Viking Tour 2018 Credit Conference Global Sovereign Update & - PowerPoint PPT Presentation

Nordic Sovereign Ratings: High, but with Sovereign Model Weaknesses Only Norway Scores ‘AAA’ in the Fitch Sovereign Model Qualitative Judgements bring most Ratings Lower Developed Market Qualitative Overlay Adjustments Sovereign Rating Model and Qualitative Overlay Macro Public Finance External Finance Structural Italy BBB Cyprus BB Sovereign Rating Model Spain A- Portugal BBB Macro Neutral Neutral Strength Weakness Greece B San Marino BBB- Public finances Neutral Neutral Strength Neutral Ireland A+ 1 Andorra BBB External finances Weakness Strength Neutral Weakness Malta A+ Iceland A Structural Weakness Neutral Neutral Neutral Belgium AA- US AAA Predicted Rating AA AA+ AAA AA+ UK AA Switzerland AAA Qualitative Overlay Norway AAA N'thlands AAA Macro +1 – – +1 Luxembourg AAA Germany AAA – – – – Public finances 2 France AA Finland AA+ External finances +1 – – – Sweden AAA Austria AA+ Structural – – – – Denmark AAA Canada AAA 3 Final Rating AAA AA+ AAA AAA -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 (Changes (Rating notches) from Sovereign Rating model to final published Rating) Source: Fitch Source: Fitch 17

Summary Global Sovereign Update & Outlook  Watch the effects of US and Eurozone policy changes  Higher interest rates will come at a bad time for government debt levels  A stronger dollar means Emerging Market sovereign pressures  The AAA Rating of the US is safe for now  The risk to China’s Rating is the risk of a return to credit-fuelled investment spending Source: Fitch, as of 29 May 2018 18

Viking Tour 2018 Credit Conference The Political Outlook in 2018-2019 Yoel Sano Head of Political Risk 13-15 June 2018

Global Trade War Risks: US in Escalation Mode US Goods Trade Balance China is US’s Top Target World China NAFTA  Absolute size of US trade deficit targeted (US$bn)  Intellectual property and industrial policies also disputed 0  Divisions within US leadership creating volatility -200  China threatening retaliation on US agri-products -400 -600 NAFTA at Risk of Collapse -800  Autos and agriculture dominate NAFTA talks -1,000  NAFTA collapse would hurt Mexico and US firms 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016  US-Mexico ties may suffer under next Mexican president Source: Trade Map EU also Targeted  US aluminium and steel tariffs prompting EU response on selected US products Asia – Exports (Harleys, Levis, Bourbon, etc) 2007 2017 (% of GDP)  Trump could counter-retaliate on autos 200 Biggest risk: Escalating cycle of tariffs and retaliations leading to wider global 150 trade war 100 Macro Transmission Mechanisms 50  Financial market declines 0 Hong Kong Singapore Vietnam Taiwan Malaysia Thailand South Korea Zealand China Australia Indonesia Philippines Japan India  Rising business uncertainty worldwide New  Disruption to trade; higher business costs and inflation  Asia’s economies especially vulnerable to US-China clash Source: National statistics offices 20

Global Trade: Positive Signs Elsewhere  Much of the rest of the world continues to become more trade integrated, particularly emerging markets  Key developments include the new TPP (CPTPP), EU-Canada FTA, EU-Japan FTA, revised EU-Mexico FTA  Closer ties between Mercosur and Pacific Alliance, China’s RCEP and ‘Belt & Road’, and others  However, benefits of new trade arrangements may take time to be felt Integration Pushing Ahead Without the US Global Trade Momentum is Still Positive World Trade Volume, % chg y-o-y Modeled Forecast (%) 25 20 15 10 5 0 -5 -10 -15 -20 -25 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Source: CPB, BMI Forecasts 21

Trade Disputes Spilling Over into Geopolitics  Trump has shown willingness to mix trade policy with geopolitics  North Korea has become ‘bargaining chip’, and Taiwan may become one  Trump has pressured Japan and S. Korea to raise defence spending  Japan is also facing US pressure on trade, despite close alliance  Escalation of trade tensions would increase geopolitical risks  US-China rivalry in Indo-Pacific will be defining feature of early 21st century  China’s RCEP trade pact and ‘Belt & Road’ to boost geopolitical reach Source: bmiresearch.com 22

North Korea-US: Four Scenarios  Compromise necessary, because North Conciliatory Hardline Korea unlikely to denuclearise completely Trump’s Stance  At best, Kim could offer multi-phased, multi- Conciliatory year, partial ‘denuclearisation’ ‘Hand of History’ ‘Trump Triumphant’  Trump and Kim establish good rapport  North Korea softens stance more than US  Even so, summit would begin long process of  Both sides feel need to compromise and offer  Kim proves more flexible, owing to full pressure of concessions sanctions, genuine fear of war, and major shift in improving relations  Trump and Kim announce major agreements in attitude principle  Kim seeks to emulate US rapprochements with  Trump and Kim agree to maintain negotiations on Vietnam, Myanmar, Cuba specifics and implementation  Kim's steps towards denuclearisation could leave Kim’s Stance  Summit begins long prcess of reconciliation him vulnerable to hardliners' coup  North Korea may or may not denuclearise ‘North Korea Off the Hook’ ‘Road to War’  US softens stance more than North  Bad chemistry/rapport between Trump and Kim  Trump proves more flexible, seeking diplomatic  Kim shows no real willingness to give up nukes coup ahead of US mid-term elections  US refuses to make concessions, or US issues  Trump claims 'great deal' achieved, but North ultimatum Korea's concessions are limited and vague  Trump and/or Kim feel betrayed and walk away  North Korea receives economic rewards, yet fails from summit Hardline to completely denuclearise  North Korea resumes ICBM/nuclear tests  US prepares for military action Source: BMI 23

Brexit: Where Could We Be in April 2019? Negotiations Extended Stable Brexit No agreement, but UK and EU come to a deal, extraordinary circumstances transition period agreed to lead EU to extend official allow for relatively smooth negotiations beyond March withdrawal from Single Market 2019 40% Probability 10% Probability UK Stays In A Customs Union UK Crashes Out Reached by PM facing major Talks collapse or UK domestic constraints or Parliament does not approve government of a different deal. No deal, and no transition composition agreements in place 30% Probability 20% Probability Note: Coloured arrows indicate level of disruption and impact on political and economic sentiment 24

Worst-Case Scenario: Hard Brexit  Impact on industries would vary, Weaker Impact based on five categories Domestic Investment Cost Weaker EU Funding Score Demand? Cutbacks? Increases? Exports? Cuts? (0-5)  UK economy would experience contraction in late 2018-early Agribusiness Yes Yes Yes Yes Yes 5 2019 and remain weak to 2021 Autos Yes Yes Yes Yes No 4  GBP depreciation and rising Financial trade barriers would cause Yes Yes Yes Yes No 4 Services inflation to rise Infrastructure Yes Yes Yes No No 3  Rising inflation would lead to lower real incomes and Retail Yes Yes 3 Yes No No consumption in UK Power/ No Yes Yes No No 2  Amid WTO rules, exporters Renewables would lose competitiveness due Metals to tariffs and non-tariff barriers Yes Yes No No No 2 Pharmaceuticals  Foreign firms could reduce or No Yes No No Yes 2 relocate UK operations Telecoms No Yes Yes No No 2  UK would need to loosen fiscal Oil & Gas and monetary policy, but with No No No Yes No 1 limitations Source: BMI, High score = negative impact 25

Italy: New Government Poses Rising Risks Party Representation in Opinion Polls Party Representation in Parliament Following March 4 Election PD M5S FI FdI LN LeU (%) 40 March 4 General Election 35 30 25 20  Populist 5-Star (M5S) and Lega Nord coalition is untested on national level 15  Fiscal expansion, tax cuts, opposition to deeper EU integration, tougher on immigration 10  Political backdrop negative for economic reform (labour, pensions, banking, etc) 5  However, eurozone referendum unlikely; polls show >60% support staying in euro  Ideological divisions could lead to tensions, policy paralysis, or fresh elections 0 May-17 Jun-17 Aug-17 Oct-17 Nov-17 Jan-18 Mar-18 Apr-18 Jun-18  If M5S-LN mismanage economy, they could face backlash in next election Source: Piepoli, SWG, Index, Demopolis, EMG, Tecne, Euromedia, Bidimedia, Lorien, Interior  Overall, Italy will remain biggest systemic risk for eurozone Ministry, BMI 26

Turkey: Economic Risks to the Fore  Recent sell-off in the Turkish lira (TRY) raises economic instability Turkish Lira  Private sector (external) debt has ballooned and costs rising (TRY/USD) 5.0  GDP growth unsustainable, propelled by monetary and fiscal stimulus 4.5  Inflation on the rise, given central bank’s structurally dovish bias 4.0 3.5 Erdogan Seeks to Reassure Voters in June 24 Election  Erdogan likely to be re-elected as president and win parliament 3.0 01 Jun 17 01 Jul 17 01 Aug 17 01 Sep 17 01 Oct 17 01 Nov 17 01 Dec 17 01 Jan 18 01 Feb 18 01 Mar 18 01 Apr 18 01 May 18 01 Jun 18 majority  Erdogan positioning himself as a figure of stability  The conservative Good Party candidate, Meral Aksener, poses Source: Bloomberg greatest challenge in presidential race  Economy and Syrian migrants to dominate debates Turkey 5-Year CDS Spread (bps) Pressure Mounts to Face Up to Economic Mismanagement 300  Erdogan has stated his ambitions to tackle the external deficit and 270 high inflation 240 210  Erdogan urged to preserve central bank independence 180  Post-election reduction of fiscal stimulus to lower household 150 consumption 02 Jun 17 02 Jul 17 02 Aug 17 02 Sep 17 02 Oct 17 02 Nov 17 02 Dec 17 02 Jan 18 02 Feb 18 02 Mar 18 02 Apr 18 02 May 18  Need to regain investor confidence, given ‘hot money’ dependence  Long-term drift away from EU raises geopolitical concerns Source: Bloomberg 27

Russia: Continued Strains with West  Relations with West will remain strained, with no clear improvement in sight  EU to extend sanctions till at least Jan. 2019; US sanctions harder to ease  Difficult to see breakthrough in Russia-US relations, while Trump investigation and Ukraine and Syria conflicts continue  Latvia, Moldova 2018 elections and Ukraine 2019 election could be diplomatic flashpoints  Putin unlikely to make a final decision on further term in 2024 until 2023  Putin faces dilemma over whether successor will have security or technocratic background  Overall, there is only limited scope for major economic reforms in 2018-2024 Source: bmiresearch.com 28

Similar Key Issues in Mexican and Brazilian Elections Main Election Issues Frustration with Corruption and Weak Growth  Brazil’s elites have been tainted by major scandals  Mexico’s main parties have also been tainted  Mexicans also frustrated by rising violence Opportunities for Political ‘Outsiders’  Mexico’s A.M. Lopez Obrador promoting tough stance towards US over trade and immigration  Brazil’s election is wide open, but far-right congressman Jair Bolsonaro performing well  Next presidents will need to decide between populist and pragmatist instincts Future of Economic Reforms  Populist presidents could adopt less business-friendly policies (eg scaling back energy reform in Mexico)  Populist governments could also roll back fiscal reforms in order to win public support 29

Japan: Abe’s Future in Doubt, Post-2018  Prime Minister Shinzo Abe represents a pillar of relative stability in House of Representatives Japan Liberal Democratic Party Komeito Constitutional Democratic Party Democratic Party for the People  Mounting scandals could prevent his re-election as LDP party leader Japanese Communist Party Nippon Ishin in September 2018 Others/Independents  Even if re-elected, Abe could be politically weakened 36 11  In 2019, Japan faces local elections in April and Upper House 12 elections in July 39  Economic policies of Abe’s rivals/successors are unclear  ‘Abenomics’, monetary policy, fiscal issues, constitutional reform, could all change 55  But Bank of Japan governor Kuroda could provide some continuity 283  Worst-case scenario: Abe’s downfall could herald return to chaotic ‘revolving door’ leadership, weakening Japan’s economy and foreign policy 29 Source: Japan House of Representatives 30

US Mid-Term Election: Policy Implications ‘Lame Duck’ Term Possible, Post-November 2018  History suggests president’s party loses Congressional seats in mid- term elections  Republican House majority may be lost. Even if majority is retained, losing further seats would hurt Trump’s reform agenda  Republicans in strong position to maintain/extend Senate majority due to favourable electoral map.  However, Democrats likely to retain enough seats (41+) to block legislation Mid-Terms Unlikely to Deliver Policy Breakthrough  Democratic win in House could lead to impeachment proceedings , although removal needs 2/3 majority (which is virtually impossible for Democrats)  ‘Lame duck’ Trump might focus increasingly on executive powers over trade and foreign policy to boost support ahead of 2020 re- election bid 31

Middle East: Trump’s Iran Deal Exit Increases Risks  For now, Iran nuclear deal holding, but could eventually collapse  Mike Pompeo’s 12 demands unacceptable to Iran  Saudi Arabia emboldened by Trump’s stance versus Iran  Saudi-Iran regional proxy conflict could intensify  Syria’s conflict will persist  Syria remains flashpoint in US-Russia –Turkey-Iran-Israel relations  Israel attacking Iranian military facilities in Syria  Yemen’s civil war looks set to persist in 2018  Possibility of new Israeli war in Gaza, or Palestinian uprising Source: bmiresearch.com 32

Major Elections in 2019: Mixed Fortunes Country Date Event Continuity of Government Reform Outlook Nigeria February General Election Thailand February General Election Ukraine Mar. & Nov. General Election Indonesia April General Election India April-May General Election Philippines 13 May Mid-Term Election South Africa May General Election Japan July Upper House Election Greece by October General Election Canada by October General Election Argentina 27 October General Election Australia by November General Election Israel by November General Election Poland by November General Election  Positive  Neutral  Negative Note: ‘Reforms’ refer to changes in business environment, fiscal position, economic liberalisation, energy, labour market, etc. 33

Yoel Sano Head of Political Risk BMI Research yoel.sano@bmiresearch.com

Viking Tour 2018 Credit Conference Western European Banks – Diverse Region, Common Themes Björn Norrman Senior Director, EMEA Financial Institution Ratings 13-15 June 2018

Where Are Rating Changes Most Likely? Outlooks and Watches in the Western European Bank Portfolio Stable Outlook Positive Outlook/Watch Negative Outlook/Watch (Count) 56 52 48 44 40 36 32 28 24 20 16 12 8 4 0 AD AT BE DK FR DE IE IT LU NL NO PT ES SE CH UK Source: Fitch. Data as of 31 May 2018. Members of cooperative groups counted only once. Only countries with > 3 ratings (IDRs) included 35

Asset Quality: Working Through the Issues  Banking systems are working through legacy NPL issues, notably in Ireland, Italy, Portugal and Spain  The economic backdrop is now more favourable, but volumes are large  The ECB is applying pressure on banks to reduce NPLs; in some cases more capital will be needed  In extreme cases further failures are possible e.g. if economic growth prospects reverse or markets won’t provide capital Changes in Sector-Wide NPLs EBA Data on NPLs, 1H17 Changes in NPL%, year to 1H17 Total NPLs for banks in sample as a % of those banks ʼ total loans (%) (%) 43 0.0 45 40 -1.0 35 30 -2.0 25 20 15 14 -3.0 15 11 10 -4.0 5 3 3 5 3 2 2 -5.0 0 CY IT PT IE DK FR UK DE ES NL CY PT IE IT ES FR DK NL DE UK Source: EBA Transparency Exercise. Sample of banks that reported in both 2017 and 2016 Source: EBA Transparency Exercise. Sample of banks that reported in both 2017 and 2016 aggregated by country. Data includes the 10 countries in the sample reporting the greatest volume in aggregated by country. Data includes the 10 countries in the sample reporting the greatest volume in EUR of NPLs aggregated across reporting banks EUR of NPLs aggregated across reporting banks 36

Asset Quality: Focus on Italy Sector NPL Evolution Sofferenze (LHS) Watchlist (LHS) Restructured (LHS) Unlikely to pay (LHS) Real GDP growth (RHS) (EURbn) (%) 400 2.0 1.0 300 0.0 200 -1.0 -2.0 100 -3.0 0 -4.0 2011 2012 2013 2014 2015 2016 1H17 2018Fª Source: Bank of Italy; banks have been reporting Unlikely to Pay (UTP) exposures under the EBA definition since 1Q15. Watchlist and restructured exposures used as a proxy of UTP for the years 2011–2014 37

Earnings Outlook  A long period of low interest rates and the zero lower bound on retail deposits continues to pressure margins  But the prospect of the end of QE and rising rates hold the prospect of improved margins  How will deposits price in a rising rate environment as TLTRO II runs off?  Cost-efficiency varies: Efficiency improvements vs investments in digital and compliance Net Interest Margin Cost / Income Ratio Averages, 2012-2017 Median values, 2012-2017 Benelux DE ES FR IT Nordics UK (%) (%) 2.5 Average trend line 100 Average trend line 90 2.0 80 70 1.5 60 50 1.0 40 30 0.5 20 10 0.0 0 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 Source: Banks' financial statements, Fitch Source: Banks' financial statements, Fitch 38

Earnings Outlook  Operating returns show a slight improvement despite low rate environment  Key driver are lower loan impairment charges, which are currently at unsustainable low levels Operating Profit / Risk Weighed Assets Loan Impairment Charges / Gross Loans Median values, 2012-2017 Median values, 2012-2018f Benelux DE ES FR IT Nordics UK (%) (%) 4.0 Average trend line 2.5 3.0 2.0 2.0 1.5 Average trend line 1.0 1.0 0.0 0.5 -1.0 0.0 -2.0 -0.5 -3.0 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 Source: Banks' financial statements, Fitch Source: Banks' financial statements, Fitch 39

Capital and MREL Outlook Focus on GTUBs CET1 Fully phased-in basis End-1Q18 Average end-1Q18 End-2016 Debt Buffers (%) End-1Q18 or latest, as % of fully-loaded RWAs 17 16 AT1 T2 Senior holdco Senior non-preferred Total at end-2016 (%) 15 14 25 13 12 11 20 10 MS HSBC DB UBS CS BARC Citi JPM BNPP BAC SG GS Source: company reports 15 Regulatory Leverage Ratio Fully phased-in basis End-1Q18 Average end-1Q18 End-2016 10 (%) 8 6 5 4 2 0 0 DB CS UBS BARC HSBC SG BNPP Citi BAC JPM MS GS HSBC CS UBS BARCBNPP SG DB Note: Senior holdco debt issued by Barclays and HSBC Holdings is not yet downstreamed in a US: Fully-loaded supplementary leverage ratio;Europe: Basel III fully-loaded Tier 1 leverage ratio subordinated manner to the opcos. Source: company reports Source: Fitch, banks 40

Implications of EU Creditor Hierarchy: Rating the New Liability Structure European approaches to accommodate “Total Loss Absorbing Capacity” (TLAC) regime Germany EU Commission Italy – Deposits from 2019 (from 1 January 2017) (“French-Style”, 2017) (Draft Budget Law 2018, Oct ’17) ‘Preferred’ senior debt, No default? All deposits Structured notes, structured notes, No default? No default? conterparties, deposits etc. counterparties, ‘Preferred’ senior debt, No default? deposits, etc. counterparties Vanilla senior debt Non-preferred Non-preferred Bailed-in Bailed-in Bailed-in (existing & new) senior debt senior debt Bailed-in Bailed-in Bailed-in T2 T2 T2 AT1 Bailed-in AT1 Bailed-in AT1 Bailed-in CET1 Wiped-out CET1 Wiped-out CET1 Wiped-out  Directive confirms grandfathering of existing TLAC (under national law) – ie, German-bank “vanilla” senior unsecured is pari passu to non- preferred senior (NPS)  Effectively “preferred” senior unsecured is the new debt class in Germany, in contrast with the rest of the EU  Questions remain on national implementation of instrument criteria (re FSB TLAC: ie, prohibiting set-off, acceleration, etc.) Source: National legislation, Fitch 41

Nordic Banks Strong Fundamentals, But Not Without Challenges Björn Norrman, Senior Director, EMEA Financial Institution Ratings

Nordics: Strong Banks in a European Context Average RoE per Country Average Cost to Income Ratio Per Country (%) (%) Denmark Finland Norway Sweden EBA average Denmark Finland Norway Sweden EBA average 20 80 70 15 60 10 50 5 40 0 30 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: European Banking Authority Source: European Banking Authority European NPL Ratios Fully Loaded Capital Ratios average End-2017 2015 2016 2017 (%) (%) (%) 5.0 25 10.0 4.0 20 3.0 15 5.0 2.0 10 1.0 5 0.0 0 0.0 Denmark Finland Norway Sweden EBA Ave Denmark Finland Norway Sweden EBA Ave Source: European Banking Authority Source: European Banking Authority 43

Nordic Banks: Key Regional Rating Considerations Title    Household Indebtedness   Property Prices    Wholesale Funding  Oil Prices  Growth Prospects Source: Fitch 44

Nordic Banks: Potential Areas of Concern 45

Nordic Banks: Household Indebtedness and Property Prices Households’ Debts in a Sample of Other Countries Residential Property Prices Percentage of net disposable income (2010 = 100) Denmark Sweden Norway The Netherlands United Kingdom Denmark Finland Norway Sweden (Units) (%) 400 150 300 130 110 200 90 100 70 0 Jun 05 Jan 06 Aug 06 Mar 07 Oct 07 May 08 Dec 08 Jul 09 Feb 10 Sep 10 Apr 11 Nov 11 Jun 12 Jan 13 Aug 13 Mar 14 Oct 14 May 15 Dec 15 Jul 16 Feb 17 Sep 17 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: OECD Source: National sources, BIS residential Property price database (http://www.bis.org/statistics/pp.htm) Swedish Residential Real Estate Norway: Completed Residential Dwellings Less New New housing unit starts Population growth New housing units needed Households 5,000 160,000 0 120,000 -5,000 80,000 -10,000 40,000 -15,000 -20,000 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018f 2019f 2020f Source: Sveriges Riksbank, Statistics Sweden, Boverket Source: Statistics Norway 46

Nordic Banks: Competitive Pressure Increasing (1) Swedish and Norwegian Mortgage Markets Return on Allocated Capital Strong mortgage 2017 2016 (%) profitability 25 20 15 10 5 0 Swe Baltics LC&I Pers. DK Pers. FI Pers. NO Pers. SE C&BB Wholes. LC&I C&PB Baltics Personal SMEs Large Banking Corp & Intern. Swedbank Nordea SEB DNB Bank Source: Banks Financial Statements  Competition is increasing, both from other banks (SBAB, Danske) and from start-ups (Stabelo, Enkla)  Competitive pressure exacerbated by housing slowdown  Top 4 market share in Sweden down to 76% at end-June 17 (end-14: 79%).  A similar, slow, development in Norway 47

Nordic Banks: Competitive Pressure Increasing (2): PSD2  Second EU Payment Service Directive (PSD2). Introduces two third party providers: Payment Initiation Services (PISP) and Account Information Services (AISP) . Banks must give non-discriminatory access Traditional Card Payment Flow AISP Model PISP Model Customer / Customer / Customer Customer Merchant Merchant Customer Customer Merchant Merchant Customer Customer cardholder cardholder Bank 1 Bank 1 Acquirer / Acquirer / Customer Customer Issuer / Issuer / PISP PISP AISP AISP Merchant Bank Merchant Bank Bank 2 Bank 2 Customer Bank Customer Bank PISP executes Card network Card network Customer Customer Merchant Merchant Customer Customer bank Transfer (eg Visa) (eg Visa) Bank Bank Bank Bank Bank 3 Bank 3  Nordic banks well prepared, but payment services likely to become less profitable over time  Opportunity for banks to improve service and customer satisfaction  Rating consideration: Franchise, business model, risk controls and deposit stability 48

Conclusion  Continued Earnings Challenge for European Banks  Asset Quality Improving, but continued North/South divide persists  Stronger capitalisation and build up of bail-in buffers.  Nordics  Strong fundamentals, healthy operating environment.  Some notable challenges and risks, in particular property prices, but also a growing competitive threat. 49

New York London 33 Whitehall Street 30 North Colonnade New York, NY 10004 Canary Wharf London, E14 5GN fitchratings.com @fitchratings

Rating the Bank Liability Structure: Visual Rating Anchor Liability – Notching Notching Approach 8  Maximum +12 IDR uplift: + 2 uplift if exempt from bail-in, +8 7 ‘Payment Continuity Uplift’ (PCU), up to +2 for superior Covered bonds 6 recoveries. On average 4-5 notch uplift, depending, among other things, on level of overcollateralisation 5 Covered Bonds  Typically +1 if preference leads to superior recoveries (US) Deposits 4 and/or reduced default probability (Germany) (Uninsured) 3 OpCo IDR  Derivative Counterparty Ratings (DCRs) typically assigned 2 Derivative +1 if sufficient buffer subordinated senior and a well- liabilities 1 Deposits (uninsured) Derivative liabilities developed resolution framework (Germany)  Typically in line with IDR but can be notched up to reflect Senior Preferred lower default risk once sufficient non-preferred TLAC / Senior Preferred HoldCo IDR 0 MREL buffers are built up Senior Non-Preferred HoldCo Senior  May be notched down from OpCo IDR to reflect double- HoldCo Senior leverage and resolution strategy -1 Regulatory Tier - 2  Typically in line with the IDR unless recovery prospects are Senior Non- -2 VR weaker than average (but ‘high burden of proof’) Preferred -3  1-2 notches below VR anchor reflects below-average or Tier-2 -4 poor recoveries (legacy instruments notching can vary) Regulatory -5  At least 5 notches below VR anchor; 2 for loss severity, 3 Additional Tier-1 AT1 for non-performance Anchor Notching a The OpCo IDR may be uplifted up to 1 notch above the VR (or more at lower rating levels) if there is a sufficient ‘qualifying junior debt’ and/or (deployable eg, down-streamed) Bank Holding Company (BHC) buffer (normally close to pillar 1 requirement in size) Source: Fitch 51

Example: Societe Generale (Reflects RAC Dated 28 September 2017) Issuer/Anchor Liability – Notching OpCo Rating Rationale  SG’s deposit rating is 1 notch above the IDR to reflect AA+ the preferential status of deposits and the buffer of (Uninsured) A+/F1 qualifying junior debt (QJD) and senior non-preferred deposit rating AA senior debt  Derivative counterparty rating (DCR) is 1 notch above AA- Derivative A+(dcr) the IDR to reflect the preferential status of derivatives liabilities Uninsured Deposits / and build-up of subordinated buffers A+ Derivative Liabilities Senior Preferred  1 notch above the IDR to reflect the bank's large Senior Non- OpCo IDR VR A buffer of QJD and senior non-preferred debt (QJD Senior Preferred A a A+ and senior non-preferred debt at end-1H17 was equal Preferred A- Tier-2 to about 8.2% of risk-weighted assets (RWA)  In line with IDR. Under its criteria, Fitch requires a BBB+ high burden of proof to notch senior debt up or down Senior Non- A from the IDR based on recovery prospects, BBB Preferred particularly at high rating levels BBB- A-  Notched down once from the VR Tier-2  5 notches below VR; 2 for loss severity, 3 for non- BB+ AT1 BB+ performance. Notching for legacy capital instruments AT1 (eg, hybrid capital) differs BB Viability Rating a  SG’s VR reflects stand-alone strength (VR) Issuer Default A  SG’s IDR is in line with its VR Rating (IDR) Source: https://www.fitchratings.com/site/pr/1029929 52

Glossary Global Trading and Universal Banks GTUB Non Performing Loans NPL 53

Viking Tour 2018 Credit Conference Outlook for Covered Bonds – Low Risk Should not Lead to Complacency Cosme de Montpellier Senior Director, Covered Bonds 13–15 June 2018

Contents 1 Low Risk, Favourable Regulatory Treatment 2 2 The Underestimated Role of Overcollateralisation 7 3 Adverse Scenario Analysis 14 4 House Prices Sensitivity 17 55

Low Risk, Favourable Regulatory Treatment 56

Covered Bonds, The Capital Markets’ Darling Risk Mitigants Regulatory Benefits  Full recourse to issuing financial institution  Undertakings for Collective Investments in Transferable Securities Directive (UCITS)  Secured by high quality collateral  Capital Requirement Regulation (CRR)  Over-collateralisation  Collateral framework for monetary operations  Protection against liquidity gaps  Liquidity Coverage Ratio (LCR)  Supervisory oversight  Bank Recovery and Resolution Directive (BRRD) 57

Crisis Proof, Stable Outlook Ratings Outlook Historical Development AAA AA category A category BBB category Non-investment grade Banks issuer default Ratings Covered Bonds Ratings (Number of rated programmes) (%) 140 100 90 120 80 100 70 60 80 50 60 40 30 40 20 20 10 0 0 2008 2010 2012 2014 2016 1Q2018 Positive/RWP Stable Negative/RWN 31 March 2018 31 March 2018 Source: Fitch Source: Fitch 58

Buffer Against Issuer Downgrade CVB Downgrades Subject to IDR Downgrade (No. of programmes) 45 34 30 24 18 15 0 If 1 Notch IDR If 2 Notch IDR If 3 Notch IDR downgrade downgrade downgrade Note: Data is shown on a cumulative basis as at 31 March 2018 Source: Fitch 59

Positive Regulatory Developments Bail-in Exemption for CVB Bail-in Exemption for CVB Norway, Canada Norway, Canada EU Harmonisation: Mandatory Liquidity Provisions for CVB EU Harmonisation: Mandatory Liquidity Provisions for CVB Austria, Finland, Hungary, Spain, Sweden Austria, Finland, Hungary, Spain, Sweden Update in CVB Legislations Update in CVB Legislations Slovakia Slovakia 60

The Underestimated Role of Overcollateralisation 61

Fitch Survey Flags Lack of Concern OC Not a Major Price Driver Lowest on Challenges’ List Is Regulatory OC Sufficient? European Country of quantitative easing the issuer Covered bonds Regulatory treatment Yes Rating 42% Lack of secondary Legal market liquidity framework Geopolitical risk Cover pool credit quality Interest rate hike Bank Rating Health of banking sector Type of assets Sovereign risk Protection by Underlying collateral overcollateralisation performance Covered bonds No maturity type Rating volatility 58% None of the above, Reduction in prices are too compressed overcollateralisation 0 100 200 300 0 20 40 60 Source: Fitch Source: Fitch Source: Fitch 62

What is an Appropriate Minimum Overcollateralisation? Covered Bonds Regulation Banking Regulation Other? 2% 4% EMIR 3% Fitch AAA Minimum Floor Leverage Ratio 5% European Banking Authority Individual Value Set by 8% Regulator? MREL 10% Basel III 63

OC Supporting Highest Ratings in Mortgage Covered Bonds Comparison Between Rating Agencies: Fitch vs Moody’s OC Consistent with Aaa Total "Cover Pool Losses" Fitch AAA Breakeven OC (%) 30 25 20 15 10 5 0 South Korea Belgium Netherlands Germany Switzerland New Zealand UK France Canada Australia Norway Singapore Source: Moody’s Global Covered Bonds Monitoring Overview 1Q17; Fitch 1Q17 Global Covered Bonds Surveillance Snapshot 64

OC Supporting CVB Ratings vs Senior Unsecured Debt Rating OC for Moody’s CVB Ratings Increase with Decreasing Senior Unsecured Debt Ratings OC consistent with Covered Bonds Rating Total "cover pool losses" (%) 30 25 20 15 10 5 0 Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 (Senior unsecured debt Rating of Covered Bonds issuer) Source: Moody’s Global Covered Bonds Monitoring Overview 1Q17 65

Overcollateralisation should be Available before Enforcement Issuer Rating Deterioration Issuer Rating Deterioration AAA AA A BBB BB B CCC CC C AAA AA A BBB BB B CCC CC C Higher Reliance Higher Reliance Issuer Default Issuer Default on Issuer on Cover Pool When is it Too Late to Expect More Overcollateralisation? When is it Too Late to Expect More Overcollateralisation? 66

Adverse Scenario Analysis 67

Lower Property Prices Impact of Property Valuation on Regulatory OC 100 90 20 80 No Credit 70 to Part >80% LTV (CRR) 60 50 100 20% Market 20% Market 40 80 75 75 Value Decline Value Decline 30 20 Cover Pool Value for 10 Regulatory Purposes 0 Cover pool Covered Cover pool Covered 100 property Bonds 100 property Bonds value 125 value 100 LTV 80% LTV 100% Source: Fitch 68

Higher Interest Rates Higher Encumbrance Higher Funding Costs Pool Top-Up Higher Mortgage Rates Lower Higher OC Defaults 69

House Prices Sensitivity 70

Interest Rates on Mortgages Mortgage Rates Have Reached Their Lowest Point Source: Fitch (%) 10 12 14 0 2 4 6 8 1Q91 3Q91 1Q92 3Q92 1Q93 3Q93 1Q94 3Q94 1Q95 3Q95 1Q96 3Q96 Norway 1Q97 3Q97 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 Sweden 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 Denmark 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 71

Scandinavian House Prices Are Sensitive to Interest Rates (1/3) Norway Average house price Mortgage loan repayable with 1/3 of average income at current interest rate (NOKm) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1Q92 3Q92 1Q93 3Q93 1Q94 3Q94 1Q95 3Q95 1Q96 3Q96 1Q97 3Q97 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Fitch 72

Scandinavian House Prices Are Sensitive to Interest Rates (2/3) Denmark Average house price Mortgage loan repayable with 1/3 of average income at current interest rate (DKKm) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Fitch 73

Scandinavian House Prices are Sensitive to Interest Rates (3/3) Sweden Average house price Mortgage loan repayable with 1/3 of average income at current interest rate (SEKm) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1Q96 3Q96 1Q97 3Q97 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source: Fitch 74

Macro-Prudential Measures to Make Households More Resilient Norway Denmark Sweden  LTV cap at 90% (guideline) 2010  LTV cap at 85% Guideline  LTV cap at 85% (repayment loan) and 70% (IO)  Amortisation requirement for loans with LTV above 2011  Stressed interest rate at origination (+5pp) 75% 2012  15% RW floor for mortgages 2013 Supervisory diamond for mortgage banks  Amortisation on loans with an LTV above 70%  Limits on deferred amortisation and ARM with short frequency 2014  RW floor at 25% of reset Regulation  LTV cap at 85% (repayment loan) and 70% (IO)  5% down payment requirement 2015  Stressed interest rate at origination (+5pp)  “Speed limit” of 10%  Amortisation on loans with an LTV above 50%:  Guidance on mortgaging of homes in growth areas o borrowers with an LTV > 70%: 2% annually 2016 (Copenhagen and Aarhus) o borrowers with an LTV > 50%: 1% annually Regulation  Guidelines for housing loans to households with high debt  Max LTV 60% for IO loans, credit lines, loans secured by secondary homes in Oslo  Limit the access to borrow for borrowers with high 2017 LTV and LTI ratios (debt of 4 times income).  Max LTI at 500%  “Speed limit” of 10% (8% for Oslo)  Increased amortisation for borrowers with LTI > 4.5: they will need to amortise an additional percentage 2018 point compared to the current regulations Source: Fitch 75

OC Mitigants Exist in Some Jurisdictions Examples of Mitigants Examples of Mitigants • • Issuers to test impact of defaults and lower house prices on OC Issuers to test impact of defaults and lower house prices on OC • • Regulator’s pre-approval of covered bond issuance plans Regulator’s pre-approval of covered bond issuance plans • • Mandatory interest rate and currency stress-testing Mandatory interest rate and currency stress-testing • • Level of unencumbered assets monitored Level of unencumbered assets monitored However However • • Mandatory OC levels (0%–10%) not designed to sustain extreme stresses Mandatory OC levels (0%–10%) not designed to sustain extreme stresses • • Risks and adequate OC protection are programme specific Risks and adequate OC protection are programme specific 76

Glossary OC Overcollateralisation; difference between the cover pool and the covered bonds, expressed in percentage of the covered bonds OC below which the covered bonds Rating would be downgraded Breakeven OC for the Rating Loan-to-value LTV European Market Infrastructure Regulation EMIR Minimum requirement for own funds and eligible liabilities MREL Foreign exchange FX Mortgage loans MO Public sector assets PS Source: Fitch 77

Viking Tour 2018 Credit Conference EMEA Corporate Credit Outlook Angelina Valavina Senior Director, EMEA Corporates 13-15 June 2018

Contents 1 Corporate Rating Outlook 2 2 What Could Upset the Balance? 13 3 European Leveraged Finance Outlook 27 79

Corporate Rating Outlook 80

Outlooks for Selected EMEA Corporate Sectors 2017 Sector Outlook 2018 Sector Outlook EMEA Chemicals Stable Stable EMEA Oil & Gas Stable Stable Global Mining Stable Positive EMEA Telecommunications Stable Stable EMEA Airlines Stable Stable Global Shipping Negative Negative EMEA Utilities Stable Stable EMEA Retail Negative Negative EMEA Consumer Food, Beverage and Stable Stable Tobacco EMEA Property and Real Estate Stable Stable EMEA Building Materials & Products/ Stable Mildly Positive Engineering & Construction Source: Fitch 81

Rating Outlooks Improving EMEA Outlook and Watch Balance, October EMEA Outlook and Watch Balance, May 2018 2016 Positive Positive Outlook Outlook RWP RWP 4% 9% RWN 1% 1% 2% RWN 2% Negative Outlook Negative 13% Outlook 7% Stable Outlook Stable Outlook 80% 81% Source: Fitch Source: Fitch 82

Difference Between Developed EMEA… DM EMEA Outlook and Watch Balance, DM EMEA Outlook and Watch Balance, May October 2016 2018 Positive Positive Outlook Outlook RWP RWP 5% 8% 1% 1% RWN RWN 2% 2% Negative Negative Outlook Outlook 10% 7% Stable Outlook Stable Outlook 82% 82% Source: Fitch Source: Fitch 83

…And Emerging EMEA EM EMEA Outlook and Watch Balance, EM EMEA Outlook and Watch Balance, May October 2016 2018 Positive Positive Outlook Outlook RWP 4% 11% RWN 1% 1% RWN 2% Negative Negative Outlook Outlook 18% 7% Stable Outlook Stable Outlook 76% 80% Source: Fitch Source: Fitch 84

EMEA Sector Outlooks: Not Performing Equally Negative Outlooks and Rating Watch Negative by Sector December 2016 May 2018 (Nr) 30 25 20 15 10 5 0 Commodities Utilities & Transportation Consumer & Healthcare Industrials TMT Source: Fitch 85

EMEA Corporates LTM Upgrades and Downgrades LTM Up / Downgrades (Nr) Upgraded Downgraded 50 45 40 35 30 25 20 15 10 5 0 Mar-2014 Mar-2015 Mar-2016 Mar-2017 Mar-2018 Source: Fitch 86

Upgrades and Downgrades by Sector Upgrades & Downgrades by Sector 1Q17 to 1Q18 Upgrades Downgrades Negative Outlook Positive Outlook (Nr) 18 14 16 12 14 10 12 10 8 8 6 6 4 4 2 2 0 0 Commodities Consumer & Healthcare Industrials TMT Utilities & Transportation Source: Fitch 87

Slight Improvement in Overall EMEA Corporate Metrics Expected 2018 EBITDA Margin Forecasts 1Q17 vs 1Q18 EMEA Corporate FFO Leverage Evolution (%) 1Q17 1Q18 (x) 2015 2016 2017 2018F 2019F 2020F 90% 80% 7.0 70% 6.0 60% 50% 5.0 40% 4.0 30% 20% 3.0 10% 0% 2.0 All EMEA Corporates Industrials Aerospace & Defense Auto & Related Div. Manuf. & Cap. Goods Build. Mat. & Construction Property/Real Estate Diversified Services Commodities Energy (Oil & Gas) Natural Resources Chemicals Consumer & Healthcare Retailing Pharmaceuticals Health Care Utilities Transport TMT 1.0 0.0 Commodities Consumer & Industrials TMT Utilities & Healthcare Transportation Source: Fitch Source: Fitch 88

EMEA Corporate Leverage and Capex Evolution EMEA Corporate Leverage and Capex Evolution, 1Q18 (Medians) FFO Adjusted Net Leverage Developed (LHS) FFO Adjusted Net Leverage Emerging (LHS) (x) Capex/CFO Developed (RHS) Capex/CFO Emerging (RHS) 6 90% 80% 5 70% 4 60% 50% 3 40% 2 30% 20% 1 10% 0 0% 2015 2016 2017 2018F 2019F 2020F Source: Fitch 89

EMEA Corporate Rating Distribution EMEA Corporate Rating Distribution Nordic Corporate Ratings and Credit Opinions Distribution (Nr) (Nr) Mar-18 Mar-17 9 80 8 70 7 60 50 6 40 5 30 4 20 3 10 2 0 1 AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC CC C RD D 0 B- B B+ BB- BB BB+ BBB- BBB BBB+ A- A A+ Source: Fitch Source: Fitch 90

What Could Upset the Balance? 91

What Could Upset the Balance? Hot Topics Timescale Direction Magnitude  Negative in pockets — corporates should be able to cope with Interest rate normalisation Medium term Negative direct impact of rising rates, key question is refinancing Currency/capital flight Medium term  Varies — more of an EM concern Negative  Negative but not disastrous for UK, with effect depending on form Brexit Short to medium term Negative of exit. Retail and airlines exposed  Negative for DM names particularly the UK. Online exacerbates Retail patterns changing Short to medium term Negative other pressures  Direct if long term threat to oil and peak generators; disruptive Batteries and electric vehicles Long term Varies but not necessarily bad for autos, utilities North Korea Short term  Unclear — depends on escalation Negative  Base case is relatively benign and pragmatic renegotiation/limited Trump/trade — NAFTA/China Short term Negative targeted initiatives. Risk rising China growth shock Medium term  Base Case gradual deceleration. Negative  Commodities recovery has relieved pressure on many Commodities Short to medium term Positive companies. Prices may moderate but not return to lows Source: Fitch 92

ECB QE Forcing Existing Eurozone Debt Holders Elsewhere, But All Change in 2019 Eurozone Issuance of Sovereign Debt Securities and ECB Purchases Net issuance of government debt securitiesª ECB purchases of government debt (ublic sector purchase programme exc supranationals) (EURbn) 800 700 600 500 400 300 200 100 0 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F a 2017 to 2019 based on Fitch projections for general government borrowing Source: EC, ECB, Datastream, Fitch 93

Extensive Liability Management Eases Liquidity Risk Refinancing Wall — Jun 17 vs. Dec 12 Snapshot Volume of debt in Fitch-rated leveraged credits Dec 12 Jun 17 (% of total debt due) 80 75 70 60 50 40 34 33 30 20 17 16 13 10 7 5 0 Year one Year two Year three Post year three Source: Fitch leveraged credit database 94

Recent Developments: Italy, Turkey, US Tariffs, Russia ITALY Recent sell-off of Italian HY bonds Political risk aversion H218 new issuance volumes to suffer US TARIFFS TURKEY Limited impact on EU steel/aluminum Sharp decline in Turkish lira Recent External Developments: Manageable for shipping Increase in leverage FX, Trade, Politics Risks rising Further pressure on liquidity RUSSIA Sanctions profound impact State funding may be available Several corporate ratings withdrawn Source: Fitch 95

Sectors in the Spotlight Non-Food Retail: Is Europe replicating US? Oil & Autos: Electrification accelerates Airlines: LCC competition disruption to continue (Alitalia/Monarch/Air Berlin) 96

“Amazon”/Online Amplifies Retail Woes US Retailers Suffer from Amazon/Online Threat But Europe is More Fragmented… Europe-based dept stores, apparel stores net sales (RHS) ᵃ Amazon’s North American net sales (RHS) U.S. dept stores net sales (Fitch-rated) (RHS) ᵃ Average EBIT margin U.S. retailers Amazon’s Germany/UK net sales (50%-60% of international Amazon op income ᵇ divisional sales) (RHS) (%) (USDbn) (%) Average EBIT margin European retailers (USDbn) 12 175 20 100 150 10 15 75 125 8 10 50 100 6 75 5 25 4 50 0 0 2 25 0 0 -5 -25 2011 2012 2013 2014 2015 2016 2017E 2011 2012 2013 2014 2015 2016 2017E ᵃ Dillard’s, GAP, Kohl’s, L Brands, Macy’s, Neiman Marcus, Nordstrom, Sears ᵃ Debenhams, House of Fraser, Next, M&S, New Look, JD Sports, Cortefiel, H&M, Inditex (Zara) ᵇ Before stock compensation ᵇ Before stock compensation Source: Fitch Source: Fitch 97

Large Retail Overcapacity in US Not an Issue in Europe Shopping Space and Spending, Per Person Shopping Centre GLA (sq.ft.000’s) 2015 a Population (m) GLA/Capita US 7,567 321 23.5 Canada 589 36 16.4 UK 299 65 4.6 France 254 67 3.8 Spain 157 46 3.4 Italy 169 61 2.8 Germany 191 81 2.4 a GLA (Gross Leasable Area); France and Germany 2014 Source: Cowen and Company 98