still not a level playing field; regulatory differences ...methodological differences are also...
TRANSCRIPT
December 9, 2010
Europe: Banks
Still not a level playing field; regulatory differences drive relative returns
A wide gap in average risk weights …
European investment banks (IBs) report similar
risk-based leverage (CT1) to those in the US, but
substantially higher “simple” leverage (TATE).
This is a function of differences in average risk
weights, which in 3Q2010 stood at 27% for
European IBs versus 54% in the US, on our
estimates. This disparity can be explained by
multiple factors, with genuine business mix
differentiation being important. Pure
methodological differences are also meaningful,
in particular for market RWA.
… set to continue under Basel III
Under Basel III, the gap in average risk weights
does not close, on our estimates, allowing the
leverage disparity to continue. Swiss IBs are an
exception, as (substantially) higher minimum
capital ratios (as per new Swiss regulation)
compensate for lower risk weights, thus closing
their TATE gap with US peers.
In our view, global comparability of risk-based
leverage cannot be achieved without ensuring a
consistent and transparent approach to RWAs.
European IBs’ competitive position improves
The end game of the current regulatory set-up is
an improved competitive position for non-Swiss
European IBs (e.g. Deutsche Bank, BNP Paribas),
in our view. Comparatively higher leverage should
allow for a pricing advantage and consequently an
increase in their global market share.
For Credit Suisse/UBS, we expect steady-state
returns to de-rate, as Swiss regulation drives a
sharp increase in capital per unit of assets; CoCos
can be a partial mitigant. All in, we struggle to see
Swiss banks exceeding mid-teen ROTE under the
new regulatory regime (exceeded 30% pre-crisis).
We find that the historically high return differential
between Swiss IBs and Deutsche Bank closes
when targeted capital structure is applied.
CS down to Neutral; BNP remains CL Buy
We downgrade Credit Suisse from Buy to Neutral
following a revision of our valuation model and
steady-state returns under the new regulatory
proposal; our preferred European bank with
exposure to capital markets is BNP Paribas, which
is on our Conviction Buy List.
ACTION RATING AND 12-MONTH PRICE TARGET CHANGES
COVERAGE VIEW: NEUTRAL
RELATED RESEARCH:
October 18, 2010: Capital is back in the spotlight, but one
size does not fit all
October 12, 2010: Swiss endorse CoCos – laying out
scenarios for European TBTF capital surcharge
September 21, 2010: Capital post Basel III: 7% Core Tier 1
not the magic number; select banks in capital surplus
Jernej Omahen +44(20)7774-6324 [email protected] Goldman Sachs International
The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
Richard Ramsden (212) 357-9981 [email protected] Goldman Sachs & Co. Pawel Dziedzic +44(20)7774-1279 [email protected] Goldman Sachs International
Aaron Ibbotson, CFA +44(20)7774-6661 [email protected] Goldman Sachs International
The Goldman Sachs Group, Inc. Global Investment Research
Share Price Target RatingPrice Old New Old New
Credit Suisse SFr 38.2 57.0 49.0 Buy Neutral
UBS SFr 15.5 20.9 20.1 Neutral Neutral
Deutsche bank € 38.2 49.0 51.0 Neutral Neutral
Barclays £p 263.0 339.0 339.0 Neutral Neutral
BNP € 49.3 78.0 78.0 Buy* Buy*
Societe Generale € 38.9 58.0 58.0 Buy Buy
* denotes Conviction List membership
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 2
Table of Contents
Overview: Still unlevel playing field under B3; regulatory arbitrage drives relative returns 3
RWA increase under Basel III substantial, mitigation is not execution risk free 5
A wide gap in European and US risk weights continues under Basel III 7
Swiss banks’ returns to de-rate, in absolute and relative terms, in our view 17
Estimates changes and valuation 21
Credit Suisse (CSGN.VX): Absolute upside attractive, relative in line; down to Neutral 22
Appendix I: Peer group, methodology and trying to bridge the gap in US GAAP and IFRS 24
Appendix II: Swiss bank returns to de-rate, in absolute and relative terms, in our view 25
Prices in the body of this report are based on the close of December 7, 2010.
We would like to thank Eugene Zagorovskis for his contribution to this report.
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 3
Overview: Still unlevel playing field under B3; regulatory arbitrage drives relative returns
We lay out the global peer group and accounting approach/adjustments we use as a basis for comparisons in Appendix I.
RWA increases under Basel III substantial, mitigation is not execution risk free
IBs have communicated sharp increases in RWA due to the Basel III effects; we believe company guidance is reasonably precise,
providing gross increases in RWA as well as mitigation targets. Cumulatively, mitigation targets are large; in total, the four
European IBs are looking to reduce RWA by €238 bn or 33% of communicated gross increase. For most banks, planned disposals
account for a meaningful proportion of mitigation and are therefore subject to execution risk, in our view. Successful execution adds
c.100 bp to CT1 ratios.
More broadly, we believe the new treatment of select assets will result in banks no longer being willing to hold them – the
regulatory changes, therefore, are likely to push these assets into the non-bank sector – one such asset class could be low-rated
securitizations, which all banks have earmarked as part of their mitigation programmes.
A wide gap in European and US risk weights to remain under Basel III
The old debate of different leverage levels between European and US IBs has recently been revived, as part of changes relating to
Basel III. In essence, this debate boils down to European IBs reporting similar CT1 ratios (i.e. risk-based leverage) to those in the US,
but substantially higher non-risk based leverage. In our view, this is primarily a function of average risk-weight differentials, which
in 3Q2010 stood at 27% for IBs in Europe and 54% for those in the US. Under Basel III, we estimate new risk weights to increase
towards 39% for European IBs and 71% for the US. We therefore do not expect the application of Basel III to meaningfully close the
gap – we estimate the gap will narrow marginally, from 99% to 79%.
We see the following main reasons for the discrepancy in risk weightings: genuine business mix differences, differences in total
asset reporting under US GAAP and IFRS, which we adjust for; differentials in off-balance sheet asset amounts and varied
approaches to RWA calculation. Due to limited disclosure, we are unable to quantify the contribution of each of these factors.
We show in Exhibit 10 how a mechanical application of various US IB risk weights to European IB assets would impact CT1 ratios,
but caution that this is only a theoretical exercise, based on several significant assumptions. We do not change our estimates for
European banks risk weights (and RWA) on the back of this analysis. However, we believe that with risk weightings failing to
adequately capture actual levels of risk during the recent crisis, market focus and debate on this topic are likely to increase.
We believe it is imperative that the global standardization of capital adequacy does not end at setting broadly similar methodology
for the calculation of CT1 capital, but also ensures consistent calculation of the denominator, i.e. RWA.
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 4
Swiss bank returns to de-rate, in absolute and relative terms, in our view
We expect the Swiss banks to face severe pressure on their returns as the amount of capital per unit of assets rises sharply, in line
with the spirit of new regulation. We believe CoCos are crucial in Swiss banks’ attempts to mitigate some of the return compression.
This said, even if we assume full CoCo issuance (for both the mandatory buffer as well as the SIFI surcharge) returns would decline
by 7%-14% (so ROTE in the c.16%-17% range) compared to “normalized” 2012E levels, all else equal. The magnitude of a de-rating
increases to 16%-24% (so ROTE in the 14-15% range) if we assume the 3% mandatory buffer is met through tangible equity build-up.
In either case, we struggle to see Swiss banks exceeding a mid-teen ROTE under the new regulatory regime. Historically, the ROTE
of Swiss IBs exceeded 30%, in good years.
In contrast to the Swiss banks, Deutsche Bank has a similar starting point of leverage, but without the same de-leveraging pressures,
in our view. As a consequence, we see a compression in the historically high ROTE differential between the Swiss banks on one side
and DBK on the other – the Swiss banks’ ROTE was 1.9x higher than that of DBK in the 2004-06 period, while we expect it to decline
towards 1.4x in 2012. Assuming full implementation of the new Swiss capital regime, this differential could fall further, towards
1.1x-1.2x.
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 5
RWA increase under Basel III substantial, mitigation is not execution risk free
We lay out the global peer group and accounting adjustments for the approach we use as a basis for comparisons in Appendix I.
IBs have communicated sharp increases in RWA due to the Basel III effects; we believe company guidance is reasonably
precise, providing gross increases in RWA as well as mitigation targets. Cumulatively, mitigation targets are large; in total,
the four European IBs are looking to reduce RWA by €238 bn or 33% of communicated gross increase. For most banks,
planned disposals account for a meaningful proportion of mitigation and are therefore subject to execution risk, in our view.
Successful execution adds c100 bp to the CT1 ratios.
More broadly, the new treatment of select assets will result in banks no longer being willing to hold them – the regulatory
changes, therefore, are likely to push these assets into the non-bank sector – one such asset class could be low rated
securitizations, which all banks have earmarked as part of their mitigation programmes.
Exhibit 1 summarises the Basel III impact on European and US IB RWA.
Exhibit 1: RWA in Europe driven 64% higher by regulatory change; mitigation plans of €238 bn RWA equivalent are large and ambitious, in our view
Risk weighted assets, bn
Note: For C, net increase as per company guidance, gross increase as per GS estimate. For UBS, management action guidance is for “up to SFr100 bn”, we incorporate SFr60 bn.
Source: Company data, Goldman Sachs Research estimates.
On aggregate, we expect European IBs to show a gross increase in RWA of €726 bn (64% increase), of which the new treatment of
securitizations amounts to €231 bn. Cumulative mitigation plans amount to €238 bn, resulting in a net increase of €489 bn. We
therefore expect Basel changes to lift the aggregate RWA by 43% from current levels. These are big numbers and as such we believe
the aggressive timing of mitigation strategies could well end up easing, and more closely reflecting the maturity profile of assets
held.
Stock specific, the range of our expectations of gross RWA increases is wide, with UBS (+92%) the highest and Barclays (BARC)
(+37%) the lowest. The banks than get to a lower net increase through mitigation – European IBs are targeting a roughly similar
magnitude of mitigation actions (around 30%), except for UBS, which is targeting mitigation at 50%. We believe UBS’s target is
ambitious; our estimates allow for SFr60 bn of mitigation effects, compared to UBS’s SFr100 bn target.
CS UBS DBK (incl DPB) BARC Total European IB BAC C JPM MS Total US IB
ccy chg % ccy chg % ccy chg % ccy chg % € chg % RWA chg % RWA chg % RWA chg % RWA chg % US$ chg %
3Q10 228 - 208 - 345 - 405 - 1,141 - 1,477 - 1,003 - 1,169 - 325 - 3,975 -
(+) Gross increase 175 77% 192 92% 278 81% 150 37% 726 64% 600 41% 779 78% 400 34% 240 74% 2,019 51%
Gross RWA, B3 403 - 400 - 623 - 555 - 1,867 - 2,077 - 1,782 - 1,569 - 565 - 5,993 -
(-) Management action -60 -26% -60 -29% -90 -26% -50 -12% -238 -21% -230 -16% -322 -32% -180 -15% -100 -31% -832 -21%
% of gross increase -34% - -31% - -32% - -33% - -33% - -38% - -41% - -45% - -42% - -41% -
(=) Net increase 115 51% 132 63% 188 55% 100 25% 489 43% 370 25% 456 45% 220 19% 140 43% 1,186 30%
Net RWA, B3 (proforma) 343 - 340 - 533 - 505 - 1,630 - 1,847 - 1,460 - 1,389 - 465 - 5,161 -
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 6
In the US, our range of gross RWA increases for the aggregate of IBs is even larger, at 34%-78% (or US$2 tn in aggregate) but the
average of 51% is below that in Europe (64%). We estimate mitigation actions in the 38%-45% range (over US$800 bn in aggregate),
resulting in net increases of around 30% (Europe 43%).
We also find that new treatment of securitizations account for a third of aggregate RWA increases; for BARC, the securitization
impact alone is half of the total. We believe that true sales of these assets come with a high execution risk – that said, we find that a
reduction in line with the maturity profile (we estimate at 5-10 years) of the assets is execution risk free.
Exhibit 2: Securitizations account for a large proportion of RWA inflation; disposals are not execution risk free
Securitization exposures, bn
Source: Company data, Goldman Sachs Research estimates.
Securitisations rated <BB-Notional
(deduction)BIII RWA
(12.5x notional)% of gross BIII RWA increase
CS 0.7 9 5%UBS 3.0 38 20%DBK 8.9 111 40%BARC 5.8 73 49%Total (€) 18 231 32%Balances shown as at 2Q10 for CS and BARC and 3Q10 for UBS and DBK
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 7
A wide gap in European and US risk weights continues under Basel III
The old debate of different leverage levels between European and US IBs has recently been revived, as part of changes
relating to Basel III. In essence, this debate boils down to European IBs reporting similar CT1 ratios (i.e. risk-based leverage)
to those in the US, but substantially higher non-risk based leverage. This is a function of average risk weight differentials,
which in 3Q2010 stood at 27% for IBs in Europe and 54% for those in the US.
Under Basel III, we estimate the new risk weights to increase towards 39% for European IBs and 71% for the US. A
somewhat narrower, but still a substantial 79% gap in average risk weights remains, on our estimates, allowing for a
disparity between risk based and non-risk based leverage to continue. This said, Swiss regulation is driving for higher CT1
ratios, which we believe will close the leverage gap to the US banks. For the time being, however, we have not observed
similar moves by the local regulators of other European IBs.
We see the following main reasons for the discrepancy in risk weightings: genuine business mix differences, differences in total
asset reporting under US GAAP and IFRS, which we attempt to adjust for (all of our Exhibits use adjusted IFRS total assets);
differentials in off-balance sheet asset amounts and varied approaches to RWA calculation. Due to limited disclosure, we are unable
to quantify the contribution of each of these factors.
We also show how a mechanical application of various US IBs risk weights to European IBs assets would impact CT1 ratios, but
caution that this is only a theoretical exercise, based on several significant assumptions (Exhibit 10). We do not change our
estimates for European banks’ risk weights (and RWA) on the back of this analysis. However, we believe that with risk weightings
failing to adequately capture actual levels of risk during the recent crisis, market focus and debate on this topic are likely to increase.
We believe it is important that the global standardization of capital adequacy does not end at setting a uniform methodology for the
calculation of CT1 capital, but also ensures consistent calculation of the denominator, i.e. RWA.
Theoretical and historical backdrop – risk weights failed during the last crisis
As the recent crisis has shown, in our view, assigning the appropriate risk weights (rw) is all important. A lower risk weight should
mark a lower probability of default (pd) as well as a loss given default (lgd); the two then form a basis for any RWA calculation. We
believe it became obvious during the crisis that RWAs failed to gauge actual riskiness of bank assets – banks with an overall low risk
weight frequently suffered losses that were disproportionally higher, compared to those that had higher risk weights.
In Europe, we believe the best examples of “low risk” banks that required urgent assistance include: HRE (and within it, Depfa),
Dexia, RBS, UBS and Commerzbank. This took place as some of the lowest risk weighted assets (i.e. widely perceived to be the
“safest”) incurred some of the largest losses; 0% rw structured products are an obvious example.
Exhibit 4 shows the theoretical relationship between risk-based and non-risk based leverage, as a function of risk weights (CT1 =
TE/TA * 1/rw). In simple terms, it demonstrates that a low risk weight, when misjudged, can give rise to substantial capital
misallocation.
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 8
Exhibit 3: Some of the lowest rw banks produced some of the largest lossesPBT (2008-09) as % of total CT1 (2007) versus RWAs as % of total assets (2007) for
major European banks
Exhibit 4: Theoretical relationship between CT1 and rw, when TETA static Theoretical example, assuming the same asset is assigned a range of risk weights,
with TA of €100, TE of €10 and hence static leverage ratio of 10x
Source: Company data, Goldman Sachs Research estimates.
Source: Company data, Goldman Sachs Research estimates.
Europe versus US: Similar risk-based leverage (CT1 ratio) but twice the (simple) leverage
When compared to US peers, European IBs report substantially higher leverage ratios (TATE). In contrast, the CT1 ratios are similar.
In our view, this is primarily due to the substantial difference in average risk weights (Exhibit 5).
One of the frequent explanations is that this difference is primarily driven by US IBs reporting RWAs under Basel 1, while European
IBs do so under Basel 2. Both are likely to move to Basel III – and current company guidance on Basel III RWA suggests that the
differential in rw will remain broadly unchanged.
We calculate the average rw for European IBs will increase from 27% under Basel 2 to 39% under Basel III; and in the US from 54%
currently to 71%. This would lead to the difference in rw decreasing marginally, from 99% to 79%.
As is always the case, an average hides disparity within the group. In the case of European IBs, the key capitalization metrics of
TATE, rw and CT1 are particularly diverse, which an observation of the aggregate diminishes. We therefore also make the following
points:
‐100%
‐80%
‐60%
‐40%
‐20%
0%
20%
40%
60%
80%
100%
0% 10% 20% 30% 40% 50% 60% 70% 80%
PBT (200
8‐09
) as %
total assets ex derivatives (200
7)
RWA as % of total assets ex derivatives (2007)
DEXI.BR
BNPP.PA
SOGN.PACAGR.PA
CNAT.PACBKG.DE
DBKGn.DE
ISP.MICRDI.MI
BBVA.MCSAN.MC
CSGN.VX
UBSN.VX
BARC.L
HSBA.L
LLOY.L
RBS.L
STAN.L
High Risk WeightsHigh Profitability
Low Risk WeightsHigh Profitability
High Risk WeightsLow Profitability
Low Risk WeightsLow Profitability 0%
10%
20%
30%
40%
50%
60%
80% 70% 60% 50% 40% 30% 20%
Co
re T
ier
1 (
%)
Risk Weighting
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 9
On the issue of non-risk based leverage ratio (TATE), the disparity among European IBs is high. CS and DBK report TATE
in the 39-43x range, while UBS and BARC report TATE significantly lower, at 25-26x. The low end of the range is broadly
comparable with the highest TATE in the US, that of Morgan Stanley at 23x.
On the issue of average risk weight, the disparity among the European IBs is limited to the difference between BARC on
one side (with 37%) and all of the others, which report a rw in a tight range of 21%-25%.
Finally, on the issue of CT1 ratio, the European IBs report an average of 10.2%, yet UBS has by far the highest CT1 with
14.2%.
Exhibit 5: Europe vs. US, before and after Basel III: wide disparity in leverage but similar CT1 ratio, due to a wide spread in rw
Simple and risk-adjusted leverage ratio, risk weightings (3Q2010)
Note 1: Total assets for US banks and CS as per company accounts under US GAAP. For DBK, UBS and BARC US GAAP proxy assets calculated as
IFRS total assets less derivative balances. Note 2: CT1 for European banks is calculated as Tier 1 capital less hybrids. We treat CS’s “Claudius”
instrument as hybrid, while CS has regulatory approval to include it in its CT1 capital. For US banks CT1 calculated as Tier 1 common ratio. Note 3:
BARC figures are as of 1H2010, due to semi-annual reporting.
Source: Company data, Goldman Sachs Research estimates.
Basel I / II Basel III Change in risk weighting (net)Leverage(TA / TE) Core Tier 1 RWA / Assets RWA / Assets
(net)RWA / Assets
(gross) ppt %
CS 43x 10.3% 21% 32% 38% 11ppt 51%
UBS 25x 14.2% 22% 36% 42% 14ppt 63%
DBK (incl DPB) 39x 8.5% 25% 39% 45% 14ppt 55%
BARC 26x 10.0% 37% 47% 51% 10ppt 28%
Average Europe 32x 10.2% 27% 39% 45% 12ppt 44%
BAC 17x 8.4% 63% 79% 89% 16ppt 25%
C 15x 10.3% 51% 74% 90% 23ppt 45%
JPM 18x 9.5% 55% 65% 73% 10ppt 19%
MS 23x 10.7% 39% 55% 67% 17ppt 43%
Average US 17x 9.4% 54% 71% 82% 16ppt 30%
US / Europe -45% -8% 99% 79% 81% 34% -33%
US - Europe -14x -0.8ppt 27ppt 31ppt 37ppt 4ppt -14ppt
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 10
Exhibit 6: Higher leverage translates into similar CT1, through lower risk weights; UBS an exception with its 14.2% CT1
Reported TATE and CT1 ratio and current risk weighting (3Q2010)
Source: Company data, Goldman Sachs Research estimates.
US v Europe: similar CT1, different leverage
0%
4%
8%
12%
16%
20%
0x 10x 20x 30x 40x 50x
Core Tier 1
TATE
CS
UBS
DBK
BARC
BAC
CJPM
MS
15x - 43x range
±1
.1%
ra
ng
e
Reported TATE and CT1 ratio, 3Q10
Reported CT1 ratio (3Q10), current risk weighting
... which allow for a wide disparity in leverage
Reported TETA ratio (3Q10), current risk weighting
CT1 ratios based on a wide spread of risk‐weights...
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0% 20% 40% 60% 80% 100%
Core Tier 1
Risk weighting
CS
UBS
DBKBARC
BAC
CJPM
MS
21-63% range
±1.1% range
0x
10x
20x
30x
40x
50x
0% 20% 40% 60% 80% 100%TA
TERisk weighting
CS
UBS
DBK
BARC
BACC
JPM
MS
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 11
Examining key reasons behind different risk weights
A wide difference exists in risk weights between IBs in Europe and the US. These institutions are frequently similar in their activity
mix (especially on the global investment banking side) and balance sheet size and are considered peers by the market; we believe
the key reasons for the differences in risk weights can be grouped into the following main categories:
1. Business mix: Genuine and substantial differences exist
We view differences in business mix and/or balance sheet composition as a genuine differentiator of risk at the individual bank level.
In our view, the mix of activities on the investment banking side is broadly similar, but more genuine differences materialize on the
lending/credit side, in our view.
For example, US banks run with higher proportions of unsecured lending, while the proportion of lower-risk mortgages tends to be
higher in Europe. Differences in risk weights are therefore to be expected and acknowledged here. Current disclosure does not allow
for a more detailed benchmarking of the credit portfolios; additionally our insight at the way the credit risk weights are set for
specific parts of the credit exposures is also limited. We believe most investors accept that credit books tend to be of different risk
profiles between regions – but the difference cannot be quantified with public disclosure, in our view.
A partial attempt at adjusting for the differences in business mix is to strip out the low-risk loans – residential mortgages –
completely from the average rw calculation. For CS/UBS, stripping out mortgages from total assets and RWA (by assuming a 10%
rw) results in average Basel III rw increasing to 34% for CS (from 32%, up 2 ppt) and to 39% for UBS (from 36%, so up 3 ppt). Low rw
of residential mortgages – a frequently quoted reason for the lower rw – cannot therefore explain the substantial difference, in our
view.
2. Accounting differences between US GAAP and IFRS
All of the exhibits use adjusted IFRS assets, as a proxy for US GAAP assets, as we discuss below.
US banks and CS file their accounts under US GAAP, while DBK, UBS and BARC do so under IFRS. Total assets (the denominator in
our RWA/A ratio) are higher under IFRS as netting of certain balances is not allowed. The largest area of difference is the treatment
of derivatives (replacement values), for which US GAAP uses net and IFRS gross balances. We adjust for this by calculating US
GAAP proxy assets for these banks as IFRS total assets less derivative balances (positive replacement values). As laid-out in
Appendix I, total asset figures for IFRS banks are presented on this basis in all Exhibits.
Our adjustment here is far from perfect and the analysis should be taken in this context. Still, we believe that the largest
differentiatior between total assets under US GAAP and IFRS is largely captured.
3. Off-balance sheet assets
US IBs hold comparatively more off-balance sheet assets than European IBs; these assets generate RWA that can distort the RWA/A
ratio by inflating the numerator. We have attempted to adjust for this element, but we caution that the disclosure of these items is
incomplete and comparability limited. We therefore see the use of these figures as a broad guide, rather than an exact estimate.
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 12
We adjust RWA/A ratio by adding off-balance sheet assets to the denominator of RWA/A ratio to arrive at an “on and off-balance
sheet asset risk weighting”. For the US banks, we calculate the average at 47%, compared to Europe at 34%. The differential would
narrow from the initial 79% to 36%.
Exhibit 7: Risk weighting differential remains, even if the definition is expanded to account for off balance sheet assets
RWA/A ratio including and excluding off balance sheet assets, Basel III, 3Q2010
Note 1: Off-balance sheet assets mainly consist of unused commitments. Note 2: BARC figures as of end 1H2010, due to semi-annual reporting.
Source: Goldman Sachs Research estimates.
4. Regulatory approach to RWA calculation, especially for mRWA
Currently, market RWA represent between 8%-16% of total RWA for European banks, compared to some 6%-37% for the US banks.
They are secondary in size to other types of RWA. While mRWA increases under Basel III, the approach used to calculate the
amounts will remain important in determining capital allocation, in our view.
Methodological differences in current mRWA calculations screen as a potentially important driver of the differences in risk weights.
Here, we refer to the application of various regulatory approved models, which can calculate a wide range of mRWA outcomes even
when the underlying risk is similar.
There are two main ways to calculate mRWA – standardized and advanced models. The standardized model generally results in
higher capital allocation and therefore a more punitive capital treatment. This is mainly due to the limited hedging benefit, which,
Risk weights
Simple On + Off balance sheet
RWA / Assets RWA / Assets + off balance sheet assets
CS 32% 26%
UBS 36% 33%
DBK (incl DPB) 39% 35%
BARC 47% 39%
Average Europe 39% 34%
BAC 79% 48%
C 74% 48%
JPM 65% 45%
MS 55% 47%
Average US 71% 47%
US / Europe 79% 36%
US - Europe 31ppt 13ppt
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 13
under the standardized approach is determined using formulae-based (or, “haircut-based”) rules. In contrast, an advanced model
will simulate the impact across the entire portfolio, giving a fuller benefit of hedging/diversification. The difference in capital
consumption under the standard and advanced approaches tends to be particularly notable with derivatives businesses.
Ultimately, we believe the question is the amount of capital backing a unit of risk – one way to approximate this is through a
mRWA/VaR ratio (Exhibit 9). We approximate the average mRWA/VAR for the US banks of 627, compared to Europe at 376. We note,
however, that averages for both the US and Europe are diverse, with outliers for both (for example, C in the US and BARC in
Europe).
In our analysis, we use market RWA as reported in the quarterly financial statements for European IBs and as per Y9-C disclosure for
the US IBs. For the purpose of this exercise we assume they are broadly comparable.
Our analysis runs as follows:
Determining the extent of advanced model usage for the calculation of mRWA: Usage of advanced models can give
rise to a lower mRWA calculation, for a similar portfolio of assets. We show that the US banks make substantially higher usage
of the standard model, while the European banks calculate substantially all of their mRWA through advanced models. This can
give rise to different levels of mRWA calculation, in our view.
We make the following steps:
Standardised VaR (1): We translate reported avg VaR into one-day, 99% VaR for all banks; we call this “standardized VaR”
VaR-related mRWA (2): We estimate mRWA driven by the standardized VaR; we call this “VaR-related mRWA”
Extent of advanced model usage for mRWA (3): We put VaR-related mRWA in the context of total mRWA; we believe this
is a good indication of the extent of advanced model use in calculating mRWA
Reported usage of advanced models (4): The source here is Pillar 3 disclosure, which is only provided by the European IBs
and shows that essentially all market RWA for CS, UBS and DBK are calculated using advanced models. BARC is the
exception with 34% of its mRWA derived through advanced models. The reported usage of the advanced model is higher
than what our “back test” would suggest for three reasons: we assume a scaling factor of 3x, at the lower end of the 3-4x
range, add-ons are not captured in our calculation, as they are not VaR driven, and VaR used to calculate mRWA might differ
from reported quarter average VaR.
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 14
Exhibit 8: Extensive advanced model usage in mRWA calculation for the European investment banks, compared to US peers VaR-related mRWA, 2Q2010 (3Q2010 for CS, UBS and DBK)
Source: Goldman Sachs Research estimates.
Comparing capitalization of mRWA between the US and European banks:
Our analysis continues along the following steps:
mRWA/VaR ratio (5) represents mRWA per unit of risk; the average in Europe is 376, compared to 627 in the US (Exhibit 9).
CT1 allocated per unit of risk (6) – we simply take the mRWA/VaR ratio and multiply it by the current CT1 ratio, to derive
the amount of CT1 capital backing each unit of risk. We show the result of this exercise in Exhibit 9.
VaR related mRWA VaR related mRWA
VaR (1-day, 99%) ccy % mRWA % of mRWA via
advanced approach
(1) (2) (3) (4)
CS 118 13,993 71% 95%
UBS 83 9,893 47% 100%
DBK (ex DPB) 87 10,281 49% 100%
BARC 81 9,558 15% 34%
Europe avg 331 39,220 32% -
BAC 189 22,413 15% -
C 188 22,294 35% -
JPM 127 15,091 14% -
MS 197 23,307 20% -
US avg 701 83,105 19% -
0%
20%
40%
60%
80%
100%
JPM BARC BAC MS C UBS DBK (ex DPB)
CS
VaR related mRWA (% of total) mRWA via advanced approach (% of total)
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 15
Exhibit 9: US banks seemingly back market assets with a higher amount of capital per unit of risk mRWA and CT1 per unit of risk as measured with 99%, one-day VaR
Source: Company data, Goldman Sachs Research estimates.
Conclusion
In our view, the actual contribution of each category to the difference in rw is impossible to quantify from the outside, due to limited
disclosure. However, we believe that with risk weightings failing to adequately capture actual levels of risk during the recent crisis,
market focus and debate on this topic are likely to increase.
Mechanically applying US risk weights to European assets reduces CT1
We mechanically apply US risk weights to European bank assets (Exhibit 10) to derive a theoretical CT1 ratio. We do not claim that
investors should look at capitalization of European banks on this basis. Rather, we use this as a way to mechanically translate and
observe differences in non-risk based leverage to the CT1 ratio (i.e. risk based) level. As discussed, there are a multitude of reasons
why rw in Europe and the US are different.
We show the outcome of this theoretical exercise below, as follows:
“Simple” risk weighting: mechanically applying the lowest and average US risk weight to European IBs’ assets
“On- and off-balance sheet” risk weighting: mechanically applying the average US total risk weight (where the denominator
includes both total assets and off-balance sheet assets) to European IBs’ assets.
mRWA / VaR CT1 / VaR
(5) (6)
CS 167 17
UBS 253 36
DBK (ex DPB) 243 21
BARC 776 78
Europe avg 376 39
BAC 769 65
C 338 35
JPM 874 83
MS 605 65
US avg 627 60
0
100
200
300
400
500
600
700
800
900
1,000
CS DBK (ex DPB) UBS C MS BAC BARC JPM
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 16
Exhibit 10: European ratios notably reduced if US risk weights are mechanically applied
CT1 ratios for European banks applying various US risk weights
Note: Calculations based on: (1) 2012E CT1 capital, which does not incorporate Basel III deductions/adjustments as the gradual phase in
starts in 2014, so after the end of our forecast period; (2) 2012E RWA estimates, which include our estimates of the Basel 2.5 and Basel III
impact.
Source: Goldman Sachs Research estimates.
CT1 ratio assuming various risk weights
Simple On + Off balance sheet
US Low (55%) US Avg (71%) US Avg (47%)
CS 10.8% 6.3% 4.9% 6.1%
UBS 14.0% 9.2% 7.2% 10.1%
DBK (proforma DPB) 8.4% 5.9% 4.6% 6.4%
BARC 10.0% 8.8% 6.9% 8.3%
Average 10.2% 7.4% 5.8% 7.5%
CT1 (2012E)
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 17
Swiss banks’ returns to de-rate, in absolute and relative terms, in our view
We expect the Swiss banks to face severe pressures on their returns as the amount of capital per unit of assets rises sharply,
in line with the spirit of new regulation. We believe CoCos are crucial in Swiss banks’ attempts to mitigate some of the
return compression. This said, even if we assume full CoCo issuance (for both the mandatory buffer as well as the SIFI
surcharge) we find that returns could decline by 7%-14% (so ROTE in the 16%-17% range) compared to “normalized” 2012E
levels, all else equal. The magnitude of a de-rating increases to 16%-24% (so ROTE in the 14%-15% range) if we assume the
3% mandatory buffer is met through tangible equity build-up. In either case, we struggle to see Swiss banks exceeding a
mid-teen ROTE under the new regulatory regime. Historically, the ROTE of Swiss IBs exceeded 30%, in good years.
In contrast to the Swiss banks is Deutsche Bank, which has a similar starting point of leverage, but without the same
potential de-leveraging pressures. As a consequence, we see a compression in the historically high ROTE differential
between the Swiss banks on one side and DBK on the other – the Swiss banks’ ROTE was 1.9x higher than that of DBK in
the 2004-06 period, while we see it declining towards 1.4x in 2012. Assuming full implementation of the new Swiss capital
regime this differential could fall further, towards 1.1x-1.2x.
Steady-state capitalization scenarios:
For these calculations we apply fully phased Basel III impact, for both the CT1 capital as well as RWA. We do this in order to reflect
the new steady-state profitability as well as capital structure. For the capital structure we assume full compliance with the new Swiss
regulation. This said, it is important to acknowledge the lengthy phase-in (or transition) period; for example, most of the hybrid
instruments will be grandfathered and therefore will count towards CT1 for a lengthy period of time.This will give banks additional
time to adjust their business mix and hence profitability.
For the Swiss banks, our analysis proceeds as follows:
New regulations call for capitalization of 19%. We expect the actual figure to end up around 20%, thus allowing for a
marginal voluntary buffer. This increase in capitalization can be achieved either by building up tangible equity – or – through a
combination of tangible equity build up and CoCo issuance.
The three basic scenarios to achieving the new minimum capitalization therefore are:
“11% + 9%”: holding common equity of 11%, but issuing high-trigger CoCos for the mandatory buffer of 3% as well as low
trigger CoCos for the SIFI surcharge of 6%.
“14% + 6%”: holding common equity of 14%, but issuing CoCos for the SIFI surcharge of 6%; for both CS and UBS, we see
this level of capitalization as the most likely outcome, and refer to it as “target” capitalization.
“20%”: build-up of tangible equity to 20%, without any CoCo issuance, only a theoretical scenario, in our view.
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 18
For Deutsche Bank, we introduce two scenarios:
“8% + 3%”: holding common equity of 8% (a buffer of 100 bp over the Basel III minimum), but issuing a type of hybrid
(possibly CoCos) for an additional 3% buffer. We note that DBK currently only has to comply with the Basel III standards, as
the German regulator has not issued any additional demands to date. For DBK, we see this level of capitalization as the most
likely outcome, and refer to it as “target” capitalization.
“11%”: build-up of tangible equity to 11%, without any hybrid/CoCo issuance.
Swiss returns to come under pressure, absolute and relative to DBK, as per our analysis:
Our analysis suggests that CS and UBS’ returns will continue to de-rate, while DBK’s returns will remain broadly stable.
The reasons for the de-rating of Swiss IBs’ returns are:
To meet new regulatory standards, both banks will need to hold more capital – this applies to tangible equity and other
components of regulatory capital. An increase in tangible equity reduces returns through an increase in base; an increase in
other forms of capital (mostly in the form of CoCos) through a reduction in profits.
Swiss IB returns de-rate least if CS/UBS make full use of CoCos (Scenario: “11% + 9%”). Assuming that both the mandatory
3% buffer and SIFI surcharge of 6% are met through CoCo issuance, we estimate steady-state ROTEs of 17.4% for CS and 15.9%
for UBS. This represents a de-rating of 14% for CS compared to our 2012N but only 7% for UBS. UBS ROTE compression is
smaller as we forecast the bank will reach a higher tangible equity level relative to CS by 2012E; in other words, the
capitalization starting point for the two banks is different.
Swiss ROTE de-rates further, if we assume the 3% mandatory buffer composed of tangible equity (Scenario: “14% + 6%”),
rather than CoCo issuance. The steady-state ROTE would fall to 15.3% for CS (a de-rating of 24% vs 2012E) and to 14.3% for UBS
(a de-rating of 16% vs 2012N).
Finally, assuming that both the 3% mandatory buffer as well as the SIFI charge are met through common equity implies a much
larger de-rating magnitude. We do not see this as realistic.
For DBK, returns are broadly stable if we assume the “8% + 3%” scenario, while they de-rate 15% if we assume build-up of core
capital towards the 11% mark.
We lay out the calculations in detail in Appendix II.
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 19
Exhibit 11: Swiss banks will see significant ROTE compression following B3…ROTE, %. We view “14% + 6%” the most likely capitalization outcome and refer to
it as “target” capitalization.
Exhibit 12: …DBK much less so
ROTE, %. We view “8% + 3%” as the most likely capitalization outcome and refer
to it as “target” capitalization
* Normalized TE * Normalized TE
Source: Goldman Sachs Research estimates.
Source: Goldman Sachs Research estimates.
20%
17%
15%
13%
17%16%
14%12%
0%
5%
10%
15%
20%
25%
GS(2012E)* 11% + 9% 14% + 6% 20%
CS UBS
14% 14%12%
0%
5%
10%
15%
20%
25%
GS(2012E)* 8% + 3% 11%
DBK
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 20
Exhibit 13: Increased capital requirements likely to reduce ROTE differential
between CS/UBS and DBK] ROTE
Exhibit 14: Swiss regulation will drive down leverage and relative returns,
versus European peer group. Reported TETA ratio (3Q10) and, BIII risk weighting; target capitalization
“14%+6%” for CS/UBS and “8%+3%” for DBK.
[2] “14%+6%” scenario for CS and UBS and “8%+3% for DBK; [3] “20%” scenario for CS
and UBS and “11% for DBK
Source: Goldman Sachs Research estimates.
Source: Goldman Sachs Research estimates.
0%
10%
20%
30%
40%
2004-06 avg 2012 (normalised) [2] [3]
CS UBS DBK
0x
10x
20x
30x
40x
50x
0% 20% 40% 60% 80% 100%
TATE
Risk weighting
CS
UBS
DBK
BARC
BACC
JPM
MSCStarget
UBStarget
DBKtarget
15
x-2
3x
ra
ng
e
32-79% range
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 21
Estimates changes and valuation
Exhibit 15: Estimate and price target changes, methodology and risks
Source: Goldman Sachs Research estimates.
Exhibit 16: Credit Suisse trades at 12% premium to UBS
P/TB multiples
Source: Company data, Datastream, Goldman Sachs Research estimates.
Old New ChangeGS EPS GS EPS GS EPS
2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012EDBK € 5.56 5.54 5.79 49.00 12 months Neutral 5.43 5.52 5.77 51.00 12 months Neutral -2% 0% 0% 4%
CS SFr 4.29 5.72 6.15 57.00 12 months Buy 4.30 5.51 6.15 49.00 12 months Neutral 0% -4% 0% -14%
UBS SFr 1.80 1.85 2.15 20.90 12 months Neutral 1.79 1.80 2.13 20.10 12 months Neutral -1% -2% -1% -4%
Risks
DBK Better / worse than expected capital markets performance, German macroeconomic data, impact of regulatory changes (Basel 2.5 and Basel 3)
CS Better / worse than expected capital markets performance, NNM flows, impact of regulatory changes (Basel 2.5 and Basel 3)
UBS Better / worse than expected capital markets performance, NNM flows, impact of regulatory changes (Basel 2.5 and Basel 3)
TP changes
DBK Increased due to forecasting period roll forward
CS Target P/TB multiple reduced due to expected reduction in long-term sustainable ROTE (see "Swiss bank returns to de-rate" section of the report)
UBS Target P/TB multiple reduced due to expected reduction in long-term sustainable ROTE (see "Swiss bank returns to de-rate" section of the report)
Target Price
ROTE / COE
ROTE / COE
ROTE / COE
TP methodology
Target Price TP period Rating Target
Price TP period Rating
1.00
1.25
1.50
1.75
2.00
2.25
2.50
2.75
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
CS UBS
-50%
-25%
0%
25%
50%
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
CS / UBS
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 22
Credit Suisse (CSGN.VX): Absolute upside attractive, relative in line; down to Neutral
What happened
We have examined the Swiss regulatory proposal and in particular its impact on the long-term return prospects
of Swiss banks. As a consequence, we have revised our valuation model, and our new 12-month price target of
SFr49 implies upside of – a still healthy - 28%. In a European banks context, CS’s upside of 28% now compares
to 30% for the sector average; on this basis, we downgrade Credit Suisse to Neutral from Buy.
Since being added to the Buy List on October 3, 2008, Credit Suisse is down 33.5% versus the 35.3% average
decline of the European banks in our coverage and the 13.0% increase of the FTSE World Europe (-12.7% in SFr).
Over the last 12-months, Credit Suisse is down 27.5% versus the 18.6% average decline of the European banks
and the FTSE World Europe’s 2.7% rise (-4.8% in SFr).
Current view
We believe that the new regulatory set-up is likely to put severe pressure on Swiss banks’ returns, when fully
phased. This is a consequence of a sharp increase in capital per unit of assets, which we estimate will push CS’s
current leverage lower.
To achieve our target capitalization structure – which we see as a combination of 14% CT1 and a 6% low trigger
CoCo issuance – we believe Credit Suisse would need to accelerate its equity build up. In our view, this is likely
to include a downward adjustment in the cash component of the dividend (we have reduced 2010E-2011E DPS
from SFr2.0 to SFr1.0). As equity builds up, steady-state returns are likely to compress substantially when
compared to those from the pre-crisis periods. We show that for both CS and UBS, steady state returns on
proposed Swiss capital regulation are unlikely to exceed mid-teens, on our estimates.
We have incorporated our lowered expectations of steady-state returns into our valuation and have reduced the
target P/TB multiple as a consequence. This drives down our 12 month ROTE/COE-model price target, from
SFr57 previously to SFr49 currently, leaving it with potential upside of 28%, compared to the European banks’
sector average of 30%. While the potential upside remains healthy in absolute terms, we believe the relative
upside now warrants a Neutral rating.
Source: Company data, Goldman Sachs Research estimates, FactSet.
Key data Current
Price (SFr) 38.19
12 month price target (SFr) 49.00
Upside/(downside) (%) 28
Market cap (SFr mn) 44,743.4
Tier 1 ratio (%) 16.3
12/09 12/10E 12/11E 12/12E
GS EPS (SFr) New 5.96 4.30 5.51 6.15
EPS (SFr) Old 5.96 4.29 5.72 6.15
DPS (SFr) New 2.00 1.00 1.00 1.00
DPS (SFr) Old 2.00 2.00 2.00 2.00
GS P/E (X) 6.4 8.9 6.9 6.2
Dividend yield (%) 5.2 2.6 2.6 2.6
GS ROE (%) 21.9 14.9 18.2 17.6
P/BV (X) 1.6 1.3 1.1 1.0
310
330
350
370
390
410
35
40
45
50
55
60
Dec-09 Mar-10 Jun-10 Sep-10
Price performance chart
Credit Suisse (L) FTSE World Europe (GBP) (R)
Share price performance (%) 3 month 6 month 12 month
Absolute (15.8) (11.7) (27.5)
Rel. to FTSE World Europe (GBP) (21.3) (23.6) (29.4)
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 12/07/2010 close.
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 23
Exhibit 17: Performance of Credit Suisse versus peer group Priced as of the close on December 7, 2010
Note: Prices as of most recent available close, which could vary from the price date indicated above
This table shows movement in absolute share price and not total shareholder return. Results presented should not and cannot be viewed as an indicator of future
performance.
Source: Factset, Quantum database.
Company Ticker Primary analyst Price currency
Price as of Dec 7, 2010
Price performance since Oct 3, 2008
3 month price performance
6 month price performance
12 month price performance
Europe Banks Peer Group Credit Suisse CSGN.VX Jernej Omahen SFr 38.19 -33.5% -15.8% -11.7% -27.5%Agricultural Bank of Greece AGBr.AT Heiner Luz € 0.79 -62.4% -26.2% -18.6% -57.5%Allied Irish Banks ALBK.I Pawel Dziedzic € 0.45 -94.0% -41.1% -53.3% -70.5%Alpha Bank ACBr.AT Heiner Luz € 4.70 -66.0% -13.4% 9.0% -46.0%Banca Monte dei Paschi di Siena BMPS.MI Domenico Vinci € 0.86 -52.2% -11.8% 3.5% -33.7%Banca Popolare di Milano PMII.MI Domenico Vinci € 2.65 -54.9% -23.9% -17.9% -49.9%Banco Pastor PAS.MC Pawel Dziedzic € 3.85 -38.6% -2.4% 2.3% -20.7%Banco Popolare BAPO.MI Domenico Vinci € 3.28 -68.3% -28.6% -20.7% -42.2%Banco Popular Espanol POP.MC Pawel Dziedzic € 4.16 -51.5% -13.5% 8.6% -27.1%Banco Sabadell SABE.MC Jernej Omahen € 3.18 -42.7% -18.0% -0.1% -23.5%Banesto BTO.MC Pawel Dziedzic € 6.37 -37.5% -10.3% 7.0% -27.0%Bank of Cyprus BOCr.AT Heiner Luz € 2.98 -27.9% -12.9% 28.5% -18.5%Bank of Ireland BKIR.I Pawel Dziedzic € 0.42 -86.5% -42.1% -45.1% -59.4%Bank of Piraeus BOPr.AT Heiner Luz € 3.23 -77.0% -23.6% -14.1% -67.0%Bankinter BKT.MC Pawel Dziedzic € 4.20 -50.8% -20.6% -1.6% -40.7%Barclays plc BARC.L Aaron Ibbotson, CFA p 262.60 -28.6% -16.4% -8.1% -11.6%BBVA BBVA.MC Jernej Omahen € 7.76 -34.3% -17.3% 7.1% -37.9%BNP Paribas BNPP.PA Jean-Francois Neuez € 49.28 -28.9% -6.5% 15.4% -11.1%Commerzbank AG CBKG.DE Domenico Vinci € 5.75 -59.5% -9.4% 4.9% -7.3%Credit Agricole SA CAGR.PA Jean-Francois Neuez € 10.04 -34.8% -5.6% 22.3% -26.4%Credito Emiliano EMBI.MI Domenico Vinci € 4.48 -28.5% -6.2% 3.9% -16.2%Credito Valtellinese PCVI.MI Domenico Vinci € 3.15 -47.0% -13.9% -16.7% -43.5%Danske Bank DANSKE.CO Aaron Ibbotson, CFA Dkr 147.90 11.2% 8.6% 16.5% 27.5%Deutsche Bank DBKGn.DE Jernej Omahen € 38.19 -21.0% -15.1% -9.8% -15.1%Deutsche Postbank DPBGn.DE Jernej Omahen € 20.16 -38.0% -18.4% -15.1% -18.5%Dexia DEXI.BR Jean-Francois Neuez € 2.94 -64.0% -9.4% -2.3% -38.5%DnB NOR DNBNOR.OL Aaron Ibbotson, CFA Nkr 78.45 69.5% 5.6% 22.6% 20.7%EFG Eurobank EFGr.AT Heiner Luz € 4.40 -64.5% -17.8% 21.2% -50.0%EFG International EFGN.S Jean-Francois Neuez SFr 12.50 -62.1% 11.6% -16.9% -21.1%Erste Bank ERST.VI Frederik Thomasen € 32.69 -15.1% 12.1% 30.2% 13.2%Grupo Santander SAN.MC Jernej Omahen € 8.10 -25.7% -16.0% 8.5% -32.0%Hellenic Bank HBNK.CY Heiner Luz € 0.90 -50.8% -12.6% -6.3% -23.7%HSBC HSBA.L Frederik Thomasen p 665.50 -17.7% 0.5% 5.7% -6.6%Intesa Sanpaolo ISP.MI Domenico Vinci € 2.11 -45.8% -10.3% 6.4% -30.6%Julius Baer Group BAER.VX Jean-Francois Neuez SFr 43.10 NA 13.4% 32.4% 29.9%KBC KBC.BR Frederik Thomasen € 28.80 -54.5% -14.1% -1.6% -10.9%Lloyds Banking Group Plc LLOY.L Aaron Ibbotson, CFA p 66.70 -53.7% -8.0% 23.6% 24.2%Marfin Popular Bank CPBC.CY Heiner Luz € 1.19 -61.2% -16.4% -0.7% -42.4%National Bank of Greece NBGr.AT Heiner Luz € 7.01 -69.2% -20.7% -10.8% -59.2%Natixis CNAT.PA Jean-Francois Neuez € 3.68 37.2% -19.4% 5.9% 3.3%Nordea NDA.ST Aaron Ibbotson, CFA Skr 71.65 4.3% 5.6% 12.8% -4.1%Raiffeisen Bank International RBIV.VI Frederik Thomasen € 39.62 -25.0% 18.0% 29.7% -10.0%Royal Bank of Scotland RBS.L Aaron Ibbotson, CFA p 41.06 -77.9% -11.0% -4.7% 24.4%Sarasin BSAN.S Jean-Francois Neuez SFr 39.45 -1.4% 4.4% -5.4% 5.2%SEB SEBa.ST Aaron Ibbotson, CFA Skr 53.35 -14.4% 11.4% 36.0% 8.2%Societe Generale SOGN.PA Jean-Francois Neuez € 38.90 -40.2% -8.7% 25.5% -20.3%Standard Chartered STAN.L Frederik Thomasen p 1842.00 56.2% 3.1% 18.7% 28.1%Svenska Handelsbanken SHBa.ST Aaron Ibbotson, CFA Skr 214.00 30.5% 4.1% 14.7% 1.3%Swedbank SWEDa.ST Aaron Ibbotson, CFA Skr 94.75 10.7% 10.7% 41.8% 25.1%TT Hellenic Postbank S.A. GPSr.AT Heiner Luz € 3.19 -48.2% -31.1% 27.6% -29.3%UBI Banca UBI.MI Domenico Vinci € 6.79 -55.7% -5.3% 1.3% -31.7%UBS UBSN.VX Jernej Omahen SFr 15.52 -35.3% -12.9% 5.4% -4.1%UniCredit CRDI.MI Domenico Vinci € 1.66 -33.5% -13.7% 5.8% -26.4%Vontobel VONN.S Jean-Francois Neuez SFr 33.40 -6.3% 11.1% 13.8% 14.2%
FTSE World Europe (GBP) 375.88 13.0% 7.0% 15.6% 2.7%Index performance in stock price currency 5.8 -12.7% 7.4% 6.7% -4.8%
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 24
Appendix I: Peer group, methodology and trying to bridge the gap in US GAAP and IFRS
Global investment banking peer group
Throughout this report we use the term European investment banks (“European IBs”) to describe a group of the following banks:
Credit Suisse (CS), UBS, Deutsche Bank (DBK) and Barclays (BARC). Similarly, we use US investment banks (“US IBs”) to describe
the following group: Bank of America (BAC), Citigroup (C), JPMorgan (JPM) and Morgan Stanley (MS). In our view, the market views
these two groups of banks as “peers”.
Total assets – using US GAAP where available and US GAAP proxy where not
Importantly, we note that the accounting standards used by IBs are not uniform. US banks and CS file their accounts under US
GAAP, while DBK, UBS and BARC do so under IFRS. Total assets are higher under IFRS as netting of certain balances is not allowed.
By far the largest area of difference is the treatment of derivatives (replacement values), where US GAAP uses net and IFRS gross
balances.
There are a number of ways to adjust the total assets difference under US GAAP and IFRS, and all are approximate. In this note, we
adjust by calculating US GAAP proxy assets for banks that file accounts under IFRS as total IFRS assets less total derivative balances
(positive replacement values). Total asset figures for IFRS banks are presented on this basis in all Exhibits and in all of our
calculations.
DBK discloses their own “target definition” leverage ratio, which is based on US GAAP proxy assets and equity. Here, DBK adjusts
its IFRS total assets (€1,958 bn) for €914 bn, which consists of netting of derivatives (€760 bn, 83% of the total adjustment),
additional pending settlements (€144 bn, 16%) and additional reverse repo netting (€10 bn, 1%). We are not able to replicate the
additional pending settlements and reverse repo netting for the three IFRS reporting banks in Europe, so rather than follow DBK’s
approach we deduct the gross derivatives balance for all; in the case of DBK our adjusted assets are within 10% of that of DBK.
UBS discloses “FINMA assets”, which are used to calculate FINMA leverage ratios. These are calculated as follows: total assets -
derivatives (nettable under Swiss GAAP) - loans to Swiss clients (ex interbank) - cash – other, with all balances quarter average.
Total assets adjusted in this manner are SFr792 bn. However, adding back loans to Swiss clients and cash, total assets would rise to
SFr991 bn. Under our approach (IFRS assets less derivatives) we get to SFr923 bn.
Tangible equity
We calculate tangible equity as per US GAAP and IFRS reporting of stated equity respectively, adjusted for total intangible assets.
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 25
Exhibit 18: Our path of adjustments to broadly comparable assets and leverage ratios Leverage ratio calculation, 3Q2010
Source: Company data, Goldman Sachs Research estimates.
Appendix II: Swiss bank returns to de-rate, in absolute and relative terms, in our view
Our analysis of the steady-state returns, under new regulatory regime is laid out in Exhibit 19. The analysis follows the following key
steps:
1. TE normalization. Normalized 2012 tangible equity is assumed to be equal to 2012E Equity Tier 1 estimate. This adjustment
eliminates such temporary distortions to TE as gains on own debt and cash flow hedges.
2. Progression toward target capital structure. We than assume that banks will pay no dividends and do not grow RWA until
target capital structure is reached, through compounding of normalized profits. When targeted equity Tier 1 is reached, we assume
banks move to retire existing hybrids via repurchase at par. Furthermore, we assume that CoCos are issued to achieve targeted Tier
1 ratio (total capital ratio of 20%).
3. Target capital structure. We consider the following three target capital structure scenario for CS and UBS – these are in line with
the current Swiss regulatory proposal (for more on this topic see our note: October 12, 2010: Swiss endorse CoCos – laying out
scenarios for European TBTF capital surcharge).
[1] 11% equity Tier 1 + 3% CoCo (high trigger) + 6% CoCo (low trigger)
[2] 14% equity Tier 1 + 6% CoCo (low trigger)
[3] 20% equity Tier 1
Total Assets Tangible Assets Tangible equity Leverage ratios
Reporting GAAP
Reporting CCY IFRS Adjustment US GAAP (or
proxy) Intagibles US GAAP (or proxy) CCY IFRS US GAAP (or
proxy)Europe
CS US SFr ‐ ‐ 1,067 9 1,058 25 ‐ 43x
UBS IFRS SFr 1,461 517 943 10 933 37 39x 25x
DBK (incl DPB) IFRS € 2,189 820 1,369 14 1,356 35 63x 39x
BARC IFRS £ 1,587 505 1,082 9 1,073 41 39x 26x
US
BAC US US$ ‐ ‐ 2,340 83 2,257 130 ‐ 17x
C US US$ ‐ ‐ 1,983 31 1,953 132 ‐ 15x
JPM US US$ ‐ ‐ 2,142 52 2,090 114 ‐ 18x
MS US US$ ‐ ‐ 841 12 830 36 ‐ 23x
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 26
For DBK, we assume the following two scenarios, which are based around the current Basel III proposal:
[1] 8% equity Tier 1 + 3% CoCo (low trigger)
[2] 11% equity Tier 1
4. Steady-state net income. We estimate steady-state net income by taking GS 2012 net income estimates, adding cost of hybrids
(that will be repurchased), subtracting cost of high and low trigger CoCo and adding yield on additional equity accumulated (at a
rate for a senior bond).
We assume the following rates for key instruments:
CoCo (high trigger): 7.50% after tax, 10% before tax;
CoCo (low trigger): 6.75% after tax, 9% before tax;
Tier 1 hybrids: 5.25% after tax, 7% before tax;
Senior unsecured debt: 2.25% after tax, 3% before tax.
5. Steady-state ROTE. We divide steady-state net income by TE achieved at the time when target capital structure is reached.
Using UBS as an example, the analysis would work as follows (again, Exhibit 19 lays this out for all three banks under review), if
we assume a capitalization scenario of “14% equity Tier 1 + 6% CoCo”, which is our target scenario:
1. TE normalization. We forecast UBS tangible equity at SFR53.5 bn in 2012E. We normalize TE by adjusting for own share
deduction (SFr2.3 bn), cash flow hedges impact (SFr2.2 bn), gain on own debt (SFr0.8 bn) and other temporary effects (SFr0.1bn) to
arrive to normalized TE of SFr48.1 bn.
2-3. Target capital structure. We assume that UBS pays no dividend until target equity Tier 1 ratio of 14% is reached in 2013. Than,
we assume, that UBS redeems SFr5.2 bn of hybrids and issues SFr20.6 bn of CoCo (low trigger) to bring total Tier 1 ratio inline with
the 20% capital target.
4. Steady-state net income = SFr7.8 bn = 2012 net income of SFr8.2 bn + saved expense on repurchased hybrids of SFr0.3 bn –
total cost of CoCo of SFr1.4 bn + yield on equity build up of SFr0.7 bn.
5. Steady-state ROTE of 14.3% is derived from steady state net income of SFr7.8 bn and steady-state TE of SFr54.3bn
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 27
Exhibit 19: New regulation pressures IBs’ returns, more so for the Swiss IBs than for DBK, on our analysis
Normalized ROTE assuming different capital structures, %
Source: Company data, Goldman Sachs Research estimates.
CS UBS DBK
[1] [2] [3] [1] [2] [3] [1] [2]
GS(2012E)* 11% + 9% 14% + 6% 20% GS(2012E)* 11% + 9% 14% + 6% 20% GS(2012E)* 8% + 3% 11%
Normalised capital structure (year) 2012N 2014 2015 2018 2012N 2013 2014 2017 2012N 2013 2016
Capital structure (% of RWA)
Equity Tier 1 (B3) 10.8% 11.0% 14.0% 20.0% 12.0% 11.0% 14.0% 20.0% 8.1% 8.0% 11.0%
CoCo (H) 0.0% 3.0% 0.0% 0.0% 0.0% 3.0% 0.0% 0.0% 0.0% 0.0% 0.0%
CoCo (L) 0.0% 6.0% 6.0% 0.0% 0.0% 6.0% 6.0% 0.0% 0.0% 3.0% 0.0%
Hybrids 4.2% 0.0% 0.0% 0.0% 1.5% 0.0% 0.0% 0.0% 2.3% 0.0% 0.0%
Tier 1 (B3) 15.0% 20.0% 20.0% 20.0% 13.5% 20.0% 20.0% 20.0% 10.5% 11.0% 11.0%
Capital structure
RWA (B3) 343 343 343 343 343 343 343 343 532 532 532
Equity Tier 1 (B3) 37 38 48 69 41 38 48 69 43 43 59
CoCo (H) 0 10 0 0 0 10 0 0 0 0 0
CoCo (L) 0 21 21 0 0 21 21 0 0 16 0
Hybrids 14 0 0 0 5 0 0 0 12 0 0
Tier 1 (B3) 51 69 69 69 47 69 69 69 56 59 59
Net income
Net income + cost of hybrids 8.2 8.2 8.2 8.2 8.5 8.5 8.5 8.5 6.9 6.9 6.9
(-) Cost of CoCo (H) 0.0 -0.8 0.0 0.0 0.0 -0.8 0.0 0.0 0.0 0.0 0.0
(-) Cost of CoCo (L) 0.0 -1.4 -1.4 0.0 0.0 -1.4 -1.4 0.0 0.0 -1.1 0.0
(-) Cost of hybrids -0.8 0.0 0.0 0.0 -0.3 0.0 0.0 0.0 -0.7 0.0 0.0
(+) Interest on bonds repurchased 0.0 0.5 0.5 0.5 0.0 0.7 0.7 0.7 0.0 0.2 0.2
Net income (shareholders) 7.5 6.6 7.3 8.7 8.2 7.0 7.8 9.1 6.2 6.0 7.1
Ratio
ROTE (normalised) 20.2% 17.4% 15.3% 12.7% 17.1% 15.9% 14.3% 12.2% 13.9% 13.7% 11.8%
v 2012E - -14% -24% -37% - -7% -16% -28% - -2% -15%
TA / TE 29x 28x 22x 16x 20x 21x 17x 13x 31x 32x 23x
TA / (TE + CoCo) 16x 16x 16x 13x 13x 13x 23x 23x
* Normalised tangible equity = CT1 (Basel 3) + permanent deductions (DTA, pension assets, shortfall of a stock of provisions over expected loss)
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 28
Reg AC
We, Jernej Omahen and Richard Ramsden, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their
securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Investment Profile
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth,
returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage
universe.
The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI,
ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month
volatility adjusted for dividends.
Quantum
Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make
comparisons between companies in different sectors and markets.
Disclosures
Coverage group(s) of stocks by primary analyst(s)
Jernej Omahen: Europe-Pan-Euro Banks. Richard Ramsden: America-Large Banks.
America-Large Banks: Bank of America Corporation, Citigroup Inc., J.P. Morgan Chase & Co., Morgan Stanley & Co., PNC Financial Services, U.S. Bancorp, Wells Fargo & Company.
Europe-Pan-Euro Banks: Agricultural Bank of Greece, Allied Irish Bank, Alpha Bank, Banca Monte dei Paschi di Siena, Banca Popolare di Milano, Banco Pastor, Banco Popolare, Banco Popular Espanol,
Banco Sabadell, Banesto, Bank of Cyprus, Bank of Ireland, Bank of Piraeus, Bankinter, Barclays plc, BBVA, BNP Paribas, Commerzbank AG, Credit Agricole SA, Credit Suisse, Credito Emiliano, Credito
Valtellinese, Danske Bank, Deutsche Bank, Deutsche Postbank, Dexia, DnB NOR, EFG Eurobank, EFG International, Erste Bank, Grupo Santander, Hellenic Bank, HSBC, Intesa Sanpaolo, Julius Baer
Group, KBC, Lloyds Banking Group Plc, Marfin Popular Bank, National Bank of Greece, Natixis, Nordea, Raiffeisen Bank International, Royal Bank of Scotland, Sarasin, SEB, Societe Generale, Standard
Chartered, Svenska Handelsbanken, Swedbank, TT Hellenic Postbank S.A., UBI Banca, UBS, UniCredit, Vontobel.
Company-specific regulatory disclosures
The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of
Goldman Sachs and referred to in this research.
Goldman Sachs beneficially owned 5% or more of common equity (excluding positions managed by affiliates and business units not required to be aggregated under US securities law) as of the
second most recent month end: Credit Suisse (SFr38.85) and UBS (SFr15.77)
Goldman Sachs has received compensation for investment banking services in the past 12 months: BNP Paribas (€50.61), Credit Suisse (SFr38.85) and Deutsche Bank (€38.56)
Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and
UBS (SFr15.77)
Goldman Sachs has received compensation for non-investment banking services during the past 12 months: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and UBS (SFr15.77)
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 29
Goldman Sachs had an investment banking services client relationship during the past 12 months with: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and UBS (SFr15.77)
Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and
UBS (SFr15.77)
Goldman Sachs had a non-securities services client relationship during the past 12 months with: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and UBS (SFr15.77)
Goldman Sachs has managed or co-managed a public or Rule 144A offering in the past 12 months: BNP Paribas (€50.61)
Goldman Sachs holds a position greater than U.S. $15 million (or equivalent) in the debt or debt instruments of: BNP Paribas (€50.61)
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Buy Hold Sell Buy Hold Sell
Global 30% 54% 16% 50% 43% 37%
As of October 1, 2010, Goldman Sachs Global Investment Research had investment ratings on 2,845 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment
Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage
groups and views and related definitions' below.
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 30
Price target and rating history chart(s)
Regulatory disclosures
Disclosures required by United States laws and regulations
See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or
other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; for equity securities, market making and/or
specialist role. Goldman Sachs usually makes a market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.
The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their
households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes
investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer,
director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman Sachs & Co. and
therefore may not be subject to NASD Rule 2711/NYSE Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts.
Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if
with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at http://www.gs.com/research/hedge.html.
Additional disclosures required under the laws and regulations of jurisdictions other than the United States
The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. Australia: This research, and any
access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. Canada: Goldman Sachs & Co. has approved of, and agreed to take responsibility for, this
research in Canada if and to the extent it relates to equity securities of Canadian issuers. Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by the company
of travel expenses for such visits. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs (Asia) L.L.C.
India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (India) Securities Private Limited; Japan: See below. Korea: Further
information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. Russia: Research reports distributed in the Russian
Credit Suis se (CSGN.VX)
61
62
68716867
6443
4560
597058
5360
57.2144.9
50.5
53
69.8968.52
82.386.3
2030405060708090
100
200
250
300
350
400
450Goldman Sachs rating and stock price target history
Stock Price Currency : Sw iss Franc
Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 9/30/2010.
The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.
Rating
Price target
Price target at removal
Covered by Jernej Omahen,as of Apr 9, 2009
Not covered by current analyst
Oct 1, 2007 N
FTSE World Europe (GBP)
Inde
x Pr
ice
Stoc
k Pr
ice Nov 20 Apr 25 Oct 3
S NN
BD J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S
2007 2008 2009 2010
De utsche Bank (DBKGn.DE)
57.4959.31
56.5748.36
46.5447.45
48.3635.59
34.6753.84
60.22
62.96
60.2266.61
72.0974.82
75.7480.95
90.2492.53
0
20
40
60
80
100
100150200250300350400450500
Goldman Sachs rating and stock price target history
Stock Price Currency : Euro
Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 9/30/2010.
The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.
Rating
Price target
Price target at removal
Covered by Jernej Omahen,as of Apr 9, 2009
Not covered by current analyst
FTSE World Europe (EUR)
Inde
x Pr
ice
Stoc
k Pr
ice
NN
D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S2007 2008 2009 2010
UBS (UBSN.VX)
22.8
19.4
19.619.5
1817.2
22.112.5
20
25
31
34
32.82
31.4535.57
37.3546.87
56.83
56.7266.0866.8869.99
01020304050607080
200
250
300
350
400
450Goldman Sachs rating and stock price target history
Stock Price Currency : Sw iss Franc
Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 9/30/2010.
The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.
Rating
Price target
Price target at removal
Covered by Jernej Omahen,as of Apr 9, 2009
Not covered by current analyst
Oct 1, 2007 B
FTSE World Europe (GBP)
Inde
x Pr
ice
Stoc
k Pr
ice Dec 19
NN
D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S2007 2008 2009 2010
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 31
Federation are not advertising as defined in the Russian legislation, but are information and analysis not having product promotion as their main purpose and do not provide appraisal within the
meaning of the Russian legislation on appraisal activity. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte.
(Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully consider their own investment risk. Investment
results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial
Services Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent
to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request.
European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available at
http://www.gs.com/client_services/global_investment_research/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with Investment Research.
Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer under the Financial Instrument and Exchange Law, registered with the Kanto Financial Bureau (Registration No. 69), and is a
member of Japan Securities Dealers Association (JSDA) and Financial Futures Association of Japan (FFAJ). Sales and purchase of equities are subject to commission pre-determined with clients plus
consumption tax. See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities
Finance Company.
Ratings, coverage groups and views and related definitions
Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a
stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review
Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular
coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the
potential return or the likelihood of the realization of the return.
Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for
all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership.
Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one
of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The
investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12
months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage
group's historical fundamentals and/or valuation.
Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic
transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because
there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and
price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not
meaningful and is therefore excluded.
Global product; distributing entities
The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant to certain contractual arrangements, on a global
basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio
strategy. This research is disseminated in Australia by Goldman Sachs & Partners Australia Pty Ltd (ABN 21 006 797 897) on behalf of Goldman Sachs; in Canada by Goldman Sachs & Co. regarding
Canadian equities and by Goldman Sachs & Co. (all other research); in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman
Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs & Partners New Zealand Limited on behalf of Goldman Sachs; in
Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman Sachs & Co. Goldman Sachs
International has approved this research in connection with its distribution in the United Kingdom and European Union.
European Union: Goldman Sachs International, authorized and regulated by the Financial Services Authority, has approved this research in connection with its distribution in the European Union and
United Kingdom; Goldman Sachs & Co. oHG, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany.
General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is
accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports
published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment.
Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a
substantial percentage of the companies covered by our Global Investment Research Division. Goldman Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).
December 9, 2010 Europe: Banks
Goldman Sachs Global Investment Research 32
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are
contrary to the opinions expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the
recommendations or views expressed in this research.
We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or
derivatives, if any, referred to in this research.
This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal
recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this
research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income
from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have
adverse effects on the value or price of, or income derived from, certain investments.
Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options
disclosure documents which are available from Goldman Sachs sales representatives or at http://www.theocc.com/about/publications/character-risks.jsp. Transactions cost may be significant in option
strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request.
All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or
available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For all research available on a particular stock, please contact
your sales representative or go to http://360.gs.com.
Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282.
Copyright 2010 The Goldman Sachs Group, Inc.
No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.