Banks: Financial
repression to bear on the sector, 29 February 2012, for more detail of the plan.
Figure 35. I think Im turning Japanese, I really think so.
Share price performance banks versus market, Japan (actual) versus Europe (2005
rebased to 1993)

Source: Berenberg research, DataStream
To conclude our discussion of potential catalysts for banks raising capital, we
highlight recent comments from the German Finance Minister.
The single supervisor, scheduled to start operating under the European Central Bank in
the summer of 2014, will not only help prevent banks from accumulating excessive risk.
Standing above national authorities, it will increase the pressure on banks to repair their
balance sheets.
Wolfgang Schuble, Minister of Finance, Germany
The German Finance Ministers comments from an op-ed written for the Financial
Times in May 2013 contain two clear messages.
Banks must repair their balance sheets. This has two implications:
recognition of the true value of assets and ensuring the provision of
adequate capital within the liability structure of a bank.
Banks cannot be trusted. The phrase help prevent banks from
accumulating excessive risk is rather chilling, in our view. It clearly suggests
that the authorities bluntly do not trust banks any longer to do their job
which is, quite simply, to manage risk. Banking is about nothing else, period.

20
30
40
50
60
70
80
90
100
110
120
93 95 97 99 01 03 05 07 09 11 13
Japan Europe
Takenaka plan announced
European Banks
Banking
67
Feedback on our views
You have been wrong! If I listened to the team over the last year I would
have lost my job.
While we have been negative on European banks overall, some of our biggest
concerns have been with the Eurozone banks. In contrast, we have been very
positive on the Nordic banks as well as more broadly a group of banks we have
identified as long-term winners (ING, KBC, HSBC, UBS, Swedbank and
Handelsbanken).
As we note in the introduction to this report, Eurozone banks have been weak
performers in the nine months following OMT. In absolute terms, they are now
back to levels reached on 11 September 2012 in the immediate aftermath of the
OMT euphoria. Relative to the broader Eurozone market, banks are now below the
level reached on 5 September, the day OMT was announced. Looking back over the
last 40 years, in relative terms Eurozone banks have only been lower than they are
today during May, June and July last year and April this year. Bar the depths of last
Julys meltdown, the relative is only 10% off the lowest it has ever been in 40
years!
In contrast, Nordic banks have increased in absolute terms and outperformed both
the sector and the market over one-, three-, six- and 12-month periods.
Timing: the structural issues that the team are talking about may not
materialise for a long time. What should I do in the short term?
In the past, we have advocated a barbell strategy. The safe end of the barbell would
be made up of our long-term winners (ING, KBC, HSBC, UBS, Swedbank and
Handelsbanken) which are characterised as managing for secular decline and having
relatively strong balance sheets. The other end of the barbell would include the
better-quality Eurozone banks such as Intesa, BBVA and BNP (note: all Sell-rated).
The government will want to support the Eurozone recovery and will
therefore not put pressure on banks to raise capital. The conclusions of the
ECBs balance sheet review will be watered down.
Political interference is a major risk to our view. But as both the ECB and
German/Dutch finance ministers have finally realised, until bank balance sheets
have been cleaned up, bank lending will remain constrained. It took the Japanese
authorities until 2002 to realise this, leading to the lost decade.
That said, the ultimate problem is one of demand, in our view the end of a 70-year
debt cycle will be characterised by weak loan growth regardless of banks propensity
to lend.
The central banks will save the day.
Short-term possibly, but we would make two points.
First, the ECB has fallen into line with the Bank of Englands thinking that bank
balance sheets must be fixed.
Second, there is a growing awareness (concern even) that the limits of monetary
policy have been reached. The Federal Reserve minutes reveal a debate on this point.
Others have been more vocal. A Spanish economics professor has likened modern-
day central banking to Soviet-era central planning both assume the possession of
perfect knowledge when in fact they have anything but. Bill Gross, co-CIO and
founder of Pimco, has also criticised central bank policies on the simple premise that
they dont seem to be working very well, leading him to conclude that it is their
policies that may be now part of the problem rather than the solution.
European Banks
Banking
68
What stocks would you own if you were more positive on the macro
environment in Europe?
If we were more positive on the macro environment in Europe and therefore by
extension the outlook for growth, we would favour those banks which currently
have high loan loss charges (LLC) relative to their pre-provision operating profits
(PPOP). Our bear case is based on anaemic economic growth forcing the
crystallisation of hidden loan losses (which arise from unsustainable forbearance),
thus making loan losses higher for longer. We have always been clear that this is one
of the basic building blocks of our bear case. Change the growth assumption and we
would be more constructive.
Banks where the ratio of PPOP to LLC is very low include much of the Eurozone
but we would highlight: Italian, Spanish and Austrian banks.
Post the current correction, the rotation out of bonds into equities and from
defensives into riskier names will resume. In this environment, you must own
banks.
This is broadly similar to the point above. The current correction in the market has
been attributed to the rapid rise in real interest rates leading to volatility in the
pricing of a wide range of financial assets. The bull case runs that higher real rates
reflect positive expectations for economic growth. This in turn would reduce loan
loss assumptions for banks and therefore lead to a rapid increase in consensus
estimates.
Note that over the very long-term 30+ years the performance and returns of
banks are negatively correlated with the level of interest rates, reflecting the bond-
like characteristics of a banks balance sheet.
Note also that to sustain the current valuation of many European banks, you need
earnings to increase and lower loan loss charges are the most realistic driver.
Capital: regulators arent worried about it; management arent worried about
it; why should I worry about it?
This argument was valid in 2006 and 2007. More seriously, we would note that
regulators and politicians are beginning to worry. We note comments in the last
month from the German/Dutch finance ministers and especially from the ECB
which all suggest that the prime concern has become the quality of bank balance
sheets, for which read capital levels.

European Banks
Banking
69
Valuation
Figure 36. European bank valuation earnings


Printed Consensus EPS EPS Growth Consensus P/E DPS Yield
11 Jun 13 Price 2013E 2014E 2015E 12E/13E 13E/14E 14E/15E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E
Benelux
ING 6.99 1.00 1.12 1.16 4% 11% 4% 7.0x 6.3x 6.0x 0.02 0.16 0.31 0.3% 2.2%
KBC 30.9 3.55 4.02 4.28 6% 13% 6% 8.7x 7.7x 7.2x 0.08 0.66 1.01 0.3% 2.1%
Russia, C & Eastern Europe
Erste Group 23.8 2.01 2.81 3.30 40% 40% 17% 11.8x 8.5x 7.2x 0.51 0.70 0.86 2.1% 2.9%
Komercni 3722 321 335 358 -10% 5% 7% 11.6x 11.1x 10.4x 223 237 243 6.0% 6.4%
Bank Pekao 172 10.1 10.9 12.1 -9% 8% 11% 17.0x 15.7x 14.1x 7.86 8.48 9.68 4.6% 4.9%
PKO BP 36.8 2.55 2.92 3.25 -16% 15% 11% 14.4x 12.6x 11.3x 1.42 1.54 1.82 3.9% 4.2%
OTP Bank 5080 538 615 786 12% 14% 28% 9.4x 8.3x 6.5x 155 220 252 3.1% 4.3%
Raiffeisen Bank International 25.4 3.05 3.85 4.54 -13% 26% 18% 8.3x 6.6x 5.6x 1.00 1.06 1.26 3.9% 4.2%
Sberbank 97.8 16.86 18.19 20.61 8% 8% 13% 0.2x 0.2x 0.1x 3.37 3.60 3.98 nm nm
France
BNP Paribas 43.9 4.73 5.42 6.31 -15% 15% 16% 9.3x 8.1x 7.0x 1.72 2.07 2.44 3.9% 4.7%
Credit Agricole 7.01 0.93 1.15 1.32 47% 24% 15% 7.6x 6.1x 5.3x 0.28 0.32 0.41 3.9% 4.5%
Natixis 3.49 0.32 0.37 0.41 5% 17% 11% 11.0x 9.4x 8.5x 0.14 0.20 0.18 4.0% 5.6%
Societe Generale 29.7 3.23 4.16 5.00 11% 29% 20% 9.2x 7.1x 5.9x 0.94 1.50 1.90 3.2% 5.0%
Germany
Commerzbank 7.59 0.50 0.90 1.25 -48% 80% 40% 15.3x 8.5x 6.1x 0.00 0.07 0.37 0.0% 1.0%
Deutsche Bank 36.2 4.07 4.77 5.82 13% 17% 22% 8.9x 7.6x 6.2x 0.82 1.06 1.46 2.3% 2.9%
Italy
Banca Monte Paschi Siena 0.23 -0.02 0.01 0.02 -33% nm 156% nm 25.2x 9.9x 0.00 0.00 0.00 0.0% 0.4%
Banca Popolare di Milano 0.40 0.02 0.04 0.05 15% 74% 30% 17.2x 9.9x 7.6x 0.01 0.01 0.02 1.8% 3.5%
Banco Popolare 1.05 0.09 0.15 0.21 nm 64% 33% 11.2x 6.8x 5.1x 0.02 0.04 0.06 1.8% 3.9%
Intesa Sanpaolo 1.36 0.11 0.14 0.18 -13% 37% 23% 13.0x 9.5x 7.7x 0.05 0.07 0.09 3.7% 4.8%
Mediobanca 4.96 0.31 0.57 0.65 -41% 83% 14% 15.9x 8.7x 7.6x 0.08 0.19 0.22 1.6% 3.7%
UBI Banca 3.17 0.16 0.29 0.39 -25% 87% 32% 20.2x 10.8x 8.2x 0.06 0.10 0.14 1.9% 3.2%
Unicredit 3.99 0.19 0.37 0.55 -4% 93% 49% 20.8x 10.8x 7.2x 0.08 0.13 0.18 2.1% 3.1%
Portugal
Millennium BCP 0.10 -0.02 0.00 0.02 -75% nm 350% nm 25.0x 5.6x 0.00 0.00 0.00 1.0% 1.0%
Banco Espirito Santo 0.72 0.00 0.06 0.12 nm nm 83% nm 11.3x 6.2x 0.00 0.01 0.02 0.1% 1.8%
Banco BPI 0.97 0.07 0.10 0.14 -27% 37% 43% 13.3x 9.7x 6.8x 0.00 0.00 0.00 0.2% 0.4%
Scandinavia
Danske 113.5 8.75 12.2 14.2 60% 39% 16% 13.0x 9.3x 8.0x 2.27 4.35 5.50 2.0% 3.8%
DNB 92.0 9.25 10.46 11.19 11% 13% 7% 9.9x 8.8x 8.2x 2.15 2.46 3.69 2.3% 2.7%
Jyske Bank 225.5 21.0 25.5 28.6 90% 21% 12% 10.7x 8.9x 7.9x 0.00 0.00 0.00 0.0% 0.0%
Nordea 79.1 0.82 0.91 0.99 9% 12% 8% 11.1x 9.9x 9.2x 0.41 0.48 0.51 4.5% 5.2%
Pohjola 12.3 1.07 1.15 1.24 -23% 7% 8% 11.5x 10.7x 9.9x 0.56 0.60 0.65 4.5% 4.8%
SEB 67.8 5.82 6.26 6.68 9% 8% 7% 11.6x 10.8x 10.2x 3.09 3.32 3.54 4.6% 4.9%
Sparebank 1 SR 51.3 6.17 6.74 6.89 18% 9% 2% 8.3x 7.6x 7.4x 1.56 1.73 1.96 3.0% 3.4%
Svenska Handelsbanken 284.2 21.6 22.9 24.3 1% 6% 6% 13.2x 12.4x 11.7x 11.4 12.1 12.9 4.0% 4.3%
Swedbank 152.8 13.3 14.2 14.9 9% 7% 5% 11.5x 10.8x 10.2x 10.13 10.64 11.13 6.6% 7.0%
Spain
Bankinter 2.85 0.20 0.26 0.31 44% 27% 20% 14.2x 11.1x 9.3x 0.09 0.11 0.14 3.2% 4.0%
BBVA 6.94 0.70 0.81 0.97 80% 16% 19% 9.9x 8.5x 7.2x 0.42 0.41 0.45 6.0% 6.0%
Banco de Sabadell 1.40 0.08 0.17 0.23 160% 115% 38% 17.9x 8.3x 6.0x 0.03 0.07 0.09 2.3% 4.8%
Banco Popular 0.63 0.02 0.07 0.09 nm 360% 29% nm 9.1x 7.1x 0.00 0.03 0.04 0.6% 5.2%
Banesto 3.51 0.38 0.53 0.67 nm 39% 26% 9.2x 6.6x 5.2x 0.13 0.22 0.30 3.7% 6.3%
Caixabank 2.67 0.10 0.28 0.36 870% 184% 29% 27.5x 9.7x 7.5x 0.21 0.20 0.21 7.8% 7.3%
Santander 5.41 0.49 0.60 0.70 35% 24% 16% 11.1x 9.0x 7.7x 0.57 0.52 0.54 10.5% 9.6%
Switzerland
BCV 477 33.4 34.1 36.2 -4% 2% 6% 14.3x 14.0x 13.2x 32.8 33.6 33.8 6.9% 7.0%
Credit Suisse 27.1 2.57 2.98 3.30 45% 16% 11% 10.5x 9.1x 8.2x 0.84 1.13 1.34 3.1% 4.2%
EFG International 11.45 1.00 1.11 1.33 31% 11% 20% 11.5x 10.4x 8.6x 0.18 0.33 0.51 1.6% 2.9%
Julius Baer 37.0 2.15 2.76 3.45 3% 28% 25% 17.2x 13.4x 10.7x 0.61 0.69 0.97 1.6% 1.9%
UBS 16.9 0.97 1.29 1.67 30% 32% 29% 17.3x 13.1x 10.1x 0.24 0.53 1.18 1.4% 3.1%
Vontobel 29.5 2.30 2.68 2.99 14% 17% 11% 12.8x 11.0x 9.8x 1.29 1.43 1.59 4.4% 4.8%
Turkey
Akbank 8.14 0.84 0.89 1.01 23% 6% 14% 9.7x 9.2x 8.1x 0.21 0.25 0.29 2.5% 3.1%
Garanti Bank 8.50 0.88 0.93 1.04 12% 7% 12% 9.7x 9.1x 8.1x 0.21 0.24 0.28 2.5% 2.8%
Turkiye Is Bankasi 5.90 0.75 0.77 0.84 11% 3% 9% 7.9x 7.7x 7.0x 0.16 0.18 0.20 2.7% 3.0%
Yapi Kredi 4.84 0.58 0.61 0.71 28% 6% 16% 8.4x 7.9x 6.8x 0.07 0.06 0.07 1.5% 1.3%
UK & Ireland
Barclays 309 36.6 43.9 51.2 3% 20% 17% 8.4x 7.0x 6.0x 7.31 9.68 13.64 2.4% 3.1%
HSBC 700 98 108 120 9% 10% 10% 11.0x 10.0x 9.1x 52.1 57.8 65.9 4.8% 5.3%
Lloyds 61.6 4.57 5.88 6.84 80% 29% 16% 13.5x 10.5x 9.0x 0.11 1.09 2.31 0.2% 1.8%
RBS 334.0 21.62 31.06 37.31 33% 44% 20% 15.4x 10.8x 9.0x 0.05 1.54 7.25 0.0% 0.5%
Standard Chartered 1480 232 252 274 8% 9% 9% 9.9x 9.1x 8.4x 91.90 100.50 110.50 4.0% 4.4%
Bank of Ireland 0.171 -0.02 0.00 0.01 -66% nm 250% nm nm 12.2x 0.00 0.00 0.00 0.0% 0.0%
European Banks
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70
Figure 37. European bank valuation book


Printed Consensus BVPS Consensus P/BV Consensus TBVPS TBVPS Growth Consensus P/TBV RoE RoTE
11 Jun 13 2013E 2014E 2013E 2014E 2013E 2014E 12E/13E 13E/14E 2013E 2014E 2013E 2014E 2013E 2014E
Benelux
ING 14.35 14.99 0.49x 0.47x 13.26 13.90 8% 5% 0.53x 0.50x 7.2% 7.6% 7.9% 8.2%
KBC 31.08 33.97 0.99x 0.91x 29.15 30.60 15% 5% 1.06x 1.01x 11.8% 12.4% 13.1% 13.5%
Erste Group 30.1 32.1 0.79x 0.74x 22.5 24.4 7% 9% 1.06x 0.98x 7.0% 9.0% 9.3% 12.0%
Komercni 2620 2711 1.42x 1.37x 2494 2589 8% 4% 1.49x 1.44x 12.9% 12.6% 13.4% 13.2%
Bank Pekao 90.4 93.0 1.90x 1.84x 88.3 92.3 6% 4% 1.94x 1.86x 11.3% 11.9% 11.8% 12.1%
PKO BP 20.7 22.1 1.78x 1.66x 19.8 21.3 9% 8% 1.86x 1.73x 12.6% 13.6% 13.4% 14.2%
OTP Bank 6061 6590 0.84x 0.77x 5121 5484 11% 7% 0.99x 0.93x 9.2% 9.7% 11.1% 11.6%
Raiffeisen Bank International 42.3 45.0 0.60x 0.57x 36.3 38.2 0% 5% 0.70x 0.66x 7.3% 8.8% 8.4% 10.3%
Sberbank 85.22 100.10 0.04x 0.03x 2.89 3.44 21% 19% 1.05x 0.88x 21.6% 19.6% nm nm
France
BNP Paribas 65.2 68.0 0.67x 0.65x 54.8 58.3 8% 7% 0.80x 0.75x 7.5% 8.1% 9.0% 9.6%
Credit Agricole 16.6 17.4 0.42x 0.40x 10.4 11.3 4% 9% 0.67x 0.62x 5.8% 6.8% 9.1% 10.6%
Natixis 5.63 5.85 0.62x 0.60x 4.86 5.02 4% 3% 0.72x 0.70x 5.6% 6.5% 6.6% 7.5%
Societe Generale 60.2 62.6 0.49x 0.47x 49.2 52.1 3% 6% 0.60x 0.57x 5.5% 6.8% 6.7% 8.2%
Germany
Commerzbank 23.95 24.23 0.32x 0.31x 21.63 20.80 -23% -4% 0.35x 0.36x 1.8% 3.7% 2.0% 4.2%
Deutsche Bank 58.0 61.5 0.62x 0.59x 45.7 48.5 2% 6% 0.79x 0.75x 7.0% 8.0% 9.0% 10.1%
Italy
Banca Monte Paschi Siena 0.56 0.61 0.40x 0.37x 0.50 0.48 -26% -5% 0.45x 0.47x nm 1.5% nm 1.8%
Banca Popolare di Milano 1.05 1.11 0.38x 0.36x 1.00 1.07 -10% 7% 0.40x 0.37x 2.1% 3.7% 2.2% 3.9%
Banco Popolare 4.71 4.82 0.22x 0.22x 3.72 3.84 -1% 3% 0.28x 0.27x 1.9% 3.2% 2.5% 4.1%
Intesa Sanpaolo 2.93 3.00 0.46x 0.45x 2.22 2.29 3% 3% 0.61x 0.59x 3.6% 4.9% 4.8% 6.4%
Mediobanca 7.96 8.45 0.62x 0.59x 7.57 8.06 5% 6% 0.65x 0.61x 4.0% 7.0% 4.2% 7.3%
UBI Banca 10.4 10.7 0.30x 0.30x 7.75 7.92 6% 2% 0.41x 0.40x 1.5% 2.8% 2.1% 3.7%
Unicredit 10.3 10.5 0.39x 0.38x 8.38 8.6 1% 2% 0.48x 0.47x 1.8% 3.6% 2.3% 4.4%
Portugal
Millennium BCP 0.14 0.15 0.71x 0.68x 0.14 0.15 -18% 4% 0.71x 0.69x nm 2.8% nm 2.8%
Banco Espirito Santo 1.56 1.73 0.46x 0.42x 1.59 1.64 2% 3% 0.45x 0.44x nm 3.9% nm 4.0%
Banco BPI 1.33 1.47 0.73x 0.66x 1.41 1.58 1% 12% 0.69x 0.62x 5.9% 7.2% 5.2% 6.7%
Scandinavia
Danske 144 153 0.79x 0.74x 125 134 6% 7% 0.91x 0.85x 6.2% 8.2% 7.2% 9.4%
DNB 85.0 93.4 1.08x 0.99x 81.8 90.2 10% 10% 1.13x 1.02x 11.4% 11.7% 11.9% 12.2%
Jyske Bank 242 265 0.93x 0.85x 238 261 10% 10% 0.95x 0.86x 9.1% 10.0% 9.3% 10.2%
Nordea 7.35 7.80 1.23x 1.16x 6.53 6.97 6% 7% 1.39x 1.30x 11.4% 12.0% 12.9% 13.5%
Pohjola 9.21 9.78 1.34x 1.26x 6.31 6.94 11% 10% 1.95x 1.78x 12.3% 12.1% 17.9% 17.3%
SEB 52.5 55.6 1.29x 1.22x 46.1 49.2 1% 7% 1.47x 1.38x 11.1% 11.6% 12.7% 13.2%
Sparebank 1 SR 54.4 59.8 0.94x 0.86x 53.6 59.1 13% 10% 0.96x 0.87x 12.0% 11.8% 12.2% 11.9%
Svenska Handelsbanken 174 184 1.63x 1.54x 164 174 9% 6% 1.74x 1.63x 12.8% 12.8% 13.8% 13.6%
Swedbank 96.3 99.7 1.59x 1.53x 85.5 88.4 4% 3% 1.79x 1.73x 14.0% 14.5% 15.9% 16.3%
Spain
Bankinter 3.70 3.82 0.77x 0.75x 3.46 3.48 7% 0% 0.82x 0.82x 5.6% 6.8% 6.0% 7.4%
BBVA 7.96 8.43 0.87x 0.82x 6.44 6.90 9% 7% 1.08x 1.01x 9.1% 9.9% 11.3% 12.2%
Banco de Sabadell 2.80 2.87 0.50x 0.49x 2.41 2.47 -4% 3% 0.58x 0.57x 2.7% 5.9% 3.2% 6.9%
Banco Popular 1.06 1.12 0.59x 0.57x 0.84 0.91 -16% 8% 0.75x 0.69x 1.3% 6.3% 1.6% 7.9%
Banesto 7.18 7.31 0.49x 0.48x 7.04 7.36 0% 5% 0.50x 0.48x 5.3% 7.3% 5.4% 7.4%
Caixabank 4.36 4.38 0.61x 0.61x 3.77 3.83 -10% 2% 0.71x 0.70x 2.2% 6.3% 2.4% 7.2%
Santander 6.94 7.1 0.78x 0.77x 4.70 4.86 -5% 3% 1.15x 1.11x 6.9% 8.6% 10.1% 12.6%
Switzerland
BCV 388 391 1.23x 1.22x 386 390 2% 1% 1.23x 1.22x 8.6% 8.7% 8.7% 8.8%
Credit Suisse 27.0 29.1 1.00x 0.93x 21.5 23.5 2% 9% 1.26x 1.16x 9.6% 10.6% 12.1% 13.2%
EFG International 9.40 10.26 1.22x 1.12x 6.72 7.59 8% 13% 1.70x 1.51x 11.6% 11.3% 15.3% 15.5%
Julius Baer 22.7 23.7 1.63x 1.56x 12.1 13.0 -8% 8% nm 2.84x 9.5% 11.9% 17.1% 22.0%
UBS 12.7 13.5 1.32x 1.25x 11.2 11.9 -4% 7% 1.51x 1.42x 7.6% 9.8% 8.6% 11.2%
Vontobel 25.2 26.4 1.17x 1.12x 23.4 24.4 8% 4% 1.26x 1.21x 9.4% 10.4% 10.2% 11.2%
Turkey
Akbank 6.00 6.65 1.36x 1.22x 6.00 6.66 17% 11% 1.36x 1.22x 15.0% 14.1% 15.0% 14.0%
Garanti Bank 5.67 6.34 1.50x 1.34x 5.73 6.41 17% 12% 1.48x 1.33x 16.5% 15.5% 16.5% 15.4%
Turkiye Is Bankasi 5.58 6.15 1.06x 0.96x 5.55 6.17 20% 11% 1.06x 0.96x 14.7% 13.1% 14.7% 13.2%
Yapi Kredi 4.08 4.71 1.19x 1.03x 3.87 4.42 22% 14% 1.25x 1.09x 15.5% 13.9% 16.4% 14.7%
UK & Ireland
Barclays 423 450 0.73x 0.69x 368 396 -1% 8% 0.84x 0.78x 8.5% 10.1% 9.9% 11.5%
HSBC 975 1028 1.11x 1.06x 825 881 9% 7% 1.32x 1.23x 10.5% 10.8% 12.4% 12.7%
Lloyds 62.5 66.0 0.99x 0.93x 56.3 60.0 -1% 7% 1.09x 1.03x 7.3% 9.2% 8.1% 10.1%
RBS 570.2 591.1 0.59x 0.57x 462.4 485.0 -1% 5% 0.72x 0.69x 3.8% 5.3% 4.6% 6.6%
Standard Chartered 1930.4 2087.1 1.19x 1.10x 1659.9 1812.9 12% 9% 1.38x 1.27x 12.7% 12.5% 14.8% 14.5%
Bank of Ireland 0.21 0.22 0.81x 0.78x 0.19 0.20 -5% 3% 0.90x 0.87x nm 1.9% nm 2.1%
European Banks
Banking
71
Figure 38. European bank valuation performance


Printed Price Market cap (bn) Absolute price performance Performance v.Euro STOXX Banks 600
11 Jun 13 Price 12m l 12m h Local Euro 1w 1m 3m 6m 12m 1w 1m 3m 6m 12m
Benelux
ING 6.99 4.57 7.91 26.8 26.8 -2% 3% 7% -2% 45% 0% 7% 9% -8% 8%
KBC 30.9 13.93 33.1 12.87 12.87 2% 0% 3% 32% 116% 4% 4% 5% 23% 60%
Erste Group 23.8 13.3 26.9 9.39 9.39 -5% -2% -7% 8% 65% -2% 1% -5% 1% 23%
Komercni 3722 3280 4235 141 5.51 0% 3% -10% -6% 11% 3% 6% -8% -12% -18%
Bank Pekao 172 133 173 45.0 10.54 5% 14% 7% 5% 23% 7% 18% 9% -2% -8%
PKO BP 36.8 30.5 38.5 45.9 10.76 8% 11% 7% 3% 15% 10% 15% 10% -4% -14%
OTP Bank 5080 3307 5313 1422 4.75 5% 4% 5% 27% 49% 7% 8% 7% 19% 11%
Raiffeisen Bank International 25.4 21.7 34.0 4.97 4.97 -3% -8% -15% -20% 11% 0% -4% -14% -25% -17%
Sberbank 97.8 81.4 112 2111 49.5 -1% -6% -7% 5% 20% 1% -2% -5% -2% -11%
France
BNP Paribas 43.9 26.2 47.9 54.5 54.5 -3% -2% -2% 2% 54% -1% 2% 0% -5% 15%
Credit Agricole 7.01 2.91 7.995 17.5 17.5 -3% 1% -3% 18% 122% -1% 5% -2% 10% 65%
Natixis 3.49 1.76 3.70 10.79 10.79 -3% 0% 7% 38% 73% -1% 4% 9% 29% 29%
Societe Generale 29.7 15.3 34.4 23.2 23.2 -3% -1% -4% 3% 70% -1% 3% -2% -4% 26%
Germany
Commerzbank 7.59 6.79 13.04 8.64 8.64 -2% -2% -30% -26% -27% 1% 2% -28% -31% -46%
Deutsche Bank 36.2 22.1 38.7 36.9 36.9 1% 0% 4% 6% 27% 3% 3% 6% -1% -6%
Italy
Banca Monte Paschi Siena 0.23 0.14 0.31 2.65 2.65 -7% 5% 7% 17% 5% -5% 9% 9% 10% -22%
Banca Popolare di Milano 0.40 0.30 0.62 1.28 1.28 -5% -15% -22% 2% 13% -2% -12% -21% -5% -16%
Banco Popolare 1.05 0.79 1.60 1.86 1.86 -8% -13% -11% -2% 9% -5% -10% -9% -9% -19%
Intesa Sanpaolo 1.36 0.85 1.54 21.1 21.1 -5% -3% 8% 12% 24% -3% 1% 10% 4% -8%
Mediobanca 4.96 2.34 5.66 4.27 4.27 -3% -3% 6% 22% 54% 0% 1% 8% 14% 14%
UBI Banca 3.17 1.82 4.04 2.86 2.86 -7% -7% -10% 8% 27% -5% -3% -8% 1% -6%
Unicredit 3.99 2.25 4.9 23.1 23.1 -7% -4% 1% 15% 47% -5% 0% 3% 8% 9%
Portugal
Millennium BCP 0.10 0.05 0.12 1.97 1.97 -5% -7% -10% 41% 85% -2% -3% -8% 31% 37%
Banco Espirito Santo 0.72 0.46 1.19 2.89 2.89 -4% -10% -27% -12% 40% -2% -6% -25% -18% 4%
Banco BPI 0.97 0.40 1.38 1.35 1.35 -5% -14% -19% 14% 134% -2% -10% -17% 7% 74%
Scandinavia
Danske 113.5 76.5 117 114.5 15.4 0% 9% 4% 16% 39% 3% 13% 6% 8% 3%
DNB 92.0 53.9 97.75 149.8 19.7 -4% -4% -1% 31% 63% -1% 0% 1% 22% 22%
Jyske Bank 226 148 242.3 16.1 2.2 -1% -4% 14% 39% 44% 1% 0% 16% 30% 7%
Nordea 79.1 54.9 83.9 320 36.7 -2% -1% 4% 28% 43% 0% 3% 6% 20% 6%
Pohjola 12.33 8.42 13.7 3 3.1 -1% -7% 0% 13% 41% 1% -4% 1% 5% 5%
SEB 67.8 41.7 72.45 147.1 16.9 -2% -3% -1% 22% 62% 1% 1% 1% 14% 20%
Sparebank 1 SR 51.3 30.1 54.25 13.1 1.7 -1% -1% 6% 40% 58% 1% 2% 8% 31% 17%
Svenska Handelsbanken 284 208 304 177 20.3 0% -4% 1% 19% 36% 2% 0% 3% 11% 1%
Swedbank 153 104.0 170 173.0 19.8 -1% -8% -4% 22% 43% 1% -4% -2% 14% 6%
Spain
Bankinter 2.85 1.32 3.06 2.50 2.50 1% 1% -1% 48% 78% 3% 5% 1% 38% 33%
BBVA 6.94 4.17 7.72 38.4 38.4 -3% -7% -8% 9% 39% -1% -4% -6% 1% 4%
Banco de Sabadell 1.40 1.17 2.27 4.14 4.14 -3% -10% -19% -34% 3% 0% -7% -18% -38% -23%
Banco Popular 0.63 0.53 1.06 5.40 5.40 -1% 6% -10% 12% -30% 2% 10% -8% 4% -48%
Banesto 3.51 1.90 3.99 2.41 2.41 0% 0% -4% 25% 31% 2% 4% -2% 17% -2%
Caixabank 2.67 1.95 3.15 12.4 12.4 -2% -5% -11% 3% 21% 0% -2% -10% -4% -10%
Santander 5.41 3.67 6.38 58.5 58.5 -2% -2% -7% -1% 25% 1% 2% -5% -7% -7%
Switzerland
BCV 477 466 560 4.1 3.3 0% -7% -10% -5% -4% 2% -4% -8% -11% -29%
Credit Suisse 27.1 15.6 29.3 42.8 34.5 -3% -5% 7% 22% 45% 0% -1% 9% 14% 8%
EFG International 11.45 4.77 13.3 1.68 1.36 0% -11% -11% 34% 84% 2% -7% -9% 26% 37%
Julius Baer 37.0 29.9 41.0 8.29 6.69 -1% -4% -1% 13% 20% 1% 0% 1% 6% -11%
UBS 16.9 9.685 18.0 64.6 52.1 0% -3% 12% 13% 51% 2% 1% 14% 5% 12%
Vontobel 29.5 17.8 33.4 1.91 1.54 -2% -3% -11% 8% 51% 1% 1% -9% 1% 13%
Turkey
Akbank 8.14 6.00 10.50 32.6 13.0 0% -18% -14% -7% 36% 3% -15% -12% -13% 1%
Garanti Bank 8.50 6.34 11.35 35.7 14.2 1% -19% -10% -4% 32% 3% -16% -8% -11% -2%
Turkiye Is Bankasi 5.90 4.00 7.80 26.5 10.58 -5% -21% -13% -4% 48% -3% -17% -11% -10% 10%
Yapi Kredi 4.84 3.23 6.28 21.0 8.38 -2% -19% -11% -6% 50% 0% -16% -9% -12% 12%
UK & Ireland
Barclays 309 148 338 39.7 46.7 -3% -2% -3% 24% 62% 0% 2% -1% 16% 21%
HSBC 700 509 773 130.4 153 -3% -6% -5% 9% 32% 0% -2% -3% 2% -2%
Lloyds 61.6 27.8 63.7 43.8 51.5 0% 4% 23% 32% 120% 2% 8% 25% 23% 64%
RBS 334.0 193.3 370.6 20.4 24.1 0% 12% 9% 12% 50% 3% 16% 11% 5% 11%
Standard Chartered 1480.0 1092.0 1860.5 35.9 42.2 -4% -7% -18% -1% 9% -1% -3% -16% -8% -19%
Bank of Ireland 0.171 0.082 0.199 5.15 5.15 -8% -4% 9% 41% 75% -5% -1% 11% 32% 30%
European Banks
Banking
72
Figure 39. European bank valuation consensus estimates


Printed 2013E Consensus estimates change (%) 2014E Consensus estimates change (%)
11 Jun 13 # ests % up % down 1w 1m 3m 6m 12m YTD 1w 1m 3m 6m 12m YTD
Benelux
ING 26 4% 4% -1% -3% -5% -16% -26% -12% -1% -2% -4% -12% -22% -8%
KBC 22 14% 23% -2% -3% 1% -10% -15% -3% -1% -1% -1% -13% -19% -6%
Erste Group 21 0% 14% -1% -5% -8% -12% -28% -12% -1% -1% -3% -6% -18% -5%
Komercni 16 0% 19% -2% -3% -4% -7% -12% -6% -3% -3% -3% -9% -14% -7%
Bank Pekao 23 9% 26% -2% -1% -2% -8% -18% -7% -2% -3% -3% -11% -20% -9%
PKO BP 22 0% 32% -4% -7% -11% -18% -25% -15% -3% -7% -9% -17% -25% -14%
OTP Bank 14 14% 36% -2% -3% 0% -12% -19% -3% -3% -4% -16% -27% -31% -18%
Raiffeisen Bank International 22 18% 41% -6% -8% -17% -24% -33% -19% -5% -5% -15% -19% -30% -14%
Sberbank 6 17% 17% 0% 0% 4% 5% 7% 4% 0% 0% 3% 2% 3% 4%
VTB 4 0% 0% 0% 0% 0% 0% 0% 0% 30% 30% 30% 30% 30% 30%
France
BNP Paribas 28 7% 25% -1% -6% -11% -13% -19% -13% -1% -4% -6% -8% -14% -8%
Credit Agricole 24 8% 4% 0% -7% -10% -14% -13% -13% 0% -6% -8% -9% -10% -8%
Natixis 14 14% 0% 2% -1% -7% -17% -25% -10% 3% 0% -5% -14% -18% -5%
Societe Generale 27 30% 22% -2% -8% -12% -14% -22% -14% -3% -2% -4% -7% -13% -7%
Germany
Commerzbank 28 25% 54% -1% -36% -55% -63% -79% -58% -5% -21% -41% -47% -66% -43%
Deutsche Bank 28 11% 14% 1% 4% 0% -9% -26% -5% -2% -5% -7% -12% -21% -10%
Italy
Banca Monte Paschi Siena 19 16% 16% 0% 100% 0% -200% -150% -300% -10% -10% -55% -70% -85% -55%
Banca Popolare di Milano 12 0% 17% -23% -23% -23% -23% -43% -23% 0% 0% -20% -20% -33% -20%
Banco Popolare 17 12% 29% -6% 4% -22% -33% -48% -22% -4% 3% -9% -19% -30% -14%
Intesa Sanpaolo 28 14% 36% -5% -13% -19% -25% -45% -25% 3% -4% -10% -15% -35% -15%
Mediobanca 10 0% 10% -5% -26% -41% -40% -53% -41% 0% -1% -5% -8% -23% -5%
UBI Banca 17 12% 18% -8% -17% -37% -42% -54% -37% -2% -8% -21% -25% -36% -21%
Unicredit 31 23% 29% 1% -13% -34% -42% -62% -38% 0% -7% -18% -24% -42% -21%
Portugal
Millennium BCP 10 0% 0% -25% -25% -25% 50% -250% 50% 0% 0% 0% -60% -80% 0%
Banco Espirito Santo 13 0% 31% 0% -110% -108% -104% -103% -106% -9% -29% -29% -36% -51% -36%
Banco BPI 10 20% 0% 4% 4% 4% -9% -27% 4% 0% -9% -9% -9% -23% -9%
Scandinavia
Danske 29 14% 3% 2% -8% -11% -17% -25% -16% 2% -6% -6% -8% -14% -8%
DNB 30 3% 10% 0% 1% 3% 6% 7% 6% 0% 3% 6% 11% 12% 11%
Jyske Bank 7 0% 14% -1% 7% 4% -1% -18% 0% 0% 3% -1% 1% -17% -1%
Nordea 28 4% 7% 1% -1% 1% 2% 2% 2% 0% -1% 1% 4% 4% 4%
Pohjola 6 0% 0% 0% 5% 4% -2% -5% -2% 0% 2% 3% -4% -3% -1%
SEB 29 7% 3% 1% 1% 3% 7% 15% 8% 0% 0% 3% 8% 13% 8%
Sparebank 1 SR 7 0% 0% 0% 5% 9% 22% 16% 21% 0% 6% 15% 27% 20% 26%
Svenska Handelsbanken 28 4% 7% 0% 1% 0% 0% 1% 0% 0% 0% 0% 0% 1% 0%
Swedbank 27 7% 7% 0% 2% 2% 6% 11% 6% 0% 1% 3% 6% 12% 6%
Spain
Bankinter 21 24% 10% 1% -4% -4% -4% -26% -4% -2% -2% -2% 2% -15% 2%
BBVA 32 13% 19% -3% -7% -5% -7% -16% -8% -2% -5% -11% -9% -8% -10%
Banco de Sabadell 24 4% 17% -3% -13% -13% -35% -59% -29% -1% -12% -16% -20% -30% -20%
Banco Popular 26 4% 12% 50% -25% -63% -75% -90% -63% -1% -14% -23% -37% -62% -31%
Banesto 0 na na 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Caixabank 19 0% 11% -3% 8% -12% -52% -67% -43% -2% -8% -11% -14% -28% -11%
Santander 32 3% 22% -3% -13% -17% -20% -34% -17% -1% -9% -13% -14% -24% -14%
Switzerland
BCV 6 0% 0% 0% -6% -6% -7% -7% -7% 0% -7% -7% -10% -9% -10%
Credit Suisse 27 22% 4% 1% -1% 1% 5% -21% 4% 1% 0% 5% 7% -18% 5%
EFG International 9 0% 22% 2% 1% 12% 11% 4% 6% -2% -4% -1% -3% -5% -5%
Julius Baer 21 38% 14% 0% 0% 0% -5% -24% -1% 2% 1% -1% -2% -14% 3%
UBS 30 20% 7% 0% 4% 1% -17% -37% -7% 1% 4% 10% -9% -24% 1%
Vontobel 8 13% 13% 0% -1% 0% 1% -12% 0% -1% 1% 1% 4% -7% 2%
Turkey
Akbank 20 35% 5% 2% 3% 3% 9% 18% 5% 0% 1% 0% 1% 10% -2%
Garanti Bank 19 37% 0% 3% 5% 4% 4% 7% 2% 1% 1% 0% -4% -1% -5%
Turkiye Is Bankasi 20 30% 10% 1% 2% 4% 10% 22% 7% -1% 1% 3% 3% 12% 3%
Yapi Kredi 16 19% 19% 0% 5% 7% 11% 11% 9% -1% -1% -3% 4% 2% 0%
UK & Ireland
Barclays 26 8% 12% 1% 0% 0% -1% 0% -1% 0% 0% 3% 5% 6% 5%
HSBC 30 17% 23% 0% -1% -3% -3% -4% -4% 0% -2% -5% -7% -10% -6%
Lloyds 29 21% 7% 0% 13% 17% 23% 1% 20% 0% 6% 7% 8% 1% 8%
RBS 26 0% 23% 1% -20% -24% -21% -33% -22% 0% -9% -16% -16% -29% -15%
Standard Chartered 32 3% 25% 0% -2% -2% -2% -1% -2% 0% -3% -2% -1% -2% -2%
Bank of Ireland 11 9% 0% -15% -15% -15% -15% 0% -15% 0% 0% 0% 0% -60% 0%
European Banks
Banking
73

Company section
Barclays plc
Banking
74
Capital and leverage still lag peers

Challenging year ahead: We believe management is unlikely to hit
its ambitious cost guidance whilst continuing to manage for revenue
growth. With a Basel III CT1 ratio of 8.4% and the worst leverage
ratio among the UK banks, we also remain concerned over capital and
leverage. As a result, we do not expect significant cash dividends in
the near term.

50p of earnings in 2015: The main area of pushback we receive on
our negative recommendation is whether Barclays (BARC) can
achieve 50p+ of EPS in 2015. We see three main areas of concern
revenues, costs and capital.

Costs look achievable, but only at the expense of revenues: While
BARC may achieve its cost target of 16.8bn in 2015, we believe this
will more likely come from lower revenues and the consequent lower
costs. Alongside this, we remain concerned about the additional one-
off costs that continue to hit the business and note that the 2015 costs
will include 700m of Costs to Achieve. On top of this, Barclays is
targeting a 55% cost income ratio in 2015, which assuming it can hit
its 16.8bn cost target, implies 19% revenue growth versus FY 2012.

Revenue headwinds come from derivative regulation and
financial repression: The outcome of the proposed OTC derivative
regulation could also be significant for BARC revenues, with the
Investment Bank (IB) contributing 45% to the top line in Q1 2013.
We forecast that regulation in its current form could hit IB revenues
by as much as 20%. On its non-IB business, low rates and
deleveraging are also likely to continue to erode margins and hence
revenues.

Leverage too high in UK context, better versus Europe: BARCs
Basel III CT1 ratio of 8.4% remains a concern and is compounded by
being the worst leverage ratio among the UK listed banks. We
estimate BARCs pain ratio (ie tangible equity to tangible assets ratio
including off balance sheet assets) at 2.3%. We would like to see
BARC rebuild that ratio and as such believe that any meaningful cash
dividend will be delayed until 2015 at the earliest.

160p price target points to significant downside: We calculate our
price target using a capital allocation sum-of-the-parts analysis. Using
this analysis, we believe BARC has a 5bn capital shortfall with the IB
the main contributor.

Risks to our view: The main risk to our view is that our revenue
estimates are too low. For the retail and commercial businesses, this
could be driven by interest rates rising or yield curves steepening. For
IB revenues, this could be driven by higher client activity.

Sell
Rating system
Current price
GBp 309
Relative
Price target
GBp 160
10/06/2013 London Close
Market cap GBP 37,684 m
Reuters BARC.L
Bloomberg BARC LN

Changes made in this note
Rating Sell (no change)
Price target GBp 160 (no change)

Chg
2013e 2014e 2015e

old % old % old %
Income 28051 - 28107 - 27655 -
PPOP 8946 - 9219 - 9598 -
EPS 27.62 - 29.80 - 33.04 -
Source: Berenberg estimates

Share data

Shares outstanding (m) 12,243
Daily trading volume 40,519,780
Performance data

High 52 weeks (GBp) 334
Low 52 weeks (GBp) 151
Relative performance to SXXP SX7P
1 month 0.5 % 1.9 %
3 months -0.9 % 0.4 %
12 months 34.8 % 26.7 %

12 June 2013
James Chappell
Analyst
+44 20 3207 7844

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., GBP m 2011 2012 2013E 2014E 2015E
EPS 24.4 -5.1 28.5 30.7 34.1
EPS (adj.) 26.7 -1.5 27.6 29.8 33.0
BVPS 433.9 401.3 422.6 446.1 472.8
TBVPS 340.4 326.8 349.6 373.1 399.8
DPS 5.50 6.50 6.50 6.50 6.50
No. of Shares (m) 12,199 12,243 12,243 12,243 12,243
P/E (adj.) 11.5x -205.4x 11.1x 10.3x 9.3x
P/TBV 0.90x 0.94x 0.88x 0.83x 0.77x
RoE (%) 5.6 -1.2 6.7 6.9 7.2
RoTE (%) 6.9 -1.5 8.2 8.2 8.5
Dividend Yield (%) 1.8 2.1 2.1 2.1 2.1
Payout Ratio (%) 23 -127 23 21 19
Source: Company data, Berenberg

Barclays plc
Banking
75
Financials

Market ratios; per share data (GBP) 2011 2012 2013e 2014e 2015e
EPS (reported) 24.4 -5.1 28.5 30.7 34.1 Market Cap 37,788
EPS (Berenberg adjusted) 26.7 -1.5 27.6 29.8 33.0 Bloomberg ticker BARC LN
TBVPS 340.4 326.8 349.6 373.1 399.8 Reuters ticker BARC.L
BVPS (reported) 433.9 401.3 422.6 446.1 472.8 Share price GBp 308.65
DPS 5.50 6.50 6.50 6.50 6.50
P/E (Berenberg adjusted) 11.6x -206.0x 11.2x 10.4x 9.3x
P/TBV (x) 0.91x 0.94x 0.88x 0.83x 0.77x Analyst James Chappell
P/BV (x) 0.71x 0.77x 0.73x 0.69x 0.65x james.chappell@berenberg.com
Dividend yield (%) 1.8% 2.1% 2.1% 2.1% 2.1% +44 20 3207 7844
Payout ratio 23% -127% 23% 21% 19%
Weighted avg. number of shares (m) 12,526 12,614 12,614 12,614 12,614
Income Statement and Ratios
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Income Summary (GBPm)
Net interest income (NII) 12,201 11,654 12,035 12,254 12,131 -4.5% 3.3% 1.8% -1.0%
Non-interest income 20,091 13,355 16,016 15,853 15,525 -33.5% 19.9% -1.0% -2.1%
Total income 32,292 25,009 28,051 28,107 27,655 -22.6% 12.2% 0.2% -1.6%
Operating expenses -20,886 -21,012 -19,105 -18,888 -18,057 0.6% -9.1% -1.1% -4.4%
Pre-provision op. profits (PPoP) 11,406 3,997 8,946 9,219 9,598 -65.0% 123.8% 3.1% 4.1%
Loan loss charge (LLC) -5,602 -3,340 -3,245 -3,153 -2,988 -40.4% -2.8% -2.8% -5.2%
Operating Profit 5,804 657 5,701 6,066 6,611 -88.7% 767.8% 6.4% 9.0%
Other non-operating -34 140 18 19 19
Reported profit before tax 5,770 797 5,719 6,085 6,630 -86.2% 617.6% 6.4% 8.9%
Taxation -1,902 -616 -1,430 -1,521 -1,657 -67.6% 132.1% 6.4% 8.9%
Minorities + Preferences -944 -805 -805 -805 -805 -14.7% 0.0% 0.0% 0.0%
Attributable profits (reported) 2,924 -624 3,484 3,759 4,167 -121.3% -658.4% 7.9% 10.9%
Income Ratios (%)
NII/ Average Total Assets 1.19% 1.17% 1.19% 1.19% 1.16% -0.03% 0.02% 0.00% -0.02%
PPoP/LLC 2.0x 1.2x 2.8x 2.9x 3.2x
Cost/income ratio 64.7% 84.0% 68.1% 67.2% 65.3% 19.3% -15.9% -0.9% -1.9%
Cost/avg. assets 1.37% 1.38% 1.27% 1.25% 1.19% 0.01% -0.10% -0.03% -0.06%
LLC/avg. loans 1.30% 0.78% 0.74% 0.69% 0.64% -0.52% -0.04% -0.05% -0.05%
LLC/NII 45.9% 28.7% 27.0% 25.7% 24.6% -17.25% -1.70% -1.23% -1.10%
Tax rate 32.8% 93.8% 25.1% 25.1% 25.1% 61.0% -68.7% 0.0% 0.0%
RoTE adjusted (%) 6.9% -1.5% 8.2% 8.2% 8.5% -8.4% 9.7% 0.1% 0.3%
RoE (stated) (%) 5.6% -1.2% 6.7% 6.9% 7.2% -6.7% 7.9% 0.2% 0.3%
RoA 0.19% -0.04% 0.23% 0.25% 0.27% -0.23% 0.27% 0.02% 0.03%
Asset Leverage (x) 36.0x 36.4x 35.2x 33.2x 31.2x
RoRWA 0.74% -0.16% 0.89% 0.94% 1.02% -0.90% 1.05% 0.05% 0.08%
Balance Sheet and Ratios
Year to 31-Dec 2011 2012 2013 2014 2015 11/12 12/13 13/14 14/15
Balance Sheet Summary (GBPm)
Customer loans 431,934 423,906 455,726 463,553 474,465 -1.9% 7.5% 1.7% 2.4%
Total assets 1,562,083 1,488,335 1,512,317 1,518,095 1,523,686 -4.7% 1.6% 0.4% 0.4%
Interest earning assets 999,374 996,644 1,028,464 1,036,291 1,047,203 -0.3% 3.2% 0.8% 1.1%
Customer deposits 366,032 385,411 454,215 466,680 480,035 5.3% 17.9% 2.7% 2.9%
Debt securities & other borrowings 154,606 143,543 143,543 143,543 143,543 -7.2% 0.0% 0.0% 0.0%
Minorities 9,607 9,371 9,371 9,371 9,371 -2.5% 0.0% 0.0% 0.0%
Ordinary equity 54,352 50,615 53,304 56,267 59,638 -6.9% 5.3% 5.6% 6.0%
Tangible equity 46,506 42,700 45,389 48,352 51,723 -8.2% 6.3% 6.5% 7.0%
Core (Equity) Tier 1 Capital 43,066 41,722 42,838 40,952 44,323 -3.1% 2.7% -4.4% 8.2%
Risk-weighted assets 390,999 386,858 394,510 406,167 408,729 -1.1% 2.0% 3.0% 0.6%
Balance Sheet Ratios (%)
RWA/assets 25.0% 26.0% 26.1% 26.8% 26.8% 1.0% 0.1% 0.7% 0.1%
Loans/assets 27.7% 28.5% 30.1% 30.5% 31.1% 0.8% 1.7% 0.4% 0.6%
Loans/deposits 118% 110% 100% 99% 99% -8.0% -9.7% -1.0% -0.5%
Tier 1 ratio 12.9% 13.2% 13.3% 12.4% 13.2% 0.3% 0.0% -0.8% 0.7%
Core (Equity) Tier 1 ratio 11.0% 10.8% 10.9% 10.1% 10.8% -0.2% 0.1% -0.8% 0.8%
Source: Company data, Berenberg Research
BBVA SA
Banking
76

Spain tarnishes Mexican jewel

BBVA is well capitalised by Spanish and European standards and it
owns a highly attractive franchise in Mexico. Our core concern is with
its exposure to Spain. BBVA is a well-run bank but the macro
uncertainties in Spain remain material principally the length and
depth of the recession, and thus the outlook for asset quality. BBVA
remains strongly preferred to Santander.

Capital materially stronger than Santander: BBVA has the fifth-
strongest plain equity-to-assets ratio among European commercial
banks and ranks seventh overall. The deficit to fill to meet a 6%
plain equity-to-assets is a mere 2bn (or 0.4 per share), easily
manageable. While a 9% year-end Basel III fully-loaded ratio lags the
10% of many key peers, we believe disposals eg at least a third of its
15% stake in China CITIC Bank can close the gap.

Macro risks in Spain matter: Spain may only account for a third of
group revenues, but the macro risks are material and threaten credit
quality. These include further asset deflation, prolonged recession
driven by deleveraging and government austerity, the net international
investment position, and renewed disruption to wholesale funding.

Turkey shows risks of conglomeracy: BBVA owns a 25% stake in
Guaranti Bank, which has fallen in value by 30% from 5.0bn to
3.5bn in just three weeks on the back of the demonstrations in
Turkey. Our point is not that such assets are risky (risks are higher but
so are returns), but that in a large diversified structure, a bank will
invariably have exposure at any one time to geographies/products
where the market has concerns.

Mexico is the jewel: We remain bullish about Mexico (26% of group
revenues) and BBVAs market-leading franchise in the country. Long-
term growth prospects are improving, given the bipartisan support for
structural reforms (ie the governments Pact for Mexico) and near-
sourcing by US companies as Chinese labour costs converge with
Mexicos.

Valuation full: Consensus = 1.1x P/TNAV for a 12% 2014 RoTE.
Our price target is based on a P/TNAV multiple derived from our
2014 RoTE and a CAPM-derived cost of equity.

Key risks to view: Spanish economic miracle; risk-on rally.

Sell
Rating system
Current price
EUR 6.94
Relative
Price target
EUR 7.00
10/06/2013 Madrid Close
Market cap EUR 37,832 m
Reuters BBVA.MC
Bloomberg BBVA SM

Price target EUR 7.00 (no change)

Chg
2013e 2014e 2015e

old % old % old %
Income 23797 -3.0 24474 -2.0 25535 -1.8
PPOP 12465 -6.0 12671 -3.9 13362 -3.2
EPS 0.99 0.0 0.83 0.0 0.96 0.0

Share data

Performance data

High 52 weeks (EUR) 8
Low 52 weeks (EUR) 4
1 month -5.0 % -3.7 %
3 months -9.4 % -8.1 %
12 months 7.6 % -0.5 %

12 June 2013
Nick Anderson
Analyst
+44 20 3207 7838

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
EPS 0.64 0.32 0.99 0.83 0.96
EPS (adj.) 0.64 0.32 0.99 0.83 0.96
BVPS 7.94 7.81 8.85 9.35 9.56
TBVPS 6.26 6.09 7.20 7.73 7.99
DPS 0.40 0.40 0.40 0.41 0.47
No. of Shares (m) 4,668 5,176 5,449 5,527 5,687
P/E (adj.) 10.8x 21.4x 7.0x 8.4x 7.2x
P/TBV 1.11x 1.14x 0.96x 0.90x 0.87x
RoE (%) 7.7 4.1 12.2 9.2 10.3
RoTE (%) 9.9 5.3 15.3 11.2 12.4
Dividend Yield (%) 5.8 5.8 5.8 5.9 6.8
Payout Ratio (%) 62 124 40 49 49

BBVA SA
Banking
77
Financials

Market ratios and per share data 2011 2012 2013e 2014e 2015e
EPS (reported) 0.64 0.32 0.99 0.83 0.96 Market Cap (EURm) 37,832
EPS (Berenberg adjusted) 0.64 0.32 0.99 0.83 0.96 Bloomberg ticker BBVA SM
TBVPS 6.26 6.09 7.20 7.73 7.99 Reuters ticker BBVA.MC
BVPS 7.94 7.81 8.85 9.35 9.56 Share price (EUR) 6.94
DPS 0.40 0.40 0.40 0.41 0.47
P/E (Berenberg adjusted) 10.8 21.4 7.0 8.4 7.2
P/TBV (x) 1.11 1.14 0.96 0.90 0.87
P/BV (x) 0.87 0.89 0.78 0.74 0.73 Analyst Nick Anderson
Dividend yield (%) 5.8 5.8 5.8 5.9 6.8 Phone +44 20 3207 7838
Payout ratio 62% 124% 40% 49% 49% email: nick.anderson@berenberg.com
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Income Summary (EURm) Year-on-year change (%)
Net interest income (NII) 13,152 15,122 15,017 16,145 17,024 15.0 -0.7 7.5 5.4
Net fees & commissions 4,031 4,353 4,393 4,527 4,646 8.0 0.9 3.0 2.6
Trading income 1,481 1,767 2,544 1,915 1,900 19.3 44.0 -24.7 -0.8
Other income 1,363 1,199 1,137 1,390 1,500 -12.1 -5.2 22.3 7.9
Total income 20,028 22,441 23,091 23,977 25,070 12.1 2.9 3.8 4.6
Operating expenses -9,737 -10,786 -11,369 -11,798 -12,136 10.8 5.4 3.8 2.9
Pre-provision op. profits (PPOP) 10,290 11,655 11,722 12,179 12,934 13.3 0.6 3.9 6.2
Loan loss charge (LLC) -4,226 -7,981 -5,478 -4,835 -4,535 88.9 -31.4 -11.7 -6.2
Operating Profit 6,064 3,674 6,244 7,345 8,399 -39.4 70.0 17.6 14.4
Other non-operating -2,618 -2,015 -544 -560 -360
Exceptionals 0 0 0 0 0
Reported profit before tax 3,446 1,659 5,700 6,785 8,039 -51.9 243.6 19.0 18.5
Taxation -206 276 -1,172 -1,497 -1,826 -233.6 -525.3 27.7 22.0
Discontinued Operations 246 393 1,588 0 0
Minorities + Preferences -481 -651 -700 -694 -754 35.3 7.4 -0.7 8.6
Attributable profits (reported) 3,004 1,676 5,416 4,593 5,458 -44.2 223.2 -15.2 18.8
Adj. attributable profit 3,004 1,676 5,416 4,593 5,458 -44.2 223.2 -15.2 18.8
Income Ratios (%)
NII/Average Assets 2.29% 2.45% 2.36% 2.52% 2.61%
PPOP/LLC (x) 2.4x 1.5x 2.1x 2.5x 2.9x
Cost/income ratio 48.6% 48.1% 49.2% 49.2% 48.4%
Cost/avg. assets 1.69% 1.75% 1.79% 1.84% 1.86%
LLC/avg. loans 1.22% 2.26% 1.54% 1.34% 1.23%
LLC/NII 32.1% 52.8% 36.5% 29.9% 26.6%
Tax rate 6.0% -16.6% 20.6% 22.1% 22.7%
RoTE adjusted (%) 9.9% 5.3% 15.3% 11.2% 12.4%
RoE (%) 7.7% 4.1% 12.2% 9.2% 10.3%
RoA 0.52% 0.27% 0.85% 0.72% 0.84%
Asset Tangible Leverage (x) 18.5x 20.2x 16.2x 15.1x 14.5x
RoRWA 0.93% 0.51% 1.61% 1.35% 1.58%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Balance Sheet Summary (EURm) Year-on-year change (%)
Customer loans 351,900 352,930 358,582 365,079 370,954 0.3 1.6 1.8 1.6
Total assets 597,688 637,860 634,166 645,995 657,309 6.7 -0.6 1.9 1.8
Interest earning assets 523,754 547,878 551,341 561,693 571,500 4.6 0.6 1.9 1.7
Customer deposits 282,173 292,716 338,370 332,288 346,407 3.7 15.6 -1.8 4.2
Debt securities & other borrowings 81,930 87,198 83,813 85,490 87,199 6.4 -3.9 2.0 2.0
Minorities 1,893 2,373 2,362 2,409 2,457 25.3 -0.4 2.0 2.0
Ordinary equity 40,952 40,449 48,205 51,650 54,379 -1.2 19.2 7.1 5.3
Tangible equity 32,275 31,537 39,253 42,698 45,427 -2.3 24.5 8.8 6.4
Core (Equity) Tier 1 Capital 34,160 35,451 36,612 40,057 42,786 3.8 3.3 9.4 6.8
Risk-weighted assets 330,771 329,033 344,217 338,408 350,635 -0.5 4.6 -1.7 3.6
RWA/assets 55.3% 51.6% 54.3% 52.4% 53.3%
Loans/assets 58.9% 55.3% 56.5% 56.5% 56.4%
Loans/Deposits 125% 121% 106% 110% 107%
Tier 1 ratio 10.3% 10.8% 10.6% 11.8% 12.2%
Core (Equity) Tier 1 ratio 10.3% 10.8% 10.6% 11.8% 12.2%
NPL/loans 4.0% 5.1%
Provision coverage 61% 72%
BNP Paribas SA
Banking
78
Complex conglomeracy increases risks

Basel ratio masks leverage concerns: While BNP appears relatively
strong in terms of regulatory capital (Basel III CT1: 10%), we believe a
leverage ratio of 2.3% tells a different story. Our Sell rating is driven
by two factors: first, our belief that BNP is a complex conglomerate;
and second, pressure on revenues and loan provisions.

Headwinds from France remain: Our EPS estimates are 20%
below consensus, which is driven by our view of the weak outlook. In
particular, we are 5% below consensus on revenues and 20% above
consensus on provisions. This is driven by our view that we are in a
period of low rates, subdued economic growth and asset deleveraging
which will continue to affect bank profitability. Recent French data
continues to support this view.

Leverage ratio shows the true risk: While BNPs Basel III CT1
ratio of 10% ranks well against peers, once the subjectivity of risk-
weights is removed, we see a different result. Our simple tangible
equity to tangible assets ratio (which includes off balance sheet items)
ranks BNP in the bottom half of European banks at 2.3%. In order to
reach a more acceptable level of 3%, BNP would need to increase
capital by 16bn.

On a pain ratio, leverage is comparable to US peers: The large
off balance sheet assets of its US peers means BNP has a similar ratio
to them (Bank of America 2.0%, JP Morgan 2.2%, Citigroup 2.6%) on
our pain ratio. While some would see that as a positive, we believe
all these ratios are too low and need to rise.

Complexity highlighted by US merger: According to the Financial
Times, BNP is planning to merge its retail banking subsidiary
BancWest with its US corporate and investment banking operations in
preparation to meet potential US proposals on foreign banking
organisations. We see this as highlighting the complexity within the
business and the lack of economies of scope emerging within the
organisation.

Price target of 25 points to c45% downside: We have revised our
estimates to reflect the weak start to the year; however, our core view
of profitability remains broadly unchanged. Our price target is
calculated using a capital allocation sum-of-the-parts analysis,
allocating tangible capital to each core division based on our preferred
equity/assets ratio. On this basis, we believe BNP has a 10bn capital
shortfall driven by its CIB business. We believe this is likely to delay
any material dividend return as it looks to rebuild capital.

Risks to our view: The main risk to our view is that BNP is able to
rebuild capital faster than expected. This would come from earnings
surprising positively or BNP choosing to abandon growth and scale
back its CIB balance sheet and ambitions.

Sell
Rating system
Current price
EUR 43.90
Relative
Price target
EUR 25.00
10/06/2013 Paris Close
Reuters BNPP.PA
Bloomberg BNP FP


Chg
2013e 2014e 2015e

old % old % old %
Income 38276 3.2 38406 2.6 38442 2.6
PPOP 13453 -1.6 13416 -3.6 13437 -0.6
EPS 4.62 0.3 4.54 -3.2 4.64 0.6

Share data

Performance data

1 month 0.6 % 2.0 %
3 months -1.1 % 0.2 %
12 months 29.7 % 21.6 %

12 June 2013
James Chappell
Analyst
+44 20 3207 7844

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
EPS 4.82 5.16 4.43 4.19 4.46
EPS (adj.) 5.01 5.28 4.64 4.40 4.67
BVPS 57.1 63.5 66.4 68.9 71.8
TBVPS 45.5 52.8 55.8 58.3 61.2
DPS 1.20 1.50 1.50 1.50 1.50
No. of Shares (m) 1,208 1,242 1,242 1,242 1,242
P/E (adj.) 9.1x 8.5x 9.9x 10.5x 9.8x
P/TBV 0.96x 0.83x 0.79x 0.75x 0.72x
RoE (%) 8.6 9.2 6.8 6.2 6.3
RoTE (%) 10.6 9.6 7.9 7.2 7.3
Dividend Yield (%) 2.7 3.4 3.4 3.4 3.4
Payout Ratio (%) 25 29 34 36 34

BNP Paribas SA
Banking
79
Financials

Market ratios; per share data (EUR) 2011 2012 2013e 2014e 2015e
EPS (reported) 4.82 5.16 4.43 4.19 4.46 Market Cap 54,537
TBVPS (reported) 45.5 52.8 55.8 58.3 61.2 Bloomberg ticker BNP FP
TBVPS (Berenberg adjusted) 46.3 49.8 52.8 55.3 58.2 Reuters ticker BNPP.PA
BVPS (reported) 57.1 63.5 66.4 68.9 71.8
DPS 1.20 1.50 1.50 1.50 1.50 Share price EUR 43.90
P/E (Berenberg adjusted) 9.1x 8.5x 9.9x 10.5x 9.8x
P/TBV (x) 0.96x 0.83x 0.79x 0.75x 0.72x
P/BV (x) 0.77x 0.69x 0.66x 0.64x 0.61x Analyst James Chappell
Dividend yield (%) 2.7% 3.4% 3.4% 3.4% 3.4% james.chappell@berenberg.com
Payout ratio 25% 29% 34% 36% 34% +44 20 3207 7844
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Income Summary (EURm)
Net banking income (NBI) 42,384 39,072 39,510 39,396 39,433 -7.8% 1.1% -0.3% 0.1%
Operating expenses -26,116 -26,543 -26,278 -26,461 -26,071 1.6% -1.0% 0.7% -1.5%
Pre-provision op. profits (PPoP) 16,268 12,529 13,232 12,935 13,363 -23.0% 5.6% -2.2% 3.3%
Loan loss charge (LLC) -6,797 -3,941 -4,351 -4,447 -4,392 -42.0% 10.4% 2.2% -1.2%
Operating Profit 9,471 8,588 8,881 8,488 8,971 -9.3% 3.4% -4.4% 5.7%
Other non-operating 100 1,302 0 4 4
Associated companies 80 489 488 454 454
Reported profit before tax 9,651 10,379 9,369 8,946 9,429 7.5% -9.7% -4.5% 5.4%
Taxation -2,757 -3,061 -2,811 -2,684 -2,829 11.0% -8.2% -4.5% 5.4%
Minorities + Preferences -844 -754 -800 -800 -800
Attributable profits (reported) 6,050 6,564 5,758 5,462 5,800 8.5% -12.3% -5.1% 6.2%
Dividends on preference shares -282 -293 -275 -275 -275
Adj. attributable profit 5,768 6,271 5,483 5,187 5,525 8.7% -12.6% -5.4% 6.5%
Income Ratios (%)
NBI/ Average Total Assets 2.14% 2.02% 2.08% 2.09% 2.11% -0.12% 0.06% 0.01% 0.02%
PPoP/LLC 2.4x 3.2x 3.0x 2.9x 3.0x
Cost/income ratio 61.6% 67.9% 66.5% 67.2% 66.1% 6.3% -1.4% 0.7% -1.1%
Cost/avg. assets 1.32% 1.37% 1.38% 1.40% 1.39% 0.05% 0.01% 0.02% -0.01%
LLC/avg. loans 1.01% 0.61% 0.69% 0.71% 0.69% -0.40% 0.09% 0.02% -0.02%
LLC/NBI 16.0% 10.1% 11.0% 11.3% 11.1% -5.95% 0.93% 0.27% -0.15%
Tax rate 28.6% 29.5% 30.0% 30.0% 30.0% 0.9% 0.5% 0.0% 0.0%
RoTE adjusted (%) 10.6% 9.6% 7.9% 7.2% 7.3% -1.1% -1.6% -0.8% 0.1%
RoE (stated) (%) 8.6% 9.2% 6.8% 6.2% 6.3% 0.6% -2.4% -0.6% 0.1%
RoA 0.29% 0.33% 0.29% 0.28% 0.30% 0.04% -0.04% -0.01% 0.02%
RoRWA 0.94% 1.14% 0.91% 0.86% 0.91% 0.20% -0.22% -0.05% 0.05%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Balance Sheet Summary (EURm)
Customer loans 665,834 630,520 623,702 629,049 635,375 -5.3% -1.1% 0.9% 1.0%
Total assets 1,965,283 1,907,290 1,891,048 1,877,087 1,863,802 -3.0% -0.9% -0.7% -0.7%
Interest earning assets 1,786,516 1,730,421 1,715,685 1,703,019 1,690,966 -3.1% -0.9% -0.7% -0.7%
Customer deposits 546,284 539,513 536,142 530,999 525,955 -1.2% -0.6% -1.0% -0.9%
Debt securities & other borrowings 177,469 188,421 187,244 185,447 183,686 6.2% -0.6% -1.0% -0.9%
Minorities 10,256 8,536 8,536 8,536 8,536 -16.8% 0.0% 0.0% 0.0%
Ordinary equity 68,109 78,645 82,265 85,589 89,250 15.5% 4.6% 4.0% 4.3%
Tangible equity 54,231 65,469 69,089 72,413 76,074 20.7% 5.5% 4.8% 5.1%
Core (Equity) Tier 1 Capital 62,337 58,048 61,720 65,044 68,705 -6.9% 6.3% 5.4% 5.6%
RWA/assets 31.2% 28.9% 31.7% 32.1% 32.4% -2.3% 2.8% 0.4% 0.4%
Loans/assets 33.9% 33.1% 33.0% 33.5% 34.1% -0.8% -0.1% 0.5% 0.6%
Loans/deposits 122% 117% 116% 118% 121% -5.0% -0.5% 2.1% 2.3%
Tier 1 ratio 11.6% 13.6% 12.0% 12.5% 13.0% 2.1% -1.6% 0.5% 0.6%
Core (Equity) Tier 1 ratio 10.2% 10.5% 10.3% 10.8% 11.4% 0.4% -0.2% 0.5% 0.6%
Commerzbank AG
Banking
80

Capital problems unresolved

Commerzbanks recent rights issue can be likened to repainting the
hull of the Titanic. The structural problems remain unresolved. Given
the high and uncertain exit costs in the non-core asset book and a
deteriorating outlook for Poland, the bank needs still more capital as
its disingenuous Basel III guidance shows. A growth-oriented strategy
compounds the risks. It is a value trap lacking capital. Sell.

Capital deficit remains material post-rights issue: Our new
analysis confirms our long-held concerns about the banks capital
position. 9bn of additional capital is needed to achieve a 6% plain
ratio and a 4% pain ratio, adjusting for the recent rights issue. This
reflects deferred tax assets and off balance sheet exposures but ignores
inadequate loan loss provisions. Commerzbank ranks in the bottom
quartile of our plain/pain ratio analysis.

Fully-loaded Basel III guidance misleading: Management quotes
a post-rights issue fully-loaded Basel III ratio of 8.4% based on
235bn of RWAs. Guidance buried in the rights issue prospectus
guides to RWAs of up to 240bn, however, implying a Basel III ratio
of only 8.2%.

Non-core exit costs high and uncertain: Non-core assets account
for 29% of group exposure at default with just under half of these in
the stressed commercial real estate and shipping segments. Given the
losses other banks have endured running off such assets (especially in
the latter stages), the likely anaemic economic growth post-crisis and
the exit plans dependence on finding strategic investors, we believe
exit costs will be higher than expected.

Polish slowdown compounds uncertainties: Accounting for 8% of
group revenues, the Polish economy was unique among EU27 states
in escaping a recession during the crisis. However, the economy is
now slowing rapidly despite aggressive monetary easing, raising the
risk of a rapid deterioration in credit quality.

Flaws in new strategy revealed by Q1 top-line weakness:
Managements four-year plan targets 4-5% pa revenue growth in what
it calls the new normal. Both the CEO and CFO appear ignorant of
what is really meant by this term. When Pimco coined the phrase
new normal, it meant a world of muted growth. The Q1 profits
warning shows the way.

Estimates updated for 20-for-21 rights issue: Only EPS changes.

Valuation: Consensus = 0.4x P/TNAV for a 4% 2014 RoTE. Our
price target is based on a P/TNAV multiple derived from our 2014
RoTE and a CAPM-derived cost of equity.

Key risks to view: Successful disposals of non-core assets; sustained
economic recovery in the Eurozone; regulatory forbearance.

Sell
Rating system
Current price
EUR 7.63
Relative
Price target
EUR 6.00
10/06/2013 XETRA Close
Reuters CBKGk.DE
Bloomberg CBK GY


Chg
2013e 2014e 2015e

old % old % old %
Income 9984 - 10161 - 10262 -
PPOP 2765 - 3104 - 3226 -
EPS 0.55 -37.3 1.65 -48.8 1.86 -48.8

Share data

Performance data

1 month -24.5 % -23.2 %
3 months -47.2 % -45.9 %
12 months -71.4 % -79.4 %

12 June 2013
Nick Anderson
Analyst
+44 20 3207 7838

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
EPS 1.8 -0.1 0.3 0.8 1.0
EPS (adj.) 1.8 -0.1 0.3 0.8 1.0
BVPS 41.9 39.6 22.8 23.6 24.6
TBVPS 37.8 36.0 20.9 21.8 22.7
DPS 0.0 0.0 0.0 0.0 0.0
No. of Shares (m) 346 561 930 1,138 1,138
P/E (adj.) 4.1x -122.2x 22.1x 9.0x 8.0x
P/TBV 0.20x 0.21x 0.36x 0.35x 0.34x
RoE (%) 2.4 -0.1 1.2 3.7 4.0
RoTE (%) 10.5 -0.6 1.4 4.0 4.3
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0
Payout Ratio (%) 0 0 0 0 0

Commerzbank AG
Banking
81
Financials

EPS (reported) 1.85 -0.06 0.34 0.85 0.95 Market Cap EURm 4463
EPS (Berenberg adjusted) 1.85 -0.06 0.34 0.85 0.95 Bloomberg ticker CBK GY
TBVPS 37.81 36.01 20.94 21.79 22.74 Reuters ticker CBKG.DE
BVPS (reported) 41.89 39.57 22.77 23.62 24.57 Share price EUR 7.66
DPS 0.00 0.00 0.00 0.00 0.00 Analyst Nick Anderson
P/E (Berenberg adjusted) 4.1x -122.8x 22.2x 9.0x 8.0x nick.anderson@berenberg.com
P/TBV (x) 0.20x 0.21x 0.37x 0.35x 0.34x +44 20 3207 7838
P/BV (x) 0.18x 0.19x 0.34x 0.32x 0.31x
Dividend yield (%) 0.0% 0.0% 0.0% 0.0% 0.0%
Payout ratio 0% 0% 0% 0% 0%
Weighted avg. number of shares (m) 346 561 930 1,138 1,138
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Net interest income (NII) 6,725 6,487 5,477 5,516 5,549 -3.5% -15.6% 0.7% 0.6%
Net fees & commissions 3,495 3,249 3,313 3,388 3,456 -7.0% 2.0% 2.3% 2.0%
Trading income 1,986 89 1,292 1,200 1,200 -95.5% 1351.7% -7.1% 0.0%
Other income -2,316 50 -99 57 57 -102.2% -298.0% -157.6% 0.0%
Total income 9,890 9,875 9,984 10,161 10,262 -0.2% 1.1% 1.8% 1.0%
Operating expenses -7,992 -7,030 -7,219 -7,058 -7,036 -12.0% 2.7% -2.2% -0.3%
Pre-provision op. profits (PPoP) 1,898 2,845 2,765 3,104 3,226 49.9% -2.8% 12.3% 3.9%
Loan loss charge (LLC) -1,390 -1,660 -1,643 -1,685 -1,649 19.4% -1.0% 2.5% -2.2%
Operating Profit 508 1,185 1,121 1,419 1,577 133.3% -5.4% 26.5% 11.2%
Other non-operating 0 0 0 0 0
Reported profit before tax 508 1,185 1,121 1,419 1,577 133.3% -5.4% 26.5% 11.2%
Taxation 240 -806 -208 -355 -394 -435.8% -74.2% 70.4% 11.2%
Minorities + Preferences -109 -103 -100 -100 -100 -5.5% -2.9% 0.0% 0.0%
Attributable profits (reported) 639 276 813 964 1,083 -56.8% 194.7% 18.5% 12.4%
Adj. attributable profit 639 -35 320 964 1,083 -105.5% -1015.0% 201.0% 12.4%
Income Ratios (%)
NII/ Average Total Assets 0.95% 0.97% 0.85% 0.87% 1.05% 0.01% -0.11% 0.02% 0.18%
PPoP/LLC 1.4x 1.7x 1.7x 1.8x 2.0x
Cost/income ratio 80.8% 71.2% 72.3% 69.5% 68.6% -9.6% 1.1% -2.9% -0.9%
Cost/avg. assets 1.13% 1.05% 1.12% 1.12% 1.08% -0.08% 0.08% -0.01% -0.03%
LLC/avg. loans 0.44% 0.57% 0.59% 0.62% 0.86% 0.13% 0.03% 0.03% 0.24%
LLC/NII 20.7% 25.6% 30.0% 30.5% 29.7% 4.9% 4.4% 0.5% -0.8%
Tax rate -47.2% 68.0% 18.6% 25.0% 25.0% 115.3% -49.5% 6.4% 0.0%
RoTE adjusted (%) 10.5% -0.6% 1.4% 4.0% -12.1% -11.1% 1.9% 2.6% -16.1%
RoE (stated) (%) 2.4% -0.1% 1.2% 3.7% -11.1% -2.6% 1.4% 2.4% -14.8%
RoA 0.11% 0.01% 0.07% 0.17% -0.43% -0.10% 0.06% 0.10% -0.60%
Asset Leverage (x) 99.6x -57.9x 20.8x 23.6x 28.2x
RoRWA 0.30% 0.03% 0.20% 0.52% -1.36% -0.27% 0.17% 0.32% -1.87%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Customer loans 296,586 278,546 276,023 271,469 267,745 -6.1% -0.9% -1.6% -1.4%
Total assets 661,763 636,012 637,797 627,275 618,669 -3.9% 0.3% -1.6% -1.4%
Interest earning assets
Customer deposits 255,344 265,842 - - - 4.1%
Debt securities & other borrowings 118,958 91,648 - - - -23.0%
Minorities 699 886 - - - 26.8%
Ordinary equity 24,104 25,441 25,902 26,866 27,949 5.5% 1.8% 3.7% 4.0%
Tangible equity 22,016 23,361 23,822 24,786 25,869 6.1% 2.0% 4.0% 4.4%
Core (Equity) Tier 1 Capital 20,756 22,610 22,204 23,168 24,251 8.9% -1.8% 4.3% 4.7%
Risk-weighted assets 236,600 208,135 206,558 202,823 199,750 -12.0% -0.8% -1.8% -1.5%
RWA/assets 35.8% 32.7% 32.4% 32.3% 32.3% -3.0% -0.3% -0.1% 0.0%
Loans/assets 44.8% 43.8% 43.3% 43.3% 43.3% -1.0% -0.5% 0.0% 0.0%
Loans/deposits 116% 105% -11%
Tier 1 ratio 11.1% 13.1% 2.0%
NPL/loans 6.64% 6.79% 0.15%
Provision coverage 44.0% 42.8% -1.2%
Crdit Agricole SA
Banking
82
Leverage and revenue the key issues

Too much leverage despite parent: Our key concern remains
leverage despite Crdit Agricole Group reporting a fully-loaded Basel
III CT1 ratio of 9.6%, as it is the equity shareholders of Crdit
Agricole SA (CASA) who will bear any losses and are exposed to the
leverage.

Leverage high on both absolute and relative basis: On our pain
and plain ratios CASA has the weakest ratios among peers at 1.0%
and 1.6% respectively. Some may be heartened by the backing of the
regional banks, but equity shareholders are exposed to the losses.
Even if we adjust for intercompany balances, the leverage ratio is still
1.9% on our plain ratio and 1.2% on our pain ratio.

New strategy leads to simplification: While the new strategy
appears to deliver a simpler business and 650m of cost savings, we
are slightly puzzled as to the continuing commitment to a
corporate/investment bank (CIB) business that has 433bn of assets.
Ideally we would like to see CASA downsize this dramatically and
focus on the core retail/savings space.

Revenue headwinds persist: Our 20% below consensus EPS
forecasts are driven by our view of the revenue headwinds in the
business. In particular, CASAs significant exposure to the French
economy and CIB business point to significant headwinds. We see
three main impacts subdued economic growth, low rates and
deleveraging leading to lower revenues and higher impairments.

Low rates will impact margins and revenues: Despite management
noting improved net interest margins for both loans and deposits in
its French retail division, the low interest rate environment is likely to
continue squeezing margins, in our view. The recent interest rate cut
by the ECB will further exacerbate this issue and limit the potential
capital generation to reduce the leverage within the business.

CIB capital remains key: CASA shareholders remain exposed to the
losses on 433bn of assets within the CIB. CASA holds only 7.7bn
of capital against these assets, giving it an equity/assets ratio of just
1.8%, far below the 5% we would like to see, and based on this
shortfall it would take 10 years profits to reduce the capital deficit.

Price target unchanged: Our price target is unchanged at 3.00 and
is calculated using a capital allocation SOTP analysis. We split Crdit
Agricole into its core divisions and allocate tangible capital to them
based on our preferred equity/assets ratio. On this basis we believe
there is a 12bn capital shortfall. CASA trades on 6.1x 2014 consensus
EPS and 0.6x TBV for a consensus forecast 10.6% ROTE.

Risks to our view: The main risk to our view is that CASA is able to
rebuild capital faster than expected. This would come from earnings
surprising positively or CASA choosing to abandon growth and scale
back its CIB balance sheet and ambitions.

Sell
Rating system
Current price
EUR 7.01
Relative
Price target
EUR 3.00
Reuters CAGR.PA
Bloomberg ACA FP


Chg
2013e 2014e 2015e

old % old % old %
Income 16849 -3.7 16742 -1.0 16629 0.0
PPOP 5126 -3.9 5060 5.8 4999 9.0
EPS 0.93 7.5 0.92 3.2 0.89 18.4

Share data

Performance data

1 month 3.7 % 5.1 %
3 months -2.6 % -1.3 %
12 months 103.7 % 95.6 %

12 June 2013
James Chappell
Analyst
+44 20 3207 7844

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
EPS -0.61 -2.58 0.99 0.95 1.05
EPS (adj.) -0.61 -2.58 0.99 0.95 1.05
BVPS 17.13 15.90 16.91 17.85 18.89
TBVPS 9.37 9.63 10.62 11.56 12.60
DPS 0.00 0.00 0.00 0.00 0.00
No. of Shares (m) 2,498 2,498 2,498 2,498 2,498
P/E (adj.) -11.5x -2.7x 7.0x 7.4x 6.7x
P/TBV 0.75x 0.73x 0.66x 0.61x 0.56x
RoE (%) -3.3 -15.5 6.0 5.4 5.7
RoTE (%) -6.1 -26.9 9.7 8.5 8.6
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0
Crdit Agricole SA
Banking
83
Financials

EPS (reported) -0.61 -2.58 0.99 0.95 1.05 Market Cap 17,510.98
TBVPS (reported) 9.4 9.6 10.6 11.6 12.6 Bloomberg ticker ACA FP
TBVPS (Berenberg adjusted) 9.9 8.9 9.9 10.8 11.8 Reuters ticker CAGR.PA
BVPS (reported) 17.1 15.9 16.9 17.8 18.9
DPS - - - - - Share price EUR 7.01
P/E (Berenberg adjusted) 7.0x 7.4x 6.7x
P/TBV (x) 0.75x 0.73x 0.66x 0.61x 0.56x
Dividend yield (%) - - - - - james.chappell@berenberg.com
Payout ratio - - - - - +44 20 3207 7844
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Net banking income (NBI) 19,385 16,440 16,229 16,573 16,621 -15.2% -1.3% 2.1% 0.3%
Operating expenses -12,393 -12,037 -11,302 -11,222 -11,129 -2.9% -6.1% -0.7% -0.8%
Operating Profit 2,740 667 1,862 2,459 2,897 -75.7% 32.0% 17.8%
Other non-operating -3 188 20 20 0 -89.4% 0.0%
Associated companies 230 503 1,023 990 978 -3.2% -1.2%
Change in the value of goodwill -1,575 -3,395 0 0 0
Reported profit before tax 1,392 -2,037 2,905 3,468 3,875 19.4% 11.7%
Taxation -885 -403 -577 -800 -930 -54.5% 43.1% 38.7% 16.3%
Minorities + Preferences -272 42 -320 -323 -302 0.8% -6.4%
Net income from disc'd operations -1,705 -3,991 456 0 0
Adj. attributable profit -1,470 -6,389 2,464 2,346 2,643 -4.8% 12.7%
Income Ratios (%)
NBI/ Average Total Assets 1.17% 0.92% 0.88% 0.90% 0.90% -21.1% -4.5% 2.1% 0.3%
PPoP/LLC 1.6x 1.2x 1.6x 1.9x 2.1x -28.3% 36.4% 15.1% 14.4%
Cost/avg. assets 0.75% 0.68% 0.61% 0.61% 0.60% -9.7% -9.1% -0.7% -0.8%
LLC/avg. loans 1.06%
LLC/NBI 21.9% 22.7% 18.9% 17.5% 15.6% 3.6% -16.9% -7.6% -10.5%
Tax rate 63.6% -19.8% 19.8% 23.1% 24.0% 16.2% 4.1%
RoTE adjusted (%) -5.9% -27.3% 10.2% 8.8% 9.2% -13.7% 3.5%
RoE (stated) (%) -3.3% -15.5% 6.0% 5.4% 5.7% -10.1% 4.8%
RoA -0.09% -0.35% 0.13% 0.13% 0.14% -4.8% 12.7%
Asset Leverage (x) 69.0x 78.7x 76.6x 69.4x 63.8x 14.0% -2.7% -9.4% -8.1%
RoRWA -0.28% -1.33% 0.49% 0.46% 0.52% -5.3% 12.1%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Customer loans 399,381 329,756 -17.4%
Total assets 1,723,608 1,842,361 1,842,400 1,842,400 1,842,400 6.9%
Interest earning assets 1,525,342 1,637,692 7.4%
Customer deposits 525,636 483,638 -8.0%
Debt securities & other borrowings 148,320 150,390 1.4%
Minorities 6,495 5,505 5,562 5,562 5,562 -15.2%
Ordinary equity 42,797 39,727 42,232 44,578 47,177 -7.2% 6.3% 5.6% 5.8%
Tangible equity 24,964 23,401 24,044 26,532 28,878 -6.3% 2.7% 10.3% 8.8%
RWA/assets 30.3% 26.1% 27.3% 27.5% 27.6%
Loans/assets 23.2% 17.9%
Loans/deposits 76% 68%
Tier 1 ratio 9.6% 10.9% 10.5% 11.2% 11.8% 1.3% -0.4% 0.6% 0.7%
Credit Suisse Group AG
Banking
84

Model still needs to change

Model still needs to change: Credit Suisses (CS) share price has
risen 25% ytd but with Wealth Management (WM) margins continuing
to fall and leverage issues still to address, we see little reason to be
optimistic given the market and regulatory headwinds that CS faces.

Pain ratio of 0.9% worst amongst peers: CS is the least
capitalised bank in our universe if we apply our pain ratio.
According to this ratio, CS held just CHF20bn of equity against
CHF2.1trn of assets at the end of 2012, giving it a capital ratio of just
0.9%. The ratio rises 18bp including the CHF3.8bn of MACCS.
However, this is the lowest in our universe and based on our estimates
CS would need to raise an additional CHF29bn to have a ratio
comparable to UBS at 2.3%. While CS points to the low-risk nature of
its assets, we are less reassured as Level 3 assets are 133% of TBV.

Basel III leverage issues persist: While CS reports double-digit
returns, we believe this is driven by the leverage. The Basel III
leverage ratio was 1.9% at the end of Q1 2013, meaning CS needs to
retain nearly five years worth of profits to reach a 3% ratio.

WM margins remain under pressure. Gross margins within WM
were 4bp below consensus at 108bp at the end of Q1 2013. We
believe that the falling margin trend will continue, with lower client
risk appetite and the shift to lower-margin mandates supported by our
view that interest rates will remain lower for longer.

Our below consensus forecasts are driven by revenues: Although
CS may hit its cost targets, we believe that revenues will continue to
disappoint in both the Private and Investment Bank. Our 2014 EPS
estimates are 35% below consensus, driven by our view of continuing
lack of investor risk appetite, low rates further impacting margins,
derivatives regulation and high yield/leverage lending normalising.

CS expensive given market headwinds: CS trades on 14.1x 2014
estimates (which are 35% below consensus) and 1.3x TBV, while the
European banks trade on 10.2x 2014 estimates and 0.9x TBV.

Our price target is unchanged at CHF13: Our price target of
CHF13 is calculated using our divisional capital allocation pricing
model, which is based on ROTE, and a 12% cost of capital. On this
basis, we believe CS has a CHF15bn capital shortfall.

estimates are too low. For both the private and investment banking
businesses, this could be driven by higher client activity helped by
better economic growth than expected.

Sell
Rating system
Current price
CHF 27.12
Relative
Price target
CHF 13.00
10/06/2013 SIX Swiss Close
Market cap CHF 45,011 m
Reuters CSGN.VX
Bloomberg CSGN VX

Price target CHF 13.00 (no change)

Chg
2013e 2014e 2015e

old % old % old %
Income 25066 - 24978 - 24695 -
PPOP 4926 - 5262 - 5498 -
EPS 1.74 - 1.92 - 2.16 -

Share data

Performance data

High 52 weeks (CHF) 29
Low 52 weeks (CHF) 16
Relative performance to SXXP SMI
1 month -2.5 % -0.2 %
3 months 3.9 % 3.5 %
12 months 13.2 % 7.8 %

12 June 2013
James Chappell
Analyst
+44 20 3207 7844

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., CHF m 2011 2012 2013E 2014E 2015E
EPS 1.36 0.80 1.74 1.92 2.16
EPS (adj.) 1.81 2.66 1.74 1.92 2.16
BVPS 27.59 27.44 25.96 26.52 27.32
TBVPS 20.32 20.77 20.64 21.32 22.23
DPS 0.75 0.75 0.75 0.75 0.75
No. of Shares (m) 1,220 1,294 1,660 1,700 1,740
P/E (adj.) 14.9x 10.2x 15.5x 14.1x 12.5x
P/TBV 1.33x 1.31x 1.31x 1.27x 1.22x
RoE (%) 5.2 3.2 7.5 7.3 8.0
RoTE (%) 7.1 4.3 9.6 9.2 9.9
Dividend Yield (%) 2.8 2.8 2.8 2.8 2.8
Payout Ratio (%) 55 94 43 39 35
Credit Suisse Group AG
Banking
85
Financials

Market ratios; per share data (CHF) 2011 2012e 2013e 2014e 2015e
TBVPS (reported) 20.3 20.8 20.6 21.3 22.2 Bloomberg ticker CSGN VX
TBVPS (Berenberg adjusted) 18.2 20.6 20.6 21.3 22.2 Reuters ticker CSGN:VX
BVPS (reported) 27.6 27.4 26.0 26.5 27.3
DPS 0.75 0.75 0.75 0.75 0.75 Share price CHF 27.12
P/TBV (x) 1.33x 1.31x 1.31x 1.27x 1.22x
Payout ratio 55% 94% 43% 39% 35% +44 20 3207 7844
Year to 31-Dec 2011 2012e 2013e 2014e 2015e 10/11 11/12 12/13 13/14
Income Summary (m) Year-on-year change (%)
Net revenues 26,225 23,966 25,037 24,978 24,695 -16.4% -8.6% 4.5% -0.2%
Pre-provision op. profits (PPoP) 3,648 2,351 4,897 5,262 5,498 -50.8% -35.6% 108.3% 7.4%
Loan loss charge (LLC) -187 -170 -172 -203 -203 -336.7% -9.1% 1.2% 18.0%
Reported profit before tax 3,461 2,181 4,725 5,059 5,295 -53.8% -37.0% 116.6% 7.1%
Taxation -671 -496 -1,226 -1,265 -1,324 -56.7% -26.1% 147.1% 3.2%
Attributable profits (reported) 1,953 1,349 3,187 3,482 3,659 -61.8% -30.9% 136.3% 9.2%
Dividends on preference shares -216 -231 -250 -250 -250
Adj. attributable profit 1,737 1,118 2,937 3,232 3,409 -64.9% -35.6% 162.7% 10.0%
Income Ratios (%)
Net revenues/ Average Total Assets 2.52% 2.43% 2.68% 2.62% 2.54%
PPoP/LLC 19.5x 13.8x 28.5x 25.9x 27.1x
Cost/avg. assets -2.17% -2.19% -2.15% -2.07% -1.98%
LLC/avg. loans -0.08% -0.07% -0.07% -0.08% -0.08%
LLC/NBI 0.7% 0.7% 0.7% 0.8% 0.8%
Tax rate 19.4% 22.7% 25.9% 25.0% 25.0%
RoTE adjusted (%) 7.0% 4.2% 8.6% 8.9% 8.8%
RoE (stated) (%) 5.2% 3.1% 6.8% 7.2% 7.2%
RoA 0.17% 0.12% 0.31% 0.34% 0.35%
RoRWA 0.72% 0.50% 0.98% 1.21% 1.28%
Year to 31-Dec 2011 2012e 2013e 2014e 2015e 10/11 11/12 12/13 13/14
Balance Sheet Summary (m) Year-on-year change (%)
Customer loans 233,413 242,223 254,334 254,334 254,334 6.7% 3.8% 5.0%
Total assets 1,049,165 924,280 946,618 962,347 978,863 1.7% -11.9% 2.4% 1.7%
Customer deposits 313,401 308,312 320,644 320,644 320,644 9.0% -1.6% 4.0%
Debt securities & other borrowings 188,771 166,775 165,384 165,384 165,384 -3.4% -11.7% -0.8%
Minorities 7,411 6,786 7,121 7,121 7,121 -23.9% -8.4%
Ordinary equity 33,674 35,498 43,088 45,075 47,522 1.2% 5.4% 21.4% 4.6%
Tangible equity 24,795 26,866 34,248 36,235 38,682 1.7% 8.4% 27.5% 5.8%
Core (Equity) Tier 1 Capital 25,953 34,768 50,344 36,235 32,782 -2.5% 34.0% 44.8% -28.0%
Risk-weighted assets 241,753 224,296 299,616 267,305 267,305 10.5% -7.2% 33.6% -10.8%
RWA/assets 23.0% 24.3% 31.7% 27.8% 27.3% 8.7% 5.3% 30.4% -12.2%
Loans/assets 22.2% 26.2% 26.9% 26.4% 26.0% 4.9% 17.8% 2.5% -1.6%
Loans/deposits 74% 79% 79% 79% 79% -2.1% 5.5% 1.0%
Tier 1 ratio 15.2% 19.4% 17.3% 14.1% 12.8% -11.7% 27.4% -10.8% -18.4%
Core (Equity) Tier 1 ratio 10.7% 15.5% 16.8% 13.6% 12.3% -11.8% 44.4% 8.4% -19.3%
Danske Bank A/S
Banking
86

Time for a revolution

Danske is a value trap. Unlocking the material latent value requires a
strategic revolution, not the current evolution. With capital inadequate
and an anaemic Danish economy squeezing revenues and asset quality,
the risks remain material without change. The market cannot continue
to ignore the weak fundamentals forever, no matter what management
promises in terms of re-pricing and dividends. Consider consensus
estimates: over the last three months, these have seen the largest cuts
outside of Italian/Spanish banks. A high-conviction Sell.

Capital remains inadequate: Danske has the fifth-lowest plain
equity-to-asset ratio in our coverage universe. The pain ratio implies
a DKK34bn deficit just to reach 4%. The CEO dismissed the banks
weak equity-to-assets ratio at Q1: We are not so concerned about
that at the momentits not a specific problem for Danske Bank. I
think you have that problem across Europe. This raises concerns
about Danskes risk appetite and shows the scale of the problem in
Europe banks are managing only for Basel, ignoring true balance
sheet risk.

Loan losses to remain higher for longer: We stick with our core
view that economic headwinds in Denmark will sustain anaemic
economic growth and keep Danish loan losses higher for longer than
the market assumes. This accounts for most of the divergence in our
25% below consensus estimates.

Flaws in new strategy shown by Q1 revenue weakness: The driver
of the 7% revenue miss in Q1 was unclear (weak economy or fallout
from new strategy or both), but it does not matter. It shows that a
strategy predicated on growth cannot deliver in the current economic
environment. The 2015 RoE target of above 12% assumes 6-8ppt of
uplift comes from growth/higher interest rates. This will not happen,
in our view.

Misleading disclosure: Are we alone in finding the banks
Highlights reformatting of the income statement confusing? No
other bank does it. The problem is compounded by reformatting the
reformatting, limiting trends to just five quarters with no
accompanying restatement of the new divisions on an IFRS basis to
allow for reconciliation. A large black mark, in our view.


Key risks to view: Danish economic miracle; disposal of non-core
Ireland; strategic U-turn.

Sell
Rating system
Current price
DKK 113.50
Relative
Price target
DKK 82.00
10/06/2013 NASDAQ OMX
Copenhagen Close
Market cap DKK 113,500 m
Reuters DANSKE.CO
Bloomberg DANSKE DC

Price target DKK 82.00 (no change)

Chg
2013e 2014e 2015e

old % old % old %
Income 47091 - 47811 - 48317 -
PPOP 19601 - 20320 - 20827 -
EPS 8.71 - 9.20 - 9.68 -

Share data

Performance data

High 52 weeks (DKK) 115
Low 52 weeks (DKK) 78
1 month 12.2 % 13.6 %
3 months 4.7 % 6.0 %
12 months 9.3 % 1.3 %

12 June 2013
Nick Anderson
Analyst
+44 20 3207 7838

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., DKK m 2011 2012 2013E 2014E 2015E
EPS 1.9 5.0 8.3 8.8 9.2
EPS (adj.) 2.5 5.5 8.7 9.2 9.7
BVPS 135.7 137.9 146.3 152.4 158.9
TBVPS 115.6 119.4 127.8 133.9 140.3
DPS 0.0 0.0 0.0 2.6 2.8
No. of Shares (m) 879 1,003 1,000 1,000 1,000
P/E (adj.) 45.7x 20.7x 13.0x 12.3x 11.7x
P/TBV 0.98x 0.95x 0.89x 0.85x 0.81x
RoE (%) 1.5 3.7 5.8 5.9 5.9
RoTE (%) 2.2 4.7 7.0 7.0 7.1
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0
Danske Bank A/S
Banking
87
Financials

Market ratios; per share data (DKK) 2011 2012 2013e 2014e 2015e
EPS (reported) 1.95 4.73 8.27 8.76 9.24 Market Cap DKKm 112,000
EPS (Berenberg adjusted) 2.48 5.48 8.71 9.20 9.68 Bloomberg ticker DANSKE DC
TBVPS 115.59 119.39 127.77 133.88 140.33 Reuters ticker DANSKE.CO
BVPS (reported) 135.69 137.87 146.30 152.41 158.86 Share price DKK 112
P/E (Berenberg adjusted) 45.1x 20.4x 12.9x 12.2x 11.6x nick.anderson@berenberg.com
P/TBV (x) 0.97x 0.94x 0.88x 0.84x 0.80x +44 20 3207 7838
P/BV (x) 0.83x 0.81x 0.77x 0.73x 0.71x
Dividend yield (%) 0.0% 0.0% 0.0% 2.3% 2.5%
Payout ratio 0% 0% 0% 30% 30%
Weighted avg. number of shares (m) 878.6 945.3 1,000.3 1,000.0 1,000.0
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Income Summary (DKKm)
Net interest income (NII) 23,537 24,788 25,039 25,489 25,927 5.3% 1.0% 1.8% 1.7%
Net fees & commissions 8,298 8,782 8,815 8,880 8,948 5.8% 0.4% 0.7% 0.8%
Trading income 7,325 8,901 6,770 6,919 6,919 21.5% -23.9% 2.2% 0.0%
Other income 4,217 5,215 4,868 4,923 4,923 23.7% -6.7% 1.1% 0.0%
Total income 43,377 47,686 45,491 46,211 46,717 9.9% -4.6% 1.6% 1.1%
Operating expenses -25,987 -26,588 -25,890 -25,890 -25,890 2.3% -2.6% 0.0% 0.0%
Loan loss charge (LLC) -13,185 -12,529 -8,117 -8,149 -7,990 -5.0% -35.2% 0.4% -2.0%
Operating Profit 4,205 8,569 11,484 12,171 12,837 103.8% 34.0% 6.0% 5.5%
Reported profit before tax 4,205 8,569 11,484 12,171 12,837 103.8% 34.0% 6.0% 5.5%
Taxation -2,482 -3,819 -3,215 -3,408 -3,594 53.9% -15.8% 6.0% 5.5%
Minorities + Preferences -11 -4 0 0 0
Attributable profits (reported) 1,712 4,746 8,268 8,763 9,242 177.2% 74.2% 6.0% 5.5%
Adj. attributable profit 2,181 5,185 8,708 9,203 9,682 137.7% 68.0% 5.7% 5.2%
Income Ratios (%)
NII/ Average Total Assets 1.03% 1.00% 0.99% 0.99% 0.98% -0.03% -0.01% 0.00% 0.00%
PPoP/LLC 1.3x 1.7x 2.4x 2.5x 2.6x
Cost/avg. assets 0.86% 0.81% 0.78% 0.77% 0.76% -0.05% -0.02% -0.01% -0.01%
LLC/avg. loans 0.79% 0.74% 0.48% 0.48% 0.46% -0.05% -0.26% -0.01% -0.02%
LLC/NII 56.0% 50.5% 32.4% 32.0% 30.8%
Tax rate 59.0% 44.6% 28.0% 28.0% 28.0% -14.5% -16.6% 0.0% 0.0%
RoTE adjusted (%) 2.2% 4.7% 7.0% 7.0% 7.1% 2.5% 2.4% 0.0% 0.0%
RoE (stated) (%) 1.5% 3.7% 5.8% 5.9% 5.9%
RoA 0.05% 0.14% 0.24% 0.25% 0.26% 0.08% 0.10% 0.01% 0.01%
RoRWA 0.20% 0.54% 1.00% 1.05% 1.09% 0.34% 0.46% 0.04% 0.04%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Balance Sheet Summary (DKKm)
Customer loans 1,698,025 1,674,390 1,695,788 1,722,476 1,750,306 -1.4% 1.3% 1.6% 1.6%
Total assets 3,424,403 3,485,181 3,529,720 3,585,271 3,643,197 1.8% 1.3% 1.6% 1.6%
Customer deposits 848,994 929,092
Debt securities & other borrowings 991,947 1,022,115
Minorities 60 4
Ordinary equity 125,795 138,230 146,301 152,412 158,858 9.9% 5.8% 4.2% 4.2%
Tangible equity 107,164 119,700 127,771 133,882 140,328 11.7% 6.7% 4.8% 4.8%
Core (Equity) Tier 1 Capital 106,826 119,097 127,201 133,312 139,758 11.5% 6.8% 4.8% 4.8%
RWA/assets 26.5% 23.5% 23.5% 23.5% 23.5% -2.9% 0.0% 0.0% 0.0%
Loans/assets 49.6% 48.0% 48.0% 48.0% 48.0% -1.5% 0.0% 0.0% 0.0%
Tier 1 ratio 16.0% 18.9% 19.9% 20.5% 20.9% 2.9% 1.0% 0.6% 0.4%
Core (Equity) Tier 1 ratio 11.8% 14.5% 15.3% 15.8% 16.3% 2.7% 0.8% 0.5% 0.5%
NPL/loans 4.93% 3.79%
Provision coverage 42.9% 52.0%
Deutsche Bank AG
Banking
88

Capital welcome, but still too much leverage

Too much leverage: While the market took the capital raise at
Deutsche Bank (DBK) positively, we still believe DBK depends on
leverage to deliver double-digit returns. With retained profits unlikely
to reduce these ratios in the near term, we still believe DBK is likely to
need to resort to outside equity to reduce this as regulatory pressure
continues to grow.

Capital raise all well and good, but leverage issues remain:
DBKs capital raise was warmly received by the market and will add
another 70bp to its Basel III CT1 ratio of 8.8% as of Q1 2013.
However, we still remain concerned about the leverage in the
business. On our estimates, DBK has a Basel III leverage ratio of
2.0%, post the 2.9bn raising. To get above the 3% level, required by
2019, requires four years worth of profits and, in our view, delays
dividends.

On our leverage ratios DBK is in the bottom three: On our pain
and plain leverage ratios (tangible equity/tangible assets), DBK
scores in the bottom three among US/European banks. While DBK
might point to its assets being less risky than peers, the fact that Level
3 assets equate to 96% of TBV does little to persuade us of the fact.

Leverage and revenue headwinds make DBK expensive: DBK is
trading on 7.6x 2014 consensus EPS, 0.75x TBV for a consensus
forecast ROTE of 10.1% in 2014, which we believe is more than fully
valued given the leverage in the model and the regulatory/market
headwinds DBK faces.

Estimates cut to reflect capital raise and revenue headwinds: We
cut our EPS estimates to reflect the 10% dilutive 2.9bn capital raise
completed in April and the structural revenue headwinds we believe
the sector faces, particularly in FICC where revenues continue to fall.

Price target of 23 points to 36% downside and 16bn capital
shortfall: Our price target on DBK rises by 3 to 23 due to the
2.9bn capital raise completed in April. Our price target is calculated
using a capital allocation sum-of-the-parts and this shows a 16bn
capital shortfall, mainly driven by the Investment Bank. This is 4bn
lower than our previous estimate, mainly due to the capital raising.

estimates are too low. For the retail and commercial businesses, this
could be driven by interest rates rising or yield curves steepening. For
CIB revenues, this could be driven by higher client activity helped by
better economic growth than expected.

Sell
Rating system
Current price
EUR 36.27
Relative
Price target
EUR 23.00
10/06/2013 XETRA Close
Reuters DBKGn.DE
Bloomberg DBK GY

Price target EUR 23.00 (20.00)

Chg
2013e 2014e 2015e

old % old % old %
Income 31957 3.0 31657 -1.1 31454 -1.7
PPOP 5198 -1.5 6587 -6.5 9036 -5.8
EPS 2.60 -4.1 3.79 -16.4 5.64 -15.1

Share data

Performance data

Relative performance to SXXP DAX
1 month 2.5 % 0.8 %
3 months 6.0 % 5.0 %
12 months 0.5 % -3.1 %

12 June 2013
James Chappell
Analyst
+44 20 3207 7844

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
EPS 4.28 0.41 2.50 3.17 4.79
EPS (adj.) 4.28 0.41 2.50 3.17 4.79
BVPS 55.77 56.26 57.84 60.27 64.30
TBVPS 39.26 41.44 43.90 46.32 50.36
DPS 0.75 0.75 0.75 0.75 0.75
No. of Shares (m) 957 960 1,020 1,020 1,020
P/E (adj.) 8.5x 88.1x 14.5x 11.4x 7.6x
P/TBV 0.92x 0.88x 0.83x 0.78x 0.72x
RoE (%) 8.1 0.7 4.5 5.4 7.7
RoTE (%) 11.7 1.0 6.0 7.0 9.9
Dividend Yield (%) 2.1 2.1 2.1 2.1 2.1
Payout Ratio (%) 18 182 30 24 16

Deutsche Bank AG
Banking
89
Financials

TBVPS (reported) 39.3 41.4 43.9 46.3 50.4 Bloomberg ticker DBK GY
BVPS (reported) 55.8 56.3 57.8 60.3 64.3 Reuters ticker DBKGn.DE
DPS 0.75 0.75 0.75 0.75 0.75
P/E (Berenberg adjusted) 8.5x 88.1x 14.5x 11.4x 7.6x Share price EUR 36.27
P/TBV (x) 0.92x 0.88x 0.83x 0.78x 0.72x
Payout ratio 18% 182% 30% 24% 16% +44 20 3207 7844
Weighted avg. number of shares (m) 930 930 1,020 1,020 1,020
Year to 31-Dec 2011 2012 2013e 2014e 2015e 10/11 11/12 12/13 13/14
Net revenues 33,228 33,863 32,925 31,294 30,913 16.3% 1.9% -2.8% -5.0%
Operating expenses -25,998 -31,200 -27,806 -25,136 -22,404 11.5% 20.0% -10.9% -9.6%
Loan loss charge (LLC) -1,840 -1,721 -1,364 -1,412 -1,378 44.4% -6.5% -20.7% 3.5%
Operating Profit 5,390 942 3,755 4,746 7,131 35.6% -82.5% 298.6% 26.4%
Other non-operating
Reported profit before tax 5,390 942 3,755 4,746 7,131 35.6% -82.5% 298.6% 26.4%
Taxation -1,064 -493 -1,169 -1,471 -2,210 -35.3% -53.7% 137.0% 25.9%
Attributable profits (reported) 4,132 395 2,546 3,234 4,880 78.9% -90.4% 544.6% 27.0%
Income Ratios (%)
Net revenues/ Average Total Assets 1.63% 1.62% 1.63% 1.55% 1.53%
PPoP/LLC 3.9x 1.5x 3.8x 4.4x 6.2x
Cost/avg. assets 1.28% 1.49% 1.38% 1.25% 1.11%
LLC/avg. loans 0.45% 0.42%
LLC/Net revenues 5.5% 5.1% 4.1% 4.5% 4.5%
Tax rate 19.7% 52.3% 31.1% 31.0% 31.0%
RoTE adjusted (%) 11.0% 1.0% 5.7% 6.8% 9.5%
RoE (stated) (%) 8.1% 0.7% 4.5% 5.4% 7.7%
RoA 0.19% 0.02% 0.13% 0.16% 0.24%
RoRWA 1.08% 0.12% 0.79% 1.01% 1.56%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 10/11 11/12 12/13 13/14
Customer loans 412,514 0
Total assets 2,164,103 2,022,275 2,021,507 2,015,998 2,014,361 13.6% -6.6% 0.0% -0.3%
Customer deposits 601,730 0
Debt securities & other borrowings 228,772 0
Minorities 1,270 239 239 239 239
Ordinary equity 53,390 54,001 58,979 61,449 65,565 9.4% 1.1% 9.2% 4.2%
Tangible equity 37,588 39,782 44,760 47,230 51,346 13.1% 5.8% 12.5% 5.5%
Risk-weighted assets 381,246 334,000 321,145 321,459 313,651 10.1% -12.4% -3.8% 0.1%
RWA/assets 17.6% 16.5% 15.9% 15.9% 15.6%
Loans/assets 19.1% 0.0% 0.0% 0.0% 0.0%
Loans/deposits 69%
Tier 1 ratio 12.9% 15.1% 17.1% 17.6% 19.3%
Core (Equity) Tier 1 ratio 10% 11.4% 13.2% 13.6% 15.3%
DNB ASA
Banking
90

Tough love from the regulator

DNB has one of the strongest balance sheets among European banks,
yet the regulator wants more. This reflects, in our view, the unusual
risk profile of the Norwegian economy and therefore the bank. Being
a play on global liquidity, Norway/DNB is at risk from any tapering
by the various expansionary central banks. For now, DNBs near-term
growth opportunities and Nordic virtues will sustain outperformance
but longer-term, the risks remain material.

Capital strength but regulator wants more: As per our analysis,
DNB has the third-strongest balance sheet overall among European
commercial banks, and on the pain ratio, it is one of only three to
clear the 4% threshold. It also has the most liquid balance sheet.
Transplanted to Sweden, it would report a c16% fully-loaded Basel III
ratio. The regulator, however, remains concerned about the build-up
of risk in Norway, most noticeably in the housing market, and so it
does everything it can to force the Norwegian banks to hold more.

Nordic virtues: DNB has demonstrated the classic Nordic virtues of
a strong track record managing credit risk and its cost base. We also
like its limited direct exposure to the Eurozone.

Growth opportunities are short-term: DNB also offers growth,
albeit short-term, as an elevated oil price and demand for oil sustain
economic activity and therefore demand for credit in Norway. Despite
a more mixed outlook within its international book, it is one of the
few banks with revenue growth; we estimate 7% in 2014 versus 2% on
average for the other Nordics.

Global liquidity represents material long-term risk: This is the
heart of the debate in our view, especially as the Federal Reserve
begins to contemplate tapering its ultra-loose monetary policy. We see
any reduction in global liquidity as a major risk to the Norwegian
economy because of the likely effect on the demand for and price of
oil. As ever, we would flag the seemingly random 90% correlation
between crude oil prices and fine wine prices since 1998 as evidence
of the global liquidity bubble.


Key risks to view: Weaker global demand sustains expansionary
monetary policy; disruption to wholesale funding markets; regulatory
forbearance.

Buy
Rating system
Current price
NOK 92.00
Relative
Price target
NOK 88.00
10/06/2013 Oslo Close
Market cap NOK 149,850 m
Reuters DNB.OL
Bloomberg DNB NO

Rating Buy (no change)
Price target NOK 88.00 (no change)

Chg
2013e 2014e 2015e

old % old % old %
Income 42815 - 45606 - 46822 -
PPOP 21794 - 24388 - 25407 -
EPS 8.37 - 9.59 - 10.01 -

Share data

Performance data

High 52 weeks (NOK) 98
Low 52 weeks (NOK) 55
1 month -1.5 % -0.2 %
3 months 1.9 % 3.2 %
12 months 37.5 % 29.5 %

12 June 2013
Nick Anderson
Analyst
+44 20 3207 7838

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., NOK m 2011 2012 2013E 2014E 2015E
EPS 8.0 8.4 8.4 9.6 10.0
EPS (adj.) 8.2 8.5 8.4 9.6 10.0
BVPS 72.3 78.6 84.2 90.6 95.6
TBVPS 69.2 75.7 81.3 87.7 92.7
DPS 2.0 2.1 2.8 3.2 5.0
No. of Shares (m) 1,629 1,629 1,629 1,629 1,629
P/E (adj.) 11.2x 10.8x 11.0x 9.6x 9.2x
P/TBV 1.33x 1.22x 1.13x 1.05x 0.99x
RoE (%) 11.4 11.2 10.2 11.0 10.7
RoTE (%) 12.4 11.9 10.6 11.3 11.1
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.1

DNB ASA
Banking
91
Financials

Source: Company data, Berenberg research
Market ratios; per share data (NOK) 2011 2012 2013e 2014e 2015e
EPS (reported) 7.97 8.37 8.37 9.59 10.01 Market Cap NOKm 150,745
EPS (Berenberg adjusted) 8.21 8.54 8.37 9.59 10.01 Bloomberg ticker DNB NO
TBVPS 69.16 75.71 81.32 87.74 92.75 Reuters ticker DNB.OL
BVPS (reported) 72.33 78.61 84.21 90.64 95.65 Share price NOK 92.55
P/TBV (x) 1.34x 1.22x 1.14x 1.05x 1.00x +44 20 3207 7838
P/BV (x) 1.28x 1.18x 1.10x 1.02x 0.97x
Dividend yield (%) 2.2% 2.3% 3.0% 3.4% 5.4%
Payout ratio 25% 25% 33% 33% 50%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Income Summary (NOKm)
Net fees & commissions 6,878 6,962 1.2%
Trading income 7,660 3,909 -49.0%
Other income 2,217 3,630 14,422 15,716 15,936 63.7% 297.3% 9.0% 1.4%
Total income 42,006 41,717 42,815 45,606 46,822 -0.7% 2.6% 6.5% 2.7%
Operating expenses -19,789 -20,693 -21,021 -21,217 -21,415 4.6% 1.6% 0.9% 0.9%
Loan loss charge (LLC) -3,442 -3,179 -3,380 -3,275 -3,370 -7.6% 6.3% -3.1% 2.9%
Operating Profit 18,775 17,845 18,414 21,113 22,037 -5.0% 3.2% 14.7% 4.4%
Other non-operating -380 -287 0 0 0 -24.5%
Exceptionals 13 95 0 0 0 630.8%
Reported profit before tax 18,408 17,653 18,414 21,113 22,037 -4.1% 4.3% 14.7% 4.4%
Taxation -5,423 -4,028 -4,788 -5,489 -5,730 -25.7% 18.9% 14.7% 4.4%
Minorities + Preferences 0 0 0 0 0
Adj. attributable profit 13,365 13,912 13,626 15,624 16,307 4.1% -2.1% 14.7% 4.4%
Income Ratios (%)
NII/ Average Total Assets 1.18% 1.15% 1.22% 1.24% 1.24% -0.02% 0.07% 0.02% 0.00%
PPoP/LLC 6.5x 6.6x 6.4x 7.4x 7.5x
Cost/avg. assets 0.92% 0.88% 0.90% 0.88% 0.86% -0.05% 0.03% -0.03% -0.02%
LLC/avg. loans 0.29% 0.25% 0.26% 0.24% 0.24% -0.04% 0.01% -0.02% 0.00%
LLC/NII 13.6% 11.7% 11.9% 11.0% 10.9% -2.0% 0.2% -0.9% 0.0%
Tax rate 28.9% 22.6% 26.0% 26.0% 26.0% -6.3% 3.4% 0.0% 0.0%
RoTE adjusted (%) 12.4% 11.9% 10.6% 11.3% 11.1% -0.5% -1.4% 0.8% -0.3%
RoE (stated) (%) 11.4% 11.2% 10.2% 11.0% 10.7% -0.2% -1.0% 0.8% -0.2%
RoA 0.60% 0.58% 0.59% 0.65% 0.65% -0.03% 0.01% 0.06% 0.01%
RoRWA 1.21% 1.23% 1.23% 1.36% 1.38% 0.02% 0.00% 0.13% 0.01%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Balance Sheet Summary (NOKm)
Customer loans 1,279,259 1,297,892 1,358,932 1,405,226 1,453,212 1.5% 4.7% 3.4% 3.4%
Total assets 2,126,098 2,264,845 2,371,360 2,452,144 2,535,881 6.5% 4.7% 3.4% 3.4%
Customer deposits 740,036 810,959 9.6%
Debt securities & other borrowings 659,320 729,137 10.6%
Minorities 0 0
Ordinary equity 117,815 128,036 137,166 147,634 155,787 8.7% 7.1% 7.6% 5.5%
Tangible equity 112,641 123,319 132,449 142,917 151,070 9.5% 7.4% 7.9% 5.7%
Risk-weighted assets 1,061,772 1,023,825 1,043,398 1,078,943 1,115,787 -3.6% 1.9% 3.4% 3.4%
RWA/assets 49.9% 45.2% 44.0% 44.0% 44.0% -4.7% -1.2% 0.0% 0.0%
Loans/assets 60.2% 57.3% 57.3% 57.3% 57.3% -2.9% 0.0% 0.0% 0.0%
Tier 1 ratio 10.4% 11.6% 12.3% 12.8% 13.1% 1.2% 0.7% 0.6% 0.3%
NPL/loans 2.27% 2.25%
EFG International AG
Small/Mid-Cap: Banking
92

Building capital

EFG remains our preferred mid-cap private bank: It is emerging as
a bank with stronger capital and a lower cost base, focused on its core
business of private banking. EFGs perceived risk will continue to fall as
new management delivers on the restructuring plan. Share price gains
will be driven by: i) EPS upgrades; ii) a reduction of risk premium; and
iii) the squeeze of still-material short interest, in our view.

Capital: EFG has strengthened its capital buffers by 44% in the past
12 months through the sale of treasury shares to its parent company
(CHF76m), the gain on EFG Financial Products (FP) IPO
(CHF121m), and retained earnings and other gains (CHF121m). The
pain ratio is now 3.6% versus 2.3% for UBS and 0.9% for Credit
Suisse. Weak capital is no longer an investor concern.

Management is delivering on the restructuring plan: The
cost/income ratio has dropped to 79% from 92% in 2011 due to
higher revenues (+8% yoy) and lower expenses (-8% yoy). EFG has
reduced its headcount by 14% and exited 20 out of 30 international
locations in 2012. Expenses should fall by a further 6% in 2013E.

Assets under management (AuM) are resilient, despite the
headcount reduction, addressing yet another investor concern. AuM
remained flat at CHF78.7bn (versus CHF78.4bn in 2011), as inflows
from continuing businesses (CHF3bn) offset outflows from exiting
locations. EFG should achieve 6% inflows (CHF5bn) from 2013.

We would continue to buy EFG: We believe share price gains will
be driven by: i) EPS upgrades as consensus believes in EFGs targets;
ie CHF200m net profit by 2015 (versus consensus: CHF190m); and ii)
the squeeze of short interest.

Risks: Apart from unfavourable industry regulatory changes, EFG is
exposed to significant valuation risk through its life insurance
portfolio (carrying value of CHF682m versus auditors fair value of
CHF477m). EFG should also face revenue headwinds in H2 2013
given the sale of EFG FP and the non-recurring nature of some
revenues reported in FY 2012 (CHF50m, 6% of total).

Valuation: EFG is trading at 10x 2014E EPS, a 50% discount to
Julius Baer. Our price target is derived from a P/TBV multiple based
on a 2014E RoTE and a CAPM-based CoE.

Buy
Rating system
Current price
CHF 11.45
Relative
Price target
CHF 13.50
Market cap CHF 1,679,248 m
Reuters EFGN.S
Bloomberg EFGN SW


Chg
2013e 2014e 2015e

old % old % old %
Income 780 - 848 - 930 -
Op Pr 168 - 223 - 267 -
EPS 0.88 - 1.19 - 1.44 -

Share data

Daily trading volume 89,285
Performance data

1 month -8.2 % -6.9 %
3 months -12.6 % -11.3 %
12 months 59.3 % 51.2 %

12 June 2013
Eleni Papoula
Analyst
+44 20 3465 2741
eleni.papoula@berenberg.com

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., CHF m 2011 2012 2013E 2014E 2015E
EPS -2.32 0.70 0.85 1.17 1.41
EPS (adj.) 0.30 0.62 0.88 1.19 1.44
BVPS 7.3 8.3 11.4 12.4 13.7
TBVPS 5.2 6.7 9.8 10.9 12.2
DPS 0.10 0.10 0.10 0.10 0.10
No. of Shares (m) 134 146 146 146 146
P/E (adj.) 38.2x 18.5x 13.0x 9.6x 8.0x
P/TBV 2.18x 1.72x 1.17x 1.05x 0.94x
RoE (%) 2.6 5.8 8.0 10.6 12.5
RoTE (%) 3.0 6.4 8.6 11.0 12.5
Dividend Yield (%) 0.9 0.9 0.9 0.9 0.9
Payout Ratio (%) 33 16 11 8 7
AuM (CHFbn) 79 79 87 95 104
Net New Money (CHFbn) -1.7 0.2 5.7 6.2 7.8

EFG International AG
93
Financials


EFG International
Market ratios and per share data (CHF) 2011 2012 E 2013 E 2014 E 2015 E
EPS reported -2.32 0.70 0.85 1.17 1.41 Market Cap (CHFm) 1,679
EPS (Berenberg adjusted) 0.30 0.62 0.88 1.19 1.44 Bloomberg ticker EFGN SW
Tangible book value per share (TBVPS) 5.25 6.66 9.79 10.88 12.21 Reuters ticker EFGN.S
Book value per share (BVPS) 7.35 8.26 11.37 12.43 13.74 Rating Buy
DPS 0.10 0.10 0.10 0.10 0.10 Analyst Eleni Papoula
P/E (Berenberg adjusted) 38.15 18.46 13.02 9.61 7.96 Share price (CHF) 11.45
P/TBV (x) 2.18 1.72 1.17 1.05 0.94 Target price (CHF) 13.50
P/BV (x) 1.56 1.39 1.01 0.92 0.83 Upside 18%
RoTE adjusted (%) 3.0 6.4 8.6 11.0 12.5
Dividend Yield (%) 0.9 0.9 0.9 0.9 0.9 Phone +44 20 3465 2741
Payout ratio (%) 33.3 16.1 11.4 8.4 7.0 email: eleni.papoula@berenberg.com
Shares outstanding (m) 134 146 146 146 146
Assets under management data and Ratios 2011 2012 E 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15
AuM data (CHFbn) Year-on-year change (%)
Average assets under management 80.9 79.3 83.1 90.7 99.6 -2.0 4.8 9.2 9.7
Relationship managers 567 477 487 496 506 -15.9 2.0 2.0 2.0
Year to 31-Dec 2011 2012 E 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15
Income Summary (CHFm) Year-on-year change (%)
Net Interest income (NII) 212 225 253 265 276 6.2 12.6 4.5 4.0
Commission income 454 492 449 490 548 8.3 -8.8 9.2 11.8
Trading income 83 70 50 54 60 -15.3 -29.2 9.2 9.7
Other income 15 -12 29 39 47 -185.5 -330.9 36.1 20.1
Total income 763 775 780 848 930 1.5 0.8 8.7 9.6
Operating expenses -699 -653 -612 -626 -663 -6.6 -6.3 2.2 6.0
Operating profit 64 121 168 223 267 90.0 39.0 32.2 19.9
Amortisation of customer relationships -14 -5 -4 -4 -4 -65.7 -22.4 0.0 0.0
Exceptionals -339 28 0 0 0 -108.1 na na na
Reported profit before tax -289 144 165 219 263 -149.7 14.5 32.9 20.2
Taxation -2 -20 -23 -31 -37 857.1 14.7 32.9 20.2
Minorities + Preferences -17 -13 0 0 0 -24.4 na na na
Attributable profits (reported) -311 98 125 170 206 -131.6 26.8 36.6 21.2
Adj. attributable profit 40 91 128 174 210 124.8 41.7 35.5 20.7
Income Ratios (%)
Commission income -8.5 8.3 -8.8 9.2 11.8 -197.5 -205.1 -205.1 27.9
Total revenue -5.6 1.5 0.8 8.7 9.6 -126.9 -49.3 1,045.0 10.8
Operating expenses 1.6 -6.6 -6.3 2.2 6.0 -523.3 -3.7 -134.9 169.7
Operating profit -46.6 90.0 39.0 32.2 19.9 -293.2 -56.7 -17.5 -38.3
Attributable profits (reported) -58.1 -131.6 26.8 36.6 21.2 126.7 -120.3 36.7 -42.2
Adj. attributable profit -79.9 124.8 41.7 35.5 20.7 -256.2 -66.6 -14.9 -41.7
Year to 31-Dec 2011 2012 E 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15
Balance Sheet Summary (CHFm) Year-on-year change (%)
Customer loans 9,548 10,434 11,177 11,629 12,098 9.3 7.1 4.0 4.0
Investments available for sale 3,984 3,298 3,298 3,298 3,298 -17.2 0.0 0.0 0.0
Total assets 21,041 23,626 24,101 24,585 25,079 12.3 2.0 2.0 2.0
Customer deposits 14,398 16,084 17,229 17,925 18,649 11.7 7.1 4.0 4.0
Minorities 25 104 121 139 159 324.0 16.3 14.8 14.4
Ordinary equity 235 719 925 1,081 1,273 205.7 28.7 16.8 17.7
Tangible equity 711 1,022 1,377 1,537 1,732 43.7 34.8 11.6 12.7
Core (Equity) Tier 1 Capital 235 719 925 1,081 1,273 205.7 28.7 16.8 17.7
Risk-weighted assets 5,614 6,046 6,748 6,884 7,022 7.7 11.6 2.0 2.0
RWA/assets 26.7 25.6 28.0 28.0 28.0 -4.1 9.4 0.0 0.0
Loans/assets 45.4 44.2 46.4 47.3 48.2 -2.7 5.0 2.0 2.0
Loans/deposits 66.3 64.9 64.9 64.9 64.9 -2.2 0.0 0.0 0.0
Tier 1 ratio 12.9 17.2 13.7 15.7 18.1 33.2 -20.1 14.5 15.4
Core (Equity) Tier 1 ratio 4.2 11.9 13.7 15.7 18.1 183.9 15.3 14.5 15.4
Erste Group Bank AG
Banking
94

High credit risk

We reiterate our bear case on Erste because we believe the market
underestimates the credit risk arising from its central and eastern
European (CEE) exposure. The market expects a 20% reduction in
loan losses in 2013 compared with 2012 (from 2.0bn to 1.6bn),
driven mostly by Romania. This is too optimistic, in our view. Apart
from asset-quality issues, Erste faces revenue headwinds due to falling
interest rates in CEE that resulted in an 8% miss to its internal target
of a stable operating result in Q1 2013. Besides, our capital analysis
reveals that the relative advantage based on Basel ratios compared
with its domestic peer is misleading. Valuation is full and we advise
investors to take profits.

Consensus loan loss charges (LLCs) of 1.6bn for FY 2013 are
too optimistic: The Q1 level of 400m is artificially low due to a
reversal of losses in Austria. Even if the asset quality in Romania (13%
of loan book) improves in FY 2013, the Czech Republic is falling into
a deeper recession than economists expected and Hungary remains
challenging. We estimate LLCs of 1.8bn for FY 2013 (10% lower
versus FY 2012), assuming there is no deterioration of the macro
environment in H2 2013. Our estimate is in line with guidance.

Operating result should remain under pressure: It will be very
difficult for Erste to make up for the lost ground in H2, because: i) net
interest income (NII) will continue to decline as both loan volumes and
lending rates drop (driven respectively by weak demand in most regions
and rate cuts; ie in Hungary and Romania); ii) fee and trading income is
as good as it gets (on a seasonally strong Q1); and iii) there is limited
room for a further reduction of operating expenses. We estimate an
operating result of 3.33bn for FY 2013, -6% yoy, -6% versus consensus
and -6% on the companys internal target of a flat operating result.

Capital simpler ratios give a different story to Basel ratios: The
Basel capital ratios of Erste are better than its domestic peer Raiffeisen
(Basel III CT1 at 9.0% excluding state aid, versus 7.6% for Raiffeisen),
but if we remove the subjectivity of risk weights, Erstes pain ratio
(which we define to exclude state aid) is 3.3%, matching Raiffeisen.

Valuation: Erste is trading at 1.0x TBV for a 2014E RoTE of 7.5%, a
50% premium to Raiffeisen. We believe the premium is based on the
perception of Erstes stronger capital, which is misleading based on
our analysis. Valuation is more than full. We would continue selling.
Our price target is derived from the Gordon growth model, based on
a P/TBV multiple driven by a 2014E RoTE and CAPM-based CoE.

Sell
Rating system
Current price
EUR 23.81
Relative
Price target
EUR 13.00
10/06/2013 Vienna Close
Reuters ERST.VI
Bloomberg EBS AV


Chg
2013e 2014e 2015e

old % old % old %
Income 6991 - 6938 - 6897 -
PPOP 2919 - 2919 - 2882 -
EPS 1.53 - 1.70 - 1.67 -

Share data

Shares outstanding (m) 395
Performance data

1 month -0.1 % 1.3 %
3 months -4.7 % -3.4 %
12 months 41.2 % 33.1 %

12 June 2013
Eleni Papoula
Analyst
+44 20 3465 2741

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
EPS -2.28 0.87 1.17 1.34 1.29
EPS (adj.) 1.51 2.14 1.53 1.70 1.67
BVPS 26.1 26.2 27.2 28.1 29.0
TBVPS 17.4 20.8 21.8 22.7 23.6
DPS 0.00 0.40 0.38 0.43 0.42
No. of Shares (m) 378 394 394 394 394
P/E (adj.) 15.8x 11.1x 15.5x 14.0x 14.2x
P/TBV 1.37x 1.15x 1.09x 1.05x 1.01x
RoE (%) -5.5 3.9 5.0 5.3 5.1
RoTE (%) 8.4 10.3 7.0 7.5 7.1
Dividend Yield (%) 0.0 1.7 1.6 1.8 1.8
Payout Ratio (%) 0 19 25 25 25

Erste Group Bank AG
Banking
95
Financials

Erste
Market ratios and per share data (EUR) 2011 2012 2013 E 2014 E 2015 E
EPS (reported) -2.28 0.87 1.17 1.34 1.29 Market Cap (EURm) 9,395
New EPS (Berenberg adjusted) 1.51 2.14 1.53 1.70 1.67 Bloomberg ticker EBS AV
Old EPS (Berenberg adjusted) 1.51 1.48 1.65 1.76 1.77 Reuters ticker EBKOF.PK
Change 0% 45% -7% -3% -6% Rating Sell
TBVPS 17.4 20.8 21.8 22.7 23.6 Analyst Eleni Papoula
DPS 0.00 0.40 0.38 0.43 0.42 Target price (EUR) 13.00
P/E (Berenberg adjusted) 15.8 11.1 15.5 14.0 14.2 Upside -45%
P/TBV (x) 1.37 1.15 1.09 1.05 1.01 Phone +44 20 3465 2741
P/BV (x) 0.91 0.91 0.88 0.85 0.82 email: eleni.papoula@berenberg.com
RoTE adjusted (%) 8.4 10.3 7.0 7.5 7.1
Dividend yield (%) 0.0 1.7 1.6 1.8 1.8
Payout ratio (%) 0.0 18.7 25.0 25.0 25.0
Weighted avg. number of shares (m) 378 394 394 394 394
Year to 31-Dec 2011 2012 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15
Net interest income (NII) 5,569 5,235 4,919 4,766 4,714 -6.0 -6.0 -3.1 -1.1
Net fees & commissions 1,787 1,721 1,742 1,784 1,795 -3.7 1.2 2.4 0.6
Trading income 122 273 330 388 388 123.5 20.6 17.6 0.0
Other income 0 0 0 0 0 na na na na
Total income 7,479 7,230 6,991 6,938 6,897 -3.3 -3.3 -0.8 -0.6
Operating expenses -3,851 -3,757 -3,705 -3,691 -3,686 -2.4 -1.4 -0.4 -0.1
Other results -1,683 -692 -367 -328 -329
Pre-provision op. profits (PPOP) 1,945 2,781 2,919 2,919 2,882 43.0 5.0 0.0 -1.3
Loan loss charge (LLC) -2,267 -1,980 -1,800 -1,672 -1,648 -12.7 -9.1 -7.1 -1.4
Reported profit before tax -322 801 1,119 1,247 1,234 -348.7 39.6 11.5 -1.1
Taxation -240 -170 -277 -349 -347 -29.2 63.0 25.8 -0.6
Minorities + Preferences -156 -147 -238 -228 -229 -5.7 61.6 -4.1 0.1
Attributable profits (reported) -719 484 603 670 658 -167.3 24.7 11.0 -1.7
Exceptional items 1,289 361 0 0 0
Adj. attributable profit 570 844 603 670 658 48.2 -28.5 11.0 -1.7
Coupon of participation capital -141 -141 -141 -141 -150 0.0 0.0 0.0 6.3
Income Ratios (%)
NII/Average interest earning assets 2.88 2.66 2.48 2.41 2.37 -7.7 -6.5 -3.2 -1.4
PPOP/LLC 0.9 1.4 1.6 1.7 1.7 63.7 15.4 7.7 0.2
Cost/income ratio 51.5 52.0 53.0 53.2 53.4 0.9 2.0 0.4 0.5
Cost/avg. assets 1.9 1.8 1.7 1.7 1.7 -4.3 -2.2 -0.6 -0.6
LLC/avg. loans 1.70 1.48 1.37 1.28 1.25 -12.5 -7.7 -6.9 -1.9
LLC/NII 40.7 37.8 36.6 35.1 35.0 -7.1 -3.2 -4.1 -0.3
Tax rate -74.6 21.2 24.8 28.0 28.1 -128.5 16.7 12.9 0.4
RoTE adjusted 8.4 10.3 7.0 7.5 7.1 21.9 -31.9 6.6 -5.4
RoE -5.5 3.9 5.0 5.3 5.1 -170.2 30.1 4.5 -3.2
RoA 0.27 0.40 0.28 0.31 0.31 45.4 -29.2 10.8 -2.2
Asset Tangible Leverage (x) 16.8 14.7 14.4 14.1 13.8 -12.4 -2.3 -2.0 -1.8
RoRWA 6.3 8.9 5.9 6.4 6.0 41.7 -33.6 7.7 -4.9
Year to 31-Dec 2011 2012 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15
Customer loans 134,750 131,928 130,768 131,386 132,039 -2.1 -0.9 0.5 0.5
Total assets 210,006 213,824 213,698 214,707 215,775 1.8 -0.1 0.5 0.5
Interest earning assets 195,922 198,203 197,776 198,394 199,047 1.2 -0.2 0.3 0.3
Debt securities & other borrowings 30,782 29,427 29,811 29,811 29,811 -4.4 1.3 0.0 0.0
Minorities 3,143 3,483 3,518 3,518 3,518 10.8 1.0 0.0 0.0
Ordinary equity 15,180 16,338 16,741 17,102 17,446 7.6 2.5 2.2 2.0
Tangible equity 6,741 8,197 8,601 8,962 9,306 21.6 4.9 4.2 3.8
Core Equity Tier 1 Capital (reported) 10,681 11,848 12,120 12,481 12,825 10.9 2.3 3.0 2.8
Core (Equity) Tier 1 Capital (excl. participation capital) 8,917 10,084 10,356 10,717 11,061 13.1 2.7 3.5 3.2
Risk Weighted assets 114,019 105,323 104,378 104,739 105,122 -7.6 -0.9 0.3 0.4
RWA/assets 54.3 49.3 48.8 48.8 48.7 -9.3 -0.8 -0.1 -0.1
Loans/assets 64.2 61.7 61.2 61.2 61.2 -3.8 -0.8 0.0 0.0
Loans/Retail Funds 113.3 107.2 104.7 104.0 103.3 -5.4 -2.3 -0.7 -0.7
Tier 1 ratio 13.3 15.5 16.0 16.3 16.6 16.5 3.4 1.8 1.6
Core (Equity) Tier 1 ratio (reported) 9.4 11.2 11.6 11.9 12.2 20.1 3.2 2.6 2.4
NPL/loans 7.8 9.6 9.9 10.2 10.5 22.4 3.6 3.1 2.8
Provision coverage 8.5 9.2 8.5 8.1 8.0 8.5 -6.8 -5.4 -0.7
Svenska Handelsbanken AB
Banking
96

20:20 vision

Handelsbanken demonstrates the clear benefits from a low-risk utility
banking model, delivering sustainably higher returns and out-
performing banks and the broader market over a prolonged period.
Capital is for uncertainty and uncertainty is much lower than at peers
given its business model. Valuation is the challenge, however. A
premium is more than justified by the predictability of its earnings in
an uncertain economic environment (such as the one Europe is likely
to experience in the next decade) and the option on growth provided
by the UK and the Netherlands. A Hold for now, but look to buy on
further weakness.

Capital more than enough: The sixth-strongest commercial bank
in our coverage universe on the pain ratio, Handelsbanken falls
short of the 4% threshold. But as Walter Bagehot opined, a well-run
bank needs no capital. No other bank in Europe has such a deeply
ingrained credit culture; no other bank can boast such a 40-year track
record of managing risk. It also has the second-most-liquid balance
sheet.

Poster child for utility banking: Handelsbanken has focused on
RoE over growth since its new strategy was forged from its own crisis
40+ years ago. For 30+ years, its commitment to and delivery of low
costs and low risk through a decentralised business model has
sustained its superior RoE versus peers. Utility banking beats growth
banking over time, in our view.

The UK opportunity is huge: The CEOs vision of the banks UK
business being larger than Sweden one day (it is one-eighth of the size
today) moves closer each quarter. The attractiveness is compounded
by potential returns the CFO notes that the oldest UK branches (8-9
years old) have, at 30%, cost-income ratios below the average Swedish
branch and very high RoEs.

Funding strategy vindicated: Handelsbanken is unique in disliking
deposits (it is only sticky until they are not) despite the pressures from
regulators bearing rules from Basel. Its preference for unsecured
funding is validated by events in Cyprus in Q1.

Valuation how much to pay for growth? Consensus = 1.7x
P/TNAV for a 14% 2014 RoTE. This appears expensive on the face
of it the key is how much to pay for UK and Dutch growth options,
and stability. Our price target is based on a P/TNAV multiple derived
from our 2014 RoTE and a CAPM-derived cost of equity.

Key risks to view: Risk-on rally; severe dislocation in wholesale
funding markets.

Hold
Rating system
Current price
SEK 284.20
Relative
Price target
SEK 250.00
Stockholm Close
Market cap SEK 180,353 m
Reuters SHBa.ST
Bloomberg SHBA SS

Rating Hold (no change)
Price target SEK 250.00 (no change)

Chg
2013e 2014e 2015e

old % old % old %
Income 35506 1.0 36817 1.7 38109 1.6
PPOP 19373 -1.6 20326 -0.2 21268 -0.2
EPS 21.36 0.1 22.36 0.0 23.39 0.1

Share data

Performance data

High 52 weeks (SEK) 302
Low 52 weeks (SEK) 209
1 month -1.5 % -0.2 %
3 months 1.0 % 2.3 %
12 months 8.7 % 0.7 %

12 June 2013
Nick Anderson
Analyst
+44 20 3207 7838

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., SEK m 2011 2012 2013E 2014E 2015E
EPS 19.2 21.6 21.4 22.4 23.4
EPS (adj.) 19.2 21.6 21.4 22.4 23.4
BVPS 151.5 164.1 163.6 175.0 187.0
TBVPS 141.3 154.2 153.8 165.2 177.1
DPS 9.8 10.8 10.9 11.4 11.9
No. of Shares (m) 623 628 634 635 635
P/E (adj.) 14.8x 13.2x 13.3x 12.7x 12.1x
P/TBV 2.01x 1.84x 1.85x 1.72x 1.60x
RoE (%) 13.8 14.8 13.3 13.5 13.2
RoTE (%) 14.8 15.9 14.2 14.3 14.0
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0
Svenska Handelsbanken AB
Banking
97
Financials

Market ratios; per share data (SEK) 2011 2012 2013e 2014e 2015e
EPS (reported) 19.18 21.60 21.38 22.37 23.40 Market Cap SEKm 180,798
EPS (Berenberg adjusted) 19.18 21.60 21.38 22.37 23.40 Bloomberg ticker SHBA SS
TBVPS 141.30 154.20 153.78 165.20 177.14 Reuters ticker SHBa.ST
BVPS (reported) 151.48 164.11 163.59 175.01 186.95 Share price SEK 284.9
P/TBV (x) 2.02x 1.85x 1.85x 1.72x 1.61x +44 20 3207 7838
P/BV (x) 1.88x 1.74x 1.74x 1.63x 1.52x
Dividend yield (%) 3.4% 3.8% 3.8% 4.0% 4.2%
Payout ratio 49% 48% 50% 50% 50%
Weighted avg. number of shares (m) 623.1 628.498 634.225 634.6 634.6
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Income Summary (SEKm)
Trading income 1,016 1,120 1,182 1,389 1,371 10.2% 5.5% 17.5% -1.3%
Other income 507 492 553 575 585 -3.0% 12.4% 4.0% 1.7%
Total income 32,809 35,062 35,859 37,435 38,726 6.9% 2.3% 4.4% 3.4%
Pre-provision op. profits (PPoP) 17,345 18,362 19,069 20,281 21,225 5.9% 3.9% 6.4% 4.7%
Loan loss charge (LLC) -816 -1,251 -1,427 -1,702 -1,792 53.3% 14.1% 19.3% 5.3%
Other non-operating 7 -3 1 0 0
Taxation -4,372 -3,092 -3,813 -4,087 -4,275 -29.3% 23.3% 7.2% 4.6%
Minorities + Preferences 0 -1 0 0 0
Attributable profits (reported) 12,323 14,037 13,846 14,492 15,157 13.9% -1.4% 4.7% 4.6%
Adj. attributable profit 12,323 14,037 13,846 14,492 15,157 13.9% -1.4% 4.7% 4.6%
Income Ratios (%)
NII/ Average Total Assets 1.02% 1.05% 1.10% 1.11% 1.12% 0.03% 0.05% 0.01% 0.01%
PPoP/LLC 21.3x 14.7x 13.4x 11.9x 11.8x
Cost/avg. assets 0.67% 0.67% 0.70% 0.69% 0.68% 0.01% 0.02% -0.01% -0.01%
LLC/avg. loans 0.05% 0.08% 0.09% 0.10% 0.10% 0.02% 0.01% 0.01% 0.00%
LLC/NII 3.5% 4.8% 5.4% 6.1% 6.2%
Tax rate 26.5% 18.1% 21.6% 22.0% 22.0% -8.4% 3.5% 0.4% 0.0%
RoTE adjusted (%) 14.8% 15.9% 14.2% 14.3% 14.0% 1.1% -1.7% 0.1% -0.4%
RoE (stated) (%) 13.8% 14.8% 13.3% 13.5% 13.2%
RoA 0.53% 0.57% 0.57% 0.58% 0.59% 0.03% 0.01% 0.01% 0.01%
RoRWA 2.35% 2.83% 2.85% 2.90% 2.94% 0.47% 0.03% 0.05% 0.04%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Balance Sheet Summary (SEKm)
Customer loans 1,591,128 1,680,479 1,699,565 1,750,027 1,805,279 5.6% 1.1% 3.0% 3.2%
Total assets 2,454,366 2,383,951 2,453,145 2,525,983 2,605,733 -2.9% 2.9% 3.0% 3.2%
Customer deposits 724,888 682,223 -5.9%
Debt securities & other borrowings 1,175,391 1,172,593 -0.2%
Minorities 0 2 2 2 2
Ordinary equity 94,524 103,848 103,817 111,063 118,641 9.9% 0.0% 7.0% 6.8%
Tangible equity 88,172 97,575 97,588 104,834 112,412 10.7% 0.0% 7.4% 7.2%
RWA/assets 20.7% 20.4% 20.1% 20.1% 20.1% -0.3% -0.3% -0.3% 0.0%
Loans/assets 64.8% 70.5% 69.3% 69.3% 69.3% 5.7% 5.7% -1.2% 0.0%
Tier 1 ratio 18.4% 20.4% 20.6% 21.4% 22.2% 2.0% 2.0% 0.2% 0.8%
NPL/loans 0.43% 0.43%
HSBC Holdings plc
Banking

98

A management that gets it

Adapting to structural challenges: We reiterate our preference for
HSBC over its European or large bank peers. We believe management
gets it, recognising that the industry faces structural rather than
cyclical challenges, and is focused on cost reduction and capital return.

Simplification generates cost savings: We believe HSBC is the only
large bank which understands that without simplification and risk
reduction it would be too big and complex to manage and control.
This simplification is forecast to generate $7bn of total cost savings by
2015 and should also reduce risk volatility.

Risk reduction delivers capital generation: The simplification of
the business is further helped by the risk reduction in the loan book
over the last 20 months towards secured lending. Alongside this, the
investment in a best-in-class culture in risk/compliance enables HSBC
to consider buybacks from 2014. This is a major shift and
differentiator for HSBC among European banks, while also
demonstrating that management is delivering on its strategy of change.

Own HSBC over Standard Chartered (STAN): While STAN
(4.4%) has a higher pain ratio than HSBC (3.7%) in our leverage
analysis, we see the business models going in very different directions.
STAN remains focused on growth to generate returns and will, in our
view, inevitably take on more risk and cost in pursuit of targets, while
HSBC focuses on simplification and costs to maximise returns.

Lower leverage than large-cap peers: Our leverage analysis ranks
HSBC above all its large-cap banks peers except STAN. US peer ratios
vary between 2.0% and 3.0%. This puts HSBC in a strong relative
position, especially considering its liquidity ratios.

Price target remains unchanged at 790p: HSBC is one of the only
banks where we currently see absolute upside to our price target
(13%). We calculate our price target using a capital allocation sum-of-
the-parts analysis on both a country and divisional basis.

Risks to our view: The key risks to our view are that our revised
revenue estimates are still too high or that HSBC is hit with additional
regulatory requirements.

Buy
Rating system
Current price
GBp 700
Relative
Price target
GBp 790
Reuters HSBA.L
Bloomberg HSBA LN


Chg
2013e 2014e 2015e

old % old % old %
Income 67067 - 68191 - 69938 -
PPOP 28253 - 29930 - 31924 -
EPS 95.80 0.7 106 0.7 116 0.7

Share data

Performance data

1 month -3.6 % -2.3 %
3 months -4.7 % -3.4 %
12 months 4.0 % -4.1 %

12 June 2013
James Chappell
Analyst
+44 20 3207 7844

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., USD m 2011 2012 2013E 2014E 2015E
EPS 91.7 74.2 96.5 106.4 116.9
EPS (adj.) 91.7 74.2 96.5 106.4 116.9
BVPS 885.6 959.1 995.8 1,046.0 1,107.4
TBVPS 708.5 804.9 845.2 896.2 957.6
DPS 41.0 45.0 50.0 55.0 60.0
No. of Shares (m) 17,868 18,476 18,675 18,675 18,675
P/E (adj.) 11.9x 14.7x 11.3x 10.3x 9.3x
P/TBV 1.54x 1.35x 1.29x 1.22x 1.14x
RoE (%) 10.6 8.1 9.9 10.4 10.8
RoTE (%) 13.1 9.8 11.7 12.2 12.5
Dividend Yield (%) 3.8 4.1 4.6 5.0 5.5
Payout Ratio (%) 45 61 52 52 51
HSBC Holdings plc
Banking

99
Financials

Market ratios; per share data (USD) 2011 2012 2013e 2014e 2015e
EPS (reported) 91.7 74.2 96.5 106.4 116.9 Market Cap
EPS (Berenberg adjusted) 91.7 74.2 96.5 106.4 116.9 Bloomberg ticker HSBA LN
TBVPS 708 805 845 896 958 Reuters ticker HSBA.L
BVPS (reported) 886 959 996 1,046 1,107 Share price GBp 700
DPS 41.00 45.00 50.00 55.00 60.00 USD 1,090
P/E (Berenberg adjusted) 11.9x 14.7x 11.3x 10.2x 9.3x GBP-USD 1.56
P/TBV (x) 1.54x 1.35x 1.29x 1.22x 1.14x Analyst James Chappell
P/BV (x) 1.23x 1.14x 1.09x 1.04x 0.98x james.chappell@berenberg.com
Dividend yield (%) 3.8% 4.1% 4.6% 5.0% 5.5% +44 20 3207 7844
Payout ratio 45% 61% 52% 52% 51%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Income Summary (USDm)
Non-interest income 31,618 23,634 30,606 31,505 32,458 -25.3% 29.5% 2.9% 3.0%
Total income 72,280 61,306 67,067 68,191 69,938 -15.2% 9.4% 1.7% 2.6%
Other non-operating 3,264 10,581 2,646 2,781 2,925 224.2% -75.0% 5.1% 5.2%
Taxation 3,928 5,315 5,253 5,771 6,293 35.3% -1.2% 9.9% 9.0%
Minorities + Preferences 1,720 1,880 1,848 1,848 1,848 9.3% -1.7% 0.0% 0.0%
Income Ratios (%)
NII/ Average Total Assets 1.98% 1.69% 2.13% 3.60% 3.58% -0.28% 0.44% 1.46% -0.02%
PPoP/LLC 2.5x 2.2x 4.8x 5.7x 6.5x
Cost/avg. assets -1.66% -1.64% -1.44% -1.41% -1.37% 0.02% 0.20% 0.03% 0.04%
LLC/avg. loans 1.28% 1.22% 0.82% 0.51% 0.47% -0.06% -0.40% -0.31% -0.05%
LLC/NII 29.8% 22.1% 16.1% 14.3% 13.0% -7.76% -5.92% -1.88% -1.23%
Tax rate -21.1% -52.8% -23.5% -23.4% -23.3% -31.7% 29.3% 0.1% 0.1%
RoTE adjusted (%) 13.1% 9.8% 11.7% 12.2% 12.5% -3.2% 1.9% 0.4% 0.4%
RoE (stated) (%) 10.6% 8.1% 9.9% 10.4% 10.8% -2.5% 1.9% 0.5% 0.4%
RoA 0.65% 0.51% 0.66% 0.73% 0.79% -0.13% 0.15% 0.07% 0.05%
RoRWA 1.40% 1.15% 1.55% 1.69% 1.84% -0.25% 0.40% 0.13% 0.15%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Balance Sheet Summary (USDm)
Customer loans 940,429 421,101 1,006,829 1,032,183 1,060,200 -55.2% 139.1% 2.5% 2.7%
Total assets 2,555,579 2,692,538 2,707,420 2,730,511 2,828,823 5.4% 0.6% 0.9% 3.6%
Interest earning assets 2,041,799 2,409,414 1,006,829 1,032,183 1,060,200 18.0% -58.2% 2.5% 2.7%
Customer deposits 1,253,925 1,340,014 1,375,919 1,455,387 1,499,241 6.9% 2.7% 5.8% 3.0%
Debt securities & other borrowings 161,619 148,940 -7.8%
Minorities 7,368 7,887 8,281 8,695 9,130 7.0% 5.0% 5.0% 5.0%
Ordinary equity 158,725 175,242 186,210 196,735 208,291 10.4% 6.3% 5.7% 5.9%
Tangible equity 129,691 145,389 156,357 166,882 178,438 12.1% 7.5% 6.7% 6.9%
Risk-weighted assets 1,209,514 1,123,943 1,183,841 1,172,260 1,201,705 -7.1% 5.3% -1.0% 2.5%
RWA/assets 47.3% 41.7% 43.7% 42.9% 42.5% -5.6% 2.0% -0.8% -0.5%
Loans/assets 36.8% 15.6% 37.2% 37.8% 37.5% -21.2% 21.5% 0.6% -0.3%
Loans/deposits 75% 31% 73% 71% 71% -43.6% 41.7% -2.3% -0.2%
Tier 1 ratio 11.5% 13.4% 13.7% 15.0% 15.8% 1.9% 0.3% 1.2% 0.8%
130,764
ING Groep NV
Banking
100

Positive actions point to brighter future

Further value to be unlocked: ING is one of the few banks in our
universe with double-digit upside to our price target (8). Short-term
catalysts remain key, with the recent ECB rate cut likely to hit core
banking earnings but the impressive performance of ING US
Insurance, combined with further potential asset sales in South Korea,
likely to enable investors to focus on the value within the Group.

Core bank earnings stability value driver: Despite reporting a 5bp
increase in NIM to 1.38% at end-Q1 2013, the subsequent interest
rate cut by the ECB is likely to put downward pressure on core bank
earnings in Q2. However, we believe this will sharpen managements
focus on further deposit re-pricing to maintain momentum and ensure
earnings stability at the bank. We believe that ING Bank could earn a
ROTE of 6.6% in 2015 on a TBVPS of 14.10.

Dutch housing market remains challenging: We believe the
increase in provisions for Dutch housing exposure shows
managements realistic view of the challenge it faces. We expect high
unemployment and falling house prices to mean that credit quality
remains poor throughout 2013 and 2014. We believe that the reform
of the Dutch tax system through a cap on LTV and lower tax
deductibility of mortgages should go a long way to addressing some of
the problems in the housing market but will take time to work.

Asset sales key to reducing double leverage: The IPO of ING US
Insurance has surprised positively (share price is up over 50%), with
INGs remaining stake worth 4bn. We currently value it at 3bn and
this additional upside could add 0.3 to our price target. Alongside
this, the potential for the IPO of the European Insurance business to
be brought forward to 2014 would be positive. The main near-term
catalyst we see is the sale of the South Korean Insurance business,
which we value at 1.2bn, but would view any disposal as positive.

ING is the cheapest bank across our coverage universe: ING
trades on 6.3x consensus 2014 EPS estimates with the sector trading
on 9.2x. ING trades on 0.5x TBV relative to the sector on 1.0x. We
calculate our price target using a sum-of-the-parts analysis.

Risks to our view: 1) The market declines, reducing the valuation for
future insurance sales or reducing interest in potential asset sales. 2)
Significant deterioration in the Dutch housing market causes higher
write-downs. 3) A further deterioration in Spain affects INGs 33bn
exposure.

Buy
Rating system
Current price
EUR 6.99
Relative
Price target
EUR 8.00
10/06/2013 Amsterdam Close
Reuters ING.AS
Bloomberg INGA NA


Chg
2013e 2014e 2015e

old % old % old %
Income - - - - - -
PPOP - - - - - -
EPS 0.72 -11.6 0.82 -0.7 0.92 -0.7

Share data

Performance data

1 month 5.2 % 6.5 %
3 months 8.0 % 9.3 %
12 months 16.9 % 8.9 %

12 June 2013
James Chappell
Analyst
+44 20 3207 7844

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
EPS 1.12 0.74 0.63 0.82 0.92
EPS (adj.) 1.12 0.74 0.63 0.82 0.92
BVPS 12.34 13.62 14.07 14.42 14.85
TBVPS 11.40 12.92 13.37 13.71 14.14
DPS 0.0 0.0 0.0 0.0 0.0
No. of Shares (m) 3,782 3,802 3,811 3,811 3,811
P/E (adj.) 6.2x 9.4x 11.0x 8.5x 7.6x
P/TBV 0.61x 0.54x 0.52x 0.51x 0.49x
RoE (%) 13.2 8.0 4.6 5.7 6.3
RoTE (%) 14.7 8.5 4.8 6.0 6.6
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0

ING Groep NV
Banking
101
Financials

TBVPS (reported) 11.4 12.9 13.4 13.7 14.1 Bloomberg ticker INGA:NA
BVPS (reported) 12.3 13.6 14.1 14.4 14.8 Reuters ticker ING.AS
DPS 0.00 0.00 0.00 0.00 0.00
P/E (Berenberg adjusted) 6.2x 9.4x 11.0x 8.5x 7.6x Share price EUR 6.99
P/TBV (x) 0.61x 0.54x 0.52x 0.51x 0.49x
Payout ratio 0% 0% 0% 0% 0% +44 20 3207 7844
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Net interest income (NII) 12,246 11,684 -4.6%
Non-interest income 30,707 29,100 -5.2%
Operating expenses -37,504 -34,672 -7.6%
Pre-provision op. profits (PPoP) 5,449 6,112 12.2%
Loan loss charge (LLC) -1,341 -2,124 58.4%
Other expenses -195 -346 77.4%
Operating Profit 3,913 3,642 -6.9%
Other non-operating 2,944 1,253 -995 -350 0 -57.4% -179.4% -64.8% -100.0%
Taxation -1,006 -844 -1,272 -1,311 -1,311 -16.1% 50.7% 3.1% 0.0%
Attributable profits (reported) 5,768 2,687 3,409 3,467 3,499 -53.4% 26.9% 1.7% 0.9%
IFRS state repayment value -1,520 -1,125 -400 -400 -400
Adj. attributable profit 4,248 1,562 3,009 3,067 3,099 -63.2% 92.7% 1.9% 1.0%
Income Ratios (%)
NII/ Average Total Assets 1.22% 1.30% 1.35% 1.35% 1.35% 0.08% 0.05%
PPoP/LLC 4.1x 2.9x
Cost/avg. assets 3.96% 3.86% -0.10% -3.86%
LLC/avg. loans 0.23% 0.38% 0.15% -0.38%
LLC/NII 11.0% 18.2%
Tax rate 14.7% 23.2% 26.0% 26.0% 25.8% 8.5% 2.8% 0.0% -0.2%
RoTE adjusted (%) 9.9% 3.2% 5.9% 5.9% 5.8% -6.7% 2.7% 0.0% -0.1%
RoE (stated) (%) 1317.4% 800.5% 458.0% 574.1% 627.4%
RoA 0.33% 0.13% 0.26% 0.27% 0.27% -0.20% 0.13% 0.01% 0.00%
RoRWA 1.43% 0.56% 1.08% 1.10% 1.10% -0.87% 0.52% 0.01% 0.00%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Customer loans 602,525 563,404
Total assets 1,279,228 1,166,193 1,146,464 1,146,093 1,145,825 -8.8% -1.7% 0.0% 0.0%
Interest earning assets 1,150,303 1,046,069
Debt securities & other borrowings 168,403 168,945
Minorities 777 1,081 3,733 3,655 3,655
Ordinary equity 46,663 51,777 53,633 54,953 56,577 11.0% 3.6% 2.5% 3.0%
Tangible equity 43,105 49,138 50,942 52,262 53,886 14.0% 3.7% 2.6% 3.1%
Risk-weighted assets 297,241 278,656 277,470 279,111 280,966 -6.3% -0.4% 0.6% 0.7%
RWA/assets 23.2% 23.9% 24.2% 24.4% 24.5%
Loans/deposits 129% 124% -5.0%
Tier 1 ratio 13.0% 13.7% 14.3% 14.2% 14.3% 0.7% 0.6% -0.1% 0.0%
Core (Equity) Tier 1 ratio 10.7% 11.3% 11.8% 11.7% 11.8% 0.6% 0.5% -0.1% 0.0%
Intesa Sanpaolo SpA
Banking
102

Preferred Italian bank

Intesa is our preferred Italian and Eurozone periphery bank, even
though we are sellers of all major periphery banks. We like Intesa
better due to its stronger capital, higher cash dividend yield and more
conservative provisioning policy versus its domestic peer. We
therefore believe that it can outperform its peripheral peers. However,
we remain bearish on the stock in the long run as we believe loan
losses will stay higher for longer than consensus expects, depressing
returns to shareholders.

Capital: Intesa has stronger capital buffers than most Eurozone
banks (including Unicredit) with a pain ratio of 3.0%. It is also
ahead of peers in implementation of Basel III, with a fully-loaded CT1
ratio at 10.7% as at Q1 2013 (versus 9.6% for Unicredit). Even though
its leverage ratio is still too high, in our view, it is stronger than peers,
which supports our relative preference.

Dividend: Intesa has a higher cash dividend yield than most
Eurozone banks, at 3.7% (DPS 0.05), compared to 2.3% for
Unicredit. Its relative capital strength could help sustain this yield,
consistent with company guidance.

Risk management: Intesa increased its NPL coverage ratio from
42.7% to 43.3% in Q1 2013, increasing risk provisions by 20% yoy,
and has maintained conservative guidance on loan losses for the rest
of the year. Its loan losses exhibit less seasonality versus those of
Unicredit, implying a more consistent risk management policy.

Long-term bear case intact: We still believe that the loan losses of
Intesa (like those of Unicredit) will remain higher for longer than
consensus expects on poor asset quality (driven by an oversized SME
sector). We also expect further pressure on net interest income, driven
by weak debt demand and low re-investment yields (NII dropped by
7.3% qoq in Q1 2013, suffering larger erosion than peers).

Valuation: Intesa is trading at 0.6x TBV for a 2014E RoTE of 5.4%
(consensus: 6.4%), a premium of 20% to Unicredit, supported by higher
RoTE, dividend yield and capital. We recommend the following pair
trades: long Intesa, short Unicredit or long Intesa, short Santander (as
per our note of 7 June, Prefer Italian banks to Spanish peers). Our price
target is based on a P/TBV multiple driven by a 2014E RoTE and
CAPM-based CoE. We make minor changes to our numbers following
the Q1 results.

Sell
Rating system
Current price
EUR 1.36
Relative
Price target
EUR 1.00
10/06/2013 Milan Close
Reuters ISP.MI
Bloomberg ISP IM


Chg
2013e 2014e 2015e

old % old % old %
Income 16571 -0.2 16461 0.0 16501 -0.2
PPOP 7755 -0.4 7588 -0.1 7545 -0.5
EPS 0.14 -0.4 0.15 1.5 0.16 0.6

Share data

Performance data

Relative performance to SXXP MSCI
Europe Banks
1 month -0.6 % 0.3 %
3 months 8.4 % 9.6 %
12 months 4.5 % -7.2 %

12 June 2013
Eleni Papoula
Analyst
+44 20 3465 2741

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
EPS -0.56 0.11 0.11 0.13 0.15
EPS (adj.) 0.17 0.14 0.14 0.15 0.16
BVPS 2.86 3.02 3.06 3.11 3.16
TBVPS 1.95 2.11 2.17 2.22 2.28
DPS 0.05 0.05 0.06 0.07 0.08
No. of Shares (m) 13,775 13,775 13,775 13,775 13,775
P/E (adj.) 7.8x 9.5x 10.1x 9.1x 8.5x
P/TBV 0.70x 0.64x 0.63x 0.61x 0.60x
RoE (%) -16.3 3.4 3.3 3.9 4.2
RoTE (%) 6.4 4.8 4.6 5.4 5.7
Dividend Yield (%) 3.7 3.7 4.4 5.1 5.9
Payout Ratio (%) -9 44 53 52 54

Intesa Sanpaolo SpA
Banking
103
Financials

Intesa
Market ratios and per share data (EUR) 2011 2012 2013E 2014E 2015E
EPS (Berenberg adjusted) 0.17 0.14 0.14 0.15 0.16 Bloomberg ticker ISP IM
TBVPS 1.95 2.11 2.17 2.22 2.28 Reuters ticker ISP.MI
P/E (Berenberg adjusted) 7.8 9.5 10.1 9.1 8.45 Rating Sell
P/TBV (x) 0.70 0.64 0.63 0.61 0.60 Target price (EUR) 1.00
P/BV (x) 0.48 0.45 0.44 0.44 0.43 Upside -27%
RoTE adjusted (%) 6.4 4.8 4.6 5.4 5.7
Payout ratio (%) -8.9 44.0 53.1 52.0 54.2 email: eleni.papoula@berenberg.com
Year to 31-Dec 2011 2012 2013E 2014E 2015E 11/12 12/13 13/14 14/15
Net fees & commissions 5,466 5,451 5,134 5,109 5,125 -0.3 -5.8 -0.5 0.3
Trading income 920 2,182 1,380 1,390 1,390 137.2 -36.8 0.7 0.0
Other income 619 818 785 775 775 32.1 -4.0 -1.3 0.0
Total income 16,785 17,881 16,543 16,454 16,463 6.5 -7.5 -0.5 0.1
Operating expenses -9,137 -8,913 -8,816 -8,873 -8,956 -2.5 -1.1 0.6 0.9
Pre-provision op. profits (PPOP) 7,648 8,968 7,727 7,582 7,507 17.3 -13.8 -1.9 -1.0
Operating Profit 3,405 4,254 3,465 3,909 4,078 24.9 -18.5 12.8 4.3
Other non-operating -1,772 -644 -200 -182 -183 -63.7 -69.0 -9.1 1.0
Exceptional items -10,720 -433 -321 -210 -197 -96.0 -25.9 -34.6 -6.2
Reported profit before tax -9,087 3,177 2,945 3,518 3,698 -135.0 -7.3 19.5 5.1
Taxation 910 -1,523 -1,250 -1,510 -1,501 -267.4 -17.9 20.8 -0.6
Minorities + Preferences -13 0 -50 -50 -50 -100.0 na 0.0 0.0
Attributable profits (reported) -8,190 1,654 1,645 1,958 2,146 -120.2 -0.6 19.0 9.6
Adj. attributable profit 2,530 2,087 1,966 2,168 2,343 -17.5 -5.8 10.3 8.1
Income Ratios (%)
NII/AIEAs 1.67 1.58 1.51 1.50 1.50
PPOP/LLC 1.8 1.9 1.8 2.1 2.2
Cost/income ratio 54.4 49.8 53.3 53.9 54.4
Cost/avg. assets 1.4 1.4 1.3 1.3 1.3
LLC/avg. loans 1.12 1.25 1.14 0.98 0.92
LLC/NII 43.4 50.0 46.1 40.0 37.4
Tax rate 10.0 47.9 42.4 42.9 40.6
RoTE adjusted (%) 6.4 4.8 4.6 5.4 5.7
RoE (%) 3.3 3.3 3.8 4.1 4.1
RoA 0.4 0.3 0.3 0.3 0.3
Asset Tangible Leverage (x) 21.6 19.7 19.1 18.6 18.1
RoRWA 0.8 0.7 0.7 0.7 0.8
Year to 31-Dec 2011 2012 2013E 2014E 2015E 11/12 12/13 13/14 14/15
Customer loans 376,974 376,625 373,469 374,234 375,149 -0.1 -0.8 0.2 0.2
Total assets 639,451 673,472 668,502 670,142 672,032 5.3 -0.7 0.2 0.3
Interest earning assets 578,453 612,948 609,792 610,557 611,472 6.0 -0.5 0.1 0.1
Customer deposits 325,300 349,082 345,560 346,343 347,351 7.3 -1.0 0.2 0.3
Debt securities & other borrowings 32,110 28,276 26,119 26,119 26,119 -11.9 -7.6 0.0 0.0
Minorities 718 586 636 686 736 -18.4 8.5 7.9 7.3
Ordinary equity 47,040 49,613 50,272 51,079 51,911 5.5 1.3 1.6 1.6
Tangible equity 31,999 34,745 35,604 36,511 37,443 8.6 2.5 2.5 2.6
Risk-weighted assets 325,206 298,619 295,248 295,560 296,081 -8.2 -1.1 0.1 0.2
RWA/assets 50.9 44.3 44.2 44.1 44.1
Loans/assets 59.0 55.9 55.9 55.8 55.8
Loans/Retail Funds 115.9 107.9 108.1 108.1 108.0
Tier 1 ratio 11.5 12.1 12.4 12.7 12.9
Core (Equity) Tier 1 ratio 10.1 11.2 11.6 11.8 12.1
NPL/loans 11.1 13.2 13.3 13.3 13.2
Provision coverage 45.4 44.5 45.0 45.0 45.0
Julius Br Gruppe AG
104

High execution risk

We remain cautious on Julius Baer (Baer) as we believe the execution
risk of the acquisition of Merrill Lynchs (ML) wealth management
business, with AuM of CHF81bn, remains high. Besides, we believe
the erosion of Baers strong capital buffers due to: i) the recognition
of goodwill on the acquisition; and ii) a potential material fine to settle
the US investigation will put more pressure on the share price in the
short term. Investors should continue taking profits.

Execution risk of ML acquisition: Most wealthy individuals use
more than one bank, so the main risk for Baer is the loss of key ML
clients to competitors. However, we factor in a successful execution.
We estimate that Baer will acquire CHF57bn (70%) of MLs current
AuM (CHF41bn in 2013 and CHF16bn in 2014), in line with the
deals current progress. This forecast is within the companys target
range, but it may be optimistic given competition from other banks.

Capital from strength to weakness: Baers pain ratio is 5.9%,
which is stronger than that of most European banks per our analysis
(with the exception of Vontobel). However, the recognition of
CHF860m of goodwill on the acquisition (over the next two years)
and an estimated fine of CHF300m to settle the US tax probe will
decrease this ratio to 3.9% per our estimates. This may no longer
support a high trading premium.

Assets under management: Baer reported a 16% rise in AuM from
CHF189bn in December 2012 to CHF220bn at April 2013, driven
mostly by assets acquired from ML in Q1 2013. However, reported
AuM may be overstated as the figure includes CHF24bn of assets
acquired from ML, of which CHF13bn have not yet been transferred
to Baers platform.

Gross margin (revenue/average AuM) stronger: Baer reported a
gross margin of 98bp (consensus: 97bp) for the first four months of
the year. This was flat yoy and seasonally better than H2 2012. Its
gross margin development compares favourably with the trend seen
among smaller peers (ie EFG, Vontobel) and Credit Suisse. Evidence
suggests an increased risk appetite in May 2013 (higher turnover of
structured products on Scoach), implying stronger gross margin for
Q2 2013.

Valuation: Baer is trading at 20x 2014E EPS, a 60% premium to
domestic peers. Valuation is full. Our price target is based on a
P/TBV multiple driven by a 2014E RoTE and CAPM-based CoE.

Hold
Rating system
Current price
CHF 37.03
Relative
Price target
CHF 39.00
Reuters BAER.VX
Bloomberg BAER VX


Chg
2013e 2014e 2015e

old % old % old %
Total
Income
1970 - 2144 - 2251 -
Op. Pr. 382 - 477 - 586 -
EPS 1.52 - 1.90 - 2.32 -

Share data

Performance data

1 month -1.7 % -0.3 %
3 months -1.9 % -0.6 %
12 months -10.4 % -18.4 %

12 June 2013
Eleni Papoula
Analyst
+44 20 3465 2741

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., CHF m 2011 2012 2013E 2014E 2015E
EPS 1.27 1.47 -0.91 0.91 1.55
EPS (adj.) 2.24 2.14 1.52 1.90 2.32
BVPS 21.8 22.5 21.0 21.9 23.5
TBVPS 14.0 15.4 10.9 12.5 14.6
DPS 1.00 0.60 0.00 0.00 0.50
No. of Shares (m) 203 202 222 222 222
P/E (adj.) 16.5x 17.3x 24.3x 19.5x 16.0x
P/TBV 2.65x 2.41x 3.38x 2.97x 2.54x
RoE (%) 10.5 8.9 7.2 8.6 9.8
RoTE (%) 17.2 14.9 12.0 16.2 16.7
Dividend Yield (%) 2.7 1.6 0.0 0.0 1.4
Payout Ratio (%) 76 66 0 0 32
AuM (CHFbn) 170 189 243 280 302
Net New Money (CHFbn) 10.2 9.7 5.8 12.4 13.7

Julius Br Gruppe AG
105
Financials

Julius Baer
Market ratios and per share data (CHF) 2011 2012 2013 E 2014 E 2015 E
New EPS (adjusted) 2.24 2.14 1.52 1.90 2.32 Bloomberg ticker BAER VX
Old EPS 1.52 1.90 2.32 Market Cap (CHFbn) 8.2
Change in EPS (%) 0.00 0.00 0.00 Reuters ticker BAER.VX
EPS reported 1.27 1.47 -0.91 0.91 1.55 Share price (CHF) 37.0
Tangible book value per share (TBVPS) 14.0 15.4 10.9 12.5 14.6 Analyst Eleni Papoula
Book value per share (BVPS) 21.8 22.5 21.0 21.9 23.5 Rating Hold
DPS 1.00 0.60 0.00 0.00 0.50 Target price (CHF) 39.0
P/E (Berenberg adjusted) 16.5 17.3 24.3 19.5 16.0 Upside 5%
P/TBV (x) 2.65 2.41 3.38 2.97 2.54
P/BV (x) 1.70 1.65 1.76 1.69 1.58 Phone +44 20 3465 2741
RoTE adjusted 17.2 14.9 12.0 16.2 16.7 email: eleni.papoula@berenberg.com
Dividend Yield (%) 2.7 1.6 0.0 0.0 1.4
Payout ratio (%) 76 66 0 0 32
Assets under management data and Ratios 2011 2012 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15
AuM data (CHFbn)
Assets under management 170.3 189.3 242.8 279.5 302.3 11.2 28.3 15.1 8.2
Net New Money 10.2 9.7 5.8 12.4 13.7 -5.1 -40.2 114.8 10.3
NNM/AuM (%) 6.0 5.7 3.1 5.1 4.9 -5.5 -46.2 67.5 -4.2
Year to 31-Dec 2011 2012 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15
Income Summary (CHFm)
Net interest income (NII) 431 465 487 507 557 7.9 4.6 4.2 9.7
Net fees & commissions 942 980 1,167 1,240 1,278 4.1 19.0 6.2 3.1
Trading income 370 266 307 387 406 -28.1 15.3 26.3 4.9
Other income 9 26 10 10 10 172.3 -60.9 0.0 0.0
Total income 1,753 1,737 1,970 2,144 2,251 -0.9 13.4 8.8 4.9
Operating expenses -1,214 -1,216 -1,588 -1,667 -1,664 0.2 30.6 5.0 -0.2
Operating Profit 539 521 382 477 586 -3.2 -26.7 24.8 22.9
Amortisation of customer relationships -92 -91 -136 -136 -136 -1.0 49.7 0.0 0.0
Restructuring costs, fines -128 -57 -490 -100 -40 -55.7 na -79.6 -60.0
Reported profit before tax 319 374 -244 241 410 17.2 -165.3 -198.7 70.2
Taxation -61 -76 41 -40 -66 24.8 -154.3 -196.4 65.6
Minorities + Preferences 0 1 0 0 0 149.3 na na na
Attributable profits (reported) 258 297 -203 201 344 15.3 -168.2 -199.2 71.1
Adj. attributable profit 453 434 338 422 514 -4.4 -22.1 24.7 22.0
Income Ratios (%)
Gross margin (bps) 102.7 103.6 108.8 99.2 86.2 0.9 5.0 -8.8 -13.2
Net interest income margin (bps) 25.7 25.7 22.5 19.4 19.1 -0.1 -12.4 -13.8 -1.5
Commission income margin (bps) 56.2 54.1 54.0 47.5 43.9 -3.6 -0.2 -12.1 -7.5
Trading income margin (bps) 22.1 14.7 14.2 14.8 14.0 -33.5 -3.4 4.5 -5.8
Cost/income ratio 68.6 68.6 77.6 75.0 71.3 0.0 13.2 -3.4 -4.9
Tax rate 19.0 20.3 16.8 16.5 16.0 6.5 -16.9 -2.4 -2.7
RoE (stated) 10.5 8.9 7.2 8.6 9.8 -15.4 -19.4 19.6 14.0
RoA 0.86 0.79 0.58 0.69 0.79 -7.7 -26.9 18.8 15.6
Asset Leverage (x) 12.3 11.3 12.4 12.5 12.3 -8.3 10.3 0.7 -1.3
RoRWA 3.65 3.43 2.50 2.81 3.26 -5.8 -27.3 12.6 15.9
RoAUM 2.70 2.39 1.73 1.99 2.20 -11.4 -27.8 15.0 10.7
Year to 31-Dec 2011 2012 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15
Balance Sheet Summary (CHFm)
Customer loans 16,408 19,783 21,811 24,047 26,511 20.6 10.3 10.3 10.3
Investments available for sale 12,168 11,775 12,492 13,253 14,060 -3.2 6.1 6.1 6.1
Total assets 52,929 54,868 58,518 61,451 64,873 3.7 6.7 5.0 5.6
Minorities 2 2 2 2 2 17.8 0.0 0.0 0.0
Ordinary equity 4,308 4,872 4,709 4,910 5,255 13.1 -3.3 4.3 7.0
Tangible equity 3,191 3,755 3,189 3,390 3,735 17.7 -15.1 6.3 10.2
Core (Equity) Tier 1 Capital 2,564 3,175 2,347 2,743 3,283 23.8 -26.1 16.9 19.7
Risk-weighted assets 12,811 12,451 14,630 15,363 16,218 -2.8 17.5 5.0 5.6
RWA/assets 24.2 22.7 25.0 25.0 25.0 -6.2 10.2 0.0 0.0
Loans/assets 31.0 36.1 37.3 39.1 40.9 16.3 3.4 5.0 4.4
Loans/deposits 47.1 50.6 52.1 55.2 58.5 7.4 2.9 6.0 6.0
Tier 1 ratio 21.8 29.3 19.3 20.9 23.1 34.5 -34.2 8.6 10.6
Core (Equity) Tier 1 ratio 20.0 25.5 16.0 17.9 20.2 27.4 -37.1 11.3 13.4
KBC Groupe SA
Banking
106

Good earnings momentum, but tight capital

We believe KBC will emerge as a long-term winner. It is downsizing,
focusing on its core business of bancassurance and gradually freeing
itself from reliance on state aid, hence reducing its risk premium. In
the short term, KBC must continue to strengthen its capital buffers.
The strong earnings momentum in Q1 2013 suggests that KBC
should be able to build its capital buffers organically, but the biggest
hurdle remains the repayment of 1.75bn of state aid, which is due by
end of June 2013.
Repayment of state aid: KBC committed to repay 1.75bn to the
Flemish state by June (1.17bn principal plus 583m premium). This
repayment will be funded by: i) H1 retained earnings (c1bn); ii) capital
release from divestments (0.3bn); and iii) existing capital reserves
(c400m, versus the prior expectation of a potential equity issue).
Capital: KBCs pain ratio (which we define to exclude state aid) is
3.2%, marginally above the 3.0% average of European peers. Even
though the local regulator will probably allow KBC to repay the next
tranche of state aid without raising new equity, it must prioritise the
strengthening of its capital (which implies, at a minimum, limited
dividend payments, further deleveraging and no scope of early
repayment of remaining state aid: 2.3bn principal plus 1.15bn
penalty).
Earnings momentum: IFRS net profit rose from 380m in Q1 2012
to 520m in Q1 2013, driven by stronger commission fees and
trading/other income (on mark-up of the structured credit book and
gains on domestic government bond sales) that more than offset the
weaker net interest income. We believe trading income gains can
recur in future quarters given current yields.
KBCs risks: KBC has low liquidity and funding risk (as signalled by
the repayment of 8bn of LTRO loans in Q1). Our main concern is
credit risk, driven by KBCs Irish exposure. We expect LLCs (295m
in Q1, 99m from Ireland) to remain at their current high level in the
next few quarters, in line with KBCs cautious guidance. The valuation
risk for the collateralised debt obligations (CDO) book is another
factor, although the company has hedged its exposure.

Valuation: KBC is trading at 0.8x TBV (including state aid) for a
2014E RoTE of 9.8%. A potential catalyst for the stock would be the
repayment of state aid in June, which should reduce further its risk
premium. On the other hand, if it misses this deadline, we expect a
short-term de-rating of the stock. Our price target is derived from the
Gordon growth model, based on a P/TBV multiple driven by a
2014E RoTE and CAPM-based CoE.

Buy
Rating system
Current price
EUR 30.86
Relative
Price target
EUR 35.00
10/06/2013 Brussels Close
Reuters KBC.BR
Bloomberg KBC BB


Chg
2013e 2014e 2015e

old % old % old %
Income 7348 - 7065 - 7266 -
PPOP 3235 - 2963 - 3086 -
EPS 3.34 - 3.51 - 3.61 -

Share data

Performance data

1 month 2.1 % 3.4 %
3 months 2.8 % 4.1 %
12 months 88.9 % 80.8 %

12 June 2013
Eleni Papoula
Analyst
+44 20 3465 2741

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
EPS -1.93 -1.09 3.34 3.51 3.61
EPS (adj.) 3.23 4.40 3.34 3.51 3.61
BVPS 47.8 37.4 36.6 38.7 40.9
TBVPS 43.8 35.1 34.4 36.7 39.1
DPS 0.01 1.00 0.00 1.00 1.00
No. of Shares (m) 340 349 417 417 417
P/E (adj.) 9.6x 7.0x 9.2x 8.8x 8.5x
P/TBV 0.70x 0.88x 0.90x 0.84x 0.79x
RoE (%) -6.0 5.1 12.0 10.3 9.8
RoTE (%) 7.6 10.8 10.0 9.8 9.5
Dividend Yield (%) 0.0 3.2 0.0 3.2 3.2
Payout Ratio (%) 1 42 0 32 28

KBC Groupe SA
Banking
107
Financials

KBC
EPS (reported) -1.93 -1.09 3.34 3.51 3.61 Market Cap (EURm) 12,155
EPS (Berenberg adjusted) 3.23 4.40 3.34 3.51 3.61 Bloomberg ticker KBC BB
TBVPS 43.8 35.1 34.4 36.7 39.1 Reuters ticker KBC.BR
BVPS 47.8 37.4 36.6 38.7 40.9 Rating Buy
P/E (Berenberg adjusted) 9.6 7.0 9.2 8.8 8.5 Share price (EUR) 30.86
P/BV (x) 0.64 0.82 0.84 0.80 0.75 Upside 13%
RoTE adjusted (%) 7.6 10.8 10.0 9.8 9.5
Year to 31-Dec 2011 2012 2013E 2014E 2015E 11/12 12/13 13/14 14/15
Net interest income (NII) 5,404 4,533 4,226 4,389 4,546 -16.1 -6.8 3.9 3.6
Net fees & commissions 1,645 1,326 1,558 1,588 1,617 -19.4 17.5 2.0 1.8
Trading income 521 366 247 242 258 -29.8 -32.5 -2.0 6.6
Other income 648 1,276 1,269 800 800 96.9 -0.5 -37.0 0.0
Dividend income -37 40 49 45 45 -208.1 22.5 -8.2 0.0
Total income 8,181 7,541 7,348 7,065 7,266 -7.8 -2.6 -3.9 2.9
Operating expenses -4,687 -4,186 -4,114 -4,102 -4,180 -10.7 -1.7 -0.3 1.9
Pre-provision profits 3,494 3,355 3,235 2,963 3,086 -4.0 -3.6 -8.4 4.2
Loan loss provisions -1,335 -1,070 -1,053 -743 -764 -19.9 -1.6 -29.4 2.8
Pre-provision op. profits (PPOP) 2,159 2,285 2,182 2,220 2,322 5.8 -4.5 1.7 4.6
Impairment -574 -118 -167 -168 -168 -79.4 41.5 0.6 0.0
Share in results of associated companies -57 -33 0 0 0 -42.1 -100.0 na na
Reported profit before tax 1,528 2,134 2,015 2,052 2,154 39.7 -5.6 1.8 5.0
Taxation -397 -568 -598 -534 -560 43.1 5.3 -10.8 5.0
Minorities + Preferences -35 -29 -25 -56 -88 -17.1 -13.8 124.0 57.1
Attributable profits (reported) 1,096 1,537 1,392 1,462 1,506 40.2 -9.5 5.1 3.0
CDO losses and divestment provisions -1,443 -395 164 0 0
CVA gains/(losses) 359 -530 0 0 0
Adj. attributable profit (IFRS) 12 612 1,556 1,462 1,506 5,000.0 154.2 -6.0 3.0
Coupon of stated aid -670 -543 0 -170 0
Adj. attributable profit post-coupon 426 994 1,392 1,292 1,506 133.3 40.0 -7.1 16.5
Income Ratios (%)
NII/AIEAs 2.09 1.94 2.52 4.05 4.20 -7.1 29.6 61.1 3.6
PPOP/LLC 3.8 19.4 13.1 13.2 13.8 414.8 -32.5 1.1 4.6
Cost/income ratio 57.3 55.5 56.0 58.1 57.5 -3.1 0.8 3.7 -0.9
Cost/avg. assets 1.5 1.5 1.6 1.6 1.6 -0.2 3.2 -0.7 1.2
LLC/avg. loans 0.40 0.09 0.25 3.21 3.21 -77.6 184.5 1,165.8 0.0
LLC/NII 10.6 2.6 4.0 3.8 3.7 -75.5 51.8 -3.1 -3.5
Tax rate 26.0 26.6 29.7 26.0 26.0 2.4 11.6 -12.4 0.0
RoTE adjusted (%) 7.6 10.8 10.0 9.8 9.5 41.1 -7.5 -1.3 -3.0
RoE (%) 5.1 12.0 10.3 9.8 9.5 138.0 -14.2 -5.4 -2.4
RoA (%) 0.14 0.37 0.54 0.50 0.58 160.8 47.0 -7.5 15.7
Asset Tangible Leverage (x) 19.0 17.4 18.0 16.8 16.0 -8.5 3.3 -6.5 -4.5
RoRWA (%) 6.0 12.9 15.9 13.3 13.7 116.9 22.9 -16.2 2.6
Year to 31-Dec 2011 2012 2013E 2014E 2015E 11/12 12/13 13/14 14/15
Customer loans 138,284 126,510 5,235 5,235 5,235 -8.5 -95.9 0.0 0.0
Total assets 285,382 256,886 259,536 258,794 263,224 -10.0 1.0 -0.3 1.7
Interest earning assets 239,265 227,522 108,270 108,270 108,270 -4.9 -52.4 0.0 0.0
Customer deposits & debt certificates 165,226 165,226 102,493 106,654 110,985 0.0 -38.0 4.1 4.1
Minorities 516 362 383 439 527 -29.8 5.8 14.6 20.0
Ordinary equity 9,756 12,099 12,923 14,157 15,405 24.0 6.8 9.6 8.8
Tangible equity 14,358 14,271 13,964 14,868 15,786 -0.6 -2.2 6.5 6.2
Core Equity Tier 1 Capital (reported) 13,413 11,951 11,381 12,348 13,359 -10.9 -4.8 8.5 8.2
Core (Equity) Tier 1 Capital (excl. part capital) 6,913 8,451 9,051 10,348 11,689 22.2 7.1 14.3 13.0
Risk Weighted assets 126,333 102,148 105,000 105,000 105,000 -19.1 2.8 0.0 0.0
RWA/assets 48.5 49.2 2.0 2.0 2.0 1.6 -95.9 0.3 -1.7
Loans/assets 81.5 76.6 5.1 4.9 4.7 -6.0 -93.3 -3.9 -3.9
Loans/Retail Funds 12.3 13.8 21.8 22.1 22.5 12.0 58.1 1.6 1.6
Tier 1 ratio 10.6 11.7 10.8 11.8 12.7 10.2 -7.4 8.5 8.2
Core (Equity) Tier 1 ratio 5.5 8.3 8.6 9.9 11.1 51.2 4.2 14.3 13.0
NPL/loans 4.9 5.3 5.3 5.3 5.3 8.2 0.0 0.0 0.0
Provision coverage 69.0 66.0 66.0 66.0 66.0 -4.3 0.0 0.0 0.0
Lloyds Banking Group plc
Banking

108
Priced for a correction; revenues key concern

Revenue and capital remain our key concerns: We believe
consensus expectations of 4% pa revenue growth are unrealistic.
Alongside this, we believe Lloyds is expensive, especially as it is still at
least 100bp short of a 10% Basel III CT1 ratio.

Revenue estimates too optimistic: Stripping out the gain on sale
and earnings of SJP from Q1 results implies 17.6bn of annualised
revenues. Current FY 2015 consensus of 18.3bn is post-Verde
disposal, which contributes 600m to revenues. Stripping this out
implies 4% pa revenue growth between 2013 and 2015, which we view
as too optimistic. We forecast revenues to fall to 15.8bn due to lower
interest-earning assets, flat rates and a decline in non-interest income.

Capital remains the focus: We expect Lloyds to hit its FY 2013
Basel III CT1 target of 9% by H1 2013. The capital generated from a
string of non-core disposals has seemingly satisfied the PRA, which
confirmed that a capital raise will not be required. Our concern
remains that the volatility of capital is not fully appreciated,
particularly given the potential impact of the insurance business on the
CT1 ratio.

Leverage still too high: Although a pain ratio (tangible equity to
tangible assets ratio including off balance sheet assets) of 3.1% ranks
Lloyds in the middle of the European banks, it is still 125bp behind
Swedbank, to which it is often compared. We therefore believe this
ratio is still too low, especially as it undercapitalises the insurance
business relative to peers.

CT1 ratio of 10% needed to start dividends: For Lloyds to become
a high dividend paying stock, we believe that it needs to have a
significant cushion above 10%. Whilst we expect Lloyds to hit
managements capital targets early, we do not expect dividends to be
paid before 2015.

Re-privatisation update on 19 June: An update on re-privatisation
strategy is expected in the Chancellors Mansion House speech. There
is mounting belief that a sale is imminent, with the Financial Times
reporting the Treasury is considering selling 10% of Lloyds this year.

Target price unchanged at 24p: Our EPS increases due to the
timing of one-off items and the Verde sale; however, our view of core
profitability remains unchanged. As a result, our price target remains
unchanged. We calculate it using a capital allocation sum-of-the-parts.

estimates are too low, which could be driven by interest rates rising.

Sell
Rating system
Current price
GBp 62
Relative
Price target
GBp 24
Reuters LLOY.L
Bloomberg LLOY LN


Chg
2013e 2014e 2015e

old % old % old %
Income 17996 0.3 16849 2.4 16385 -3.4
PPOP 8290 1.7 7688 3.9 7386 -2.1
EPS 0.48 650 3.24 -13.2 3.94 -7.9

Share data

Performance data

1 month 6.8 % 8.1 %
3 months 23.1 % 24.4 %
12 months 88.8 % 80.8 %

12 June 2013
James Chappell
Analyst
+44 20 3207 7844

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., GBP m 2011 2012 2013E 2014E 2015E
EPS -4.07 -2.10 3.59 2.81 3.63
EPS (adj.) -4.07 -2.10 3.59 2.81 3.63
BVPS 66.8 62.5 63.5 66.3 67.9
TBVPS 55.2 52.9 54.0 56.8 58.4
DPS 0.00 0.00 0.00 0.00 2.00
No. of Shares (m) 68,727 70,343 71,113 71,113 71,113
P/E (adj.) -15.1x -29.3x 17.1x 21.9x 17.0x
P/TBV 1.12x 1.16x 1.14x 1.08x 1.05x
RoE (%) -6.1 -3.3 5.7 4.3 5.4
RoTE (%) 1.2 14.8 7.9 8.1 7.1
Dividend Yield (%) 0.0 0.0 0.0 0.0 3.2
Lloyds Banking Group plc
Banking

109
Financials


EPS (reported) -4.07 -2.10 3.59 2.81 3.63 Market Cap
EPS (Berenberg adjusted) -4.07 -2.10 3.59 2.81 3.63 Bloomberg ticker LLOY LN
TBVPS 55 53 54 57 58 Reuters ticker LLOY.L
BVPS (reported) 67 63 63 66 68 Share price GBp 61.6
DPS 0 0 0 0 2.00
P/E (Berenberg adjusted) -15.1x -29.3x 17.1x 21.9x 17.0x
P/TBV (x) 1.12 1.16 1.14 1.09 1.06 Analyst James Chappell
P/BV (x) 0.92 0.98 0.97 0.93 0.91 james.chappell@berenberg.com
Dividend yield (%) 0 0 0 0 3.2% +44 20 3207 7844
Payout ratio 0 0 0 0 55%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Net interest income (NII) 12,210 10,335 10,197 10,060 8,938 -15.4% -1.3% -1.3% -11.2%
Non-interest income 8,836 8,051 7,848 7,202 6,895 -8.9% -2.5% -8.2% -4.3%
Total income 21,046 18,386 18,045 17,262 15,833 -12.6% -1.9% -4.3% -8.3%
Pre-provision op. profits (PPoP) 10,425 8,262 8,435 7,984 7,231 -20.7% 2.1% -5.3% -9.4%
Operating Profit 638 2,565 4,417 4,385 3,978 302.0% 72.2% -0.7% -9.3%
Other non-operating -4,179 -3,177 -694 -1,670 -520
Reported profit before tax -3,541 -612 3,723 2,715 3,458 -82.7% -708.3% -27.1% 27.4%
Taxation 828 -773 -1,050 -597 -761 -193.4% 35.8% -43.1% 27.4%
Attributable profits (reported) -2,786 -1,469 2,548 1,993 2,573 -47.3% -273.4% -21.8% 29.1%
Income Ratios (%)
NII/ Average Total Assets 2.07% 1.93% 2.01% 2.02% 1.83%
PPoP/LLC 1.1x 1.5x 2.1x 2.2x 2.2x
Cost/avg. assets 1.08% 1.07% 1.05% 1.05% 1.01%
LLC/avg. loans 1.62% 1.02% 0.75% 0.68% 0.65%
LLC/NII 80.2% 55.1% 39.4% 35.8% 36.4%
Tax rate -129.8% 30.1% 23.8% 13.6% 19.1%
RoTE adjusted (%) 1.2% 14.8% 7.9% 8.1% 7.1%
RoE (stated) (%) -6.1% -3.3% 5.7% 4.3% 5.4%
RoA -0.28% -0.16% 0.28% 0.23% 0.30%
Asset Leverage (x) -4.2x -95.5x 28.2x 35.8x 23.6x
RoRWA -0.73% -0.44% 0.85% 0.70% 0.96%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Customer loans 565,638 517,225 502,469 486,668 459,588 -8.6% -2.9% -3.1% -5.6%
Total assets 970,546 924,552 901,578 866,728 831,508 -4.7% -2.5% -3.9% -4.1%
Interest earning assets 585,400 543,300 511,950 502,700 492,600 -7.2% -5.8% -1.8% -2.0%
Customer deposits 413,906 426,912 440,459 448,428 428,284 3.1% 3.2% 1.8% -4.5%
Minorities 674 685 685 685 685
Ordinary equity 45,920 43,999 45,147 47,140 48,290 -4.2% 2.6% 4.4% 2.4%
Tangible equity 40,708 39,191 40,339 42,332 43,482 -3.7% 2.9% 4.9% 2.7%
RWA/assets 36.3% 33.6% 32.2% 31.9% 31.2%
Loans/assets 58.3% 55.9% 55.7% 56.2% 55.3%
Loans/deposits 137% 121% 114% 109% 107%
Tier 1 ratio 12.5% 13.8% 15.2% 16.6% 18.2%
Source: Company data, Berenberg.
43,777
Nordea Bank AB
Banking
110

Something rotten in the state of Denmark

The Nordea investment story is complex. It offers Nordic virtues and
for now at least a focus on RoE over growth. But risks abound
capital is weak, disclosure is poor and the management of its balance
sheet is more aggressive than (Nordic) peers. On top of this, there is
exposure to Denmark and Norway, and the overhang of the Swedish
governments stake. For now, we fear Eurozone banks uncertainties
more than Nordeas, but strongly prefer the simpler Swedbank story.

Capital weak versus Nordic peers: Unsurprisingly, given its weaker
Basel III ratios, Nordea scores poorly in our analysis, being in the
bottom tercile. Even on the pain ratio, where it scores relatively
well, it would need 6bn to achieve a 4% ratio. We note its more
aggressive balance sheet management with its focus on RWA
optimisation and the least liquid balance sheet among Swedish banks.

Nordic virtues: Born from the wreckage of Swedens banking crisis
20 years ago, Nordea has built a very strong risk management track
record. It has built a similar track record in delivering its strategic
plans and managing its costs. Moreover, its direct exposure to the
more challenged parts of the Eurozone is limited.

European vices: In contrast, it has a greater appetite for trading risk
and, as noted above, has more aggressively managed its balance sheet.
Most of all, we are increasingly concerned about its selective
disclosure. As noted with Q1, disclosure on FX effects, Basel III and
disposal gains (taken through NII) was poor by Swedish standards.

Commitment to utility banking model questionable: Nordea was
one of the first banks to focus on RoE over growth. We also note the
chairmans cautious view on growth in Europe financial services at the
Sampo capital markets day. But questions remain. If there is no
organic growth, would it target inorganic? What if there is a cyclical
rebound in growth?

Danish/Norwegian exposure adds to uncertainties: As per our
commentary on Danske and DNB, we remain concerned about risk in
these two countries: near-term economic headwinds in Denmark
could sustain higher loan losses for longer, and in Norway a reduction
in global liquidity could have an effect in the longer term.

Valuation full: Consensus = 1.4x P/TNAV versus 14% 2014 RoTE.

Key risks to view: Danish economic miracle; regulatory forbearance;
risk-on rally.

Buy
Rating system
Current price
SEK 79.10
Relative
Price target
SEK 81.00
Stockholm Close
Reuters NDA.ST
Bloomberg NDA SS


Chg
2013e 2014e 2015e

old % old % old %
Income 10284 -0.4 10597 -0.5 10829 -0.6
PPOP 5083 -0.5 5410 -1.0 5632 -1.0
EPS 0.81 0.1 0.87 0.0 0.91 0.0

Share data

Performance data

1 month 1.3 % 2.6 %
3 months 3.6 % 4.9 %
12 months 15.3 % 7.3 %

12 June 2013
Nick Anderson
Analyst
+44 20 3207 7838

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., EURm 2011 2012 2013E 2014E 2015E
EPS 0.65 0.77 0.81 0.87 0.91
EPS (adj.) 0.65 0.77 0.81 0.87 0.91
BVPS 6.43 6.91 7.02 7.53 8.04
TBVPS 5.80 6.26 6.37 6.87 7.38
DPS 0.26 0.34 0.36 0.38 0.40
No. of Shares (m) 4,027 4,026 4,026 4,040 4,040
P/E (adj.) 14.0x 11.7x 11.2x 10.4x 10.0x
P/TBV 1.57x 1.45x 1.43x 1.32x 1.23x
RoE (%) 10.6 11.7 11.6 11.9 11.7
RoTE (%) 11.8 13.0 12.8 13.1 12.8
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0
Nordea Bank AB
Banking
111
Financials

EPS (Berenberg adjusted) 0.65 0.77 0.81 0.87 0.91 Bloomberg ticker NDA SS
TBVPS 5.80 6.26 6.37 6.87 7.38 Reuters ticker NDA.ST
BVPS (reported) 6.43 6.91 7.02 7.53 8.04 Share price EUR 9.28
DPS 0.26 0.34 0.36 0.38 0.40 SEK 80.4
P/E (Berenberg adjusted) 14.3x 12.0x 11.4x 10.7x 10.2x EUR-SEK 8.6661
P/TBV (x) 1.60x 1.48x 1.46x 1.35x 1.26x Analyst Nick Anderson
P/BV (x) 1.44x 1.34x 1.32x 1.23x 1.15x nick.anderson@berenberg.com
Dividend yield (%) 2.8% 3.7% 3.9% 4.1% 4.3% +44 20 3207 7838
Payout ratio 40% 44% 44% 44% 44%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Net interest income (NII) 5,464 5,752 5,639 5,810 5,937 5.3% -2.0% 3.0% 2.2%
Trading income 1,512 1,784 1,782 1,875 1,916 18.0% -0.1% 5.2% 2.2%
Other income 132 196 230 204 204 48.5% 17.3% -11.3% 0.0%
Total income 9,497 10,236 10,242 10,539 10,765 7.8% 0.1% 2.9% 2.1%
Operating expenses -5,223 -5,186 -5,185 -5,186 -5,191 -0.7% 0.0% 0.0% 0.1%
Loan loss charge (LLC) -734 -933 -826 -870 -890 27.1% -11.5% 5.4% 2.3%
Taxation -913 -991 -952 -959 -1,002 8.5% -3.9% 0.8% 4.5%
Income Ratios (%)
PPoP/LLC 5.8x 5.4x 6.1x 6.2x 6.3x
Cost/avg. assets 0.84% 0.74% 0.78% 0.78% 0.76% -0.10% 0.05% -0.01% -0.01%
LLC/avg. loans 0.22% 0.27% 0.23% 0.24% 0.24% 0.05% -0.03% 0.01% 0.00%
LLC/NII 13.4% 16.2% 14.6% 15.0% 15.0%
Tax rate 25.8% 24.1% 22.5% 21.4% 21.4% -1.7% -1.6% -1.1% 0.0%
RoTE adjusted (%) 11.8% 13.0% 12.8% 13.1% 12.8% 1.1% -0.2% 0.3% -0.4%
RoE (stated) (%) 10.6% 11.7% 11.6% 11.9% 11.7%
RoA 0.42% 0.44% 0.50% 0.53% 0.54% 0.02% 0.05% 0.03% 0.01%
RoRWA 1.44% 1.74% 1.96% 2.08% 2.13% 0.30% 0.22% 0.12% 0.05%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Customer loans 337,203 346,251 354,574 361,554 368,718 2.7% 2.4% 2.0% 2.0%
Total assets 716,204 677,309 661,487 674,510 687,874 -5.4% -2.3% 2.0% 2.0%
Minorities 86 5
Ordinary equity 26,034 28,000 28,441 30,410 32,467 7.6% 1.6% 6.9% 6.8%
Tangible equity 23,459 25,344 25,785 27,754 29,811 8.0% 1.7% 7.6% 7.4%
RWA/assets 25.9% 24.8% 25.4% 25.4% 25.4% -1.1% 0.6% 0.0% 0.0%
Loans/assets 47.1% 51.1% 53.6% 53.6% 53.6% 4.0% 2.5% 0.0% 0.0%
Tier 1 ratio 12.2% 14.3% 15.0% 15.8% 16.7% 2.0% 0.7% 0.8% 0.9%
NPL/loans 1.31% 1.88%
Raiffeisen Bank International AG
Banking
112

New CEO does not alleviate concerns

Raiffeisen (RBI) has appointed Karl Sevelda, an existing member of its
Board, as the new CEO following the resignation of Herbert Stepic
on 24 May in the midst of the internal compliance investigation on
offshore transactions. We believe the new CEO will bring little change
to the group strategy of opportunistic growth and Basel capital-light
structure, so we would continue selling.

New CEO to bring little change, in our view. Karl Sevelda has been
a member of RBIs board since 1998 and in charge of the corporate
banking division. Mr Sevelda has been part of the decision-making
process of RBI for the past 15 years. We therefore believe his
leadership will not bring significant change to RBIs priorities and
strategy. We believe the minority 28% shareholders would have
benefited more from an external CEO, as per our note of 30 May,
A new external CEO is needed. We would therefore continue selling.

Capital remains weak: RBIs fully-loaded Basel III CT1 ratio is
7.5%, excluding participation capital of 2.5bn, which is the weakest
among peers. The company cannot afford to repay the participation
capital using the existing capital buffers. It will take RBI four years to
accumulate 1.8bn in retained earnings based on current dividend
policy. This is too little too late, in our view. The bank must raise
equity. While its pain ratio of 3.3% matches Erstes, it is still below
the 4% level we deem the minimum for Eurozone banks.

RBI remains reliant on Russia, which contributes 48% to group net
profit (despite accounting for only 12% of loans), driven by the release
of provision reserves and a high interest margin. However, as we
argued in our note on 17 April, Russia alone cannot save the day, this is
not sustainable. The company is targeting expansion in riskier
unsecured retail lending to maintain margins which will eventually
increase its cost of risk (from -1m in 2013 to 45m in 2014 per our
estimates).

Asset quality continues to be challenging, and RBI is guiding for
stable loan loss charges (LLCs) in 2013, which has a negative read-
across to Erste. Non-performing loans rose to 9.9% of the total
(versus 9.8% in December and 8.9% in March 2012) and LLCs of
220m (consensus: 245m) are 45% higher yoy.

Valuation: RBI is trading at 0.7x tangible book value (TBV) for a
7.2% 2014 RoTE, a 40% discount to Erste due to a weaker Basel
capital ratio and concerns on governance. Our price target is based on
a P/TBV multiple driven by 2014E RoTE and CAPM-based CoE.

Sell
Rating system
Current price
EUR 25.43
Relative
Price target
EUR 22.00
10/06/2013 Vienna Close
Reuters RBIV.VI
Bloomberg RBI AV


Chg
2013e 2014e 2015e

old % old % old %
Income 5061 - 5104 - 5017 -
PPOP 1877 - 1916 - 1869 -
EPS 3.05 - 3.61 - 3.56 -

Share data

Performance data

1 month -5.6 % -4.3 %
3 months -14.8 % -13.5 %
12 months -13.2 % -21.3 %

12 June 2013
Eleni Papoula
Analyst
+44 20 3465 2741

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
EPS 3.95 2.70 2.02 2.58 2.46
EPS (adj.) 5.95 4.06 3.05 3.61 3.56
BVPS 37.3 39.1 43.6 44.0 46.4
TBVPS 31.9 32.4 36.9 37.3 39.7
DPS 1.05 1.17 1.00 1.00 1.00
No. of Shares (m) 195 195 195 195 195
P/E (adj.) 4.3x 6.3x 8.3x 7.0x 7.2x
P/TBV 0.80x 0.79x 0.69x 0.68x 0.64x
RoE (%) 10.8 7.3 5.6 6.4 6.1
RoTE (%) 13.3 8.9 6.1 7.2 6.7
Dividend Yield (%) 4.1 4.6 3.9 3.9 3.9
Payout Ratio (%) 27 43 49 39 41

Raiffeisen Bank International AG
Banking
113
Financials

Raiffeisen
New EPS (reported) 3.95 2.70 2.02 2.58 2.46 Market Cap (EURm) 4,971
New EPS (Berenberg adjusted) 5.95 4.06 3.05 3.61 3.56 Bloomberg ticker RBI AV
Old EPS (Berenberg adjusted) 5.95 4.37 3.12 3.63 3.38 Reuters ticker RAIFF.PK
Change 0.0% -7.2% -2.3% -0.6% 5.1% Share price (EUR) 25.43
TBVPS 31.9 32.4 36.9 37.3 39.7 Analyst Eleni Papoula
BVPS 37.3 39.1 43.6 44.0 46.4 Rating Sell
DPS 1.05 1.17 1.00 1.00 1.00 Target price (EUR) 22.00
P/E (Berenberg adjusted) 4.3 6.3 8.3 7.0 7.2 Upside -13%
P/TBV (x) 0.80 0.79 0.69 0.68 0.64
P/BV (x) 0.68 0.65 0.58 0.58 0.55 Phone +44 20 3465 2741
RoTE adjusted (%) 13.3 8.9 6.1 7.2 6.7 email: eleni.papoula@berenberg.com
Dividend yield (%) 4.1 4.6 3.9 3.9 3.9
Payout ratio (%) 26.6 43.4 49.4 38.7 40.6
Year to 31-Dec 2011 2012 2013E 2014E 2015E 11/12 12/13 13/14 14/15
Net fees & commissions 1,490 1,517 1,434 1,438 1,445 1.8 -5.4 0.3 0.5
Trading income 363 215 285 295 295 -40.8 32.8 3.5 0.0
Other income 37 101 92 218 218 173.0 -9.1 137.3 0.0
Total income 5,557 5,304 5,061 5,104 5,017 -4.6 -4.6 0.9 -1.7
Operating expenses -3,120 -3,263 -3,185 -3,188 -3,148 4.6 -2.4 0.1 -1.3
Pre-provision op. profits (PPOP) 2,437 2,041 1,877 1,916 1,869 -16.2 -8.0 2.1 -2.5
Loan loss charge (LLC) -1,064 -1,009 -976 -927 -883 -5.2 -3.3 -5.1 -4.7
Reported profit before tax 1,373 1,032 901 990 986 -24.8 -12.7 9.9 -0.3
Taxation -399 -284 -277 -261 -259 -28.9 -2.5 -5.8 -0.6
Minorities + Preferences -6 -23 -30 -26 -35 282.0 31.1 -13.6 36.2
Attributable profits (reported) 968 725 594 703 692 -25.1 -18.1 18.4 -1.6
Exceptional items 190 64 0 0 0
Adj. attributable profit 1,158 789 594 703 692 -31.8 -24.8 18.4 -1.6
Coupon of participation capital -200 -200 -200 -200 -213 0.0 0.0 0.0 6.3
Adjusted attributable profit post coupon 958 589 394 503 479 -38.5 -33.2 27.7 -4.7
Income Ratios (%)
NII/AIEAs 2.73 2.69 2.66 2.58 2.48 -1.2 -1.3 -3.1 -3.9
PPOP/LLC 2.54 2.60 2.50 2.42 2.33 2.5 -4.0 -3.1 -3.8
Cost/income ratio 56.15 61.52 62.92 62.46 62.74 9.6 2.3 -0.7 0.5
Cost/avg. assets 2.24 2.31 2.37 2.40 2.36 2.8 2.8 1.3 -1.8
LLC/avg. loans 1.35 1.22 1.17 1.11 1.05 -9.6 -4.3 -5.1 -5.2
LLC/NII 29.02 29.07 30.03 29.39 28.87 0.2 3.3 -2.2 -1.8
Tax rate 29.09 27.52 30.75 26.36 26.29 -5.4 11.8 -14.3 -0.3
RoTE adjusted 13.3 8.9 6.1 7.2 6.7 -32.6 -31.6 17.4 -6.0
RoE 10.8 7.3 5.6 6.4 6.1 -32.7 -22.9 13.3 -3.9
RoA 1.0 0.6 0.4 0.5 0.5 -43.1 -25.1 16.3 3.7
Asset Tangible Leverage (x) 14.6 14.0 12.5 12.3 11.9 -4.6 -10.8 -0.9 -3.7
RoRWA 19.8 12.6 8.7 10.3 9.9 -36.4 -30.6 17.7 -3.9
Year to 31-Dec 2011 2012 2013E 2014E 2015E 11/12 12/13 13/14 14/15
Customer loans 72,566 75,657 81,576 83,343 83,369 4.3 7.8 2.2 0.0
Total assets 145,638 131,173 146,985 136,115 132,697 -9.9 12.1 -7.4 -2.5
Interest earning assets 138,165 124,894 134,481 128,839 122,192 -9.6 7.7 -4.2 -5.2
Customer deposits 55,407 57,633 66,747 66,297 65,185 4.0 15.8 -0.7 -1.7
Debt securities & other borrowings 19,922 16,555 14,367 13,290 12,470 -16.9 -13.2 -7.5 -6.2
Minorities 1,000 1,066 1,143 719 732 6.5 7.2 -37.1 1.8
Ordinary equity 9,326 10,404 10,936 10,872 11,754 11.6 5.1 -0.6 8.1
Tangible equity 7,229 8,118 8,727 8,832 9,715 12.3 7.5 1.2 10.0
Core Equity Tier 1 Capital (reported) 8,356 9,191 9,415 9,265 9,753 10.0 2.4 -1.6 5.3
Core (Equity) Tier 1 Capital (excl. participation capital) 5,856 6,691 6,915 6,765 7,253 14.3 3.3 -2.2 7.2
Risk Weighted assets 89,210 88,800 95,300 82,825 85,179 -0.5 7.3 -13.1 2.8
RWA/assets 64.8 60.8 63.9 63.9 63.8 -6.1 5.0 0.0 -0.2
Loans/assets 55.5 61.2 62.8 62.8 62.8 10.3 2.6 0.0 0.0
Loans/Retail Funds 122.2 125.7 127.9 128.1 129.3 2.9 1.7 0.2 1.0
Tier 1 ratio 9.2 10.7 11.5 11.5 12.0 16.4 7.5 0.7 4.0
Core (Equity) Tier 1 ratio reported 9.9 11.2 11.4 12.1 12.6 13.2 2.4 5.6 4.1
RBS plc
Banking
114

Financially repressed

Between a rock and a hard place: Despite the best efforts of
management, RBS continues to be financially repressed. On a
fundamental basis we believe RBS is overvalued and until the capital
structure/government shareholding is simplified it is hard to argue
why investors would want to own the shares.

Too much debt remains the problem, not its supply: As we have
long argued, the problem in the UK is the lack of credit demand (due
to debt/GDP in the UK being over 400%) rather than supply. Until
policymakers realise that we cannot solve this crisis with more debt,
RBS looks set to remain a government pawn, in our view.

Leverage remains high despite PRA: Following the recent
machinations of the FPC and PRA, RBS does not have to raise
external capital and can rely on internal measures. On our pain and
plain leverage ratios, RBS has a pain ratio of 2.4% and a plain
ratio of 6.1%. This would leave it in the third quartile relative to peers,
but above the majority of US/European large-cap peers. In order to
hit a 3% pain ratio, RBS would require 9.0bn of capital.

PSC report and Mansion House speech key for future: The
Chancellors Mansion House speech on 19 June should give an
indication of the re-privatisation of RBS. Alongside this, the debate
over whether RBS should be split into a good/bad bank needs to be
resolved, with our view being a split achieves nothing new.

Dividends likely to be delayed as profits disappoint: We believe
that earnings at all the UK banks will disappoint due to revenue
headwinds and provisions normalising at higher levels. As a result,
dividends at RBS will be delayed until 2015 at the earliest, in our view.

Valuation expensive even relative to the old days: RBS is trading
on 15.4x 2013 consensus EPS and 0.7x TBV. This is expensive, as the
long-term average P/E for the sector was 10-11x pre-crisis. Our EPS
changes reflect the timing of one-offs and asset disposals.

Target price unchanged at 190p: We use a capital allocation sum-
of-the-parts analysis to value RBS. On this basis, RBS is c1.9bn short
of our optimal capital target.

estimates are too low.

Sell
Rating system
Current price
GBp 334
Relative
Price target
GBp 190
Reuters RBS.L
Bloomberg RBS LN


Chg
2013e 2014e 2015e

old % old % old %
Income 22124 -5.2 20395 -0.2 20094 0.1
PPOP 8088 -10.4 7399 -5.4 7310 -4.9
EPS 4.40 39.3 17.35 -12.6 25.47 -6.1

Share data

Performance data

1 month 13.9 % 15.2 %
3 months 10.8 % 12.1 %
12 months 23.6 % 15.6 %

12 June 2013
James Chappell
Analyst
+44 20 3207 7844

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., GBP m 2011 2012 2013E 2014E 2015E
EPS -18.45 -55.04 6.13 15.17 23.91
EPS (adj.) -18.45 -55.04 6.13 15.17 23.91
BVPS 635.7 567.4 567.1 582.2 605.9
TBVPS 477.7 440.5 436.9 456.4 484.6
DPS 0.0 0.0 0.0 0.0 0.0
No. of Shares (m) 11,023 11,171 11,298 11,298 11,298
P/E (adj.) -18.1x -6.1x 54.5x 22.0x 14.0x
P/TBV 0.70x 0.76x 0.76x 0.73x 0.69x
RoE (%) -2.8 -9.1 1.1 2.6 4.0
RoTE (%) -3.6 -11.9 1.4 3.4 5.0
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0

RBS plc
Banking
115
Financials

EPS (reported) -18.45 -55.04 6.13 15.17 23.91 Market Cap 37,001
EPS (Berenberg adjusted) -18.45 -55.04 6.13 15.17 23.91 Bloomberg ticker RBS LN
TBVPS 478 441 437 456 485 Reuters ticker RBS.L
BVPS (reported) 636 567 567 582 606 Share price GBp 334
DPS 0.00 0.00 0.00 0.00 0.00
P/E (Berenberg adjusted) -18.1x -6.1x 54.5x 22.0x 14.0x
Dividend yield (%) 0.0% 0.0% 0.0% 0.0% 0.0% +44 20 3207 7844
Payout ratio 0% 0% 0% 0% 0%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Net interest income (NII) 12,689 11,695 10,669 10,449 10,358 -7.8% -8.8% -2.1% -0.9%
Non-interest income 12,052 11,665 10,315 9,897 9,756 -3.2% -11.6% -4.1% -1.4%
Total income 24,741 23,360 20,985 20,347 20,113 -5.6% -10.2% -3.0% -1.1%
Pre-provision op. profits (PPoP) 9,263 8,629 7,250 6,996 6,952 -6.8% -16.0% -3.5% -0.6%
Operating Profit 1,824 3,350 3,115 3,719 4,342 83.7% -7.0% 19.4% 16.8%
Other non-operating -2,590 -8,759 -858 -1,000 -400
Reported profit before tax -766 -5,409 2,257 2,719 3,942 606.1% -141.7% 20.5% 45.0%
Taxation -1,127 -441 -1,100 -625 -867 -60.9% 149.4% -43.1% 38.7%
Other items -76 -41 129 0 0
Attributable profits (reported) -1,997 -6,056 688 1,702 2,683 203.3% -111.4% 147.3% 57.7%
Income Ratios (%)
PPoP/LLC 1.2x 1.6x 1.8x 2.1x 2.7x
Cost/income ratio 62.6% 63.1% 65.5% 65.6% 65.4% 0.5% 2.4% 0.2% -0.2%
Cost/avg. assets 1.05% 1.05% 1.08% 1.11% 1.16% 0.00% 0.03% 0.04% 0.04%
LLC/avg. loans 1.55% 1.19% 1.01% 0.86% 0.71% -0.36% -0.18% -0.15% -0.15%
LLC/NII 58.6% 45.1% 38.8% 31.4% 25.2%
Tax rate 61.8% 13.2% 35.3% 16.8% 20.0% -48.6% 22.1% -18.5% 3.2%
RoTE adjusted (%) -3.6% -11.9% 1.4% 3.4% 5.0% -8.2% 13.3% 2.0% 1.7%
RoE (stated) (%) -2.8% -9.1% 1.1% 2.6% 4.0%
RoA -0.13% -0.43% 0.05% 0.14% 0.24% -0.29% 0.48% 0.09% 0.09%
RoRWA -0.37% -1.26% 0.16% 0.42% 0.69% -0.89% 1.42% 0.26% 0.27%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Customer loans 454,112 430,088 388,982 371,186 364,807 -5.3% -9.6% -4.6% -1.7%
Total assets 1,506,867 1,312,295 1,241,824 1,154,374 1,116,252 -12.9% -5.4% -7.0% -3.3%
Interest earning assets 662,222 604,647 552,464 534,329 518,082
Customer deposits 414,143 433,239 432,657 413,008 421,820
Debt securities & other borrowings 188,940 121,365 649,991 580,489 530,872
Minorities 1,234 1,770 1,770 1,770 1,770
Ordinary equity 70,075 63,386 64,074 65,776 68,459 -9.5% 1.1% 2.7% 4.1%
Tangible equity 55,217 49,841 50,446 52,648 55,831 -9.7% 1.2% 4.4% 6.0%
RWA/assets 33.3% 35.0% 34.0% 34.0% 34.5%
Loans/assets 30.1% 32.8% 31.3% 32.2% 32.7%
Loans/deposits 110% 99% 90% 90% 86%
Tier 1 ratio 13.2% 12.4% 13.7% 15.3% 16.4% -0.7% 1.2% 1.6% 1.1%
Core (Equity) Tier 1 ratio 10.7% 10.3% 11.5% 12.9% 14.0% -0.4% 1.2% 1.4% 1.1%
Source: Company data, Berenberg Research.
Banco Santander SA
Banking
116

It is all about the capital

Our high-conviction Sell rating on Santander reflects three concerns:
material capital deficit, high and sustained macro risks in Spain, and a
deteriorating outlook for credit quality in Brazil. The group strategy of
selling parts of major subsidiaries may bring short-term earnings and
capital relief, but it exacerbates long-term problems: it compounds the
capital deficit in the Spanish parent and undermines the logic of the
group. We cut our price target by 34% to 3.9, given the capital
deficit.

Capital problem #1 capital ratios materially low: Meeting a 6%
plain equity-to-assets ratio implies a 24bn shortfall; a 4% pain
ratio implies a 36bn capital shortfall (given substantial deferred tax
assets). That there is a capital deficit cannot be disputed
management forecasts a fully-loaded Basel III ratio of only 8% by
year-end and it continues to focus on generating capital gains
including listing subsidiaries. The debate is the scale.

Capital problem #2 it is in the wrong places: Major subsidiaries
are well capitalised based on reported Basel ratios, implying that most
of the deficit is in the Spanish parent. The group structure and local
regulator demands mean that the parent cannot access capital in the
subsidiaries. The strategy of listing units compounds this problem.

Macro risks in Spain matter: Spain may only account for 17% of
group revenues but the macro risks are material and threaten credit
quality. These include further asset deflation, prolonged recession
driven by deleveraging and government austerity, the net international
investment position and renewed disruption to wholesale funding.

Brazil opportunity becomes risk: Brazil accounts for 46% of
group revenues. Waning demand for its commodities reveals the lack
of structural reform in the economy. Brazil risks returning to type
weaker growth and higher inflation implying risks to asset quality.

Valuation full: Consensus = 1.2x P/TNAV versus 12% 2014 RoTE.

Key risks to view: Spanish/Brazilian macro; sustained risk-on rally.

Price target cut by 34%: After publishing our detailed sector report
on capital, our price target includes the capital deficit for the first time.
Based on a 24bn deficit, we cut our price target by 2.05.

Sell
Rating system
Current price
EUR 5.41
Relative
Price target
EUR 3.90
10/06/2013 Madrid Close
Reuters SAN.MC
Bloomberg SAN SM

Price target EUR 3.90 (5.95)

Chg
2013e 2014e 2015e

old % old % old %
Income 44042 - 46417 - 47942 -
PPOP 23179 - 25446 - 26350 -
EPS 0.51 - 0.58 - 0.61 -

Share data

Performance data

1 month 0.8 % 2.1 %
3 months -8.3 % -7.0 %
12 months -15.3 % -23.3 %

12 June 2013
Nick Anderson
Analyst
+44 20 3207 7838

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
EPS 0.60 0.23 0.51 0.58 0.61
EPS (adj.) 0.57 0.20 0.51 0.58 0.61
BVPS 8.53 7.59 7.21 7.05 6.95
TBVPS 5.85 5.41 5.28 5.32 5.32
DPS 0.60 0.60 0.50 0.28 0.30
No. of Shares (m) 8,957 9,833 11,141 12,425 13,192
P/E (adj.) 9.6x 27.6x 10.6x 9.3x 8.9x
P/TBV 0.93x 1.00x 1.02x 1.02x 1.02x
RoE (%) 6.8 2.7 6.8 8.0 8.4
RoTE (%) 10.0 3.6 10.2 11.6 11.8
Dividend Yield (%) 11.1 11.1 9.2 5.2 5.5
Payout Ratio (%) 100 266 98 48 49

Banco Santander SA
Banking
117
Financials

Market ratios and per share data 2011 2012 2013e 2014e 2015e
EPS (reported) 0.60 0.23 0.51 0.58 0.61 Market Cap (EURm) 56,426
EPS (Berenberg adjusted) 0.57 0.20 0.51 0.58 0.61 Bloomberg ticker SAN SM
TBVPS 5.85 5.41 5.28 5.32 5.32 Reuters ticker SAN.MC
DPS 0.60 0.60 0.50 0.28 0.30
P/E (Berenberg adjusted) 9.7 27.9 10.7 9.4 9.0
P/TBV (x) 0.94 1.01 1.04 1.03 1.03
P/BV (x) 0.64 0.72 0.76 0.78 0.79 Analyst Nick Anderson
Dividend yield (%) 11.0 11.0 9.1 5.2 5.4% +44 20 3207 7838
Payout ratio 99.7 265.8 97.9 48.2 49% nick.anderson@berenberg.com
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Net interest income (NII) 29,110 30,147 30,261 32,254 33,403 3.6 0.4 6.6 3.6
Net fees & commissions 10,208 10,307 10,651 11,050 11,427 1.0 3.3 3.7 3.4
Trading income 2,499 2,698 2,505 2,480 2,480 8.0 -7.1 -1.0 0.0
Other income 937 523 625 633 633 -44.2 19.5 1.2 0.0
Total income 42,754 43,675 44,042 46,417 47,942 2.2 0.8 5.4 3.3
Operating expenses -19,559 -20,116 -20,864 -20,972 -21,592 2.9 3.7 0.5 3.0
Operating Profit 13,295 10,893 10,998 13,274 14,255 -18.1 1.0 20.7 7.4
Other non-operating -2,984 -2,446 -1,828 -1,868 -1,709
Reported profit before tax 10,311 8,447 9,171 11,406 12,546 -18.1 8.6 24.4 10.0
Taxation -2,500 -2,299 -2,337 -2,861 -3,135 -8.0 1.7 22.4 9.6
Minorities + Preferences -766 -890 -1,146 -1,280 -1,373 16.2 28.7 11.7 7.3
Attributable profits (reported) 5,351 2,205 5,688 7,265 8,038 -58.8 158.0 27.7 10.6
Adj. attributable profit 5,071 1,925 5,688 7,265 8,038 -62.0 195.5 27.7 10.6
Income Ratios (%)
NII/Average Total Assets 2.36% 2.39% 2.37% 2.49% 2.53%
PPOP/LLC 2.3x 1.9x 1.9x 2.1x 2.2x
Cost/avg. assets 1.58% 1.60% 1.63% 1.62% 1.63%
LLC/avg. loans 1.31% 1.67% 1.63% 1.61% 1.57%
LLC/NII 34.0% 42.0% 40.3% 37.7% 36.2%
Tax rate 24.2% 27.2% 25.5% 25.1% 25.0%
RoTE adjusted (%) 10.0% 3.6% 10.2% 11.6% 11.8%
RoE (%) 6.4% 2.4% 6.8% 8.0% 8.4%
RoA 0.41% 0.15% 0.45% 0.56% 0.61%
Asset Tangible Leverage (x) 23.9x 23.9x 21.8x 19.8x 19.0x
RoRWA 0.87% 0.34% 1.02% 1.29% 1.39%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Customer loans 769,036 745,987 751,779 764,082 777,400 -3.0 0.8 1.6 1.7
Total assets 1,251,525 1,269,628 1,285,911 1,308,914 1,333,146 1.4 1.3 1.8 1.9
Interest earning assets 941,436 926,572 936,487 952,993 970,600 -1.6 1.1 1.8 1.8
Customer deposits 632,533 626,639 639,171 651,955 664,994 -0.9 2.0 2.0 2.0
Debt securities & other borrowings 230,105 236,083 240,440 244,884 249,417 2.6 1.8 1.8 1.9
Minorities 6,445 9,672 9,866 10,063 10,264 50.1 2.0 2.0 2.0
Ordinary equity 80,895 81,243 86,931 94,196 98,215 0.4 7.0 8.4 4.3
Tangible equity 52,365 53,176 58,864 66,128 70,147 1.5 10.7 12.3 6.1
RWA/assets 45.2% 43.9% 43.4% 43.5% 43.9%
Loans/assets 61.4% 58.8% 58.5% 58.4% 58.3%
Loans/Deposits 122% 119% 118% 117% 117%
Tier 1 ratio 11.0% 11.2% 12.2% 13.2% 13.5%
NPL/loans 3.89% 4.54% 5.03% 4.97% 4.73%
Provision coverage 61.4% 72.6% 58.0% 60.0% 60.0%
SEB AB
Banking
118

Focus on growth creates uncertainty

We continue to rate SEB management, its risk management record
and its disclosure among the best in Europe. However, we believe its
commitment to growth is a mistake; we would prefer to see it focus
on RoE by de-costing and de-risking the business further. Swedbank
and Handelsbanken have shown the benefits of such a strategy, which
we believe remains key to preserving value given the anaemic
economic growth likely to endure in Europe in the next decade.

Capital compares poorly to Nordic peers: One of the most
surprising results of our analysis was SEBs ranking: it is the lowest of
the Nordics on the pain ratio (a function of its large off balance
sheet commitments arising from its corporate focus); on the plain
ratio, it ranks seventh from last out of all the banks, just ahead of
Danske. While its reported Basel III fully-loaded ratio, at 13%, is one
of the best in Europe, we note that of the 50 largest listed banks in
Europe, SEB reported the 10
th
-largest drop in average risk weights
since Q1 2011. On the positive side, we note SEB has one of the most
liquid balance sheets of Europes 50 largest banks, and a very strong
track record of managing credit risk.

Swedish virtues: Like other Swedish banks, SEBs corporate memory
remains influenced by the early 1990s crisis. This manifests itself in a
strong credit risk track record and stability of all key revenue lines in
other words, a low risk appetite.

Best-in-class disclosure and transparency: SEB is among the best
of its Nordic and EU peers in terms of disclosure. We would highlight
detailed supplemental quarterly disclosures, openness on exceptional
items/changes (in contrast to Nordea), be they FX effects or changes
in accounting standards, and regular access to management.

Commitment to growth is a concern: Our prime concern with SEB
is its commitment to growth. As per the new three-year plan to 2015,
it aims to grow revenues by c5% pa. The history of banking shows a
very strong correlation between growth and increased risk.

Cost commitment uncertain: Following an ambiguous answer to a
question about costs in SEBs Q4 results, we have a lingering doubt
about the banks commitment to the cost cap to 2014 if activity
rebounds. While management was categorical about the cap in Q1,
it left open plans for 2015 year three of the strategic plan.


Key risks to view: Sustained Eurozone recovery; wholesale funding
market dislocation; risk-on rally.

Hold
Rating system
Current price
SEK 67.80
Relative
Price target
SEK 61.00
Stockholm Close
Reuters SEBa.ST
Bloomberg SEBA SS


Chg
2013e 2014e 2015e

old % old % old %
Income 39200 0.6 39930 0.6 40591 0.5
PPOP 16788 0.4 17507 0.7 18124 0.5
EPS 5.67 0.0 5.93 0.0 6.13 0.0

Share data

Performance data

1 month -0.6 % 0.7 %
3 months -0.8 % 0.5 %
12 months 33.3 % 25.3 %

12 June 2013
Nick Anderson
Analyst
+44 20 3207 7838

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., SEK m 2011 2012 2013E 2014E 2015E
EPS 4.9 5.3 5.7 5.9 6.1
EPS (adj.) 4.9 5.3 5.7 5.9 6.1
BVPS 46.7 49.9 53.0 56.3 59.7
TBVPS 41.9 45.1 48.3 51.6 55.0
DPS 1.8 2.8 2.6 2.7 2.8
No. of Shares (m) 2,205 2,198 2,207 2,207 2,207
P/E (adj.) 13.8x 12.8x 12.0x 11.4x 11.1x
P/TBV 1.62x 1.50x 1.40x 1.31x 1.23x
RoE (%) 11.2 11.1 11.1 10.9 10.6
RoTE (%) 12.5 12.4 12.7 11.9 11.6
Dividend Yield (%) 2.6 4.1 3.8 4.0 4.1
Payout Ratio (%) 35 52 45 45 45
SEB AB
Banking
119
Financials

EPS (Berenberg adjusted) 4.91 5.29 5.67 5.93 6.13 Bloomberg ticker SEBA SS
TBVPS 41.95 45.11 48.29 51.57 54.96 Reuters ticker SEBa.ST
P/TBV (x) 1.62x 1.51x 1.41x 1.32x 1.24x +44 20 3207 7838
P/BV (x) 1.46x 1.37x 1.28x 1.21x 1.14x
Dividend yield (%) 2.6% 4.0% 3.8% 3.9% 4.1%
Payout ratio 35% 52% 45% 45% 45%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Trading income 3,548 4,579 4,179 4,240 4,245 29.1% -8.7% 1.5% 0.1%
Other income 3,062 2,989 3,307 3,315 3,405 -2.4% 10.6% 0.2% 2.7%
Total income 37,686 38,823 39,450 40,189 40,779 3.0% 1.6% 1.9% 1.5%
Operating expenses -23,513 -23,652 -22,589 -22,561 -22,568 0.6% -4.5% -0.1% 0.0%
Loan loss charge (LLC) 778 -937 -1,252 -1,243 -1,268 -220.4% 33.6% -0.7% 2.1%
Exceptionals -1,153 -487 10 0 0
Taxation -2,942 -2,093 -3,085 -3,277 -3,389 -28.9% 47.4% 6.2% 3.4%
Income Ratios (%)
NII/ Average Total Assets 0.76% 0.74% 0.73% 0.73% 0.73% -0.01% -0.01% 0.00% 0.00%
PPoP/LLC -18.2x 16.2x 13.5x 14.2x 14.4x
Cost/income ratio 62.4% 60.9% 57.3% 56.1% 55.3% -1.5% -3.7% -1.1% -0.8%
Cost/avg. assets 1.05% 1.00% 0.91% 0.89% 0.88% -0.06% -0.09% -0.02% -0.01%
LLC/avg. loans -0.07% 0.08% 0.10% 0.10% 0.10% 0.14% 0.02% 0.00% 0.00%
LLC/NII -4.6% 5.3% 6.9% 6.7% 6.7%
Tax rate 19.7% 14.7% 19.8% 20.0% 20.0% -5.0% 5.1% 0.2% 0.0%
RoTE adjusted (%) 12.5% 12.4% 12.7% 11.9% 11.6% -0.1% 0.3% -0.7% -0.4%
RoE (stated) (%) 11.2% 11.1% 11.1% 10.9% 10.6%
RoA 0.49% 0.49% 0.50% 0.52% 0.53% 0.00% 0.01% 0.01% 0.01%
RoRWA 1.60% 1.84% 2.13% 2.18% 2.23% 0.25% 0.29% 0.06% 0.05%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Customer loans 1,186,223 1,236,088 1,268,446 1,283,013 1,299,347 4.2% 2.6% 1.1% 1.3%
Total assets 2,359,381 2,453,456 2,517,681 2,546,595 2,579,016 4.0% 2.6% 1.1% 1.3%
Minorities 261 90
Ordinary equity 102,478 109,423 116,307 123,505 130,949 6.8% 6.3% 6.2% 6.0%
Tangible equity 91,991 98,963 105,947 113,145 120,589 7.6% 7.1% 6.8% 6.6%
RWA/assets 28.8% 23.9% 23.7% 23.7% 23.7% -4.9% -0.2% 0.0% 0.0%
Loans/assets 50.3% 50.4% 50.4% 50.4% 50.4% 0.1% 0.0% 0.0% 0.0%
Tier 1 ratio 15.9% 17.5% 17.0% 18.0% 19.0% 1.6% -0.5% 1.0% 1.0%
NPL/loans 1.36% 1.01%
Socit Gnrale SA
Banking
120

Too much leverage and too little revenue

Risks remain to the downside. We have two main concerns for
Socit Gnrale (SocGen): the first is the leverage within the
business, while the second is the lack of clarity with the strategy. The
first drives our view that SocGen has a 10bn capital shortfall within
the business, while the latter leaves us uncertain how that capital
shortfall will be reduced.

Leverage is our main concern. On both our pain and plain
leverage ratios, SocGen is in the bottom quartile among European and
US peers. On our pain ratio SocGen has a ratio of 2.1% and on our
plain ratio it has a ratio of 3.2%. For SocGen to achieve a 3%
pain ratio would require 13bn of capital.

Our main concern on capital is the CIB business. SocGen has
over 600bn of assets within CIB, but only allocates 9.6bn of capital
to it. Even if we net off derivatives, assets within the division are still
over 400bn, equating to an equity/assets ratio of 2.2%. This is low
both on an absolute basis and also relative to peers.

Weak revenue outlook limits capital generation in the business.
The continuing weak French economy and outlook for CIB revenues
reduce revenues and hence internal capital generation for SocGen.
This leaves management with few options to help reduce the leverage
in the business bar reducing RWAs which starts a vicious circle.

New strategy needs to address core issues. While the new strategy
provides short-term benefits in terms of 900m costs cuts, we wait to
see whether it sets out a clearer sense of purpose for SocGen. We
remain concerned that management is not addressing the structural
challenges that we think SocGen faces.

Estimates cut to reflect weak outlook for revenues. We have cut
our estimates to reflect, firstly, one-off impacts/restructuring charges
and, secondly, our negative outlook for revenues.

Unchanged price target of 16 points to 46% downside. Our price
target is calculated using a capital allocation sum-of-the-parts analysis.
On this basis, we believe SocGen has a 10bn capital shortfall, driven
by its CIB business.

Risks to our view. The main risk to our view is that SocGen is able
to rebuild capital faster than expected. This would come from
earnings surprising positively or SocGen choosing to abandon growth
and scale back its CIB balance sheet and ambitions.

Sell
Rating system
Current price
EUR 29.72
Relative
Price target
EUR 16.00
Reuters SOGN.PA
Bloomberg GLE FP


Chg
2013e 2014e 2015e

old % old % old %
Income 23962 -4.6 24043 -1.0 23925 -0.3
PPOP 8282 -17.5 8803 -7.0 8795 -3.3
EPS 3.77 -24.4 4.14 -10.8 4.02 0.1

Share data

Performance data

1 month 1.2 % 2.5 %
3 months -3.9 % -2.6 %
12 months 47.9 % 39.9 %

12 June 2013
James Chappell
Analyst
+44 20 3207 7844

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
EPS 2.82 0.64 2.86 3.71 4.04
EPS (adj.) 2.81 0.64 2.85 3.69 4.03
BVPS 54.68 56.95 58.48 61.29 64.43
TBVPS 43.84 44.70 47.32 50.21 53.42
DPS 0.00 0.45 0.45 0.45 0.45
No. of Shares (m) 747 754 764 769 774
P/E (adj.) 10.5x 46.4x 10.4x 8.0x 7.3x
P/TBV 0.68x 0.66x 0.63x 0.59x 0.56x
RoE (%) 5.2 1.1 4.9 6.1 6.4
RoTE (%) 6.9 1.5 6.1 7.4 7.6
Dividend Yield (%) 0.0 1.5 1.5 1.5 1.5
Payout Ratio (%) 0 70 16 12 11
Socit Gnrale SA
Banking
121
Financials

TBVPS (reported) 42.0 45.6 48.3 51.2 54 Bloomberg ticker GLE FP
TBVPS (Berenberg adjusted) 43.8 44.7 47.3 50.2 53.4 Reuters ticker SOGN.PA
BVPS (reported) 54.7 56.9 58.5 61.3 64.4
DPS 0.00 0.45 0.45 0.45 0.45 Share price EUR 29.72
P/TBV (x) 0.68x 0.66x 0.63x 0.59x 0.56x
Payout ratio 0% 70% 16% 12% 11% +44 20 3207 7844
Year to 31-Dec 2011 2012 2013e 2014e 2015e 10/11 11/12 12/13 13/14 14/15
Net banking income (NBI) 25,636 23,110 22,866 23,804 23,852 -3.0% -9.9% -1.1% 4.1% 0.2%
Operating expenses -17,036 -16,438 -16,031 -15,616 -15,349 3.0% -3.5% -2.5% -2.6% -1.7%
Pre-provision op. profits (PPoP) 8,600 6,672 6,835 8,188 8,502 -12.9% -22.4% 2.4% 19.8% 3.8%
Loan loss charge (LLC) -4,330 -3,935 -3,560 -3,525 -3,481 4.1% -9.1% -9.5% -1.0% -1.2%
Operating Profit 4,270 2,737 3,275 4,663 5,022 -25.3% -35.9% 19.6% 42.4% 7.7%
Other non-operating 12 -507 563 152 152
Associated companies 94 154 39 0 0
Change in the value of goodwill -265 -842 0 0 0
Reported profit before tax 4,111 1,542 3,877 4,815 5,174 -29.7% -62.5% 151.4% 24.2% 7.4%
Taxation -1,323 -334 -1,007 -1,317 -1,399 -14.2% -74.8% 201.5% 30.8% 6.2%
Adj. attributable profit 2,087 481 2,168 2,810 3,086 -41.7% -77.0% 350.6% 29.6% 9.8%
Income Ratios (%)
NBI/ Average Total Assets 2.22% 1.90% 1.81% 1.86% 1.83% -0.12% -0.32% -0.09% 0.05% -0.02%
PPoP/LLC 2.0x 1.7x 1.9x 2.3x 2.4x
Cost/income ratio 66.5% 71.1% 70.1% 65.6% 64.4% 3.8% 4.7% -1.0% -4.5% -1.2%
Cost/avg. assets 1.47% 1.35% 1.27% 1.22% 1.18% 0.01% -0.12% -0.08% -0.05% -0.04%
LLC/avg. loans 1.18% 1.12% 1.00% 0.98% 0.95% 0.06% -0.05% -0.12% -0.02% -0.03%
LLC/NBI 16.9% 17.0% 15.6% 14.8% 14.6%
Tax rate 32.2% 21.7% 26.0% 27.4% 27.0% 5.8% -10.5% 4.3% 1.4% -0.3%
RoTE adjusted (%) 6.9% 1.5% 6.1% 7.4% 7.6% -5.9% -5.4% 4.6% 1.3% 0.2%
RoE (stated) (%) 5.2% 1.1% 4.9% 6.1% 6.4%
RoA 0.18% 0.04% 0.17% 0.22% 0.24% -0.14% -0.14% 0.13% 0.05% 0.02%
RoRWA 0.60% 0.15% 0.69% 0.89% 0.96% -0.47% -0.45% 0.55% 0.19% 0.07%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 10/11 11/12 12/13 13/14 14/15
Customer loans 367,517 350,241 356,345 361,395 366,631 -1.2% -4.7% 1.7% 1.4% 1.4%
Total assets 1,181,372 1,250,696 1,272,494 1,290,527 1,309,224 4.4% 5.9% 1.7% 1.4% 1.4%
Interest earning assets 1,074,906 1,144,931 1,164,886 1,181,393 1,198,510
Customer deposits 340,172 337,230 344,098 348,488 352,988 0.8% -0.9%
Debt securities & other borrowings 108,583 135,744 138,509 140,276 142,087 -23.2% 25.0%
Minorities 3,443 3,513 3,634 3,807 4,000
Ordinary equity 47,067 49,809 51,525 53,981 56,712 1.4% 5.8% 3.4% 4.8% 5.1%
Tangible equity 37,463 40,498 41,377 43,833 46,564 5.9% 8.1% 2.2% 5.9% 6.2%
Core (Equity) Tier 1 Capital 31,547 34,608 35,455 37,911 40,642 13.4% 9.7% 2.4% 6.9% 7.2%
Risk-weighted assets 349,275 324,092 312,500 316,809 322,559 4.3% -7.2% -3.6% 1.4% 1.8%
RWA/assets 29.6% 25.9% 24.6% 24.5% 24.6%
Loans/assets 31.1% 28.0% 28.0% 28.0% 28.0%
Loans/deposits 108% 104% 104% 104% 104% -2.2% -4.2%
Tier 1 ratio 10.7% 12.5% 13.2% 13.8% 14.4% 0.2% 1.8% 0.7% 0.6% 0.6%
Core (Equity) Tier 1 ratio 9.0% 10.7% 11.3% 12.0% 12.6% 0.7% 1.6% 0.7% 0.6% 0.6%
Standard Chartered plc
Banking
122
To change or not to change

June pre-close key: We reiterate our Sell on STAN despite it trading
close to our price target as uncertainty over revenue targets leaves it
susceptible to disappointment. The June pre-close provides the next
key data point and management communication will be key.

Sell rating driven by rising risks: We downgraded STAN on 11
March 2013 as we felt that the continuing pursuit of double-digit
growth would increase the risk and volatility of future returns. In
particular, we continue to believe that STAN has become too big to
grow at double digits without significant additional risk. By way of
example, STAN had a $107.4bn balance sheet in 2001 versus a
$636.5bn balance sheet today, thereby increasing sixfold the new
assets that need to be generated to hit double-digit growth targets.

June pre-close next catalyst: The pre-close update STAN will issue
on 26 June is likely to be a key point for STAN. While April was in
line with its expectations there seems little evidence to believe revenue
growth has picked up and STAN may need to step away from its
double-digit targets. How this is communicated will be key as
consensus is still looking for 8-9% EPS in each of the next three years.

Leverage ratios better relative to peers: On our pain and plain
leverage ratios, STAN stands out relative to peers as it has a pain
ratio of 4.4% and a plain ratio of 6.4%. This reflects the markets in
which STAN operates and cushions the rising risk we see with the
strategy that STAN is pursuing.

Competition on the rise: The one factor that was new to our
thinking after the Q1 2013 IMS was the impact of competition. It
seems clear to us from the statement that STAN has enjoyed relatively
benign competition in its markets over the last few years. However,
this seems to have changed as every bank now looks to Asia for
growth, utilising the liquidity benefits of QE. STAN highlights
margins and spreads falling between 15% and 30%.

Revenue headwinds not priced in: While management remains
confident that it will still achieve consensus PBT of $8.2bn operating
profit in 2013, we believe this comes with additional risks. We now
forecast operating profit of $7.8bn due to our view of weaker
revenues and higher impairments. This would see STAN trading on
11.5x 12-month forward earnings, in line with its 10-year average.

Price target of 1,450p unchanged: We calculate our price target
using a capital allocation sum-of-the-parts and a 9.5% cost of equity.

Risks to our view: There are two main risks to our view: first, that
provisions remain at current levels, which would cause our EPS to rise
by 2% to 232c; and second, our revenue growth estimates are too low
(7% in 2013): each 1% increase in revenue growth adds 1% to EPS.

Sell
Rating system
Current price
GBp 1,480
Relative
Price target
GBp 1,450
Reuters STAN.L
Bloomberg STAN LN

Price target GBp 1,450 (no change)

Chg
2013e 2014e 2015e

old % old % old %
Income 20154 - 21411 - 22748 -
PPOP 9263 - 9855 - 10494 -
EPS 228 - 239 - 253 -

Share data

Performance data

High 52 weeks (GBp) 1,838
Low 52 weeks (GBp) 1,229
1 month -4.1 % -2.8 %
3 months -18.8 % -17.5 %
12 months -17.4 % -25.4 %

12 June 2013
James Chappell
Analyst
+44 20 3207 7844

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., USD m 2011 2012 2013E 2014E 2015E
EPS 200.8 199.7 225.1 236.2 249.9
EPS (adj.) 198.1 225.2 228.2 239.2 252.8
BVPS 1,645.1 1,817.9 1,963.2 2,111.8 2,267.3
TBVPS 1,351.2 1,487.2 1,637.3 1,791.1 1,951.9
DPS 76.0 84.0 92.8 97.3 102.9
No. of Shares (m) 2,384 2,413 2,449 2,488 2,530
P/E (adj.) 11.6x 10.2x 10.1x 9.6x 9.1x
P/TBV 1.71x 1.55x 1.41x 1.29x 1.18x
RoE (%) 12.0 11.1 11.5 11.3 11.1
RoTE (%) 14.6 13.3 13.6 13.1 12.8
Dividend Yield (%) 3.3 3.6 4.0 4.2 4.5
Payout Ratio (%) 38 42 41 41 41

Standard Chartered plc
Banking
123
Financials

Market ratios; per share data (USD) 2011 2012 2013e 2014e 2015e
EPS (reported) 200.8 199.7 225.1 236.2 249.9 Market Cap
EPS (Berenberg adjusted) 198.1 225.2 228.2 239.2 252.8 Bloomberg ticker STAN LN
TBVPS 1,351 1,487 1,637 1,791 1,952 Reuters ticker STAN.L
BVPS (reported) 1,645 1,818 1,963 2,112 2,267 Share price GBp 1,480
DPS 76.00 84.00 92.82 97.32 102.86 USD 2,305
P/E (Berenberg adjusted) 11.6x 10.2x 10.1x 9.6x 9.1x GBP-USD 1.56
Dividend yield (%) 3.3% 3.6% 4.0% 4.2% 4.5% +44 20 3207 7844
Payout ratio 38% 37% 41% 41% 41%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Income Summary (USDm)
Non-interest income 7,484 8,061 8,925 9,451 10,017 7.7% 10.7% 5.9% 6.0%
Total income 17,637 18,784 20,154 21,411 22,748 6.5% 7.3% 6.2% 6.2%
Loan loss charge (LLC) -1,019 -1,392 -1,584 -1,701 -1,751 36.6% 13.8% 7.4% 2.9%
Taxation -1,842 -1,866 -2,156 -2,290 -2,456 1.3% 15.5% 6.2% 7.3%
Income Ratios (%)
NII/ Average Total Assets 2.21% 2.08% 2.00% 1.95% 1.87% -0.13% -0.08% -0.05% -0.08%
PPoP/LLC 7.6x 5.8x 5.8x 5.8x 6.0x
Cost/avg. assets 1.79% 1.74% 1.63% 1.58% 1.54% -0.04% -0.12% -0.05% -0.04%
LLC/avg. loans 0.40% 0.51% 0.54% 0.54% 0.52% 0.10% 0.03% 0.00% -0.02%
LLC/NII 10.0% 13.0% 14.1% 14.2% 13.8%
Tax rate 27.5% 28.0% 28.1% 28.1% 28.1% 0.5% 0.1% 0.0% 0.0%
RoTE adjusted (%) 14.6% 13.3% 13.6% 13.1% 12.8% -1.3% 0.3% -0.5% -0.3%
RoE (stated) (%) 12.0% 11.1% 11.5% 11.3% 11.1%
RoA 0.86% 0.78% 0.82% 0.80% 0.79% -0.08% 0.04% -0.02% -0.01%
RoRWA 1.84% 1.67% 1.69% 1.61% 1.57% -0.17% 0.02% -0.09% -0.04%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Balance Sheet Summary (USDm)
Customer loans 266,790 283,885 304,704 326,803 350,818 6.4% 7.3% 7.3% 7.3%
Total assets 592,686 636,518 703,379 762,632 827,256 7.4% 10.5% 8.4% 8.5%
Interest earning assets 491,149 540,759 582,115 645,825 717,693 10.1% 7.6% 10.9% 11.1%
Customer deposits 345,726 377,639 409,274 439,877 473,131 9.2% 8.4% 7.5% 7.6%
Debt securities & other borrowings 63,857 74,778 80,756 88,426 96,830 17.1% 8.0% 9.5% 9.5%
Minorities 661 693 748 727 808 4.8% 8.0% -2.9% 11.2%
Ordinary equity 40,714 45,362 49,578 54,046 58,863 11.4% 9.3% 9.0% 8.9%
Tangible equity 33,653 38,050 42,266 46,734 51,551 13.1% 11.1% 10.6% 10.3%
Risk-weighted assets 270,510 301,861 345,438 380,761 419,836 11.6% 14.4% 10.2% 10.3%
RWA/assets 45.6% 47.4% 49.1% 49.9% 50.8% 1.8% 1.7% 0.8% 0.8%
Loans/assets 45.0% 44.6% 43.3% 42.9% 42.4% -0.4% -1.3% -0.5% -0.4%
Loans/deposits 77% 75% 74% 74% 74% -2.0% -0.7% -0.2% -0.1%
Tier 1 ratio 13.7% 13.4% 13.0% 13.0% 12.9% -0.2% -0.4% 0.0% 0.0%
Core (Equity) Tier 1 ratio 11.8% 11.7% 11.5% 11.6% 11.7% -0.1% -0.2% 0.1% 0.1%
NPL/loans 1.52% 1.9% 1.6% 1.6% 1.6% 0.4% -0.3% 0.0% 0.0%
Provision coverage 64.0% 56.7% 72.3% 79.8% 85.2% -7.3% 15.6% 7.5% 5.5%
36,249
Swedbank AB
Banking
124

Class act: the right strategy at the right time

What more is there to like? A utility banking strategy combined with
one of the strongest balance sheets in the sector implies high and
sustainable cash return to shareholders. We believe Swedbank should
be a core holding in any portfolio, let alone within the allocation to
banks. The dividend yield exceeds 6% and is growing. Buy.

Capital strength: Swedbank is one of only three commercial banks to
pass the 4% pain ratio (ie surplus capital when testing for a stressed,
systemic crisis). The strength of its balance sheet is even more solid
given its emerging credit culture and retail mortgage focus.

Early adoption of utility banking pays dividends: Over the last
four years, the new management team has sought to de-cost, de-risk
and simplify the groups structure and balance sheet, with a singular
focus on RoE not growth. The move to a 75% dividend payout ratio
earlier in the year completed the utility banking strategy. Quarterly
result after quarterly result have shown to us that such a fundamental
restructuring combined with managing for a secular decline is the
most profitable strategy for any European bank to follow right now.

Restructuring still producing benefits: Management has met or
beaten cost expectations for at least nine straight quarters. The cost-
income ratio is now the lowest among Nordic peers, yet cost guidance
was tightened yet further at Q1. Can this be sustained? Logically no,
but the roll-out and exploitation of mobile banking should deliver
further, incremental gains for a while longer.

Should we be worried by the CEOs comments on revenues? The
CEO recently spoke of increasing revenue pressure from low rates/
activity and of drawing a line in the sand for market share. We are not
concerned. The CEOs strategy is all about managing for a world of
declining revenue while market share defence will not be at the
expense of price/RoE. We should be worried about the other
European banks.

Valuation focus on yield: Conventional P/TNAV full: consensus
= 1.7x for 16% 2014 RoTE. But a sustainable dividend yield shows
upside: 2014 consensus = 7.1% with 5% dividend CAGR 2013-15.
Our price target is based on a dividend discount model derived from
our 2013 dividend yield, a CAPM-derived cost of equity and a 3%
growth rate.

Key risks to view: Swedish macro and SME (not housing) asset
quality; political interference; wholesale funding/Baltic exposure in
risk-off.

Buy
Rating system
Current price
SEK 152.80
Relative
Price target
SEK 165.00
Stockholm Close
Reuters SWEDa.ST
Bloomberg SWEDA SS


Chg
2013e 2014e 2015e

old % old % old %
Income 35895 - 36428 - 36877 -
PPOP 19613 - 20371 - 20964 -
EPS 13.37 - 13.92 - 14.40 -

Share data

Performance data

1 month -5.1 % -3.8 %
3 months -3.9 % -2.6 %
12 months 15.1 % 7.0 %

12 June 2013
Nick Anderson
Analyst
+44 20 3207 7838

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., SEK m 2011 2012 2013E 2014E 2015E
EPS 9.5 12.1 13.4 13.9 14.4
EPS (adj.) 11.3 12.1 13.4 13.9 14.4
BVPS 89.3 96.7 100.0 103.5 107.1
TBVPS 78.5 86.2 89.8 93.4 97.0
DPS 5.3 9.9 10.0 10.4 10.8
No. of Shares (m) 1,130 1,102 1,099 1,099 1,100
P/E (adj.) 13.6x 12.6x 11.4x 11.0x 10.6x
P/TBV 1.95x 1.77x 1.70x 1.64x 1.58x
RoE (%) 12.2 14.4 14.7 13.7 13.7
RoTE (%) 15.4 15.2 16.6 15.2 15.1
Dividend Yield (%) 3.5 6.5 6.6 6.8 7.1
Payout Ratio (%) 54 82 75 75 75

Swedbank AB
Banking
125
Financials

EPS (Berenberg adjusted) 11.25 12.09 13.37 13.92 14.40 Bloomberg ticker SWEDA SS
TBVPS 78.55 86.22 89.83 93.35 96.95 Reuters ticker SWEDa.ST
P/TBV (x) 1.95x 1.78x 1.71x 1.64x 1.58x +44 20 3207 7838
P/BV (x) 1.72x 1.59x 1.53x 1.48x 1.43x
Dividend yield (%) 3.5% 6.5% 6.6% 6.8% 7.0%
Payout ratio 54% 82% 75% 75% 75%
Weighted avg. number of shares (m) 1129.6 1101.9 1099.1 1098.7 1100.0
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Net interest income (NII) 19,014 20,361 21,003 20,924 21,058 7.1% 3.2% -0.4% 0.6%
Trading income 1,584 3,073 2,195 2,570 2,600 94.0% -28.6% 17.1% 1.2%
Other income 3,850 3,220 3,049 3,030 3,035 -16.4% -5.3% -0.6% 0.2%
Total income 34,045 36,268 35,895 36,428 36,877 6.5% -1.0% 1.5% 1.2%
Loan loss charge (LLC) 1,911 185 -403 -920 -940 -90.3% -317.9% 128.4% 2.1%
Operating Profit 17,557 19,893 19,210 19,451 20,024 13.3% -3.4% 1.3% 2.9%
Other non-operating -2,134 -427 -310 -200 -100
Exceptionals 4 -997 -390 0 0
Taxation -3,669 -4,157 -3,811 -3,956 -4,085 13.3% -8.3% 3.8% 3.3%
Income Ratios (%)
NII/ Average Total Assets 1.07% 1.09% 0.00% 0.00% 0.00% 0.02% -1.09% 0.00% 0.00%
PPoP/LLC -8.2x -106.5x 48.7x 22.1x 22.3x
Cost/income ratio 54.0% 45.7% 45.4% 44.1% 43.2% -8.4% -0.3% -1.3% -0.9%
Cost/avg. assets 1.04% 0.88% 0.85% 0.83% 0.81% -0.15% -0.03% -0.02% -0.02%
LLC/avg. loans -0.16% -0.02% 0.03% 0.07% 0.07% 0.15% 0.05% 0.04% 0.00%
LLC/NII -10.1% -0.9% 1.9% 4.4% 4.5%
Tax rate 20.9% 20.9% 19.8% 20.3% 20.4% 0.0% -1.1% 0.5% 0.1%
RoTE adjusted (%) 15.4% 15.2% 16.6% 15.2% 15.1% -0.2% 1.4% -1.4% -0.1%
RoE (stated) (%) 12.2% 14.4% 14.7% 13.7% 13.7%
RoA 0.77% 0.76% 0.77% 0.79% 0.81% -0.01% 0.00% 0.02% 0.02%
RoRWA 2.30% 2.96% 3.21% 3.32% 3.40% 0.66% 0.25% 0.11% 0.07%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Customer loans 1,211,454 1,238,864 1,237,880 1,253,648 1,269,711 2.3% -0.1% 1.3% 1.3%
Total assets 1,857,065 1,846,941 1,919,105 1,941,948 1,965,215 -0.5% 3.9% 1.2% 1.2%
Minorities 140 154
Ordinary equity 97,993 106,070 109,742 113,862 117,821 8.2% 3.5% 3.8% 3.5%
Tangible equity 86,231 94,618 98,566 102,686 106,645 9.7% 4.2% 4.2% 3.9%
Core (Equity) Tier 1 Capital 77,302 80,697 109,742 97,362 101,321 4.4% 36.0% -11.3% 4.1%
Risk-weighted assets 492,337 464,339 457,503 463,331 469,267 -5.7% -1.5% 1.3% 1.3%
RWA/assets 26.5% 25.1% 23.8% 23.9% 23.9%
Loans/assets 65.2% 67.1% 64.5% 64.6% 64.6%
Loans/deposits 216%
Tier 1 ratio 17.2% 18.7% 24.0% 22.6% 23.2% 1.5% 5.3% -1.4% 0.6%
Core (Equity) Tier 1 ratio 15.7% 17.4% 24.0% 21.0% 21.6% 1.7% 6.6% -3.0% 0.6%
NPL/loans 1.87% 1.05%
UBS AG
Banking
126
Lots of leverage, but adjusting the model

Strategy delivery continues: We continue to believe that UBS is the
only IB to own as it adapts its model as a wealth manager. We see this
delivering two benefits: first, a re-rating to that of a wealth manager (ie
from 8x to 14x P/E); and second, additional capital return.

Q1 2013 results show strategy is working: We believe the Q1 2013
results mark an important point for UBS management in that they
show that its new strategy can deliver. In particular, the 6bp rise in the
gross margin and CHF24bn of net new assets add credibility to the
strategy, in our view.

Wealth Management (WM) is the key positive: While the Q1
trends in WM were positive, we do not expect this to continue as the
retrocession fee changes will have an impact in Q2. This will see gross
margins fall before the recent re-pricing should support the gross
margin at c84bp.

IB needs to keep delivering: The change in strategy appears to have
had limited impact on the IBs performance judging by Q1 2013.
Whilst this has led to some re-hiring, Q3 2013 is likely to be the key
quarter to judge whether the business is sized correctly.

Capital position makes UBS the only IB to own: We believe this is
the key area where UBS differentiates itself from peers and should
allow it to trade at a premium as a result. Fully-loaded Basel III CT1
was 10.1% at the end of Q1 2013 and management targets 13%
300bp above peers. Interestingly, the buffer it targets above 13%,
before increasing the dividend payout, will be influenced by the
leverage in the business. We believe UBSs management is one of the
few to recognise this as a key issue, adding to our view that it remains
realistic on the operating outlook.

Leverage ratios are low but changing: On our pain ratio UBS
has a leverage ratio of 2.3%, while on our plain ratio it is 4.5%.
While this is low among European banks, UBS is aiming to de-lever
CHF430bn of assets; this would increase the pain ratio to over 3%.

Estimate increases reflect lower losses on non-core business:
Our 2013 estimates rise due to the higher profits from Q1 2013 and
the lower losses than expected from the run-off businesses.

Price target of CHF17 remains unchanged: We calculate our price
target of CHF17 using a capital allocation sum-of-the-parts analysis.
On this basis, UBS is one of only two European banks exposed to
investment banking that are properly capitalised, in our view.

Risks to our view: The main risk to our positive view on UBS is that
the non-core run-off costs come in higher than the 1.5% of assets we
estimate. Alongside this, we remain wary that regulators continue to
demand ever-higher capital ratios and that litigation threats persist.

Buy
Rating system
Current price
CHF 16.86
Relative
Price target
CHF 17.00
Reuters UBSN.VX
Bloomberg UBSN VX


Chg
2013e 2014e 2015e

old % old % old %
Income 26026 9.5 26560 5.9 27262 4.8
PPOP 2879 42.3 5056 -2.3 5700 -1.3
EPS 0.48 43.5 0.94 -4.6 1.07 -3.6

Share data

Performance data

Relative performance to SXXP SMI
1 month -0.5 % 1.9 %
3 months 11.7 % 11.3 %
12 months 25.9 % 20.4 %

12 June 2013
James Chappell
Analyst
+44 20 3207 7844

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., CHF m 2011 2012 2013E 2014E 2015E
EPS 1.10 -0.66 0.70 0.92 1.06
EPS (adj.) 1.08 -0.66 0.69 0.90 1.03
BVPS 12.7 12.0 12.7 13.4 13.9
TBVPS 10.1 10.3 11.0 11.7 12.1
DPS 0.10 0.15 0.20 0.60 0.70
No. of Shares (m) 3,747 3,776 3,758 3,758 3,758
P/E (adj.) 15.6x -25.5x 24.6x 18.7x 16.3x
P/TBV 1.66x 1.64x 1.54x 1.44x 1.39x
RoE (%) 8.7 -6.0 5.6 6.9 7.6
RoTE (%) 11.9 -7.8 7.0 8.5 9.3
Dividend Yield (%) 0.6 0.9 1.2 3.6 4.2
Payout Ratio (%) 9 -23 29 65 66

UBS AG
Banking
127
Financials

Market ratios; per share data (CHF) 2011 2012 2013e 2014e 2015e
EPS (reported) 1.10 -0.66 0.70 0.92 1.06 Market Cap 63,357
EPS( adj) 1.08 -0.66 0.69 0.90 1.03 Bloomberg ticker UBSN VX
TBVPS (reported) 10.1 10.3 11.0 11.7 12.1 Reuters ticker UBSN:VX
TBVPS (Berenberg adjusted) 8.9 9.5 10.2 10.9 11.4
BVPS (reported) 12.7 12.0 12.7 13.4 13.9 Share price CHF 16.86
DPS 0.10 0.15 0.20 0.60 0.70
P/E (Berenberg adjusted) 15.6x -25.5x 24.6x 18.7x 16.3x
P/TBV (x) 1.66x 1.64x 1.54x 1.44x 1.39x
Payout ratio 9% -23% 29% 65% 66% +44 20 3207 7844
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Income Summary (CHFm)
Pre-provision op. profits (PPoP) -15,656 -21,241 -18,459 -17,132 -16,787 35.7% -13.1% -7.2% -2.0%
Loan loss charge (LLC) -84 -117 -63 -65 -66 39.3% -46.3% 2.8% 1.8%
Operating Profit -15,740 -21,358 -18,522 -17,197 -16,853 35.7% -13.3% -7.2% -2.0%
Other non-operating 21,046 19,563 22,556 22,072 22,414 -7.0% 15.3% -2.1%
Reported profit before tax 5,306 -1,795 4,035 4,875 5,561 -133.8% -324.8% 20.8% 14.1%
Taxation -900 -460 -1,200 -1,219 -1,390 -48.9% 160.8% 1.6% 14.1%
Minorities + Preferences -269 -223 -201 -201 -201 -17.1% -9.9% 0.0%
Attributable profits (reported) 4,137 -2,478 2,634 3,455 3,970 -159.9% -206.3% 31.2% 14.9%
Income Ratios (%)
NII/ Average Total Assets 0.50% 0.45% 0.49% 0.54% 0.58%
PPoP/LLC 186.4x 181.5x 294.0x 265.3x 255.5x
Cost/income ratio 3.3x 4.6x 4.1x 3.8x 3.7x
Cost/avg. assets -1.65% -2.03% -2.03% -2.08% -2.17%
LLC/avg. loans -0.03% -0.04% -0.02%
LLC/NII 0.0x 0.0x 0.0x 0.0x 0.0x
Tax rate -17.0% 25.6% -29.7% -25.0% -25.0%
RoTE adjusted (%) 11.9% -7.8% 7.0% 8.5% 9.3%
RoE (stated) (%) 8.7% -6.0% 5.6% 6.9% 7.6%
RoA 0.29% -0.20% 0.23% 0.32% 0.38%
RoRWA 1.72% -0.96% 1.05% 1.47% 1.76%
Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15
Balance Sheet Summary (CHFm)
Customer loans 342,409 373,459 9.1%
Total assets 1,416,962 1,259,797 1,147,183 1,079,157 1,031,919 -11.1% -8.9% -5.9% -4.4%
Customer deposits 342,409 373,459 9.1%
Debt securities & other borrowings 140,617 104,837 -25.4%
Minorities 4,405 3,151 3,213 3,213 3,213 -28.5% 2.0% 0.0%
Ordinary equity 48,529 45,949 48,885 51,588 53,303 -5.3% 6.4% 5.5% 3.3%
Tangible equity 38,834 39,488 42,085 44,788 46,503 1.7% 6.6% 6.4% 3.8%
Core (Equity) Tier 1 Capital 29,098 33,095 28,563 32,486 35,591 13.7% -13.7% 13.7% 9.6%
Risk-weighted assets 240,962 258,113 250,098 235,499 225,439 7.1% -3.1% -5.8%
RWA/assets 17.0% 20.5% 21.8% 21.8% 21.8%
Tier 1 ratio 13.8% 12.8% 11.4% 13.8% 15.8%
Unicredit SpA
Banking
128

High risk, low return

We reiterate our long-term bear case on Unicredit as we believe that
loan losses will remain higher for longer than consensus expects, and
net interest income will remain under pressure due to weak debt
demand and low reinvestment yields. We believe that our bear case
will most likely be triggered by Q4 2013 as opposed to Q2 results,
given short-term optimistic guidance by the CEO. We would favour
Intesa over Unicredit on capital, country risk and cash dividend yield.

Capital weaker than its peer. Unicredit lags Intesa on a simple
leverage ratio. Its pain ratio is 2.2% as at 2012, compared to 3.0%
for Intesa. This is despite Unicredits greater exposure to (riskier)
CEE.

Loan losses to remain high. We were disappointed that Unicredit
reduced its NPL coverage ratio in Italy from 56% in Q4 2012 to 53% in
Q1 2013, driving the reduction in group LLCs from 4.6bn in Q4 2012
to 1.2bn in Q1 2013 (-9% yoy). We believe Unicredit will aim to
gradually rebuild its coverage ratio, and that loan losses will peak again in
Q4 2013. We forecast group loan losses of 7.2bn in 2013, higher than
consensus.

Weak demand for loans to put pressure on NII. As per the recent
Bank Lending Survey, demand for loans by households and SMEs is
expected to remain weak in 2013, which should put pressure on NII.
Any potential reduction of wholesale funding costs as per the bull-
case argument will be offset by lower reinvestment yields, and the
inevitable repayment of LTRO money (26.1bn) will exert further
pressure on margins. We forecast NII of 13.9bn in 2013, -3% yoy.

CEE headwinds. Unicredit derives 26% of its revenues from CEE
(of which c7% is from Poland). Its exposure in CEE (former driver of
growth) may act as a headwind in the short term, in light of the recent
slowdown of the Polish economy (resulting in another 25bp rate cut)
and the steeper-than-expected recession in the Czech Republic.

Prefer Intesa to Unicredit. We prefer Intesa over Unicredit as it has
stronger capital buffers, a higher dividend yield (4.4% compared to 2.5%
for Unicredit in 2013E) and it is less exposed to CEE headwinds.

Valuation. Unicredit is trading at 0.5x TBV for a 2014E RoTE of
2.7%, a 20% discount to Intesa. Our price target is based on a P/TBV
multiple driven by a 2014E RoTE and CAPM-based CoE. We make
minor changes to our numbers following the Q1 results.

Sell
Rating system
Current price
EUR 3.99
Relative
Price target
EUR 2.50
10/06/2013 Milan Close
Reuters CRDI.MI
Bloomberg UCG IM


Chg
2013e 2014e 2015e

old % old % old %
Income 24090 1.0 24225 1.5 23891 3.9
PPOP 9175 1.9 9310 2.9 8955 9.3
EPS 0.13 0.8 0.26 0.4 0.34 -0.1

Share data

Performance data

Relative performance to SXXP MSCI
Europe Banks
1 month -1.6 % -0.7 %
3 months 2.3 % 3.5 %
12 months 33.6 % 21.8 %

12 June 2013
Eleni Papoula
Analyst
+44 20 3465 2741

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., EUR m 2011 2012 2013E 2014E 2015E
EPS -5.11 0.18 0.13 0.26 0.34
EPS (adj.) -5.11 0.18 0.13 0.26 0.34
BVPS 26.67 10.64 10.65 10.76 10.95
TBVPS 18.55 7.94 7.94 8.06 8.24
DPS 0.00 0.09 0.10 0.10 0.10
No. of Shares (m) 1,833 4,823 4,823 4,823 4,823
P/E (adj.) -0.8x 22.3x 31.4x 15.3x 11.8x
P/TBV 0.22x 0.50x 0.50x 0.50x 0.48x
RoE (%) -17.9 1.4 1.0 2.0 2.6
RoTE (%) -1.5 1.9 1.3 2.7 3.4
Dividend Yield (%) 0.0 2.3 2.5 2.5 2.5
Payout Ratio (%) 0 50 79 38 29

Unicredit SpA
Banking
129
Financials

Unicredit
EPS (Berenberg adjusted) -5.11 0.18 0.13 0.26 0.34 Bloomberg ticker UCG IM
TBVPS 18.55 7.94 7.94 8.06 8.24 Reuters ticker CRDI.MI
P/E (Berenberg adjusted) -0.78 22.28 31.41 15.32 11.78 Rating Sell
P/BV (x) 0.15 0.38 0.38 0.37 0.36 Upside -37%
RoTE adjusted (%) -1.47 1.95 1.33 2.70 3.43
Payout ratio 0.0 50.2 78.6 38.3 29.5 email: eleni.papoula@berenberg.com
Year to 31-Dec 2011 2012 2013E 2014E 2015E 11/12 12/13 13/14 14/15
Net interest income (NII) 15,252 14,285 13,896 14,125 14,367 -6.3 -2.7 1.6 1.7
Net fees & commissions 8,048 7,793 7,952 7,991 7,974 -3.2 2.0 0.5 -0.2
Trading income 1,099 2,808 1,805 1,805 1,805 155.4 -35.7 0.0 0.0
Other income 613 657 675 675 675 7.2 2.8 0.0 0.0
Total income 25,012 25,543 24,328 24,597 24,822 2.1 -4.8 1.1 0.9
Operating expenses -15,431 -14,979 -14,983 -15,015 -15,036 -2.9 0.0 0.2 0.1
Operating Profit 3,848 951 2,156 3,272 3,715 -75.3 126.7 51.7 13.5
Other non-operating -710 -92 174 194 194
Exceptionals -9,756 -742 -650 -650 -650
Reported profit before tax -6,618 118 1,681 2,816 3,259 -101.8 1,326.6 67.6 15.7
Taxation -1,414 1,539 -467 -958 -979 -208.9 -130.4 105.1 2.1
Minorities + Preferences -365 -358 -200 -200 -244 -1.9 -44.1 0.0 22.2
Attributable profits (reported) -9,205 865 613 1,258 1,636 -109.4 -29.1 105.1 30.1
Adj. attributable profit 551 1,606 1,263 1,908 2,286 191.4 -21.4 51.0 19.8
Income Ratios (%)
NII/AIEAs 1.64 1.54 1.50 1.52 1.55
PPOP/LLC 1.67 1.10 1.30 1.52 1.61
Cost/income ratio 61.7 58.6 61.6 61.0 60.6
Cost/avg. assets 1.66 1.62 1.61 1.62 1.62
LLC/avg. loans 1.03 1.74 1.31 1.15 1.11
LLC/NII 37.6 67.3 51.7 44.7 42.3
Tax rate 14.8 na 5.0 10.0 10.0
RoTE (%) adjusted -1.5 1.9 1.3 2.7 3.4
RoE (%) -17.9 1.4 1.0 2.0 2.6
RoA (%) -0.06 0.10 0.07 0.14 0.18
Asset Tangible Leverage (x) 25.6 19.9 20.0 19.6 19.2
RoRWA 0.12 0.38 0.29 0.44 0.52
Year to 31-Dec 2011 2012 2013E 2014E 2015E 11/12 12/13 13/14 14/15
Customer loans 559,553 547,144 551,629 548,022 548,022 -2.2 0.8 -0.7 0.0
Total assets 926,769 926,838 929,574 927,721 929,509 0.0 0.3 -0.2 0.2
Interest earning assets 846,267 837,424 843,399 841,311 842,861 -1.0 0.7 -0.2 0.2
Debt securities & other borrowings 162,990 170,451 168,746 167,059 165,388 4.6 -1.0 -1.0 -1.0
Minorities 3,318 3,669 3,869 4,069 4,313 10.6 5.5 5.2 6.0
Ordinary equity 51,479 61,579 61,614 62,293 63,350 19.6 0.1 1.1 1.7
Tangible equity 35,794 45,921 45,956 46,635 47,692 28.3 0.1 1.5 2.3
RWA/assets 49.7 46.1 46.8 47.1 47.2
Loans/assets 60.4 59.0 59.3 59.1 59.0
Loans/Retail Funds 140.5 133.6 120.5 117.6 115.4
Tier 1 ratio 9.3 11.4 11.2 11.4 11.5
Core (Equity) Tier 1 ratio 8.4 10.8 10.7 10.8 11.0
NPL/loans 12.5 13.6 14.8 15.0 14.9
Provision coverage 48.6 44.8 50.1 51.4 53.1
Vontobel Holding AG
130

Strongest capital: a blessing and a curse

Vontobel has the strongest capital compared to domestic peers and
the European commercial banks within our coverage, with a pain
ratio of 6.6%. We would have been more positive on the stock if
Vontobel committed to returning part of this excess capital to
shareholders, but it aims to prioritise acquisition opportunities instead,
which carry significant execution risk (as the history of EFG
International has shown). Another reason for our cautiousness is that
asset management cannot continue to offset the weakness of its
private and investment banking divisions, in our view.
Acquisition strategy the curse. Vontobel wants to acquire a small
private bank (AuM: CHF15bn-25bn), or a small asset manager (AuM:
CHF25bn-35bn). It estimates that its excess capital is cCHF500m,
which implies that the maximum goodwill on an acquisition that
Vontobel is willing to take on is also CHF500m. Assuming successful
execution, such a deal would erode the companys tangible equity
from 6.6% of its tangible assets to 4.3%, remaining ahead of peers.
However, we would prefer it if Vontobel avoids such a risk and
chooses instead to increase its payout ratio from 59% currently to
80% (yield of 5%), or pay a special dividend.
We remain cautious on business mix. Asset management
outperformance, driven by Vontobels US fund range (VUS), has
continued to offset the weakness in private and investment banking,
but we do not believe this is sustainable. Vontobel may have to close
its top fund (Emerging Markets Equity) to old and new investors (it
has already had a soft close), or the star fund manager, Rajiv Jain,
may just leave or retire.

Valuation and dividend. Vontobel is relevant to income funds (DPS
of CHF1.2, 4% recurring yield). It is trading at 15x 2014E EPS (a 50%
premium to EFG) and 1.3x TBV for a 2014E RoTE of 8.7%. Its
valuation is full, in our view. Our price target is derived from a
P/TBV multiple based on a 2014E RoTE and a CAPM-based CoE.

What would make us buyers? i) Valuation (our price target of
CHF25 is a good entry point); ii) a change in risk appetite among the
wealthy clients of private banking (boosting its gross margin); iii) a
change in Vontobels strategy away from growth through acquisitions
and towards returning excess capital to investors.

Hold
Rating system
Current price
CHF 29.45
Relative
Price target
CHF 25.00
Reuters VONN.S
Bloomberg VONN SW


Chg
2013e 2014e 2015e

old % old % old %
Income 759 - 775 - 806 -
Op. Pr. 149 - 157 - 178 -
EPS 1.94 - 2.04 - 2.31 -

Share data

Performance data

1 month -0.6 % 0.7 %
3 months -10.8 % -9.5 %
12 months 24.2 % 16.2 %

12 June 2013
Eleni Papoula
Analyst
+44 20 3465 2741

Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
Y/E 31.12., CHF m 2011 2012 2013E 2014E 2015E
EPS 1.76 2.02 1.84 1.94 2.21
EPS (adj.) 2.42 2.12 1.94 2.04 2.31
BVPS 23.0 24.2 24.8 25.6 26.5
TBVPS 20.9 22.2 22.7 23.3 24.2
DPS 1.10 1.20 1.20 1.20 1.20
No. of Shares (m) 65 65 65 65 65
P/E (adj.) 12.1x 13.9x 15.2x 14.5x 12.8x
P/TBV 1.41x 1.33x 1.30x 1.26x 1.22x
RoE (%) 7.6 8.5 7.4 7.5 8.3
RoTE (%) 11.6 9.6 8.5 8.7 9.5
Dividend Yield (%) 3.7 4.1 4.1 4.1 4.1
Payout Ratio (%) 62 59 65 62 54
AuM (CHFbn) 82 98 108 117 125
Net New Money (CHFbn) 8.2 8.6 6.5 6.0 5.0

Vontobel Holding AG
131
Financials

Vontobel
Market ratios and per share data (CHF) 2011 2012 E 2013 E 2014 E 2015 E 2015 E
EPS reported 1.76 2.02 1.84 1.94 2.21 Market Cap (CHFbn) 1.9
EPS (Berenberg adjusted) 2.42 2.12 1.94 2.04 2.31 Bloomberg ticker VONN SW
Tangible book value per share (TBVPS) 20.9 22.2 22.7 23.3 24.2 Reuters ticker VONN.S
Book value per share (BVPS) 23.0 24.2 24.8 25.6 26.5 Rating Sell
P/E (Berenberg adjusted) 12.1 13.9 15.2 14.5 12.8 Share price (CHF) 29.45
P/TBV (x) 1.41 1.33 1.30 1.26 1.22 Target price (CHF) 25.00
P/BV (x) 1.28 1.22 1.19 1.15 1.11 Upside -15%
RoTE adjusted (%) 11.6 9.6 8.5 8.7 9.5
Dividend Yield (%) 3.7 4.1 4.1 4.1 4.1 Phone +44 20 3465 2741
Shares outstanding (m) 65.0 65.0 65.0 65.0 65.0
Assets under management data and Ratios 2011 2012 E 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15
AuM data (CHFbn) Year-on-year change (%)
Assets under management 82.2 98.4 108.5 117.2 125.3 19.7 10.3 8.0 6.9
Net New Money 8.2 8.6 6.5 6.0 5.0 4.9 -24.1 -8.3 -15.6
NNM/AuM (%) 10.4 10.5 6.6 5.5 4.3 0.3 -36.6 -16.9 -21.9
Year to 31-Dec 2011 2012 E 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15
Income Summary (CHFm) Year-on-year change (%)
Net Interest income (NII) 60 52 59 63 64 -13.5 13.2 6.8 1.6
Commission income 452 495 547 581 606 9.5 10.6 6.1 4.3
Trading income 249 205 137 116 120 -17.8 -33.1 -15.5 4.0
Other income 28 19 16 16 16 -32.5 na na na
Total income 790 771 759 775 806 -2.4 -1.5 2.1 4.0
Operating expenses -609 -611 -610 -619 -628 0.3 -0.1 1.4 1.6
Operating profit 181 161 149 157 178 -11.4 -7.0 4.9 13.5
Amortisation of customer relationships -10 -8 -6 -6 -6 -18.8 -22.0 0.0 0.0
Exceptionals -24 4 0 0 0 -116.7 na na na
Reported profit before tax 147 156 143 150 172 6.3 -8.6 5.2 14.1
Taxation -33 -26 -26 -27 -31 -22.4 0.1 5.2 14.1
Minorities + Preferences 0 0 0 0 0 -100.0 na na na
Attributable profits (reported) 114 131 117 123 141 14.9 -10.3 5.2 14.1
Adj. attributable profit 157 135 124 130 147 -14.1 -8.3 4.9 13.4
Income Ratios (%)
Gross margin ex IB (trading income) (bp) 67.3 62.1 58.4 57.4 55.7 -7.7 -5.9 -1.8 -3.0
Net interest income margin (bp) 7.5 5.7 5.5 5.5 5.2 -23.7 -3.1 -1.1 -5.2
Commission income margin (bp) 56.3 54.3 51.4 50.5 49.2 -3.5 -5.4 -1.7 -2.7
Cost/income ratio 78.6 77.5 80.3 79.8 77.9 -1.3 3.6 -0.7 -2.3
Tax rate 22.5 16.4 18.0 18.0 18.0 -26.9 9.5 0.0 0.0
RoTE adjusted 11.6 9.6 8.5 8.7 9.5 -16.8 -12.1 2.3 9.8
RoE (stated) 7.6 8.5 7.4 7.5 8.3 12.0 -13.6 2.4 10.4
RoA 0.6 0.7 0.6 0.6 0.7 14.2 -11.1 4.8 14.1
Asset Leverage (x) 13.7 14.5 14.6 14.0 13.5 6.3 0.5 -4.1 -3.9
RoRWA 2.9 2.7 2.4 2.4 2.8 -8.4 -11.6 2.6 14.7
RoAUM 0.2 0.1 0.1 0.1 0.1 -24.4 -21.5 -2.8 5.8
Year to 31-Dec 2011 2012 E 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15
Balance Sheet Summary (CHFm) Year-on-year change (%)
Customer loans 1,370 2,479 2,479 2,479 2,479 80.9 0.0 0.0 0.0
Investments available for sale 1,040 901 1,356 1,356 1,356 -13.4 50.6 0.0 0.0
Total assets 18,692 21,089 21,705 21,402 21,354 12.8 2.9 -1.4 -0.2
Minorities 0 0 0 0 0 na na na na
Ordinary equity 1,497 1,574 1,614 1,661 1,725 5.1 2.6 2.9 3.9
Tangible equity 1,356 1,441 1,476 1,516 1,574 6.3 2.4 2.7 3.8
Risk-weighted assets 4,969 5,019 5,339 5,246 5,216 1.0 6.4 -1.7 -0.6
RWA/assets 26.6 26.6 26.6 26.6 26.6 0.0 0.0 0.0 0.0
Loans/assets 7.3 11.8 11.4 11.6 11.6 60.3 -2.8 1.4 0.2
Loans/deposits 18.2 28.6 19.0 19.0 19.0 57.5 -33.6 0.0 0.0
Tier 1 ratio 23.3 27.2 26.3 27.7 29.1 16.6 -3.2 5.2 5.0
Core (Equity) Tier 1 ratio 23.3 27.2 26.3 27.7 29.1 16.6 -3.2 5.2 5.0
European Banks
Banking

132
Appendices
Figure 40. Standing the test of time
EBA stress test results July 2011 CT1 ratios, all 91 banks

Source: EBA, Berenberg research

Name Code CT1% 2010
Actual
With mitigating
actions to 4/11
Supervisory
recognised ratio 5% 6% 7% 8% 9% 10%
Banca March ES079 PASS 22.2% 23.5% 27.8% 0 0 0 0 0 0
Irish Life And Permanent IE039 PASS 10.6% 20.4% 20.0% 0 0 0 0 0 0
OTP Bank HU036 PASS 12.3% 13.6% 13.6% 0 0 0 0 0 0
Sydbank DK010 PASS 12.4% 13.6% 13.6% 0 0 0 0 0 0
Banque Et Caisse D'Epargne LU045 PASS 12.0% 13.3% 13.8% 0 0 0 0 0 0
Danske Bank DK008 PASS 10.0% 13.0% 13.0% 0 0 0 0 0 0
Jyske Bank DK009 PASS 12.1% 12.8% 12.8% 0 0 0 0 0 0
PKO Bank Polski PL052 PASS 11.8% 12.2% 12.2% 0 0 0 0 0 0
Op-Pohjola Group FI012 PASS 12.2% 11.6% 11.6% 0 0 0 0 0 0
Rabobank NL048 PASS 12.6% 10.8% 10.8% 0 0 0 0 0 0
SEB SE085 PASS 11.1% 10.5% 10.5% 0 0 0 0 0 0
Landesbank Berlin DE027 PASS 14.6% 10.4% 10.4% 0 0 0 0 0 0
Dexia BE004 PASS 12.1% 10.4% 10.4% 0 0 0 0 0 0
Bank Of Valletta MT046 PASS 10.5% 10.4% 10.4% 0 0 0 0 0 0
Kutxa ES077 PASS 13.2% 10.1% 10.5% 0 0 0 0 0 0
KBC Bank BE005 PASS 10.5% 10.0% 10.0% 0 0 0 0 0 0
Allied Irish Banks IE037 PASS 3.7% 10.0% 11.7% 0 0 0 0 0 0
Hypo Real Estate DE023 PASS 28.4% 10.0% 10.0% 0 0 0 0 0 0
Nordea SE084 PASS 8.9% 9.5% 9.5% 0 0 0 0 0 -999
Swedbank SE087 PASS 8.7% 9.4% 9.4% 0 0 0 0 0 -492
Unicaja ES073 PASS 12.5% 9.4% 12.2% 0 0 0 0 0 -128
Nykredit DK011 PASS 8.8% 9.4% 9.4% 0 0 0 0 0 -485
Dekabank DE028 PASS 13.0% 9.2% 9.2% 0 0 0 0 0 -284
ABN Amro NL049 PASS 9.9% 9.2% 9.2% 0 0 0 0 0 -960
BBVA ES060 PASS 8.0% 9.2% 10.2% 0 0 0 0 0 -2,624
DnB NOR NO051 PASS 8.3% 9.0% 9.0% 0 0 0 0 -42 -1,218
Intesa Sanpaolo IT040 PASS 7.9% 8.9% 9.2% 0 0 0 0 -369 -3,960
Grupo BBK ES075 PASS 10.2% 8.8% 11.3% 0 0 0 0 -67 -360
WGZ Bank DE029 PASS 10.8% 8.7% 8.7% 0 0 0 0 -75 -302
Vital ES080 PASS 12.5% 8.7% 9.2% 0 0 0 0 -21 -84
ING Bank NL047 PASS 9.6% 8.7% 8.6% 0 0 0 0 -1,355 -5,268
Handelsbanken SE086 PASS 7.7% 8.6% 8.6% 0 0 0 0 -394 -1,447
Credit Agricole FR014 PASS 8.2% 8.5% 8.5% 0 0 0 0 -2,853 -8,387
HSBC GB089 PASS 10.5% 8.5% 8.5% 0 0 0 0 -5,684 -16,254
Santander ES059 PASS 7.1% 8.4% 8.9% 0 0 0 0 -4,224 -10,734
Erste Bank AT001 PASS 8.7% 8.1% 8.1% 0 0 0 0 -1,145 -2,476
NKBM dd SI058 PASS 7.4% 8.0% 8.0% 0 0 0 0 -49 -99
BNP Paribas FR013 PASS 9.2% 7.9% 7.9% 0 0 0 -1,063 -8,296 -15,529
Raiffeisen Bank Int'l AT002 PASS 8.1% 7.8% 7.8% 0 0 0 -197 -1,197 -2,197
AVERAGE BANK 8.9% 7.7% 8.1%
Lloyds GB091 PASS 10.2% 7.7% 7.7% 0 0 0 -1,562 -7,045 -12,528
National Bank Of Greece GR031 PASS 11.9% 7.7% 9.7% 0 0 0 -239 -962 -1,685
UBI Banca IT044 PASS 7.0% 7.4% 8.1% 0 0 0 -561 -1,536 -2,511
Alpha Bank GR032 PASS 10.8% 7.4% 8.2% 0 0 0 -295 -797 -1,299
Barclays GB090 PASS 10.0% 7.3% 7.3% 0 0 0 -4,551 -11,125 -17,699
Espiga ES070 PASS 8.2% 7.3% 8.4% 0 0 0 -176 -428 -681
CT1 % 2012 Adverse Scenario Capital deficit to
European Banks
Banking

133
Figure 41. EBA stress test results July 2011 CT1 ratios, all 91 banks (contd)

Source: EBA, Berenberg research

Name Code CT1% 2010
Actual
With mitigating
actions to 4/11
Supervisory
recognised ratio 5% 6% 7% 8% 9% 10%
LBW DE019 PASS 8.2% 7.1% 7.5% 0 0 0 -1,220 -2,627 -4,035
Bayerische Landesbank DE021 PASS 9.3% 7.1% 8.3% 0 0 0 -1,180 -2,525 -3,871
Bank Of Ireland IE038 PASS 8.4% 7.1% 8.7% 0 0 0 -715 -1,514 -2,313
SNS Bank NL050 PASS 8.4% 7.0% 7.0% 0 0 -3 -254 -505 -756
DZ Bank DE020 PASS 8.2% 6.9% 6.9% 0 0 -83 -1,323 -2,564 -3,804
Effibank ES063 PASS 8.3% 6.8% 8.3% 0 0 -75 -402 -729 -1,056
BPCE FR015 PASS 7.8% 6.8% 6.8% 0 0 -1,245 -6,370 -11,495 -16,620
Ibercaja ES072 PASS 9.7% 6.7% 7.3% 0 0 -76 -317 -557 -797
Unicredit IT041 PASS 7.8% 6.7% 7.2% 0 0 -1,745 -7,043 -12,342 -17,640
Banco BPI PT056 PASS 8.2% 6.7% 7.0% 0 0 -94 -363 -632 -900
Societe Generale FR016 PASS 8.1% 6.6% 6.6% 0 0 -1,966 -6,421 -10,876 -15,332
Deutsche Bank DE017 PASS 8.8% 6.5% 6.5% 0 0 -2,271 -7,270 -12,269 -17,268
La Caixa ES062 PASS 6.8% 6.4% 9.1% 0 0 -976 -2,622 -4,269 -5,915
Commerzbank DE018 PASS 10.0% 6.4% 6.4% 0 0 -2,175 -5,641 -9,108 -12,574
RBS GB088 PASS 9.7% 6.3% 6.3% 0 0 -4,780 -11,628 -18,475 -25,322
Monte Dei Paschi IT042 PASS 5.8% 6.3% 8.8% 0 0 -796 -1,927 -3,058 -4,189
Caixa Geral PT053 PASS 8.5% 6.2% 6.5% 0 0 -618 -1,420 -2,222 -3,023
Pollensa ES082 PASS 11.2% 6.2% 8.0% 0 0 -1 -3 -5 -7
Bank Of Cyprus CY007 PASS 8.1% 6.2% 9.5% 0 0 -223 -486 -749 -1,011
Grupo BMN ES068 PASS 8.3% 6.1% 9.3% 0 0 -355 -760 -1,165 -1,570
WestLB DE024 PASS 8.7% 6.1% 6.1% 0 0 -598 -1,278 -1,958 -2,637
Banco De Sabadell ES065 NEAR FAIL 6.2% 5.7% 8.0% 0 -151 -716 -1,281 -1,846 -2,411
Banco Popolare IT043 NEAR FAIL 5.8% 5.7% 6.2% 0 -313 -1,292 -2,271 -3,251 -4,230
Banca Civica ES071 NEAR FAIL 8.0% 5.6% 9.4% 0 -168 -634 -1,101 -1,567 -2,034
Ontinyent ES081 NEAR FAIL 8.9% 5.6% 7.2% 0 -3 -9 -16 -23 -29
Norddeutsche Landesbank DE022 NEAR FAIL 4.6% 5.6% 5.6% 0 -466 -1,545 -2,623 -3,702 -4,781
HSH Nordbank DE025 NEAR FAIL 10.7% 5.5% 9.1% 0 -339 -1,054 -1,769 -2,484 -3,199
TT Hellenic Postbank GR035 NEAR FAIL 18.5% 5.5% 7.1% 0 -35 -103 -172 -240 -308
Millennium BCP PT054 NEAR FAIL 5.9% 5.4% 6.2% 0 -397 -1,086 -1,775 -2,464 -3,152
BFA-Bankia ES061 NEAR FAIL 6.9% 5.4% 6.5% 0 -1,325 -3,488 -5,652 -7,815 -9,978
Novacaicagalicia ES067 NEAR FAIL 5.2% 5.3% 6.5% 0 -361 -911 -1,460 -2,010 -2,559
Banco Popular Espaol ES064 NEAR FAIL 7.1% 5.3% 7.4% 0 -640 -1,594 -2,548 -3,502 -4,456
NLB dd SI057 NEAR FAIL 5.2% 5.3% 5.4% 0 -106 -263 -420 -577 -734
Marfin Popular CY006 NEAR FAIL 7.3% 5.3% 9.2% 0 -197 -483 -769 -1,054 -1,340
Piraeus Bank GR033 NEAR FAIL 8.0% 5.3% 6.3% 0 -278 -670 -1,062 -1,453 -1,845
Bankinter ES069 NEAR FAIL 6.2% 5.3% 6.8% 0 -232 -555 -877 -1,200 -1,522
ESFG PT055 NEAR FAIL 6.4% 5.1% 6.3% 0 -716 -1,484 -2,251 -3,018 -3,785
EFG Eurobank GR030 FAIL 9.0% 4.9% 7.6% -58 -551 -1,045 -1,538 -2,031 -2,525
Catalunyacaixa ES066 FAIL 6.4% 4.8% 6.3% -75 -573 -1,070 -1,568 -2,065 -2,563
Oesterreichische Volksbank AT003 FAIL 6.4% 4.5% 9.8% -160 -498 -836 -1,175 -1,513 -1,851
Unnim ES076 FAIL 6.3% 4.5% 6.2% -85 -257 -429 -602 -774 -946
Grupo Caja3 ES078 FAIL 8.6% 4.0% 6.6% -140 -279 -417 -556 -694 -833
Banco Pastor ES074 FAIL 7.6% 3.3% 5.6% -317 -501 -686 -871 -1,055 -1,240
CAM ES083 FAIL 3.8% 3.0% 5.1% -947 -1,430 -1,912 -2,395 -2,878 -3,361
Agricultural Bank Of Greece GR034 FAIL 6.3% -0.8% 6.0% -765 -899 -1,032 -1,165 -1,298 -1,431
TOTAL -2,547 -10,715 -41,395 -103,200 -195,819 -312,441
CT1 % 2012 Adverse Scenario Capital deficit to
European Banks
Banking
134

Figure 42. Deposit insurance schemes, selected European countries

Country Savings limit Coverage Who does it apply to? Pre-funded? Looking to
move to ex-
ante?
Are funds
safe guarded?
Backed by
govt.?
Costs to banks Other Comments
Austria 100,000 100% Individuals and all institutions
except govt.
No No n/a Yes - Raiffeisen banks will aid each other, as
will the savings banks.
- If one group cannot cover the cost the
other will step in.
- If still short govt. will step in.
- Deposits must be in EEA ccy.
Belgium 100,000 100% Individuals, SMEs and NPOs. Large
companies (those submitting full
accounts) are excluded.
Yes n/a Yes Yes - Annual fee of 8bp of all eligible deposits
(not just < 100k).
- Fund is currently 2bn, no limit to the
size of the fund.
- Written in law that deposits will be paid
(guaranteed by govt.)
- Deposits must be in EEA ccy.
Denmark 100,000
* outstanding loans are deducted
frombalance
100% Individuals and all institutions
except banks and govt.
Yes n/a No, can be
used in a
dowry scheme
(take over)
No - Annual fee of 25bp of covered deposits.
- Once fund reaches 1% payments will
stop (expected in 2015).
Finland 100,000 100% Individuals and all institutions
except banks and govt.
Yes n/a Yes No - Avg. 10bp fee on covered deposits.
- Stronger capitalised banks pay lower
fees.
- Fund reached 1% of covered deposits by
2011.
France 100,000 100% Individuals and all institutions
except financial companies and
govt.
Yes n/a No, can do
recaps
Yes - All banks pays an annual fee of 4,000.
- Banks are charged another levy based on
size of covered deposits (20-25bp),
adjusted for risk.
- Fund can raise additional money, repaid
by extra fees charges to the banks. Govt.
funding a last resort.
- Parliament clarifying mandate to
guarantee deposits and bank resolutions.
Germany
(mandatory)
100,000 100% Individuals and all institutions
except banks, insurers and govt.
Yes n/a Yes Yes - Annual fee of 1.6bp of liabilities to
customers (excl. deductibles such as
covered bonds).
Germany
(voluntary)
Banks set own limit (2/3 > 10m) 30% until 2014
20% until 2019
15% until 2024
8.75% thereafter
Deposits held by non-banking
institutions. Excludes deposits
already covered by mandatory
scheme.
Yes n/a No, broad
mandate
No (although
did assist in
2008)
- Annual fee of 6bp of liabilities to
customers (excl. deductibles such as
covered bonds).
Italy 100,000 100% Individuals and all institutions
govt.
No No n/a No - Risk weighted contributions determined
by splitting banks into 5 classes
- Larger and riskier banks pay a higher
contribution.
European Banks
Banking
135

Figure 43. Deposit insurance schemes, selected European countries (contd)


Country Savings limit Coverage Who does it apply to? Pre-funded? Looking to
move to ex-
ante?
Are funds
safe guarded?
Backed by
govt.?
Costs to banks Other Comments
Ireland 100,000 100% Individuals and small companies.
Specific criteria excludes medium
and large businesses. Govt. is also
excluded.
Yes n/a Yes Yes - Annual fee of 20bp of all deposits.
Netherlands 100,000 100% Individuals, SMEs and NPOs. Large
companies and banks are excluded.
* When scheme goes ex-ante large
businesses are included.
No Yes, initially
Jul'13 now
postponed.
Likely 2015.
n/a Yes, if
contribution
is above 5% of
equity then
govt. will loan
to the bank
- Contributions are based on share of
guaranteed deposits.
- In the ex-ante systemthis will be risk
adjusted.
- Change to ex-ante basis delayed as it
would "burden banks" and "prevent
lending to business".
Norway NOK2m(c.270,000)
* EC wants Norway to lower limit to
100k.
100% Individuals and all institutions
govt.
Yes n/a No, fund has
a broad remit
No formal
obligation
- Annual fee based on guaranteed
deposits, RWA and capital ratio.
- Fee = 10bp of GD + 5bp of RWA + capital
ratio adjustment.
- Target size = 1.5% of total guaranteed
deposits +0.5% of total RWA.
- No longer an upper limit, pre-2013 fees
were suspended above the target size.
- Above target, 2.7% of covered deposits.
Spain 100,000 100% Individuals and all institutions
except govt.
Yes n/a No, can be
used to recap
banks
No - Annual fee of 20bp of covered deposits,
with extra if needed.
- May suspend contributions when fund
reaches 1% of covered deposits.
Sweden 100,000 100% Individuals and all institutions
except member institutions, banks
and govt.
Yes n/a Yes Yes - Avg. annual fee of 10bp of covered
deposits.
- Range is 6-14bp, based on capital
adequacy ratio relative to other banks.
- Potentially includes foreign deposits if
these are not covered by their home
country (govt. discretion).
' Fund is currently SEK28bn, with no limit
to the size of the fund.
Switzerland CHF100,000 (c.80,000)
* up to a maximumtotal payout of
CHF6bn
100%
* conditional on
the size of total
payout
Individuals and all institutions
except banks, securities dealers and
govt.
No, however
banks are
forced to hold
extra balance
No n/a No formal
obligation
- Contributions are based on share of
guaranteed deposits.
- There is no risk adjustment.
- Foreign banks can participate in the
scheme as long as they have a branch in
Switzerland.
UK 85,000 (c.100,000) 100% Individuals, SMEs and NPOs.
Larger businesses are generally
excluded.
No No n/a Yes - Borrows money fromgovt. then repays
with levy on bank profits.
- Levy is based on expected claims for the
year, in 2013/14 it was 285m, only 7m
is set aside for deposit insurance.
European Banks
Banking
136
Contacts: Investment Banking

Equity Research E-mail: firstname.lastname@berenberg.com; Internet www.berenberg.de
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Nick Anderson +44 (0) 20 3207 7838 Dr. Holger Schmieding +44 (0) 20 3207 7889 Gunnar Cohrs +44 (0) 20 3207 7894
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TOBACCO
CHEMICALS INSURANCE Erik Bloomquist +44 (0) 20 3207 7870
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Sales E-mail: firstname.lastname@berenberg.com; Internet www.berenberg.de
Specialist Sales Sales Sales Trading
BANKS LONDON HAMBURG
Iro Papadopoulou +44 (0) 20 3207 7924 John von Berenberg-Consbruch +44 (0) 20 3207 7805 Paul Dontenwill +49 (0) 40 350 60 563
Matt Chawner +44 (0) 20 3207 7847 Christian Endras +49 (0) 40 350 60 359
CONSUMER Toby Flaux +44 (0) 20 3465 2745 Gregor Labahn +49 (0) 40 350 60 571
Rupert Trotter +44 (0) 20 3207 7815 Karl Hancock +44 (0) 20 3207 7803 Chris McKeand +49 (0) 40 350 60 798
Sean Heath +44 (0) 20 3465 2742 Fin Schaffer +49 (0) 40 350 60 596
INSURANCE David Hogg +44 (0) 20 3465 2628 Lars Schwartau +49 (0) 40 350 60 450
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HEALTHCARE James Matthews +44 (0) 20 3207 7807 Philipp Wiechmann +49 (0) 40 350 60 346
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INDUSTRIALS Richard Payman +44 (0) 20 3207 7825 Stewart Cook +44 (0) 20 3465 2752
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MEDIA PARIS
Julia Thannheiser +44 (0) 20 3465 2676 PARIS Sylvain Granjoux +33 (0) 1 5844 9509
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TECHNOLOGY Dalila Farigoule +33 (0) 1 5844 9510 SOVEREIGN WEALTH FUNDS
Jean Beaubois +44 (0) 20 3207 7835 Clmence La Clavire-Peyraud +33 (0) 1 5844 9521 Max von Doetinchem +44 (0) 20 3207 7826
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TELECOMMUNICATIONS CORPORATE ACCESS
Julia Thannheiser +44 (0) 20 3465 2676 ZURICH Patricia Nehring +44 (0) 20 3207 7811
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UTILITIES Carsten Kinder +41 (0) 44 283 2024 EVENTS
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European Banks
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Please note that the use of this research report is subject to the conditions and restrictions set forth in the
General investment-related disclosures and the Legal disclaimer at the end of this document.
For analyst certification and remarks regarding foreign investors and country-specific disclosures, please
refer to the respective paragraph at the end of this document.
Disclosures in respect of section 34b of the German Securities Trading Act
(Wertpapierhandelsgesetz WpHG)
Company Disclosures

Barclays plc no disclosures
BBVA SA no disclosures
BNP Paribas SA no disclosures
Commerzbank AG no disclosures
Crdit Agricole SA no disclosures
Credit Suisse Group AG no disclosures
Danske Bank A/S no disclosures
Deutsche Bank AG no disclosures
DNB ASA no disclosures
EFG International AG no disclosures
Erste Group Bank AG no disclosures
Svenska Handelsbanken AB no disclosures
HSBC Holdings plc no disclosures
ING Groep NV 5
Intesa Sanpaolo SpA no disclosures
Julius Br Gruppe AG no disclosures
KBC Groupe SA no disclosures
Lloyds Banking Group plc no disclosures
Nordea Bank AB no disclosures
Raiffeisen Bank International AG no disclosures
RBS plc no disclosures
Banco Santander SA no disclosures
SEB AB no disclosures
Socit Gnrale SA no disclosures
Standard Chartered plc no disclosures
Swedbank AB no disclosures
UBS AG no disclosures
Unicredit SpA no disclosures
Vontobel Holding AG no disclosures

(1) Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as the Bank) and/or its affiliate(s) was Lead
Manager or Co-Lead Manager over the previous 12 months of a public offering of this company.
(2) The Bank acts as Designated Sponsor for this company.
(3) Over the previous 12 months, the Bank and/or its affiliate(s) has effected an agreement with this company
for investment banking services or received compensation or a promise to pay from this company for
investment banking services.
(4) The Bank and/or its affiliate(s) holds 5% or more of the share capital of this company.
(5) The Bank holds a trading position in shares of this company.
(6) The Bank and/or its affiliate(s) holds a net short position of 1% or more of the share capital of this
company, calculated by methods required by German law as of the last trading day of the past month.

Historical price target and rating changes for Barclays plc in the last 12 months (full coverage)

Date Price target - GBp Rating Initiation of coverage
31 October 12 160.00 Sell 17 February 11

European Banks
Banking
138
Historical price target and rating changes for BBVA SA in the last 12 months (full coverage)

Date Price target - EUR Rating Initiation of coverage
17 July 12 5.20 Sell 19 March 12
28 January 13 6.80 Sell
19 April 13 7.00 Sell

Historical price target and rating changes for BNP Paribas SA in the last 12 months (full coverage)

28 January 13 25.00 Sell 28 January 13

Historical price target and rating changes for Commerzbank AG in the last 12 months (full coverage)

02 October 12 1.00 Sell 02 October 12
07 May 13 6.00 Sell

Historical price target and rating changes for Crdit Agricole SA in the last 12 months (full coverage)


Historical price target and rating changes for Credit Suisse Group AG in the last 12 months (full coverage)

Date Price target - CHF Rating Initiation of coverage
20 July 12 13.00 Sell 20 July 12

Historical price target and rating changes for Danske Bank A/S in the last 12 months (full coverage)

Date Price target - DKK Rating Initiation of coverage
12 November 12 81.00 Sell 15 March 11

Historical price target and rating changes for Deutsche Bank AG in the last 12 months (full coverage)

20 July 12 20.00 Sell 20 July 12
12 June 13 23.00 Sell

Historical price target and rating changes for DNB ASA in the last 12 months (full coverage)

Date Price target - NOK Rating Initiation of coverage
28 June 12 72.00 Buy 15 March 11
19 July 12 77.00 Buy
12 November 12 81.00 Buy
08 April 13 88.00 Buy

Historical price target and rating changes for EFG International AG in the last 12 months (full coverage)

26 July 12 9.30 Buy 24 May 12
22 January 13 13.00 Buy
12 February 13 13.50 Buy

Historical price target and rating changes for Erste Group Bank AG in the last 12 months (full coverage)

30 November 12 13.00 Sell 15 April 11

European Banks
Banking
139
Historical price target and rating changes for Svenska Handelsbanken AB in the last 12 months (full
coverage)

Date Price target - SEK Rating Initiation of coverage
19 July 12 240.00 Hold 15 March 11
12 November 12 250.00 Hold
21 January 13 260.00 Hold
08 April 13 250.00 Hold

Historical price target and rating changes for HSBC Holdings plc in the last 12 months (full coverage)

15 May 13 790.00 Buy 27 July 11

Historical price target and rating changes for ING Groep NV in the last 12 months (full coverage)

28 January 13 8.00 Buy 28 January 13

Historical price target and rating changes for Intesa Sanpaolo SpA in the last 12 months (full coverage)

06 August 12 2.00 Buy 18 August 11
14 March 13 1.10 Hold

Historical price target and rating changes for Julius Br Gruppe AG in the last 12 months (full coverage)

22 January 13 39.00 Hold 24 May 12

Historical price target and rating changes for KBC Groupe SA in the last 12 months (full coverage)

30 November 12 28.00 Buy 30 November 12
15 February 13 30.00 Buy
17 May 13 35.00 Buy

Historical price target and rating changes for Lloyds Banking Group plc in the last 12 months (full
coverage)

17 February 11

Historical price target and rating changes for Nordea Bank AB in the last 12 months (full coverage)

19 July 12 74.00 Buy 15 March 11
12 November 12 77.00 Buy
08 April 13 81.00 Buy

Historical price target and rating changes for Raiffeisen Bank International AG in the last 12 months (full
coverage)

30 November 12 27.00 Sell 15 April 11

European Banks
Banking
140
Historical price target and rating changes for RBS plc in the last 12 months (full coverage)

17 February 11

Historical price target and rating changes for Banco Santander SA in the last 12 months (full coverage)

17 July 12 5.00 Sell 19 March 12
30 July 12 5.40 Buy
12 June 13 3.90 Sell

Historical price target and rating changes for SEB AB in the last 12 months (full coverage)

12 November 12 56.00 Buy 15 March 11
08 April 13 61.00 Hold

Historical price target and rating changes for Socit Gnrale SA in the last 12 months (full coverage)


Historical price target and rating changes for Standard Chartered plc in the last 12 months (full coverage)

07 August 12 1450.00 Hold 27 July 11
12 March 13 1450.00 Sell

Historical price target and rating changes for Swedbank AB in the last 12 months (full coverage)

12 November 12 130.00 Buy 15 March 11
08 April 13 146.00 Buy
03 May 13 165.00 Buy

Historical price target and rating changes for UBS AG in the last 12 months (full coverage)

20 July 12 13.00 Buy 20 July 12
30 October 12 17.00 Buy

Historical price target and rating changes for Unicredit SpA in the last 12 months (full coverage)

07 August 12 5.20 Buy 18 August 11

Historical price target and rating changes for Vontobel Holding AG in the last 12 months (full coverage)

30 July 12 17.00 Sell 24 May 12
07 March 13 25.00 Hold

European Banks
Banking
141

Berenberg distribution of ratings and in proportion to investment banking services

Buy 41.10 % 50.00 %
Sell 20.16 % 12.50 %
Hold 38.75 % 37.50 %

Valuation basis/rating key
The recommendations for companies analysed by the Banks equity research department are either made on an
absolute basis (absolute rating system) or relative to the sector (relative rating system), which is clearly stated in
the financial analysis. For both absolute and relative rating system, the three-step rating key Buy, Hold and Sell
is applied. For a detailed explanation of our rating system, please refer to our website at
http://www.berenberg.de/research.html?&L=1
NB: During periods of high market, sector or stock volatility, or in special situations, the rating system criteria as
described on our website may be breached temporarily.

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Bundesanstalt fr Finanzdienstleistungsaufsicht -BaFin- (Federal Financial Supervisory Authority),
Graurheindorfer Strae 108, 53117 Bonn and Marie-Curie-Str. 24-28, 60439 Frankfurt am Main, Germany.
General investment-related disclosures
Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as the Bank) has made every effort to carefully research
all information contained in this financial analysis. The information on which the financial analysis is based has been
obtained from sources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the
relevant specialised press as well as the company which is the subject of this financial analysis.
Only that part of the research note is made available to the issuer (who is the subject of this analysis) which is
necessary to properly reconcile with the facts. Should this result in considerable changes a reference is made in the
research note.
Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on this
document. The companies analysed by the Bank are divided into two groups: those under full coverage (regular
updates provided); and those under screening coverage (updates provided as and when required at irregular
intervals).
The functional job title of the person/s responsible for the recommendations contained in this report is Equity
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Legal disclaimer
This document has been prepared by Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as the Bank). This
document does not claim completeness regarding all the information on the stocks, stock markets or developments
referred to in it.
On no account should the document be regarded as a substitute for the recipient procuring information for
himself/herself or exercising his/her own judgements.
The document has been produced for information purposes for institutional clients or market professionals.
Private customers, into whose possession this document comes, should discuss possible investment decisions with
their customer service officer as differing views and opinions may exist with regard to the stocks referred to in this
document.
This document is not a solicitation or an offer to buy or sell the mentioned stock.
European Banks
Banking
142
The document may include certain descriptions, statements, estimates, and conclusions underlining potential market
and company development. These reflect assumptions, which may turn out to be incorrect. The Bank and/or its
employees accept no liability whatsoever for any direct or consequential loss or damages of any kind arising out of the
use of this document or any part of its content.
The Bank and/or its employees may hold, buy or sell positions in any securities mentioned in this document,
derivatives thereon or related financial products. The Bank and/or its employees may underwrite issues for any
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Analyst certification
I, Nick Anderson, hereby certify that all of the views expressed in this report accurately reflect my personal views
about any and all of the subject securities or issuers discussed herein.
In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the
specific recommendations or views expressed in this research report, nor is it tied to any specific investment
banking transaction performed by the Bank or its affiliates.
I, James Chappell, hereby certify that all of the views expressed in this report accurately reflect my personal views
I, Eleni Papoula, hereby certify that all of the views expressed in this report accurately reflect my personal views
I, Andrew Lowe, hereby certify that all of the views expressed in this report accurately reflect my personal views
I, Eoin Mullany, hereby certify that all of the views expressed in this report accurately reflect my personal views
I, Michelle Wilson, hereby certify that all of the views expressed in this report accurately reflect my personal views
Remarks regarding foreign investors
The preparation of this document is subject to regulation by German law. The distribution of this document in other
jurisdictions may be restricted by law, and persons into whose possession this document comes should inform
themselves about, and observe, any such restrictions.
European Banks
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143
United Kingdom
This document is meant exclusively for institutional investors and market professionals, but not for private customers.
It is not for distribution to or the use of private investors or private customers.
United States of America
This document has been prepared exclusively by the Bank. Although Berenberg Capital Markets LLC, an affiliate of
the Bank and registered US broker-dealer, distributes this document to certain customers, Berenberg Capital Markets
LLC does not provide input into its contents, nor does this document constitute research of Berenberg Capital
Markets LLC. In addition, this document is meant exclusively for institutional investors and market professionals, but
not for private customers. It is not for distribution to or the use of private investors or private customers.
This document is classified as objective for the purposes of FINRA rules. Please contact Berenberg Capital Markets
LLC (+1 617.292.8200), if you require additional information.
Third-party research disclosures
Company Disclosures

Barclays plc no disclosures
BBVA SA no disclosures
BNP Paribas SA no disclosures
Commerzbank AG no disclosures
Crdit Agricole SA no disclosures
Credit Suisse Group AG no disclosures
Danske Bank A/S no disclosures
Deutsche Bank AG no disclosures
DNB ASA no disclosures
EFG International AG no disclosures
Erste Group Bank AG no disclosures
Svenska Handelsbanken AB no disclosures
HSBC Holdings plc no disclosures
ING Groep NV no disclosures
Intesa Sanpaolo SpA no disclosures
Julius Br Gruppe AG no disclosures
KBC Groupe SA no disclosures
Lloyds Banking Group plc no disclosures
Nordea Bank AB no disclosures
Raiffeisen Bank International AG no disclosures
RBS plc no disclosures
Banco Santander SA no disclosures
SEB AB no disclosures
Socit Gnrale SA no disclosures
Standard Chartered plc no disclosures
Swedbank AB no disclosures
UBS AG no disclosures
Unicredit SpA no disclosures
Vontobel Holding AG no disclosures

(1) Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject
company by the end of the prior month.*
(2) Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public
offering for the subject company.*
(3) Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report.
(4) Berenberg Capital Markets LLC received compensation for investment banking services in the past 12 months,
or expects to receive such compensation in the next 3 months.*
(5) There is another potential conflict of interest of the analyst or Berenberg Capital Markets LLC, of which the
analyst knows or has reason to know at the time of publication of this research report.
European Banks
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144
* For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the Disclosures in respect of
section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz WpHG) section above.
Copyright
The Bank reserves all the rights in this document. No part of the document or its content may be rewritten, copied,
photocopied or duplicated in any form by any means or redistributed without the Banks prior written consent.
May 2013 Joh. Berenberg, Gossler & Co. KG

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