PERSPECTIVES OF EUROPEAN BANKS EXCERPT FROM THE EUROPEAN BANKING - PowerPoint PPT Presentation

PERSPECTIVES OF EUROPEAN BANKS EXCERPT FROM THE EUROPEAN BANKING STUDY 2018 BRUSSELS, NOVEMBER 2018

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Agenda Where do the largest 50 European banks stand today? Which business models work well? Is a national or pan-European consolidation the silver bullet? 1811 - Perspectives of European banks - 3

Ranking of top 50 European banks changed over 2017 as a result of large mergers and new entrants — total assets have recently decreased slightly Basis 2017 1) , in EUR bn 50 LARGEST EUROPEAN BANKS BY TOTAL ASSETS Long term view — market share and total assets 2,500 Top 50 market share 61% 63% 62% 61% 60% 30.6 30.0 29.9 28.8 28.7 2,000 Acquisition of Top 50 total assets , Banco Popular in EUR tr 1,500 2013 2014 2015 2016 2017 1,000 “Merger” RZB Merger of Banca Pop. 500 and Pop. di Milano and RBI 0 Change of rank compared with the year before: new new 19 Universal banks 25 Retail banks 6 Wholesale banks 2016 1) Sample contains 50 largest European banks by latest stated total assets, for 2017, all figures are based on full year numbers; Europe includes the 28 countries of the European Union, Norway, Russian Federation, Switzerland, Turkey; see backup for further details on the sample; Source: company reports, European Banking Federation, ECB, FitchConnect, zeb.research 1811 - Perspectives of European banks - 4

Ten years after the financial crisis, European banks are in their most resilient position ever — with Basel III finalized, regulatory timetable is set Capital and liquidity of European top 50 banks COMMON EQUITY TIER 1 (CET1) RATIO 1) (in %) COMMENTS  Regulatory pressure has led to increased Min CET1 2) CET1 and leverage ratios (12.5%)  7 years after its agreement, the Basel III 14.1 13.5 13.1 12.2 11.6 post-crisis reforms were finalized in December 2017  Full adoption of “Basel IV” rules by 2013 2014 2015 2016 2017 2027 — long phase-in period for banks CET1 ratio and more clarity about the full impact LEVERAGE RATIO (LR) 3) / LCR 4) (in %)  Still a huge regulatory agenda — numerous initiatives to be met but no sign of any further fundamental “game 113 114 123 132 138 changers”! Min LR  Strength of regulatory requirements 5.4 5.1 5.0 4.6 (3.0%) 4.3 regarding capitalization and liquidity remains to be tested during financial 2013 2014 2015 2016 2017 crises Leverage ratio LCR 1) CET1 ratio: CET1 capital to risk-weighted assets; 2014/15/16/17: transitional CET1 ratio, 2013: Tier 1 ratio; 2) Est. market avg., individual req. for each bank; avg. consists of 4.5% Pillar 1 req. + 2.5% capital conservation buffer + 1.0% avg. countercyclical buffer + 1.0% avg. systemic buffers (incl. G-SIB, syst. buffer) + 2.0% avg. SREP surcharge + 1.5% “maneuvering” buffer; 3) Based on reported figures, estimated if not available, see backup for details; 4) LCR: Liquidity Coverage Ratio, based on reported figures; Source: company reports, FitchConnect, zeb.research 1811 - Perspectives of European banks - 5

The profitability problem: returns have increased recently but remain below the cost of equity — no overall operational improvements Profit after tax and key components of European top 50 banks POST-TAX ROE / COST OF EQUITY / CIR 1) (in %) COMMENTS 66 66 66 68 65  RoE has improved since 2016, but still below cost of equity 7.1 5.4 4.5  RoE increase is predominantly driven by 3.8 3.9 positive litigation, LLP and XO 2013 2014 2015 2016 2017 developments — historically low levels in CIR Post-tax RoE CoE 2017 POST-TAX PROFIT DEVELOPMENT (in EUR bn)  However, positive litigation, LLP and XO developments are often one offs and cannot be relied upon every year 66.8  2016 drop explained by a large decline -3.5 118.8 in operational profits which could not be 55.5 compensated by legacy items ∆ Op. result ∆ Litigation/ 2013 2017 development 2) LLP/ XO development 3) 1) Post-tax RoE (return on equity): post-tax profit to avg. total equity, cost of equity (CoE): 10-year moving average of European 10-year gov. bonds as risk-free rate plus risk premium of 5.5% multiplied by banks’ individual beta; CIR (cost -income ratio): operating expenses to total earnings; 2) Includes total operating earnings and operating exp.; 3) Litigation costs, loan loss provisions (LLPs), extraord. result and profit / loss from discontinued operations (XO result) and tax; Source: Bloomberg, FitchConnect, zeb.research 1811 - Perspectives of European banks - 6

After good figures in 2016/17, capital markets turned negative again in the first half of 2018 — average valuation of banks still on crisis level Capital market performance and valuation TSR 1) OF LISTED EUROPEAN TOP 50 AND EURO STOXX 600 COMMENTS (IN % P.A.) “Recovery” after Debt and  Top 50 banks outperformed the financial crisis yield crisis market over the last two years 24.6 15.8  P/B ratios of top 50 below the 5.1 important hurdle of 1.0x and well -1.2 0.1 behind the market average -10.5  Current valuation nearly 2013 2014 2015 2016 2017 9M 2018 unchanged compared to post- Listed European top 50 Euro Stoxx 600 crisis period 2009/2010  Spread between top 50 banks and P/B RATIO 2) DEVELOPMENT OF LISTED EUROPEAN TOP 50 the market has actually widened 1.88  Investors still display low 1.57 confidence in banks’ value generation 1.0 -0.06  During first half of 2018 , stocks -0.03 -0.01 0.04 -0.13 0.20 0.75 0.74 of most European banks fell into bear market Δ 2013 Δ 2014 Δ 2015 Δ 2016 Δ 2017 Δ 2018 EoY 2012 9M 2018 Listed European top 50 Euro Stoxx 600 1) Total shareholder return; 2) Price-to-book ratio; Source: Bloomberg, Thomson Reuters Datastream, zeb.research 1811 - Perspectives of European banks - 7

No fundamental changes in the foreseeable future — profitability remains the key issue as the overall capital situation is positive Outlook of European top 50 banks See backup for further details APPROACH CAPITALIZATION (in %) Main drivers: Impact yields ±100 bps 4) final Basel III (-1.5%)  Holistic simulation IFRS9 (-0.2%) MiFID/MiFIR (-0.1%) 2) based on B/S and P&L 0.2 0.0 -0.0 -1.9 figures of top 50 banks 12.4 -0.1 -0.4 11.9  No management Based on reported figures by 14.1 actions banks — up to -0.1 based on 12.2 “RWA inflation”: further published Brexit studies 1) +26% RWAs from  Const. B/S and P&L, 2017 to 2022 market environm. and CET1 ratio Yield Benign credit Brexit Regulation 3) CET1 ratio regulatory implement. 2017 environment environment 2022  Baseline scenario: PROFITABILITY (in %) Main drivers: constant yields as of MiFID/MiFIR (-0.4%) 12/31/2017 TLAC/MREL (-0.4%) reporting/superv. (-0.4%) 2) 0.0 -0.4  Implementing most -0.3 -1.6 -0.6 important regulatory 4.8 -1.2 initiatives (based on 7.1 3.6 Up to -0.8 based on further cost / business impact) published Brexit studies 1) 4.2 through assumed bank- Regulation 3) specific impacts on RoE Yield Benign credit Brexit RoE 2017 environment environment 2022 P&L, B/S and capital 1) Based on reported figures/calculations from other published Brexit studies; 2) Remaining driver capitalization: reg. rep./supervision (-0.1%), other approx. zero; profitability: final Basel III (-0.3%), ring-fencing UK/ US (-0.2%), other approx. zero; 3) Incl. MiFID/MiFIR, TLAC/MREL, ring-fencing UK/ US, final Basel III calc. fully phased-in (incl. Rev. SA/IRBA, SA-CCR, CVA, SEC, FRTB and rev. SA op. risk), IFRS 9, regulatory reporting and supervision (incl. AnaCredit and new disclosure requirements, stress test and SREP); 4) Estimated impact of a short-term, parallel shift of the yield curve by +/- 100bp based on banks’ reported net interest income sensitivities; Source: zeb.research European Banking Study 2018 - 8

Based on the current situation, European banks have several strategic options to develop their existing business models Major market trends SITUATION… …OPTIONS FOR CLASSIC BANKS… ... AND RESULTING TRAJECTORIES Indicative  Keep the existing business model high 1  Gain economies of scale Current situation Overall Value chain complexity consolidation as well as future  Focus on certain Beyond products/channels projections of 2 banking  “ Disintermediation ” European top 50 Product of the bank banks reveal a specialization need for urgent Current action in order  Implement state-of-the- position art IT infrastructure to meet current 3  Digitalize processes and challenges of the reduce legacy systems European banking industry Value chain breakup  Maximize the customer low relationship value 4 through add. services narrow Product/service breadth broad  Build/join ecosystems Trajectories (different but combinable strategic options) European Banking Study 2018 - 9

Agenda Where do the largest 50 European banks stand today? Which business models work well? Is a national or pan-European consolidation the silver bullet? 1811 - Perspectives of European banks - 10