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Global Equity Research

13 March 2012

Global Investment Banks


IB landscape changes across the globe the path to
an acceptable ROE for Tier I and II players

Global Banks
Kian Abouhossein

AC

(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
J.P. Morgan Securities Ltd.

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com
J.P. Morgan Securities Ltd.

Alex Kantarovich, CFA

AC

(7-495) 967-3172
alex.kantarovich@jpmorgan.com
J.P. Morgan Bank International LLC
AC

Delphine Lee

(33-1) 40 15 49 28
delphine.x.lee@jpmorgan.com
J.P. Morgan Securities Ltd.

Eugenio M Cicconetti

AC

(44-20) 7325-8215
eugenio.cicconetti@jpmorgan.com
J.P. Morgan Securities Ltd.

Joseph Leung

AC

(852) 2800-8517
joseph.mj.leung@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited

Mervin Naidoo

AC

(27-11) 507-0716
mervin.x.naidoo@jpmorgan.com
J.P. Morgan Equities Ltd.

Naresh Bilandani

AC

(971) 4428-1763
naresh.n.bilandani@jpmorgan.com
JPMorgan Chase Bank, N.A., Dubai Branch

Natsumu Tsujino, CFA

AC

(81-3) 6736-8618
natsumu.tsujino@jpmorgan.com
JPMorgan Securities Japan Co., Ltd.

Raul Sinha

AC

(44-20) 7742-2190
raul.sinha@jpmorgan.com
J.P. Morgan Securities Ltd.

Saul Martinez

AC

(1-212) 622-3602
saul.martinez@jpmorgan.com
J.P. Morgan Securities LLC

Scott Manning

AC

(61-2) 9220-1803
scott.r.manning@jpmorgan.com
J.P. Morgan Securities Australia Limited

Seshadri K Sen, CFA

AC

(91-22) 6157-3575
seshadri.k.sen@jpmorgan.com
J.P. Morgan India Private Limited

Sofie Peterzens

AC

(44-20) 7777-9063
sofie.c.peterzens@jpmorgan.com
J.P. Morgan Securities Ltd.

Vivek Juneja

AC

(1-212) 622-6465
vivek.juneja@jpmorgan.com
J.P. Morgan Securities LLC

See page 229 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan 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.
www.morganmarkets.com

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table of Contents
For Specialist Sales advice,
please contact:
Harry Harutunian
(44-20) 7779-2695
harry.harutunian@jpmorgan.com

James Lloyd
(44-20) 7742-4267
james.d.lloyd@jpmorgan.com

Adriana Roitstein
(1-212) 622-2702
adriana.roitstein@jpmorgan.com

Executive Summary ......................................................................... 3


Investment Banking Wallet Outlook ............................................. 17
IB revenue wallet: 2005-06 normalised environment................. 18
Global Investment Banking Industry: Regional Overview ......... 25
U.S. IB industry .............................................................................. 26
MENA IB overview.......................................................................... 57
Global Investment Banking headwinds: ROE below cost of
equity .............................................................................................. 61
Regulatory headwinds and poor IB cost management:
leads to ROE below CoE................................................................ 62
Winners and Losers: a the Global Investment Banking
Industry........................................................................................... 83
Global IB headwinds trigger paradigm shift to generate
adequate S/H ROEs........................................................................ 95
IB Industry in need of 3 Step changes to improve returns to
10-13% ............................................................................................ 96
Global Investment Banking Revenue Breakdown by Product.. 115
Global Investment Banking P&L Quarterly and Yearly trends.. 125
Quarterly IB Revenue Progression ............................................. 126
Global Investment Banks: Company outlook and
Investment case ........................................................................... 135
UBS ............................................................................................... 136
CSG............................................................................................... 139
DBK............................................................................................... 142
Barclays........................................................................................ 145
GS ................................................................................................. 147
MS ................................................................................................. 150
Citigroup....................................................................................... 152
Bank of America........................................................................... 153
Nomura Holdings ......................................................................... 154
Macquarie Group ......................................................................... 157
Investec ........................................................................................ 161
BNP Paribas ................................................................................. 165
Socit Gnrale.......................................................................... 168
Crdit Agricole ............................................................................. 171
RBS ............................................................................................... 174
HSBC ............................................................................................ 176
Standard Chartered...................................................................... 179
UniCredit....................................................................................... 181
SEB ............................................................................................... 184
VTB ............................................................................................... 186
EFG Hermes ................................................................................. 188
ICICI .............................................................................................. 191
Itau Unibanco ............................................................................... 192
Company financials ..................................................................... 195

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Executive Summary

Executive Summary

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Executive summary
Table 1: Selective Global Banks
across geographies included in this
IB analysis
North America
Goldman Sachs
Morgan Stanley
Citigroup
Bank of America

JAPAN
Nomura Holdings

Europe
UBS
CSG
Deutsche Bank
Barclays
RBS
HSBC
Standard
Chartered
BNP Paribas
Socit Gnrale
Crdit Agricole
Natixis
SEB
UniCredit
Mediobanca

MENA
EFG Hermes

Source: J.P. Morgan

RUSSIA
VTB

Africa
Investec
Australia
Macquarie Group
Brazil
Itau Unibanco
India
ICICI Bank

In this document, we analyse the evolving business model of Investment Banks to a


changing global IB landscape, triggered mainly by regulation. We analyse
Investment Banks across geographies, with the list of banks included in our analysis
shown in Table 1.

IB Global revenues normalizing at 2005-06 levels


We believe the IB revenue wallet will not be the driver of higher ROE for IBs and
we expect the IB revenue wallet to run between 2005-2006 levels. On our current
estimates, the IB revenue wallet in 2013E would be down -30% from peak levels
seen in 2009. However, with our base case IB revenue outlook in the middle of
2005-06, we admit the range between the two years is significant at -12% to
+15% from our current base case forecast.
We see no real innovation within the industry to create new products which will
drive the growth story in IB revenues. In addition, we believe the EM revenue
pool is still relatively small compared to developed markets. Comparing IBD
volumes in EM (the BRIC1 and MENA countries) with US and EU markets we see
that, whilst growth has been impressive with a 27% CAGR in all deal volumes 200111 compared to 2% CAGR for US and EU, in general total volumes of activities are
still small compared to developed markets. We estimate IBD revenues in EM
countries (BRIC + MENA +South Africa) to be $7.6bn on average in 2009-2011
compared to $39.8bn for North America+Europe over the same period.
Looking at different IB businesses, overall we believe FICC, with 51% of 2013E
IB revenue share, remains the key driver of the revenue wallet. We estimate
clean FICC revenues to decline -2% p.a. over the next two years. We estimate
equities to outperform FICC with 2% p.a. growth over the next two years but equities
only constitute 26% of the revenue wallet, and with IBD declining -6% in our
estimates in 2012E before increasing 4% in 2013E, we estimate the overall IB
revenue growth rate to be -1% p.a. over the next two years, illustrating the
importance of FICC.

BRIC: Brazil, Russia, India, China

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 1: IB revenue wallet progression since 1999: 2012E-13E between 2005-2006 levels (1999
indexed to 100)
Equities (LHS)

500

Fixed Income (LHS)

Investment Banking (LHS)

450
400
350
300
250
200
150
100
50
0
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012E

2013E

Source: J.P. Morgan estimates, company data. Note: Clean IB revenues (Equities, FICC, Advisory & Underwriting) excluding
writedowns, basis risk losses and DVA/own debt; revenues for GS, MS, DB, UBS, CS, BoA-ML, Citi and JPM included

Industry headwinds: regulation and fixed costs reducing


ROE to 7%
Table 2: Average IB ROE declines
to 6.8% post regulation in 2013E
%, $ thousands

IB ROE
Tier I IB ROE
Tier II IB ROE

PreReg.
13.6%
14.2%
13.3%

PostReg.
6.8%
6.7%
6.8%

306
403

288
380

258

243

IB comp/head
Tier I IB
comp/head
Tier II IB
comp/head

Source: J.P. Morgan estimates

We believe the IB industry is facing two material headwinds in the form of i)


increased regulation and ii) weak staff cost management leading to a structurally
higher compensation fixed cost base and thus making returns in the business highly
cyclical and volatile. We believe these two headwinds will have a material impact
on ROE.
1. Headwind 1: Regulation leads to average IB ROE in our estimates declining
from 13.6% pre-regulation to 6.8% post regulation in 2013E with two-thirds
of the decline coming from the Basel 2.5/3 impacts and the remainder from
different provisions of the Dodd-Frank Act, and UK ICB impact as discussed in
the section from page 62. Although the final implementation timeline of
regulations is still uncertain, with rule writing also delayed in some cases, in our
opinion the market is looking at the IB industry from a new regulatory world
perspective and expects IB managements to pro-actively adjust their business to a
new ROE world triggered by regulatory headwinds.
We estimate average IB ROE to decline to 6.8% post regulations in 2013E,
however, excluding the impact of sections of the Dodd-Frank Act, which only
impact U.S. IBs, and UK ICB proposals, we estimate average ROE of 8.3% for
the U.S. IBs GS, MS and 7.4% for UK IBs Barclays and RBS.

Table 3: IB division compensation


expense split 2012E
%

CS
BNP
SG
Barcap
UBS

Fixed and
Deferred
Comp
88%
88%
83%
83%
71%

Source: J.P. Morgan estimates

Variable
Comp
12%
12%
17%
17%
29%

2. Headwind 2: Compensation regulation headwinds have led to i) higher


salaries and ii) an increase in deferred compensation vesting and being expensed
in future periods which in a difficult revenue environment has significantly
increased the fixed cost base. We estimate Tier I IBs will operate with fixed
compensation levels of 50-60%, while for Tier II IBs, the range is much
higher at 70-90%.
The increased fixed costs in our view make it difficult for IBs to adjust their cost
base, hence we believe most of the IB restructuring going forward may have
to come from senior staff headcount reductions rather than compensation
expense reduction.

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Headwinds lead to polarisation of the IB Industry between


Tier I and II

Our definition of Agency and


Institutional Players
Agency Players: Run mainly on
execution model for their universal
bank captive corporate, retail or
private client relationships for
revenues. Advice is focused on the
captive client base rather than
institutional global clients. Business is
focused following clients. Staffing sits
mainly within country headquarters
rather than New York and London to
minimize staff costs.
Institutional Players: Run a full-scale,
global business, providing complex
solutions to clients, capital, market
makers and liquidity providers. They
compete for global asset gatherers,
sovereigns, and corporates. Financial
institutions will be a large part of the
revenue mix. Staff levels sit mainly in
the financial hubs New York and
London.

These two headwinds discussed above could lead to polarisation of the IB industry in
our view as we believe Tier I players should be able to manage their cost base
better having generally lower salaries as well as less deferred compensation
schedules. More importantly the main differentiator between Tier I and Tier II IB
players would be FICC in our view considering it constitutes 51% of the 2013E
IB revenue wallet in our estimates and operates at a higher efficiency level than the
equity business (i.e. more absolute profit). In addition FICC is more affected by the
regulatory changes relative to equities. We believe the winning model in a more
polarised IB environment should be Tier I institutional players and Boutiques
with a high profitability model with Tier II agency players in the middle.
Emerging market players should continue to benefit from growth in the region.
Generally, FICC is becoming more cash-equity like due to regulatory
pressures. This is led by i) Dodd-Frank increasing the transparency within FICC,
moving from an OTC to a more transparent SEF platform trading business as we are
used to in cash equities (but not like exchanges) and ii) due to Basel capital rules
increasing FICC capital consumption, IB for the FICC clients becoming highly
valuable.
1. As we have witnessed in cash equities, FICC will likely become even more
execution-only focused with a drive to electronic trading. These platform builds
in our view are high barriers to entry due to the heavy technological investments
involved which will likely only be supported by large-scale FICC revenue players
generating c.$10bn+ (i.e. Tier I players). Tier II IBs generating about $5bn will
struggle to compete in our view. Over time liquidity will flow to IBs with the best
technology-execution type platforms as we witnessed in cash equities, which has
seen GS and CS in top positions in the equity electronic segment.
2. To be a Tier I FICC player in the future one needs to be running a full
product/platform business as seen in cash equities with the willingness to commit
capital on behalf of clients. In short, in a Basel 3 world, clients will be willing to
pay for IB capital access. Cash Equities has become an increasingly commoditylike business for two key reasons: i) the rise of cheap execution through electronic
trading, and ii) the expectations from clients for IBs to commit capital on their behalf
to get paid in full agency trades by clients. The capital usage in trading is part of the
revenue wallet calculation paid by the client reflected in the block loss level. Hence
we think in a FICC world which is becoming more transparent, giving access to
balance sheet and capital is the key. This means FICC Tier I players will likely
remain committed to the Basel 3 low ROE businesses such as hybrid and exotics
within FICC, leading to gaining flow market shares from clients that will pay for the
access to IB capital. We believe Tier II IBs could lose continuous flow market
share due to their unwillingness to commit capital on behalf of clients.
Equity boutiques are highly profitable, illustrating the issue of polarisation, as equity
clients are willing to pay for advice. We expect FICC boutiques to start to develop
more actively in FICC, which is becoming more cash equity like.
We already see a large polarisation in the IB businesses but we believe Tier I
players could become even bigger liquidity providers in FICC. The top 6 players
account for 50% of our estimated 2013E IB revenue wallet while the top 10 players

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

account for 72% of our estimated IB revenue wallet in 2013E, leaving the bottom 10
players with 8% market share.
Table 4: Classification based on
FICC
Tier I
Institutional
GS
DB
BARC
Citi
BofA
Tier II
Institutional
MS
UBS
CS
BNPP
SG
RBS
Jefferies
RBC

FICC is even more concentrated today with the Top 6 players accounting for
58% of market share in our estimates with the next 5 players only accounting for
24% of our 2013E estimated revenue wallet. The bottom 12 players only account
for 10% of 2013E FICC market share in our estimates.

Tier II Agency
HSBC
Standard
Chartered

In Equities we estimate the Top 6 players account for 48% of our revenue wallet
share in 2013E with the bottom 10 players again accounting for only 8% of revenue
wallet share in our 2013E estimates. We see exit strategies by Tier II institutional IBs
such as RBS and UCG, announced recently, leading to ongoing market consolidation.

Growth Market
Players
EFG Hermes
Investec
VTB

In IBD as well we see a similar picture, with the Top 6 players accounting for
57% of the revenue wallet in our 2013E estimates with the bottom 10 players only
accounting for 6% of the IBD revenue wallet. We note that within IBD U.S. IBs are
relatively more profitable compared to Europe due to more concentration.

Itau Unibanco
ICICI BANK
Tier III Agency
CASA
Natixis
SEB
UCG
MB

We show our 2013E estimated market shares based on our IB revenue wallet by bank
in Table 6 and Table 7.

Source: J.P. Morgan estimates

Table 5: IB revenue wallet share


highly concentrated even pre
market share movements
%
2013E
Top 6
Top 10
Bottom
10

FI
58%
76%
7%

Eq.
48%
69%
8%

IBD
57%
79%
6%

IB
50%
72%
8%

Source: J.P. Morgan estimates

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 6: Global Investment Banks: Revenue Market share by product 2013E


$ million
JPM*

GS**

DB

BofA

Citi

BARC

MS

HSBC

CS

BNPP

UBS

Nomura

RBS

IB Fees
Advisory
Equity Underwriting
Debt Underwriting
Total

11.8%

11.9%
8.2%
7.0%
8.8%

5.8%
6.0%
6.1%
5.9%

9.9%
13.5%
11.2%
11.2%

3.6%
5.1%
9.7%
6.7%

6.3%
5.6%
8.9%
8.1%

12.7%
11.0%
5.7%
9.0%

5.1%
6.7%
10.3%
7.8%

6.9%
6.2%
5.9%
6.2%

0.7%
1.5%
2.3%
1.6%

2.8%
6.2%
1.7%
3.1%

3.0%
4.2%
1.4%
2.5%

0.5%
0.6%
3.8%
2.0%

Fixed Income Markets


SPG
Credit Trading
FX
Rates
GEM
Commodities
Total Fixed Income Markets

12.4%

5.5%
17.2%
7.4%
10.5%
2.7%
21.3%
9.7%

6.7%
10.2%
14.6%
10.2%
7.9%
9.6%
9.6%

9.2%

5.7%
6.8%
3.0%
12.1%
14.3%
7.0%
8.2%

3.7%
4.6%
4.3%
5.8%
1.6%
13.3%
4.7%

5.7%
1.5%
6.6%
2.7%
16.1%
0.0%
5.6%

11.4%
5.6%
2.2%
4.4%
4.6%
2.7%
4.3%

2.0%
0.8%
4.6%
6.6%
1.9%
2.1%
3.5%

1.3%
6.5%
7.0%
4.5%
2.3%
1.4%
4.0%

3.4%

2.7%
4.1%
3.9%
5.1%
5.6%
0.0%
3.9%

7.3%

16.7%
18.9%
11.5%
11.6%***

5.2%
6.7%
5.9%
5.4%

6.2%

4.9%

5.6%
2.8%
6.8%
5.0%

8.3%
12.4%
14.8%
9.4%***

1.8%
3.2%
12.4%
5.0%

7.3%
12.5%
8.6%
7.2%***

10.2%
0.5%
1.1%
4.4%

5.8%
8.6%
6.3%
6.3%

5.2%

2.3%
0.7%
0.6%
1.4%

10.2%

9.3%

8.1%

7.8%

7.6%

7.1%

6.4%

5.6%

5.1%

5.0%

4.1%

3.4%

3.3%

Equity Markets
Equity Derivatives
Cash equities
Prime brokerage
Total equities1
Total Revenue

8.4%

Source: J.P. Morgan estimates. *JPM market share assuming constant revenues at 2011 levels. JPM FICC revenues adjusted for DVA gain of $70m in 2Q, $529m in Q3 and DVA loss of $135m in 4Q 2011. Q2 2011 DVA gains of $140m in trading equally divided
between FICC & Equity Markets. JPM Equities revenues adjusted for DVA gains of $70m in 2Q, $377m in Q3 and DVA loss of $27m in Q4 2011. Q2 2011 DVA gains of $140m in trading equally divided between FICC & Equity Markets.**GS only institutional Client
services revenues for Fixed Income and equities. ***/1. Equity revenues adjusted for brokerage, clearing and settlement fees for GS, MS and CS.

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 7: Global Investment Banks: Revenue Market share by product 2013E


$ million
SG
IB Fees
Advisory
Equity Underwriting
Debt Underwriting
Total
Fixed Income Markets
SPG
Credit Trading
FX
Rates
GEM
Commodities
Total Fixed Income Markets
Equity Markets
Equity Derivatives
Cash equities
Prime brokerage
Total equities1
Total Revenue

RBC2

CASA

STAN

MQG

UCG

Natixis

0.7%
1.1%
1.8%
1.3%

2.9%

1.2%
0.9%
1.1%
1.1%

0.4%
0.5%
0.6%
0.5%

3.1%
2.2%
0.4%
1.6%

0.3%
0.6%
0.5%
0.5%

0.1%
0.2%
0.1%
0.2%

0.8%
0.8%
2.7%
3.0%
0.8%
1.1%
1.8%

2.0%
3.6%
0.8%
1.9%
0.0%
1.8%
1.5%

0.9%
0.4%
1.9%
1.7%
0.4%
0.0%
1.0%

0.0%
0.6%
8.8%
3.6%
0.0%
3.8%
2.9%

0.0%
0.0%
0.3%
0.2%
0.0%
7.3%
1.2%

1.0%
1.5%
3.4%
1.4%
2.1%
1.0%
1.7%

0.0%
0.0%
0.6%
0.6%
0.2%
1.1%
0.4%

13.8%
1.0%
0.0%
5.6%

4.3%

0.0%
4.0%
0.0%
1.3%

0.0%
2.2%
0.0%
0.6%

0.0%
1.5%
7.3%
2.3%

3.3%
0.3%
1.0%
1.7%

1.4%
1.0%
0.0%
0.9%

3.3%

2.4%

2.2%

1.6%

1.5%

1.3%

1.2%

Jefferies4

ING3

Investec

VTB

SEB

MB

2.2%

0.6%
0.4%
0.4%
0.5%

0.9%
0.8%
2.2%
1.4%

0.4%
0.4%
0.2%
0.3%

0.5%
0.9%
0.5%
0.6%

0.2%
0.3%
0.1%
0.2%

0.6%

0.0%
0.4%
2.5%
1.8%
0.0%
0.0%
0.9%

0.0%
0.8%
0.2%
0.0%
0.0%
0.0%
0.2%

0.5%

0.3%
0.1%
1.8%
0.1%
0.0%
0.0%
0.4%

0.1%
0.1%
0.2%
0.1%
0.1%
0.1%
0.1%

1.0%

0.6%

0.2%
0.2%
0.0%
0.4%

0.7%

0.4%
0.6%
0.7%
0.5%

1.6%
0.1%
0.5%
0.8%

1.0%

0.7%

0.5%

0.5%

0.4%

0.3%

Source: J.P. Morgan estimates. * GS only institutional Client services revenues for Fixed Income and equities.1. Equity revenues adjusted fro brokerage, clearing and settlement fees for GS, MS and CS. 2. estimated using average IB universe growth rates on 2011
numbers. 3. Estimated from 9M-11 disclosure with Investor day 2011 using average IB universe growth rates. 4. Year ending November for Jefferies; estimated using average IB universe growth rates on 2011 numbers

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Headwinds leading to market polarisation triggering


paradigm shift of the global IB industry

Table 8: Step 1: Average 2013E IB


ROE improves to 7.7% post legacy
asset reduction
%, $ thousands
Post
reguln
Average IB ROE
Average Tier I IB
ROE
Average Tier II IB
ROE

6.8%

Post
legacy
asset
reducn.
7.7%

6.7%

7.7%

6.8%

7.6%

With the backdrop of IB regulatory headwinds, cost inflexibility and FICC


becoming more "cash-equity like" we see a lot of moving parts and believe all
IBs will have to structurally change their business models to make adequate
returns for shareholders.
With the starting point of an average 6.8% IB ROE post regulation in 2013E, we
see three key levers for IBs' managements to improve ROE in the long-term:
1.

IB managements could focus on legacy asset reductions which together with


additional RWA mitigations should improve average IB ROE to 7.7% in
2013E in our estimates. We expect IB management to take a look-through
approach on legacy assets in order to assess how much further measures are
required to generate adequate ROEs for S/Hs. In our view, banks which act at
a faster pace will be given more credit by the market for proactively
managing the changing landscape.

2.

Market share movements in FICC in the new regulatory world will increase
the ROE gap between Tier I and Tier II institutional players as discussed in
section on page 100. As we discussed above, and also in the section FICC
becoming more like cash-equity post regulations - winning formula: scale
institutional, captive agency-only, or boutique, we expect increased volumes
of business will flow to FICC liquidity providers with the willingness to commit
capital on behalf of clients in segments such as credit structuring, who at the
same time offer technologically advanced electronic FICC trading platforms, i.e.
scale players who offer a universal FICC solution. We run our sensitivity on a 15% decline in market share for Tier II institutional players and a -5% decline
for selected agency players. Post the market share movements, average IB
ROE in 2013E for Tier I players goes up to 9.2% while for Tier II
institutional players it goes down to 6.9%.

Source: J.P. Morgan estimates

Table 9: Step 2: Average 2013E Tier


I IB ROE improves to 9.2% post
market share movements
%, $ thousands
Post
reguln
Average IB ROE
Average Tier I IB
ROE
Average Tier II IB
ROE

6.8%

Post
mkt.
share
movemt
7.7%

6.7%

9.2%

6.8%

6.9%

Source: J.P. Morgan estimates

Post our sensitivity analysis on FICC market share movements, the top 6
players account for 61% of our estimated 2013E revenue wallet, as shown in
Figure 3, and we expect the key counterparties globally in FICC to include GS,
DBK, Citi, BofA and Barclays.

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(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 2: FICC revenue concentration pre sensitivity on market share


movements

Figure 3: FICC revenue concentration post sensitivity on market


share movements

%
100%
90%
80%
70%

HSBC

60%
40%

BARC
BofA
Citi

30%

DB

50%

MQG. ING KN SEB


INP MB
SG UCG
CASA JEF VTB
NOM.
RBC
STAN
RBS
BNPP
CS
UBS
MS

SG MQG. ING
VTB MB
BNPP STAN
INP
CASA JEF KN SEB
RBC
UBS
UCG
RBS
NOM.
CS

100%
90%
80%

MS

70%

HSBC
BARC

60%

BofA

50%

Citi

40%
DB

30%

20%

GS

20%

10%

JPM*

10%

GS
JPM*

0%

0%
0

10

12

14

16

18

20

22

24

26

28

Source: J.P. Morgan estimates. Note:*JPM clean revenues for 2011 based on published
numbers. JPM FICC revenues adjusted for DVA gain of $70m in 2Q, $529m in Q3 and DVA
loss of $135m in 4Q 2011. Q2 2011 DVA gains of $140m in trading equally divided between
FICC & Equity Markets.

Table 10: Tier 1 vs. Tier II IB


comp/head differential widens post
10%/13% ROE sensitivity in 2013E
$ thousands

Average IB
comp/head
Average Tier I
IB comp/head
Average Tier II
IB comp/head

Prereguln
306

Post
sensitivity
262

403

352

258

243

Source: J.P. Morgan estimates

Table 11: Final IB ROE 2013E post


regulation and ex regulatory
arbitrage
%
Post
reguln
.
Average IB ROE
Average Tier I
IB ROE
Average Tier II
IB ROE

11.0%
13.0%

Post
reguln.
(ex reg
arb.)
12.1%
14.9%

10.0%

10.5%

Source: J.P. Morgan estimates. reg arb:


regulatory arbitrage

10

12

14

16

18

20

22

24

26

Source: J.P. Morgan estimates. Note:*JPM clean revenues for 2011 based on published
numbers. JPM FICC revenues adjusted for DVA gain of $70m in 2Q, $529m in Q3 and DVA
loss of $135m in 4Q 2011. Q2 2011 DVA gains of $140m in trading equally divided between
FICC & Equity Markets.

We note, we do not expect bid-ask spread improvement from a more


concentrated FICC business, as history based on cash-equity markets illustrates
margins have continuously reduced as transparency reduced margins and increase
in electronic trading usage leads to ongoing margin decline. Currently in the US
we estimate 60-70% of cash equity trading is electronic.
3. However, even post market share movements, we believe ROE in the
business would be below cost of equity even for Tier I FICC players which in
our view will lead to transfer of employee return to shareholder return i.e.
further staff cuts as the first step as compensation is inflexible and finally
compensation adjustments as the last resort.
We have analysed equities restructuring post the Spitzer settlement when
staff levels within cash equity were reduced within the equity business by 35%
in the period July 2001 to end 2003 and bonus compensation levels reduced by
35-45%. Within FICC, we estimate -14% reductions in staff levels for the IBs
mainly in FICC post Dodd-Frank Act and Basel rules implementation, as so far
staff reduction has been only -5%.
We estimate Tier I FICC players would have to operate with 13% ROE while
Tier II players would need to operate with 10% ROE. Taking out regulatory
arbitrage issues, ROEs improve to 16.7% for GS, 11.7% for MS, 15% for Barclays
and 11.8% for RBS on our estimates. Post our sensitivity analysis to reach these
ROE levels, comp/head declines by an average -15% from pre-regulation levels.
We note staff levels will be a key expense adjustment as fixed costs due to salary
increases and deferred bonus expenses make it more difficult to reduce staff costs
levels through bonus cuts.

The new IB world post industry paradigm shift


On our analysis, GS remains the best in class IB paymaster even post our
sensitivity analysis while Tier II institutional IBs average comp/head declines of
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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

-37% below the best in class compensation benchmark. We believe the key talent
pool will concentrate on FICC Tier I IBs.
Although 10% ROE for Tier II institutional FICC players looks low, we think
an agency model can be run at lower comp/head and with less volatility in
revenues mainly supporting the Private Banking or Retail client base, and the
business should be able to command 1x TBV valuation. Agency-type employees
focused on executing relationship business arguably will not require material bonus
pay. We believe BNPP is best in class in respect to transferring from an
institutional to an agency type model and operating out of Paris with lower staff
compensation.
Tier I FICC players with more volatile revenues in our view need to generate
13% ROE over time and can be valued at a premium to 1x TBV post
restructuring. Emerging Market focused IBs will likely create superior returns and
should be less affected at this point from the regulatory change, in our view.

Stock selection in a changing landscape: Tier I winners vs.


Tier II restructuring IBs
First of all, we prefer IBs over credit banks as i) we see in the medium term more
positive earnings surprise potential within the IB sector compared to traditional credit
banks as ii) IBs are generally more cost flexible and iii) have the ability to improve
ROEs through the release of capital. These efforts should lead to an adequate
ROE for S/Hs. In our view Tier II FICC institutional players have to make the
most material adjustments transferring from a Tier II institutional IB business with
ambitions of Tier I, to now scaling down to a shareholder friendly agency type FICC
business.
Hence we put forward the question whether to own Tier I FICC IBs such as GS,
DB, Citi, BofA, BARC which could be winners in the long-term and will likely
restructure post regulation and benefit from further market share movements from
Tier II to Tier I, or Tier II such as UBS, CSG which are in restructuring mode
and could release equity? MS may have to follow Swiss banks CS and UBS and
consider restructuring as well, in our view. In such a case (i.e. releasing equity),
we would become more positive on MS at 0.6x tangible BV 2012E.
Tier II institutional FICC IBs in our view will need to restructure now
whereas the market could give Tier I IBs some time goodwill before
pressuring for restructuring. We believe Tier II institutional IBs are under
pressure as ROEs have arguably been inadequate for S/Hs with i) the high
compensation fixed cost leaving them unable to generate adequate returns and ii)
the changing landscape with Basel 2.5 and Basel 3 as of Jan. 2013 leading to
ongoing ROE erosion especially in highly capital-intensive businesses such as
credit.
We believe investors could benefit from owning Tier II IBs in restructuring
mode today given the IB division is valued at close to zero in our current
implied valuation. At the same time, we see opportunity for material capital
release which should be valued at least at 1x tangible BV in the long-term. We
note that even CS and UBS restructuring announcements in our view are not far

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

reaching enough to generate adequate ROEs and hence we expect further ongoing
capital release of these IBs.
Tier I institutional IBs in our view will undertake limited restructuring at this
point and hence will likely trade at a discount to BV until the market feels that
ongoing market share gains are more permanent than cyclical. This in our view
could be years away and hence on an 18-month view we prefer the Tier II
restructuring IBs, with IB implied values close to zero, than Tier I IBs. At a later
stage we are looking to switch from Tier II IBs into Tier I.
We conclude, we remain OW IBs over credit banks and our preferred names in
the IB space are Swiss IBs UBS and CSG on account of their restructuring. We
realize in the short-term FICC houses could outperform due to the strong 1Q12
environment, but our preference for UBS and CSG is based on an 18 month
view. We believe both Swiss IBs should be able to deliver on their restructuring
program. However, to generate at least 10% ROE, we expect further restructuring
measures in terms of staffing and capital release may be necessary to create increased
shareholder value. In short, the smaller the IB business of Tier II FICC becomes,
currently valued at a material discount to BV or zero in our SOP, the more
value is created for shareholders by paying back capital and becoming more
private banking focused.
Table 12: Global Investment Banks: P/BV of the SOP Investment Banking division and sensitivity to group valuations 2013E
Local currency
UBS
12.5
16
2
13

CS
24.5
28
7
21

SG
24.5
26
8
19

BNP
37.0
41
12
30

MS
18.2
23
13
10

DB
35.4
36
20
16

BARC
2.4
2.6
1.8
0.9

GS
117.4
120
102
19

Average
-

SOP P/BV CIB

0.6

0.5

0.3

0.7

0.9

0.6

0.9

0.9

0.7

Implied P/BV of IB at current prices

-0.2

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.4

SOP value IB at 1x BV
Implied SOP Value rest
Implied SOP group
Upside

4
13
17
37%

13
21
34
40%

23
19
41
69%

17
30
47
26%

15
10
25
37%

35
16
51
44%

2
1
3.0
24%

117
19
135
15%

37%

Current share price


SOP TP group
SOP Value IB
Implied SOP value rest

Source: J.P. Morgan estimates. priced from Bloomberg as of 9th March 2012 (intra-day)

Within Tier I IBs we prefer Citi, trading at 0.6x TBV 2012E as we expect good
growth driven by 1) benefit from capital returns given solid capital ratios and
potential for the capital position to grow further with continued shrinkage of Citi
Holdings; 2) continued potential for revenue growth led by its emerging markets
footprint especially in its Consumer and Transaction Services businesses; and 3)
improved operating leverage including in its Securities & Banking business.
Within the Tier I IBs, we see DB and GS as winners and expect them to generate
strong 1Q12 due to their Tier I FICC franchises and gearing. However, we find both
of these Tier I IBs less attractive over the next 18-months. GS is valued at 0.9x
2012E tangible BV generating low RoNAV. We find GS is doing little in terms of
adjusting its compensation ratio and staffing level, the two management control
levers, to generate adequate ROE for shareholders. As we discussed earlier, as a Tier
I IB, we believe GS will wait to get clarity in terms of regulation and exit of Tier II
players before starting to materially change its business model. Hence, we do not see
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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

GS materially re-valuing above its tangible BV. DB in our view is more attractively
valued than GS, but operates with 7.8bn of capital deficit in our estimates and
material tail risk considering NPL coverage of 45% and structured credit assets of
23bn that are operating with mark-to-model losses of 2.7bn. We find in this
respect Citi significantly more attractive at 8.6% fully loaded 2012E at Basel 3
capital position against Deutsche Bank 7.4%. We refer to our report Deutsche Bank:
Downgrade from OW to N: unleveraged valuation unattractive for DB as we
conclude a structural re-rating will be possible post equity issuance, in our view.
Within growth FICC players, our preference is for Investec as we believe it has high
liquidity and adequate capital levels, we estimate 9.5% core tier 1 (Basel 3) for
Investec at present. In addition, we expect gradual improvement in activity levels
which should support top-line and we also believe earnings risk is cushioned by
impairment release in a world where asset prices are improving. Hence at current
valuation, with the stock trading at 0.9x PB (CY12e) and RoNAV 10.5%, riskreward is attractive against global peers. In a scenario of further write-downs of the
run-off book, we calculate the worst case NAV/sh in GBP of 360p (1.1x). We note,
Investec is able to generate a 13.5% ROE in FY14e and 15.4% by FY16e.

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(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 13: Selective Global Banks: Valuation Summary 2012E-13E


Lcl currency
Market
cap ( bn)

UBS
CSG
DB
Euro IBs

39.8
24.8
33.0
97.7

12.3
23.0
43.1

12.3
25.9
47.1

11.8
21.0
44.1

12.8
24.2
48.1

9.4
8.8
7.6
8.7

7.9
7.4
7.4
7.6

1.0
1.1
0.8
1.0

1.0
0.9
0.8
0.9

1.1
1.2
0.8
1.0

1.0
1.0
0.7
0.9

12.3%
14.5%
11.2%
12.5%

13.0%
14.9%
10.4%
12.6%

Fully
Loaded
Basel 3
Eq.Tier 1
2012E (%)
8.5%
6.9%
7.4%
7.7%

SG
BNPP
CASA
French Banks

19.2
45.0
12.0
76.1

45.1
47.9
10.2

48.8
51.0
10.9

44.5
47.0
9.91

48.2
50.2
10.5

7.5
7.4
6.4
7.3

6.8
7.0
5.6
6.7

0.5
0.8
0.5
0.7

0.5
0.7
0.4
0.6

0.6
0.8
0.5
0.7

0.5
0.7
0.5
0.6

7.6%
11.0%
7.8%
9.7%

7.9%
10.9%
8.5%
9.8%

7.5%
8.8%
5.9%
8.0%

35.1
35.0
119.7
44.5
234.3

4.1
0.5
7.8
15.4

4.4
0.5
8.3
16.8

3.9
0.5
7.7
15.4

4.2
0.5
8.2
16.8

8.7
14.8
10.4
11.5
10.9

6.8
11.3
9.1
10.6
9.3

0.6
0.5
1.1
1.6
1.0

0.5
0.5
1.0
1.5
1.0

0.6
0.6
1.1
1.6
1.1

0.6
0.5
1.1
1.5
1.0

7.6%
1.5%
11.4%
14.5%
10.0%

9.1%
4.2%
12.2%
14.4%
11.0%

8.4%
8.7%
9.3%
11.0%
9.4%

46.1
27.4
73.4

125.8
29.6

136.7
31.5

124.5
28.4

135.4
30.3

10.7
9.1
10.1

9.6
8.6
9.2

0.9
0.6
0.8

0.9
0.6
0.8

0.9
0.6
0.8

0.9
0.6
0.8

9.1%
7.2%
8.4%

9.4%
7.2%
8.6%

9.7%
9.9%
9.8%

75.8
65.9
141.7

54.1
13.3

57.4
14.6

54.1
13.3

57.4
14.6

8.0
12.4
10.0

7.0
7.0
7.0

0.6
0.6
0.6

0.6
0.6
0.6

0.6
0.6
0.6

0.6
0.6
0.6

8.6%
6.3%
7.5%

9.1%
10.0%
9.5%

8.6%
7.3%
8.0%

13.6
13.6

537

573

515

551

13.7
13.7

8.8
8.8

0.7
0.7

0.7
0.7

0.7
0.7

0.7
0.7

4.6%
4.6%

6.9%
6.9%

11.0%
11.0%

Macquarie
Australia

7.3
7.3

32.8

33.8

32.8

33.8

12.1
12.1

10.5
10.5

0.8
0.8

0.8
0.8

0.8
0.8

0.8
0.8

6.5%
6.5%

7.5%
7.5%

Unicredit
SEB
Investec**

23.4
12.1
4.2

8.4
47
437

8.8
50.7
460

8.4
47
437

8.8
50.7
460

10.4
9.1
9.8

7.2
8.3
8.4

0.5
1.0
0.9

0.5
1.0
0.9

0.5
1.0
0.9

0.5
1.0
0.9

6.1%
12.0%
10.5%

7.1%
12.1%
11.8%

9.3%
12.1%
9.5%

VTB*
ICICI Bank
Itau Unibanco
Growth Markets
Total/Avg.

19.6
16.1
68.3

3.8
511
18

4.6
545
21

3.8
511
18

4.6
545
21

7.2
16.7
10.5
10.8
9.3

5.5
14.6
9.3
9.4
7.7

1.3
1.8
2.1
1.9
0.9

1.1
1.7
1.8
1.6
0.8

1.3
1.8
2.1
1.9
0.9

1.1
1.7
1.8
1.6
0.8

20.1%
11.1%
21.6%
19.3%
10.8%

21.2%
11.9%
20.9%
19.3%
11.5%

12.5%
5.8%
8.6%

Barclays
RBS
HSBC
StanChart
UK Banks
GS
MS
US IBs
Citi
Bank of America
US Large Caps
Nomura
Japan

787.9

NAV
2012E

NAV
2013E

NAV ex
own debt
2012E

NAV ex
own debt
2013E

PE 2012E

PE 2013E

P/NAV 12E

P/NAV 13E

P/NAV ex
own debt
12E

P/NAV ex
own debt
13E

RONAV ex
own debt
gain 12E

RONAV ex
own debt
gain 13E

Source: J.P. Morgan estimates, Company data. Priced from Bloomberg on 9th March, 2012 (intra-day.) **Note: March y/end (numbers to financial y/end). * in US$, RONAV = ROE= NI for the period/average equity less goodwill for the previous and current period.
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(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Investment Banking Wallet Outlook

Investment Banking Wallet Outlook

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amit.x.ranjan@jpmorgan.com

IB revenue wallet: 2005-06 normalised


environment
Overview defining the sustainable IB revenue year
We estimate the global IB revenue wallet to remain ex-growth for the next 2
years 2012E-13E in a low GDP environment. Global IB revenues peaked in our
view in 2009 with large amounts of profitable exit trades at the time of credit spread
tightening as well as margin expansion driven by inactivity of a number of players.
We believe 2005-06 was a more normalized revenue environment, in 2010 we
saw margins declining from the peak levels seen in 2009 as well as the comeback of
some Tier I IB players who had been less active in the immediate aftermath of the
crisis.
In our view 2011 was a very difficult year for most of the IB players, with macro and
policy uncertainty dominating the newsflow. Within FICC: Credit, EM and mortgage
businesses had a very difficult 2011 with basis risk losses except for Q1 2011.
We estimate 2012E-13E IB revenue wallet on a comparable basis for the players in
Figure 4 to be somewhere in between the levels seen in 2005-2006. As a result, we
see potential for revenues to be +14% (2006 level) to -13% (2005 level) from our
current forecast in the long-term run rate.
FICC share of IB revenue wallet although down from as high as c.59% in 2009, the
best FICC year historically continues to be the main driver of IB performance with
c.51% of the IB revenue wallet still accounted for by FICC.
In summary, we believe there is not a lot of growth from 2005-2006 levels in the
IB industry revenue wallet chasing GDP and an appropriate industry strategy
would be to focus on its cost as well as capital base to generate above cost of
equity returns for its shareholders.
Figure 4: IB revenue wallet progression since1999: 2012E-13E down -30% from 2009 peak levels
$ Billions
Equities

Fixed Income

Investment Banking

207.7

-31%

183.9

2.75x

167.8

165.9

145.0 143.3 145.7


126.2

75.6

93.8

95.6

88.3

33.7

105.3

92.9

75.5

72.9

39.2
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011 2012E 2013E

Source: J.P. Morgan estimates company data. Note: Clean IB revenues (Equities, FICC, Advisory & Underwriting) excluding
writedowns, basis risk losses and DVA/own debt; revenues for GS, MS, DB, UBS, CS, BoA-ML, Citi and JPM included

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

IB revenue -1% decline over next 2 years, FICC the main


Delta generating 51% of revenues
We expect Investment Banking revenues to decrease -3% in 2012E before
improving to +2% in 2013E, with growth in Equities and IBD offset by a -2%
decline in FICC which still continues to be the main driver of IB performance.
IB revenue growth rates are still highly geared to Fixed Income which accounts
for c.51% of total IB revenues in 2013E in our estimates. We estimate Fixed Income
revenues (adjusted for estimated basis risk losses in 2011E) to decline -3% in 2012E
and further -1% in 2013E. We estimate equity to outperform FICC, with revenues
increasing 2% CAGR 11E-13E ex basis risk losses. In IBD, we estimate revenues to
decline -6% in 2012E, looking at low issuance YTD, but estimate revenues to grow
by 4% in 2013E.
Table 14: Global Investment Banks weighted average revenues progression1 by business 2011-13E
%

Equity derivatives
Cash equities incl electronic trading
Prime Services
Sub total flow
Total Equities ex writedowns/gains/basis risk gains (losses)2
Total Equities ex writedowns/own debt gains
Total Equities
Structured Credit Trading
Credit trading (incl. loans, bonds, CDS)
Total Credit
Rates
Currencies
Commodities
Emerging Markets Fixed Income
Sub total flow
Total Fixed Income ex writedowns/gains/basis risk gains (losses)2
Total Fixed Income ex writedowns/gains
Total fixed income
Total I-banking (ECm+DCM+M&A) ex-writedowns
Total IB revenues ex writedowns/gains/basis risk gains (losses)
Total IB revenues ex writedowns/own debt gains
Total IB revenues

11E/10E

12E/11E

13E/12E
5%
4%
4%
4%
4%
4%
4%

10E-12E
CAGR
-1%
1%
2%
1%
0%
-1%
-1%

11E-13E
CAGR
5%
3%
2%
4%
2%
3%
5%

-5%
0%
4%
-1%
1%
-4%
-6%

5%
1%
0%
3%
-1%
2%
5%

-62%
-52%
-55%
-11%
-2%
-16%
12%
-15%
-12%
-22%
-19%

68%
51%
55%
-7%
-3%
1%
4%
-2%
-3%
5%
4%

-2%
-1%
-1%
-2%
1%
4%
6%
1%
-1%
-1%
-1%

-20%
-15%
-16%
-9%
-3%
-8%
8%
-9%
-8%
-9%
-8%

28%
22%
24%
-4%
-1%
3%
5%
-1%
-2%
2%
2%

-8%

-6%

4%

-7%

-1%

-8%
-14%
-14%

-3%
1%
1%

2%
2%
2%

-5%
-6%
-7%

-1%
2%
2%

Source: J.P. Morgan estimates. Notes: 1.) Weighted Average including UBS, CSG, GS, MS, BNP, SG and BARC ONLY; 2.Adjusted for estimated basis risk losses of $0.9bn in equities and $5bn in
FICC in 2011E.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Fixed Income: Credit to provide the positive delta over next


two years
Overall, we see a -2% CAGR decline in 2011E-13E Fixed income revenues ex
basis risk losses, on a clean basis and 2% CAGR growth in revenues including
basis risk losses in 2011.

Figure 5: IB revenue wallet split


2013E
%
IBD
23%

FICC
51%
Equities
26%

Source: J.P. Morgan estimates

In Credit trading we estimate revenues to recover in 2012E and then we estimate a


slight decline of -1% in 2013E. We estimate credit trading revenues to improve in
2012E from the low levels seen in 2011 which were driven by basis risk losses. In
2011, for three quarters in a row we saw the worst credit market environment with
illiquidity and high levels of volatility at the same time. The credit market
environment made it difficult to account for client trades as well as hedge market risk.
In our view Q1 12 has seen material improvement in the credit market
environment and we expect revenues to improve as credit spreads have come in
which should lead to inventory mark-ups, and monetisation of trades has improved in
all FICC asset classes. We estimate $5bn in basis risk losses in credit trading
revenues in 2011 which should come back partially in 2012E.
We believe Rates business is operating with slightly higher margins as some players
have scaled down/ planning an exit from especially the more complex and long-dated
products. We also believe higher trading volumes and higher revenues from the
financing would drive the growth story in Rates. However, we estimate revenues to
decline -4% CAGR in 12E-13E from the very high levels seen in 2011 as
revenues from financing decline to more normalised levels in 2013E in our view.
We estimate FX revenues to decline from the very high levels seen in 2011 which
was driven by trending markets and volatility. We believe FX is a countercyclical
business with outperformance seen in uncertain market environments. As a result, we
estimate -3% decline in FX revenues in 2012E as market environment becomes less
uncertain; however, we still believe it is a very good environment for the FX
business. We estimate FX revenues to decline -1% CAGR in 2012E-13E.
Commodities and EM Fixed Income had a difficult year in 2011; however, we
believe commodities and EM Fixed Income revenues should normalise in
2012E-13E and estimate commodities revenues to grow 3% CAGR in 2012E-13E
and EM revenues to grow 5% over the same time period.

Equities to outperform Fixed Income over next 2 years, but


only 26% of revenues
We expect total equities revenues (ex basis risk losses) to perform better compared to
Fixed Income and estimate revenues to decline -1% in 2012E before growing 4% in
2013E. Our 2011E equity growth estimate is also adjusted for $0.9bn in estimated
basis risk losses.
In both cash equities and equity derivatives, client flows have been on the slower
side YTD in 2012, down -15% to -25% YoY. In Equity derivatives we believe
revenues should have been helped by rising equity markets leading to mark to market
gains in dividend swaps and correlation books. Hence, with trending equity markets
we would expect revenues to decline only modestly by -1% in 2012E. Overall with

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

increasing equity markets we see potential for growing confidence in equities and
hence a pickup in trading activity and also potentially ECM.
However, structurally we expect equity derivatives to outperform cash equities in
terms of revenue growth in an improving equity environment with 5% p.a. growth in
2012E and 2013E, whereas we estimate cash equities to grow by 1% in 2012E and
4% in 2013E.
We estimate Prime Services revenues to be flat YoY in 2012E and grow 4% in
2013E. We see marginal increase in leverage but hedge funds still remain cautiously
positioned in our view.

IBD revenues limited growth despite strong deal pipelines


We estimate IBD revenues to decline -6% YoY in 2012E looking at current low
issuance volumes but estimate revenues to recover by +4% YoY in 2013E.
Within IBD given the continued market uncertainty and difficult macro environment,
we estimate M&A which is normally a late cycle business to be on the slower side in
2012E. In DCM, the decline in refinancing schedule for Financial Institutions should
drive issuance volumes lower in our view longer-term. However, the decline is likely
to be offset partly by ECM over time if equity markets continue to trend higher. We
note that deal pipelines are very strong based on discussions with IBs; however, they
have been very poor indicators of realised transactions over the last 3-4 years.

EM World, the next delta of growth?


With limited product innovation within the IB industry, the question arises
whether the EM world could become the driver for IB revenue growth and
profitability? We are using issuance and M&A data to put the size of the EM
wallet in context of Europe and the US. Comparing ECM, DCM and M&A
volumes in EM (the BRIC2 and MENA countries) with US and EU markets we see
that, whilst the growth been impressive with a 27% CAGR in all deal volumes 200111compared to 2% CAGR for US and EU, in general total volumes of activities are
still dwarfed by Developed markets.
EM ECM volumes peaked at $427mn 2010 (94% of US and EU activity in that
year) and fell to $145m in 2011(37% of US and EU levels). We note that US and
European levels are relatively low to historic standards of volumes.
DCM volumes stood at $73mn 2011(10% of US and EU activity in that year),
M&A value stood at $399mn 2011(38% of US and EU activity in that year) with
limited deal flow in respect to M&A in US and Europe.
Whilst we expect strong EM growth to be maintained, we do not expect any
near term closure of the gap between relative levels of activities in the markets,
and therefore we do not believe that IBs EM Growth strategies will be sufficient
grow profitability streams which can compensate for the combined impact of slowed
DM growth and increased regulatory pressures. To summarise, given the size of the
revenue wallet we do not expect EM to be a material driver of IB revenue wallet over
the next 5-7 years and see over-capacity building in the region.
2

BRIC: Brazil, Russia, India, China


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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 6: Emerging market vs. developed Historical ECM Volumes

Figure 7: Emerging market vs. Developed Historical DCM Volumes

$ million

$ million

Total Emerging Market

Total (Europe+US)

2011

Total (Europe+US)

Source: Dealogic Note: Emerging Market include BRIC, MENA and South Africa

Source: Dealogic Note: Emerging Market include BRIC, MENA and South Africa

Figure 8: Emerging market vs. Developed Historical M&A Volumes

Figure 9: Emerging market vs. Developed Historical Deal Volumes

$ million

$ million

Total Emerging Market

Total (Europe+US)

Source: Dealogic Note: Emerging Market include BRIC, MENA and South Africa

Total Emerging Market

2012 YTD

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

2012 YTD

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1999

500,000

1998

1,000,000

1997

1,500,000

1996

9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
-

2,000,000

1995

2,500,000

2012 YTD

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1995

2011

2012 YTD

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

Total Emerging Market

1996

7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
-

1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
-

Total (Europe+US)

Source: Dealogic Note: Emerging Market include BRIC, MENA and South Africa

We also note that in general whilst EM business is more profitable than EU


business, it is generally less profitable than US business.
Looking at 2011 data we see
EM ECM revenues/volumes at 2.2% vs. 1.6% for EU, 3.1% for the US,
EM DCM revenues/volumes at 0.4% vs. 0.2% for EU, 0.4% for the US,
EM M&A revenues/volumes at 0.4% vs. 0.8% for EU, 3.9% for the US,
DCM margins have already halved from the mid 2000s peak for EM, whilst they
have been stable for EM. In M&A, EM margins are less than 1/3rd of the late 1990s
peak levels, and around half the mid 2000s levels, whilst they are back at the mid
2000s levels for DM.
Overall we do not see great potential for higher returns coming from the EM markets
on a sustained basis.

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 10: Emerging market vs. developed Historical ECM Revenues


$ million

Figure 11: : Emerging market vs. Developed Historical DCM


Revenues
$ million

18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
-

25,000
20,000
15,000
10,000

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

2011

2012 YTD

2010

2009

2008

2007

2006

2005

2004

Total Emerging Market


Total (Europe+US)

Source: Dealogic Note: Emerging Market include Brazil, Russia, India, China, MENA and
South Africa

2012 YTD

Total (Europe+US)

2003

2002

2001

2000

1999

1998

1997

1996

1995

5,000

Total Emerging Market

Source: Dealogic Note: Emerging Market include Brazil, Russia, India, China, MENA and
South Africa

Figure 12: Emerging market vs. Developed Historical M&A Revenues

Figure 13: Emerging market vs. Developed Historical Deal Revenues

$ million

$ million

Total (Europe+US)

Total Emerging Market

Source: Dealogic Note: Emerging Market include Brazil, Russia, India, China, MENA and
South Africa

Total (Europe+US)

2012 YTD

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2012 YTD

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

2000

5,000

1999

10,000

1998

15,000

1997

20,000

70,000
60,000
50,000
40,000
30,000
20,000
10,000
1996

25,000

1995

30,000

Total Emerging Market

Source: Dealogic Note: Emerging Market include Brazil, Russia, India, China, MENA and South
Africa

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

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Europe Equity Research


13 March 2012

Global Investment Banking Industry: Regional


Overview

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Global Investment Banking Industry:


Regional Overview

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

U.S. IB industry
AC

Kian Abouhossein
(44-20) 7325-1523

kian.abouhossein@jpmorgan.com

Amit Ranjan
(44-20) 7325-4780

amit.x.ranjan@jpmorgan.com

Please also see our notes:


"Global Investment Banks: US Basel
2.5 NPR2 capital at risk analysis: yet
another US IB disadvantage,
downgrade GS, MS to N published
25th Jan 2012
Global Investment Banks:
Regulatory Arbitrage series: OW
European over US IBs published 8th
March 2011

Highly profitable cash cow business, but more long-term


limited growth opportunities with regulation disadvantage
compared to Europe
Generally, the U.S. IB business is by far the most developed capital market
globally with the highest revenues per head and highest profitable business
proposition compared to any other geography for the top 4 players as: i) higher
concentration; ii) depth and size of the market; and iii) lower cost of a transaction
compared to Europe in particular, as one trading platform with one regulation
compared to Europe operated through local offices. Hence, generally IB staff earn
more in the U.S. than in Europe given the higher overall margin business in the US.
However, in the long-term, structurally the US business in our view is a cash
cow business but with i) more limited growth opportunities, and ii) market
share gains from competitors given the already more concentrated market.
Hence, in the longer term we expect to see a structural growth in headcount and
capital outside of the US with net growth mainly in EM markets.
The U.S. IB industry is more consolidated than Europe in our view with 4 Tier I
players (such as GS, Citi and BofA) dominating in FICC, Equities and IBD.
This has led to better fee levels within IBD business compared to Europe. DBK
is a leading player in FICC, but lacks scale in Equities. MS, Barclays (post
Lehman acquisition) are tier I Equity houses but Tier II FICC franchises in the
US. We expect Barclays expansion in the U.S. to bear fruit in the long-term but
at a cost in the short-term for shareholders as we witnessed at DB 15 years ago.
We believe the retrenchment by Tier II European IBs and in our view MS in different
product areas, especially within FICC, creates a large window of opportunity for the
Tier I IBs in the U.S. to gain more market share.

The U.S. IB industry key characteristics:


1.) A very deep and established market in which U.S. non-financial companies are
already highly dependent on debt capital markets for their funding needs
and the market is well developed, which makes it difficult for new entrants to
make inroads through pricing alone.
2.) High entry barrier due to the material technology-focused trading approach
with an estimated two-thirds of all cash equity trading electronic compared to
40% in Europe and 10% in EM regions. In addition, revenue pool allocation by
clients is less driven by advice but more by best execution as we witness in the
equity derivative flow business, with an estimated 60% of all transactions on
screen compared to 40% in Europe. The focus on technology, offering
liquidity, and focus by investors on pricing makes it more difficult for
potential new entrants into this business.
3.) Further consolidation in the US to lead to further market share growth for
the top 4-5 US players. In particular, Tier I U.S. IBs should gain market
share in the U.S. from Tier II European IBs. We believe that as Tier 2 and
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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Tier 3 European IBs scale back, the first reduction in cost base and RWAs
will be in the U.S. given the high entry barriers. We expect a more European
focused approach with particular focus on their local markets. Hence, Tier I U.S.
IBs have the opportunity to gain more market share in the U.S triggered by
European IB exits. However, we believe the gain in market share would be
limited as most Tier II European IBs have not been successful in capturing
a large market share in the U.S. in the first place given the higher entry
barriers in terms of i) staff costs, and ii) technology spend.
4.) Regulatory arbitrage puts U.S. IBs at a relative disadvantage to Europe
We believe U.S. IBs are at a relative disadvantage to their European counterparts
based on our analysis of Section 716, Volcker, End-user clearing and NPR2
regulations. This regulatory arbitrage in our view limits to an extent the
expansion of U.S. IBs in the near-term until the final rules on different
regulations especially Dodd-Frank Act are finalized. We have discussed the
issue of regulatory arbitrage in our notes, Global Investment Banks: US Basel
2.5 NPR2 capital at risk analysis: yet another US IB disadvantage, downgrade
GS, MS to N published 25th Jan 2012 and Global Investment Banks:
Regulatory Arbitrage series: OW European over US IBs published 8th March
2011.

Key players to watch in U.S.


In our view, the ultimate winner in the U.S. is GS and it has the opportunity to
focus on retaining, growing further as a client flow giant given that it operates
with: i) FICC scale; ii) market leading electronic platform in equities; iii) revenue
scale that should allow it to remain the best in class in terms of remuneration,
thereby enabling it to attract and retain top talent; and iv.) GS liquid execution
track record has been excellent; thus we believe GS should be a winner in a more
cash equity' like FICC world and should also catch-up in EM. However, we
note that GS has been most impacted by recent US regulatory proposals as
discussed below and needs to internally adjust its business model.
In addition Citi and BofA have the opportunity to take advantage of
retrenchment by European IBs, but it remains to be seen to what extent they
are willing/able to make use of this opportunity in view of the tighter regulations.
DBK maintains a leading presence in the U.S. through its Tier I global FICC
franchise but continues to be outside the Top 5 in U.S. cash equities in our view.
We believe DB management has been focusing on making inroads into the Top
Tier in U.S. cash equities for some time now, but the relatively consolidated
nature of the U.S. IB industry in terms of ECM/M&A and the technological focus
has made it difficult for new entrants to make any significant market share gains.
Barclays remains a Tier II player in FICC US; however, we are willing to
give them the benefit of the doubt in FICC. Barclays with its entrepreneurial
spirit reminds us of DB 10-15 years ago, when building aggressively the US, and
hence with its strength in the European FICC business should be able to finance
and expand successfully in the U.S. in our view. We believe the jury is still out
in respect to Barclays with an excellent Tier I equity franchise in the US
acquired through Lehman, but it remains to be seen whether Barclays will
be successful in its global cash equity build out.
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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

U.S. market dominated by 3-4 global Tier I players


We believe 4 Tier I institutional players such as GS, Citi and BofA continue to
dominate in FICC while MS has shown material pickup in its Equities business in
2010 and 2011. We estimate market share gains of 4-5% which is very material
in terms of profit impact for U.S. IBs like GS, Citi and BofA in our estimates
from market share gains in Europe, as Tier II IBs look to restructure, as there is
unlikely to be an additional cost involved.
FICC: Looking at different business areas, we believe DBK, GS, Citi and BofA
continue to dominate Fixed Income despite the relative under performance
from BofA in 2011. In our view Tier II/III Fixed Income players like MS,
UBS, CSG, BNPP, SG, and Nomura have to date not been able to make any
material gains in market share in the U.S.
In Equities we believe GS, MS, Citi and BofA continue to dominate, while
European players like CSG, UBS and Barclays also maintain a significant
presence in the region. US being more electronic focused (about 65% of total
trading) market shares are more concentrated within the larger players.
Within Equity derivatives, we believe the US is more concentrated compared
to Europe with GS in a particularly strong position with the French banks
operating with very small market shares. Citi, Bank of America and MS are also
significant players in our view.
Figure 14: Equity volume traded: Top 10 players account for 71% of
volume traded on NYSE in 2011

Figure 15: Equity volume traded: Top 10 players account for 74% of
volume traded on NASDAQ in 2011

CSFB
11%

NITE
19%

Others
29%

NITE
11%

Others
26%

UBS
14%
MLCO
11%

GSET
3%
FCM
3%

JPM
3%
CDEL
3%

UBS
10%

GSET
4%
DBAB
5%

Source: Bloomberg, RANK function on NYSE

DBAB
4%
BCAP
4%

CITI
6%

BCAP
7%

CDEL
8%

CITI
5%

CSFB
6%

MLCO
8%

Source: Bloomberg, RANK function on NASDAQ

In IBD, looking at 2011 revenue data from Dealogic, JPM, BoA-ML, Citi, GS
and MS are the top players with highest revenues in ECM, DCM and M&A in
North America.
Top 10 players accounted for 54% of M&A revenues in 2011 in Europe while for
North America the Top 10 players accounted for 62% of revenues.
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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Top 10 players accounted for 53% of DCM revenues in 2011 in Europe while for
North America the Top 10 players accounted for 67% of revenues.
Top 10 players accounted for 58% of ECM revenues in 2011 in Europe while for
North America the Top 10 players accounted for 62% of revenues.
This relative concentration of the U.S. market is reflected in margins/pricing in our
view, with revenue per unit deal volume higher across ECM, DCM and M&A in
North America compared to Europe, as shown in Figure 16 to Figure 18. As a result,
we believe it is difficult for new players to make inroads into the U.S. market
through pricing alone.
Figure 16: Revenues per unit of deal volume comparison in ECM
2011

Figure 17: Revenues per unit of deal volume comparison in DCM


2011

4.0%

1.2%
ECM NORTH AMERICA

ECM EUROPE

DCM NORTH AMERICA

1.1%

3.5%

DCM EUROPE

1.0%
3.0%

0.9%
0.8%

2.5%

0.7%
2.0%

0.6%
0.5%

1.5%

0.4%
1.0%

2011

2012ytd

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

0.2%

1995

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

Source: Dealogic

2012ytd

0.3%

0.5%

Source: Dealogic

Figure 18: Revenues per unit of deal volume comparison in M&A


2011
%
1.0%

M&A NORTH AMERICA

M&A EUROPE

0.9%

0.8%

0.7%

0.6%

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0.4%

2012ytd

0.5%

Source: Dealogic

29

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 15: Top 10 ECM players by revenue in North America

Table 16: Top 10 DCM players by revenue in North America

$ millions, %

$ millions, %

Bank
JPMorgan
Morgan Stanley
BoA Merrill Lynch
Goldman Sachs
Citi
Credit Suisse
Barclays Capital
Deutsche Bank
RBC Capital Markets
Wells Fargo Securities
Subtotal
Total

Net Revenue
($m)
708
609
584
494
430
414
403
313
284
255
4494
7304

% share
10
8
8
7
6
6
6
4
4
3
62
100

Cumulative %
Share
10
18
26
33
39
44
50
54
58
62
62
100

Source: Dealogic

Bank
BoA Merrill Lynch
JPMorgan
Citi
Goldman Sachs
Morgan Stanley
Deutsche Bank
Barclays Capital
Credit Suisse
Wells Fargo Securities
UBS
Subtotal
Total

Net Revenue
($m)
971
951
638
575
567
562
539
508
396
321
6030
8950

% share
11
11
7
6
6
6
6
6
4
4
67
100

Cumulative %
Share
11
21
29
35
41
48
54
59
64
67
67
100

Source: Dealogic

Table 17: Top 10 M&A players by revenue in North America


$ millions, %
All Advisor Parent
Goldman Sachs
Morgan Stanley
JPMorgan
BoA Merrill Lynch
Credit Suisse
Barclays Capital
UBS
Jefferies & Company
Deutsche Bank
Citi
Subtotal
Total

Net Revenue
($m)
883
831
823
659
570
445
368
343
325
324
5574
9007

% share
10
9
9
7
6
5
4
4
4
4
62
100

Cumulative %
Share
10
19
28
35
42
47
51
55
58
62
62
100

Source: Dealogic

30

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

European IB industry
AC

Kian Abouhossein
(44-20) 7325-1523

kian.abouhossein@jpmorgan.com

Amit Ranjan
(44-20) 7325-4780

amit.x.ranjan@jpmorgan.com

A materially changing landscape, opportunities beckon for


global Tier I players
Europe in our view is undergoing by far the biggest changes within the global
Investment Banking industry at present with: i) structural changes in the industry
with less bank on-balance sheet reliance for corporates to secure funds to more offbalance sheet capital markets usage; ii) European sovereign concerns and ongoing
de-leveraging as discussed in our report, European Banks Deleveraging: E2tr asset
achievable, but 14x leverage needs further improvement: Remain Cautious
published 23rd Nov 2011; and iii) sub-scale regional players with material IB
ambitions having to exit/scale back in various product areas triggered by Basel 3,
LCR and new proposed IB regulations. As a result, we believe the Europe IB
landscape could see more consolidation and should witness the biggest shift in
terms of market share. In short, the European IB industry is becoming over
time more US like in terms of market share concentration and spread
improvement, in our view, triggered by regulation and the European sovereign
crisis.
1.) Structural changes leading to more DCM funding compared to on balance
sheet loans
As shown in Figure 19 and Figure 20 below, non-financial Euro companies are
significantly more dependent on loans from the banking sector at 49% compared to
non-financial US companies at 6%.
However, we believe the ongoing de-leveraging in the European Banking sector
could lead to a structural change in the funding mix for companies in Europe with the
funding mix shifting towards capital market funding over time in our view.

Figure 19: Funding sources for non-financial US Companies

Figure 20: Funding sources for non-financial Euro Companies


Bonds
9%

Other
30%

Other
42%

Loans
6%

Source: GS presentation by CFO David Viniar, Feb 8, 2012

Bonds
64%

Loans
49%

Source: GS presentation by CFO David Viniar, Feb 8, 2012

2.) European Bank deleveraging an opportunity for stronger US Tier I IBs to


gain market share
Considering the dislocated funding market in Europe and low capital ratios,
European Banks are deleveraging by 2tr with most of the deleveraging driven by
31

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(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

reduction in IB related assets, in particular FICC as discussed in our report,


European Banks Deleveraging: E2tr asset achievable, but 14x leverage needs
further improvement: Remain Cautious published 23rd Nov 2011. We believe a US
GAAP adjusted leverage ratio of 14x compared to US Bank at 8x, still needs ongoing
deleveraging even post 2tr asset reduction and hence we see an ongoing structural
shift in market share from European to US Banks/IBs. In addition, we see an ongoing
exit of US$ assets, due to the difficulty in securing funding for European banks
giving "long-US Dollar" US IBs the opportunity to gain market share from European
corporates in the FICC market.
3.) European players exiting/shrinking opens up opportunities for Tier 1
Global/U.S. players
Several Tier 2 and Tier 3 European IBs have announced plans to scale back or
completely exit certain business areas as they lack sufficient scale and increased
capital requirements, making these businesses unattractive from an ROE perspective
under the new Basel and IB regulatory environment. This in our view opens up
opportunities for U.S. players who already maintain a significant presence in the
region with, in our view, c.1/3rd of revenues coming from Europe.
Larger U.S. IBs already maintain a significant presence in the EMEA
region, with for example Citi in its Securities and Banking division generating
c.34% of its revenues ex CVA/DVA in FY 2011 from the EMEA region while
JPM at its 2011 Investor day indicated c.39% in revenues from non-U.S.
developed markets over the 2006-2010 period.
Figure 21: Citi Securities and Banking division revenue (ex
CVA/DVA) breakdown by geography in 2011

Figure 22: JPM 2006-2010 IB Revenue by geography


%

Developing Asia
9%
Developing
EMEA
4%

Asia
21%

North America
33%
Latin America
5%

Latin America
12%

EMEA
34%
Source: Citigroup FY 2011 results presentation

Non-U.S.
Developed
39%

U.S.
43%

Source: JPMorgan Investor day presentation 2011

Some larger Tier 1 U.S. IB players like GS view the ongoing de-leveraging
and macro concerns in Europe as a potential opportunity and see material
gaps to be filled due to the retrenchment of European IBs.
We view the ultimate winner in Europe as Deutsche Bank given that it
operates with i) FICC scale, ii) in a healthy regulatory environment for its IB
business, and iii) boasts a solid funding cost due to its implicit German guarantee.
32

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Kian Abouhossein
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kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

In addition, we expect Barclays will be a winner within Europe considering its


FICC positioning. However, UK regulatory headwinds through the ICB proposals
could materially impact Barclays' long-term FICC position. Despite this issue, we
believe Barclays is set to gain market share in FICC and hence be able to
generate adequate returns to S/Hs.
We believe Tier II European IBs like CSG, UBS, RBS will continue to
retrench from their ambitious Tier I institutional goals - especially in Fixed
Income. The recent restructuring announcements are likely to continue, driving
material market share movements. These banks will likely increasingly exit the
institutional business as they will be unable to compete post the regulatory
changes, focusing instead on an agency type model.
Tier 2 agency players like BNP, SG are likely to become even more agency
like and concentrate on their local regions and hence captive corporate franchise.

European market more fragmented than U.S.: consolidation


to benefit global players
We believe significant over-capacity needs to be withdrawn from the European IB
industry and this could result in market share gains of 4-5%, which is very
material in terms of profit impact for global Tier I IBs like DBK, GS, Citi, BofA
and Barclays in our estimates.
We believe Tier II institutional players like UBS, CS and RBS stand to lose the
most from this capacity realignment as they restructure their businesses. Basel 3
capital requirements and lack of revenue scale along with an inflexible cost base
imply further restructuring in our view, creating a gap which Global Tier I players
would look to fill.
Tier II Agency and Tier III Agency players such as BNP,SG, HSBC, SEB, UCG
would continue to hold on to their market shares or suffer smaller declines as
corporate relationships based revenues and revenues from local markets accounts for
majority of revenues.
FICC: Looking at different business areas, we believe DBK continues to
dominate European Fixed Income while the other top players in FICC include
GS, Barclays, Citi and BofA-ML. We believe Tier II Fixed Income players like
UBS, CS and RBS stand to lose the most from a shift in market share as
Global Tier I players make a move to fill in the gaps left by the scale down or exit
of the Tier II players.
In Equities we believe the market is more fragmented, particularly in cash
equities, with the players with significant presence including CSG, DBK, Citi,
BofA-ML, UBS, GS, MS, SG and Nomura. We look at data on the share of value
traded on the London stock exchange and German exchanges as evidence of this.
This is partially the result of legacy positions of local brokers in Europe. But in
addition, with the US being more electronic focused (about 65% of total trading)
market shares are more concentrated amongst the larger players. In comparison,
within Europe we estimate electronic trading at just 40% of total volumes.
Within Equity derivatives, we believe the French Banks SG and BNP
continue to dominate along with DBK, GS, Bank of America and MS also
accounting for significant market share, whereas the market in the US is more
33

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Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

concentrated, with the French banks operating with very small market shares and
GS in particular in a very strong position.
Figure 23: Equity value traded: Top 10 players account for 70% of
value traded on London Stock exchange in 2011

CSFB
13%

Others
30%

CSFB
13%

Others
23%

DBK
13%

DBK
9%

CITI
8%
SG
4%

UBS
7%

MSCO
4%

MLCO
7%
GSCO
5%

Figure 24: Equity value traded: Top 10 players account for 77% of
value traded on German exchanges in 2011

NOMI
6%

Source: Bloomberg, RANK function on LN exchange

JPM
7%

MSCO
4%
NOMI
5%
GSCO
5%
MLCO
6%

UBS
11%

CITI
6%

JPM
7%

SG
7%

Source: Bloomberg, RANK function on German Composite exchanges

In IBD, looking at 2011 revenue data from Dealogic, DBK was the top player with
highest revenues in ECM, DCM and M&A in Europe.
However, the European market is much more fragmented than the U.S. in our
view based on our analysis looking at Dealogic data as shown in Table 18 to Table
23.
Top 10 players accounted for 54% of M&A revenues in 2011 in Europe while for
North America the Top 10 players accounted for 62% of revenues.
Top 10 players accounted for 53% of DCM revenues in 2011 in Europe while for
North America the Top 10 players accounted for 67% of revenues.
Top 10 players accounted for 58% of ECM revenues in 2011 in Europe while for
North America the Top 10 players accounted for 62% of revenues.
This fragmentation of the European market is reflected in the margins/pricing
in our view with revenue per unit deal volume higher across ECM, DCM and
M&A in North America compared to Europe, as shown in Figure 25 to Figure 27.
Over time, we expect more consolidation within the industry in terms of market share
and hence an improving margin environment.

34

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Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 25: Revenues per unit of deal volume comparison in ECM

Figure 26: Revenues per unit of deal volume comparison in DCM

4.0%

1.2%
ECM NORTH AMERICA

ECM EUROPE

DCM NORTH AMERICA

1.1%

3.5%

DCM EUROPE

1.0%
3.0%

0.9%
0.8%

2.5%

0.7%
2.0%

0.6%
0.5%

1.5%

0.4%
1.0%

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

Source: Dealogic

2012ytd

0.2%

0.5%

2012ytd

0.3%

Source: Dealogic

Figure 27: Revenues per unit of deal volume comparison in M&A


%
1.0%

M&A NORTH AMERICA

M&A EUROPE

0.9%

0.8%

0.7%

0.6%

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0.4%

2012ytd

0.5%

Source: Dealogic

35

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 18: Top 10 ECM players by revenue in Europe 2011

Table 19: Top 10 ECM players by revenue in North America 2011

$ millions, %

$ millions, %

Bank
Deutsche Bank
Morgan Stanley
Credit Suisse
Goldman Sachs
JPMorgan
BoA Merrill Lynch
Citi
UBS
Barclays Capital
UniCredit
Subtotal
Total

Net Revenue
($m)
242
223
210
185
152
146
121
91
81
68
1,519
2,623

% share
9
8
8
7
6
6
5
3
3
3
58
100

Cumulative %
Share
9
18
26
33
39
44
49
52
55
58
58
100

Bank
JPMorgan
Morgan Stanley
BoA Merrill Lynch
Goldman Sachs
Citi
Credit Suisse
Barclays Capital
Deutsche Bank
RBC Capital Markets
Wells Fargo Securities
Subtotal
Total

Net Revenue
($m)
708
609
584
494
430
414
403
313
284
255
4494
7304

% share
10
8
8
7
6
6
6
4
4
3
62
100

Cumulative %
Share
10
18
26
33
39
44
50
54
58
62
62
100

Source: Dealogic

Source: Dealogic

Table 20: Top 10 DCM players by revenue in Europe 2011

Table 21: Top 10 DCM players by revenue in North America 2011

$ millions, %

$ millions, %

Bank
Deutsche Bank
Barclays Capital
BNP Paribas
JPMorgan
HSBC
Credit Suisse
Citi
RBS
Goldman Sachs
UBS
Subtotal
Total

Net Revenue
($m)
411
333
311
281
278
252
236
236
217
186
2,740
5,126

% share
8
7
6
5
5
5
5
5
4
4
53
100

Cumulative %
Share
8
15
21
26
31
36
41
46
50
53
53
100

Bank
BoA Merrill Lynch
JPMorgan
Citi
Goldman Sachs
Morgan Stanley
Deutsche Bank
Barclays Capital
Credit Suisse
Wells Fargo Securities
UBS
Subtotal
Total

Net Revenue
($m)
971
951
638
575
567
562
539
508
396
321
6030
8950

% share
11
11
7
6
6
6
6
6
4
4
67
100

Cumulative %
Share
11
21
29
35
41
48
54
59
64
67
67
100

Source: Dealogic

Source: Dealogic

Table 22: Top 10 M&A players by revenue in Europe 2011

Table 23: Top 10 M&A players by revenue in North America 2011

$ millions, %

$ millions, %

All Advisor Parent


Deutsche Bank
Goldman Sachs
JPMorgan
Credit Suisse
Morgan Stanley
Rothschild
Lazard
UBS
BoA Merrill Lynch
BNP Paribas
Subtotal
Total
Source: Dealogic

Net Revenue
($m)
484
435
402
350
339
319
312
274
238
188
3,339
6,172

% share
8
7
7
6
5
5
5
4
4
3
54
100

Cumulative %
Share
8
15
21
27
33
38
43
47
51
54
54
100

All Advisor Parent


Goldman Sachs
Morgan Stanley
JPMorgan
BoA Merrill Lynch
Credit Suisse
Barclays Capital
UBS
Jefferies & Company
Deutsche Bank
Citi
Subtotal
Total

Net Revenue
($m)
883
831
823
659
570
445
368
343
325
324
5574
9007

% share
10
9
9
7
6
5
4
4
4
4
62
100

Cumulative %
Share
10
19
28
35
42
47
51
55
58
62
62
100

Source: Dealogic

36

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Japanese IB industry

AC

Natsumu Tsujino
(81-3) 6736-8618

natsumu.tsujino@jpmorgan.com

IB Revenue pool depends a lot on large equity issuance


Historically, corporate bonds account for a small portion of Japanese corporate debt.
With Japanese banks having abundant capacity to lend, we think the corporate bond
market is unlikely to expand much. Also, Japanese companies are not increasing
leverage. Thus, equity financing remains the most important part of Japanese IB
business. From time to time large companies issue capital for capital expenditure,
M&A, and the need to replenish capital decline due to large losses resulting from a
severe operating environment such as sharp yen appreciation. Large M&A deals are
increasing amid the strong yen. Thus we will likely continue to see some big deals in
the future. However, the issuance of capital depends a lot on the overall equity
market environment and is not a steady business.
Nomura is the dominant player in Japanese ECM business, with its strong client
relationships and strong marketing ability backed by a strong retail brokerage
network and international distribution capability. Daiwa Securities is losing its
position after its alliance with Sumitomo Mitsui Financial Group (SMFG) was
dissolved. SMBC Nikko Securities has started to get involved in large deals after the
former Nikko Securities was bought by SMFG. International players tend to get
international book runner position in important deals that must be marketed to global
investors, therefore, the business remains an important part of global IB.

Figure 28: Growth of Bank Lending

Figure 29: Trend of Debt Balance of Corporations (All Industries)

YoY growth rate (%)

trillion
700.0

6.0
4.0
2.0

Corporate bonds

600.0

Adjusted (All Banks)


Adjusted (Major Banks)

500.0

0.0
-2.0

Short-term loans payable

400.0

-4.0
-6.0
-8.0
-10.0

Before adjustment (All Banks)

Long-term loans payable

300.0
200.0

Before adjustment (Major Banks)


1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11

Source: J.P. Morgan from Bank of Japan Financial and Economic Statistics Monthly.
Note: Special factors such as (1) loan securitizations, (2) forex fluctuations, and (3) bad loan
claim write-offs are adjusted.

100.0
0.0
60

65

70

75

80

85

90

95

00

05

10

Source: Incorporated business statistical research.

Global markets business


As the Japanese equity market has stayed stagnant for a long time, online brokers
that have many high-frequency individual traders have captured a large market share
in terms of TSE trade value. Yet Nomura which has the largest market share in trade
value are generating larger equity trading revenues.

37

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 30 includes both trade value for brokerage-related trades and other trades.
Profits from other trades depend a lot on the market environment. As noted earlier,
online brokers such as SBI and Rakuten account for a relatively large portion. We
estimate that a large part of others consists of several major global investment banks.
Figure 31 represents equity trading revenue by major Japanese securities firms. The
source of equity trading revenues is not just Japan but also includes other regions.
However, if we compare Nomura's Japan entitys equity trading revenue with the
others, other securities companies trading revenues are relatively small and fluctuate
significantly.
Figure 30: Equity Trading Value on Tokyo Stock Exchange: Japanese
major players account for around 50%
million, Apr-Dec 2011

Figure 31: Trading Revenues of Major Securities Companies


million, Year-end March, consolidated
FY2010

Nomura
77,638,698
17%

Equity

Daiwa
37,045,685
8%

SMBC Nikko
31,812,000
7%
Others
269,867,208
58%

SBI
26,353,012
6%
Mizuho
Rakuten 11,761,000
2%
11,713,634
2%

Bonds

Total

Nomura
o/w Japanese brokerage unit
Daiwa
Mizuho
Mitsubishi UFJ Securities HD
Nomura
o/w Japanese brokerage unit
Daiwa
Mizuho
Mitsubishi UFJ Securities HD
Nomura
o/w Japanese brokerage unit
Daiwa
Mizuho
Mitsubishi UFJ Securities HD

90,900
25,979
27,500
4,582
-6,952
245,400
143,787
81,500
-1,628
-46,027
336,503
169,765
109,000
12,624
-27,195

3Q FY2011
(9 month cumulative)
1,500
1,334
11,000
-9,458
-1,624
173,147
119,849
47,000
9,105
89,100
173,631
121,183
58,000
12,870
58,712

Source: Company data.

Source: Company data and Financial Quest.

38

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13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 32: Revenues per unit of deal volume comparison in ECM


2011

Figure 33: Revenues per unit of deal volume comparison in DCM


2011

1.8%

0.7%

1.6%

0.6%

1.4%

0.5%

1.2%
1.0%

0.4%

0.8%

0.3%

0.6%

0.2%

0.4%

0.1%

0.2%
0.0%

0.0%

ECM Japan

Source: Dealogic

DCM Japan

Source: Dealogic

Figure 34: Revenues per unit of deal volume comparison in M&A


2011
%
0.7%
0.6%
0.5%
0.4%
0.3%
0.2%
0.1%
0.0%

M&A Japan

Source: Dealogic

Figure 35: JAPAN IB Historical Deal Volumes

Figure 36: JAPAN IB Historical Revenues

$ million

$ million
4,500

800,000

4,000

700,000

3,500

600,000

3,000

500,000

2,500

400,000

2,000

300,000

1,500

200,000

1,000

100,000

500
-

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
ECM

Source: Dealogic

DCM

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
ECM

M&A

DCM

M&A

Source: Dealogic

39

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Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 24: Top 10 ECM players by revenue in Japan

Table 25: Top 10 DCM players by revenue in Japan

$ millions, %

$ millions, %
Bank

Nomura
Daiwa Capital Markets
Mizuho
Morgan Stanley
Bank of America Merrill Lynch
Sumitomo Mitsui FG
Goldman Sachs
UBS
Deutsche Bank
Citi
Subtotal
Total

Net Revenue
($m)
254.60
187.27
86.53
73.49
72.63
67.08
28.75
10.47
7.02
6.20
794.05
835.31

No.

% Share

80
62
64
62
7
75
4
7
5
2
115
117

30.48
22.42
10.36
8.80
8.70
8.03
3.44
1.25
0.84
0.74
95.06
100.00

Source: Dealogic

Bank Parents
Mizuho
Morgan Stanley
Nomura
Daiwa Capital Markets
Sumitomo Mitsui FG
Goldman Sachs
Deutsche Bank
Bank of America Merrill Lynch
Barclays Capital
Citi
Subtotal
Total

Net Revenue
($m)
201.54
129.17
129.04
89.37
81.43
30.84
22.12
20.60
10.98
10.57
725.65
801.79

No.

% Share

521
442
449
458
393
183
105
156
84
49
794
841

25.14
16.11
16.09
11.15
10.16
3.85
2.76
2.57
1.37
1.32
90.50
100.00

Source: Dealogic

Table 26: Top 10 M&A players by revenue in Japan


$ millions, %
All Advisor Parent
Nomura
Sumitomo Mitsui FG
Mizuho
Morgan Stanley
Daiwa Capital Markets
Goldman Sachs
JPMorgan
Bank of America Merrill Lynch
Citi
Deutsche Bank
Subtotal
Total

Net Revenue
($m)
127.14
61.71
44.76
43.08
33.37
30.45
19.28
17.09
14.62
13.36
404.87
513.08

No.

% Share

109
107
61
34
39
11
14
11
11
6
290
2,605

24.78
12.03
8.72
8.40
6.50
5.94
3.76
3.33
2.85
2.60
78.91
100.00

Source: Dealogic

40

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Europe Equity Research


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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Joseph Leung

Asia ex Japan IB industry

AC

(852) 2800-8517

joseph.mj.leung@jpmorgan.com

Suzy Tian
(852) 2800 8552

suzy.t.tian@jpmorgan.com

Figure 37: Asia ex Japan deal value


and IBD revenue breakdown
100%
90%

M&A

80%
70%
60%

DCM

50%
40%
30%

ECM

20%
10%
0%
Deal value

China a major part of Asia ex Japan


In Asia ex Japan, 2011 industry revenue dropped by 19% y/y to $6.0 billion, mainly
driven by lower ECM revenue (-35%). Deal value dropped by 11% to $911 billion,
with ECM falling by 62%. Commission rates (bank revenue as % of deal value) fell
6bp to 66bp, due to fall in DCM and M&A commission rates. ECM commission
rates sustained above 100bp, higher than DCM and M&A commission rates of 42bp
and 27bp in 2011.
In 2011, China was 76% of Asia ex Japan's revenue, and 65% of deal value. Since
2006, more than half of Asia ex Japan's revenue has been from China. In 2006-07,
China's ECM revenue picked up as major companies were listed in Hong Kong. As
companies obtained listing, China M&A revenue has started to pick up since 2008.
DCM has lagged, as Chinas debt market remains under-developed. In China, DCM
revenue rose to historical high of $1.6 billion (+31% y/y), accounting for 35% of
total IBD revenue in 2011, when ECM revenue dropped by 37% from 2010.

Revenue

Source: Dealogic

Figure 38: China deal value and IBD


revenue breakdown

Commission rates in China are also higher than the rest of Asia ex Japan. In 2011,
overall commission rates in China (78bp) were 12bp higher than Asia ex Japan
(66bp), mainly because ECM commission rates were 38bp higher. DCM commission
rate were also 13bp higher, while M&A commission rates were 4bp lower.

100%
90%

M&A

80%
70%
60%

DCM

50%
40%
30%

We think the main reason for ECM and DCM commission rates being higher in
China is that the market share is tightly held by Chinese banks, and competition has
been focused on services quality rather than price. Among the top 10 banks in ECM
revenue, the top three were Chinese banks, with 4 out of the 10 being foreign banks
(UBS, MS, GS, and DB). For DCM, all top 10 were Chinese banks.

ECM

20%
10%
0%
Deal value

Revenue

Source: Dealogic

Figure 39: Outside China deal value


and IBD revenue breakdown
100%
90%

M&A commission rates were lower in China because foreign banks have been
establishing foothold and are competing on prices. Among the top 10 banks in M&A
revenue, 7 were foreign banks. This is also reflected in China M&A commission
rates being lower than average of Asia ex Japan.
As China is a major source of IBD revenue in Asia ex Japan, Chinese banks were
also large in Asia. Out of top 10 banks in terms of revenue, 5/ 9/ 1 were Chinese
banks for ECM/ DCM/ M&A activities, respectively.

M&A

80%

Outside China: More DCM, less competition in M&A

70%
60%

DCM

50%
40%
30%

ECM

20%
10%
0%
Deal value

Source: Dealogic

Revenue

Outside China, DCM represented a larger part of deal value. For Asia ex Japan
outside China, DCM on average comprised 51% of deal value for 2009-11, while
DCM was only 38% in China for the same period. Commission rates for DCM were
much lower than ECM in Asia ex Japan ex China, which is similar to China. M&A
commission rates were, however, higher than DCM outside China, while M&A
commission rates were worse than DCM in China. We attribute this to relatively less
competition in M&A activities outside China.

41

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Kian Abouhossein
(44-20) 7325-1523
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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 40: Revenues per unit of deal volume comparison in ECM


3.00%

Figure 41: Revenues per unit of deal volume comparison in DCM


1.40%
1.20%

2.50%

1.00%

2.00%

0.80%
1.50%
0.60%
1.00%

0.40%

0.50%

0.20%

0.00%

0.00%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Asia ex Japan
China
Outside China

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Asia ex Japan
China
Outside China

Source: Dealogic

Source: Dealogic

Figure 42: Revenues per unit of deal volume comparison in M&A

Figure 43: Revenues per unit of deal volume comparison in total IBD

0.45%

1.00%

0.40%

0.90%
0.80%

0.35%

0.70%

0.30%

0.60%

0.25%

0.50%
0.20%

0.40%

0.15%

0.30%

0.10%

0.20%

0.05%

0.10%

0.00%

0.00%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Asia ex Japan
China
Outside China

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Asia ex Japan
China
Outside China

Source: Dealogic

Source: Dealogic

Figure 44: Deal value: China as % of Asia ex Japan

Figure 45: Revenue: China as % of Asia ex Japan

90%

90%

80%

80%

70%

70%

60%

60%

50%

50%

40%

40%

30%

30%

20%

20%

10%

10%

0%

0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
ECM
DCM
M&A

Source: Dealogic

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
ECM
DCM
M&A

Source: Dealogic

42

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 27: Top 10 ECM players by revenue in Asia ex Japan

Table 28: Top 10 ECM players by revenue in China

$ millions, %

$ millions, %

Bank
Ping An Securities
Goldman Sachs
Guosen Securities
Deutsche Bank
Morgan Stanley
UBS
CMB
CITIC Securities
CICC
Credit Suisse
Subtotal
Total

Net Revenue
($m)
201.11
171.52
168.47
146.31
130.24
128.86
120.25
100.02
97.25
96.30
1,360.33
3,286.16

% share
6.1
5.2
5.1
4.5
4.0
3.9
3.7
3.0
3.0
2.9
41.4
100.0

Cumulative %
Share
6.1
11.3
16.5
20.9
24.9
28.8
32.5
35.5
38.5
41.4
41.4
100.0

Bank
Ping An Securities
Guosen Securities
China Merchants Bank
UBS
Morgan Stanley
Haitong Securities Ltd
CICC
CITIC Securities
Goldman Sachs
Deutsche Bank
Subtotal
Total

Net Revenue
($m)
201.11
168.47
119.01
104.58
102.29
89.71
87.88
87.49
84.65
71.63
1,116.81
2,539.82

% share
7.9
6.6
4.7
4.1
4.0
3.5
3.5
3.4
3.3
2.8
44.0
100.0

Source: Dealogic

Source: Dealogic

Table 29: Top 10 DCM players by revenue in Asia ex Japan

Table 30: Top 10 DCM players by revenue in China

$ millions, %

$ millions, %

Bank
Bank of China Ltd
ICBC
ABC
CCB
China Dev Bank
CITIC Securities
CMB
Deutsche Bank
BoCom
CICC
Subtotal
Total

Net Revenue
($m)
147.76
122.49
75.58
74.50
68.48
68.37
57.71
56.09
55.74
52.24
778.96
1,959.76

% share
7.5
6.3
3.9
3.8
3.5
3.5
2.9
2.9
2.8
2.7
39.8
100.0

Cumulative %
Share
7.5
13.8
17.7
21.5
24.9
28.4
31.4
34.2
37.1
39.7
39.7
100.0

Bank
Bank of China Ltd
ICBC
ABC
CCB
China Dev Bank
CITIC Securities
CMB
BoCom
CICC
China Everbright Bank
Subtotal
Total

Net Revenue
($m)
143.19
120.62
75.39
74.30
68.39
67.83
56.76
55.65
51.88
51.12
765.12
1,600.79

% share
8.9
7.5
4.7
4.6
4.3
4.2
3.6
3.5
3.2
3.2
47.8
100.0

Source: Dealogic

Source: Dealogic

Table 31: Top 10 M&A players by revenue in Asia ex Japan

Table 32: Top 10 M&A players by revenue in China

$ millions, %

$ millions, %

All Advisor Parent


BoA Merrill Lynch
Goldman Sachs
Citi
Morgan Stanley
JPMorgan
Credit Suisse
CICC
UBS
Deutsche Bank
Nomura
Subtotal
Total
Source: Dealogic

Net Revenue
($m)
74.45
60.87
45.79
38.93
33.81
33.49
27.08
25.52
23.59
23.43
386.96
765.57

% share
9.7
8.0
6.0
5.1
4.4
4.4
3.5
3.3
3.1
3.1
50.6
100.0

Cumulative %
Share
9.7
17.7
23.7
28.7
33.2
37.5
41.1
44.4
47.5
50.5
50.5
100.0

Net Revenue
($m)
BoA Merrill Lynch
44.85
Goldman Sachs
29.84
Credit Suisse
27.51
CICC
25.57
JPMorgan
19.92
Deutsche Bank
18.87
CITIC Securities
14.66
Nomura
13.51
China Renaissance Cap Inv
13.29
UBS
13.13
Subtotal
221.15
Total
445.58
All Advisor Parent

% share
10.1
6.7
6.2
5.7
4.5
4.2
3.3
3.0
3.0
3.0
49.6
100.0

Cumulative %
Share
7.9
14.6
19.2
23.4
27.4
30.9
34.4
37.8
41.2
44.0
44.0
100.0

Cumulative %
Share
8.9
16.5
21.2
25.8
30.1
34.3
37.9
41.4
44.6
47.8
47.8
100.0

Cumulative %
Share
10.1
16.8
22.9
28.7
33.2
37.4
40.7
43.7
46.7
49.6
49.6
100.0

Source: Dealogic

43

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(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Scott Manning

AC

(61-2) 9220-1803

scott.r.manning@jpmorgan.com

James Nicholias
(61-2) 9220-1528

james.nicholias@jpmorgan.com

Bharat Anand
(61-2) 9220-1550

bharat.k.anand@jpmorgan.com

Australian IB Industry
Similar to other jurisdictions globally, the market is highly competitive and contested
predominantly by the global investment banks. Across Investment Banking
operations, the ECM market is dominated by secondary capital raisings (as opposed
to IPOs), DCM is dominated by the four domestic major banks (as corporate bond
issuance is relatively minor), and M&A broadly tracks global activity levels. On the
Equities side, cash market volumes remain the key driver, with electronic trading
only penetrating relatively recently.
ECM
ECM activity fell significantly through the GFC in 2008 (refer Figure 46). The solid
recovery through 2009 was largely a function of 1) substantial levels of re-caps
across REITS to address gearing relative to declining commercial property values, 2)
increasing capital levels for banks to meet new regulatory requirements, 3) rights
issues from industrials and resource companies as a vehicle for consolidation.
However, more recently through 2010 and 2011, volumes have been subdued.
Figure 46: Primary and Secondary ECM Volumes - Australia
A$'m
35,000
30,000
25,000
20,000
15,000
10,000
5,000

Primary Capital Raised

2012 Q1

2011 Q4

2011 Q3

2011 Q2

2011 Q1

2010 Q4

2010 Q3

2010 Q2

2010 Q1

2009 Q4

2009 Q3

2009 Q2

2009 Q1

2008 Q4

2008 Q3

2008 Q2

2008 Q1

2007 Q4

2007 Q3

2007 Q2

2007 Q1

2006 Q4

2006 Q3

2006 Q2

2006 Q1

2005 Q4

2005 Q3

Secondary Capital Raised

Source: IRESS

DCM
Australian DCM activity is relative subdued due to the lack of a deep liquid
secondary market for corporate bonds, which results in the typical asset
management fixed income allocation of ~10% relative to more typical global
benchmark weightings of ~30%. In any event, the DCM market is dominated by the
four domestic major banks (ANZ, CBA, NAB, WBC) who account for the majority
of private bonds on issue (and typically act as arranger, etc for their own debt).
Accordingly, there is a relatively limited pool of DCM fees (and FICC trading
opportunities) for global investment banks in Australia.
M&A
Following a period of sustained growth in M&A up until the lead up of the GFC in
2008, domestic M&A activity followed global trends and sharply declined during
2009 (refer Figure 47). Improved performance during 2010 and 2011 can be largely
attributed to activity in resources, oil and gas, food and beverages, and financials.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 47: M&A Volumes - Australia vs Global


USD in Millions
1,200,000

60,000

1,000,000

50,000

800,000

40,000

600,000

30,000

400,000

20,000

200,000

10,000

0
0
2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1
Global
Australia (rhs)

Source: Bloomberg

Equities
As highlighted in Figure 48 below, equity volumes remained materially lower during
2011 averaging ~A$300bn versus the pre GFC peak of ~A$450bn in 2007. The
material decline in volumes and thus revenues as a whole for Australian cash equities
businesses has also been magnified by the emergence of several new players in the
market e.g. Nomura, CLSA, Commonwealth.
Figure 48: ASX Quarterly Traded Market Values
A$ in billions

450
400
350
300
250
200
150
100
50
0
2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1
Source: AFMA

It is also worth noting that the Australian cash equities market is yet to see a material
shift towards of electronic trading (ie <10% vs US closer to ~60%). Commission
allocations are still largely dependent on Panel reviews and fundamental research.

45

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

South African IB industry


Mervin Naidoo

Deal pipeline strong but uncertainty keeps market tight

AC

(27-11) 507-0716
mervin.x.naidoo @jpmorgan.com

Corporate South Africa has been reluctant to engage in M&A or significant IB


activities with current high levels of uncertainty. As seen from the charts below, the
current levels offer a sustainable base for growth.

Figure 49: SA IB historical deal values ($m)

Figure 50: SA IB historical bank revenues ($m)


450

60,000
ECM

DCM

M&A

400

50,000

ECM

DCM

M&A

350
300

40,000

250

30,000

200
150

20,000

100

10,000

50
-

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Dealogic.

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Dealogic.

Ability to use balance sheet still important


The ability to support client activities through the balance sheet remains important in
SA. While there has been strong growth in trading revenues over the past decade, the
market sophistication is relatively low with DCM and ECM products vanilla
products and most of trading revenues generated in FX and FI.

Combined corporate and investment banking (CIB)


In an effort to improve operational efficiencies and get a greater share of
transactional and trading business in corporate to complement IB revenues, all of the
SA banks have structured themselves along the lines of a CIB structure. The higher
capital requirements relating to proprietary positions and particularly equities have
seen SA banks position themselves for greater client flow.

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kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Russian IB industry
Alex Kantarovich, CFA
+7 495 967 3172

alex.kantarovich@jpmorgan.com

Ekaterina Petrovich
+7 495 967 3103

ekaterina.a.petrovich@jpmorgan.com

Metamorphosis ongoing; shifting landscape. Russias IB industry is relatively


young as the country's financial market is yet to reach maturity. Russia has seen
trading of financial instruments for around 20 years (since early 90s); however, the
earlier stage of the markets turbulent history produced few deals and the industry as
we know it started to take shape through the noughties after the painful economic
and political crisis period of 1998/99. Rising valuations and proliferation of modern
technologies saw the emergence of the domestic investment houses including the
independents like RenCap, Troika, Aton as well as IB divisions within private banks
including Alfa, UralSib, MDM and Trust. A number of international or regional
players entered the market, through acquisitions (Deutsche Bank/UFG,
UBS/Branswick) or organic buildup (J.P. Morgan, Goldman Sachs, Credit Suisse,
Morgan Stanley, Merrill Lynch). This should come as a little surprise, as the five
years of 2003-07 saw a 10-fold increase in ECM/DCM/M&A deal volume.
Entrants, failures, exits. The recent years have seen yet another wave of new
entrants, this time the government-controlled giants Sberbank and VTB. The latter
opted for an organic buildup with ~200 hired from the local operation of Deutsche
Bank in 2008, after looking to buy the private brokers (RenCap and Troika Vedomosti 2006). Currently, VTB has a strong IB operation with headcount of 1,170
and offices in the major financials centers world-wide. In 2011, Sberbank announced
the acquisition of Troika for $1 bn, a fraction of the pre-crisis price tags discussed in
the press (Kommersant, Vedomosti). RenCap was seriously damaged by the 2008
crisis, forcing the bank to fire-sell a 50% stake to the Russian billionaire Mikhail
Prokhorov for $500 mn. Another notable casualty was Unicredit as it chose to writeoff its Russian investment (after it acquired Aton brokerage for $425 mn in 2006). A
local broker Otkritie launched operations several years ago with participation of
VTB; lately the brokerage has been beset by series of scandals related to rogue
traders and compensation fraud (the FT, the Telegraph). MDM and Trust have
thrown in the towel largely shutting their securities operations.

47

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 51: Top ECM players by revenue in Russia (2011)

Figure 52: Top DCM players by revenue in Russia (2011)

%
1.8%
2.6%

1.6%

2.5%

6.1%
21.9%

7.5%
8.8%
21.5%
9.7%
16.1%

DB
MS
VTB
GS
RC
CS
Citi
JPM
SBER
HSBC
Others

VTB
SBER
BC
BNP
GS
RBS
Citi
GPB
VEB
JPM
Others

15.7%
31.9%
9.6%
6.9%
5.8%

4.1%
4.1%

5.4% 5.4%

5.7%

5.2%
Source: Dealogic.

Source: Dealogic.

Figure 53: Top M&A players by revenue in Russia (2011)

Figure 54: Russian IB revenue split by segment

$ mn
1,800

12.1%
23.9%
12.1%
4.2%
10.6%

4.7%
4.8%

8.6%

5.1%
6.0% 7.7%

Source: Dealogic.

DB
CS
VTB
JPM
GPB
SBER
Rothschild
RC
UBS
BoA
Others

1,600

ECM

DCM

M&A

1,400
1,200
1,000
800
600
400
200
-

Source: Dealogic.

Outlook: improving after a tough 2H11. Meanwhile, given the limited issuance in
recent years, particularly through the 2008/09 crisis and the EU debt crisis triggering
the activity freeze, unsatisfied demand is likely to be high. We highlight that
revenues recovering to their 2007 peak would see them doubling from 2011 levels.
The pick up in activity looks set to take place in the absence of new shocks.
State connections and competitiveness. Given the steady decline in commission
rates in recent years (from ~50-60 bps 10 years ago to 10-20 bps at present),
participation in various deals has emerged as a key consideration for the
sustainability and development of business for the industry players. The statecontrolled duo should be in a position to participate in most deals, the role previously
enjoyed by RenCap, particularly given the sheer size of the government privatization
program.

48

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kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

New state privatization drive. The Russian government announced an ambitious


plan aimed at reducing the states share in the largest Russian companies over 20122017, as part of the economic liberalization campaign. By selling its stakes, the
government anticipates to raise about $70 bn, with approximately $300 mn to be
attracted in 2012 (more than $200 mn for a 15% stake in Rosneft and about $94 mn
for a 10% stake in VTB, according to FTSE Global Markets and WSJ citing the
government. In 2013, the government hopes to raise an additional $32bn (WSJ). An
unfavorable market environment and political uncertainty, however, are likely to
alter the initial privatization schedule and, consequently, to postpone gains.
Table 33: Preliminary state privatization program 2012-2017
Company

Sector

Government's
stake before
privatization
100%

Government's
stake after
privatization
90.0%

Rosnano

Nano-technology

Russian Railways

Transportation

100%

50% + one share

Uralvagonzavod

Machine manufacturing

100%

50% + one share

United Shipbuilding Corporation

Shipbuilding

100%

50% + one share

United Aviation Corporation

Aircraft building

82.95%

50% + one share

FSK

Utilities

79.48%

50% + one share

Transneft

Oil&gas

78.10%

50% + one share

Sberbank

Financials

57.60%

50% + one share

MRSK

Utilities

53.69%

50% + one share

Zarubezhneft

Oil & gas

100%

0% + a golden share

United Grain Company

Agriculture

100%

0% + a golden share

Rosneft

Oil & gas

75.16%

0% + a golden share

RusHydro

Utilities

57.97%

0% + a golden share

Sheremetyevo Airport

Transportation

100%

0%

State Transport Leasing Company

Transportation

100%

0%

Sovkomflot

Transportation

100%

0%

Rosselkhozbank

Financials

100%

0%

Rosagroleasing

Agriculture

99.99%

0%

VTB

Financials

75.50%

0%

Aeroflot

Transportation

51.17%

0%

Alrosa

Mining

50.93%

0%

Inter RAO

Utilities

17.76%

0%

Rostelecom-Svyazinvest

TMT

not available

0%

Source: Interfax, Kommmersant, Finmarket, RA Expert, WSJ.

49

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Positive capital markets momentum likely. We expect ECM revenues to soar by


40% y/y in 2012 and 10% y/y in 2013 to $323 mn and $355 mn, respectively. Frontloaded debt underwriting in 2012 may boost DCM revenues by 50% y/y to $363 mn
in 2012 following a milder growth of 10%y/y to $399 mn in 2013. We also anticipate
M&A activity to rebound, demonstrating healthy growth rates of 15%y/y and
10%y/y in 2012-2013, thus allowing M&A revenues to reach $322 mn and $354 mn
during the forecast period. According to our estimates, VTB IB may also enjoy
higher net revenue of $143mn in 2012 (+37% y/y) with growth becoming flattish in
2013 as VTBs market share may reflect competitive pressure from Sberbank/Troika.
Table 34: Russian IB revenue 2012-2013
2011A

2012E

2013E

Comment

ECM

16%

12%

12%

Eroding on competition with Sberbank

DCM

16%

14%

12%

Eroding on competition with Sberbank

M&A

11%

17%

16%

Eroding on competition with Sberbank

ECM

37

40

43

DCM

38

50

47

M&A

30

54

55

105

143

145

ECM

230

323

355

DCM

242

363

399

M&A

280

322

354

Total net revenue

752

1,007

1,108

ECM

14%

40%

10%

Pickup in issuance in 2012 and 2013

DCM

-5%

50%

10%

Issuance front loaded in 2012

M&A

-25%

15%

10%

VTB's share of IB revenue (%)

VTB's revenue ($ mn)

Total net revenue


Russian IB sector revenue ($ mn)

Russian IB sector revenue growth (%)

Source: Dealogic, J.P. Morgan estimates.

50

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Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

India IB: Operating environment is tough


The macro environment appears tough for the Indian IB sector driven by the
following factors: 1) low ECM and M&A activity; 2) high interest rates and the tight
liquidity position (also high LAF borrowings); and 3) weak global sentiment.

AC

Seshadri K Sen
(91-22) 6157-3575

seshadri.k.sen@jpmorgan.com

Dibin Korath

Equities: CY 12 showing signs of improvement


The trading volumes have increased from the lows of Dec 2011 as shown in the chart
below. The average daily turnover has increased from c$2.0bn in Dec 2011 to
c$4.0bn in Feb 2012. We can also note that the share of the cash equities has dropped
over the last quarters from the chart below.

(91-22) 6157-3576

dibin.m.korath@jpmorgan.com

India BSE & NSE Combined Turno - LHS


Source: Bloomberg

Jan-12

Nov-11

Sep-11

22000
21000
20000
19000
18000
17000
16000
15000
Jul-11

May-11

Jan-11

Mar-11

Sep-10

Mar-10

Jan-10

10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0

Nov-10

Rs bn

Jul-10

Figure 56: Split of the turnover by segments

$mn, Index

May-10

Figure 55: Daily turnover BSE and NSE has increased in 2012

Sensex - RHS

1,800
1,600
1,400
1,200
1,000
800
600
400
200
1Q 11

2Q 11

3Q 11

Options

4Q 11
Futures

1Q 12

2Q 12

3Q 12

Cash

Source: Edelweiss 3Q 12 presentation

IB business: Drop in the amount raised from equities


The majority of the resources raised in India are from the domestic equities. The
amount raised from the equities has significantly reduced in the CY 2011 as shown
in the chart below. We can also note that the equity raised from overseas markets has
reduced in the CY 2011.

51

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Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 57: Resources raised (domestic): debt and equities

Figure 58: Resources raised from overseas primary markets

Rs bn

Rs bn

INR bn

Equity

INR bn

Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12

18
16
14
12
10
8
6
4
2
0

Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12

350
300
250
200
150
100
50
0

Debt

Equity

Source: CMI

Source: CMI

Figure 59: India IB historical deal values ($m)

Figure 60: India IB historical bank revenues ($m)


900

160,000

800

140,000

700

120,000

600

100,000

500

80,000

400

60,000

300

40,000

200

20,000

100

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
ECM

Source: Dealogic.

DCM

M&A

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
ECM DCM M&A

Source: Dealogic.

52

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Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 35: Top 10 ECM players by revenue in India

Table 36: Top 10 DCM players by revenue in India

$ millions, %

$ millions, %

Bank
DSP Merrill Lynch Ltd
Citigroup Global Markets India Pvt Ltd
Kotak Mahindra Capital Co Ltd
SBI Capital Markets Ltd
JM Financial Consultants Pvt Ltd
Cenkos Securities plc
Standard Chartered Bank
JP Morgan Securities Ltd
Deutsche Bank AG (London)
HSBC Securities & Capital Markets (India)
Pvt Ltd
Subtotal
Total

Net
Revenue
($m)
20.7
4.6
3.9
3.8
3.7
3.2
2.6
2.6
2.6
2.6
50.3
104.4

No.

%
Share

2.0
8.0
4.0
6.0
8.0
2.0
1.0
1.0
1.0

19.8
4.4
3.7
3.7
3.5
3.0
2.5
2.5
2.5

3.0
22.0
104.0

2.5
48.2
100.0

Bank Parent
AXIS Bank
ICICI Bank
Standard Chartered Bank
Citi
HSBC
RBS
Barclays Capital
Yes Bank Ltd
Deutsche Bank
AK Capital Services Ltd
Subtotal
Total

Net Revenue ($m)


22.8
19.4
18.6
18.6
12.4
8.7
8.6
8.5
8.4
6.7
132.6
183.3

No.
168.0
126.0
80.0
20.0
71.0
12.0
67.0
72.0
50.0
92.0
350.0
382.0

% Share
12.4
10.6
10.2
10.1
6.8
4.7
4.7
4.7
4.6
3.6
72.3
100.0

Source: Dealogic

Source: Dealogic

Table 37: Top 10 M&A players by revenue in India


$ millions, %
All Advisor Parent
Morgan Stanley
Goldman Sachs
Lazard
Avendus Capital Pvt Ltd
UBS
HSBC
Deutsche Bank
Citi
Credit Suisse
Ambit Corporate Finance Pvt Ltd
Subtotal
Total

Net Revenue
($m)
24.3
18.4
13.9
11.7
9.3
8.8
7.8
7.6
5.9
5.2
113.0
192.8

No.

% Share

8.0
6.0
6.0
18.0
4.0
6.0
2.0
6.0
1.0
8.0
53.0
1383.0

12.6
9.6
7.2
6.0
4.8
4.5
4.1
3.9
3.1
2.7
58.6
100.0

Source: Dealogic

53

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Brazilian IB industry
Saul Martinez

AC

(1-212) 622-3602
saul.martinez@jpmorgan.com
Thomas Strakos
(55-11) 4950-3474
thomas.f.strakos@jpmorgan.com
Christopher Delgado
(1-212) 622-6601
christopher.delgado@jpmorgan.com

Developing capital markets with large growth potential


Brazil has a relatively small but competitive investment banking industry. Although
relatively concentrated in a small numbers of players, the competitors do include
everything from boutique investment banks to large domestic and foreign banks.
Moreover, since access to capital markets is still limited to a small portion of topquality Brazilian companies, competition among banks has become extremely
aggressive.
The products offered comprise mostly plain vanilla M&A advisory, ECM and DCM.
The product range is evolving, however, as appetite for Brazilian assets increases.
Debt instruments have developed especially quickly since it become cheaper to raise
funding locally. Strong growth has been seen in debentures, structured funds, ABS
and MBS.

Structure of local players


Most local banks competing in this market benefit from strong and solid balance
sheets supported by large deposit bases. These banks usually also have a strong
commercial relationship with the clients, being present through corporate banking
activities and benefitting from the cross-selling opportunities to obtain IB mandates.
Mandates are also rarely granted if there has not been a support from the bank
offering credit facilities.

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 61: Brazil - Revenues per unit of deal volume comparison in


ECM 2011

Figure 62: Brazil - Revenues per unit of deal volume comparison in


DCM 2011

%
1.2%

4.0%
3.5%

ECM Brazil

1.0%

3.0%

DCM Brazil

0.8%

2.5%

0.6%

2.0%
1.5%

0.4%

1.0%

0.2%

0.5%

0.0%

0.0%

Source: Dealogic

Source: Dealogic

Figure 63: Brazil - Revenues per unit of deal volume comparison in


M&A 2011
%
1.2%

M&A Brazil

1.0%
0.8%
0.6%
0.4%
0.2%
0.0%

Source: Dealogic

55

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13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 64: Brazil IB Historical Deal Volumes

Figure 65: Brazil IB Historical Revenues

$ million

$ million
2,000

300,000

1,800

250,000

1,600
1,400

200,000

1,200

150,000

1,000
800

100,000

600

50,000

400
200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
ECM

DCM

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
ECM DCM M&A

M&A

Source: Dealogic

Source: Dealogic

Table 38: Top 10 ECM players by revenue in Brazil

Table 39: Top 10 DCM players by revenue in Brazil

$ millions, %

$ millions, %

Bank
Itau BBA
BTG Pactual
Credit Suisse
Banco Bradesco BBI SA
Bank of America Merrill Lynch
Santander
Goldman Sachs
Morgan Stanley
JPMorgan
Banco do Brasil SA
Subtotal
Total

Net Revenue
($m)
81.60
60.67
51.40
22.91
21.16
14.45
11.97
11.05
6.26
3.78
285.25
298.98

No.

% Share

22
13
13
10
6
12
5
6
5
6
32
32

27.29
20.29
17.19
7.66
7.08
4.83
4.00
3.70
2.09
1.27
95.41
100.00

Source: Dealogic

Bank Parents
Itau BBA
HSBC
Santander
JPMorgan
Banco Bradesco BBI SA
Credit Suisse
Banco do Brasil SA
BTG Pactual
Citi
Bank of America Merrill Lynch
Subtotal
Total

Net Revenue
($m)
25.30
19.96
18.00
16.36
12.11
11.49
9.77
9.29
8.27
7.38
137.93
176.02

No.

% Share

47
41
28
12
45
10
31
31
14
14
125
137

14.37
11.34
10.23
9.30
6.88
6.53
5.55
5.28
4.70
4.19
78.36
100.00

Source: Dealogic

Table 40: Top 10 M&A players by revenue in Brazil


$ millions, %
All Advisor Parent
BTG Pactual
Credit Suisse
Itau BBA
Goldman Sachs
JPMorgan
Citi
Deutsche Bank
Banco Bradesco BBI SA
UBS
Morgan Stanley
Subtotal
Total

Net Revenue
($m)
70.12
59.37
56.00
54.75
41.80
36.63
34.32
27.28
26.06
20.85
427.18
588.94

No.

% Share

48
27
37
17
12
7
5
23
5
14
138
684

11.91
10.08
9.51
9.30
7.10
6.22
5.83
4.63
4.42
3.54
72.53
100.00

Source: Dealogic

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Naresh Bilandani

AC

(971) 4428-1763

naresh.n.bilandani@jpmorgan.com

MENA IB overview
Long-term opportunities for growth of the IB industry in MENA remain
attractive in our view; given nearly three quarters of businesses in the region
remain family or government-owned and hence reliant only on captive funding or
direct/indirect government backing, capital markets can potentially provide a more
efficient and cost-effective way of raising capital /financing.
Additionally it is broadly evident that MENA corporates have begun to realize:
a) the benefits of foreign capital in the shareholding/financing structure something
that can be sourced primarily by global IBs given the lack of scale of the domestic IB
industry; and b) diversity of product offering & solutions, b/s strength and
networking benefits that global IBs, which are increasingly penetrating the region,
bring to the table. A significant number of mega-corporates such as Qatar Petroleum,
Rasgas, National Commercial Bank, Saudi Aramco, Emirates Airlines, Etihad &
Qatar Airways, Jumeirah Hotels, larger Egyptian banks such as National Bank of
Egypt and Bank Misr, etc. remain unlisted, while an even greater number of large
corporates remain majority controlled by the governments (e.g. Abu Dhabi banks) - a
select number of large unlisted corporates have publicly announced plans for future
IPOs, which would be a sizeable ECM opportunity for the IB players.
Table 41: IPO statistics for MENA
No. of deals
Capital raised, $bn
Avg. deal size, $bn
#1 sector (no. of deals)
#2 sector (no. of deals)
#1 sector ($bn raised)
#2 sector ($bn raised)

2008
77
15.8
206
Financials (26)
Industrials (12)
Telecom ($4.3bn)
Materials ($4.0bn)

2009
22
2.4
110
Financials (12)
Telecom (4)
Telecom ($1.1bn)
Energy ($0.6bn)

2010
48
5
103
Financials (9)
Industrials (8)
Materials ($1.2bn)
Real estate ($1.0bn)

2011
31
2
58
Financials (9)
Consumer (5)
Financials ($0.8bn)
Consumer ($0.3bn)

Source: E&Y, Bloomberg

MENA DCM opportunity. Scope for DCM activity in the region remains relatively
higher currently vs. the longer term potential opportunity in the MENA ECM space.
Roughly $125bn of conventional & Islamic debt has been printed by the
governments, quasi and private issuers since 2008 helped by: a) the implicit backing
of the highly rated GCC sovereigns; b) falling yields; c) evidence of strength of the
governing institutions to limit fallouts of Arab Spring in the GCC and d) currency
stability and fiscal surpluses of the GCC governments. This is notwithstanding the
preference of family businesses (a high proportion in MENA region) for debt capital
to avoid dilution while this mindset is gradually changing, it still remains largely
prevalent. UK and European IBs have primarily dominated the MENA DCM league
tables over the last three years.
2012 looks more promising for MENA M&A with political calm returning and
M&A activity could see a steady uptick as international investors return to the
region and regional investors set their sights in broader MENA and European
region. 2011 was an overall slow year for M&A advisory, which has historically
(over the past 10yrs) formed the highest mix (c.65%) of the fee pot. As per Allen &
Overy data, Saudi Arabia and UAE continued to attract deal flow in 2011 (e.g.
c.$1bn acquisition by Coca Cola of a 50% stake in Saudi Aujan Industries and
Hilong China taking 51% stake in Al Mansoori Pipes of UAE) with Dubai
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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

continuing to remain the hub of M&A activity in the region. M&A spending from
Qatar and Kuwait also rose in 2011 with Qatar continuing to invest in London prime
real estate and European financial services (KBL, Greek banks) and Kuwaiti private
investors investing into the Dubai hotel industry. Beyond GCC, Turkey and Egypt
are attracting interest from the GCC financials industry with QNB in talks with
Dexia to purchase Denizbank of Turkey and Burgan Bank Kuwait in talks to buy a
controlling stake in Eurobank Tekfen Turkey of Eurobank EFG Greece.
The contribution of IB revenues within the group bottom-line of most local
banks, though having grown YoY in FY11, still remains limited. Most of the
large banks in the region like ENBD, QNB, NBAD, etc. do not report IB segment
break-up of assets, revenues, equity, etc. separately but lump them together with the
corporate banking segment, which typically drives more than 2/3rd of GCC banking
business in our view. That said, some key banks in Saudi Arabia, Kuwait and Egypt
report IB segmental break-up and we list the Top-5 of these segments below (though,
potentially, the IB segment revenues & contribution of the likes of ENBD and QNB
would be relatively higher to the group income in our view).
Table 42: IB segment snapshot of key GCC banks
LCY mn

Origin

Al Rajhi Bank
Samba Finl. Group
Natnl. Bk of Kuwait
Bk Saudi Fransi
Comml Intnl Bk

Total assets
2011
% of group
828
0.4%
101
0.1%
57
0.4%
431
0.3%
1,534
1.8%

Saudi Arabia
Saudi Arabia
Kuwait
Saudi Arabia
Egypt

2011
46
113
-

Net equity
% of group
0.2%
0.6%
-

Net income
% of group
% of group, yr ago
2.5%
1.1%
8.2%
5.4%
4.6%
4.4%
2.9%
0.8%
-

2011
183
354
14
83
-101

ROA
2011
22%
415%
21%
32%
-

ROE
2011
753%
94%
-

Source: Company data

Figure 66: MENA IB total deal value, $mn

Figure 67: MENA IB net bank revenues, $mn

250,000

1,600

1,400
200,000
1,200

1,000

150,000

800
100,000

600

400
50,000
200

1995

1996

1997

1998

1999

2000

2001

2002
ECM

Source: Dealogic

2003

DCM

2004

2005

2006

2007

2008

2009

2010

2011

1995

1996

M&A

1997

1998

1999

2000

2001

2002
ECM

2003
DCM

2004

2005

2006

2007

2008

2009

2010

2011

M&A

Source: Dealogic

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(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 43: MENA IB advisory league tables, 2011


Bank
BofA-ML
DB
JPM
MS
Al Rajhi
DB
BSFR
Oppenheimer
UBS
Bk Misr
Subtotal
Total

MENA ECM
Net Rev ($mn)
12
10
9
9
7
6
6
4
3
3
69
125

No.
3
2
3
1
1
2
1
4
1
1
13
55

%share
9.8
7.6
7.0
6.9
5.4
5.1
5.0
3.1
2.7
2.7
55.3
100.0

Bank
HSBC
StanC
JPM
Citi
GS
DB
RBS
MUFJ
Barclays
BNPP
Subtotal
Total

MENA DCM
Net Rev ($mn)
11
8
6
5
4
4
4
4
3
3
52
75

No.
28
19
16
16
13
11
6
11
12
13
50
59

%share
14.2
10.5
7.8
6.7
5.5
5.4
5.3
4.9
4.6
4.5
69.3
100.0

Bank
BofA-ML
CS
DB
GS
Citi
MS
RBS
BNPP
Nomura
Rothschild
Subtotal
Total

MENA M&A
Net Rev ($mn)
39
33
29
25
14
12
12
10
10
9
194
273

No.
11
8
3
9
7
6
3
4
2
5
41
727

%share
14.4
12.2
10.7
9.3
5.1
4.5
4.3
3.8
3.7
3.4
71.2
100.0

Source: Dealogic

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amit.x.ranjan@jpmorgan.com

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13 March 2012

Global Investment Banking headwinds: ROE


below cost of equity

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Global Investment Banking headwinds:


ROE below cost of equity

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Regulatory headwinds and poor IB cost


management: leads to ROE below CoE
We believe the two key issues facing the IB industry at present and which need to be
addressed are 1:) difficult regulatory environment which is driving returns lower
through increased capital requirements as well as potential increase in funding costs
(UK ICB proposal); and 2) poor cost management on the part of the IB industry
leading to an unusually high cost base, limiting cost flexibility to respond to the low
revenue environment.
We believe both these issues will result in the IB industry changing to adapt to the
changing market environment, creating different demands in strategy from Tier I and
Tier II players.

Headwind 1: Regulations imply Global IB ROE to decline


from 13.6% to 6.8% on average post regulation
In this section we first discuss various regulations impacting the IB industry
including Basel 2.5, U.S. NPR2, Basel 3, Section 716 and swap push-out provisions
of the Dodd-Frank Act as well as the ICB in U.K.
IB ROEs to halve to 6.8% post regulation from 13.6% pre-regulation, driven
2/3rd by Basel 2.5 and 3 capital charges
We estimate average RoE post all the regulatory changes for the IBs to decline to
6.8% from 13.6% pre-regulatory changes in 2013E.
ROE post regulatory changes is very similar for almost all the players; however, we
would note that UBS, CS, RBS, SG and BNP have already announced material
restructuring in their IB division, but we are yet to see any material restructuring
from Tier I IBs.
We would also highlight the fact that of the average -7% impact on ROE from
regulations, we estimate 2/3rd of the impact is due to Basel 2.5 and Basel 3 changes
which are largely known and have limited estimates.
We estimate an average -50% decline in 2013E ROE from the sum of all the
regulatory changes for the IBs as shown in Table 44.
Excluding regulatory arbitrage i.e. the impact of NPR2 rules and sections of
Dodd-Frank act which impact only the U.S. IBs, we estimate GS and MS to
generate 2013E ROE of 8.6% and 8.0%, respectively, i.e. an improvement of
180bps and 130bps, respectively.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 44: Global Investment Banks 2013E ROE in the IB division pre and post regulation changes
%
IB ROE 2013E
1. Clearing via CCP1
2. Moving derivatives to exchange
3. OTC post trade transparency
4. Higher capital on non CCP clearing
Dodd Frank global
5. Ban on prop trading, limits on market making,
PE/HF Investments
6. Section 716 US reg - segregation IB
7. NPR2 RWA Increase
Dodd-Frank US/French Proposal only
8. Increase in cost of funding
ICB Impact (UK only)
9. Stressed VaR capital buffer
10. Incremental Risk Charge
11. Securitisation & correlation
Basel 2.5
12. CVA, CCR & other
13. Securitisation risk weighted 1250%
Basel 3 excluding mitigation
14. Mitigation
15. Group excess capital
Total impact
IB ROE pre mitigation
Decline in ROE
Resulting IB ROE
Decline in ROE
IB ROE post regulation (ex reg. arbitrage)
Decline in ROE

CS
13.9%
0.9%
-1.1%
-0.6%
-0.1%
-1.1%

UBS
12.7%
0.6%
-1.4%
-0.7%
-0.1%
-1.7%

DB
12.8%
1.4%
-1.3%
-0.6%
-0.1%
-0.9%

GS
15.7%
1.9%
-1.0%
-0.9%
-0.2%
-0.4%

MS
12.6%
1.0%
-0.8%
-0.5%
-0.1%
-0.4%

BNP
16.2%
-0.2%
-1.3%
-0.5%
0.0%
-2.0%

SG
14.6%
0.4%
-1.1%
-0.7%
-0.1%
-1.6%

BARC
14.1%
0.4%
-0.8%
-0.4%
-0.1%
-0.9%

RBS
10.0%
1.0%
-0.9%
-0.4%
0.0%
-0.5%

Avg.
13.6%
0.8%
-1.1%
-0.6%
-0.1%
-1.1%

-1.2%
-1.5%
-0.7%
-3.0%
-3.8%
-4.6%
-6.4%
13.7%
-1.9%
-7.0%
5.4%
-62%
6.9%
-50%
6.9%
-50%

-1.2%
-1.4%
-1.1%
-3.1%
-3.2%
-4.3%
-5.8%
66.8%1
-1.4%
-5.3%
4.6%
-64%
7.4%
-42%
7.4%
-42%

-1.6%
-0.6%
-1.1%
-2.9%
-3.3%
-5.0%
-6.4%
13.3%
0.0%
-6.4%
4.9%
-62%
6.4%
-50%
6.4%
-50%

-0.7%
-0.1%
-3.7%
-4.3%
-2.1%
-1.2%
-1.9%
-4.3%
-3.2%
-4.5%
-6.2%
7.9%
0.0%
-8.9%
5.8%
-63%
6.8%
-57%
8.6%
-45%

-0.7%
-0.1%
-1.7%
-2.3%
-0.9%
-1.2%
-0.9%
-2.6%
-1.6%
-2.3%
-3.4%
2.1%
0.0%
-5.9%
6.2%
-51%
6.7%
-46%
8.0%
-36%

-0.4%
-0.4%
-1.8%
-0.8%
-0.5%
-2.9%
-2.7%
0.0%
-2.7%
0.0%
0.0%
-6.5%
9.7%
-40%
9.7%
-40%
10.0%
-38%

-0.2%
-0.2%
-1.8%
-1.4%
-1.3%
-3.7%
-3.6%
-6.5%
-7.7%
3.8%
0.0%
-9.1%
5.0%
-66%
5.5%
-62%
5.6%
-62%

-2.7%
-2.7%
-0.7%
-0.7%
-0.7%
-2.0%
-3.4%
-2.5%
-4.9%
4.0%
0.0%
-7.2%
6.0%
-58%
6.9%
-51%
8.8%
-38%

-2.1%
-2.1%
-0.6%
-0.6%
-0.6%
-1.6%
-2.1%
-2.1%
-3.5%
3.1%
0.0%
-5.5%
3.9%
-61%
4.5%
-55%
6.1%
-39%

-0.2%
0.0%
-0.6%
-0.8%
-0.5%
-0.5%
-1.3%
-1.1%
-1.0%
-2.9%
-3.0%
-3.5%
-5.2%
12.7%
-0.4%
-6.9%
5.7%
-58%
6.8%
-50%
7.5%
-45%

Source: J.P. Morgan estimates, company data. Notes: i) Morgan Stanley Institutional Securities estimates ii) Goldman Sachs Institutional Client Services & Investment Banking estimates; iii) our
ROE estimates are based on JPMC allocated capital (10% of RWAs); iv) for the impact of Section 619, we have assumed the pure prop trading revenues would be impacted, partly offset by costs
savings note that we have assumed a ban on prop trading for French banks as well; v) note that percentages cannot be added up as both numerators and denominators are changing. 1. Includes
legacy assets transferred from IB to corporate center starting Q1 12. RBS: In 2013E, RBS GBM will be in transition phase of restructuring and hence we have not included the impact of reduction in
wholesale funding which in the longer term we estimate will add up to c.5% to the GBM ROE assuming minimal revenue generation from the reduced TPAs. Please note we do not include the
impact of Basel Liquidity rules in our calculations, and have discussed these in some of our other publications. Please note, the current proposed regulations on central clearing could imply that
risk weights will increase when activity moves from bilateral trades to centrally cleared trades. We have not included this potential negative impact in our calculations.

Regulatory timing not a concern to us


We expect an increase in regulation for the next several years with Basel 3 rules
starting from January 1, 2013 albeit in a phased manner and as various
provisions of the Dodd-Frank Act and Basel 3are progressively implemented in
the U.S.
We show the expected timeline of different global IB regulations in Table 45
below, although the rules are still in different phases of implementation and the final
implementation date may vary from current expectations. In short, with Dodd-Frank
Act and Basel headwinds, the impact on IBs is material and in our view, a preferable
strategy would be for IB managements to act now rather than post implementation of
regulations. We expect IB managements to act decisively to adjust their business
models before implementation of regulation. In our view, increased demands
from shareholders on ROE generation should encourage managements to be
more pro-active rather than wait for implementation of the rules.

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kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 45: Expected Timeline of regulations to hit the IB industry: still an avalanche of regulation in the pipeline
July, 2012

January, 2013

US Basel 2.5
Capital rules

Basel III
Counterparty credit
risk
Basel III capital
deductions (phasedin)

Section 619 - Volcker


rule
Market
infrastructure
& Bank
operations

CFTC swap-dealer
margin requirements

January, 2015

January, 2016

January, 2018

Basel III min.


core tier 1

January, 2019

Basel III fully loaded

Net stable
funding ratio

LCR

Mifid II

ICB

Section 716 - Lincoln


amendment
EMIR

Bank size

G SIFI
resolution
mechanisms
Affecting Globally
Affecting U.S.

G-SIFI
capital
charge

G-SIFI fully loaded

Affecting E.U.
Affecting U.K.

Source: SEC, CFTC, BIS, FSB, EC. Note: EMIR expected to be effective latest by 2012 end. G-SIFI resolution mechanisms to be implemented in second half of 2012

Detailed Breakdown of Regulatory Impact: Capital and Earnings


We estimate IB RWAs to increase by 60% on average from pre-regulation levels
driven primarily by the Basel 2.5 and Basel 3 regulations. U.S. NPR2 rules also
imply additional RWAs of $93bn for GS and $43bn for MS in our estimates. For
detailed discussion of the NPR2 rules, please refer to "Global Investment Banks: US
Basel 2.5 NPR2 capital at risk analysis: yet another US IB disadvantage, downgrade
GS, MS to N published 25th Jan 2012.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 46: Global Investment Banks 2013E RWAs in the IB division pre and post regulatory changes
lcl currency millions
IB RWA 2013E
1. Clearing via CCP1
2. Moving derivatives to exchange
3. OTC post trade transparency
4. Higher capital on non CCP clearing
Dodd Frank global
5. Ban on prop trading, limits on market making,
PE/HF Investments
6. Section 716 US reg - segregation IB
7. NPR2 RWA Increase
Dodd-Frank US/French proposal only
8. Increase in cost of funding
ICB Impact (UK only)
8. Stressed VaR capital buffer
9. Incremental Risk Charge
10. Securitisation & correlation
Basel 2.5
11. CVA, CCR & other
12. Securitisation risk weighted 1250%
Basel 3 excluding mitigation
13. Mitigation
Total impact
Impact %
Resulting RWA

CS
112,993
-9,365
0
0
943
-8,423
0

UBS
119,100
-8,589
0
0
723
-7,866
0

DB
186,700
-21,796
0
0
1,830
-19,966
0

GS
298,474
-35,280
0
0
2,994
-32,286
0

MS
275,000
-23,818
0
0
2,112
-21,706
0

BNP
149,406
-1,840
0
0
398
-1,442
0

SG
72,647
-3,277
0
0
557
-2,720
0

BARC
180,834
-9,027
0
0
785
-8,241
0

RBS
111,092
-14,921
0
0
0
-14,921
0

0
0
0
0
0
11,000
14,000
6,154
31,154
42,000
55,000
97,000
-56,000
63,731
56%
176,724

0
0
0
0
0
12,500
15,000
11,000
38,500
40,300
60,000
100,300
-100,034
30,900
26%
150,000

0
0
0
0
0
27,000
9,000
18,300
54,300
65,000
120,000
185,000
-95,000
124,334
67%
311,034

100
93,000
93,100
0
0
45,000
25,000
42,000
112,000
75,000
120,000
195,000
-100,000
267,814
90%
566,288

100
43,000
43,100
0
0
20,000
30,000
20,000
70,000
40,000
60,000
100,000
-39,000
152,394
55%
427,394

0
0
0
0
0
19,000
8,000
5,000
32,000
30,000
0
30,000
0
60,558
41%
209,964

0
0
0
0
0
10,000
8,000
7,000
25,000
24,000
58,000
82,000
-15,000
89,280
123%
161,926

0
0
0
0
0
10,000
10,000
10,000
30,000
57,222
39,425
96,647
-40,000
78,406
43%
259,240

0
0
0
0
0
7,000
7,000
7,000
21,000
28,940
30,285
59,225
-26,225
39,079
35%
150,170

Source: J.P. Morgan estimates. Notes: i) Morgan Stanley Institutional Securities estimates ii) Goldman Sachs Institutional Client Services & Investment Banking estimates; iii) for the impact of
Section 619, we have assumed the pure prop trading revenues would be impacted, partly offset by costs savings note that we have assumed a ban on prop trading for French banks as well, iv)
UBS: Includes legacy assets transferred from IB to corporate center starting Q1 12, v) SG excluding 12bn of RWAs from legacy assets. Please note we do not include the impact of Basel Liquidity
rules in our calculations, and have discussed these in some of our other publications.1. Please note, the current proposed regulations on central clearing could imply that risk weights will increase
when activity moves from bilateral to centrally cleared trades. We have not included this potential negative impact in our calculations.

In Table 47 below, we estimate a -21% impact on Net Income in 2013E from


various IB regulations. For the U.K. banks, ICB proposals would decrease Net
Income by -20% on average due to increased funding costs in our estimates. Note
that RBS should benefit in the long run from reduction in wholesale funding, which
we have not included in our 2013E estimates.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 47: Global Investment Banks Impact on 2013E Net Income from regulatory changes
lcl currency millions
IB net Income 2013E
1. Clearing via CCP
2. Moving derivatives to exchange
3. OTC post trade transparency
4. Higher capital on non CCP clearing
Dodd Frank global
5. Ban on prop trading, limits on market making,
PE/HF Investments
6. Section 716 US reg - segregation IB
7. NPR2 RWA Increase
Dodd-Frank US/French proposal only
8. Increase in cost of funding
ICB Impact (UK only)
8. Stressed VaR capital buffer
9. Incremental Risk Charge
10. Securitisation & correlation
Basel 2.5
11. CVA, CCR & other
12. Securitisation risk weighted 1250%
Basel 3 excluding mitigation
12. Mitigation
Total impact
Resulting Net Income

CS
1,572
-2%
-8%
-4%
0%
-15%
-

UBS
1,516
-3%
-11%
-5%
0%
-19%
-

DB
2,392
-2%
-10%
-5%
0%
-17%
-

GS
4,687
-1%
-6%
-6%
0%
-13%
-4%

MS
3,467
-1%
-6%
-4%
0%
-11%
-5%

BNP
2,422
-2%
-8%
-3%
0%
-13%
-3%

SG
1,059
-2%
-8%
-5%
0%
-14%
-2%

BARC
2,548
-2%
-6%
-3%
0%
-11%
-

RBS
1,114
-5%
-9%
-4%
0%
-18%
-

Avg.
-2%
-8%
-4%
0%
-15%
-

-14.6%
1,343

-19.1%
1,226

-16.9%
1,988

0%
0%
-5%
-18.1%
3,841

0%
0%
-6%
-16.8%
2,884

0%
0%
-3%
-15.9%
2,037

0%
0%
-2%
-16.1%
889

-19%
-19%
-29.8%
1,788

-21%
-21%
-38.8%
682

-21%
-

Source: J.P. Morgan estimates. Notes: i) Morgan Stanley Institutional Securities estimates ii) Goldman Sachs Institutional Client Services & Investment Banking estimates; iii) for the impact of
Section 619, we have assumed the pure prop trading revenues would be impacted, partly offset by costs savings note that we have assumed a ban on prop trading for French banks as well in the
sensitivity analysis.

Global IBs regulatory headwinds: bottom-up impact analysis on IB


profitability
Swiss Banks CS, UBS IB ROE declines from 13.3% to 7.2% on average in our
sensitivity scenario on 2013e estimates, as a result of the Basel 2.5 RWA increase
which impacts ROE by -3.1% on average, while Basel 3 RWA increase impacts ROE
by -6.1% excluding the impact of mitigation. UBS also indicated SF82bn in Basel 3
pro-forma RWAs as of Dec -11, related to legacy assets and the SNB StabFund
option would be part of the corporate center from Q1 12, which would also improve
the IB ROE in our estimates.
In our sensitivity analysis, we estimate that regulatory changes lower Swiss banks
CIB returns by decreasing CIB net income -17% and increasing IB RWAs by 53%
on average in our estimates:
For U.S. IBs GS and MS IB ROE declines from an average 14.2% to 6.8% in
2013E post regulatory changes. For the U.S. IBs NPR2 if implemented as in the
proposals would have a material impact, with GS RWAs going up by $93bn while
for MS the increase in RWAs is $43bn.
Excluding the impact of U.S. NPR2 rules will improve post regulation average
IB ROE for the U.S. IBs to 7.8%. In addition, U.S. IBs are also at a disadvantage
compared to Global IBs because of the rules which prohibit banking entities from
engaging in proprietary trading, investing in or sponsoring hedge funds or private
equity funds and propose limits on market-making activities, and Section 716 swap
push out rule of the Dodd-Frank Act. Excluding the impact of Dodd-Frank Act
proposals which only impact the U.S. IBs i.e., looking at ROE ex regulatory
arbitrage would imply average ROE improves to 8.3% post regulations.
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Europe Equity Research


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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

For UK IBs Barclays and RBS, IB ROE declines to 6.9% and 4.5%,
respectively, in 2013E. UK banks are also impacted by increases in funding costs
from the ICB proposals, which we estimate would have -20% impact on 2013E net
income on average in our estimates. IB RWAs in 2013E for Barclays and RBS
increase by 39% on average due to the impact of different regulations. If we exclude
the impact of ICB proposals, IB ROE would have been 8.8% for Barclays and 6.1%
for RBS in 2013E. Also note that in 2013E, RBS GBM will be in a transition phase
of restructuring and hence we have not included the impact of reduction in wholesale
funding which in the longer term we estimate will add up to c.5% to the GBM ROE
assuming minimal revenue generation from the reduced TPAs.
French banks CIB ROE declines from 15.4% to 7.6% on average in our
sensitivity scenario on 2013e estimates, as a result of: a) Basel 3 RWAs inflation
accounting for close to half of the reduction in profitability, and b) Basel 2.5
accounting for about one third of the decline in ROE. OTC derivatives and the
potential ban on prop trading have a lower impact on French banks CIB ROE,
representing about one fifth of the decline. Note that our CIB ROE estimates are
based on JPMCe allocated capital of 10% of RWAs vs. 7% by French banks.
In our sensitivity analysis, we estimate that regulatory changes lower French banks
CIB returns by decreasing CIB net income -16% and increasing IB RWAs by 82%
on average in our estimates:
-16% negative impact on CIB net profits on average: the biggest impact
comes from moving derivatives to exchanges/SEF, with -8% impact, followed by
OTC post trade transparency requirements reducing earnings by -4% on average.
The impact from CCP-clearing of standardised OTC derivatives and the ban on
prop trading remains lower in comparison at 2% of earnings. Note that the ban on
prop trading is only hypothetical at this stage, and is our interpretation of the
measures announced by French presidential candidate F. Hollande.
82% increase in CIB RWAs on average: The main impact from regulatory
changes is the higher capital requirements, and more specifically, the RWAs
inflation. Similarly to IB peers, French banks should get some capital relief from
clearing "standardised" OTC derivatives through Central Counterparties (CCPs);
however, these benefits are insignificant at less than 5% of RWAs.
BNP Paribas is significantly less impacted than SG with only 61bn or 41%
increase in RWAs vs. 89bn or 123% for SG. The impact of Basel 2.5 and CVA
is lower for BNPP at 21% and 20%, respectively, compared to 33-34% for SG.
More importantly, SG largest impact on RWAs comes from the securitization risk
weighted at 1250% increasing RWAs by 58bn pre mitigation, which BNPP does
not have.
In our sensitivity analysis, BNP Paribas fares better than SG, with CIB ROE
declining to 9.7% vs. 5.5% for SG in 2013e.
BNP Paribas would be the least impacted within French banks and IB peers
with CIB ROE declining to 9.7% from 16.2% in 2013e, as: a) the group
benefits from one of the lowest cost/income ratio at 61% vs. 73% for SG and
72% industry average; b) lower impact from Basel 2.5 with a net RWAs increase
of 21% vs. 34% for SG and industry average of 30%; and c) the lowest impact
from Basel 3 with an increase of RWAs of 30bn only, CVA and CCR related,
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(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

equivalent to a 20% increase vs. 92% for SG and 40% industry average. Basel 3
impact is significantly lower due to securitization the group already currently
risk weights lower rated tranches at 1250% and hence is not impacted by the rule
change.
Socit Gnrale would be one of the most impacted by regulatory changes,
with CIB ROE decline from 14.6% to 5.5% in our sensitivity scenario on
2013e estimates. This is mainly driven by the RWAs increase from Basel 3 of
89bn net of mitigation equivalent to 92% increase vs. 40% industry average. SG
is the most impacted by the change in securitization risk weighted at 1250% with
58bn pre-mitigation or 80% vs. 44% for peers. Most of SG mitigation impact of
15bn is targeted at the CDOs of RMBS, which are the main driver for the 58bn
of RWAs inflation from securitization the group expects to release 1.3bn of
capital from unwinding CDOs of RMBS and selling the underlying assets.
However, overall RWAs reduction/mitigation is lower for SG at 15bn or 21% of
RWAs vs. 33% industry average and 55% for European peers.

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amit.x.ranjan@jpmorgan.com

Summary of the key Global IB regulations impacting the


industry
Below we summarize the key upcoming regulations which impact IB ROE in our
calculation. For details please refer to our report, Global Investment Banks:
Regulatory Proposal Analysis: Structural IB Profitability Decline published 9th
September 2009.
1. Centralised clearing of OTC derivatives
Lawmakers in US, EU and other members of the G20 have proposed regulation
requiring clearing of eligible OTC derivatives3 through regulated central
counterparties (CCPs), such as ICE and EUREX (for CDS) and SwapClear (for
swaps), (standardization has not been fully defined). US banks have been obliged to
clear centrally since July 2011 and implementation for EU banks is expected by mid
2012. Clearing may be out of scope for end users if they are non-financial end users
and fall below a designated threshold amount, to be defined by ESMA
In the US where end user clearing is mandatory, current regulation suggests that the
end users could face the same margin requirements as swap dealers themselves.
2. Migrating standardized OTC derivatives onto exchanges & Swap Execution
Facilities (SEFs)
Regulators in the US, EU and other members of the G20 have proposed that those
OTC derivatives which are already at the standardized end of the spectrum should be
moved onto a regulated central exchange or other regulated forum, in the interests of
transparency, efficiency and ongoing liquidity. The EU rules are expected to be
finalized end 2012 at the earliest under MiFID II and due to be implemented over a
1-2 year timeframe with full implementation by2014/2015
3. Improving post-trade transparency - Record-keeping and reporting
requirements for all OTC derivatives trades:
Regulators in the US, EU and other members of the G20 propose the timely
disclosure of details for all OTC trades to a central repository, and timely public
dissemination of aggregate price and volume data to improve market transparency.
Regulators would have full access to all the reported data. The detailed technical
rules are expected to be finalized end 2012 and currently expected to take effect mid
2013.
The Dodd Frank Act also proposes that large Hedge Funds and Private Equity Funds
register with the SEC and report their trading activities and positions.
4. Increased charges for non-CCP cleared OTC derivatives
In order to promote standardization and to strengthen the incentives to use CCP
clearing, Basel and the G20 have raised capital and margin requirements for
bilaterally cleared OTC derivatives trades. Counterparty risk capital requirements
have been increased and CVA charges have been added on to cover mark-to-market
unexpected counterparty risk losses. The detailed technical rules are due to be
finalized end of 2012 and currently expected to take effect beginning of 2013. Note
3

Eligible in the EU, as yet to be defined by European Securities and Markets Authorities
ESMA
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amit.x.ranjan@jpmorgan.com

that CVA charges may also apply to CCP-cleared OTC derivatives, if the Clearing
Member bank is clearing the trade on behalf of a Client (with whom they have a
bilateral trade).
5. Dodd-Frank: Section 619 ban on prop trading and limits on market making,
investments in HFs and PE funds
Section 619 of the Dodd-Frank Act prohibits banking entities from engaging in
proprietary trading, investing in or sponsoring hedge funds or private equity funds
and proposes limits on market-making activities. Finalisation, initially due on July
21st 2012 will to be delayed according to 29th Feb 2012 testimony to the House
Financial Services Committee in Washington given by the Federal Reserve Chairman
Ben Bernanke .Banks will have a two-year implementation period with a 1 year
extension potential on a case-by-case basis; therefore we would expect
implementation in 2014 at the earliest.
In addition, the US Commodity Futures Trade Commission has proposed imposing
position limits on certain commodities to curb levels of speculation in the energy,
agriculture and certain other OTC derivative markets, in response to the price
volatility the markets experienced in 2008.
6. Dodd-Frank: Section 716
Section 716 of the Dodd-Frank Act will require banks to separate their derivative
business from those banking entities that are able to tap Federal Reserve credit
facility or discount window. It will require creation of a swap entity (or use of a
current non-bank entity such as e.g. broker-dealer) that will need to be capitalized
and equity funded outside of the US bank entity (although the new entity can still be
debt financed by the group holding company). The rule will only apply to new
business executed after the effective date of July 16th 2012, and there is a two year
implementation deadline. The rules apply to a limited range of activities including
equity derivatives and high yield or non CCP cleared credit interest rates, FX,
centrally cleared CDS on investment grade names, bullion and base (physical)
commodities are exempt.
7. US Basel 2.5: Market Specific RWAs for US entities
In efforts to comply with Section 919A in the Dodd Frank act which states that credit
rating agency ratings can no longer be used as references due to conflicts of interest,
in the NPR2 document release in December 2011 the US agencies proposed
alternatives for calculating market specific risk for sovereigns and related exposures,
bank exposures, financial and non-financial corporate exposures and securitizations.
Whilst the ambition of the legislation was to deliver rating equivalence, the current
proposals do not appear equivalent. We highlight the following
Securitization risk weighting ratings, now based on cumulative losses, will
essentially double the over risk weighing of securitization exposures, with the
highest rated tranches being the most significantly impacted e.g. the minimum
risk weighting would be 20% in the US compared to 7% in the EU.
Sovereign ratings based on OECD Country Risk Ratings would lead to all EU
countries being rated with the same 0% risk weighting, and the US and US
Government S Entities would maintain a 0% risk weighting in all circumstances.
In the event of a default elsewhere (at any time over the past five years) this
weight would jump to 150%.
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Corporate risk weightings would not fall below100% on the current calibration of
the key indicators, and industry responses suggest that the same 100% rating
could apply to entities ranging from AAA to C
We would not expect finalization of the rules before H2 2012and final
implementation before H2 2014.
The US Agencies also propose consistent treatment in the banking book as well as
the trading book, in due course. Please see our note Global Investment Banks: US
Basel 2.5 NPR2 capital at risk analysis: yet another US IB disadvantage, downgrade
GS, MS to N published 25th Jan 2012 for details
8. Basel 2.5: Mitigating procyclicality through the use of stressed VaR capital
buffer
The Basel Committee has, amongst several proposed reforms to market risk
calculations, suggested that a separate buffer that accounts for potential losses in
adverse circumstances be added to the market risk charge so that banks are better
able to absorb losses during stress conditions, to reduce pro-cyclicality. In addition to
the existing capital requirement, an additional capital buffer will be required of at
least 3 times the 10-day 99% stressed-VAR. Basel 2.5 was effective for the EU banks
from Q4 2011.The US Version (see point 7. above) is unlikely to be finalized before
the end of 2012.
9. Basel 2.5: Incremental risk charge to the standardized market risk
methodology
In July 2009 the Basel Committee introduced a new 'incremental risk charge' (IRC)
for credit trading book positions, excluding securitizations. This charge has been
introduced to account for liquidity risk and credit migration risk, neither of which
was previously incorporated in the value-at-risk calculation used to measure trading
book market risk. Basel 2.5 implementation was effective for the EU banks from Q4
2011.The US Version (see point 7. above) is unlikely to be finalized before the end
of 2012.
10. Basel 2.5: Increased capital requirements for securitization exposures and
re-securitizations
In addition to applying a stressed VAR capital charge (8) and an incremental risk
charges(9), the revisions include an increase in capital charges for securitization
exposures within the trading book. More specifically, the Basel Committee has
revised Pillar I, which prescribes minimum regulatory capital requirements, and
Pillar 3, which stipulates disclosure requirements from banks intended to
complement capital requirements. Basel 2.5 implementation was effective for the EU
banks from Q4 2011. The US Version (see point 7. above) is unlikely to be finalized
before the end of 2012.
11. ICB
The UK Treasury indicated its intent to consult on finalising the ICB proposed strong
but flexible ringfence of legally and economically separate subsidiaries, to include
EEA Retail and SME deposits and overdraft lending at a minimum, and to exclude
prohibited services which would expose the bank to financial market risk and
counterparty credit risk exposures. The ringfenced entity should hold a minimum
17% Primary Loss Absorbing Capital (including a10% minimum B3 ratio) with
back-stop limits on the proportion of wholesale funding allowed to support the entity.
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amit.x.ranjan@jpmorgan.com

The proposals are due for implementation as soon as practically possible after
2015and no later than 2019.
Whilst there are no parallel EU proposals at present, Commissioner Barnier of the
EC has appointed an expert group under the chairmanship of Erkki Liikanen to
review and report upon the structure of EU banking generally.
This list of regulatory implications is not exhaustive, and we have covered key
aspects of other upcoming regulations (eg. Liquidity Coverage Ratios) in other
documents.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Headwind 2: Fixed compensation expenses of 71-88%


could potentially trigger senior staff cuts
Overview - poor cost management a structural problem
Increased regulation of employee bonus compensation has triggered increasing
salaries and led to a higher proportion of deferred compensation levels, leading to a
concerning highly fixed cost base for a volatile revenue business. The impact of this
change in compensation practice by IB managements was felt in 2011 when
revenue levels declined significantly but the high fixed cost base implied that
corresponding adjustments to compensation expense could not be made,
rendering most of the IBs either unprofitable or barely profitable in H2 11.
Lack of revenue scale from Tier II FICC IBs to manage fixed cost compensation
leverage, lead to further material staff cuts
Based on best in class Swiss disclosure, we estimate 71% for UBS and 88% for
CSG 2012E IB compensation costs is fixed in the form of salaries and deferred
compensation expenses compared to 55% for UBS and 66% for CSG in 2009 on our
estimates. We assume for T1 IBs on average 55-60% of comp to be fixed this year.
For Swiss IBs, salaries alone would account for 36-37% of Total IB comp for CS and
UBS in 2012E on our estimates. We note, we operate with limited disclosure
from the U.S. IBs in respect to compensation details but we estimate Tier I IBs
such as GS and DB through the crisis have not been as aggressive in increasing
salaries and deferred compensation and hence we estimate will operate with
fixed compensation levels of 50-60% rather than 70-90% for Tier II IBs.
We believe all IB managements and especially the Tier II IBs will have to
rethink their strategy of higher deferrals and increased base salaries and if the
revenue environment continues to be inline with our estimated growth rates, we
expect to potentially see significant adjustments in this policy. We think going
forward further adjustments in cost base might have to be driven by reduction of
more senior IB staff in order to reduce the fixed cost base.
Figure 68: IB revenue/head and comp/head 2012E: French Banks
model different from Swiss

Figure 69: IB division compensation expense split 2012E


%, $ millions

$ 000

Fixed & Deferred comp


IB Comp/head (in $ '000)

729,535
672,212
602,283

317,511

631,139

332,058

318,750

UBS

BNP

286,351

SG

6,420
12%

584,390

268,234

CS

Variable Comp

IB revenue/head (in $ '000)

5,343

3,812

7,770

12%

17%

17%

88%

88%

83%

83%

CS

BNP

SG

Barcap

5,369
29%

71%

UBS

Barcap

Source: J.P. Morgan estimates, Company data, exchange rates from Bloomberg. Note: exchange
Source: J.P. Morgan estimates, Company data, exchange rates from Bloomberg. Note: exchange
rates used CHFUSD=1.0984, GBPUSD = 1.5835 and EURUSD=1.4018. Note: BNPP accounting
rates used CHFUSD=1.0984, GBPUSD = 1.5835 and EURUSD=1.4018.
different vs. peers with deferred comp costs including deferred comp to be paid in future years.

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(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Swiss Banks: Increased fixed costs unsustainable at 7188% could lead to further staff cuts
Overview Swiss banks, best in class disclosure but a worrying picture
We have analysed in detail the split of compensation expense for both UBS and CS
in Table 48 to Table 49 below, splitting the compensation expense into a fixed
component, which includes the salaries and also deferred portion of compensation
from previous years and a variable compensation expense component. We
appreciate the excellent disclosure provided by both CS and UBS on group
compensation expense which enables us to analyse the compensation expense
split at the group level, while we make our own assumptions regarding IB comp
expense breakdown into fixed and variable components.
Swiss IBs: IB division compensation analysis
For our calculations, we assume 65-80% of deferred compensation expensed in a
year to be attributable to the IB division for both CS and UBS. We estimate most of
the variable compensation of the group would be attributable to the IB division.
From our analysis of the compensation expense split for both CS and UBS in the
IB, a few things which stand out are:
1. Fixed compensation in 2011 in the form of salaries has gone up to c.38% of
total IB compensation expense for UBS and c.41% of total IB compensation
expense for CS. We expect salaries to remain at these elevated levels given the
higher deferral rates in variable compensation expense. UBS following an annual
salary review increased base salaries for 2011 at the group level, with effect from
March 2011, by a total of SF 350 million or 5% over the previous year.
2. Fixed component of compensation in the form of deferrals from previous
years has gone up substantially to 21% of IB comp expense in 2011 from
17% in 2010 and 2% in 2009 for UBS, and to 34% in 2011 from 36% in 2010
and 33% in 2009 for CS in our estimates. The ratio for CS is much higher
given its higher bonus pool compared to UBS in 2009-10.
3. We estimate c.71% of 2013E compensation costs for UBS and c.84% of
2013E compensation costs for CSG in the IB division to be fixed in the form
of salaries and deferred compensation expenses.
4. Variable component of compensation has come down due to higher level of
deferrals, thus limiting management ability to control costs in our view.
Based on these observations, we see limited scope to limit costs in the IB division
by IBs, putting Tier 2 IBs lacking revenue scale in Fixed Income at a
disadvantage compared to Top Tier Fixed Income players.
Given the current regulations its likely that a significant portion of 2012E and
2013E compensation will also consist of deferred compensation expenses from
previous years which would in turn push up the fixed costs. Increasing fixed costs
intensifies pressure on the cost base; offers limited cushion in the form of variable
cost to absorb the impact of revenue downturns.

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Table 48: UBS: Investment Banking division Compensation expense


SF million
2009
3,412

2010
3,396

2011
1,925

2012E
1,779

2013E
1,668

10/09
0%

11/10
-43%

12E/11
-8%

13E/12E
-6%

Bonus expense for the respective performance year


Deferred expense from previous years expensed in current year
Variable comp discretionary bonus expense in P&L

1,879
126
2,006

2,089
1,177
3,266

1,355
1,201
2,555

1,156
770
1,926

1,051
736
1,787

11%
831%
63%

-35%
2%
-22%

-15%
-36%
-25%

-9%
-4%
-7%

Salaries
Other Variable Compensation
Variable Compensation discretionary bonus
Salaries and variable compensation
Social Security
Pension and other post-employment benefit plans
Other personnel expenses
Contractors

2,253
593
2,006
4,851
198
244
84
68

2,344
248
3,266
5,858
214
188
423
60

2,204
281
2,555
5,041
201
212
307
58

2,105
257
1,926
4,289
192
203
156
48

1,927
222
1,787
3,936
166
189
106
39

4%
-58%
63%
21%
8%
-23%

-6%
13%
-22%
-14%
-6%
13%
-27%
-3%

-4%
-9%
-25%
-15%
-4%
-4%
-49%
-17%

-8%
-14%
-7%
-8%
-13%
-7%
-32%
-19%

Fixed Costs
Deferred expense from previous years expensed in current year
Salaries
Social Security
Pension and other post-employment benefit plans
Other personnel expenses
Contractors

2,973
126
2,253
198
244
84
68

4,406
1,177
2,344
214
188
423
60

4,183
1,201
2,204
201
212
307
58

3,474
770
2,105
192
203
156
48

3,162
736
1,927
166
189
106
39

48%
4%
8%
-23%
-11%

-5%
2%
-6%
-6%
13%
-27%
-3%

-17%
-36%
-4%
-4%
-4%
-49%
-17%

-9%
-4%
-8%
-13%
-7%
-32%
-19%

Variable Costs
Other Variable Compensation
Variable Compensation discretionary bonus

2,472
593
1,879

2,337
248
2,089

1,636
281
1,355

1,414
257
1,156

1,273
222
1,051

-5%
-58%
11%

-30%
13%
-35%

-14%
-9%
-15%

-10%
-14%
-9%

Total Compensation Expense

5,445

6,743

5,819

4,888

4,436

24%

-14%

-16%

-9%

55%
45%

65%
35%

72%
28%

71%
29%

71%
29%

Bonus Pool
PVTR and Others

Fixed Costs as % of Total Compensation expense


Variable Costs as % of Total Compensation expense

-11%

Source: J.P. Morgan estimates.

Table 49: Credit Suisse: Investment Banking division Compensation expense


SF millions
IB Base Salary expense
Total deferred expense relating to awards in prior years
Other incl. Social Security
Total Fixed Compensation

2009
2,194
2,856
648
5,698

2010
2,991
2,868
713
6,572

2011
2,746
2,289
730
5,766

2012E
2,628
1,800
699
5,127

2013E
2,523
1,426
671
4,621

Variable Compensation recognized in Income Statement for current year

2,954

1,461

901

717

877

8,652
19,075
149,725
154,862
34%

8,033
20,625
139,055
70,836
18%

6,667
21,125
108,355
42,670
14%

5,845
20,219
89,026
35,468
12%

5,497
19,410
73,475
45,165
16%

66%
20,537

82%
16,214

86%
11,496

88%
12,374

84%
12,374

42%
58%

50%
57%

58%
52%

47%
54%

44%
51%

Total personnel expenses


Average Number of Employees in the IB
Deferred Expense/Head
Variable Comp/Head
Variable Compensation in current year as % of IB compensation
Fixed Compensation as % of IB personnel expenses
Total Revenues
IB Compensation Ratio
IB Comp/Group Comp
Source: J.P. Morgan estimates.

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French Banks BNP Paribas best in class compensation


mgmt of Tier II IBs
BNPP high fixed cost base due to high salaries, however low bonuses are key
Fixed costs account for 88% of total CIB compensation in 2011; however, they
include deferred compensation for future years. Since 2009, the group has booked
all variable compensation components including the deferred and conditional part
payable in future years. Fixed costs have increased to 88% of total CIB comp, up
from 79% in 2010, but this mainly reflects the decline in variable compensation by 50% YoY, whilst fixed costs declined marginally by -3% YoY.
Fixed compensation in the form of salaries accounts for 67% of total CIB
compensation. Salaries have increased significantly over the past few years,
increasing 30% in 2010 and 5% in 2011. This is the result of the industry wide
adjustment to fixed pay vs. variable given the high deferral rates in variable
comp; however, this also reflects the investments made by the group, with
staffing levels in CIB increasing to estimated 20,716 at end 2011, up 28% vs.
2009. The deleveraging plan is expected to reduce headcount and compensation
costs - we estimate fixed salaries to decline -8% in 2013e.
Deferred compensation accounts for 21% of total CIB compensation in
2011; however, this includes all variable compensation payable in future
years. There are hence no variable compensation charges carried forward.
Variable compensation accounts for only 12% of total CIB compensation in
2011, down from 21% in 2010 as the group halved the bonuses. This level is
significantly lower than in the past - one third pre crisis, and hence, cost
flexibility has been reduced.
Overall, CIB compensation ratios remain one of the lowest in the industry at
34% on a clean basis in 2011, down from 40% before 2009. Without the deferred
part of the compensation fully booked upfront, the comp ratio would be even lower.
We expect comp ratio to deteriorate to 38.5% in 2012e and 36.0% in 2013e, as the
group deleverages part of their financing activities where cost/income is low and cost
savings mainly comes in from 2013.

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amit.x.ranjan@jpmorgan.com

Table 50: BNP Paribas: Breakdown of Corporate & Investment Banking compensation expenses
million
2009
12,194
12,493

2010
11,998
11,998

2011
9,731
10,751

2012E
8,968
9,618

2013E
9,548
9,548

2010
-2%
-4%

2011
-19%
-10%

2012E
-8%
-11%

2013E
6%
-1%

CIB non compensation expenses


CIB compensation expenses
ow fixed comp costs (ex. Deferred comp)
ow fixed comp costs - deferred comp
ow variable comp costs
CIB operating expenses (clean)
CIB restructuring charges
CIB operating expenses (stated)

2,080
3,373
1,797
1,074
502
5,453
0
5,453

2,243
4,199
2,337
1,000
863
6,442
0
6,442

2,287
3,655
2,453
770
432
5,942
184
6,126

2,334
3,703
2,503
770
430
6,037
200
6,237

2,345
3,437
2,302
740
395
5,782
0
5,782

8%
24%
30%

2%
-13%
5%

2%
1%
2%

0%
-7%
-8%

72%
18%

-50%
-8%

0%
2%

-8%
-4%

18%

-5%

2%

-7%

CIB Cost/income ratio (clean)


CIB Comp ratio (clean)
CIB Non comp ratio (clean)

43.6%
27.0%
16.6%

53.7%
35.0%
18.7%

55.3%
34.0%
21.3%

62.8%
38.5%
24.3%

60.6%
36.0%
24.6%

CIB staff
CIB comp cost/staff (thousands)

16,139
111,368

19,919
117,307

20,716
118,435

20,198
123,901

19,592
117,514

23%
5%

4%
1%

-2%
5%

-3%
-5%

27.0%
2,871
502
85%

35.0%
3,337
863
79%

34.0%
3,223
432
88%

38.5%
3,273
430
88%

36.0%
3,042
395
89%

16%
72%

-3%
-50%

2%
0%

-7%
-8%

CIB revenues
CIB revenues (clean)

CIB comp ratio (clean)


Fixed costs incl. deferred comp
Variable comp
Fixed incl deferred as % total IB compensation
Source: J.P. Morgan estimates, Company data.

Socit Gnrale more institutional business leading to lower cost flexibility


Fixed costs account for 90% of total CIB compensation in 2011, up from 84% in
2010, but this reflects the decline in variable compensation by -43% YoY as well as
the 3% increase in fixed costs. Unlike BNP Paribas, the deferred part of the
compensation is booked in future years, which makes the cost base less flexible on a
relative basis.
Fixed compensation in the form of salaries accounts for 66% of total CIB
compensation. Similarly to peers, salaries have increased significantly over the
past few years, increasing 30% in 2010 and 8% in 2011. SG has also made
significant investments with CIB headcount increasing to an estimated 13,979 at
end 2011, up 15% vs. 2009. The deleveraging plan is expected to reduce
headcount and compensation costs, and the group is expected to provide details in
the near future.
Deferred compensation accounts for 25% of total CIB compensation in 2011,
and variable compensation 10% of total. Variable compensation level is also
significantly lower than in the past vs. fixed costs, and deferred costs are booked
in future years, which reduces cost flexibility going forward.
CIB compensation ratio deteriorated to 47% on a clean basis in 2011, up from
43% in 2010, mainly as a result of the decline in revenues down -13% YoY on a
clean basis and -24% on a stated basis whilst comp costs declined -5% YoY. We
expect comp ratio to deteriorate to 49% in 2012e-13e, mainly due to the deleveraging
plan which reduces revenues by 750m or 11% of 2011 clean revenues on a FY
basis.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 51: Socit Gnrale: Breakdown of Corporate & Investment Banking compensation expenses
million
CIB revenues
CIB revenues (clean)

2009
6,867
9,848

2010
7,836
7,665

2011
5,981
6,696

2012E
5,550
6,200

2013E
6,200
6,200

2010
14%
-22%

2011
-24%
-13%

2012E
-7%
-7%

2013E
12%
0%

CIB non compensation expenses


CIB compensation expenses
ow fixed comp costs (ex. Deferred comp)
ow fixed comp costs - deferred comp
ow variable comp costs
CIB operating expenses (clean)
CIB restructuring charges
CIB operating expenses (stated)

1,218
2,659
1,471
700
488
3,877
0
3,877

1,410
3,296
1,913
850
533
4,706
0
4,706

1,386
3,147
2,066
780
301
4,533
215
4,748

1,424
3,069
2,045
740
284
4,493
100
4,593

1,464
3,038
2,025
735
278
4,502
0
4,502

16%
24%
30%
21%
9%
21%

-2%
-5%
8%
-8%
-43%
-4%

3%
-2%
-1%
-5%
-6%
-1%

3%
-1%
-1%
-1%
-2%
0%

21%

1%

-3%

-2%

CIB Cost/income ratio (clean)


CIB Comp ratio (clean)
CIB Non comp ratio (clean)

39.4%
27.0%
12.4%

61.4%
43.0%
18.4%

67.7%
47.0%
20.7%

72.5%
49.5%
23.0%

72.6%
49.0%
23.6%

CIB staff
CIB comp cost/staff (thousands)

12,134
121,251

13,313
143,667

13,979
147,772

13,839
147,772

13,562
149,280

10%
18%

5%
3%

-1%
0%

-2%
1%

27.0%
2,171
488
82%

43.0%
2,763
533
84%

47.0%
2,846
301
90%

49.5%
2,785
284
91%

49.0%
2,760
278
91%

27%
9%

3%
-43%

-2%
-6%

-1%
-2%

CIB comp ratio (clean)


Fixed costs incl. deferred comp
Variable comp
Fixed incl deferred as % total IB compensation
Source: J.P. Morgan estimates, Company data.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

UK Banks fixed compensation cost base unsustainable at


84-91%, further restructuring required
We believe that the flexibility within the cost base has reduced significantly over the
years due to the higher proportion of fixed costs in a weak revenue environment.
With an outlook of limited recovery in revenue growth in future years, we believe
that cost restructuring is inevitable across the industry, with the high proportion of
fixed costs leading to staff cuts as the main lever.
Barclays: We see cost inflexibility within BarCap although this is partly as a result
of managements strategy to improve market share within Equities and Investment
Banking. We expect Barclays management to continue further cost restructurings as
revenue growth remains challenging through 2012.
Table 52: Barcap: Breakdown of compensation expense
million
Bonus Pool

2010
2,261

2011
1,536

2012E
1,659

2013E
1,792

11/10
-32%

12E/11
8%

13E/12E
8%

Fixed Costs
Deferred expense from previous years expensed in current year
Salaries
Social Security
Pension and other post-employment benefit plans
Other personnel expenses and share based payments
Bank Payroll tax

3,872
717
2,686
122
89
181
76

4,021
711
2,833
120
121
181
54

4,073
814
2,780
120
128
182
49

4,090
868
2,754
116
130
176
45

4%
-1%
5%
-2%
36%
0%
-29%

1%
14%
-2%
0%
5%
0%
-9%

0%
7%
-1%
-3%
2%
-3%
-9%

Variable Costs
Other Variable Compensation incl sales commissions, commitments &
other incentives
Variable Compensation discretionary bonus

1,808
612

837
453

834
412

839
375

-54%
-26%

0%
-9%

1%
-9%

1,196

384

422

465

-68%

10%

10%

68%
32%

83%
17%

83%
17%

83%
17%

Fixed Costs as % of Total Compensation expense


Variable Costs as % of Total Compensation expense
Source: J.P. Morgan estimates, Company data.

RBS: In Q3 2011, RBS indicated that it did not accrue any discretionary
compensation, implying that the high proportion of fixed costs has resulted in limited
flexibility to manage profitability in a weak revenue environment. We believe that
individual business lines within GBM have significantly different cost/ income
ratios. Strongly positioned businesses within Rates, FX and Mortgages are well
below the average C/I ratio for the division, whereas businesses with market shares
outside the Top 5 and Top 10 are operating with C/I ratios even above 100% in some
cases. Ongoing restructuring in our view will help GBM and the group compensation
structure in the long term.

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Europe Equity Research


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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 53: RBS: Breakdown of Group compensation expenses


million
Bonus Pool
o.w. GBM
o.w. Rest
Bonus expense for the respective performance year
Deferred expense from previous years expensed in current year
Variable comp discretionary bonus expense in P&L
Deferred expense from prior years still outstanding
Awards for Current Year deferred to future periods
Total outstanding deferreds at period end
% of current Year bonus pool deferred
Fixed Cost
Deferred expense from previous years expensed in current year
Salaries
Temporary and contract costs
Social Security
Pension and other post-employment benefit plans
Other personnel expenses and share based payments
Bank Payroll tax
Reconciliation with managed
Variable Cost
Variable Compensation discretionary bonus
Total Compensation expense
Fixed Costs as % of Total Compensation expense
o.w. Salaries as % of Total Compensation expense
o.w. Deferred comp expense as % of Total comp expense
Variable Costs as % of Total Compensation expense

2010
1,375
937
438

2011
785
390
395

2012E
750
363
387

2013E
717
337
379

11/10
-43%
-58%
-10%

12E/11
-4%
-7%
-2%

13E/12E
-4%
-7%
-2%

863
1,246

483
502
985

461
408
869

441
321
762

-44%
31%
-21%

-4%
-19%
-12%

-4%
-21%
-12%

238
512
750
37%

248
302
550
38%

142
288
430
38%

110
276
385
38%

4%
-41%
-27%

-43%
-4%
-22%

-23%
-4%
-10%

8,093
5,473
700
661
569
923
99
-715

7,680
502
5,423
846
640
447
310
27
-515

7,378
408
5,152
863
627
447
295
24
-438

6,731
321
4,637
820
577
447
280
22
-372

-5%
31%
-1%
21%
-3%
-21%
-66%
-73%
-28%

-4%
-19%
-5%
2%
-2%
0%
-5%
-10%
-15%

-9%
-21%
-10%
-5%
-8%
0%
-5%
-10%
-15%

863
863

483
483

461
461

441
441

-44%
-44%

-4%
-4%

-4%
-4%

8,956

8,163

7,839

7,172

-9%

-4%

-9%

90%
61%
4%
10%

94%
66%
6%
6%

94%
66%
5%
6%

94%
65%
4%
6%

Source: J.P. Morgan estimates, Company data.

Table 54: RBS: GBM compensation breakdown


million
Fixed Costs as % of Total Compensation expense
Variable Costs as % of Total Compensation expense

2010
82%
18%

2011
91%
9%

2012E
91%
9%

2013E
91%
9%

Source: J.P. Morgan estimates, Company data.

In 2011, some IBs like DB, Barclays and MS increased their deferrals to higher
levels in our view, while Swiss IBs UBS and CS seemed to have managed to reduce
their level of deferred compensation expense vesting in future periods.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 55: Global Investment Banks: Summary compensation table 2010-11


Local currency billion

Salaries and other compensation

2010
7.0

UBS
2011
6.8

Current Year Bonus Pool


Bonus expense for current performance year
Awards for current year deferred to future periods
% of Current year bonus pool deferred

4.2
2.6
1.6
37%

2.6
1.8
0.7
28%

Deferred expense from prior years still outstanding


Total outstanding deferred at period end

1.5
2.8

1.0
1.7
0.3

Fixed Cost
Deferred expense from previous years expensed in current year
Salaries and other compensation
Others

1.5
7.0
2.9

Variable Cost
Variable Compensation recognized in Income Statement for current year
Other Variable Compensation
Total Compensation expense
Fixed Costs as % of Total Compensation expense
o.w. Deferred comp from previous year as % of Total comp. expense
Variable Costs as % of Total Compensation expense
Deferred bonus vesting plans
in 2012E
2013 and beyond

YoY
-3%

2010
8.2

CSG
2011
8.1

-40%

5.8
2.3
3.6
61%

3.2
1.7
1.5
47%

2.3
5.9

2.2
3.7

1.5
6.8
2.5

3.6
8.2

2.6
2.9
16.9

1.8
2.9
15.6

67%
9%
33%

70%
10%
30%
1.1
0.9

-39%

-8%

YoY
-2%

Barclays
2010 2011
6.2
6.3
2.9
1.7
1.2
41%

2.2
0.9
1.3
58%

0.4
1.6

0.8
2.0

3.1
8.1

0.9
6.2
1.4

1.0
6.3
1.61

2.3
14.1

1.7
12.8

1.7
0.8
10.9

0.9
0.6
10.4

84%
25%
16%

87%
24%
13%

78%
8%
22%

85%
10%
15%

2.4
1.3

-45%

-36%

-9%

YoY
2%

2010

DB
2011

-25%

4.3
2.2
2.1
49%

3.6
1.4
2.2
61%

-17%

12.7

13.1

3%

YoY

27%

-5%

1.1
0.9

Source: Company data.

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This page is intentionally blank

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Winners and Losers: a the Global


Investment Banking Industry

Winners and Losers: Polarisation of the


Global Investment Banking Industry

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

FICC becoming more like cash-equity post regulations winning formula: scale institutional, captive agency-only, or
boutique
Our definition of Agency and
Institutional Players
Agency Players: Run mainly on
execution model for their universal
bank captive corporate, retail or
private client relationships for
revenues. Advice is focused on the
captive client base rather than
institutional global clients. Business is
focused following clients. Staffing sits
mainly within country headquarters
rather than New York and London to
minimize staff costs.
Institutional Players: Run a full-scale,
global business, providing complex
solutions to clients, capital, market
makers and liquidity providers. They
compete for global asset gatherers,
sovereigns, and corporates. Financial
institutions will be a large part of the
revenue mix. Staff levels sit mainly in
the financial hubs New York and
London.

We believe the current regulatory and uncertain revenue environment could


have long-term repercussions for the state of the IB industry and we expect
further polarization of the IB industry driven by market share movements in FICC
away from Tier II Institutional IBs and towards Tier I IBs.
In a FICC world which is becoming more cash-equity like, we see a scenario in
which IB managements would have to make a decision on whether they have the
appetite or ability to run a full-scale all-in-one business servicing clients in all
the product areas globally or they are in a better position running a small-scale IB
focusing only on flow businesses, and supporting their more profitable divisions be it
Private banking or Retail banking.
In our view, winners in the new regulatory and revenue environment are Global
FICC Tier I IBs, boutique houses and agency only-type IBs. In our view, firms
which are running institutional businesses which are not able to offer the whole range
of client solutions would be better placed focusing on an agency-only business model
or becoming much smaller; i.e. concentrated in the domestic markets. Hence, we
expect Tier II IBs to be more pro-active and expect further restructuring to come.
Figure 70: Global Investment Banks: Classification based on FICC

Source: J.P. Morgan estimates

Cash Equity Case Study: FICC to become more Cash Equity


like leading to Tier I to gain market share
Cash Equities has become an increasingly commodity-like business for two key
reasons: i) the rise of cheap execution through electronic trading, and ii) the
expectations from clients for IBs to commit capital on their behalf to get paid in full
agency trades by clients. The capital usage in trading is part of the revenue
wallet calculation paid by the client.
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(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 71: NYSE Arca (All Electronic U.S. Trading Platform) Volume as % of NYSE Composite
Volume
150%
130%

NYSE Arca Volume as % of NYSE Composite


Volume
3M Average

110%
90%
70%
50%
30%
10%

Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12

-10%

Source: Bloomberg. Note: Total volume of shares traded for NYSE stocks traded on NYSE ARCA. NYSE Arca is an all-electronic U.S.
trading platform owned by NYSE Euronext. *Index value is calculated internally by Bloomberg and is an approximation.

With the upcoming implementation of Dodd-Frank, which will require FI


trading to take place on SEF platforms, we believe FI will become more Cash
Equity like, with the Tier I players taking increasing shares of the market. We
note SEF platforms remain unclear in terms of exact definitions; however, it is clear
we are moving from an OTC business to a more transparent FI environment and
hence a more commoditized execution type model.
What happened with equities
Electronic trading rose to dominate as Tier II players were squeezed out by high
investment cost barriers to entry, with full agency players retaining market
share
At present 70% of equities trading is done electronically in the US with Europe
following the same trend up from < 20% in the mid 2000s to an estimated 40%-50%
electronic order flow. The space is dominated by GS and CS who made early
decisions to invest.
As a result of this, we can clearly see the differentiation between average
revenues for Tier I and Tier II equity players, with Tier I players (>$2bn+ of Cash
Equity revenues) holding 46% of the revenue market share on our estimates.
Table 56: 2013E Cash Equities Revenues
$ bn
GS
3.4

MS
2.2

UBS
1.5

CS
2.2

DB
1.2

BNP
0.1

SG
0.2

BARC
0.5

HSBC
0.7

RBS
0.2

Source: J.P. Morgan estimates.

What we expect for Fixed Income:


Current Tier I FI players will be the only banks with enough resources/scale to invest
in technology and to take the required haircuts on execution-only business, Those
players exiting full service (i.e. structuring and more exotic business which are low
ROE under Basel 3) and moving to Flow-only models will also likely lose Flow
market share due their unwillingness to commit capital to their clients.
We believe that, unless banks are currently generating FICC revenues which justify
i) large investments in the required technology infrastructure to a more IT driven
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amit.x.ranjan@jpmorgan.com

execution-only model, and ii) and the willingness to commit capital in low ROE
business under Basel 3 while still delivering meaningful revenues/profitability they
will not be able to compete in the new fixed income world.
Hence, we do not see Tier II FI being able to compete with FI Tier I houses
generating half of the revenues in some instances. Yet again, an agency model rather
than an institutional is seen as a more likely outcome for the Tier II IBs.
We believe that i) the revenue starting point, and ii) liquidity providers will
determine which banks are able to gain revenue market shares in the future.
Therefore we see a scenario where the Tier II players will (and are in the case of
UBS and CSG) exit Basel 3 low ROE business and therefore only have access to
limited execution-only pools of revenue which are shrinking. At the same time, we
expect the Tier I players to accept low ROE Basel 3 ROEs in certain business
segments such as credit structuring and equity derivative structuring in order to
maximize the client revenue share across all parts of the Fixed Income offering,
leaving them with a larger revenue market share overall. In short, in a more
transparent cash equity like world, clients will expect technology driven
execution and commitment in capital to get more of the revenue pool within
FICC. We illustrate this in the table below.
Table 57: Revenue market share to depend on capital/liquidity providing capabilities
$ million
Revenue Pool paid by client
Assumed Block Loss (%)
Block Loss
Revenue Net of Block Loss

Tier I player
5
25%
1.25
3.75

Tier II player
1
10%
0.1
0.9

Source: J.P. Morgan estimates

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

IB revenue wallet concentration: Top 6 players account for


c.50% market share: Is there appetite for more?
Table 58: IB (FICC+Equities+IBD)
revenue Market share 2013E
%
Bank
GS
DB
BofA
Citi
BARC
MS
HSBC
CS
BNP
UBS
NOM.
RBS
SG
RBC
CASA
STAN
MQG
UCG
KN
JEF
ING
INP
VTB
LAZ.
SEB
MB

Market
Share
9.3%
8.1%
7.8%
7.6%
7.1%
6.4%
5.6%
5.1%
5.0%
4.1%
3.4%
3.3%
3.3%
2.4%
2.2%
1.6%
1.5%
1.3%
1.2%
1.0%
0.7%
0.5%
0.5%
0.4%
0.4%
0.3%

Source: J.P. Morgan estimates

Total IB (FICC+Equities+IBD) revenue wallet: c.$250bn in 2013E


We estimate the total IB revenue wallet in 2013E based on c.$250bn of Total IB
revenues for 27 players globally. After looking at the data in detail, we estimate:
Top 6 players account for 50% of our estimated 2013E revenue wallet with U.S.
IBs (GS, BofA and Citi) and European IBs (DBK, Barclays) in the Top 6 pre any
market share movement estimates.
Next 4 players (MS, HSBC, CS and BNP) account for 22% of the market share in
2013E in our estimates implying 72% market share for the Top 10 players in
2013E pre any market share movement estimates.
The market share concentration curve peaks towards the end as expected
with the bottom 10 players accounting for 8% of market share.
Figure 72: IB (FICC+Equities+IBD) revenue Market share concentration curve 2013E
%

100%
90%
UBS

80%
70%

CS

HSBC

60%

RBS

RBC

NOM.

SG

STAN

UCG

CASA MQG

JEF INP LAZ.


KN ING VTB SEB MB

BNP

MS
BARC
Citi
BofA
DB
GS

50%
40%
30%
20%
10%

JPM*

0%
0

10

12

14

16

18

20

22

24

26

28

Source: J.P. Morgan estimates. Note:*JPM on clean revenues for 2011 based on published numbers. JPM FICC revenues adjusted for
DVA gain of $70m in 2Q, $529m in Q3 and DVA loss of $135m in 4Q 2011. Q2 2011 DVA gains of $140m in trading equally divided
between FICC & Equity Markets. JPM Equities revenues adjusted for DVA gains of $70m in 2Q, $377m in Q3 and DVA loss of $27m in
Q4 2011. Q2 2011 DVA gains of $140m in trading equally divided between FICC & Equity Markets.

Total FICC revenue wallet: c.$122bn in 2013E: Top 6 players account for
c.57% market share pre any market share movement estimates
We estimate the FICC revenue wallet in 2013E for 26 global IB players to be
c.$122bn with Top 5 players accounting for 48% of the market share.
Tier I FICC players Citi, GS, DB, BofA and Barclays each account for 810% of market share in 2013E in our estimates with total FICC revenues of
$55bn in 2013E.
Next 5 players which are HSBC, MS, CS, RBS and UBS account for 24% of the
market share with $29bn in revenues in our estimates in 2013E i.e. close to half
the revenues of the Tier I FICC players.
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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 59: FICC revenue Market


share 2013E
%
Bank
GS
DB
Citi
BofA
BARC
HSBC
MS
CS
UBS
RBS
BNPP
NOM.
STAN
SG
UCG
RBC
MQG.
CASA
ING
JEF
VTB
KN
SEB
INP
MB

Market
Share
9.7%
9.6%
9.2%
8.4%
8.2%
5.6%
4.7%
4.3%
4.0%
3.9%
3.5%
3.4%
2.9%
1.8%
1.7%
1.5%
1.2%
1.0%
0.9%
0.6%
0.5%
0.4%
0.4%
0.2%
0.1%

Source: J.P. Morgan estimates

We believe Tier II FICC Institutional players like RBS, CS, UBS and MS
have not been successful in breaking into the Tier I league and we see further
restructuring as inevitable for the Tier II institutional players as lack of revenue
scale implies unsustainable ROEs for these banks. We expect to see market
share movement away from these Tier II players and see Tier I FICC players
benefiting from these market share movements.
Tier II Agency players like STAN and HSBC run on a different FICC
revenue model in our view based more on corporate relationships and we do not
estimate much market share movement for Tier II Agency players.
Bottom 12 players only account for 10% of 2013E FICC market share in our
estimates. While we need to differentiate between players in Emerging markets
as well as players which concentrate only on their domestic markets, we think the
market share concentration curve reflects the highly consolidated nature of the
business.
Figure 73: FICC revenue Market share concentration curve 2013E
%

100%

SG UCG

90%
80%
70%

HSBC

60%
40%

BARC
BofA
Citi

30%

DB

50%

20%

GS

10%

JPM*

NOM.
STAN
RBS
BNPP
CS
UBS
MS

SEB
MQG. ING KN
INP MB
CASA JEF VTB
RBC

0%
0

10

12

14

16

18

20

22

24

26

28

Source: J.P. Morgan estimates. Note:*JPM on clean revenues for 2011 based on published numbers. JPM FICC revenues adjusted for
DVA gain of $70m in 2Q, $529m in Q3 and DVA loss of $135m in 4Q 2011. Q2 2011 DVA gains of $140m in trading equally divided
between FICC & Equity Markets.

Total Equities revenue wallet: c.$60bn in 2013E: Top 6 players account for 48%
market share
We estimate the Equity revenue wallet in 2013E for 26 global IB players to be
c.$60bn with Top 6 players accounting for 48% of the market share.
GS is the Number 1 player by revenues in our estimates with c.12% market
share and $7bn in revenues in 2013E. GS has established a proven track record
as a flow giant with best in class liquid execution and electronic trading
platforms. MS follows next with c.9% market share in our estimates in
2013E.
Tier I Equities players CS, UBS and BofA each account for 6-7% of market
share in 2013E in our estimates with total Equities revenues of $12bn in 2013E.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

French IBs SG, BNP along with DB, Nomura, Barclays and Citi follow next
with 4-5% market share each. Each of these players is good in a particular
product or geography with both the French IBs strong in equity derivatives in
Europe but not a Tier I cash equities house. DB on the other hand maintains a
strong presence in Europe, but has struggled in the U.S. cash equities in our view.
Table 60: Equity revenue Market
share 2013E
%
Bank
GS
MS
CS
UBS
BofA
SG
DB
NOM
HSBC
BARC
Citi
BNPP
RBC
MQG.
UCG
RBS
CASA
JEF
KN
MB
VTB
STAN
ING
SEB
INP

Market
Share
11.6%
9.4%
7.2%
6.3%
6.2%
5.6%
5.4%
5.2%
5.0%
5.0%
4.9%
4.4%
4.3%
2.3%
1.7%
1.4%
1.3%
1.0%
0.9%
0.8%
0.7%
0.6%
0.6%
0.5%
0.4%

Source: J.P. Morgan estimates

We believe Tier III equity houses with only flow businesses primarily related
to cash equities have struggled to remain profitable and we see the trend to
scale down or close as seen in recent announcements by RBS, UCG to
continue.
We expect to see much lower market share movement in equities compared to
FICC and expect the market to remain more fragmented and accommodative of
more players.
We believe more domestic focused players will continue to hold on to their
market shares as they are more dependent on domestic and corporate
relationships.
Bottom 10 players account for 8% of market share in 2013E in our estimates.
Figure 74: Equity revenue Market share concentration curve 2013E
%

100%

MB ING STAN
SEB INP
MQG.
KN VTB
UCG CASA
HSBC
RBC
RBS JEF

90%

BNPP

80%

BARC
NOM

70%
60%

SG

50%

DB

BofA

40%

UBS

CS

30%

Citi

JPM*
MS

20%
GS

10%
0%
0

10

12

14

16

18

20

22

24

26

28

Source: J.P. Morgan estimates. Note:*JPM on clean revenues for 2011 based on published numbers. JPM Equities revenues adjusted
for DVA gains of $70m in 2Q, $377m in Q3 and DVA loss of $27m in Q4 2011. Q2 2011 DVA gains of $140m in trading equally divided
between FICC & Equity Markets.

Total IBD revenue wallet: c.$50bn in 2013E: Top 5 players account for 49% of
market share
We estimate 2013E IBD revenue wallet of $50bn for 27 players globally in our
analysis with Top 5 players accounting for 49% of the revenue wallet.
BofA, MS, GS and Barclays are in the Top 5 IBD players in 2013E in our
estimates, with $19bn of revenues which represents 37% market share.
Next 5 players (HSBC, Citi, CS, DB and UBS) account for 30% of IBD market
share in our estimates.
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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

However, the bottom 10 players only account for 6% of revenue market


share in 2013E in our estimates, indicating the concentrated nature of revenues
in the business.
In IBD, we see more fragmentation in the European market while the U.S.
market is more consolidated with high barriers of entry which also implies higher
margins as shown in Figure 76 to Figure 78.
Table 61: IBD (ECM+DCM+M&A)
revenue Market share 2013E
%
Bank
BofA
MS
GS
BARC
HSBC
Citi
CS
DB
UBS
RBC
NOM.
JEF
Lazard
RBS
BNP
MQG
INP
SG
CASA
SEB
STAN
ING
UCG
VTB
MB
KN

Market
Share
11.2%
9.0%
8.8%
8.1%
7.8%
6.7%
6.2%
5.9%
3.1%
2.9%
2.5%
2.2%
2.1%
2.0%
1.6%
1.6%
1.4%
1.3%
1.1%
0.6%
0.5%
0.5%
0.5%
0.3%
0.2%
0.2%

Source: J.P. Morgan estimates

Margins in ECM, DCM as well as advisory are higher in North America


compared to Europe in our view due to the less fragmented nature of the market
with Top 5 players accounting for 41% of DCM revenues in 2011 in North
America compared to 31% in Europe. A similar trend is seen in M&A/advisory
revenues as well with Top 5 players in North America accounting for 42% of
revenues as per Dealogic, while the corresponding number in Europe is 33%.
We see good correspondence between strong franchise in FICC and DCM
revenues as well as good correspondence between strong franchise in Equities
and ECM revenues.
ECM: MS with a strong equities franchise was ranked 2nd by revenues in both
North America and Europe in 2011 based on Dealogic data. On the other hand,
DB with a strong equities franchise in Europe was ranked number 1 in Europe but
DB was ranked number 8 in U.S. where we believe DB is not strong in cash
equities.
We expect some market share movement as Tier II IBs scale back in FICC,
which we expect should be reflected partly in DCM market share as well.
Figure 75: IBD (ECM+DCM+M&A) revenue Market share concentration curve 2013E
%

100%

MQG SG
JEF
INP
BNP
RBC
Lazard
NOM.
DB
UBS
CS
Citi
HSBC
BARC
GS
RBS

90%
80%
70%
60%
50%
40%

SEBSTANUCG MB
CASA ING VTB

MS

30%

BofA

20%

JPM*

10%
0%
0

10

12

14

16

18

20

22

24

26

28

Source: J.P. Morgan estimates. Note:*JPM on clean revenues for 2011 based on published numbers.

90

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13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 76: Revenues per unit of deal volume comparison in ECM

Figure 77: Revenues per unit of deal volume comparison in DCM


1.2%

4.0%
ECM NORTH AMERICA

ECM EUROPE

DCM NORTH AMERICA

1.1%

3.5%

DCM EUROPE

1.0%

3.0%

0.9%
0.8%

2.5%

0.7%
2.0%

0.6%
0.5%

1.5%

0.4%
1.0%

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

Source: Dealogic

2012ytd

0.2%

2012ytd

0.3%

0.5%

Source: Dealogic

Figure 78: Revenues per unit of deal volume comparison in M&A


1.0%

M&A NORTH AMERICA

M&A EUROPE

0.9%

0.8%

0.7%

0.6%

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0.4%

2012ytd

0.5%

Source: Dealogic

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 62: Top 10 ECM players by revenue in Europe 2011

Table 63: Top 10 ECM players by revenue in North America 2011

$ millions, %

$ millions, %

Bank
Deutsche Bank
Morgan Stanley
Credit Suisse
Goldman Sachs
JPMorgan
BoA Merrill Lynch
Citi
UBS
Barclays Capital
UniCredit
Subtotal
Total

Net Revenue
($m)
242
223
210
185
152
146
121
91
81
68
1,519
2,623

% share
9
8
8
7
6
6
5
3
3
3
58
100

Cumulative %
Share
9
18
26
33
39
44
49
52
55
58
58
100

Bank
JPMorgan
Morgan Stanley
BoA Merrill Lynch
Goldman Sachs
Citi
Credit Suisse
Barclays Capital
Deutsche Bank
RBC Capital Markets
Wells Fargo Securities
Subtotal
Total

Net Revenue
($m)
708
609
584
494
430
414
403
313
284
255
4494
7304

% share
10
8
8
7
6
6
6
4
4
3
62
100

Cumulative %
Share
10
18
26
33
39
44
50
54
58
62
62
100

Source: Dealogic

Source: Dealogic

Table 64: Top 10 DCM players by revenue in Europe 2011

Table 65: Top 10 DCM players by revenue in North America 2011

$ millions, %

$ millions, %

Bank
Deutsche Bank
Barclays Capital
BNP Paribas
JPMorgan
HSBC
Credit Suisse
Citi
RBS
Goldman Sachs
UBS
Subtotal
Total

Net Revenue
($m)
411
333
311
281
278
252
236
236
217
186
2,740
5,126

% share
8
7
6
5
5
5
5
5
4
4
53
100

Cumulative %
Share
8
15
21
26
31
36
41
46
50
53
53
100

Bank
BoA Merrill Lynch
JPMorgan
Citi
Goldman Sachs
Morgan Stanley
Deutsche Bank
Barclays Capital
Credit Suisse
Wells Fargo Securities
UBS
Subtotal
Total

Net Revenue
($m)
971
951
638
575
567
562
539
508
396
321
6030
8950

% share
11
11
7
6
6
6
6
6
4
4
67
100

Cumulative %
Share
11
21
29
35
41
48
54
59
64
67
67
100

Source: Dealogic

Source: Dealogic

Table 66: Top 10 M&A players by revenue in Europe 2011

Table 67: Top 10 M&A players by revenue in North America 2011

$ millions, %

$ millions, %

All Advisor Parent


Deutsche Bank
Goldman Sachs
JPMorgan
Credit Suisse
Morgan Stanley
Rothschild
Lazard
UBS
BoA Merrill Lynch
BNP Paribas
Subtotal
Total
Source: Dealogic

Net Revenue
($m)
484
435
402
350
339
319
312
274
238
188
3,339
6,172

% share
8
7
7
6
5
5
5
4
4
3
54
100

Cumulative %
Share
8
15
21
27
33
38
43
47
51
54
54
100

All Advisor Parent


Goldman Sachs
Morgan Stanley
JPMorgan
BoA Merrill Lynch
Credit Suisse
Barclays Capital
UBS
Jefferies & Company
Deutsche Bank
Citi
Subtotal
Total

Net Revenue
($m)
883
831
823
659
570
445
368
343
325
324
5574
9007

% share
10
9
9
7
6
5
4
4
4
4
62
100

Cumulative %
Share
10
19
28
35
42
47
51
55
58
62
62
100

Source: Dealogic

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Small, can be profitable scaling up is difficult: Equity


Boutique IB examples
We see polarization of business in Fixed Income world like equity houses between
large global players and small focused players. There are large global equity houses
which provide whole range of services like prime brokerage, cash equities, equity
derivatives etc with bulge bracket compensation and then there are small boutiques
which are focused and are highly profitable like Autonomous and Redburn Partners
with high revenue /head. We also note fixed cost is low - as illustrated by the low
compensation ratios for Autonomous and Redburn, with profit being paid out to
members purely dependent on profit performance. This business model is highly
profitable to certain size of 100-150 people in our view. As the number of employees
increases, and Boutiques expand to become more full-agency like, the client base
sees them more and more like Tier I players unwilling to pay extra for services added
and profitability begins to decline.
We believe re-tuning their FICC strategy from an institutional focused
approach to an agency-only model could benefit MS, UBS and CSG as Tier II
FICC players. In addition, post regulation we expect new FICC boutiques to
enter the business.
Table 68: GS vs. Boutique Investment Banks - Latest annual accounts and comparison with Tier I IB (fiscal YE)
$ in millions
GS IB division*
31-Dec-11

Autonomous
31-Mar-11

Redburn Partners
31-May-11

KBW group
31-Dec-11

Turnover
Variable Expense
Net Revenues
Operating Expense
o/w staff costs
Operating profit
Interest Income/Expense
Profit for financial year before Member's remuneration and profit shares
Taxation
Member's remuneration charges as an expense
Profit for financial year

21,635
(15,659)
(9,179)
5,976
5,976
(1,912)
4,064

93.0
(15.2)
77.9
(42.2)
(23.7)
35.7
0.2
35.8
(0.4)
(4.3)
31.1

264.5
264.5
(315.6)
(183.4)
(51.1)
(51.1)
19.4
(31.7)

Comp expense for staff


Comp expense for members
Total expense for employees

(9,179)1
(9,179)1

22.6
22.6
(4.7)
(1.0)
17.8
0.0
17.8
(3.0)
14.8
(1.0)
(3.0)
(4.0)

(23.7)
(4.3)
(28.1)

(183.4)
(183.4)

14.8

31.1

22,490**

85
45
130

585

22,490**

8
19
27

42.4%
42.4%

4.5%
13.2%
17.6%

30.5%
5.6%
36.1%

69.3%
69.3%

961,983

867,625

598,880

452,156

Year ended

Profit for financial year available for discretionary division among Members
Average no. of staff
Average no. of members
Total employees
Comp Ratio for staff
Comp Ratio for Members
Comp Ratio for total employees*
Net rev per total employee

585

Source: Company reports, J.P. Morgan estimates. Note. KBW operating expense includes restructuring charge of $15mn of which $7mn severance cost. Severance cost is not reported as a part of
comp expense and hence not adjusted. GBUSD rate used = 1.5817.*Investment Banking and Institutional client services. **estimated assuming 65% of total staff in IB. ***Average comp/employee
for GS.1. estimated assuming group comp ratio. *The compensation does not include profit paid out to the members.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Investment bank JVs an option - Kepler-UniCredit JV


We look at the JV between UniCredit and Kepler capital markets and think it could
also be an option for Tier II Institutional IBs, which do not want to run a full-scale
FICC business or want to focus on certain markets only but wish to make use of the
expertise of other players.
On the 15th of November, UniCredit has agreed to enter into an exclusive alliance
with Kepler Capital Markets for Cash Equity research and execution services for
Western European Equities. The rational for this strategic alliance is that UCG has
decided to appoint Kepler to support UniCredit Equity Capital Markets (ECM)
business in the following areas:
Equity research and provision of analyst reports for Western European ECM and
all other UniCredit units
Exclusive distribution of Western European ECM transactions worldwide.
The economic details of these transactions were not disclosed but we understood that
UCG has simply outsourced the cash equity business to Kepler, as a consequence
UCG doesnt have any stake in Kepler, while is likely to receive some fees for the
potential business originated by Kepler thanks to the leverage of the UCG franchise.
According to UCG this decision has been made because the Western European Cash
Equity business, consisting of 120 professionals which we estimate generated total
revenues of circa 30mn in 2010, was no longer considered a strategic and core
platform within the new CIB division with UCG Group.

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Global IB headwinds trigger paradigm shift to


generate adequate S/H ROEs

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Global IB headwinds trigger paradigm shift


to generate adequate S/H ROEs

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13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

IB Industry in need of 3 Step changes to


improve returns to 10-13%
We believe the IB industry is undergoing a phase of transition and there are
three key tools which the industry has at its disposal to tackle the low ROE
overhang.
1.

Additional RWA reductions from legacy asset reductions and further RWA
mitigation

2.

Market Share movements in FICC which should benefit Tier I FICC players
at the expense of Tier II institutional players

3.

A last step which the IBs would look at in our view could be further staff
reductions, non-comp cost cuts and if the revenue environment does not
improve or deteriorates further, IBs could use comp adjustment as a final
measure to reach 13% ROE for Tier I IBs and 10% ROE for Tier II IBs. We
believe IB managements need to demonstrate their ability to generate
adequate returns in the business.

Our starting point for this sensitivity analysis is the IB ROE post regulation as
discussed on page 62. We estimate IB ROE to decline from 13.6% pre regulation to
6.8% post regulation in 2013E.

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kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 69: Global Investment Banks 2013E ROE in the IB division pre and post regulation changes
%
IB ROE 2013E
1. Clearing via CCP
2. Moving derivatives to exchange
3. OTC post trade transparency
4. Higher capital on non CCP clearing
Dodd Frank global
5. Ban on prop trading, limits on market making,
PE/HF Investments
6. Section 716 US reg - segregation IB
7. NPR2 RWA Increase
Dodd-Frank US/French Proposal only
8. Increase in cost of funding
ICB Impact (UK only)
9. Stressed VaR capital buffer
10. Incremental Risk Charge
11. Securitisation & correlation
Basel 2.5
12. CVA, CCR & other
13. Securitisation risk weighted 1250%
Basel 3 excluding mitigation
14. Mitigation
15. Group excess capital
Total impact
IB ROE pre mitigation
Decline in ROE
Resulting IB ROE
Decline in ROE
IB ROE post regulation (ex reg. arbitrage)
Decline in ROE

CS
13.9%
0.9%
-1.1%
-0.6%
-0.1%
-1.1%

UBS
12.7%
0.6%
-1.4%
-0.7%
-0.1%
-1.7%

DB
12.8%
1.4%
-1.3%
-0.6%
-0.1%
-0.9%

GS
15.7%
1.9%
-1.0%
-0.9%
-0.2%
-0.4%

MS
12.6%
1.0%
-0.8%
-0.5%
-0.1%
-0.4%

BNP
16.2%
-0.2%
-1.3%
-0.5%
0.0%
-2.0%

SG
14.6%
0.4%
-1.1%
-0.7%
-0.1%
-1.6%

BARC
14.1%
0.4%
-0.8%
-0.4%
-0.1%
-0.9%

RBS
10.0%
1.0%
-0.9%
-0.4%
0.0%
-0.5%

Avg.
13.6%
0.8%
-1.1%
-0.6%
-0.1%
-1.1%

-1.2%
-1.5%
-0.7%
-3.0%
-3.8%
-4.6%
-6.4%
13.7%
-1.9%
-7.0%
5.4%
-62%
6.9%
-50%
6.9%
-50%

-1.2%
-1.4%
-1.1%
-3.1%
-3.2%
-4.3%
-5.8%
66.8%1
-1.4%
-5.3%
4.6%
-64%
7.4%
-42%
7.4%
-42%

-1.6%
-0.6%
-1.1%
-2.9%
-3.3%
-5.0%
-6.4%
13.3%
0.0%
-6.4%
4.9%
-62%
6.4%
-50%
6.4%
-50%

-0.7%
-0.1%
-3.7%
-4.3%
-2.1%
-1.2%
-1.9%
-4.3%
-3.2%
-4.5%
-6.2%
7.9%
0.0%
-8.9%
5.8%
-63%
6.8%
-57%
8.6%
-45%

-0.7%
-0.1%
-1.7%
-2.3%
-0.9%
-1.2%
-0.9%
-2.6%
-1.6%
-2.3%
-3.4%
2.1%
0.0%
-5.9%
6.2%
-51%
6.7%
-46%
8.0%
-36%

-0.4%
-0.4%
-1.8%
-0.8%
-0.5%
-2.9%
-2.7%
0.0%
-2.7%
0.0%
0.0%
-6.5%
9.7%
-40%
9.7%
-40%
10.0%
-38%

-0.2%
-0.2%
-1.8%
-1.4%
-1.3%
-3.7%
-3.6%
-6.5%
-7.7%
3.8%
0.0%
-9.1%
5.0%
-66%
5.5%
-62%
5.6%
-62%

-2.7%
-2.7%
-0.7%
-0.7%
-0.7%
-2.0%
-3.4%
-2.5%
-4.9%
4.0%
0.0%
-7.2%
6.0%
-58%
6.9%
-51%
8.8%
-38%

-2.1%
-2.1%
-0.6%
-0.6%
-0.6%
-1.6%
-2.1%
-2.1%
-3.5%
3.1%
0.0%
-5.5%
3.9%
-61%
4.5%
-55%
6.1%
-39%

-0.2%
0.0%
-0.6%
-0.8%
-0.5%
-0.5%
-1.3%
-1.1%
-1.0%
-2.9%
-3.0%
-3.5%
-5.2%
12.7%
-0.4%
-6.9%
5.7%
-58%
6.8%
-50%
7.5%
-45%

Source: J.P. Morgan estimates, company data. Notes: i) Morgan Stanley Institutional Securities estimates ii) Goldman Sachs Institutional Client Services & Investment Banking estimates; iii) our
ROE estimates are based on JPMC allocated capital (10% of RWAs); iv) for the impact of Section 619, we have assumed the pure prop trading revenues would be impacted, partly offset by costs
savings note that we have assumed a ban on prop trading for French banks as well; v) note that percentages cannot be added up as both numerators and denominators are changing. 1. Includes
legacy assets transferred from IB to corporate center starting Q1 12. RBS: In 2013E, RBS GBM will be in transition phase of restructuring and hence we have not included the impact of reduction in
wholesale funding which in the longer term we estimate will add up to c.5% to the GBM ROE assuming minimal revenue generation from the reduced TPAs. Please note we do not include the
impact of Basel Liquidity rules in our calculations, and have discussed these in some of our other publications. Please note, the current proposed regulations on central clearing could imply that risk
weights will increase when activity moves from bilateral to centrally cleared trades. We have not included this potential negative impact in our calculations.

1. Step: Legacy Assets reduction implies average ROE to


improve from 6.8% to 7.7%
We estimate IB ROE post regulation to decline to 6.8% on average in 2013E, down
from 13.6% on average in 2013E pre any regulatory changes. However, IB
management will be focusing on a going concern basis, which means looking at IB
ROEs ex legacy assets as a better reflection of returns and restructuring
required. We estimate most of the legacy asset reductions as well as passive
mitigation from roll-over to come from 2013 onwards as indicated by some IBs in
their roll-over/maturity schedules. We believe IB managements in their long-term IB
ROE targets should already be taking into account legacy assets disposals; hence we
look at the IB ROE post legacy asset reduction and already announced mitigations.

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 70: Global Investment Banking ROE 2013E: Average IB ROE to improve 90bps to 7.7% post legacy asset reduction/passive roll-off
%, local currency

Pre regulation
IB ROE
IB comp ratio
IB comp/head ($ thousands)
IB comp differential vs. best in class
Post regulation
IB ROE post regulation
IB ROE post regulation (ex regulatory
arbitrage)
IB comp ratio
IB comp/head ($ thousands)
IB comp differential vs. best in class
Impact from legacy asset/ additional
RWA reduction
Legacy asset/ additional RWA reduction
IB ROE post legacy asset/ additional
RWA reduction
IB ROE post legacy asset/ additional
RWA reduction (ex reg. arbitrage)

CS

UBS

DB

GS

MS

BNP

SG

BARC

RBS

Avg./
Total

Avg.
Tier I

Avg.
Tier II

13.9%
44%
267
-42%

12.7%
47%
254
-45%

12.8%
40%
393
-14%

15.7%
40%
459
0%

12.6%
40%
333
-27%

16.2%
35%
218
-52%

14.6%
43%
259
-42%

14.1%
44%
358
-22%

10.0%
37%
218
-53%

13.6%
41%
306
-33%

14.2%
41%
403

13.3%
41%
258

6.9%
6.9%

7.4%
7.4%

6.4%
6.4%

6.8%
8.6%

6.7%
8.0%

9.7%
10.0%

5.5%
5.6%

6.9%
8.8%

4.5%
6.1%

6.8%
7.5%

6.7%
7.9%

6.8%
7.3%

44%
257
-40%

47%
238
-45%

40%
370
-14%

40%
428
0%

41%
314
-27%

35%
201
-53%

43%
244
-43%

47%
340
-21%

40%
205
-52%

42%
288
-33%

43%
380
-11%

42%
243
-43%

15,147
7.5%

0
7.4%

55,000
7.8%

90,000
8.1%

20,000
7.1%

15,000
10.4%

57,000
8.5%

14,000
7.3%

15,000
5.1%

7.7%

7.7%

7.6%

7.5%

7.4%

7.8%

10.6%

8.5%

10.7%

8.6%

9.3%

6.8%

8.6%

9.2%

8.2%

Source: J.P. Morgan estimates. Notes: i) Morgan Stanley Institutional Securities estimates ii) Goldman Sachs Institutional Client Services & Investment Banking estimates; iii) our ROE estimates
are based on JPMC allocated capital (10% of RWAs. RBS: In 2013E, RBS GBM will be in transition phase of restructuring and hence we have not included the impact of reduction in wholesale
funding which in the longer term we estimate will add up to c.5% to the GBM ROE assuming minimal revenue generation from the reduced TPAs.

Table 71: Global Investment Banks: Key ratios post legacy asset/ additional RWA reduction
%
CS

UBS

DB

GS

MS

BNP

SG

BARC

RBS

Avg.

13.9%
44%
267
38%
82%

12.7%
47%
254
33%
80%

12.8%
40%
393
34%
74%

15.7%
40%
459
32%
72%

12.6%
40%
333
30%
70%

16.2%
35%
218
26%
61%

14.6%
43%
259
30%
73%

14.1%
44%
358
22%
66%

10.0%
37%
218
32%
69%

IB ROE post regulation


IB ROE post regulation (ex regulatory
arbitrage)
IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

6.9%
6.9%

7.4%
7.4%

6.4%
6.4%

6.8%
8.6%

6.7%
8.0%

9.7%
10.0%

5.5%
5.6%

6.9%
8.8%

44%
257
40%
84%

47%
238
35%
83%

40%
370
37%
77%

40%
428
35%
75%

41%
314
32%
73%

35%
201
29%
63%

43%
244
32%
75%

IB ROE post legacy asset/ additional


RWA reduction
IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

7.5%

7.4%

7.8%

8.1%

7.1%

10.4%

44%
257
40%
84%

47%
238
35%
83%

40%
370
37%
77%

40%
428
35%
75%

41%
314
32%
73%

35%
201
29%
63%

IB ROE pre regulation


IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

13.6%
41%
306
31%
72%

Avg.
Tier I
14.2%
41%
403
30%
71%

Avg.
Tier II
13.3%
41%
258
31%
72%

4.5%
6.1%

6.8%
7.5%

6.7%
7.9%

6.8%
7.3%

47%
340
26%
73%

40%
205
38%
78%

42%
288
34%
76%

43%
380
33%
75%

42%
243
34%
76%

8.5%

7.3%

5.1%

7.7%

7.7%

7.6%

43%
244
32%
75%

47%
340
26%
73%

40%
205
38%
78%

42%
288
34%
76%

43%
380
33%
75%

42%
243
34%
76%

Source: J.P. Morgan estimates. Notes: i) Morgan Stanley Institutional Securities estimates ii) Goldman Sachs Institutional Client Services & Investment Banking estimates; iii) our ROE estimates
are based on JPMC allocated capital (10% of RWAs). RBS: In 2013E, RBS GBM will be in transition phase of restructuring and hence we have not included the impact of reduction in wholesale
funding which in the longer term we estimate will add up to c.5% to the GBM ROE assuming minimal revenue generation from the reduced TPAs.

Global Investment banks Details on legacy assets/ additional RWA mitigation


post 2013E
Credit Suisse: Credit Suisse with its Q3 11 presentation indicated reduction in IB
RWAs to SF195bn by 2012 and a further SF25bn reduction by 2014 to SF170bn. We
estimate SF185bn in RWAs by 2013E excluding the impact of regulations related to
central clearing and moving derivatives to exchanges. As a result, we include further
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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

SF15bn in RWA reduction in our calculations. The reduction in RWAs is targeted at


the least productive assets in FICC under Basel 3 with SF40bn related to Macro
businesses, SF40bn in credit and securitized products, SF9bn in EM and
commodities and SF10bn in the wind-down portfolio.
UBS: UBS indicated SF150bn in RWAs by 2013 in the core investment bank, which
is already in our 2013E estimates; hence we do not assume any additional RWA
reduction.
Deutsche Bank: Deutsche Bank indicated additional relief of 70bn post 1 Jan 2013
from the roll-off of CB&S capital intensive assets. We already include 15bn of the
planned reduction in our 2013E estimates; hence we assume additional 55bn
reduction in RWAs post 2013E.
Table 72: Deutsche Bank: CB&S: Additional relief expected mainly by 2018 from roll-off of capital intensive assets
billion
TCD* at Jan 1
2013
25

Expected time frame

Notes

2013-2014

Alt-A and subprime inventory, to be exited


as client demand disappears

Credit correlation

15

30% of remaining notional rolled-off by 2014, 80% rolled-off by


2015, 100% rolled-off by 2018 (assuming no management
action)

Banking book securitisations


o.w. Weighted average life <5 years
o.w. Weighted average life >5 years

33
16
17

Liquid trading book

Weighted average life <5 years


Weighted average life >5 years

Implies relief expected in 2018 and


beyond

Source: Company reports and J.P. Morgan estimates. *TCD indicates total capital demand: Total Capital Demand (TCD) = RWA + 12.5 x Tier 1 impact of Capital Deduction Items (CDI)

Goldman Sachs: GS indicated $89bn (split $39bn market risk RWAs and $50bn
credit risk RWAs) in RWA reduction by 2013E and additional $45bn (split $10bn
market risk RWAs and $35bn credit risk RWAs) in RWA reduction by 2015E from
passive roll-off of mortgage securitization and credit correlation portfolios. GS had in
June 2011 also indicated the potential for active significant mitigation well in excess
of conservative scenario as Credit correlation and mortgage securitization positions
represent $12bn in Basel III market risk capital requirements. Hence, we estimate
potential for additional $90bn RWA mitigation from active steps by management in
our forecasted low IB revenue environment scenario.
BNP Paribas: The group's legacy assets portfolio amounted to 12.7bn (of which
12.5bn in the banking book), mostly in CIB with the remaining in other businesses
(e.g. BancWest). 72% of the assets in that portfolio are AAA-rated, and most of the
assets are Dutch RMBS - 8.1bn out of total 12.7bn. This excludes 9.2bn of legacy
assets inherited from Fortis (IN portfolio) in the corporate center. We estimate the
legacy assets portfolio in CIB had RWAs of 15bn end 2012e under Basel 3
standards, or 7% of total CIB RWAs post regulatory changes.
Socit Gnrale: The legacy assets portfolio of SG CIB amounted to 17bn end
2011, down from 33bn end 2010, as the group accelerated the disposals with 13bn
of sales achieved in 2011 with limited impact from disposals (116m or about 1% of
assets). The 17bn of legacy assets of which 12.4bn of reclassified assets
includes: 2.4bn of US CDOs of RMBS, 0.8bn of US RMBS, 3.1bn of US CLOs,
2bn of other US ABS and CDOs, 3bn of Euro ABS and CLOs. We estimate the
legacy assets portfolio in CIB had RWAs of 20bn under Basel 2.5 and close to
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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

85bn under Basel 3 pre mitigation and 70bn post mitigation of 15bn. SG is
focusing on the dismantling of CDOs of RMBS which would be the most capital
intensive under Basel 3, and the group has already achieved 1.3bn of capital savings
by 2013, of which 0.9bn already freed up at end 2011.
UK Banks: Barclays targets Credit market assets Basel 3 RWAs to be 14bn by
2013E which in our view will be eventually reduced to zero and hence we estimate
additional 14bn RWA reduction in our calculation of post legacy asset reduction
ROE. For RBS the 15bn RWAs relates to GBM restructuring where the Group
targets 150bn RWAs (ex Dodd Frank reduction in our view) in the medium term.
We estimate 165bn RWAs by 2013E, hence the additional 15bn RWA reduction in
our numbers.

2. Step: A more Cash Equity like FICC business triggers


market share movements and Tier I and II FICC ROE
divide at 9.2% and 6.9%, respectively
In our view some Tier II IBs would still struggle to generate shareholder acceptable
returns even post legacy asset reductions and taking into account already announced
RWA mitigation measures beyond 2013E. This in our view could lead to further IB
restructuring and in turn market share movements, as a result Tier I IBs should gain
market share. The rational for our view is that clients want to trade with players
who in a more cash equity like FICC environment offer best execution facilities
and have the willingness to support low ROE businesses such as structuring.
It would become increasingly difficult in our view for Tier II IBs to provide complex
long-dated solution/ complex transactions involving inventory capital consumption
under Basel 3 to clients, and early evidence of this can be seen by the decision of
Swiss IBs to exit/scale down from long-dated unsecured trades in Rates. The
revenue loss may not be restricted to structuring and businesses which are low
ROE under Basel 3 alone, but may also result in loss in share in flow business in
our view.
We run sensitivity around market share movements, assuming -15% market share
loss in FICC for Tier II institutional players, benefitting Tier I players. In Figure 79
and Figure 80 we show the FICC revenue concentration curve pre and post our
sensitivity exercise.

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kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 79: FICC revenue concentration pre sensitivity on market


share movements

Figure 80: FICC revenue concentration post sensitivity on market


share movements

%
100%
90%
80%
70%

HSBC

60%
40%

BARC
BofA
Citi

30%

DB

50%

MQG. ING KN SEB


INP MB
SG UCG
CASA JEF VTB
NOM.
RBC
STAN
RBS
BNPP
CS
UBS
MS

100%
90%
80%

MS

70%

CS

HSBC
BARC

60%

BofA

50%

Citi

40%
DB

30%

20%

GS

20%

GS

10%

JPM*

10%

JPM*

0%

SG MQG. ING
VTB MB
BNPP STAN
INP
CASA JEF KN SEB
UCG RBC
RBS
NOM.

UBS

0%
0

10

12

14

16

18

20

22

24

26

28

Source: J.P. Morgan estimates. Note:*JPM clean revenues for 2011 based on published
numbers. JPM FICC revenues adjusted for DVA gain of $70m in 2Q, $529m in Q3 and DVA
loss of $135m in 4Q 2011. Q2 2011 DVA gains of $140m in trading equally divided between
FICC & Equity Markets.

10

12

14

16

18

20

22

24

26

Source: J.P. Morgan estimates. Note:*JPM clean revenues for 2011 based on published
numbers. JPM FICC revenues adjusted for DVA gain of $70m in 2Q, $529m in Q3 and DVA
loss of $135m in 4Q 2011. Q2 2011 DVA gains of $140m in trading equally divided between
FICC & Equity Markets.

Detailed Sensitivity on market share movements Tier I and II FICC players


We run sensitivity on market share movements, assuming -15% declines in market
share in 2013E for Tier II institutional players in FICC, benefitting Tier I FICC
players.
We assume marginal cost/income of 30% on new revenues for Tier I FICC players
and assume normal cost/income inline with IB division cost/income ratio in 2013E in
our current estimates for Tier II institutional IBs, as we believe Tier II institutional
IBs would try to move out of businesses which are currently high cost/income.
Post our sensitivity exercise around market share movements, we estimate Tier I
IB (BARC, GS, DBK) ROE to improve to 9.2%, i.e. 150 bps improvements
on average. This is a significant improvement, but still implies well below cost
of equity returns even for Tier I IBs.
Tier II Institutional IBs (CS, UBS, MS, BNP, SG and RBS) on the other hand
could see their IB ROE declining by 70bps from average 7.6% to 6.9% in
2013E post our sensitivity on market share movements.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 73: Global Investment Banking ROE Sensitivity 2013E: Tier I IB ROE to improve 150bps to 9.2% post sensitivity on market share
movements
%, local currency

Pre regulation
IB ROE
IB comp ratio
IB comp/head ($ thousands)
IB comp differential vs. best in class
Post regulation
IB ROE post regulation
IB ROE post regulation (ex regulatory
arbitrage)
IB comp ratio
IB comp/head ($ thousands)
IB comp differential vs. best in class
Impact from legacy asset/ additional
RWA reduction
Legacy asset/ additional RWA reduction
IB ROE post legacy asset/ additional
RWA reduction
IB ROE post legacy asset/ additional
RWA reduction (ex regulatory
arbitrage)
Post Market Share movements
Movement in market share
IB ROE post market share movements
IB ROE post market share movements
(ex reg arbitrage)

CS

UBS

DB

GS

MS

BNP

SG

BARC

RBS

Avg./
Total

Avg.
Tier I

Avg.
Tier II

13.9%
44%
267
-42%

12.7%
47%
254
-45%

12.8%
40%
393
-14%

15.7%
40%
459
0%

12.6%
40%
333
-27%

16.2%
35%
218
-52%

14.6%
43%
259
-44%

14.1%
44%
358
-22%

10.0%
37%
218
-53%

13.6%
41%
306
-33%

14.2%
41%
403
-12%

13.3%
41%
258
-44%

6.9%
6.9%

7.4%
7.4%

6.4%
6.4%

6.8%
8.6%

6.7%
8.0%

9.7%
10.0%

5.5%
5.6%

6.9%
8.8%

4.5%
6.1%

6.8%
7.5%

6.7%
7.9%

6.8%
7.3%

44%
257
-40%

47%
238
-45%

40%
370
-14%

40%
428
0%

41%
314
-27%

35%
201
-53%

43%
244
-42%

47%
340
-21%

40%
205
-52%

42%
288
-33%

43%
380
-11%

42%
243
-43%

15,147
7.5%

0
7.4%

55,000
7.8%

90,000
8.1%

20,000
7.1%

15,000
10.4%

57,000
8.5%

14,000
7.3%

15,000
5.1%

7.7%

7.7%

7.6%

7.5%

7.4%

7.8%

10.6%

8.5%

10.7%

8.6%

9.3%

6.8%

8.6%

9.2%

8.2%

-0.6%
6.9%

-0.6%
6.7%

0.8%
9.5%

0.8%
9.0%

-0.7%
6.6%

-0.5%
9.5%

-0.3%
7.9%

0.7%
9.0%

-0.6%
3.9%

7.7%

9.2%

6.9%

6.9%

6.7%

9.5%

11.8%

8.0%

9.8%

8.0%

10.9%

5.6%

8.6%

10.8%

7.5%

Source: J.P. Morgan estimates. RBS: In 2013E, RBS GBM will be in transition phase of restructuring and hence we have not included the impact of reduction in wholesale funding which in the
longer term we estimate will add up to c.5% to the GBM ROE assuming minimal revenue generation from the reduced TPAs.

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(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 74: Global Investment Banks: Sensitivity of key ratios to market share movements
%
CS

UBS

DB

GS

MS

BNP

SG

BARC

RBS

Avg.
13.6%
41%
306
31%
72%

Avg.
Tier I
14.2%
41%
403
30%
71%

Avg.
Tier II
13.3%
41%
258
31%
72%

IB ROE pre regulation


IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

13.9%
44%
267
38%
82%

12.7%
47%
254
33%
80%

12.8%
40%
393
34%
74%

15.7%
40%
459
32%
72%

12.6%
40%
333
30%
70%

16.2%
35%
218
26%
61%

14.6%
43%
259
30%
73%

14.1%
44%
358
22%
66%

10.0%
37%
218
32%
69%

IB ROE post regulation


IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

6.9%
44%
257
40%
84%

7.4%
47%
238
35%
83%

6.4%
40%
370
37%
77%

6.8%
40%
428
35%
75%

6.7%
41%
314
32%
73%

9.7%
35%
201
29%
63%

5.5%
43%
244
32%
75%

6.9%
47%
340
26%
73%

4.5%
40%
205
38%
78%

6.8%
42%
288
34%
76%

6.7%
43%
380
33%
75%

6.8%
42%
243
34%
76%

IB ROE post legacy asset/ additional


RWA reduction
IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

7.5%

7.4%

7.8%

8.1%

7.1%

10.4%

8.5%

7.3%

5.1%

7.7%

7.7%

7.6%

44%
257
40%
84%

47%
238
35%
83%

40%
370
37%
77%

40%
428
35%
75%

41%
314
32%
73%

35%
201
29%
63%

43%
244
32%
75%

47%
340
26%
73%

40%
205
38%
78%

42%
288
34%
76%

43%
380
33%
75%

42%
243
34%
76%

IB ROE post market share


movements
IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

6.9%

6.7%

9.5%

9.0%

6.6%

9.5%

7.9%

9.0%

3.9%

7.7%

9.2%

6.9%

44%
240
40%
84%

47%
218
36%
83%

38%
370
36%
74%

39%
428
35%
74%

41%
297
33%
73%

35%
186
29%
64%

43%
231
32%
75%

44%
340
26%
70%

40%
173
40%
80%

41%
276
34%
75%

40%
380
32%
72%

42%
224
35%
76%

Source: J.P. Morgan estimates. RBS: In 2013E, RBS GBM will be in transition phase of restructuring and hence we have not included the impact of reduction in wholesale funding which in the
longer term we estimate will add up to c.5% to the GBM ROE assuming minimal revenue generation from the reduced TPAs.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Market share movements post our assumed sensitivity analysis


In our view Tier II FICC Institutional IBs (CS, UBS, MS, BNP, SG, RBS) would
be impacted the most from any potential market share movements in FICC as
they restructure and scale back from certain product areas. We believe scale
back/exit of capabilities in certain product areas would prevent these IBs from
providing the range of solutions Institutional clients are looking for.

Table 75: FICC market share 2013E:


pre and post estimated sensitivity
on market share movements
%
GS
DB
Citi
BofA
BARC
HSBC
MS
CS
NOM.
UBS
RBS
BNPP
STAN
UCG
SG
RBC
MQG.
CASA
ING
JEF
VTB
KN
SEB
INP
MB

New
10.5%
10.4%
10.0%
9.1%
8.9%
5.6%
4.0%
3.7%
3.4%
3.4%
3.4%
3.0%
2.9%
1.6%
1.5%
1.3%
1.2%
1.0%
0.9%
0.6%
0.5%
0.4%
0.4%
0.2%
0.1%

Old
9.7%
9.6%
9.2%
8.4%
8.2%
5.6%
4.7%
4.3%
3.4%
4.0%
3.9%
3.5%
2.9%
1.7%
1.8%
1.5%
1.2%
1.0%
0.9%
0.6%
0.5%
0.4%
0.4%
0.2%
0.1%

Delta
0.8%
0.8%
0.8%
0.7%
0.7%
0.0%
-0.7%
-0.6%
0.0%
-0.6%
-0.6%
-0.5%
0.0%
-0.1%
-0.3%
-0.2%
0.0%
-0.1%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

Source: J.P. Morgan estimates. Note: assuming


constant market share for JPM as in 2011.

Tier II FICC Agency players (HSBC, STAN) should not be impacted


materially as we believe their current market share is driven by corporate
relationships i.e. more captive client base or strong retail distribution network
which are less likely to be impacted from market share movements.
Tier III FICC Agency/domestically focused players (UCG, SEB, INVESTEC,
VTB) should also be less impacted by any potential market share movement in
our view as their revenues are mostly generated from their domestic markets
which have high barriers of entry and are in addition also relatively small for Tier
I institutional players.
We believe market share movements should benefit Tier I FICC players (GS,
DBK, BARC, Citi and BofA) which continue to operate with scale in most FICC
product areas and offer the whole range of solutions to Institutional clients.
Sensitivity to -15% FICC market share loss for Tier II Institutional IBs and 5% for selected Tier II/Tier III Agency players
We run a sensitivity analysis assuming Tier II Institutional players could lose up to
15% market share to Tier I Institutional FICC players post restructuring. We assume
-5% market share loss for Tier II Agency players for the purpose of this sensitivity.
We estimate $4.5bn in FICC revenues to be re-allocated from Tier II and Tier III
IBs to Tier I FICC players (DBK, GS, BARC, Citi and BofA) in proportion to
their current market share.
Post market share movements, we estimate Top 6 players to account for
60% of FICC market share, up from 58% pre-market share movements.
We estimate GS and DBK to have average 10.2% of the revenue wallet share
post market share movements while Citi ends up with 9.8% and BARC and
BofA end up with 8.8% FICC market share on average.
Market share of Tier II Institutional FICC players goes down to 23% from 26%
pre-market share movements.
Bottom 10 players account for only 4% of FICC market share in 2013E in
our estimates post market share movements.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

3. Step: Shifting returns from employees to S/Hs through


staff and compensation reductions
Differentiated IB ROE final post staff and compensation adjustment to 13% for
Tier I and 10% for Tier II players
We have highlighted the importance of revenue scale in the business in the past
and we now see scale being all the more important in the current market
environment. The response of IB managements to the current difficult market
conditions has been on expected lines and we see a clear differentiation between Tier
I and Tier II IBs response in this respect. We believe Tier I IBs which have large
FICC revenue generation have the ability to absorb additional IT investments and
regulation-related increased expenses. To put the revenue scale difference in
perspective, Tier I FICC players on average generate close to twice the revenues of
Tier II players in our estimates in 2013E.
Tier II IBs have been forced to aggressively scale back or exit certain
businesses where they lack scale or regulation has rendered the businesses
unprofitable
Tier I IBs have also been impacted but to a lesser extent in our view with
more focus on reducing the high cost base through staff cuts and other cost
reduction programs but at the same time maintaining scale to capture market
share by filling in the gaps created by the exit of Tier II IBs.
Anshu Jain, the CEO of DBK CIB division recently commented in an interview that
Its hard to see how the spate of regulations that weve seen unfold over last 18
months will do other than consolidate our industry even further, Jain said. You
have to be in the top three or maximum top seven to be able to sustain
profitability, he said.4
Therefore, in our view, the whole industry including the Tier I names will once
again need to re-visit the cost base and staffing levels in order to increase
operational efficiency, as market share adjustments and legacy asset disposals
will not be enough to attain market acceptable returns.

Cash Equity- Spitzer Case study: FICC cost reduction


inevitable
We believe there are a few lessons which can be drawn from the cash equities
industry post the Spitzer settlement as FICC is becoming more commoditised in
the new regulatory world, moving more to a Cash Equity like business.
The agreement between securities firms and regulators on structural reforms,
as a part of the Spitzer settlement, prompted restructuring of sell side
operations in order to comply with requirements relating to separation of Investment
Banking and Research.
Between Jul-2001 and the end of 2003 based on the U.S. security Brokerage
Industry staff levels were reduced by -21% reflecting sell side restructuring &
resolution of conflicts of interests between research and banking divisions at
4

Source: Bloomberg. Diamond, Jain Say Investor Confidence Increased in January 26th Jan
2012
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Europe Equity Research


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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

securities firms. Post the global settlement on April 2003, staff levels remained flat
owing to the fact that banks had started restructuring months before the actual
settlement because of mounting pressure from the regulators.
On April 28, 2003, a global settlement was reached between SEC, NASAA,
NASD, NYSE, New York Attorney General Eliot Spitzer and ten large brokerage
firms found to have conflicts of interest between research and investment banking
departments. The ten brokerage firms were required to pay $1.4 billion as a part of
the Global Settlement The objective throughout the investigation and negotiations
was to protect small investors and restore integrity to the marketplace. The settlement
prompted brokerage firms to restructure and reduce costs as Analyst compensation
couldnt be drawn from banking revenues.
Overall, based on our analysis, staff levels within cash equity were reduced
within the equity business by 35% in the period July 2001 to end 2003. In
addition post Spitzer the bonus compensation pool was reduced by 45% for the
industry in one year. In respect to FICC, the business most impacted by Basel 3 as
well as Dodd-Frank, we expect a similar reaction in terms of staff reductions as well
as compensation adjustments. In our view, the new regulatory environment is more
likely to drive FICC staff cuts rather than compensation cuts considering the material
fixed cost base within the industry as discussed Swiss Banks: Increased fixed costs
unsustainable at 71-88% could lead to further staff cuts (see page 74) post salary
increases within the industry. In addition, with more trading automation driven by
Dodd-Frank it is likely that: i) less human capital, and ii) cheaper staffing is required
in the long-term.
Hence, based on our analysis, we could witness an additional 14% staff
reductions post only 5% reduction so far and -10% compensation adjustments
in order to generate adequate returns for shareholders at net ROE of 13% for
Tier I IBs and 10% for Tier II IBs. However, the Spitzer settlement was well
anticipated and IB firms were able to react before the final Spitzer settlement and
rules were introduced. It is much less clear in the current environment how to
interpret regulator proposals in the final rule making and market impact- hence, we
assume restructuring will be post regulatory changes rather than in the Spitzer
investigation pre-settlement and new rule decisions.
Figure 81: US Security Brokerage Industry equity regulatory
environment change Number of employees (000s)

Source: Bureau of Labor Statistics, US Department of Labor.

Figure 82: US Security Brokerage Industry today Number of


employees (000s)

Source: Bureau of Labor Statistics, US Department of Labor.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Final Impact on ROE: the path to get back to 13% for Tier I IBs and 10% ROE
for Tier II Institutional IBs
In our view, Tier II Institutional IBs could end up targeting 10% ROE as an
acceptable level of return to shareholders. We believe it is not possible for Tier II
IBs in the restructuring mode to generate 13% ROE as it would mean unviable levels
of compensation or staff reductions. Tier II IBs, in our view, could run their
Investment Banks to support their Private Banking franchise, corporate clients or
their retail client base i.e. a more agency-like structure over time. This may lead to
lower ROE but we believe more predictable IB earnings and lower staff costs
from employees in execution type businesses with lower compensation levels. Hence
we believe even with 10% ROE, it could become 1x BV business for Tier II IBs.
For Tier I IBs, however, we believe 13% ROE is the cost of equity plus a
premium to shareholders for running a full-scale Investment Bank, with greater
volatility in earnings compared to the Tier II Agency-like model and for taking on
higher amounts of risk. Most importantly, a ROE of 13% over time will, we
estimate, lead to 1.2-1.3x tangible BV in the new world.
We do not expect material intellectual talent to leave the IB industry as the
payout on average remains highly attractive. We see some staff moving to the
hedge fund and private banking segments however, the staffing levels required
in our view are pretty limited. IBs will, we expect, also make more significant
differentiation in pay to keep key staffing levels within the IB, in our view.
Overall, we see an ongoing shift of top performers moving to the Tier I firms,
We run our sensitivity analysis on further restructuring in two steps:
5. Fixed cost reduction through staff cuts which will drive Tier II Institutional
IB ROE towards 10%. We estimate total potential IB staff cuts of maximum
20% in our analysis across players as in a more cash equity like FICC world; we
think it would be difficult to reduce the level of staff further as most of these cuts
will be in FICC and imply a reduction of about 25-35%. We also assume -5%
reduction in non-comp costs, further reduction in our view is difficult as
investment in technology driven execution facilities would increase non-comp
costs for the IBs.
6. As a result we run the next step in our sensitivity analysis assuming
reduction in comp costs for Tier II FICC players who are not able to reach 10%
ROE and Tier I FICC players who are not able to reach 13% ROE.
1. Sensitivity on staff cuts and non-comp reduction: average Tier II IB ROE
improves to 9.0% in 2013E; Tier I IBs ROE improves to 12.2%
Based on our sensitivity analysis, we estimate average ROEs for Tier II Institutional
IBs to improve to 9.0% post further staff cuts and a 5% reduction in non-comp
expenses. We assume only 5% reduction in non-comp expenses as we do not
estimate significant declines in costs as FICC becomes more electronic as well as
increased regulatory requirements force IBs to devote additional resources to
technology/reporting platforms.
We believe both Swiss IBs have limited flexibility to reduce comp expenses
because of the high fixed cost base, as discussed on page 74. Both Swiss IBs
have already announced material restructuring, hence we run the sensitivity
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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

assuming additional 13% headcount reduction and 5% reduction in non-comp


expenses, which implies average ROE of 10.0% in 2013E. MS reaches IB ROE
of 9.0% under a scenario of a 20% reduction in staff and 5% reduction in noncomp expenses in our sensitivity analysis.
In our sensitivity, amongst the French IBs BNP should reach 10.0% ROE in
2013E assuming 5% reduction in non-comp expense and no additional
headcount reduction. For SG, we assume additional -9% headcount reduction and
-5% reductions in non-comp expenses to reach 10.0% ROE in 2013E.
Tier I IBs GS, DBK and Barclays reach average IB ROE of 12.2% under a
scenario of additional -20% staff cuts and -5% reduction in non-comp costs
in our sensitivity.
Table 76: Global Investment Banking ROE Sensitivity 2013E: Further adjustments to staff levels and non-comp cost needed to improve ROE
%, local currency
CS

UBS

DB

GS

MS

BNP

SG

BARC

RBS

Avg./
Total

Avg.
Tier I

Avg.
Tier II

13.9%
44%
267
-42%

12.7%
47%
254
-45%

12.8%
40%
393
-14%

15.7%
40%
459
0%

12.6%
40%
333
-27%

16.2%
35%
218
-52%

14.6%
43%
259
-44%

14.1%
44%
358
-22%

10.0%
37%
218
-53%

13.6%
41%
306
-33%

14.2%
41%
403
-12%

13.3%
41%
258
-44%

6.9%
6.9%

7.4%
7.4%

6.4%
6.4%

6.8%
8.6%

6.7%
8.0%

9.7%
10.0%

5.5%
5.6%

6.9%
8.8%

4.5%
6.1%

6.8%
7.5%

6.7%
7.9%

6.8%
7.3%

44%
257
-40%

47%
238
-45%

40%
370
-14%

40%
428
0%

41%
314
-27%

35%
201
-53%

43%
244
-43%

47%
340
-21%

40%
205
-52%

42%
288
-33%

43%
380
-11%

42%
243
-43%

15,147
7.5%

0
7.4%

55,000
7.8%

90,000
8.1%

20,000
7.1%

15,000
10.4%

57,000
8.5%

14,000
7.3%

15,000
5.1%

7.7%

7.7%

7.7%

7.5%

7.4%

7.8%

10.6%

8.5%

10.7%

8.6%

9.3%

6.8%

8.6%

9.2%

8.2%

-0.6%
6.9%

-0.6%
6.7%

0.8%
9.5%

0.8%
9.0%

-0.7%
6.6%

-0.5%
9.5%

-0.3%
7.9%

0.7%
9.0%

-0.6%
3.9%

7.7%

9.2%

6.9%

6.9%

6.7%

9.5%

11.8%

8.0%

9.8%

8.0%

10.9%

5.6%

8.6%

10.8%

7.5%

Staff cuts and non-comp cost


reduction (-5%)
Headcount reduction
Non comp cost reduction (-5%)

-11%
-2,078
-217

-14%
-2,243
-143

-20%
-4,156
-348

-20%
-4,329
-405

-20%
-3,980
-248

0%
0
-166

-9%
-1,221
-123

-20%
-4,320
-201

-10%
-1,400
-137

-23,726

Resulting IB ROE
Resulting IB ROE (ex reg arbitrage)
IB comp ratio
IB non comp ratio
IB cost/income

10.0%
10.0%
39.4%
37.9%
77.2%

10.0%
10.0%
40.2%
34.0%
74.3%

12.9%
12.9%
30.6%
34.8%
65.3%

11.9%
15.4%
31.2%
33.6%
64.9%

9.0%
10.6%
32.5%
31.1%
63.6%

10.0%
10.3%
34.9%
27.3%
62.2%

10.0%
10.2%
39.1%
30.5%
69.6%

11.8%
13.8%
35.2%
25.2%
60.3%

5.2%
7.0%
35.5%
37.8%
73.2%

10.7%
11.6%
35.4%
31.8%
67.2%

12.2%
14.0%
32.3%
31.2%
63.5%

9.0%
9.7%
36.9%
33.1%
70.0%

Pre regulation
IB ROE
IB comp ratio
IB comp/head ($ thousands)
IB comp differential vs. best in class
Post regulation
IB ROE post regulation
IB ROE post regulation (ex regulatory
arbitrage)
IB comp ratio
IB comp/head ($ thousands)
IB comp differential vs. best in class
Impact from legacy asset/ additional
RWA reduction
Legacy asset/ additional RWA reduction
IB ROE post legacy asset/ additional
RWA reduction
IB ROE post legacy asset/ additional
RWA reduction (ex regulatory
arbitrage)
Post Market Share movements
Movement in market share
IB ROE post market share movements
IB ROE post market share movements
(ex reg arbitrage)

-14%
-1,988

Source: J.P. Morgan estimates. RBS: In 2013E, RBS GBM will be in transition phase of restructuring and hence we have not included the impact of reduction in wholesale funding which in the
longer term we estimate will add up to c.5% to the GBM ROE assuming minimal revenue generation from the reduced TPAs.

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 77: Global Investment Banks: Sensitivity on Key ratios post further staff cuts and non-comp cost adjustments
%
CS

UBS

DB

GS

MS

BNP

SG

BARC

RBS

Avg.

IB ROE pre regulation


IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

13.9%
44%
267
38%
82%

12.7%
47%
254
33%
80%

12.8%
40%
393
34%
74%

15.7%
40%
459
32%
72%

12.6%
40%
333
30%
70%

16.2%
35%
218
26%
61%

14.6%
43%
259
30%
73%

14.1%
44%
358
22%
66%

10.0%
37%
218
32%
69%

IB ROE post regulation


IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

6.9%
44%
257
40%
84%

7.4%
47%
238
35%
83%

6.4%
40%
370
37%
77%

6.8%
40%
428
35%
75%

6.7%
41%
314
32%
73%

9.7%
35%
201
29%
63%

5.5%
43%
244
32%
75%

6.9%
47%
340
26%
73%

IB ROE post legacy asset/ additional


RWA reduction
IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

7.5%

7.4%

7.8%

8.1%

7.1%

10.4%

8.5%

44%
257
40%
84%

47%
238
35%
83%

40%
370
37%
77%

40%
428
35%
75%

41%
314
32%
73%

35%
201
29%
63%

IB ROE post market share


movements
IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

6.9%

6.7%

9.5%

9.0%

6.6%

44%
240
40%
84%

47%
218
36%
83%

38%
370
36%
74%

39%
428
35%
74%

10.0%

10.0%

12.9%

39%
238
38%
77%

40%
215
34%
74%

31%
370
35%
65%

IB ROE post additional staff cuts/noncomp cost reductions


IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

13.6%
41%
306
31%
72%

Avg.
Tier I
14.2%
41%
403
30%
71%

Avg.
Tier II
13.3%
41%
258
31%
72%

4.5%
40%
205
38%
78%

6.8%
42%
288
34%
76%

6.7%
43%
380
33%
75%

6.8%
42%
243
34%
76%

7.3%

5.1%

7.7%

7.7%

7.6%

43%
244
32%
75%

47%
340
26%
73%

40%
205
38%
78%

42%
288
34%
76%

43%
380
33%
75%

42%
243
34%
76%

9.5%

7.9%

9.0%

3.9%

7.7%

9.2%

6.9%

41%
296
33%
73%

35%
186
29%
64%

43%
231
32%
75%

44%
340
26%
70%

40%
173
40%
80%

41%
276
34%
75%

40%
380
32%
72%

42%
224
35%
76%

11.9%

9.0%

10.0%

10.0%

11.8%

5.2%

10.7%

12.2%

9.0%

31%
428
34%
65%

32%
293
31%
64%

35%
186
27%
62%

39%
230
31%
70%

35%
340
25%
60%

35%
169
38%
73%

35%
274
32%
67%

32%
380
31%
64%

37%
222
33%
70%

Source: J.P. Morgan estimates. RBS: In 2013E, RBS GBM will be in transition phase of restructuring and hence we have not included the impact of reduction in wholesale funding which in the
longer term we estimate will add up to c.5% to the GBM ROE assuming minimal revenue generation from the reduced TPAs.

2.Further comp reductions required for some Tier II IBs to reach 10.0% and
Tier I IBs to reach 13.0% ROE
In our sensitivity, we also estimate further -7% reduction in comp costs on average
for Tier I IBs (GS, BARC and DBK) to reach 13% ROE in 2013E.
GS remains the best in class IB paymaster in the industry with estimated
$386k in comp/head post the comp reductions, down -16% from estimated $459k
pre-regulation.
DBK and Barclays follow next with $366k and $303k in estimated
comp/head, down -7% and -15%, respectively, from our current estimate for
2013E of average $375k in comp/head.
Tier II Institutional IBs CS, UBS and MS would have average comp/head of
$251k in our sensitivity analysis, down -9% on average from our current estimate
for 2013E of average $285k in comp/head.
French IBs BNP and SG should continue to operate with low comp/head
with BNP comp/head declining -8% to $201k in our sensitivity analysis while
SG comp/head declines to $244k from $259k per head pre regulations.

109

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

In 2013E, RBS GBM will be in transition phase of restructuring and hence we


have not included the impact of reduction in wholesale funding which in the
longer term we estimate will add up to c.5% to the GBM ROE assuming minimal
revenue generation from the reduced TPAs. We believe further extensive
restructuring/ cost cuts might not be needed if the Group successfully achieves
outlined wholesale funding reduction without significant loss of revenues.
Table 78: Global Investment Banking ROE 2013E: Sensitivity on roadmap to 13% ROE for Tier I IBs and 10% for Tier II Institutional IBs
%, local currency
CS

UBS

DB

GS

MS

BNP

SG

BARC

RBS

Avg./
Total

Avg.
Tier I

Avg.
Tier II

13.9%
44%
267
-42%

12.7%
47%
254
-45%

12.8%
40%
393
-14%

15.7%
40%
459
0%

12.6%
40%
333
-27%

16.2%
35%
218
-52%

14.6%
43%
259
-44%

14.1%
44%
358
-22%

10.0%
37%
218
-53%

13.6%
41%
306
-33%

14.2%
41%
403
-12%

13.3%
41%
258
-44%

6.9%
6.9%

7.4%
7.4%

6.4%
6.4%

6.8%
8.6%

6.7%
8.0%

9.7%
10.0%

5.5%
5.6%

6.9%
8.8%

4.5%
6.1%

6.8%
7.5%

6.7%
7.9%

6.8%
7.3%

44%
257
-40%

47%
238
-45%

40%
370
-14%

40%
428
0%

41%
314
-27%

35%
201
-53%

43%
244
-42%

47%
340
-21%

40%
205
-52%

42%
288
-33%

43%
380
-11%

42%
243
-43%

15,147
7.5%

0
7.4%

55,000
7.8%

90,000
8.1%

20,000
7.1%

15,000
10.4%

57,000
8.5%

14,000
7.3%

15,000
5.1%

7.7%

7.7%

7.6%

7.5%

7.4%

7.8%

10.6%

8.5%

10.7%

8.6%

9.3%

6.8%

8.6%

9.2%

8.2%

-0.6%
6.9%

-0.6%
6.7%

0.8%
9.5%

0.8%
9.0%

-0.7%
6.6%

-0.5%
9.5%

-0.3%
7.9%

0.7%
9.0%

-0.6%
3.9%

7.7%

9.2%

6.9%

6.9%

6.7%

9.5%

11.8%

8.0%

9.8%

8.0%

10.9%

5.6%

8.6%

10.8%

7.5%

Staff cuts and non-comp cost


reduction (-5%)
Headcount reduction
Non comp cost reduction (-5%)

-11%
-2,078
-217

-14%
-2,243
-143

-20%
-4,156
-348

-20%
-4,329
-405

-20%
-3,980
-248

0%
0
-166

-9%
-1,221
-123

-20%
-4,320
-201

-10%
-1,400
-137

-23,726

Resulting IB ROE
Resulting IB ROE (ex reg arbitrage)
IB comp ratio
IB non comp ratio
IB cost/income

10.0%
10.0%
39.4%
37.9%
77.2%

10.0%
10.0%
40.2%
34.0%
74.3%

12.9%
12.9%
30.6%
34.8%
65.3%

11.9%
15.4%
31.2%
33.6%
64.9%

9.0%
10.6%
32.5%
31.1%
63.6%

10.0%
10.3%
34.9%
27.3%
62.2%

10.0%
10.2%
39.1%
30.5%
69.6%

11.8%
13.8%
35.2%
25.2%
60.3%

5.2%
7.0%
35.5%
37.8%
73.2%

10.7%
11.6%
35.4%
31.8%
67.2%

12.2%
14.0%
32.3%
31.2%
63.5%

9.0%
9.7%
36.9%
33.1%
70.0%

Comp reducn. reqd to get back to 10%/


13%
Cut in IB comp to get back to 10%/13%
IB ROE
Resulting IB comp ratio
IB comp/head ($ thousands)
IB comp differential vs. best in class

0%
10.0%
39.4%
257
-33%

0%
10.0%
40.2%
238
-38%

-1%
13.0%
30.2%
366
-5%

-10%
13.0%
28.1%
386
0%

-12%
10.0%
28.3%
276
-28%

0%
10.0%
34.9%
201
-48%

0%
10.0%
39.1%
244
-37%

-11%
13.0%
31.3%
303
-21%

nm
-

-10%
11.0%
31.4%
262
-32%

-7%
13.0%
29.9%
352
-9%

-4%
10.0%
32.2%
243
-44%

Pre regulation
IB ROE
IB comp ratio
IB comp/head ($ thousands)
IB comp differential vs. best in class
Post regulation
IB ROE post regulation
IB ROE post regulation (ex regulatory
arbitrage)
IB comp ratio
IB comp/head ($ thousands)
IB comp differential vs. best in class
Impact from legacy asset/ additional
RWA reduction
Legacy asset/ additional RWA reduction
IB ROE post legacy asset/ additional
RWA reduction
IB ROE post legacy asset/ additional
RWA reduction (ex regulatory
arbitrage)
Post Market Share movements
Movement in market share
IB ROE post market share movements
IB ROE post market share movements
(ex reg arbitrage)

-14%
-1,988

Source: J.P. Morgan estimates. RBS: In 2013E, RBS GBM will be in transition phase of restructuring and hence we have not included the impact of reduction in wholesale funding which in the
longer term we estimate will add up to c.5% to the GBM ROE assuming minimal revenue generation from the reduced TPAs.

110

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 79: Global Investment Banks: Key ratios: Sensitivity on roadmap to attaining 13% and 10% ROE in 2013E for Tier I and Tier II IBs
%
CS

UBS

DB

GS

MS

BNP

SG

BARC

RBS

Avg.

IB ROE pre regulation


IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

13.9%
44%
267
38%
82%

12.7%
47%
254
33%
80%

12.8%
40%
393
34%
74%

15.7%
40%
459
32%
72%

12.6%
40%
333
30%
70%

16.2%
35%
218
26%
61%

14.6%
43%
259
30%
73%

14.1%
44%
358
22%
66%

10.0%
37%
218
32%
69%

IB ROE post regulation


IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

6.9%
44%
257
40%
84%

7.4%
47%
238
35%
83%

6.4%
40%
370
37%
77%

6.8%
40%
428
35%
75%

6.7%
41%
314
32%
73%

9.7%
35%
201
29%
63%

5.5%
43%
244
32%
75%

6.9%
47%
340
26%
73%

IB ROE post legacy asset/ additional


RWA reduction
IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

7.5%

7.4%

7.8%

8.1%

7.1%

10.4%

8.5%

44%
257
40%
84%

47%
238
35%
83%

40%
370
37%
77%

40%
428
35%
75%

41%
314
32%
73%

35%
201
29%
63%

IB ROE post market share


movements
IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

6.9%

6.7%

9.5%

9.0%

6.6%

44%
240
40%
84%

47%
218
36%
83%

38%
370
36%
74%

39%
428
35%
74%

10.0%

10.0%

12.9%

39%
238
38%
77%

40%
215
34%
74%

Ratios Pre regulation and post


10%/13% ROE
Pre regulatory changes
IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

44%
267
38%
82%

Post 10%/13% ROE


Resulting IB comp ratio
Resulting IB comp/head ($ thousands)
Resulting IB non-comp ratio
Resulting IB cost/income ratio
% change in ratios
IB comp/head
IB cost/income ratio

IB ROE post additional staff cuts/noncomp cost reductions


IB comp ratio
IB comp/head ($ thousands)
IB non-comp ratio
IB cost/income ratio

13.6%
41%
306
31%
72%

Avg.
Tier I
14.2%
41%
403
30%
71%

Avg.
Tier II
13.3%
41%
258
31%
72%

4.5%
40%
205
38%
78%

6.8%
42%
288
34%
76%

6.7%
43%
380
33%
75%

6.8%
42%
243
34%
76%

7.3%

5.1%

7.7%

7.7%

7.6%

43%
244
32%
75%

47%
340
26%
73%

40%
205
38%
78%

42%
288
34%
76%

43%
380
33%
75%

42%
243
34%
76%

9.5%

7.9%

9.0%

3.9%

7.7%

9.2%

6.9%

41%
297
33%
73%

35%
186
29%
64%

43%
231
32%
75%

44%
340
26%
70%

40%
173
40%
80%

41%
276
34%
75%

40%
380
32%
72%

42%
224
35%
76%

11.9%

9.0%

10.0%

10.0%

11.8%

5.2%

10.7%

12.2%

9.0%

31%
370
35%
65%

31%
428
34%
65%

32%
293
31%
64%

35%
186
27%
62%

39%
230
31%
70%

35%
340
25%
60%

35%
169
38%
73%

35%
274
32%
67%

32%
380
31%
64%

37%
222
33%
70%

47%
254
33%
80%

40%
393
34%
74%

40%
459
32%
72%

40%
333
30%
70%

35%
218
26%
61%

43%
259
30%
73%

44%
358
22%
66%

37%
218
32%
69%

41%
306
31%
72%

41%
403
30%
71%

41%
258
31%
72%

39%
257
38%
77%

40%
238
34%
74%

30%
366
35%
65%

28%
386
34%
62%

28%
276
31%
59%

35%
201
27%
62%

39%
244
31%
70%

31%
303
25%
56%

nm
-

31%
262
32%
66%

30%
352
31%
61%

32%
243
33%
65%

-4%
-6%

-6%
-7%

-7%
-12%

-16%
-15%

-17%
-15%

-8%
3%

-6%
-4%

-15%
-15%

-15%
-9%

-13%
-14%

-6%
-10%

Source: J.P. Morgan estimates. RBS: In 2013E, RBS GBM will be in transition phase of restructuring and hence we have not included the impact of reduction in wholesale funding which in the
longer term we estimate will add up to c.5% to the GBM ROE assuming minimal revenue generation from the reduced TPAs.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Global IB restructuring targets announced so far


UBS: UBS announced a SF2bn cost reduction program based on their run rate as of
the end of 2Q11 to be realised by 2013E and IB Basel 3 RWA reduction to SF150bn
by 2013 mainly coming from exiting asset securitization and complex structured
products business, down-sizing FICC global correlation, macro directional trading,
small decrease in US credit flow, short end flow rates business, synthetic equity and
equity linked products. UBS said it will completely exit equity prop trading. UBS
also announced in August 2011 plans to cut 3,500 jobs at group level, 45% of which
is expected to be in IB .
CSG: CSG announced expense reduction of SF2.0bn by end 2013, SF1.4bn of which
would come from the IB. The target also includes RWA reduction from SF270bn to
SF170bn by 2014. The target would be achieved by exiting CMBS origination,
downscaling securitized products business, exiting long dated unsecured trades in
rates, commodities and emerging markets. The actions are expected to imply RWA
reduction of Sfr40bn in macro rates, SF 30Bn in securitised products and SF10bn in
credit.
DB: DB announced in Q3 11headcount reduction of c500 personnel to be realized in
4Q11 - 1Q12.
GS: GS announced in Q2 2011 target of c.$1.2 billion in run rate compensation and
non-compensation reductions which was later increased to $1.4 billion. As part of the
cost-savings program, GS indicated headcount reductions in the range of 1,000
people globally.
MS: In Dec-11, press reported that that MS plans to reduce staff by 1,600 globally
across all divisions in 1Q 12.The report contained confirmation by an MS spokesman
although the company issued no press release.
Barclays: Barclays, during their investor day announced reduction of 29bn legacy
RWAs with minimal revenue impact and 1bn costs saves by 2013E. With FY11
results they increased the cost saves target to 2bn.
BNP: BNP is targeting 45bn RWA reduction in CIB by end of 2012 i.e. 57bps
capital improvement through down-scaling structured finance activities. The
measures will generate cost savings of 450mn. BNP also aims to structurally reduce
USD funding by $60bn by 2012.
SG: SocGen is targeting RWA reduction of 30-40bn mainly through legacy assets
reduction and CIB business that are affected by regulations and consuming USD
funding. US real estate financing, aircraft/shipping finance, leveraged finance &
asset based finance are the areas expected to be affected and legacy asset portfolio is
expected to decline to 10bn in 2013 from 17bn end 2011. The measures are
expected to generate 250mn cost savings and staff level reduction of 880 in France.
UCG: UCG management is implementing a restructuring plan aimed at improving
the cost base by 10% by 2015 i.e. 1.5bn savings and RWA reduction of 35bn by
2015. The measures include exiting unprofitable business such as cash equities and
reallocating capital within areas in the division.

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Europe Equity Research


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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 80: Global Investment Banks: Announced Deleveraging Plans [1/2]

Bank

GS

Restructuring plans announced


Announced in Q2 2011 plans to generate cost-savings
of $1.2Bn annually. Revised the savings target to
$1.4Bn in Q4 2011. Separately, GS sold servicing
platform, Litton, and consolidated the rest of Australian
operations in Q3 2011 resulting into headcount
reduction of about 800.

Staff
1,000 heads
globally over the
course of 2011 as
a part of the cost
savings initiative

Exit asset securitization and complex structured


products. Small to medium decrease in US FICC credit
flow. small decrease in short-end flow rates and large
decrease in long end flow rates. Large decreases in
FICC global correlation. Exit Macro Directional Trading.
small to medium decrease in synthetic equity and equity
linked. Exit equity prop trading

Announced in
August 11: 3,500
job cuts across
the firm, 45% to
come from IB

CS

Exit CMBS origination, downscale less capital-efficient


businesses Securitized Products. Exit long dated
unsecured trades in rates, commodities and GEM.

Announced in Q2
11-Q3 11: 2,000
job cuts
announced in July
and 1,500
additional in
November

DB

Announced in Q3 11: ~500 net onshore CB&S


headcount reduction during 4Q2011 1Q2012

500

Barclays

Capital
release
expected

Cost Saving
expected

Comment

Legacy Assets

Revenue Impact
guidance

90% reduction in RWAs


arising from legacy
assets. RWA reduction
of 35% by 2016 in core
investment bank. 45% of
this target is expected to
be completed by 2012
and by 2013 80% of the
target shall be achieved

SF28bn of
financial assets
and SF 23bn of
positive
replacement
values,
accounting for
SF80bn Basel 3
RWAs

SF300mn in macro &


SF200mn in credit

$1.4Bn

Dec 2011:
announced plans
to cut 1,600 jobs
globally in Q1
2012

MS

UBS

RWAs reduction
target

Announced during Investor day - reduction of 29bn


legacy assets RWAs and 1bn costs saves
Announced with FY11 results - 1bn additional cost
saves

Total of
approximately SF2
billion reduction
from annual costs
by the end of 2013
IB RWA reduction
target of SF100bn
from 270bn to 170bn
by 2014, of which:
40Bn in Macro rates &
Fx, 30Bn in securitised
products and 10 Bn in
Credit

Total cost savings


of Sf2bn by the
end of 2013,
mostly in IB
division. SF1.2bn
to be realised by
beginning of 2012

limited revenue impact


as majority of
reductions in low
return areas
IAS 39
reclassified
assets 23bn

29bn related to their


credit market portfolio
by 2013E (from 2010
level)

2bn on 2010 level


excluding business
as usual growth.

Credit Market
portfolio of
15.2bn

Credit market assets


ex loans to protium
are P&L neutral, so
minimal revenue
impact

Source: Company reports and J.P. Morgan estimates

113

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 81: Global Investment Banks: Announced Deleveraging Plans - [2/2]

Bank
BNP

Restructuring plans announced


Targets 45bn of RWAs reduction in CIB by end 2012
(57bp capita improvement) mostly in structured
finance activities. Aim to structurally reduce USD
funding by $60bn by 2012. Cost savings expected:
about 450m.

SocGen

30-40bn of RWAs or a reduction of 50-60bn in


liquidity needs. The deleveraging is focused on legacy
assets as well as CIB businesses affected by
regulations and consuming USD funding: certain
capital markets activities, but also US real estate
financing, aircraft/shipping finance, leveraged finance
and asset based finance. Legacy assets portfolio to
decline to 10bn in 2013 from 17bn end 2011.

Unicredit

Management is implementing a restructuring plan


targeted at reducing costs by 1.5bn and RWAs by
35bn through exiting unprofitable business such as
cash equities and relocating capital

Staff
About 1,400 FTEs

880 FTEs in
France

RWAs reduction
target
45bn of RWAs by
end 2012, of which
22bn had been
achieved already end
2011

30-40bn of RWAs by
2013

35bn

Capital
release
expected
57bp of
Basel 3
Common
Equity
capital
Dismantlin
g of CDOs
of RMBS:
1.3bn of
Basel 3
capital
savings
secured by
2013.

Cost Saving
expected

Legacy Assets

Revenue Impact
guidance

450m of cost
savings

Reclassified
legacy assets:
only 4.8bn end
June 2011

0.8bn losses on
disposals and 1.4bn
on a recurring FY
basis

Initial guidance
was about 5% of
cost base or
250m

Legacy assets
net book value:
17bn end 2011,
of which
reclassified
legacy assets
12.4bn.

0.5-0.7bn losses on
disposals and 750m
on a recurring FY
basis

Comment

1.5bn

Source: Company reports and J.P. Morgan estimates

114

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Global Investment Banking Revenue


Breakdown by Product

Global Investment Banking Revenue


Breakdown by Product

115

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Global Investment Banking Revenue Breakdown by Product 2010-13E


Table 82: Investment Banking Revenue Breakdown by product 2010E
$ million
JPM
IB Fees
Advisory
Equity Underwriting
Debt Underwriting
Other
Total
Fixed Income Markets
SPG
Credit Trading
FX & Rates
FX
Rates
GEM
Commodities
Prop trading/hedge gains/others
Total Fixed Income Markets clean
Gains on own debt/writedowns/other
Total Fixed Income Markets
Equity Markets
Equity Derivatives
Cash equities
Prime brokerage
Prop trading/other equity-related
Brokerage, Clearing, exchange, distribun. fees
Total equities clean
Gains/losses on own debt
Total equities
Credit Portfolio
Underlying
CVA
Other
Total Revenues Clean

6,186

14,738
15,025

4,583
4,763

GS

MS

UBS

CS

DB

BNPP

SG

BARC

HSBC

RBS

STAN
CHAR

Citi

BofA

CASA

2,062
1,462
1,286

1,470
1,454
1,371

761
867
887

1,135
938
2,100

754
929
1,578

158
100
691

60
90
350

713
570
1,569

408
326
898

97
54
70

720
937
2,171

1,018
1,329
3,059

107
100
184

4,810

4,295

2,515

4,173

3,262

949

500

842
549
1,917
353
3,661

2,852

1,632

222

3,828

5,406

392

619
4,083
6,033
1,702
4,331
510
2,631
-379
13,497
210
13,707

578
1,386
2,513
877
1,636
360
1,752
0
6,589
-704
5,885

266
2,135
2,195
1,315
880
543
147
144
5,430
481
5,912

2,613
1,669
2,071
650
1,422
822
268
-251
7,192
-477
6,715

918
3,156
6,479
3,049
3,431
1,513
899
477
13,441
-619
12,823

284
344
4,280
1,259
3,021
326
205
989
6,428
6,428

99
323
2,070
737
1,333
148
105
487
3,232
132
3,364

808
1,886
5,968
853
5,115
1,462
959
218
11,301
112
11,413

2,052
577
1,922
1,101
821
2,814
0
645
8,010
452
8,462

490
1,307
2,800
834
1,965
1,555
0
443
6,594
205
6,799

157
2,037
1,200
837
206
2,400

12,528
423
12,951

92
99
1,234
507
727
64
111
177
1,777
-43
1,734

3,501
3,226
1,432
0
-1,711
6,448
70
6,518

1,311
1,575
1,663
414
-644
4,318
-122
4,196

1,645
1,846
1,079
22

1,462
1,133
835
647

2,363
80
162
63

2,903
208
136

1,105
414
1,260
230

264
378
1,649
113

482
550
138
206

206
-

4,592
64
4,655

1,860
2,491
1,383
538
-900
5,371
-142
5,229

4,077
14
4,092

2,668
2,668

3,246
3,246

3,009
3,009

2,404
2,404

1,376
1,376

206

24,755

-439
-439
14,763

12,537

16,736

2,848
2,848
23,629

5,750
5,750
15,795

3,112
3,112
10,091

1,400
1,400
19,371

495
495
13,761

2,068
2,068
11,670

2,400

14,263
-189
14,074

444
622
0
176

206

3,708
-207
3,501

4,144
4,144

1,242
1,242

962
962

3,272
3272

3,580
3,580

2,827

23,515

27,611

6,991

Source: J.P. Morgan estimates, Company data. Note: Credit Portfolio for French banks includes financing activities revenues (e.g. corporate lending, structured finance, energy & commodities), French banks disclosures differ from IB peers, as a result, revenues
estimates are not entirely comparable.*GS only institutional Client services revenues for Fixed Income and equities. Barc clean revenues is adjusted for 200mn gain on gilts. JPM FICC revenues adjusted for $287m DVA gains in FICC, Equities revenues adjusted for
$181m DVA gains in Equities.

116

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 83: Investment Banking Revenue Breakdown by product 2010E


$ million
Natixis
IB Fees
Advisory
Equity Underwriting
Debt Underwriting
Other
Total
Fixed Income Markets
SPG
Credit Trading
FX & Rates
FX
Rates
GEM
Commodities
Prop trading/hedge gains/others
Total Fixed Income Markets clean
Gains on own debt/writedowns/other fixed income
Total Fixed Income Markets
Equity Markets
Equity Derivatives
Cash equities
Prime brokerage
Prop trading/other equity-related
Brokerage, Clearing, exchange and distribution fees
Total equities clean
Gains/losses on own debt
Total equities

Nomura

20
25
30
75
0
36
487
197
290
33
132
82
769
70
839

1,269

2,874
2,874

416
217
0
121

Macquarie
Group

ING

VTB

RBC

53
0
15

4
10
17

133
97
661

38
53
108

31
24
43

893

270

268

68

31

891

199

98

0
0
326
43
283
0
471
401
1,197
1,197

24
16
346
330
16
0
0
0
386
386

124
371
1,359
865
494
494
124
0
2,471

7
22
81
52
30
30
7
1
148

111
28
28

329
1,119
560
560

2,471

254
1,017
0
0

77
106
106
0
288
288

754

2,761

1,271

3,892

Investec

55
57
156

1,271

Total Revenues Clean

EFG
Hermes

MB

72
99
99

2,761

2,293
2,293

UCG

518
251
125

754

Credit Portfolio
Underlying
CVA
Other

SEB

1,199

ICICI
BANK7

29

186
745
1,136
204
932
204

139

1,448

30

2,272

45

148

139

1,448

30

2,272

45

771
302
59
36

48
26
4
9

47
47
221

1,164

87

315

377

455

3,152

1,164

87

315

377

455

3,152

3,903

303

1,344

2,024

6,623

204

0
0
0
6,904

3,361

944

Source: J.P. Morgan estimates, Company data. Note: 7. ICICI Bank equity revenues exclude broking revenues of $123mn (mostly retail broking.) ING revenues Estimated from 9M-11 disclosure with Investor day 2011 using average IB universe growth rates.

117

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kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 84: Investment Banking Revenue Breakdown by product 2011E


$ million
GS

MS

UBS

CS

DB

BNPP

SG

BARC

HSBC

RBS

STAN
CHAR

Citi

BofA

CASA

1,987
1,085
1,283

1,737
1,132
1,359

441
725
395

976
819
1,641

874
788
1,485

145
130
517

80
100
370

645
548
2,030

189
189
882

54
44
102

684
672
1,954

1,246
1,303
2,693

144
100
217

5,859

4,355

4,228

1,562

3,437

3,147

793

550

792
516
1,762
373
3,443

3,223

1,260

200

3,310

5,242

461

14,873

495
2,450
1,617
3,586
459
2,105
-1,994
8,718

376
901
921
1,751
288
1,314
-220
5,330

177
1,588
1,510
1,469
450
153
-42
5,305

1,359
1,149
518
1,606
939
321
-1,028
4,864

785
2,361
3,194
3,301
1,585
1,018
-582
11,662

243
239
1,144
2,584
331
198
941
5,679

95
259
709
1,211
150
107
72
2,604

617
1,439
607
3,642
2,253
683
342
9,583

1,436
144
1,156
503
2,781
0
443
6,464

628
879
977
1,521
1,176
0
312
5,493

126
1,560
921
288
2,894

10,896

8,103

99
84
488
661
69
118
55
1,573

15,337

0
8,718

3,672
9,002

-174
5,131

-437
4,427

299
11,961

-1,227
4,452

-122
2,481

-116
9,467

6,464

635
6,128

2,894

1,367
12,263

765
8,868

1,573

3,326
3,188
1,598
0

1,665
2,016
2,062
429

1,178
1,687
1,149
198

1,615
2,233
1,312
-12

1,188
1,235
928
-55

2,223
81
168
162

3,010
178
0
160

1,132
424
1,033
226

370
529
577
159

498
569
142
213

0
288
0
0

-1,847
6,265
150
6,415

-743
5,428
599
6,027

4,212
-2,106
2,106

-625
4,524
248
4,772

3,296
111
3,407

2,634
0
2,634

3,348
0
3,348

2,815

1,634

1,422

288

2,815

1,634

1,422

0
0
0
0

0
0
0
0

0
0
0
0

0
0
0
0

2,404
2,404
0
0

6,025
6,025
0
0

2,922
2,922
0
0

700
700
0
0

124
124
0
0

19,338
19,488

14,986
19,257

11,079
8,799

12,824
12,635

20,509
20,919

15,130
13,903

9,424
9,301

16,541
16,425

11,444
11,444

JPM
IB Fees
Advisory
Equity Underwriting
Debt Underwriting
Other
Total
Fixed Income Markets
SPG
Credit Trading
FX
Rates
GEM
Commodities
Prop trading/hedge gains/others
Total Fixed Income Markets Clean
Gains on own debt/writedowns/other
fixed income
Total Fixed Income Markets
Equity Markets
Equity Derivatives
Cash equities
Prime brokerage
Prop trading/other equity-related
Brokerage, Clearing, exchange and
distribution fees
Total equities clean
Gains/losses on own debt
Total equities
Credit Portfolio
Underlying
CVA
Other
Total Revenue Clean
Total Revenue

4,412
4,832

332
698
23

288

2,400
356
2,756

3,744
224
3,968

1,054
0
1,054

2,013
2,013
0
0

1,802
1202

3,092
3,092

3,520
3,520

10,187
10,822

3,381
3,381

22,629
23,618

6,608
6,608

600
19,035
21,417

Source: J.P. Morgan estimates, Company data. Note: Credit Portfolio for French banks includes financing activities revenues (e.g. corporate lending, structured finance, energy & commodities), French banks disclosures differ from IB peers, as a result, revenues
estimates are not entirely comparable.*GS only institutional Client services revenues for Fixed Income and equities. JPM FICC revenues adjusted for DVA gain of $70m in 2Q, $529m in Q3 and DVA loss of $135m in 4Q 2011. Q2 2011 DVA gains of $140m in trading
equally divided between FICC & Equity Markets. JPM Equities revenues adjusted for DVA gains of $70m in 2Q, $377m in Q3 and DVA loss of $27m in Q4 2011. Q2 2011 DVA gains of $140m in trading equally divided between FICC & Equity Markets.

118

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Kian Abouhossein
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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 85: Investment Banking Revenue Breakdown by product 2011E


$ million
Natixis

Nomura

Macquarie
Group

SEB

UCG

MB

Investec

ING

VTB

RBC

Jefferies*

Lazard

ICICI
BANK7

20
25
30

372
234
248

388
214
65

55
68
123

35
36
15

134
92
504

100
52
100

51
37
43

667

75
103
103
0
280

246

86

731

253

1,123

1,088

33

3,193

0
0
55
58
0
648
449
1,210

26
16
368
16
0
0
0
427

103
309
721
412
412
103
0
2,059

2
5
12
7
7
2
1
35

169
42
211

33
519
519
1,071

131
627

1,496

75

854

Fixed Income Markets


SPG
Credit Trading
FX
Rates
GEM
Commodities
Prop trading/hedge gains/others
Total Fixed Income Markets Clean

0
0
169
232
32
120
13
565

120
481
175
601

1,553

715

35

Equity Markets
Equity Derivatives
Cash equities
Prime brokerage
Prop trading/other equity-related
Total equities clean

324
186
0
40
550

2,427

238
954
0
0
1,192

78
107
107
0
292

877
344
67
37
1,325

250
136
23
45
454

161
230

2440

594

350

-502

Credit Portfolio
Underlying
CVA
Other

2,253
2,253

Total Revenue Clean

3,444

6,473

3,069

999

3,629

575

1,172

1,673

256

5489

2431

1088

180

IB Fees
Advisory
Equity Underwriting
Debt Underwriting
Other
Total

35
35

175

Source: J.P. Morgan estimates, Company data. Note. 7. ICICI Bank equity revenues exclude broking revenues of $111mn (mostly retail broking). * Year ending November for Jefferies. ING revenues estimated from 9M-11 disclosure with Investor day 2011 using
average IB universe growth rates.

119

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 86: Investment Banking Revenue Breakdown by product 2012E


$ million

IB Fees
Advisory
Equity Underwriting
Debt Underwriting
Other
Total
Fixed Income Markets
SPG
Credit Trading
FX & Rates
FX
Rates
GEM
Commodities
Prop trading/hedge gains/others
Total Fixed Income Markets
Equity Markets
Equity Derivatives
Cash equities
Prime brokerage
Prop trading/other equity-related
Brokerage, Clearing, exchange and
distribution fees
Total equities
Credit Portfolio
Underlying
CVA
Other
Total Revenue

GS

MS

UBS

CS

DB

BNPP

SG

BARC

HSBC

RBS

STAN
CHAR

Citi

BofA

CASA

1,722
893
1,500

1,890
1,188
1,223

415
681
372

1,019
681
1,272

841
661
1,304

97
170
502

110
130
400

728
692
2,221

125
125
999

59
49
113

445
505
2,041

1,218
1,292
2,296

159
100
220

4,115

4,301

1,467

2,972

2,806

769

640

837
546
1,869
388
3,641

3,641

1,249

222

2,992

4,806

480

549
3,429
4,591
1,471
3,120
482
2,126
283
11,461

368
919
2,614
875
1,739
291
1,353
0
5,546

134
1,332
2,759
1,440
1,318
418
146
0
4,789

1,181
1,106
1,734
445
1,289
860
273
342
5,496

682
2,030
5,990
2,982
3,008
1,480
951
315
11,448

202
177
3,154
1,005
2,150
321
192
395
4,441

83
191
1,564
590
974
139
99
167
2,244

587
1,391
4,107
602
3,505
2,508
690
262
9,545

1,896
296
2,133
1,361
773
3,106
554
7,984

361
1,082
2,402
854
1,548
1,140
300
5,284

0
141
2,704
1,700
1,004
0
302
0
3,147

10,200

91
74
978
428
550
67
0
114
1,324

3,459
3,296
1,662
0

1,732
2,097
2,123
107

1,244
1,505
931
0

1,583
2,107
1,259
0

1,120
1,165
870
0

2,158
78
160
101

2,922
169
0
161

1,166
450
1,027
230

452
646
594
194

726
363
145
218

0
302
0
0

-1,847
6,570

-743
5,315

3,678

-650
4,298

3,155

2,497

3,252

2,873

1,886

1,451

302

2,637

3,400

795

2,257
2,257
-

4,804
4,804
-

1,929
1,929
-

650
650
-

253
253
-

1,970
1,970
-

0
0
-

1,357
1,457
-100
-

N/A
-650
-

2,767
2,767

22,145

15,162

9,935

12,766

19,666

12,512

8,066

16,709

13,763

9,954

3,670

18,931

5,365

10,533

0
678
0
117

Source: J.P. Morgan estimates. Note: Credit Portfolio for French banks includes financing activities revenues (e.g. corporate lending, structured finance, energy & commodities), French banks disclosures differ from IB peers, as a result, revenues estimates are not
entirely comparable.*GS only institutional Client services revenues for Fixed Income and equities.

120

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 87: Investment Banking Revenue Breakdown by product 2012E


$ million
Natixis

Nomura

Macquarie
Group

20
25
30
75

462
397
256
1,115

427
235
72
734

Fixed Income Markets


SPG
Credit Trading
FX
Rates
GEM
Commodities
Prop trading/hedge gains/others
Total Fixed Income Markets

0
0
140
182
29
111
6
469

3,517

Equity Markets
Equity Derivatives
Cash equities
Prime brokerage
Prop trading/other equity-related
Total equities

307
177
0
37
521
1,942
1,942
3,006

IB Fees
Advisory
Equity Underwriting
Debt Underwriting
Other
Total

Credit Portfolio
Underlying
CVA
Other
Total Revenue

SEB

UCG

MB

Investec

ING*

VTB

RBC*

Jefferies*

Lazard*

70
96
96

52
64
116

33
34
14

126
87
475

95
49
95

262

232

81

689

238

54
40
50
143

1,410

1,058

1,025

0
0
59
62
0
700
485
1,307

26
22
362
22
0
0
0
432

99
298
695
397
397
99
0
1,986

6
18
41
24
24
6
1
118

169
42

71
532
532

202
730
170
557

2,776

257
1,030
1,287

81
111
111
0
303

798
120
60
20
997

333
24
71
48
476

7,408

3,328

997

3,215

1,135

528

1,842

758

163
233

2,467

600

353

366

674

1,132

1,727

1,038

5,719

2,416

1,025

211
35
35

177

Source: J.P. Morgan estimates. Note: *Forecasts using 2011 reported numbers and average growth rate for the sector. Year ending November for Jefferies. ING revenues estimated from 9M-11 disclosure with Investor day 2011 using average IB universe growth
rates.

121

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 88: Investment Banking Revenue Breakdown by product 2013E


$ million

IB Fees
Advisory
Equity Underwriting
Debt Underwriting
Other
Total
Fixed Income Markets
SPG
Credit Trading
FX
Rates
GEM
Commodities
Prop trading/hedge gains/others
Total Fixed Income Markets
Equity Markets
Equity Derivatives
Cash equities
Prime brokerage
Prop trading/other equity-related
Brokerage, Clearing, exchange and
distribution fees
Total equities
Credit Portfolio
Underlying
CVA
Other
Total Revenue

GS

MS

UBS

CS

DB

BNPP

SG

BARC

HSBC

RBS

STAN
CHAR

Citi

BofA

CASA

1,825
947
1,590

1,941
1,260
1,284

435
715
390

1,060
708
1,323

883
694
1,370

111
170
527

110
130
400

801
801
2,403

88
88
1,085

66
54
126

553
591
2,184

1,552
1,550
2,526

185
100
242

4,362

4,485

1,541

3,090

2,947

808

640

947
631
1,952
415
3,944

4,005

1,262

246

3,328

5,628

528

549
3,429
1,545
3,097
511
2,188
302
11,621

368
919
888
1,722
297
1,373
0
5,568

129
1,287
1,455
1,331
439
147
0
4,789

1,145
1,106
454
1,292
885
280
0
5,162

669
2,030
3,041
3,008
1,508
989
260
11,505

202
159
954
1,935
353
221
332
4,156

83
163
561
877
153
114
164
2,114

570
1,349
626
3,575
2,734
725
221
9,799

1,915
331
1,497
837
3,341
0
606
8,527

361
1,082
812
1,497
1,101
0
293
5,145

0
156
1,870
1,104
0
302
0
3,433

10,500

91
70
407
495
70
0
107
1,240

0
3,701
3,398
1,745
0

0
1,835
2,222
2,251
111

1,281
1,550
960
0

1,617
2,234
1,311
0

1,154
1,204
891
0

2,266
82
165
134

3,068
174
0
173

1,248
495
1,033
242

506
723
600
217

897
224
149
224

0
302
0
0

-1,847
6,997

-743
5,676

3,791

-650
4,513

3,249

2,646

3,415

3,016

2,046

1,495

302

2,769

3,550

771

2,275
2,275
-

4,811
4,811
-

1,897
1,897
-

600
600
-

284
284
-

1,983
1,983
-

1,559
1,559
-

2,797
2,797

22,980

15,729

10,121

12,766

19,976

12,421

8,066

17,360

14,862

9,884

3,981

20,157

5,335

11,059

0
712
59

Source: J.P. Morgan estimates. Note: Credit Portfolio for French banks includes financing activities revenues (e.g. corporate lending, structured finance, energy & commodities), French banks disclosures differ from IB peers, as a result, revenues estimates are not
entirely comparable.*GS only institutional Client services revenues for Fixed Income and equities.

122

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Kian Abouhossein
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kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 89: Investment Banking Revenue Breakdown by product 2013E


$ million
Natixis

Nomura

Macquarie
Group

SEB

UCG

MB

Investec

ING*

VTB

20
25
30

462
487
308

469
259
79

76
105
105

54
67
120

34
35
15

131
90
492

98
51
98

55
43
47

75

1,256

807

285

241

84

714

247

Fixed Income Markets


SPG
Credit Trading
FX
Rates
GEM
Commodities
Prop trading/hedge gains/others
Total Fixed Income Markets

0
0
133
173
32
116
6
461

4,074

0
0
64
67
0
756
524
1,411

28
28
377
28
0
0
0
460

99
297
693
396
396
99
0
1,979

6
18
41
24
24
6
1
118

169
42
211

Equity Markets
Equity Derivatives
Cash equities
Prime brokerage
Prop trading/other equity-related
Total equities

321
184
0
37
542

3,136

0
278
1,112
0
1,390

82
112
112

349
25
75
50
498

37
37

307

833
125
63
21
1,042

Credit Portfolio
Underlying
CVA
Other

1,811
1,811

Total Revenue

2,889

8,466

3,609

1,052

3,261

IB Fees
Advisory
Equity Underwriting
Debt Underwriting
Other
Total

RBC*

Jefferies*

Lazard*

145

1,461

1,096

1,062

71
529
529
1,129

550

198
721
172
548

1,828

754

171
244

370

450

2,584

629

700

1,168

1,746

1,145

5,873

2,478

1,062

183

Source: J.P. Morgan estimates. Note: *Forecasts using 2011 reported numbers and average growth rate for the sector. Year ending November for Jefferies. ING revenues estimated from 9M-11 disclosure with Investor day 2011 using average IB universe growth
rates.

123

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

This page is intentionally blank

124

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Europe Equity Research


13 March 2012

Global Investment Banking P&L Quarterly and


Yearly trends

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Global Investment Banking P&L Quarterly


and Yearly trends

125

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Europe Equity Research


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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Quarterly IB Revenue Progression


Table 90: Quarterly Clean Fixed Income Revenue Progression
$ million
CS
UBS
DB
BofA
Citigroup
MS
GS
BNP
Socgen
CASA
Natixis
Barclays
RBS
HSBC
Nomura
MQG1
SEB
UCG**
MB2
Investec
VTB
Total3

Q1 10
2,569
1,764
5,614
5,352
5,088
2,723
5,917
2,593
1,078
736
151
4,255
3,223
1,901
595
398
94
833
50
30
31,637

Q2 10
1,572
1,302
3,012
2,203
3,488
1,743
3,027
1,539
694
442
214
3,367
1,686
1,827
464
280
121
519
30
40
19,769

Q3 10
1,591
986
3,162
3,247
3,385
1,310
2,827
1,647
892
502
155
3,061
1,583
1,453
931
269
78
646
55
40
18,512

Q4 10
971
977
1,800
1,726
2,302
813
1,726
1,402
596
300
275
2,645
1,479
1,109
884
250
93
474
13
30
13,518

Q1 11
2,786
1,949
4,920
3,996
3,986
1,929
4,325
2,313
1,009
748
198
3,387
2,834
2,152
835
617
102
1062
27
30
22,618

Q2 11
825
1,409
3,327
2,565
2,922
1,430
1,599
1,596
753
534
233
2,615
1,619
1,528
839
260
95
667
-20
60
13,554

Q3 11
755
823
2,061
324
2,271
1,367
1,431
1,137
348
318
99
2,675
666
592
593
155
112
172
14
60
10,598

Q4 11
409
1,108
1,419
1,218
1,717
604
1,363
1,165
501
201
69
1,621
1,179
1,397
926
178
118
158
14
60
8,189

Q1 12E
2,393
1,506
4,293
1,650
3,800
1,821
813
462
3,373
99
19,649

Q2 12E
1,345
1,280
2,797
1,452
3,040
1,171
520
393
2,429
103
14,033

Q3 12E
898
1,032
2,146
1,234
2,432
1,041
488
353
2,283
110
11,555

Q4 12E
860
970
2,212
1,210
2,189
911
423
336
2,111
120
10,885

2011
4,864
5,353
11,662
8,103
10,896
5,330
8,718
6,197
2,604
1,573
565
9,583
5,338
6,464
3,193
1,210
427
2,059
35
211
627
99,994

2012E
5,496
4,789
11,448
10,200
10,533
5,546
11,461
4,441
2,244
1,324
469
9,545
5,003
7,984
3,517
1,307
432
1,986
118
211
528
96,752

2013E
5,162
4,789
11,505
10,500
11,059
5,568
11,621
4,156
2,114
1,240
461
9,799
4,724
8,527
4,074
1,412
460
1,979
119
211
550
98,164

Source: J.P. Morgan estimates, Company data. Notes: i) GS restated Q1 10 onwards FICC client execution from Institutional Client Services, ii) Barc revenues adjusted for credit market revenues & Barc Q410 FICC revenues adjusted for 200mn gain on gilts; iii)
BNP and SG Q3 11 Fixed Income revenues include 362m and 87m of losses on sales of government bonds. 1. Macquarie Group do not disclose quarterly earnings. Quarterly revenue numbers are JPM estimates, derived using half-yearly MQG divisional
disclosures and quarterly trends in global fee pools; 2. Estimated as not disclosed and Q411 not reported, 3.quarterly total for CS, UBS, DB, MS, GS, BNP, Socgen, CASA & Barclays. **Q4 11 estimate

126

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 91: Quarterly Clean Equity Revenue Progression


$ million
CS
UBS
DB
BofA
Citigroup
MS
GS
BNP
Socgen
CASA
Natixis
Barclays
RBS
HSBC
Nomura
MQG1
SEB
UCG**
MB2
Investec
VTB
Total3

Q1 10
1,608
1,187
1,306
1,514
1,218
1,371
2,390
1,169
1,088
523
682
778
496
273
818
349
72
186
30
84

Q2 10
1,605
1,210
740
882
620
1,286
1,554
328
437
493
689
841
356
206
524
300
86
369
20
77

Q3 10
1,225
920
934
967
1,062
1,121
2,042
710
869
481
488
564
311
116
661
322
59
316
17
77

Q4 10
1,440
984
1,134
781
808
1,184
2,033
773
900
519
823
964
282
160
758
300
71
293
20
77

Q1 11
1,740
1,425
1,250
1,256
1,103
1,732
2,322
980
1,252
559
772
874
441
346
773
386
66
307
445
77

Q2 11
1,428
1,209
799
1,092
776
1,801
1,916
976
886
504
811
924
384
266
704
300
75
409
13
51

Q3 11
1,113
766
516
756
289
1,341
2,181
413
667
486
478
544
184
261
433
241
81
440
-17
51

Q4 11
841
778
733
640
232
1,277
1,693
551
555
414
415
481
412
184
516
265
70
169
13
51

Q1 12E
1,345
1,076
911

Q2 12E
1,237
938
781

Q3 12E
1,183
825
715

Q4 12E
1,183
839
748

1,575
2,157
781
976

1,638
2,108
683
846

1,409
2,025
618
650

1,437
2,127
683
781

739

731

717

686

74

77

75

76

11,667

8,563

8,813

9,854

11,574

9,939

7,540

6,909

9,558

8,962

8,143

8,484

2011
5,149
4,212
3,296
3,744
2,400
6,171
8,112
2,909
3,348
1,054
550
2,815
1,255
1,634
2,427
1,192
292
1,325
454
230
-502
53,068

2012E
4,948
3,678
3,155
3,400
2,637
6,059
8,417
2,497
3,252
795
521
2,873
915
1,886
2,776
1,287
303
997
476
233
366
52,402

2013E
5,163
3,791
3,249
3,550
2,769
5,676
8,845
2,646
3,415
771
542
3,016
869
2,046
3,136
1,390
307
1,042
498
244
450
54,398

Source: J.P. Morgan estimates, Company data. Note: GS restated from Q1 10. Including prime services for Barclays. GS institutional client services revenues. . 1.Macquarie Group do not disclose quarterly earnings. Quarterly revenue numbers are JPM estimates,
derived using half-yearly MQG divisional disclosures and quarterly trends in global fee pools; 2. Estimated as not disclosed. Q4 11 not reported; 3.quarterly total for CS, UBS, DB, MS, GS, BNP, Socgen, CASA & Barclays. **Q4 11 estimate

127

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13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 92: Quarterly Clean IBD (Advisory+ECM+DCM) Revenue Progression


$ million
$ millions
CS
MS
GS
DB
UBS
Barclays
Citigroup
BofA
RBS
HSBC
Nomura
MQG1
SEB
Investec
VTB
Total2

Q1 10
839
887
1,203
779
591
1,037
1,057
1,216
741
1,118
335
239
58
208
5,337

Q2 10
917
885
941
663
444
695
674
1,301
868
1,020
230
170
81
212
4,545

Q3 10
906
1,008
1,159
766
429
817
930
1,306
548
1,023
293
194
67
212
5,085

Q4 10
1,293
1,515
1,507
1,065
948
1,295
1,167
1,583
686
1,202
412
290
64
258
7,623

Q1 11
1,012
1,008
1,269
1,015
507
994
851
1,511
540
1,185
301
256
86
258
5,805

Q2 11
1,107
1,473
1,448
1,028
470
1,016
1,085
1,637
540
1,333
166
150
73
160
6,542

Q3 11
737
864
781
530
261
769
736
1,048
175
1,234
175
116
51
156
3,943

Q4 11
570
883
857
585
309
855
638
1,046
521
1,163
211
145
70
156
4,059

Q1 12E
706
1,060
1,000
753
376
981
65
4,877

Q2 12E
730
1,077
1,005
716
358
947
67
4,833

Q3 12E
739
1,055
1,022
658
358
922
60
4,754

Q4 12E
796
1,109
1,088
679
376
927
71
4,974

2011
3,437
4,228
4,355
3,147
1,562
3,443
3,310
5,242
1,260
3,223
854
667
280
731
131
36,084

2012E
2,972
4,301
4,115
2,806
1,467
3,641
2,991
4,806
1,249
3,641
1,115
734
262
689
143
35,013

2013E
3,090
4,485
4,362
2,947
1,541
3,944
3,328
5,598
1,262
4,005
1,256
807
285
714
145
37,707

Source: J.P. Morgan estimates, Company data. Note: GS restated from Q1 10. 1.Macquarie group do not disclose quarterly earnings. Quarterly revenue numbers are JPM estimates, derived using half-yearly MQG divisional disclosures and quarterly trends in global
fee pools ;2.quarterly total for CS, UBS, DB, MS, GS & Barclays. Barclays revenues include Principal Investments

Table 93: Quarterly Clean Total* IB Revenue Progression


$ million
CS
UBS
DB
MS
GS
Citigroup3
Bank of America4
Barclays
RBS
HSBC
Nomura
MQG1
SEB
Investec
VTB
Total2

Q1 10
5,016
3,543
7,699
4,981
9,510
7,725
9,558
6,071
4,459
3,292
1,748
986
224
322

Q2 10
4,094
2,956
4,415
3,914
5,522
5,708
5,877
4,903
2,910
3,053
1,217
750
288
328

Q3 10
3,722
2,336
4,862
3,439
6,028
5,502
6,843
4,443
2,442
2,592
1,886
785
205
329

Q4 10
3,703
2,909
3,998
3,512
5,266
4,580
5,333
4,904
2,447
2,471
2,054
840
227
365

Q1 11
5,537
3,881
7,185
4,669
7,916
6,249
8,239
5,254
3,815
3,683
1,909
1,259
254
365

Q2 11
3,360
3,088
5,154
4,704
4,963
5,334
6,671
4,555
2,543
3,127
1,709
710
243
271

Q3 11
2,605
1,851
3,107
3,572
4,393
4,785
3,522
3,989
1,025
2,087
1,202
512
244
268

Q4 11
1,820
2,196
2,737
2,764
3,913
3,267
4,197
2,956
2,112
2,744
1,656
588
257
268

36,821

25,805

24,829

24,293

34,443

25,824

19,517

16,386

Q1 12E
4,444
2,958
5,956
4,285
6,957
5,093
238
29,693

Q2 12E
3,311
2,576
4,294
4,167
6,153
4,107
247
24,608

Q3 12E
2,820
2,215
3,520
3,698
5,479
3,922
244
21,654

Q4 12E
2,840
2,185
3,639
3,755
5,403
3,723
267
21,546

2011
13,449
11,127
18,106
15,729
21,185
19,035
22,629
15,841
8,175
11,321
6,476
3,069
999
1,172
256
168,220

2012E
13,416
9,935
17,409
15,905
23,993
18,931
18,406
16,059
7,984
13,510
7,235
3,328
997
1,132
1,038
167,403

2013E
13,416
10,121
17,701
15,729
24,827
20,157
19,648
16,760
7,901
14,578
7,617
3,609
1,052
1,168
1,145
173,196

Source: J.P. Morgan estimates, Company data. Note: *GS includes Institutional client services. GS restated Q1 10 onwards. Including principal investments for Barclays. Barc Q410 revenues adjusted for 200mn gain on gilts.1. MQG do not disclose quarterly
earnings. Quarterly revenue numbers are JPM estimates, derived using half-yearly MQG divisional disclosures and quarterly trends in global fee pools; 2. Quarterly Total for CS, UBS, DB, MS, GS & Barclays; 3. Securities and Banking division revenues for Citi, 4.
Global Banking and Markets Segment Revenues for BofA

128

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 94: Quarterly clean IB division compensation ratio


%
%
DB
MS
GS
CS
UBS
BNP
Socgen
CASA
Natixis
Barclays
RBS
HSBC
Nomura
Macquarie Group1
SEB
UCG
Mediobanca
Investec
Average2

Q1 10
37%
44%
48%
44%
53%
32%
35%
35%
34%
38%
32%
32%
47%
40%
27%
31%
33%
36%
41%

Q2 10
46%
34%
49%
46%
56%
36%
44%
39%
32%
35%
33%
31%
46%
47%
24%
37%
27%
38%
43%

Q3 10
42%
42%
52%
51%
65%
35%
37%
39%
37%
43%
40%
33%
48%
47%
26%
35%
32%
40%
46%

Q4 10
47%
46%
26%
52%
45%
38%
45%
45%
39%
58%
34%
37%
42%
41%
30%
32%
30%
40%
45%

Q1 11
45%
44%
44%
48%
52%
31%
39%
39%
34%
45%
36%
29%
42%
41%
26%
28%
26%
41%
44%

Q2 11
47%
50%
44%
50%
56%
33%
43%
42%
35%
48%
39%
31%
52%
55%
26%
33%
29%
41%
47%

Q3 11
54%
47%
50%
70%
78%
32%
48%
45%
47%
44%
48%
41%
58%
55%
25%
44%
42%
53%

Q4 11
53%
51%
37%
86%
55%
41%
65%
72%
45%
50%
30%
36%
37%
60%
26%
42%
55%

Q1 12E
42%
43%
44%
46%
55%
37%
43%
48%
45%
45%

Q2 12E
46%
40%
44%
48%
55%
39%
47%
49%
45%
46%

Q3 12E
44%
41%
44%
48%
53%
38%
53%
50%
46%
46%

Q4 12E
42%
40%
29%
48%
46%
41%
59%
43%
46%
44%

2011
48%
51%
43%
57%
61%
34%
47%
43%
39%
47%
39%
29%
50%
50%
27%

49%

2012E
43%
41%
40%
47%
53%
39%
50%
48%
45%
46%
34%
31%
33%
45%
28%
45%

2013E
42%
40%
40%
44%
47%
36%
49%
45%
44%
44%
31%
32%
32%
45%
28%
43%

Source: J.P. Morgan estimates, Company data. Note: We estimate CB&S comp ratio for DB as compensation expense not disclosed; Institutional securities compensation ratio for MS; GS group level; Assumed 65% of CIB expenses attributable to Investment Banking
for BNP and SocGen. Barc Q110 and Q210 comp ratio back calculated using Comp:total income (not adjusted for own credit and credit market losses) of 38% and 37%. Barc Q310 and Q410 comp ratio back calculated using Comp:total income (excluding own credit)
of 43% in Q310 and 43% in FY10. Barc Q111 ratio back calculated using 44% Comp:total income( excluding own credit). 2. Average for DB, MS, GS, CS, UBS, BNP, Socgen & Barclays.1.MQG do not disclose quarterly earnings. Quarterly revenue numbers are JPM
estimates, derived using half-yearly MQG divisional disclosures and quarterly trends in global fee pools

129

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 95: Quarterly clean IB division non-compensation ratio


%
DB
MS
GS
CS
UBS
BNP
Socgen
CASA
Natixis
Barclays
RBS
HSBC
Nomura
MQG*
SEB
UCG
Mediobanca
Investec
Average**

Q1 10
16%
22%
20%
22%
19%
17%
19%
19%
18%
15%
14%
17%
47%
20%
32%
18%
10%
22%
19%

Q2 10
24%
34%
43%
29%
25%
19%
24%
21%
17%
31%
20%
18%
52%
33%
26%
22%
7%
22%
29%

Q3 10
26%
38%
30%
32%
33%
19%
20%
21%
20%
24%
25%
18%
43%
35%
33%
21%
8%
21%
28%

Q4 10
36%
36%
35%
32%
29%
20%
24%
24%
21%
11%
33%
21%
44%
33%
35%
21%
9%
21%
28%

Q1 11
18%
29%
25%
25%
20%
18%
21%
21%
19%
18%
19%
16%
46%
23%
32%
16%
6%
21%
22%

Q2 11
25%
32%
37%
39%
26%
20%
23%
23%
19%
24%
30%
17%
47%
31%
36%
19%
9%
16%
28%

Q3 11
29%
44%
74%
56%
42%
19%
25%
24%
25%
27%
45%
27%
71%
69%
32%
26%
10%
11%
40%

Q4 11
43%
46%
43%
74%
45%
24%
18%
39%
24%
28%
26%
19%
63%
40%
34%
11%
42%

Q1 12E
21%
31%
29%
29%
28%
22%
26%
26%
19%
36%
25%

Q2 12E
31%
27%
35%
38%
31%
23%
48%
26%
22%
35%
29%

Q3 12E
34%
29%
41%
44%
36%
22%
41%
27%
22%
36%
32%

Q4 12E
38%
33%
41%
46%
39%
24%
29%
23%
24%
35%
35%

2011
31%
35%
39%
40%
32%
21%
21%
28%
21%
20%
34%

2012E
30%
30%
36%
38%
33%
24%
23%
26%
24%
18%
35%

2013E
32%
30%
34%
38%
33%
25%
24%
24%
24%
17%
35%

61%
36%
34%

60%
41%
36%

57%
40%
35%

15%
30%

29%

29%

Source: J.P. Morgan estimates, Company data. Note: We estimate CB&S non-comp ratio for DB as compensation expense not disclosed; Institutional securities compensation ratio for MS; GS at group level; Assumed 35% of CIB expenses attributable to Investment
Banking for BNP and SocGen.Barclays implied non-compensation ratio based on disclosed costs and compensation expense. **Average for DB, MS, GS, CS, UBS, BNP, Socgen & Barclays. *MQG do not disclose quarterly earnings. Quarterly revenue numbers are
JPM estimates, derived using half-yearly MQG divisional disclosures and quarterly trends in global fee pools

130

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 96: Quarterly clean IB division Pre-tax income


$ million
DB
MS
GS
CS
UBS*
BNP
Socgen
CASA
Natixis
Citi1
BofA2
Barclays
RBS
HSBC
Nomura
MQG*
SEB
UCG**
Mediobanca**
Investec
ING
VTB

Q1 10
3,711
2,019
3,799
1,753
1,359
1,566
1,096
962
387
4,350
5,030
2,703
2,416
1,541
327
401
91
284
203
81
520
235

Q2 10
1,383
839
636
971
667
509
442
691
443
1,925
1,277
1,813
1,366
1,418
-424
150
142
236
187
130
323
7

Q3 10
1,514
900
1,972
635
83
713
1,009
763
356
1,613
2,689
1,495
863
1,117
115
146
85
246
65
130
303
343

Q4 10
689
1,382
2,117
622
633
646
392
540
355
958
1,124
1,940
805
874
196
220
78
106
119
196
72
254

Q1 11
2,966
586
2,409
1,610
1,042
1,356
1,120
895
544
2,631
3,737
1,691
1,721
1,871
112
459
103
446
189
114
542
304

Q2 11
1,414
872
942
380
416
910
786
686
485
1,373
2,045
1,350
792
1,487
-89
100
89
361
206
80
272
222

Q3 11
584
297
1,321
(727)
(393)
541
283
538
155
1,029
(973)
985
129
523
-886
-126
103
(91)
(10)
80
(240)
14

Q4 11E
(57)
(711)
954
(1,019)
(206)
192
(103)
(147)
207
(542)
(63)
511
934
1,091
49
0
122
200
100
80
131
108

Q1 12E
2,380
1,114
1,815
1,086
480
933
744

Q2 12E
1,090
1,384
1,363
445
341
350
439

Q3 12E
850
1,109
917
226
240
376
165

Q4 12E
796
1,014
2,028
169
332
135
(23)

1,762
-

1,261
-

1,159
-

1,004
-

100

104

97

116

2011
4,853
780
5,526
331
935
2,975
2,056
2,416
1,391
3,891
4,746
4,537
3,576
4,972
-814
433
417
88
702
648

2012E
4,601
4,621
6,124
1,830
1,393
1,794
1,326
1,618

2013E
4,541
4,953
6,893
2,285
2,039
2,000
1,717
1,876

6,366
N/A
5,186
2,590
6,077
655
476
418

7,136
N/A
5,961
2,700
7,145
854
524
456

1,397

1,795

Source: J.P. Morgan estimates Company data. Note: Clean pre-tax pre-provisions income; CB&S pre-tax income for DB including loan products. Institutional client services pre-tax income for MS. Advisory and capital markets for BNP. HSBC IB pretax estimated using
HSBC IB revenue estimates, IB cost estimates and estimated provisions, also quarterly breakup is estimated.*MQG do not disclose quarterly earnings. Quarterly revenue numbers are JPM estimates, derived using half-yearly MQG divisional disclosures and quarterly
trends in global fee pools. 1. Securities and Banking division for Citi, 2. Global Banking and Markets Segment for BofA.**Q4 11 estimate as not reported yet

131

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Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 97: Quarterly IB division Risk Weighted Assets


$ million
DB
MS
GS
CS
UBS
BNP
Socgen
CASA
Natixis
Barclays
RBS
HSBC
Nomura
MQG*
SEB
UCG
Mediobanca
Investec
ING
VTB

Q1 10
263,378
331,913
455,790
143,708
117,884
282,670
152,207
191,919
135,430
296,378
223,902
260,733
123,309
64,286
17,730
95,400
38,020
36,832
49,279
11,596

Q2 10
234,099
325,174
451,247
142,058
114,071
246,486
138,277
178,047
113,558
290,381
211,173
267,812
132,297
64,286
17,285
95,850
36,120
37,940
46,011
19,962

Q3 10
239,137
326,000
444,000
150,157
128,434
273,943
157,080
175,576
101,184
303,004
225,839
266,356
140,512
64,286
17,460
92,385
38,230
39,048
44,698
15,262

Q4 10
244,869
329,560
444,290
142,591
124,275
261,419
148,106
163,114
95,973
295,004
226,534
264,900
139,645
64,286
17,415
89,367
37,258
40,273
41,231
15,064

Q1 11
239,174
301,482
455,811
167,856
210,547
279,115
158,286
166,923
99,106
305,574
234,810
276,975
139,889
64,286
17,415
85,575
36,454
41,499
44,133
30,076

Q2 11
240,125
304,759
451,010
170,808
223,340
277,753
157,126
168,503
93,613
311,733
228,057
289,050
162,599
64,286
16,875
84,388
35,444
40,462
42,627
34,059

Q3 11
251,506
346,790
456,204
184,709
240,078
268,451
156,408
172,515
94,099
305,862
216,196
294,831
167,337
64,286
16,605
83,947
33,254
39,425
46,390
32,768

Q4 11E
311,555
316,000
457,027
15,929
172,049
267,311
166,933
190,606
102,854
294,370
245,598
332,722
206,593
64,286
17,299
39,425
57,148
38,297

Q1 12E
312,405
316,000
461,597
156,595
167,471
243,380
150,522

Q2 12E
313,967
316,000
459,289
158,161
165,796
237,202
145,254

Q3 12E
315,536
316,000
456,993
159,743
164,967
236,028
142,639

Q4 12E
444,908
446,000
668,993
191,691
204,385
235,991
142,639

17,114

16,943

17,324

17,818

2011

2012E
444,908
446,000
668,993
191,691
208,666
235,991
142,639
149,554
322,969
219,567
346,998

2013E
428,891
446,000
665,648
191,691
161,340
275,018
236,304
212,949
417,939
257,956
512,639

52,857
17,818

52,857
18,352

53,516

67,556

Source: J.P. Morgan estimates, Company data. Note: Group RWAs for GS and MS. CB&S RWA for DB, CIB RWAs for BNP and SocGen. Note: HSBC IB RWAs throughout are estimated (75% of GBM RWAs).* *MQG do not disclose quarterly earnings. Quarterly
revenue numbers are JPM estimates, derived using half-yearly MQG divisional disclosures and quarterly trends in global fee pools

132

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 98: Quarterly IB division allocated capital


$ million
DB
MS
GS
CS
UBS
BNP
Socgen
CASA
Natixis
BofA
Barclays
RBS
HSBC
Nomura
MQG*
SEB
UCG
Mediobanca
Investec
ING
VTB

Q1 10
20,637
16,300
41,007
19,115
22,706
19,787
11,341
14,114
7,381
53,131
29,638
22,390
26,073
17,566
4,500
1,436
9,540
3,802
1,792
4,928
1,502

Q2 10
20,846
17,500
41,493
19,658
22,276
17,254
10,667
13,216
7,186
51,245
29,038
21,117
26,781
18,412
4,500
1,431
9,585
3,612
1,859
4,601
1,455

Q3 10
24,385
17,200
42,564
19,375
26,460
19,176
13,091
13,056
8,752
50,173
30,300
22,584
26,636
18,838
4,500
1,411
9,239
3,823
1,926
4,470
1,389

Q4 10
24,257
18,600
43,149
19,346
28,126
18,299
13,140
12,638
7,858
46,935
29,500
22,653
26,490
19,632
4,500
1,269
8,937
3,726
1,969
4,123
1,267

Q1 11
26,577
20,700
42,847
21,881
31,555
19,538
13,943
12,459
7,164
41,491
30,557
23,481
27,698
19,474
4,500
1,267
8,558
3,645
2,012
4,413
2,006

Q2 11
26,353
22,100
43,704
21,158
36,707
19,443
13,849
12,674
7,057
37,458
31,173
22,806
28,905
20,417
4,500
1,317
8,439
3,544
1,957
4,263
2,153

Q3 11
25,363
29,300
44,578
23,990
38,918
18,792
13,011
12,999
6,358
36,372
30,586
21,620
29,483
20,690
4,500
1,317
8,395
3,325
1,903
4,639
3,064

Q4 11E
24,167
27,500
53,199
23,040
35,360
17,959
12,266
14,149
10,285
33,575
29,437
24,560
33,272
21,545
4,500
1,342
1,903
5,715
3,152

Q1 12E
23,108
28,188
63,488
22,427
34,419
17,037
14,732

Q2 12E
23,108
28,751
75,767
22,427
34,419
16,604
14,049

Q3 12E
23,108
28,818
90,420
22,427
34,419
16,522
13,675

Q4 12E
23,108
37,962
107,907
22,652
35,452
16,519
13,551

1,356

1,369

1,383

2,138

2011

2012E
23,108
41,687
58,295
22,652
35,452
16,519
14,739
14,955
32,297
21,957
34,700

2013E
23,108
41,687
63,673
22,878
35,806
19,251
18,947
21,295
41,794
25,796
51,264

3,700
2,138

3,700
2,294

4,522

5,959

Source: J.P. Morgan estimates, Company data. Note: Assumed allocated equity for GS ICS and investment banking divisions; Institutional securities allocated equity for MS. Global Banking & Markets allocated equity for BofA. Average allocated equity per company for
JPM, DB; Regulatory Equity allocated for UBS; CIB allocated equity for BNP & Socgen JPM allocated equity for Barclays. Barclays and RBS Allocated capital is 10% of IB RWAs during that period end. *MQG do not disclose quarterly earnings. Quarterly revenue
numbers are JPM estimates, derived using half-yearly MQG divisional disclosures and quarterly trends in global fee pools.

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kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 99: Quarterly IB division stated ROE


%
DB
MS
GS
CS
UBS
BNP
Socgen
CASA
Natixis
BofA1
Barclays
RBS
HSBC
Nomura
MQG
SEB
Investec
ING
VTB

Q1 10
44%
43%
27%
25%
16%
51%
26%
2%
4%
25%
25%
31%
19%
7%
25%
19%
13%
34%
52%

Q2 10
14%
31%
7%
13%
19%
19%
19%
3%
4%
7%
16%
14%
17%
-9%
9%
30%
11%
23%
1%

Q3 10
28%
9%
11%
7%
-13%
25%
19%
2%
3%
12%
14%
12%
13%
2%
9%
18%
10%
20%
77%

Q4 10
12%
12%
13%
9%
2%
27%
12%
3%
3%
6%
22%
10%
11%
4%
14%
17%
13%
12%
62%

Q1 11
32%
15%
15%
20%
12%
51%
24%
4%
5%
21%
21%
21%
22%
2%
29%
25%
16%
38%
50%

Q2 11
15%
20%
6%
4%
4%
34%
19%
4%
5%
17%
15%
9%
16%
-2%
6%
20%
13%
20%
33%

Q3 11
1%
28%
10%
-3%
-8%
22%
3%
5%
2%
NM
5%
2%
6%
-17%
-8%
24%
9%
-16%
1%

Q4 11E
11%
-5%
5%
-19%
-2%
15%
-21%
-13%
1%
NM
5%
1%
10%
1%
0%
26%
9%
9%
11%

Q1 12E
26%
11%
8%
14%
4%
31%
6%

Q2 12E
12%
13%
5%
6%
3%
12%
4%

Q3 12E
9%
11%
3%
3%
2%
13%
1%

Q4 12E
8%
7%
5%
2%
3%
5%
-1%

21%

22%

20%

16%

2011

2012E
14%
8%
7%
6%
3%
11%
2%
2%

2013E
13%
8%
7%
7%
5%
14%
7%
7%

12%
8%
14%
3%
9%
14%

10%
8%
11%
3%
10%
14%

29%

27%

Source: J.P. Morgan estimates, Company data. Note: CB&S ROE for DB; ICS and investing banking ROE for GS. Institutional Securities ROE for MS; Global Banking and Markets Segment ROE for BofA,RBS. IB RoE estimated for HSBC, Standard Chartered and
Barclays

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13 March 2012

Global Investment Banks: Company outlook


and Investment case

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Global Investment Banks: Company


outlook and Investment case

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

UBS

AC

Kian Abouhossein
(44-20) 7325-1523

kian.abouhossein@jpmorgan.com

Amit Ranjan
(44-20) 7325-4780

amit.x.ranjan@jpmorgan.com
Please see our notes:
UBS: Investor Day Feedback: bank
utility with potential for 50% payout
and Sfr4bn buyback published 18th
Nov 2011
UBS-CSG Investment Bank: IB
Joint-Venture Scenario: Self-funded
16% ROE entity, published 8th Nov
2011
UBS: Strategic review: Roadmap to
creating a stable cashflow giant: Top
global IB pick, published 20th
October 2011

IB restructuring play underestimated, strong capital and


best WM franchise globally
UBS INVESTMENT BANKING STRATEGY:
IB Contribution and Outlook: UBS Investment Bank contributes 26% to Group
Net Income in 2013E in our estimates, down from as high as 38% in 2006. We
estimate UBS to generate SF9.4bn in clean IB revenues in 2013E, with SF4.4bn in
FICC revenues, SF3.5bn in Equities and SF1.4bn in IBD.
UBS remains a strong player in equities in our view, with a strong cash
equities franchise which generated SF1.5bn in revenues in 2011.
We believe UBS remains a Tier II player in FICC businesses except FX where
it remains a Top 5 player globally with estimated SF1.3bn in revenues in 2011.
We appreciate the restructuring measures already announced by management
with its Investor day. But to make adequate returns for shareholders we believe
further restructuring is inevitable and see additional SF30-50bn reduction in
RWAs on top of the already announced restructuring plan as shown below.
Restructuring: At its Investor day UBS announced restructuring of its Investment
Bank with the aim to exit from certain FICC asset securitization and complex
structured products businesses as well as equity prop trading and FICC macro
directional trading. UBS also aimed at a large decrease of long-end flow rates and
FICC global correlation businesses as shown in Figure 85 .

Figure 83: UBS: Divisional* net


Income contribution 2013E
%
WM
Americas
10%

UBS targets to further reduce core IB RWAs under Basel 3 to c.SF150bn by


2013, down from SF212bn pro-forma Basel 3 at YE2011.

IB
23%

Table 100: UBS: Basel 3 RWA reduction targets1


SF billions
AM
8%

WM&SB
59%

Source: J.P. Morgan estimates. Note: *ex corporate


center

Figure 84: UBS: Divisional* Basel 3


capital consumption 2013E
%
CC
22%

WM&SB
14%
AM
2%

Source of RWA reduction


Core Investment Bank
Business realignment
CVA2 mitigation / optimization
Securitization
OTC to CCP3
Other hedging
Legacy
SL ARS4 inventory
Mitigation: sales and restructuring
Total
SNB StabFund5

RWA
reduction
~70-90
~35
~30
~5
~0-10
~0-10
~18
~45
~145
~20

Source: Company reports. Note: 1 Basel 3 RWAs on a pro forma basis, 2 Credit valuation adjustment, 3 Over-the-counter to central
counterparty, 4 Student loan auction rate securities 5 Factors that will affect the timing of the exercise of our option to buy the SNB
StabFunds equity include the Funds progress in repaying the loan to SNB and the RWAs associated with assets owned by the Fund

WM
Americas
9%

IB
53%

Source: J.P. Morgan estimates. Note: * corporate


center including legacy assets related RWAs

UBS had in Aug-2011 updated on its SF2bn in Group cost reduction target with
planned headcount reduction of 3,500, with 55% of the reduction coming
from the Investment Bank.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

However, we believe further restructuring is inevitable as we question the


rationale of maintaining a headcount of c.16,000 employees and SF150bn in
RWAs in the IB which generates only 25% of group net income and consumes
more than 50% of Group capital. Hence, we expect UBS IB to shrink materially
as returns appear inadequate to shareholders in a Basel 3 world.
Figure 85: UBS: Restructuring measures announced with 2011 Investor day

Source: UBS Investor day presentation. Note: 1. Basel 3 future RWAs expectations compared to the 9M11 average on a pro forma basis

INVESTMENT CASE AND VALUTION:


We believe UBS is attractive as it has i) strong capital position reaching Basel 3
common equity Tier 1 ratio of 8.5% by 2012E on a fully loaded basis, ii) IB
restructuring with potential for material capital release for shareholders, and iii)
private banking cashflow gearing with asset gathering accounting for 55% of
group net income in 2013E. Capital generation is material at 197bps under B3,
leading to potential 50% DPS payout as of 2014 yielding 6% DPS.
UBS valuation appears attractive, trading at 2012E 1.0x P/NAV, for RONAV ex
own debt of 12.3%. At the current share price, the IB division is valued at 0
based on our SOP multiples in our implied valuation calculations. So for UBS
any dollar of capital release from the IB is highly accretive to shareholders, in
our view, considering the business is valued at implied P/BV of zero. In short,
the smaller UBS IB the higher the value of UBS.

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Europe Equity Research


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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 101: UBS: SOP Valuation 2013E


SF millions, per share
2013E
earnings

P/E

B3 Common
Equity T1 Capital

P/BV

Value
per share

As % of
total

Valuation

ROE

2,181
1,625
3,806

10.0
8.0
9.1

2,000
2,000
4,000

10.9
6.5
8.7

6
3
9

37%
22%
58%

21,814
12,999
34,813

109%
81%
95%

529

8.0

450

9.4

7%

4,232

118%

Investment Bank

1,516

6.0

15,000

0.6

15%

9,097

10%

Wealth Management Americas


PW Acquisition expense
Divisional Total

665
(154)
6,363

7.5
8.0
8.2

2,725

1.8
2.3

8%
-2%
87%

4,991
-1,229
51,904

24%

22,175

1
-0.3
14

Corporate Functions/other
Of which excess capital

(284)
17

8.0
8.0

6,339
3,407

1.0
1.0

1
1

7%
6%

4,070
3,542

Total Banking

6,097

9.8

31,920

1.9

16

100%

59,515

Wealth Management
Retail & Corporate
Wealth Management and Swiss Bank
Global Asset Management

29%

19%

Source: J.P. Morgan estimates.

Valuation Methodology
Our Dec 2012 SOP valuation based Price Target for UBS is SF16. Note that our SOP
multiples are differentiated by business and franchise quality. Taking these factors
into account, we value Wealth Management on a 2013E P/E of 10x and Retail and
Corporate on 8x, resulting in a total Wealth Management and Swiss Bank P/E of
9.1x. We value Global Asset management on an 8x 2013E P/E, Investment Bank on
6x and Wealth Management Americas on 7.5x. Our PT implies a Total Banking P/E
of 9.8x.
Risks to Our View
Risks that could prevent the stock from achieving our target price and OW rating
include:
The performance of the capital markets, impacting both the investment banking
capital markets business as well as the performance of UBS assets under
management.
Potential risk of further markdowns in remaining legacy credit assets, and potential
risk of further balance sheet assets becoming impaired, although greatly reduced post
transaction with SNB.
The US, as well as global, economies could experience a sharper slowdown with a
corresponding deterioration in credit quality and weaker revenues.
Legal risk in part from the structured credit and financial market crisis, could become
an issue in particular for banks with material capital markets activities as well as
within asset and wealth management
Recent negative newsflow on unauthorized trading losses could impact Private
Banking inflows and client trading businesses.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

CSG
AC

Kian Abouhossein
(44-20) 7325-1523

kian.abouhossein@jpmorgan.com

Expect more IB restructuring and focus on flow-based IB


model

Please see our notes:

CS INVESTMENT BANKING STRATEGY:


IB Contribution and Outlook: Credit Suisse Investment Bank contributes 36% to
Group Net Income in 2013E in our estimates, down from as high as 75% in the high
margin year of 2009. We estimate CS to generate SF12.4bn in clean IB revenues in
2013E, with SF4.8bn in FICC revenues, SF4.8bn in Equities and SF2.9bn in IBD.

Credit Suisse Group: IB


restructuring first step in the right
direction...but still a long way to go
published 02nd Nov 2011

CS remains a Tier I player globally in equities in our view, with strong cash
equities and electronic trading platform which generated SF2.0bn in revenues in
2011.

UBS-CSG Investment Bank: IB


Joint-Venture Scenario: Selffunded 16% ROE entity, published
8th Nov 2011

We believe CS remains a Tier II institutional player in most FICC businesses


outside its traditional DLJ franchise in structured credit where it remains a Top
player globally with estimated SF1.2bn in revenues in 2011.

Figure 86: CS: Divisional* net


Income contribution 2013E

We believe CS after an abnormally high margin environment in 2009 went


into expansion mode in FICC especially in Rates and FX, to break into the
Top Tier in FICC. However the subsequent deterioration in IB revenue
environment has made management rethink its expansion strategy resulting
in the restructuring measures announced with Q3 11 results.

Amit Ranjan
(44-20) 7325-4780

amit.x.ranjan@jpmorgan.com

%
AM
11%
WMC
39%

IB
34%

Restructuring: CS with its Q3 11 results announced restructuring of its Investment


Bank with the aim to reduce Basel 3 RWAs in FICC by SF100bn to SF110bn by
2014, down from SF209bn pro-forma Basel 3 RWAs at the end of Q3 11.

CIC
16%

Source: J.P. Morgan estimates. Note: *ex


corporate center

Figure 87: CS: Divisional Basel 3


capital consumption 2013E
%
CC
6%

AM
4%

We appreciate the restructuring measures already announced by management.


However we believe the inflexible cost base with c.80% of cost base in the IB
fixed, will require further restructuring measures unless revenue environment
shows any material improvement.

CS targets to downscale/exit certain FICC product areas such as long dated


unsecured trades in Global Rates, EM and commodities as well as securitized
products and exit from CMBS origination.
CS had already achieved a substantial reduction in RWAs by Q4 11, reducing
RWAs in the IB division by $83bn in H2 11.

WMC
7%
CIC
20%

CS also indicated targeted cost savings of SF2bn by 2013 of which SF1.4bn


would be in the IB.
Table 102: CS: FICC RWA distribution pre and post refinement of IB strategy
SF billions

IB
63%

Source: J.P. Morgan estimates.

Macro (Rates & FX)


Securitized Products
Credit
Emerging Markets
Commodities
Wind-down
Total

Basel 3 3Q 2011
RWA
66
65
30
21
5
10
209

RWA mitigation
-40
-30
-10
-8
-1
-10
-99

Basel 3 RWAs post refinement of IB


strategy
26
35
20
13
4
0
110

Source: Company reports

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

However, even post announced reduction in RWAs, IB would be consuming 63%


of Group Basel 3 capital in 2013E in our estimates.
Figure 88: CS: IB restructuring announced with Q3 11 results

Source: CS Q3 11 earnings presentation

INVESTMENT CASE AND VALUTION:


CS valuation appears attractive, trading at 1.2x P/NAV for RONAV ex own debt of
14.5% in 2012E with c.2/3rd of Group Net Income from asset gathering businesses.
However, management needs to start delivering on restructuring for CSG to re-rate.
We believe further restructuring beyond announced targets of the FICC franchise is
inevitable and it should alleviate any concerns around the capital position of the
bank. CS reaches Basel 3 common equity Tier 1 ratio of 6.9% on a fully loaded
basis by 2012E in our estimates. However, CS generates c.130bps of B3 Tier 1
common capital p.a. in 2013E in our estimates based on SF292bn RWAs and
still pays a 75c dividend, as a result we are less concerned about its capital
position.

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kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 103: CS: SOP Valuation 2013E


SF millions
2013E
Earnings

P/E

B3 CE T1
Capital

P/BV

AuM
(bn)

% of
AuM

Value/
share

% of
total

Valuation
(mn)

ROE

Wealth Management Clients


Corporate and Institutional Clients
Private Banking

1,759
709
2,468

10.0
8.0
9.4

1,408
3,926
5,333

12.5
1.4
4.4

838
143
981

2.1%
4.0%

13
4
17

45%
15%
60%

17,590
5,673
23,263

125%
18%

Investment Banking

1,572

6.0

17,822

0.5

24%

9,434

9%

513

7.5

876

4.4

10%

3,850

59%

Divisional Total

4,554

8.0

24,031

27

94%

36,546

19%

Corporate centre
of which excess capital
TOTAL - CASH / Basel 3 Tier I
Target price Dec 2012

(149)
10
4,415
4,415

10.0

1,583
2,178
27,792

0
2
28
28

0%
6%
100%

96
2,178
38,819
38,819

Asset Management

8.8
8.8

1.0
1.0

419

0.9%

16%

Source: J.P. Morgan estimates.

Valuation Methodology
Our Dec 2012E sum-of-the-parts based price target for Credit Suisse is SF28. Note
that our SOP multiples are differentiated by business and for franchise quality.
Taking these factors into account, we value Wealth Management clients on a 2013E
P/E of 10x and Corporate and Institutional Clients on 8.0x for a total Private Banking
2013E P/E of 9.4x. We value Asset management at a 7.5x P/E. Our PT implies an
8.8x P/E on overall 2013E earnings.
Risks to Our View
We believe the key risks that could keep our OW rating and target price from being
achieved include the following:
The performance of the capital markets, impacting both the investment
banking capital markets business as well as the performance of Credit Suisses
assets under management.
Growth in new private banking money and the development of private banking
transaction margins. Impact of legislation and regulatory issues surrounding
Swiss banking secrecy and customer confidentiality.
The US, as well as global, economies could experience a slowdown with a
corresponding deterioration in credit quality and weaker revenues. In addition,
widening credit spreads could affect funding costs.
Legal risk in part from the structured credit and financial market crisis
could become an issue in particular for banks with material capital markets
activities as well as within asset and wealth management.

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(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

AC

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780

amit.x.ranjan@jpmorgan.com

Please see our notes:


Deutsche Bank: Downgrade from
OW to N: unleveraged valuation
unattractive published 24th Jan
2012
Deutsche Bank: CIB Investor Day
Feedback: What is the long-term
ROE potential of the IB?",
published 2nd June 2011

PBC
27%

AWM
10%

CB&S
47%

IB winner in the long-term but short-term capital overhang


remains, with material legacy asset tail risk
DBK Tier I IB in FICC: winner in the medium to long-term
IB Contribution and Outlook: Deutsche Bank CB&S division contributes 52% to
Group Net Income in 2013E in our estimates, down from as high as 68% in the high
margin year of 2009 due to normalisation of market environment as well as increased
retail contribution post consolidation of Postbank. We estimate DBK to generate
15.4bn in clean IB revenues in 2013E, with 8.8bn in FICC revenues, 2.5bn in
Equities and 2.3bn in origination and advisory revenues.
DB remains a Tier I player globally in all FICC product areas in our view,
with a strong FX, Rates businesses and improved revenues from commodities
where it is now a Top 5 player in our estimates.
DB remains a Tier 1 equities franchise in Europe, despite a relatively
disappointing performance in 2011. We believe DB is also addressing the
weakness in its U.S. cash equities business where it has failed to break into the
Top 5 players.

Figure 89: DBK: Divisional* net


Income contribution 2013E

GTB
16%

DBK

DB was the number one player by revenue in Europe in ECM, DCM and
M&A in 2011 based on Dealogic data.
We believe DB is the most well-positioned to benefit from a retrenchment of
Tier II European IBs owing to its strong FICC franchise. In addition, we also
believe several provisions such as Section 716 of the Dodd-Frank Act in the
U.S. would also benefit European IBs such as DB at the expense of U.S. IBs.
Figure 90: DBK: Global Tier I IB: strongly positioned to benefit from retrenchment of Tier II IBs

Source: J.P. Morgan estimates. Note: *ex


corporate Investments/ adjustments

Figure 91: DBK: Divisional Basel 3


capital consumption 2013E
%

GTB
5%

CI
3%

PBC
13%AWM
1%

Source: DB 2011 CIB workshop presentation by Anshu Jain

CB&S
78%
Source: J.P. Morgan estimates.

However, we believe DB managements 2013 potential ROE of 20-25% pre-tax


in the IB is unlikely in the near to medium-term unless there is material market
share movement away from Tier II IBs towards Tier I players. As a result, net IB
ROE of 10-11% is likely in the near to medium-term in our estimates.

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amit.x.ranjan@jpmorgan.com

Restructuring: DB in Oct-11 announced ~500 net onshore CB&S headcount


reduction during 4Q 2011 1Q 2012. Unlike Tier II IBs, we do not expect DB to
announce any major restructuring of its IB businesses but instead expect stricter
cost control and further efficiency initiatives on the lines of CIB Integration (0.5bn
net 2011 IBIT impact) and complexity reduction programs which completed in 2011.
Figure 92: DBK: No major IB restructuring announcement, expect focus on cost rationalization

Source: DBK CIB workshop 2011 presentation by Anshu Jain

INVESTMENT CASE AND VALUTION:


We see DB as a long-term winner from the retrenchment of European Tier II
IBs but in the short-term we are cautious on account of DBs weak capital
position. We believe for shareholders as the first loss piece holder (i.e. equity) the
tail risks remain material - as 23bn carrying value of IAS 39 assets remain with FV
to carrying value of 90%, and impaired loans coverage ratio of 45% is questionable.
We believe a focus on balance sheet cleanup moving to a mark-to-market model
would benefit the company. Until DB addresses its capital deficit it will likely not
rerate to its tangible BV, in our view.
DB trades at 0.8x P/NAV for RoNAV 11% and PE 7.3x 2012E on a fully diluted
basis. We estimate DB to reach Basel 3 T1 ratio of 7.4% fully-loaded in 2012YE.
Hence we reiterate our view of DBs risk-reward being unattractive currently due to
its capital deficit of 7.6bn, as outlined in our report Deutsche Bank: Downgrade
from OW to N: unleveraged valuation unattractive published 24th Jan 2012.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 104: DBK: SOP valuation 2013E


millions
PCAM
Private and Business Clients
Asset and Wealth Management
CIB
Corporate Banking & Securities
Transaction Banking
Corporate Investment
Adjustments/Centre
Excess capital
Deutsche Group Operational Value
Total 2012 YE Price Target

Adj. Earnings
1,874
1,389
484
3,186
2,392
794
-281
-173
-41
4,564

Multiple
7.9
8.0
7.5
8.0
8.0
8.0
7.0
6.0
8.2

Capital
6,263
5,709
554
35,144
32,969
2,176
1,123

Multiple
2.4
2.5
6.6
0.7
0.6
2.9
-1.8

-2,781
39,750

1.0
0.9

Value
14.7
11.1
3.6
25.5
19.1
6.4
-2.0
-1.0
-2.6
35

per share
16
12
4
27
20
7
-2
-1
-3
36
36

%
43%
32%
11%
74%
55%
18%
-6%
-3%
-8%
100%

RoE
30%
24%
88%
9%
7%
36%
-25%
11%

Source: J.P. Morgan estimates.

Valuation Methodology
Our Dec-2012E Sum-of-the-parts based price target for Deutsche Bank is 36. Note
that our SOP multiples are differentiated by business and franchise quality. We value
DBs Tier 1 CB&S division at 8.0x P/E, at a premium to Tier 2 IB peers. We value
the AWM division at a discount to Swiss peers, owing to the better Private Banking
franchise of both Swiss peers.
Risks to Our View
We believe the key risks (both upside and downside) that could keep our N rating
and target price from being achieved include the following:
1. The performance of the capital markets, impacting both the investment banking
capital markets business (particularly Fixed Income) as well as the performance of
Deutsche Banks assets under management.
2. Upside risks include a pick-up in capital market and trading activity, with DB
highly geared to the trading environment through its CB&S division.
3. Provision and mark-to-market risk in Deutsche Banks riskier assets such as
monoline exposures, leverage finance, RMBS, CMBS, CDOs and other structured
credit assets.
4. The US, as well as global, economies could experience slowdown with a
corresponding deterioration in credit quality and weaker revenues. In addition,
widening credit spreads could affect DBs profitability.
5. Legal risk in part from the structured credit and financial market crisis could
become an issue in particular for banks with material capital markets activities as
well as within asset and wealth management.

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Barclays
Progressing towards improved returns
Raul Sinha

AC

IB Contribution and Outlook: BarCap consumes 56% of the Groups capital in


2013E and contributes 47% to the Group PBT ex bank levy on our estimates. When
compared to average European IBs where 56% of Groups capital is consumed to
generate 39% of the PBT, Barclays is positioned relatively well in our view.

(44-20) 7742-2190

raul.sinha@jpmorgan.com

Vivek Gautam
(44-20) 7742-3244

vivek.gautam@jpmorgan.com

Barclays remains a Tier 1 player in FICC globally and amongst the top 2 in
Europe with strong market positioning in Flow rates, Commodities, flow credit,
FX and munis. We estimate Barclays FICC revenues to be 6.7bn in 2013E,
below the 2009-10 level but amongst the top 5 globally on our estimates.

Within Equities the group ranks outside top 5 players on 2013E revenues on
our estimates with a significant portion of revenues generated by Equity
derivatives and Prime Brokerage in our view. We estimate 1.9bn Equity
revenues in 2013E - below the management target of 2.6bn-2.9bn.

Within Investment banking, the Group fares amongst the top tier
Investment Banks with most of the revenues driven by loans (debt financing)
and debt underwriting businesses. We estimate 2.3bn IB revenues and 0.3bn
Principal Investment revenues in 2013E.

Please see our notes:


Barclays: Further re-rating may
require restructuring published 6
Feb 2012
Barclays: progressing towards
improved returns published 13 Feb
2012
UK banks: No safe havens - Prefer
UK Asians ahead of UK
Domestics: CRE Forbearance and
wholesale funding risks to weigh
published 28 October 2011
Table 105: Barclays: Divisional RoE
targets vs JPMe
2011
Barcap
Barcorp
Africa
RBB-UK
Barclaycard
Europe
Wealth

10%
1%
10%
15%
17%
-6%
11%

2013
Target*
15% -16%
10% -11%
13% -14%
14% -15%
16% -17%
4% -5%
17% -18%

2013E
JPMe**
10%
4%
23%
33%
30%
-3%
16%

Source: J.P. Morgan estimates, Company data. *


2013 Targets at 10% CT1. ** Based on 10%
Basel 3 RWAs, Barcap includes Bank Levy

We estimate Barcap 2013E revenues to be 11.2bn vs. the target of 15bn-15.6bn.


Rest of the Group: Although the impact of weak growth and lower for longer
interest rates is likely to be felt across divisions, we continue to see returns from
Barclays Retail and business banking operations ex Europe above targets.
Restructuring: During Q411 results, the Group increased their cost saves target
from 1bn to 2bn by 2013E given the challenging revenue environment. The Group
has also outlined their plans to reduce the Structured Credit RWAs from 43bn in
2010 on a Basel 3 basis to 14bn by 2013E.
Investment conclusion:
The group made progress on costs as well as demonstrated RWA flexibility within a
weak revenue environment for the industry, which, in our view is a step in the right
direction for the valuation of the shares. However, we continue to believe that further
re-rating requires more action on restructuring in response to regulation, especially
while capital markets revenues remain below the groups expectations of a
normalized run-rate. We also believe that key economic drivers underpinning the
strategic targets unveiled in 2011 may have changed materially enough to warrant a
review of strategy in order to address weaker than expected revenues. With shares
trading at 0.6x 2013E TBV ex own debt for a 2013E RoNAV ex own debt of 9.1%,
we believe that current valuations discount weak returns. Barclays remains our top
pick with the domestic UK Banks.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 106: Barclays: 2013E SOP


million
Earnings
1,133
275
2,422
61
249
1,065
799
6,004
-1,512

UK Retail
Barclays Corporate
Barclays Capital
Investment Management
Wealth
Barclaycard
Europe and Africa
Underlying Post Tax Core Earnings
Corporate Activities
Restructuring Charges and Litigation Losses
Capital Excess/ (Shortfall) (Basel3)
Price Target (Dec 2012E)

Value
5,331
7,040
22,736
490
2,485
5,495
8,931
52,507
-11,099
-4,000
-3,714
33,695

Valuation basis
RoE - g/CoE - g
RoE - g/CoE - g
RoE - g/CoE - g
PE
PE
RoE - g/CoE - g
RoE - g/CoE - g

1 times BV

Value per Share


0.4
0.6
1.8
0.0
0.2
0.4
0.7
4.1
-0.9
-0.3
-0.3
2.65

P/E (x)
4.7
25.6
9.4
8.0
10.0
5.2
11.2
8.7

P/BV (x)
1.5
1.0
0.9
0.0
0.0
1.5
1.6
1.1

0.0
7.5

0.8

Source: J.P. Morgan estimates, Company data.

Valuation Methodology
Our sum-of-the-parts based Dec-2012E price target for Barclays of 265p is
calculated using cost of equity of 10.5% and 12% for the Group ex Barcap and
Barcap respectively and expected 2013E returns fully adjusted for Basel 3.
Risks to Our View
We believe the key risks (both upside & downside) that could prevent our OW rating
and price target from being achieved include the following:
The key downside risks include regulatory risks especially ringfencing and high
dependence on investment banking activities. Through Barclays Capital, the Group is
significantly exposed to the fixed income cycle and the corporate credit cycle and is
vulnerable to a slowdown in volumes and/or further deterioration in the economic
environment which could result in higher writedowns.
The key upside risks include rapid improvement in economic conditions especially
macro concerns. Barclays has lower exposure to UK mortgages than UK peers and
potentially better customer asset quality with significant exposure to consumer credit
through Barclaycard. Barclays is also exposed to the economic cycle through its
lending exposure in particular to the UK credit cycle, South Africa and Spain. Being
a retail bank it is also exposed to the interest rate environment.
.

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(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

GS

AC

Kian Abouhossein
(44-20) 7325-1523

kian.abouhossein@jpmorgan.com

Amit Ranjan
(44-20) 7325-4780

amit.x.ranjan@jpmorgan.com
Please see our notes:
Global Investment Banks: US
Basel 2.5 NPR2 capital at risk
analysis: yet another US IB
disadvantage, downgrade GS, MS
to N published 25th Jan 2012
Global Investment Banks:
Regulatory Arbitrage series: OW
European over US IBs, published
8th March 2011

Figure 93: GS: Divisional* net


Income contribution 2013E

GS Tier I IB globally in FICC and Equities: regulation a disadvantage in the


short-term
IB Contribution and Outlook: GS Investment Banking and ICS division together
contribute 71% to Group Net Income in 2013E in our estimates, indicating the extent
to which GS is leveraged to an improvement in IB revenue environment. We
estimate GS to generate $11.6bn in clean FICC revenues in 2013E, with $8.8bn in
Equity revenues, $4.4bn in underwriting and advisory revenues.
GS remains a Tier I player globally in all FICC product areas in our view,
with a strong Rates, Credit and commodities business. GS generated $8.7bn in
clean revenues in 2011, with material impact from basis risk losses particularly in
credit trading in our estimates.
GS remains the top player in equities globally with $8.1bn in clean equity
revenues in 2011. GS continues to benefit from its strong electronic trading
platforms and proven track record in liquid execution.

%
Invest.
Mgmt.
11%

Track record to adapt in new IB environment as Tier I player


gaining market share. But needs to start delivering returns
to S/Hs for re-valuation

IBD
13%

GS was the number one player by revenue globally in M&A in 2011 based
on Dealogic data while it was in the Top 5 players in ECM globally.

I&L
18%

ICS
58%

We believe GS is very well positioned to benefit from retrenchment of Tier II


European IBs owing to its strong FICC franchise and global presence. In a
February 2011 presentation, GS management had indicated that c.80% of their
inventory (ex OTC derivatives) turns over within 6 months on average as shown
in Figure 94, indicating management flexibility in allocating assets.
Figure 94: GS: Aged Inventory: Number of Days before Turnover: Inventory Turnover*

Source: J.P. Morgan estimates. Note: *ex


corporate Investments/ adjustments

> 360 days


8%

180-360 day s
10%

91-180 day s
14%

0-45 day s
54%

46-90 day s
14%
Source: Company reports. * Inventory composition includes cash inventory and some listed derivatives; excludes OTC derivatives.
1Q07 - 3Q10 Quarterly Average Days as % of Balance Sheet

Restructuring: GS in Q2 11 announced plans to reduce headcount by 1,000 heads


globally over the course of 2011 as a part of a cost savings initiative. GS announced
in Q2 11 plans to generate cost savings of $1.2bn annually which was subsequently
increased to $1.4bn in Q4 11. Unlike Tier II IBs, we do not expect GS to
announce any major restructuring of its IB businesses but instead expect it to use
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(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

the comp flexibility provided by its strong revenue base to improve return to
shareholders.
INVESTMENT CASE AND VALUTION:
We see GS as a clear winner in a more cash-equity like FICC world as well as
from the retrenchment of European Tier II/ Tier III IBs.GS trades at 0.9x
P/NAV for RoNAV 9% and PE 10.6x 2012E on a fully diluted basis. We estimate
GS to reach Basel 3 T1 ratio of 9.7% fully-loaded in 2012YE.
GS valuation does not look cheap, but we believe there is potential to re-rate
the ROE with a more aggressive cost management stance. Currently, GS is not
adjusting its cost base materially relative to its revenue generation to generate
adequate returns for shareholders. Unless GS management starts to adjust its cost
base we do not see GS re-rating above 1x tangible BV.
In addition, we see U.S. regulations as more punitive for U.S. IBs like GS and
believe the market share movements would only be realized in the long term. As
a result, shareholder returns could remain subdued till there is more clarity around
the myriad of different regulations.
Table 107: GS: SOP Valuation 2013E
$ millions
Division
ICS and Investing & Lending
ICS and Investment Banking
Investing & Lending
Investment Management
Excess capital over Basel 3 Core Tier I
Cost of pref/other
Divisional Total Basel 3 capital

2013
Earnings
5,872
4,685
1,188
755

P/E
9.2
10.0
6.0
9.0

30
-170
6,487

10.0
9.9

Basel 3 Equity
Tier I capital
61,957
52,957
9,000
3,684

P/core
Tier I
0.9
0.9
0.8
1.8

Value/
Share
101
88
13
13

% of
Total
84%
73%
11%
11%

Valuation
(mn)
53,971
46,845
7,126
6,795

5,155

1.0

70,796

0.9

9
-3
120

8%
-3%
100%

4,898
(1,701)
63,962

RoE
9%
9%
13%
20%

9%

Source: J.P. Morgan estimates.

Valuation Methodology
Our Dec 2012E sum-of-the-parts-based price target for Goldman Sachs is $120. Note
that our SoP multiples are differentiated by business and franchise quality, and the IB
multiple is adjusted for regulatory uncertainty. Taking these factors into account, we
value ICS and Investment Banking on 10.0x P/E and Investing and Lending on 6.0x
2013E P/E. We value Investment Management on a 9x P/E. Our PT implies a 9.9x
P/E on our overall 2013E earnings.
Risks to Our View
We believe the key risks (both on the upside and downside) that could keep our N
rating and target price from being achieved include the following:
The performance of the capital markets, impacting both the investment banking
capital markets business (especially fixed income) as well as the performance of
Goldman Sachs assets under management.
Upside risks include a pick-up in capital market and trading activity, with GS highly
geared to the trading environment through its Institutional Client Services and
Investment Banking divisions.
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(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Funding risk with Goldman Sachs being predominantly wholesale funded could
become a material issue should credit markets freeze up.
The US, as well as global economies, could experience a slowdown with a
corresponding deterioration in credit quality and weaker revenues, impacting
Goldman Sachs' profitability.
Legal risk coming out from the structured credit and financial market crisis could
become a material issue both from a financial and reputational perspective.
Regulatory risk with the proposed changes in Basel rules and financial reform in
OTC derivatives could significantly reduce profitability of the group.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

MS

AC

Kian Abouhossein
(44-20) 7325-1523

kian.abouhossein@jpmorgan.com

Amit Ranjan
(44-20) 7325-4780

amit.x.ranjan@jpmorgan.com
Please see our notes:
Global Investment Banks: US
Basel 2.5 NPR2 capital at risk
analysis: yet another US IB
disadvantage, downgrade GS, MS
to N published 25th Jan 2012
Global Investment Banks:
Regulatory Arbitrage series: OW
European over US IBs, published
8th March 2011

Figure 95: MS: Divisional* net


Income contribution 2013E
%
GWM
AM 10%
4%

Institutional
Securities
86%

Source: J.P. Morgan estimates. Note: *ex


eliminations and unallocated capital

Strong Equities franchise but Tier II FICC in need of


shrinkage to generate adequate ROE
IB Contribution and Outlook: MS Institutional Securities division contributes 86%
to Group Net Income in 2013E in our estimates. We estimate MS to generate $5.6bn
in clean FICC revenues in 2013E, with $6.4bn in Equity revenues, and $4.5bn in
underwriting and advisory revenues.
MS remains a Tier I player in Equities in our view, with $6.2bn in clean
equities revenues in 2011. MS equity franchise has performed very well in 2010
and 2011 in a very difficult operating environment, demonstrating the strength of
the franchise.
MS remains a Tier II Institutional FICC player with $5.3bn in clean revenues
in 2011. MS continues to be a top Tier player in some FICC areas like
Commodities, but we believe it has not been able to increase its revenue share
meaningfully in Rates and FX.
MS IB division made $4.2bn in clean revenues in 2011 and was the number one
player by revenues globally in ECM in 2011 based on Dealogic data while it was
in the Top 3 players by revenue in M&A globally.
Restructuring: MS in Dec-11 announced plans to reduce headcount by 1,600
globally during Q1 2012. We believe MS would need to announce further
restructuring of its FICC franchise if the current low revenue environment
persists, as its cost base is inflexible on account of large deferred compensation.
INVESTMENT CASE AND VALUTION:
MS trades at attractive valuation relative to its peers of 0.6x P/NAV for RoNAV
7.2% and PE 9.2x 2012E on a fully diluted basis. MS capital position remains strong
with Basel 3 T1 ratio of 9.9% fully-loaded by 2012YE. However, lack of clarity
around Dodd-Frank Act and the Basel 2.5 regulations would limit any material
change in capital return policy to shareholders in our view.
In addition, as in the case with GS, we see U.S. regulations as more punitive for
U.S. IBs like MS and believe MS lacks the revenue scale in FICC to generate
shareholder acceptable returns. We would welcome MS to review the FICC
build-out and start releasing capital to shareholders and shrinking the FICC
business. MS is not making adequate ROEs with the current strategy and
business mix, in our view, at 7.2% in 2012E and 7.1% 2013E (tangible BV ex
DVA).

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(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 108: MS: SOP Valuation 2013E


$ millions
Division
Institutional Securities
Asset Management
Global Wealth Management
Unallocated Capital
Excess Capital
Cost of prefs/other
Total
Target Price Dec 2012

2013E
Earnings
3,468
179
403
85
74
-158
4,050

P/E
7.0
8.5
8.5
9.0
10.8

Allocated
Equity
28,515
955
1,911
8,893
7,738

P/BV

48,012

0.9

0.9
1.6
1.0
1.0

AuM (bn)

% of
AuM

308
1,702

0.5%
0.2%

Value/Share
13
1
2
5
4
-1
23

% of
Total
55%
3%
8%
20%
18%
-3%
100%

Valuation
(mn)
24,275
1,524
3,425
8,893
7,738
-1,425
43,838

RoE
12%
19%
21%
8%

23

Source: J.P. Morgan estimates.

Valuation Methodology
Our Dec 2012E sum-of-the-parts-based price target for Morgan Stanley is $23. Note
that our SoP multiples are differentiated by business and franchise quality, and the IB
multiple accounts for regulatory uncertainty. Taking these factors into account, we
value Institutional Securities on a 7x 2013E P/E, and Asset Management and Global
Wealth Management both on an 8.5x P/E. Our price target implies a 10.7x P/E on
overall 2013E earnings.
Risks to Our View
We believe the key risks (both upside and downside) that could keep our N rating
and target price from being achieved include the following:
The performance of the capital markets, impacting both the investment banking
capital markets business as well as the performance of Morgan Stanleys assets under
management.
Upside risks include a pickup in capital market and trading activity, with MS highly
geared to the trading environment through its Institutional Securities division.
Execution risk in Morgan Stanleys Wealth management joint venture with
Citigroups SSB division.
Mark-to-market risk in Morgan Stanleys riskier assets such as leverage finance,
residential and commercial real estate and other structured credit assets.
In addition, other assets such as credit card loans, consumer finance and other ABS
could see mark-to-market gains and losses.
Funding risk with Morgan Stanley being predominantly wholesale funded could
become a material issue should credit markets freeze up.
The US, as well as global economies, could experience a slowdown with a
corresponding deterioration in credit quality and weaker revenues.
Legal risk in part from the structured credit and financial market crisis could become
an issue, in particular for banks with material capital markets activities as well as
within asset and wealth management.

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(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

AC

Vivek Juneja

(1-212) 622-6465

vivek.juneja@jpmorgan.com

Citigroup
Investment Bank Outlook:
Citigroup has a top tier global capital markets franchise, with capital raising
across the globe and trading operations in approximately 75 countries worldwide.
Cs securities and banking business is one of its key business lines and accounted for
sizable 27% (ex CVA/DVA) of total Citigroup revenues in 2011 despite weakness in
trading. Citi added to its investment banking teams in early 2011 to offset personnel
exits in 2009 and 2010 and increase market share. We expect Citi to remain among
the leading global investment banking players due to breadth of its footprint in
the business and benefit from growth outside the developed markets.
C maintains a Tier 1 trading franchise in virtually all areas, reporting $12bn$13bn in trading revenues and $4bn-$5bn in investment banking fees in 2011.
Similar to peers, FICC accounted for over 80% of total trading revenues.
Trading revenues (ex-DVA) were hurt in 2011 by weak market conditions but it
should benefit from the recovery in 1Q and elimination of prop trading losses.
Expenses have been elevated in the Securities and Banking business as C added
$1 bil in expenses in 2011. We would expect C to focus on improving operating
margins and fine-tuning staffing levels. C has already begun this, taking $400m
in severance charges in 4Q, primarily related to Securities and Banking but
expense reductions have lagged revenue declines.
We would expect C to benefit from exit or scaling back of smaller scale
competitors. In addition, C should benefit relative to peers from large emerging
markets exposure, with over 50% of Cs Institutional Client Group revenues
(which includes Securities and Banking) from emerging markets.
Investment Thesis
We maintain Citigroup at Overweight longer-term relative to our universe due to: 1)
attractive valuation with the shares trading below tangible book value; 2) strong and
growing capital levels; 3) revenue growth opportunities led by its emerging markets
franchise (40% of Citigroup revenues in 2011); 4) sizable amount of loan loss
reserves; and 5) potential for return of excess capital to shareholders in the near term
post stress test given strong capital position. Citi also has better revenue growth
drivers than peers because of its emerging markets and international businesses, and
continued shrinkage of Citi Holdings.
Valuation
Citi trades at 0.7 times price to tangible book and at 8 times our 2012E EPS both
metrics below peer averages. Our price target is $46.50 and assumes a price to
tangible book value multiple of 0.9 times its expected YE 2012 tangible book value,
a discount to the expected peer group multiple of 1.5 times. While we expect Citi to
continue to trade at a discount, we expect the discount to narrow gradually with
improved performance and increased visibility for return of capital.
Risks to Rating and Price Target
Citigroups business and earnings are sensitive to economic and general business
conditions. Downside risks that may affect our outlook include regulatory risk, risks
from government interference, interest rate risk, higher than expected increase in
credit losses, significant deterioration in credit risk profile, changes in capital
structure/adequacy, actions by ratings agencies, changes in overall economic and
loan growth, and performance of the equity and fixed income markets. Lastly, given
a global franchise and presence in emerging markets, Citigroup is subject to
geopolitical risk and material economic downturn outside of the U.S.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

AC

Vivek Juneja

(1-212) 622-6465

vivek.juneja@jpmorgan.com

Bank of America
Investment Bank Outlook
Bank of America has become a top tier player in trading and investment banking
worldwide since its acquisition of Merrill Lynch and has done a good job with the
integration. BACs investment bank contributed 27% to total company revenues (ex
CVA/DVA) in 2011 despite weakness in trading. The 2009 acquisition of Merrill
Lynch doubled the size of BACs equities business and vastly expanded the reach of
investment banking.
BAC has gained market share in investment banking and was top ranked by fees
in 4Q11 in investment banking and syndicated loans per Dealogic. BAC
continues to expand it investment banking franchise globally, leveraging its
resources and adding capabilities/products outside the US. BAC has invested in
hiring staff overseas to grow market share.
Similar to peers, BAC is most active in fixed income trading, which accounted
for nearly 70% of total sales and trading revenues (ex CVA/DVA). Credit and
Rates are two key FICC businesses commodities is a much smaller contributor.
BAC is in the process of cutting expenses to maintain profitability in light of the
slowdown in business volumes and impact of Volcker rule and Dodd Frank bill.
Near-term, BAC should benefit from positive seasonality in trading and reduced
negative comparisons from prop trading.
Longer term, BAC has scale in most trading businesses (except commodities) and
BAC has resources to absorb added costs from new regulations and likely should
benefit from the exit of the business by less scaled competitors.
Investment Thesis
We continue to rate Bank of America Overweight longer term relative to our
universe due to relatively attractive valuation, potential for significant appreciation
when earnings normalize, ongoing improvement of capital levels and position as a
leading retail and commercial core franchise in the US. BACs normalized earnings
should benefit from the large cost cutting program under way, reduction in the very
large legacy asset servicing expenses, and decline in litigation expenses. There has
been some progress on mortgage related issues some issues remain to be resolved
but BAC has put aside sizable additional reserves.
Valuation
Our price target for Bank of America is $10.50 and is based on 0.8x price to our
December 2012E tangible book value multiple, nearly a 50% discount to expected
peer median tangible book value multiple of 1.5x. We expect BAC to trade at a
discount near term due to continued headline risk, mortgage related headwinds and
some pressure on revenues. Bank of America is currently trading at 0.6x tangible
book value, which is below the large cap banks median of 1.1x, and 12x our 2012
EPS estimate.
Risks to Rating and Price Target
Bank of Americas business and earnings are sensitive to economic and general
business conditions. Risks that may affect our outlook for the company include
higher than expected mortgage putback losses on GSEs and/or private label MBS,
and mortgage related litigation changes, unfavorable regulatory changes, interest rate
risk, changes in credit risk profile, changes in capital requirements, actions by ratings
agencies, changes in overall economic growth and loan growth, and performance.
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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

AC

Natsumu Tsujino

Nomura Holdings

(81-3) 6736-8618

natsumu.tsujino@jpmorgan.com

Figure 96: Nomura: Cumulative Net


Income (9 months, FY2011)
%, Dec-end, 2011
Marchant 3% Asset
banking, etc management
Investmen
t banking 8%

7%
Domestic retail
37%

19%

Low ROE is a challenge. Strong capital and still positioned


to grow global IB
IB Contribution and Outlook: IB is the most important segment of the business,
with the majority of its capital and cost base allocated to IB. However, in recent
quarters the level of profit has suffered, especially if one-time exit gains at merchant
banking business are excluded. Domestic retail brokerage profits have been much
more stable. In the past two quarters, domestic retail segment profits also have
declined sizably due to the decline in commissions from investment trust funds.
While Nomura's attempt to expand overseas business by acquiring the team from the
former Lehman Brothers in Europe and building a team in the US from scratch has
been hampered by the market turmoil started from the issues of Greece and the Euro
zone, Nomura plans to grow again, taking advantage of relatively strong
capitalization.

26%
Equity

Figure 97: Breakdown of Nomuras Global Markets Revenue by Region

Global markets
45%
Fixed income

million
3Q
FY09

Source: Company data.

Global Markets
Fixed income
Japan
Europe
US
Asia
Japan
Europe
US
Asia
Equity
Excl. Instinet (estimates)
Japan
Asia
Europe
US
Japan
Asia
Europe
US

4Q
FY09

1Q
FY10

2Q
FY10

3Q
FY10

4Q
FY10

1Q
FY11

2Q
FY11

3Q
FY11

70,500 55,600 41,000 77,800 71,700


19,035 21,128 15,990 25,674 21,510
42,300 23,352 15,580 25,674 25,095
2,115 5,004 4,920 16,338 19,359
7,050 6,116 4,510 8,558 5,736

69,400
20,820
26,372
13,880
8,328

67,600
25,688
20,280
14,872
6,760

45,700
27,877
9,140
4,570
4,113

71,200
22,072
25,988
9,256
13,884

27.0%
60.0%
3.0%
10.0%

38.0%
42.0%
9.0%
11.0%

39.0%
38.0%
12.0%
11.0%

33.0%
33.0%
21.0%
11.0%

30.0%
35.0%
27.0%
8.0%

30.0%
38.0%
20.0%
12.0%

38.0%
30.0%
22.0%
10.0%

61.0%
20.0%
10.0%
9.0%

31.0%
36.5%
13.0%
19.5%

90,100
70,100
21,030
38,555
9,814
701

76,500
56,500
18,080
18,080
17,515
2,825

46,300
26,300
11,572
4,603
14,334
-4,208

55,200
35,200
14,080
7,040
10,560
3,520

61,500
41,500
12,450
11,205
13,695
4,150

64,300
46,300
18,520
9,723
13,890
4,167

56,700
38,700
8,127
11,223
11,997
7,353

33,400
15,400
7,546
3,234
3,388
1,232

39,700
21,700
7,595
5,425
3,255
5,425

30%
55%
14%
1%

32%
32%
31%
5%

44%
18%
55%
-16%

40%
20%
30%
10%

30%
27%
33%
10%

40%
21%
30%
9%

21.0%
29.0%
31.0%
19.0%

49.0%
21.0%
22.0%
8.0%

35.0%
25.0%
15.0%
25.0%

Source: Company data, J.P. Morgan.

Cost reductions in progress and will reduce FY2012 costs sizably: Nomura has
announced a US$1.2 billion cost cut plan (a 20-25 billion quarterly personnel cost
reduction) during summer to fall 2011, and personnel costs declined considerably
from 142.6 billion in 2Q (7-9/2011) to 127.8 billion in 3Q (10-12/2011). The
127.8 billion figure included 6-7 billion in restructuring costs; if these are absent
in 4Q and 1Q FY2012, personnel costs should decline further. This size of the cost
cut was not enough for Nomura to breakeven in the operating environment of 3Q
(10-12/2011), though.
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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Risk mitigation targeting Basel III is in progress and is now strongly capitalized.
The Tier 1 common ratio at end-December was 10.5% based on Basel 2.5 and just
under 10% based on Basel III. The Tier 1 ratio was 12.2% based on Basel 2.5 and
just over 10% based on Basel III. It was a rather big improvement from its Basel IIIbased Tier 1 common ratio at end-September 2011, which was just over 8%, thanks
to successful risk mitigation, including unrated securitized product exposures.
Assuming Nomura was to sell its holding in Nomura Real Estate Holdings, in which
it has 51% stake through its consolidated subsidiary Nomura Land and Building, we
believe it would be able to improve its Tier 1 common ratio by another 2.5-3% points.
INVESTMENT CASE AND VALUTION:
We maintain our Neutral rating and price target of 380 (by end-March 2013),
with target P/B of 0.7x. We set a P/B of 0.7x for a company close to breakeven but
with the potential to earn annualized ROE of up to roughly 5%. The stock already
trades at 0.7x our end-March 2013 tangible BPS estimate. We accordingly do not see
much upside potential for the stock in the short term, unless Nomura is to prove that
it will be able to post meaningfully high ROE rather than just returning to
profitability. The average ROE of global IBs is still much higher than Nomuras,
therefore we think its P/B will remain well below its peers for the time being. In
addition, within Japan, financial sector valuations are still low overall, and since
Nomura looks richly valued relative to insurance and megabank stocks and in light of
RoEs, the difference between the stock's current price and our price target is
somewhat small.
Nomura may be able to grow its global business faster than its global peers, if some
of major global peers continue to face the challenge of reducing risks more, which
may help Nomura gain market share and improve its ROE.
Downside risks include European market instability, a prolonged slump in
investment trust sales in Japan, and a tightening of investment trust regulations.
Upside risks include higher-than-expected increase in revenues due to market
recovery.
We no longer use SOTP valuation for Nomuras price target as its profitability has
deteriorated too much since the Lehman shock. However, if we were to apply such a
method as before, Nomuras fair value would become much higher than the current
share price, as we have to apply a positive P/B multiple to its wholesale business,
which has been posting losses for many quarters over the past few years.
Figure 98: Nomuras SOTP Valuation Example
million

Domestic retail

Estimated capital
allocation Mar 2013
250,000

Target P/B

Fair value

1.4

357,143

1,668,100
50,000

0.70
2.9

1,167,670
142,857
1,667,670
455

Global wholesale
Asset management
Fair value
Fair value per share

ROE currently around 10% and with cost of capital of 7%, fair P/B will be 1.4x.
ROE currently around breakeven, but assuming it will turn to around 3-6%, we
used 0.7x for adequate multiple with low ROE business.
ROE currently around 20% and with cost of capital of 7%, fair P/B will be 2.9x.

Source: J.P. Morgan estimates

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 99: Nomuras Segment Revenues and Profits


million
2Q
FY09
Domestic retail
Net revenues
Expenses other than interest expenses
Pretax profits
Global wholesale
Net revenues
Expenses other than interest expenses
Pretax profits
Clean normalized pretax profits(except one-time valuation
losses and merchant banking profits)
Global markets
Fixed Income revenues
Equity revenues
Other revenues
Net revenues
Expenses other than interest expenses
Pretax profits
Global investment banking
Investment banking gross revenues
Allocation to other segment
Investment banking (net of allocation to other segment)
Others (merchant banking etc.)
Net revenues
Expenses other than interest expenses
Pretax profits

3Q
FY09

1Q
FY10

2Q
FY10

3Q
FY10

4Q
FY10

1Q
FY11

2Q
FY11

3Q
FY11

95,452 110,959
71,479 73,216
23,973 37,743

87,753
64,975
22,778

97,482
74,482
23,000

96,239
78,572
17,667

94,189
72,176
22,013

83,980
73,250
10,730

79,713
69,614
10,099

168,416 108,700 163,300 172,100


133,197 149,800 155,700 161,300
35,219 -41,100
7,600 10,800
40,604 -37,500
9,600 15,900

186,400
157,000
29,400
9,300

141,200
156,100
-14,900
-7,200

79,300
152,400
-73,100
-68,300

176,100
138,300
37,800
3,800

76,600 70,500 55,600 41,000 77,800 71,700


93,400 90,100 76,500 46,300 55,200 61,500
4,600
3,200
900
9,200 11,400
7,800
174,499 163,850 132,964 96,400 144,400 141,000
127,845 130,751 102,975 122,800 123,200 127,800
46,654 33,099 29,989 -26,300 21,100 13,200

69,400
64,300
3,300
137,000
125,500
11,500

67,600
56,700
5,800
130,100
124,300
5,700

45,700
33,400
-6,500
72,600
121,200
-48,600

71,200
39,700
7,700
118,700
110,300
8,400

93,150 104,290
66,796 69,119
26,354 35,171

199,304 210,091
161,110 161,584
38,194 48,507
50,611 65,010

4Q
FY09

33,200
12,200
20,945
3,860
24,805
33,265
-8,460

81,700
37,200
44,464
1,777
46,241
30,833
15,408

43,300
15,400
27,840
7,612
35,452
30,222
5,230

29,000
13,200
15,800
-3,600
12,200
27,000
-14,800

39,700
18,700
21,100
-2,000
19,000
32,500
-13,500

61,900
25,600
36,200
-5,100
31,100
33,500
-2,400

54,400
25,100
29,300
20,100
49,400
31,500
17,900

32,300
13,400
18,900
-7,700
11,200
31,800
-20,600

23,800
12,300
11,500
-4,800
6,700
31,200
-24,500

45,100
21,700
23,400
34,000
57,400
28,000
29,400

Asset management
Net revenues
Expenses other than interest expenses
Pretax profits

16,467
11,994
4,473

17,247
13,166
4,081

18,001
13,090
4,911

15,768
11,771
3,997

16,191
12,022
4,169

17,278
11,702
5,576

17,298
11,018
6,280

18,843
11,397
7,446

15,951
11,238
4,713

15,301
11,058
4,243

Segments total pretax profits

69,021

87,759

64,103

640

34,547

39,376

59,034

14,559

-57,657

52,142

Adjustment between segment and financial accounting -39,878


pretax profits
Net gain/loss on trading related to economic hedging
8,600
transactions
Realized gain/loss on investments in equity securities held
-468
for operating purposes
Equity in earnings of affiliates
602
Corporate items
-19,588
Others
-29,024

-65,894

-40,917

16,469

-8,018

-13,303

-12,925

21,033

15,381

-15,246

-13,300

2,700

5,228

-6,019

5,168

-2,087

-1,505

4,221

7,737

65

-3,015

250

-713

390

291

681

-183

-316

1,877
-10,693
-43,843

1,585
-28,114
-14,073

363
-2,486
13,114

1,993
5,512
-8,791

1,380
-15,668
-4,573

5,260
-20,685
4,296

3,475
12,783
5,599

1,970
-8,442
17,815

1,301
-28,852
4,884

Source: Company data.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Macquarie Group
Scott Manning

AC

(61-2) 9220-1803

scott.r.manning@jpmorgan.com

James Nicholias
(61-2) 9220-1528

james.nicholias@jpmorgan.com

Bharat Anand
(61-2) 9220-1550

bharat.k.anand@jpmorgan.com

Please see our notes:

MQG: Operational Briefing:


Weight On Costs, Wait On
Revenues
Published 7th Feb 2012
MQG 1H12 Result: More
Clarity On Capital, But
Earnings Outlook Still Tough
Published 30th Oct 2011
MQG: Cyclical Or Structural?
A Closer Look At ROE
Published 30th Mar 2011

The market has effectively looked through the weaker FY12E guidance at the
February 2012 Operational Briefing to focus on the key issues of cost initiatives and
capital management with a view to understanding the path to recovery in ROE.
Cost Initiatives
The FY11 AGM in July 2011 saw MQGs first attempt to demonstrate a costconscious outlook in tough operating conditions. Following an A$380m reduction in
expenses in 1H12, the Operational Briefing outlined future cost initiatives which
would benefit 2H12E and FY13E earnings. We expect a similar reduction in
expenses in 2H12E, with a further ~A$260m of benefit in FY13E as the cost run-rate
is fully realised (predominantly in Macquarie Securities and Macquarie Capital).
Capital Management
In relation to the announced ~A$900m buy-back, MQG has confirmed subject to
regulatory approval, buyback expected to commence in 1H13 and to proceed
concurrent with further capital actions. In our view, the successful realisation of
~A$600m of capital efficiencies is the key behind the commitment to commence the
buyback in 1H13 (now having ~A$800m of surplus capital at hand). A likely key
trigger for continuance of the buy-back beyond the initial commencement is the
issuance of the planned A$500m hybrid once APRA rules are finalised. The
potential sale of MQGs stake in SYD (formerly MAp) is unlikely to be top of the
list, given that the current SYD share price still results in a ~A$120m adverse
valuation variance which would have to be taken to the P&L upon sale.
Prospects for ROE Recovery
Based on MQG disclosures, the blended ROE (5-year average) for Annuity Style and
Capital markets businesses (excluding legacy) is identical at 20%, generating
~A$1.7bn of earnings. In effect, this is substantially above our current earnings
forecasts (at close to half this level), as the outlook for MQGs Capital markets
businesses remains challenging, resulting in ongoing poor levels of profitability.
Table 109: Approximate Business Basel 3 ROE
A$ in billions

Macquarie Funds Group


Corporate and Asset Finance
Banking and Financial Services
Annuity Style Businesses

Basel 3
Equity
1.5
1.6
0.7
3.8

Macquarie Securities
Macquarie Capital
FICC
Capital Market Businesses

0.7
1.3
2.5
4.5

Run-off and legacy


Corporate and other
Corporate and Other

1.3
1.1
2.4

Total Average Ordinary Equity

10.7

FY12E
ROE.

5 Yr Ave
ROE

5 Yr Av
Earnings*

23%

20%

0.8

0%

40%
20%
15%
20%

0.3
0.3
0.4
0.9

16%

1.7

Source: Company data (Slide 49, 1H12 results presentation), J.P. Morgan estimates

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Valuation
We value each of MQGs different styles of earnings stream with consideration given
to the appropriate multiples for each, as well as placing value on the equity held
against balance sheet equity investments which generate minimal direct earnings, and
surplus capital. On this basis, our valuation is A$30.06.
Our FY13E forecasts reflect a mere 2% underlying revenue growth and fully
incorporates the benefit of MQGs announced cost initiatives. Despite a subdued
revenue growth outlook, we think significant operational leverage (ie ~85%
efficiency ratio) at currently depressed earnings levels will attract investor interest as
markets recover.
In our view, MQG will continue to trade in line with Global IB comps on a P/B
basis. Following its expansion into offshore markets over recent years during
periods of dislocation during the GFC, investors will take Global IB outcomes as a
proxy for MQGs revenue growth prospects.
Table 110: MQG Valuation JPM
A$ in millions
Earnings
Macquarie - JPM FY13E
Traditional Banking
Funds Management
Investment Banking
Core Earnings
Capital - Equity Investments

279
215
254
749
88
836
28
864

Capital - Surplus

Multiple
8.0x
12.0x
7.0x
8.8x
1.5x
11.2x
8.0x
12.1x

Value

Share
count (m)

per share

348
348
348
348
348
348
348
348

6.41
7.40
5.11
18.93
7.91
26.84
3.22
30.06

2,233
2,578
1,781
6,593
2,754
9,347
1,123
10,470

SHF

ROE

2,332
1,500
3,896
7,728
2,623
10,351
900
11,251

P/B

12.0%
14.3%
6.5%
9.7%

0.96x
1.72x
0.46x
0.85x
1.05x
0.90x
1.25x
0.93x

8.1%
7.7%

Source: J.P. Morgan estimates, Bloomberg.

Figure 100: Macquarie Historical Price/Book Relative to Global Investment Banking Peers
5x
4
3
2
1
0
Jan-06

Jan-07

Jan-08
MQG AU Equity

Jan-09

Jan-10

Jan-11

Jan-12

Average (ex MQG)

Source: Company data, J.P. Morgan estimates.


Note: composite includes Deutsche Bank, Goldman Sachs, Credit Suisse, Morgan Stanley, UBS and Macquarie.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

MQGs performance in Australia


Despite MQG embarking on a expansion into European and American markets
throughout the course of the GFC, the majority of earnings are still generated from
the Australian operations (ie 40%) relative to ~30% for America and ~15% each for
Asia Pacific and EMEA (refer Figure 101).
Figure 101: MQG Geographical Revenue Split
70%
60%
50%
40%
30%
20%
10%
0%
2005

2006
Australia

2007
Americas

2008

2009
Asia Pacific

2010

2011

EMEA

Source: Company data

ECM
As highlighted in Table 111, MQG relatively speaking recorded a strong
performance in ECM activity in 2011, ranking second in terms of announced deals
behind UBS. However given the backdrop of weak equity volumes relative to history
(Table 111), the revenue contribution to its markets facing businesses was still
subdued. Some of the primary or secondary market equity raisings that MQG
participated in included Origin Energys ~A$800m rights issue and Southern Cross
Media Groups ~A$250m rights issue. Whilst MQGs performance in 2011 in
respect to ECM flows is a positive, it remains to been seen whether they are able to
achieve the same relative performance in 2012 given that management has
highlighted ~A$300m of cost savings for the Securities/Capital divisions at their
recently conducted Feb-12 Operational Briefing.
DCM
MQGs absence from the domestic DCM league tables (refer Table 111above), does
not come as a surprise, as this area has traditionally been dominated by the presence
of the four major Australian Retail Banks (i.e. ANZ, CBA, NAB and WBC) which
have large wholesale debt issuance programs and often utilize each others services in
this area.
M&A
For MQG specifically, whilst recently they have been able to benefit from positive
market activity in the sectors highlighted above, they still lag well behind global
peers in the domestic M&A league tables (refer Table 111above). This is also a
function of MQG's transition away from its specialist funds model towards vanilla
investment banking, which provides structural headwinds to M&A volumes.

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13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Table 111: Investment Banking Australia/NZ League Tables 2011 Announced


ECM
Rank

Company

1
2
3
4
5
6
7
8
9
10

UBS
Macquarie
J.P. Morgan
Morgan Stanley
BAML
Credit Suisse
RBS
Goldman Sachs
Deutsche Bank
Citi

DCM
Vol
(US$mm)
5,022
2,128
1,890
1,498
1,456
1,439
944
642
633
409

No.
36
20
13
15
12
8
44
10
11
5

Rank

Company

1
2
3
4
5
6
7
8
9
10

J.P. Morgan
Citi
BAML
Barclays Capital
Credit Suisse
Deutsche Bank
Nomura
HSBC
UBS
BNP Paribas

M&A
Vol
(US$mm)

No.

7,576
6,380
6,263
6,168
5,344
3,655
3,182
3,169
2,855
2,709

28
25
24
21
17
15
16
13
12
13

Rank

Company

1
2
3
4
5
6
7
8
9
10

Goldman Sachs
J.P. Morgan
UBS
Barclays Capital
Morgan Stanley
Moelis
Scotia Capital
RBS
Flagstaff
Macquarie

Vol
(US$mm)
52,233
38,266
29,997
29,968
27,152
25,690
19,637
19,496
16,173
15,520

No.
44
18
33
6
10
6
2
8
8
39

Source: Bloomberg. Note The Major Australian Retail Banks (ANZ, CBA, NAB and WBC) have been omitted from the DCM rankings listed above.

Equities
MQG continues to be ranked as a Top 3 Equities firm in the benchmark domestic
Peter Lee survey, and held ~8% market share in 2001 across domestic cash equities,
ranking fourth behind UBS, Citi and Deutsche Bank (refer Figure 102).
Figure 102: 2011 Broker Market Share - ASX Traded Buy & Sell
14%
12%
10%
8%
6%
4%
2%
0%
UBS

Citi

Deutsche MQG
Bank

Goldman Credit
Sachs Suisse

Morgan BOAML
J.P. Nomura
Stanley
Morgan

Source: IRESS

Valuation and Risks


We value each of MQGs different styles of earnings stream with consideration given
to the appropriate multiples for each, as well as placing value on the equity held
against balance sheet equity investments which generate minimal direct earnings, and
surplus capital. On this basis, our June 2012 price target of A$30.06 reflects our
current valuation based on FY13E earnings. Risks to the share price target (both
upside and downside) include activity levels in global financial markets and
successful integration of MQGs recently acquired businesses.

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13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Investec
Mervin Naidoo

AC

(27-11) 507-0716

mervin.x.naidoo @jpmorgan.com

Turnaround potential underestimated, strong capital,


improving ROE and substantial WM franchise
INVESTEC INVESTMENT BANKING STRATEGY:
IB Contribution and Outlook: We estimate that Investecs Capital Markets (CM)
and Investment Bank (IB) units contributed c61% to group operating profit in Sep-11
(adjusted for run-off books in Private Banking), up from an average of 43.7% (20052010). The SA operating profit contribution (2005-2010) averaged 67%. The pre-tax
ROE on the combined IB and CM units was 21.3% in Sep-11. The IB unit made a
loss of GBP5.5m while CM generated earnings of GBP143m in Sep-11.

Please see our notes:


"Investec Plc - Q3FY12 Interim
Management Statement",
published 3rd Feb 2012
Investec Plc: A mixed bag with
banking a continued drag estimate cuts but valuation
supports OW, published 18th Nov
2011

The group has reorganized itself around 3 pillars (announced Nov-11), namely Asset
management, Wealth and Specialised Banking. The continued focus on fee
generation through third party asset gatherers bodes well for the group in our view.
The group plans to foster closer working relationships across its banking operations
in an effort to capture greater share of clients wallet and extract synergies across the
group. The strategy is a generic banking one but the execution in our view is
challenging as we believe Investecs culture is well entrenched and has historically
not lent itself to leveraging the group well. If executed appropriately, this strategy
should realize cost savings through rationalizing back-office infrastructure for the
group.

Figure 103: SA IB historical deal values ($m)

Figure 104: SA IB historical bank revenues ($m)


450

60,000
ECM

DCM

M&A

50,000

400

ECM

DCM

M&A

350
300

40,000

250

30,000

200
150

20,000

100

10,000

50
-

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Dealogic.

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Dealogic.

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13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 105: Operating profit benefiting from improving impairments

Figure 106: Contribution of major business units


80.0%

60.0%
FY11

50.0%

70.0%

FY12e

40.0%

60.0%

30.0%

50.0%

20.0%

40.0%

10.0%

IB & CM
PB & AM

30.0%

0.0%
PB

WM

IB

CM

AM

PA

GS

-10.0%

20.0%
10.0%

-20.0%

0.0%
2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E

-30.0%

Source: Company reports, J.P. Morgan estimates.

Source: Company reports.

Figure 107: SA operating profit contribution remains strong

Table 112: Allocation of capital will improve as Private Bank


impairments normalise

80.0%
70.0%

30.0%

Private Banking
Wealth and Investment
Capital Markets
Investment Banking
Asset Management
Property Activities
Other

20.0%

Source: Company reports.

60.0%
50.0%
40.0%

Allocated
Pre-tax
Capital
Current ROE
33.8%
-1.70%
11.7%
9.90%
32.0%
27.50%
9.3%
-3.80%
4.6%
81.70%
2.7%
13.50%
5.9%
-9.80%

10.0%
0.0%
2005A

2006A

2007A

2008A

2009A

2010A

2011A

Source: Company reports.


Source: Company reports.

Investec remains a formidable player in select niches in our view. It is a


strong equity and property market play and trading tends to mirror its customer
needs and its principal investments rather than a substantial franchise at a product
level. We do not see Investec as having significant scale to compete with its
bulge bracket peers in trading businesses.
We believe Investec remains a Tier II player in SA FICC businesses and a
Tier III player in UK FICC businesses. As such, we believe that its success lies
in its strong capital position, continued growth in asset and wealth management
operations, improving margins in lending and flow-based trading and improved
efficiencies to support ROE in lending operations. Much of our expected
recovery factors in a normalization of the group's impairment charge.
The Private Bank (Figure 108) has seen significant impairment charge in its SA and
UK (including Ireland) structured property books in H2FY11, with Australia
experiencing a more substantial adjustment in H1FY12. While there remains
substantial risk to the residential property book provisions in Australia and Ireland,
we believe these charges may experience elevated levels in H2FY12 and H1FY13.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 108: Private Banking impairment analysis


100,000

Other
Growth and Acquisition Finance

80,000

Structured Property Finance

60,000

40,000

20,000

0
1H11

2H11

1H12

1H11

Aus

2H11
SA

1H12

1H11

2H11

1H12

UK
-20,000

Source: Company reports, J.P. Morgan estimates.

While the SA and UK portfolios appear to be over the worst and should ease, we
expect SA to decline, with UK staying relatively flat. Australia has a residential
development book of A$450m (A$90m provisions versus A$380m in default). The
Irish residential property development book is GBP200m (50% provisions versus
c90-100% in default). Based on the levels of default, we believe the provisions
against these books will continue into H2FY12e and H1FY13e. Both the Australia
and Irish development property books are in run-off.
Where does the balance of risks lie? In FY11, Private Bank made a GBP91m loss
versus average (2002-2010) operating profit of GBP73.1m and peak levels of
GBP166.4m. In H1FY12, the Private Bank made an operating loss of GBP4.9m
(profit of GBP37m on core book and a loss of GBP42m on run-off books).
INVESTMENT CASE AND VALUATION:
Notwithstanding a delay in earnings recovery, we nevertheless remain
constructive on the stock as:

High liquidity and capital levels are already in the base. New business
margins will be strong (already seeing evidence of this) and combined with
the groups focus on capital light activities should support the ROE outlook.
Capital levels are adequate (Investec Plc: 11.8%; Investec Ltd 11.6%). We
estimate core tier 1 (Basel 3) for Investec at 9.5% at present.
We expect activity levels to continue improving (albeit more gradual)
and this will support top-line prospects. The group is structuring itself to
achieve greater internal synergies and right-size for current market
conditions. Most of operating profit has historically come from SA (c70%)
which also provides us with comfort.
Impairment release (although elevated and more gradual) cushions
earnings risk. The risks to the development property books however
remain and we now forecast more gradual release.
At current valuation at 0.9x PB (CY12e), we remain constructive on the
stock. Notwithstanding the risk to earnings from further write-down of runoff books (see below), we calculate the worst case impact to NAV
ofsGBP676m, resulting in NAV/sh of 360p (PB of 1.14x on adjusted basis).
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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

On our estimates, the group is capable of 13.5% ROE in FY14e and 15.4%
by FY16e.
What is the impact of written off remaining exposures in Private Bank on group
valuation? Assuming a full provision of the remaining run-off book exposures will
result in a further A$360m and GBP100m in provisions. The impact on NAV is
GBP676m, resulting in NAV/sh of 360p.
Our price target reflects our SOTP valuation, which uses 12m forward EPS and
the weighted peer multiples 12m forward. Our Nov-12 SOTP-derived price
target is 500p (6466c).
Table 113: SOTP valuation
Division
Private banking
Wealth and Investment
Capital Markets
Investment banking
Asset management
Property activities
Central services
Less: Value of run-off books not provided for
Total
Shares in issue (million)
SOTP fair value per share (GBp)
SOTP (12m forward TP)
ZAR:GBP exchange rate

Valuation method
P/B ratio
P/E ratio
P/E ratio
P/E ratio
P/E, Assets under management *
P/E ratio
P/E ratio

Multiple
0.53
10.0
9.0
13.3
*
10.8
7.0

Base case
million
1057
310
1599
164
1143
179
15
-676
3790
840.0
451
500
12.92

Source: Bloomberg, J.P. Morgan estimates. Conversion for ZAR/GBP using exchange rate of 12.92. * SA asset mgt on 2.92% of AUM and 12x PE; International asset mgt on 1.52% of AUM and
10x PE.

Risks to Our View


Key risks to our OW recommendation and price target include:
Stronger than expected market performances from UK and South African equity
and property markets in particular.
Further deterioration in the UK which damages capital positions and weakens
earnings from UK operations more than we anticipate.
If Investec gains market share quicker than we expect and provisioning required
eases more than anticipated, earnings could surprise on the upside.
Currency risk most of the operating profits were from South Africa. If the rand
exchange rate is weaker than our estimates, it could dent Sterling reported
earnings.
Refinancing risk. With c52% of total assets outside of SA, Investec has to raise
funding in difficult conditions, with a concomitant impact on margins and/or asset
growth.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

AC

Delphine Lee

(33-1) 40 15 49 28

delphine.x.lee@jpmorgan.com

Kian Abouhossein
(44-20) 7325-1523

kian.abouhossein@jpmorgan.com

Please see our notes:


French Banks: Structural
deleveraging inevitable downgrade
BNP to N and CASA to UW 27 Jan
2012
European banks: All eyes on funding:
LCR, the next undiscounted regulatory
headwind 6 Sept 2011
Global Investment Banks: Investment
Banking wallet outlook all eyes on
equity derivatives on 8 Sept 2010

BNP Paribas
Profitable Tier II player in IB as run like an agency business
further capital release expected
BNP PARIBAS INVESTMENT BANKING STRATEGY:
IB Contribution and Outlook: We estimate BNP Paribas Corporate & Investment
Bank contributes 32% of group pretax profits in 2013e, and consumes 40% of
allocated capital based on our methodology (10% of RWAs for CIB). The group
remains a Tier II player with 9.5bn of revenues in CIB in 2013e, split 3.6bn in
Fixed Income, 2.2bn in equities & advisory and 3.7bn in financing. However,
BNPP benefits from solid positions in equity derivatives, European Fixed Income
and a large corporate franchise in Europe.
BNP Paribas remains a strong player in equity derivatives, with estimated
1.7bn of revenues in 2011. The group is a relatively small cash equity house
through Exane BNPP, and the prime brokerage business acquired from Bank of
America also generated negligible revenues vs. equity derivatives. BNP Paribas
see further potential from a) a more rapid roll out of standardised or listed product
distribution platforms and b) emerging markets.
BNP Paribas is a Tier II player in Fixed Income globally with about 4bn of
clean revenues in 2011, despite decent market shares in Europe (#1 on all bonds
in euros). Main strengths in Fixed Income are in Rates & FX, and to a lesser
extent credit. The group aims to gain market share from smaller players exiting
gradually and other players scaling down due to capital constraints.
Financing businesses remain core to CIB despite the deleveraging, with
3.7bn of revenues in 2013e post deleveraging vs. 4.3bn in 2011. We estimate
total CIB loan book to decline from 150bn to about 115bn end 2012e, with a
structured finance book of 55bn. The group aims to leverage its global network
to develop banking and cash management services.
Main strength of BNP Paribas Corporate & Investment Bank is its relatively
high profitability post regulatory changes. BNPP CIB would be the least impacted
by regulatory changes within French banks and IB peers with CIB ROE declining to
9.7% from 16.2% in 2013e, as a) the group benefits from one of the lowest
cost/income ratio at 61% vs. 72% industry average, b) lower impact from Basel 2.5
with a net RWAs increase of 21% vs. industry average of 30%, and c) the lowest
impact from Basel 3 with an increase of RWAs of 30bn only, CVA and CCR
related, equivalent to 20% increase vs. 40% industry average. Basel 3 impact is
significantly lower due to the smaller legacy assets portfolio vs. peers and lower
impact from securitization the group already currently risk weights lower rated
tranches at 1250% and hence is not impacted by the rule change. The legacy assets
amounted to about 10bn in CIB, mostly Dutch RMBS, and overall quality is high
with over 70% of AAA-rated assets. We estimate the legacy assets portfolio in CIB
had RWAs of 15bn end 2012e under Basel 3 standards, or 7% of total CIB RWAs
post regulatory changes.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

CIB deleveraging: The group targets 45bn of RWAs reduction by end 2012, of
which 22bn had already been achieved by end 2011. This should lead to a capital
improvement of 57bp. BNPP has also already achieved most of the targeted $65bn
reduction in USD liquidity needs, with CIB USD cash balance sheet running with a
$19bn surplus of stable funding. Deleveraging will continue to focus on asset
repricing, stricter origination policies and asset sales/business disposals, mostly in
structured finance. Part of the CIB assets will be sold at an estimated 3-5% discount
to book leading to losses of c.0.8bn pretax. Revenues impact is 1.0bn net of 0.4bn
of repricing, offset by 450m of cost savings (c.1,400 headcount reduction), hence
the pre-prov impact on a FY recurring basis will be about 0.5bn or 10% of CIB
clean pretax in 2011.
INVESTMENT CASE AND VALUTION:
We remain Neutral on BNP Paribas on valuation grounds. BNP Paribas trades at
7.3x 2012e earnings and 0.8x NAV 2012e for a RoNAV of 10.8% ex own debt, vs.
SG at 0.5x NAV for RoNAV of 7.5% and European banks at 0.9x NAV for a
RoNAV of 10%. Long term, the stock should re-rate towards 1x tangible book value
in our view, however, we see more limited upside in the medium term given the
ongoing uncertainties around the Italian sovereign situation. Within French banks,
BNP Paribas appears better positioned from a capital and funding perspective, and
should be able to comply with new Basel 3 requirements quicker and at a lower cost.
However, this is already reflected in the valuation with the stock having
outperformed SG by 33% over the past year, and trading at a significant premium to
French peers.
Table 114: BNP Paribas SOP valuation (Dec-12e)
million

Retail banking in France


SFS + Intl retail
Personal Finance
BancWest
Europe Mediterranean
Equipment solutions
Investment Solutions
Wealth & Asset Management
Insurance
Securities Services
Corporate and investment banking
BNL
BeLux retail banking
Other central revenues/costs
Other capital
Group
Nb shares (m)
Target price ()

2013
Earnings
1,327
1,598
711
447
58
381
1,268
524
581
163
2,422
263
369
-821
91
6,516

P/E

Capital

P/BV

7.5
6.6
6.5
6.5
9.0
6.5
7.4
8.0
7.0
7.0
6.0
6.0
6.5
8.0

6,565
12,691
3,697
3,232
3,567
2,195
7,265
1,565
5,300
400
21,141
6,028
3,868
4,765
4,321
66,644

1.5
0.8
1.3
0.9
0.1
1.1
1.3
2.7
0.8
2.9
0.7
0.3
0.6

7.8

1.0
0.8

AuM
(bn)

853.0
692.0
161.0

% of
AuM

1.1%
0.6%
2.5%

Value/
share
8.1
8.6
3.8
2.4
0.4
2.0
7.6
3.4
3.3
0.9
11.8
1.3
1.9
-1.5
3.5
41

% of
total
20%
21%
9%
6%
1%
5%
18%
8%
8%
2%
29%
3%
5%
-4%
8%
100%

Valuation

ROE

9,955
10,532
4,623
2,906
525
2,478
9,398
4,188
4,066
1,143
14,533
1,580
2,397
-1,805
4,321
50,910
1,230

20%
13%
19%
14%
2%
17%
nm
33%
11%
41%
11%
4%
10%
10%

41

Source: J.P. Morgan estimates.

Valuation Methodology
Our SOP-based Dec-2012E price target for BNP Paribas is 41. Our SOP
multiples are differentiated by business (e.g. 6-7x for CIB, 8x for French retail, 9-10x
for EM) and franchise quality. Note that we have also accounted for an additional
70bn in RWAs in Corporate & Investment Banking resulting from new Basel 2.5
and Basel 3 rules.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Risks to Our View


Key risks to achieving our price target on the downside/upside include:
The performance of the capital markets, in particular with respect to demand for
equity derivatives, and derivatives trading profits in the environment of
increasing correlation and falling dividend expectations impacting the CIB
division, as well as structured credit pricing leading to potential asset writedowns
both at BNP Paribas and Fortis Bank.
Asset quality, and the performance of the Italian, Emerging Markets, US
operations in BancWest as well as its US commercial real estate book, which in
our view requires potentially further writedowns.
The French retail banking environment, and the net interest margin trends in this
market, equity markets performances, macro-economic conditions as well as the
impact of the interest rate environment and changes to the shape of the yield
curve.
Potential additional sovereign debt writedowns on the group's exposures to
Greece, Ireland, Portugal, Italy and Spain. Negative capital and funding
implications from the ongoing uncertainties on the sovereign risk. Deterioration
in the funding outlook for Italy in a scenario with weaker economic conditions
and further ratings downgrades.
Upside risks: Significant relaxation in the Basel 3 liquidity rules.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Socit Gnrale
AC

Delphine Lee

(33-1) 40 15 49 28

delphine.x.lee@jpmorgan.com

Kian Abouhossein
(44-20) 7325-1523

kian.abouhossein@jpmorgan.com

Tier I Equity Derivatives, but Tier II IB overall leading to


further restructuring and capital release
SOCIETE GENERALE INVESTMENT BANKING STRATEGY:
IB Contribution and Outlook: We estimate Socit Gnrale Corporate &
Investment Bank contributes 32% of group pretax profits excluding legacy assets in
2013e, and consumes 34% of allocated capital excluding legacy assets based on our
methodology (10% of RWAs for CIB).

Please see our notes:


French Banks: Structural
deleveraging inevitable downgrade
BNP to N and CASA to UW 27 Jan
2012
European banks: All eyes on funding:
LCR, the next undiscounted regulatory
headwind 6 Sept 2011
Global Investment Banks: Investment
Banking wallet outlook all eyes on
equity derivatives on 8 Sept 2010

The group remains a small player in IB with 6.2bn of revenues in CIB in 2013e,
split 2.6bn in Equities, 1.6bn in Fixed Income and 1.9bn in Financing &
Advisory. SGs main strength is in equity derivatives where the group has a leading
franchise, just behind GS. In Fixed income and Financing, SG has decent market
shares in Europe only, but still well behind BNPP and Tier I investment banks.
Socit Gnrale has a leading franchise in equity derivatives, with estimated
2.6bn of revenues in 2013e, up from 2.4bn in 2011. The group is a relatively
small cash equity house and has no real prime brokerage activities. The group
aims to consolidate its global leadership position in equity derivatives in a less
competitive environment.
Socit Gnrale is a small player in Fixed Income globally with about 1.6bn
of clean revenues in 2013e, down from 1.8bn in 2011. The group has decent
market shares in Euro corporate bonds and Euro rates, however, remains subscale
globally. The long-term ambition of the group has never been to compete with
Tier I players, and the main rationale for investing in the business is to support its
European client base, leverage its structured product franchise and position CIB
for increased disintermediation.
Financing businesses are scaled down with the deleveraging, with 1.9bn of
revenues in 2013e post deleveraging vs. 2.5bn in 2011. We estimate total CIB
loan book to decline from c.100bn to about 80bn end 2012e, with a structured
finance book of 32bn, as the group refocuses on its core strengths: natural
resources financing, and core EMEA clients.
Relative profitability of Socit Gnrale Corporate & Investment Bank
understated due to legacy assets. SG CIB would be the most impacted by
regulatory changes within IB peers with CIB ROE declining to 5.5% from 14.6% in
2013e due to the legacy assets. Excluding the legacy assets, CIB ROE would be
8.5% vs. industry average of 7.7%. At 8.5% ROE however, we believe further
restructuring/deleveraging is required in Fixed Income & Financing which are the
business most impacted by regulatory changes.
CIB deleveraging: SG targets 30-40bn of RWAs reduction or a decline of 5060bn in liquidity needs. The deleveraging is focused on legacy assets as well as CIB
businesses affected by regulations and consuming USD funding: certain capital
markets activities, but also US real estate financing, aircraft/shipping finance,
leveraged finance and asset based finance. For more details on the deleveraging plan,
please refer to French Banks: Structural deleveraging inevitable downgrade BNP
to N and CASA to UW on 27 Jan 2012.

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kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Legacy assets: SG reduced its legacy assets portfolio to 17bn end 2011, down
from 33bn end 2010, as the group accelerated the disposals with 13bn of sales
achieved in 2011 with limited impact from disposals (116m or about 1% of
assets). The group targets to reduce the legacy assets portfolio to 10bn by 2013.
We estimate the legacy assets portfolio in CIB had RWAs of 20bn under Basel
2.5 end 2011 and close to 85bn under Basel 3 pre mitigation and 70bn post
mitigation of 15bn. SG is focusing on the dismantling of CDOs of RMBS which
would be the most capital intensive under Basel 3, and the group has already
achieved 1.3bn of capital savings by 2013, of which 0.9bn already freed up at
end 2011.
Deleveraging in core businesses: The group also started selling loans in the
secondary market with 6bn of disposals in 2011 at reasonable cost (163m or
3% discount to BV). We have however assumed the haircut on asset disposals
will be closer to 4%-5%. Management guided to 500-700m of additional losses
on disposals. We estimate the group targets overall 20bn reduction in the
financing loan book, of which 6bn has been achieved end 2011.
Financial impact: Overall, SG expects the deleveraging to reduce CIB revenue
run rate by 750m (12% of 2011 CIB revenues), offset by cost savings of 250m
(5% of 2011 CIB costs, about 880 headcount reduction in France alone), resulting
in pre-provision impact of 500m (25% of 2011 CIB excl. legacy assets or 11%
of group pretax).
INVESTMENT CASE AND VALUTION:
We remain OW on SG as the risk reward appears attractive at current prices
and we expect investor sentiment to improve with the ongoing disposals of CIB
assets and management delivery on the announced deleveraging plan. Whilst
profitability is expected to remain low in the next few years, we feel this has been
more than reflected in valuation despite the +23% outperformance vs. the sector
ytd, the stock is still at 2012E 7.5x PE, 0.5x NAV vs. 9.4x and 0.9x NAV on average
for the sector. Even adjusted for the 5bn of capital shortfall, SG would still be
trading at 0.6x NAV, and liquidity risk has been significantly reduced by the extra
ECB support, hence, we feel that the discount to the sector is largely unjustified.
Table 115: Socit Gnrale SOP Valuation (Dec-12e)
million

Retail banking in France


Specialised financial services (SFS)
Retail international
Global Investment & Management Services
Asset management
Private Banking
Securities Services & Online services
Total Corporate & Investment Banking
Central revenues/costs
Unallocated capital
Group
Nb shares
2013E Target price

2013
Earnings
1,416
315
276
302
129
140
32
950
-463
-34
2,761

P/E

Capital

P/B

8.0
7.0
8.5
7.9
7.5
8.5
7.0
6.0
7.5

6,184
3,146
7,410
1,648
458
554
636
17,256
1,350
-2,092
34,902

1.8
0.7
0.3
1.4
2.1
2.1
0.4
0.3

7.2

1.0
0.6

AuM (bn)

189.7
96.0
93.7

% of
AuM

1.3%
1.0%
1.3%

Value/
share
15
3
3
3
1
2
0
8
-3
-3
26

% of
total
57%
11%
12%
12%
5%
6%
1%
29%
-11%
-11%
100%

Valuation

ROE

11,329
2,202
2,346
2,386
970
1,190
225
5,698
-2,123
-2,092
19,746
756
26

23%
10%
4%
18%
28%
25%
5%
6%
8%

Source: J.P. Morgan estimates.

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13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Valuation Methodology
Our sum-of-the-parts-based Dec-2012E price target for Socit Gnrale is 26.
Note that our SoP multiples are differentiated by business (e.g. 6-7x for CIB, 8x for
French retail, 9-10x for EM) and franchise quality. We have also accounted for an
additional 112bn in CIB RWAs as a result of Basel 2.5 and Basel 3 rules.
Risks to Our View
We believe the key risks that could keep our OW rating and price target from being
achieved include the following:
Asset quality, and the performance of the emerging markets businesses as well as
emerging market macro risks related to FX as well as the political environment
Performance of the capital markets, in particular with respect to demand for
equity derivatives, and derivatives trading profits in the environment of
increasing correlation and falling dividend expectations impacting the CIB
division as well as structured credit pricing leading to potential asset writedowns.
The French retail banking environment, and the net interest margin trends in this
market, as well as the impact of the interest rate environment and changes to the
shape of the yield curve.
Potential additional sovereign debt writedowns on the group's exposures to
Greece, Ireland, Portugal, Italy and Spain. Negative capital and funding
implications from the ongoing uncertainties on the sovereign risk.

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(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Crdit Agricole
Tier II IB in restructuring to be focus on agency model
AC

Delphine Lee

(33-1) 40 15 49 28

delphine.x.lee@jpmorgan.com

Kian Abouhossein
(44-20) 7325-1523

CREDIT AGRICOLE INVESTMENT BANKING STRATEGY:


IB Contribution and Outlook: We estimate Crdit Agricole Corporate &
Investment Bank contributes 32% of group pretax profits excluding legacy assets in
2013e, and consumes 30% of allocated capital excluding legacy assets based on our
methodology (10% of RWAs for CIB).

kian.abouhossein@jpmorgan.com
Please see our notes:
French Banks: Structural
deleveraging inevitable downgrade
BNP to N and CASA to UW 27 Jan
2012
European banks: All eyes on funding:
LCR, the next undiscounted regulatory
headwind 6 Sept 2011
Global Investment Banks: Investment
Banking wallet outlook all eyes on
equity derivatives on 8 Sept 2010

The group remains a small player in IB with 4.7bn of revenues in CIB in 2013e,
split 1.4bn in Equities, 1.1bn in Fixed Income and 2.5bn in Financing businesses.
The group is number 10 Corporate & Investment Bank in Europe5. CASA has
already substantially reduced its capital market activities since 2008, and is a small
player both in Equities and Fixed Income, even in Europe. CASAs main strength is
in project finance and trade finance which have been impacted by the challenging
market conditions in 2011, however, the group is adapting its model in financing
businesses to defend some of its market shares.
Crdit Agricole is a small player in equities, with estimated 1.4bn of revenues
in 2013e. With the deleveraging plan, the group is exiting equity derivatives. The
equities business line also includes Advisory & ECM as well as Newedge.
Excluding these activities, cash equities through Cheuvreux and CLSA generate
about 600m of revenues in our estimates. In equities, CA CIB is in discussion
with CITICS to explore opportunities to create a global institutional brokerage
platform and an Asia-Pacific focused investment bank. CITICS is already
expected to purchase a 19.9% equity stake in each of CLSA and Cheuvreux for
$374m. The goal is to create a leading research driven agency only equity house
with the merger of Cheuvreux and CLSA and larger business cooperation with
CITICS.
Crdit Agricole is also a very small player in Fixed Income globally with
about 1.1bn of clean revenues in 2013e, down from 1.3bn in 2011. With the
deleveraging, CA CIB is exiting commodities. The group is #7 in Euro bonds but
remains subscale even in Europe; the model in Fixed Income is agency-based,
focusing on servicing the groups target corporate customers and positioning CIB
for increased disintermediation.
Financing businesses are scaled down with the deleveraging, with 2.1bn of
revenues in 2013e post deleveraging vs. 2.5bn in 2011. CASA had strong
market shares in some areas, e.g. #1 aircraft finance, #3 project finance and #5
export finance globally, and #3 in loan syndication in Europe. These activities
have suffered from the USD funding squeeze, however, the group aims to
continue to defend its project and trade finance positions. To achieve that, CASA
is adapting its model to an originate-to-distribute system, with the bank keeping
20% vs. most of the loans previously.
CIB deleveraging: The group will discontinue certain businesses, some nonstrategic
international operations, and scale down financing activities mainly, focusing on
activities which mostly consume dollar funding, low ROE and return on liquidity.
5

Source: Credit Agricole.


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13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

The target is 15-18bn reduction by 2012 of which 11bn was achieved by end
2011. The asset deleveraging will mainly focus on equity derivatives and financing
activities. Overall, CASA aims to reduce about 30bn of RWAs, to be achieved
through the cutback in operations, transfer of loans and portfolio disposals. Losses on
disposals are guided at 890m, split 240m in Q4 11 and 650m in 2012.
Restructuring costs of 336m were booked in Q4 11 CASA is reducing staff by
13% or 1,750 FTEs, split 550 in France and 1,200 in other countries. The negative
revenue impact of 350-375m is expected to be offset by cost savings of estimated
c.200m. We estimate earnings impact of 350m pretax in CIB. For more details on
the deleveraging plan, please refer to French Banks: Structural deleveraging
inevitable downgrade BNP to N and CASA to UW on 27 Jan 2012.
INVESTMENT CASE AND VALUTION:
We remain Underweight on Credit Agricole as valuation looks relatively
unattractive compared to French peers. CASA is trading at 2012E 6.4x earnings, 0.5x
NAV for RoNAV of 7.8%, however, we find risk reward unattractive, given that the
group remains vulnerable through a) its 5.5bn funding exposure to Emporiki, and b)
its weak capitalization levels at 5.9% Basel 3 Common Equity end 2012e, especially
in a worst case scenario for Greece. For similar valuations, we prefer SG, with lower
exposures to peripheral risk.
Table 116: Crdit Agricole SOP Valuation (Dec-12e)
million

Total Retail Banking


Credit Lyonnais - French Retail
Regional Banks - French Retail
Specialised Financial Services (SFS)
International Retail Banking
Asset Gathering
Asset management
Private Banking
Insurance
Corporate & Investment Banking
Other revenues and costs
Other capital
Group
Target Price

2013
Earnings
973
701
1,014
391
-1,133
1,779
554
119
1,106
816
-1,362
-83
2,122

P/E
8.8
8.0
8.0
7.0
7.0
8.1
8.0
9.0
8.0
7.0
4.7
6.3

Capita
l
15,331
2,369
3,120
4,118
5,724
12,962
9,680
16,369
-2,296
-6,562
35,804

P/BV

AuM
(bn)

% of
AuM

0.6
2.4
2.6
0.7
-1.4
1.1
0.9
0.3
1.0
0.4

658.6
134.3
232.7

0.7%
0.8%
3.8%

Value/
share
3.4
2.3
3.3
1.1
-3.2
5.8
1.8
0.4
3.6
2.3
-3.5
-2.6
5.3

% of
total
64%
42%
61%
21%
-60%
108%
33%
8%
66%
43%
-65%
-49%
100%

Valuation

ROE

8,523
5,605
8,116
2,734
-7,932
14,352
4,434
1,073
8,845
5,709
-8,699
-6,562
13,324
5

6%
30%
33%
9%
-20%
14%
11%
5%
6%

Source: J.P. Morgan estimates.

Valuation Methodology
Our sum of the parts based Dec-2012E price target for Credit Agricole is 5.
Note that our SoP multiples are differentiated by business (e.g. 6-7x for CIB, 8x for
French retail, 9-10x for EM) and franchise quality.
Risks to Our View
Key investment risks on the downside and upside include:
Interest rate trends and changes mainly related to yield-curve, to the competitive
environment and regulation.
Capital markets environment as well as structured credit pricing, impacting the
CIB division as well as potential asset writedowns.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Deteriorating asset quality could also have an impact on our valuation, as could
the development of capital markets.
The ownership structure, with the 41 Regional Banks holding a majority stake of
55% in CASA, also limits the influence and interests of minority shareholders.
Regulatory risk with uncertainties regarding capital and liquidity requirements.
Sovereign risk through the government bond exposures and lending exposures in
Greece and Italy. Deteriorating funding conditions for Italy with weaker
economic growth and further ratings downgrades. Disorderly default of Greece.
Upside risks: significant relaxation of the Basel 3 liquidity rules, disposal of
Emporiki.

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13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

RBS
Restructuring to benefit post 2013E
Raul Sinha

AC

(44-20) 7742-2190

raul.sinha@jpmorgan.com

IB Contribution and Outlook: RBS GBM consumes 39% of Core divisions capital
in 2013E & contributes 23% to the Core PBT (from 45% in 2010) ex bank levy on
our estimates.

Vivek Gautam
(44-20) 7742-3244

vivek.gautam@jpmorgan.com

Please see our notes:


UK Banks: Restructuring for
returns - RBS first to move but
won't be the last. Upgrade RBS to
Neutral from UW published 9
January 2012
Royal Bank of Scotland:
Adjusting estimates for lower
revenues, expect restructuring
impact on RoE post 2013
published 24 February 2012
Royal Bank of Scotland:
Restructuring in line with
expectations published 12 January
2012
UK banks: No safe havens - Prefer
UK Asians ahead of UK
Domestics: CRE Forbearance and
wholesale funding risks to weigh
published 28 October 2011

FICC is the biggest contributor to RBS GBM revenues with Rates, FX, and
mortgage trading strongly placed. We estimate 3.4bn FICC revenues (inc credit
markets) in 2013E contributing 65% of GBM revenues.

Within Equities the group lacked scale to be in Top Tier of Global IBs and
hence decided to close their cash equities and corporate broking businesses. We
estimate 0.6bn equity revenues in 2013E with structured products generating
significant revenues.

The Group lacks scale within the IB operations and following a strategy
review, decided to close ECM and M&A operations to focus on Fixed Income.

We believe the Group aims to be GBM light in the long term with renewed focus on
historical strength areas such as such as macro, financing and risk management. We
estimate 2013E GBM revenues to be 5.2bn with FICC contributing 65% of the
revenues. We estimate Portfolio management & origination revs of 1.3bn in 2013E.
Rest of the Group: In addition to GBM, Ulster and Non Core are also overhangs
on current profitability. Non core has been a drag on Groups profitability for a
long time now and is likely to continue offsetting profits generated from the core
bank. We continue to worry about the time and eventual cost of the Non core run
down and see this is a key vulnerability for the group if economic conditions turn out
to be more challenging that anticipated. Although over the longer term we believe
that Non core would become less material to profitability. The core UK franchises
within RBS have performed strongly in our view and along with GTS, offer
attractive returns in the long term in our view.
Restructuring: With Q411 results, RBS announced the details of their latest
restructuring plans focused on both cost savings and reduction of capital intensive
businesses. Restructuring plan includes closure/sale of cash equities, corporate
broking, ECM, and M&A advisory businesses with 3 year targets of i) 150bn
GBM RWAs (75bn reduction on Basel 3 basis) ii) c. 300bn GBM TPAs (120bn
reduction from H111 level) with associated wholesale funding reduction of c.
75bn on top of c. 100 unsecured wholesale funding reduction due to non core. The
Group also announced c.3500 staff reductions over the next 3 years split between
UK and non UK locations.
Investment conclusion
The group outlined details of further restructuring in order to bring its medium term
core ROE in excess of 12%. Weaker returns are likely to persist in the near term,
with the more significant benefits of the restructuring for returns likely to show 2014
onwards in our view. Although the new Core targets represent a more realistic
outcome within the current economic outlook, we continue to see near to medium

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

term pressures on overall group returns. With the shares trading at 0.6x TBV and
overall group RoE unlikely to approach CoE in 2013/14, we remain Neutral and
prefer Barclays within the domestic UK banks.
Table 117: RBS: 2013E SOP
million
Global Banking & Market
Global Transaction Services
UK Retail
UK Corporate
Wealth
Ulster
US Retail & Commercial
RBS Insurance
Core Group post tax core earnings
Corporate Activities
Non-Core
Capital at risk due to CRE exposure
Capital Excess/Shortfall
Price Target (Dec 2012E)

Earnings
740
640
1,487
1,106
287
-197
449
0
4,513
0
-1,506
2,316

Value
11,556
6,403
6,906
9,001
2,868
1,250
6,346
0
44,331
0
-5,107
-3,839
-2,373
33,013

Valuation Basis
RoE - g/CoE - g
PE
RoE - g/CoE - g
RoE - g/CoE - g
PE
RoE - g/CoE - g
RoE - g/CoE - g
P/B
PE
DCF
Capital at risk

Value per share


0.10
0.06
0.06
0.08
0.03
0.01
0.06
0.00
0.40
0.00
-0.05
-0.03
-0.02
0.30

P/E (x)
15.6
10.0
4.6
8.1
10.0
-6.4
14.1
0.0
9.8
14.1

P/BV (x)
0.7

14.3

0.7

1.5
1.3
2.1
0.3
1.1
1.0
1.1

Source: J.P. Morgan estimates, Company data.

Valuation Methodology
Our Dec-12 price target of 30p is based on our sum-of the parts analysis. We base
this on a peer multiple rating as well as incorporating Basel III adjustments to the
Groups capital position.
Risks to Our View
Several risks could prevent the stock from achieving our target price and N rating.
Through Corporate Markets, the bank is highly exposed to corporate credit quality
and to some extent the market conditions in fixed income. RBS is also exposed to the
UK general insurance cycle and currency risks, more specifically the US dollar both
through Corporate Markets and Citizens, and also the euro, which present risks to the
upside and downside, in our view.

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13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

HSBC
GBM recovery key to group strategic targets
Raul Sinha

AC

(44-20) 7742-2190

raul.sinha@jpmorgan.com

Vivek Gautam
(44-20) 7742-3244

vivek.gautam@jpmorgan.com

Josh Klaczek
(852) 2800-8534

josh.klaczek@jpmorgan.com

Please see our notes:


HSBC Holdings plc: DM Issues
Recede, but EM Growth to
Moderate published 27 February
2012
HSBC Holdings plc: Benefiting
From Both (EM/DM) Worlds
published 28 October 2011

HSBC GBM contributed 32% of group PBT in 2011 and consumed 42% of
capital on a Basel 3 basis. We expect GBMs PBT contribution to rise to 41% in
2013. GBM is likely to benefit from growing trade flows between developed and
emerging markets as well as HSBCs strong balance sheet position.
Asia and Emerging markets are the key drivers of GBM income, with 53% of
revenues in 2011 generated in markets outside Europe and North America.
GBMs long-term growth strategy is based on being Emerging markets led and
financing focused.
We believe that client flows are the key driver of GBM franchise revenues, with
c.50% of the relationship client base being highly profitable and sticky corporate
clients.
Legacy assets remain a drag on capital, but are likely to run off within the
transition period for Basel 3. The division reported a pre tax return on RWA of
2.1% excluding legacy assets in 2011.
Figure 109: GBM Asia likely to be key growth driver

UK banks: No safe havens - Prefer


UK Asians ahead of UK
Domestics: CRE Forbearance and
wholesale funding risks to weigh
published 28 October 2011

Source: Company reports.

Credit & Rates areas could see potential recovery: HSBCs credit and rates
businesses in Europe saw significant headwinds in 2011 in a difficult market
environment with the group reporting losses in credit and rates in Q311. We expect
Rates and Credit revenues to rise 30% to $2.2bn in 2012, after falling 55% in
2011.
Foreign Exchange: HSBCs FX business is driven by its strong client base with
majority of revenues coming from highly profitable corporate clients including CMB
clients. FX revenues increased 19% in FY11 to $3.3bn driven by i) increased client
activity in HK, Rest of Asia Pacific, North America and Latin America ii) benefits
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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

from market volatility in 2011 resulting in improved trading environment for FX and
iii) increase in metal business revenues driven by rally in precious metal prices. We
expect FX revenues to rise 11% in 2012.
Equities: HSBC is a relatively focused player in equities with focus on gaining
market share to reach Top 5 in Asia and Top 10 in Europe. Equity revenues increased
27% in FY11 driven by increased client flows in HK and Europe in H111 with some
headwinds in Q411.
Securities Services: The securities services business consists of three sub
businesses: global custody, sub custody and fund management, as well as a Prime
brokerage JV started in 2009 with Equities, and the client base is mainly institutional.
Securities Services revenues increased 11% YoY FY11 driven by higher spreads in
Rest of Asia Pacific and LatAm, higher transaction volumes and rise in assets under
custody. We expect the Custody businesses within Securities services to continue to
benefit from HSBC's balance sheet strength especially in UK, Asia and ME, where
HSBC is among the largest players.
Table 118: HSBC: GBM revenue split by product
$ million
Global Markets
Credit
Rates
Foreign Exchange
Equities
Securities Services
Asset & Structured Finance
Global Banking
Financing & ECM
Payments & Cash Mgmt
Other Transaction Services
Balance Sheet Management
Principal Investments
Other
Total

2009
10,364
2,330
2,648
2,979
641
1,420
346
4,630
3,070
1,053
507
5,390
42
512
20,938

2010
9,173
1,649
2,052
2,752
755
1,511
454
4,621
2,852
1,133
636
4,102
319
697
18,912

2011
8,098
335
1,341
3,272
961
1,673
516
5,401
3,233
1,534
634
3,488
209
-139
17,057

2012E
9,182
737
1,448
3,632
1,067
1,757
542
5,908
3,556
1,718
634
2,965
234
92
18,381

Source: Company reports.

Global Banking: Within Global Banking, Financing & ECM consists of IB


businesses including ECM, DCM, Advisory, Credit & Lending, Project Finance and
Leverage & Acquisition Finance. Financing & ECM revenues increased 13% YoY
driven by asset growth in Asia, strong project and export finance in H111 and
increase in advisory revenues notably in Europe. We expect Financing, being a
balance sheet strength driven business, to continue to benefit from HSBCs strong
Balance sheet, high capital ratios and ability to fund itself at cheap rates.
Payments and Cash Management: The PCM business of HSBC provides domestic
and cross border payments and liquidity management services, and caters to both
GBM and CMB clients with revenues booked within respective divisions. PCM
revenues were up 35% YoY driven by growth in liability balances partly offset by
low interest rates in developed markets.
Investment conclusion
We believe that the HSBCs surplus funding, strong balance sheet and exposure to
emerging markets despite moderating growth will continue benefitting HSBC,
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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

however US HFC business continues to be a lag on Group's profitability which is a


worry given the recent rise in delinquencies. Management targets sustainable returns
to the range of 12-15%, with significant action on costs.
HSBC offers an attractive yield (4.5%), backed by a robust capital position (CT1:
10.1% at FY11) and 2012 is likely an inflection point on asset mix & cost efficiency.
With shares trading at 1.1x 2013E NAV ex own debt for RoNAV of 12.2%, we
remain OW but continue to prefer Standard Chartered over HSBC.
Table 119: HSBC: 2013E SOP
million
Europe
HK
Asia
o.w. Asia ex Associates and JV
o.w. Asian Associates and JV
ME
North America
o.w. North America Ex HFC
o.w. HFC
Latin America
Group post tax Core Earnings
Corporate Activities
Capital Excess/Shortfall
Capital at Risk due to Chinese Exposure
Price Target (Dec 2012E)

Earnings
2,906
3,349
4,837
3,028
1,809
822
-1,186
-138
-1,048
1,447
12,176
-1,101
-47
11,028

Value
27,227
19,812
61,758
46,058
15,700
8,078
11,748
16,084
-4,336
14,613
143,236
-12,771
-1,033
-6,068
123,363

Valuation Basis
RoE - g/CoE - g
RoE - g/CoE - g
RoE - g/CoE - g
Blended PE and Mkt Value
RoE - g/CoE - g
RoE - g/CoE - g
DCF
RoE - g/CoE - g
PE
1 times BV
Capital at risk

Value per share


1.4
1.0
3.3
2.4
0.8
0.4
0.6
0.8
-0.2
0.8
7.5
-0.7
-0.1
-0.3
6.50

P/E (x)
9.4
5.9
12.8

P/BV (x)
1.0
2.5
2.9

9.8
-9.9

1.8
0.6

10.1
11.6
11.7

1.5

Source: J.P. Morgan estimates, Company data.

Valuation Methodology
Our target price of 650p for Dec 12 is based on our sum-of-the-parts analysis
calculated using cost of equity of 10.5% and expected 2013E geographical returns
fully adjusted for Basel 3.
Risks to Our View
We believe the key risks that could prevent our target price and OW rating from
being achieved include the following: Being a global universal bank, HSBC is
exposed to general macro variables such as a slowdown in world GDP growth;
higher or lower interest rates in all of the economic regions; and changes in FX rates
(especially USD). Credit exposure is predominantly to the US consumer (both
mortgages and unsecured) in terms of loan losses so any changes in asset quality
could impact group earnings. Hong Kong is also a significant part of the groups
earnings growth profile.

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13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Standard Chartered
Growth underpinned by unique EM franchise
Raul Sinha

AC

(44-20) 7742-2190

raul.sinha@jpmorgan.com

Vivek Gautam
(44-20) 7742-3244

vivek.gautam@jpmorgan.com

Josh Klaczek
(852) 2800-8534

josh.klaczek@jpmorgan.com

Please see our notes:


Standard Chartered: Opportunity
knocks again published 21
November 2011
Standard Chartered: Continues to
deliver- FY11 ahead, positive
outlook published 29 February
2012
Standard Chartered: Delivering
Returns, Diversified Franchise
published 28 October 2011
UK banks: No safe havens - Prefer
UK Asians ahead of UK
Domestics: CRE Forbearance and
wholesale funding risks to weigh
published 28 October 2011

Standard Chartered is a major intermediary for cross border trade flows and
banking across Asia, Africa and Middle East. The group has generated
compounded annual revenue growth of 16% in the last 9 years.
At its core, Standard Chartered has grown by financing trade, commercial
banking and FX within emerging and between emerging and developed markets.
Its market positions in Asian markets are difficult for non-local players to
compete against, given the regulatory restrictions for new entrants and for
opening new branches. Leaving aside selected markets (HK & Singapore) where
the group offers a full range of retail and wholesale products, Standard Chartered
has a significantly differentiated client proposition based on international
connectivity which competes mainly with Citigroups EM businesses and HSBC
across all markets in our view.
Management believes that wholesale banking revenue pools are growing 2x to
2.5x GDP growth in its markets, driving a natural rate of growth in the mid teens
before market share gains. The groups core strategy is to be within the top 3 cash
management banks for its clients as these share a majority of the total fee pool.
c54% of WB revenues are still generated within the more steady growing
Commercial banking operations which are less volatile than markets related
revenues and hence provide a solid base for growth. Transaction banking and FX
which generates over 50% of client income which itself comprises c75%-80% of
total WB revenues.
Table 120: Standard Chartered: Wholesale banking revenue split
$ million
Trade and lending
ow Transaction Banking
ow Lending and Portfolio Mgmt
Global markets
ow Financial Markets
ow Foreign Exchange
ow Rates
ow Commodities & Equities
ow Capital Markets
ow Credit & Other
ow Corporate Finance
ow Principal Finance
ow Asset Liability Mgmt ('ALM')
Total

FY07
2,570
2,033
537
2,673
1,323
1,017
158
49
259
-160
454
400
496
5,243

FY08
3,214
2,663
551
4,275
2,365
1,194
748
141
234
48
745
253
912
7,489

FY09
3,386
2,537
849
5,905
3,311
1,349
879
389
409
285
1,294
337
963
9,291

FY10
3,638
2,770
868
6,341
3,303
1,200
837
411
541
314
1,710
416
912
9,979

FY11
4,088
3,247
841
6,758
3,688
1,434
893
603
548
210
1,873
276
921
10,846

Source: Company reports.

Investment conclusion
We believe Standard Chartered is an attractive long-term growth story with strong
banking franchises in Asia, Africa and in the Middle East. While the macro
environment for revenue growth remains difficult globally for banks, we believe that
Standard Chartered is likely to outperform and continue to see Standard Chartered as
well positioned to benefit from 1) Growth, with underlying loan growth of 5% in H2
2011; 2) Strong capital (11.8% CT1) and excess liquidity; 3) re-pricing opportunities
and 4) broad-based franchise with strong performance from Greater China &
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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

ASEAN offsetting India & Korea. The shares trade at 1.7x 2012E TNAV & 12.2x
2012E P/E. With earnings resilient relative to the sector and the group continuing to
deliver growth, we remain OW.
Table 121: Standard Chartered: 2013E SOP
million
Hong Kong
Singapore
Korea
Other Asia Pacific
India
Middle East and Other
Africa
Americas, UK and Europe
Post Tax Core Earnings
Minorities & prefs
Capital at Risk due to Chinese Exposure
Capital Excess/ (Shortfall)
Price Target (Dec 2012E)

Earnings
907
628
144
820
351
412
373
207
3,842
-172
3670

Value
6,657
7,694
2,072
10,985
5,189
4,020
2,467
5,098
44,181
-2,049
-1,141
2,795
43,786

Valuation Basis
RoE - g/CoE - g
RoE - g/CoE - g
RoE - g/CoE - g
RoE - g/CoE - g
RoE - g/CoE - g
RoE - g/CoE - g
RoE - g/CoE - g
1 times BV
PE
Capital at Risk
1 times BV

Value per share


2.7
3.2
0.9
4.5
2.1
1.7
1.0
2.1
18.2
-0.8
-0.5
1.1
18.0

P/E (x)
7.3
12.3
14.4
13.4
14.8
9.7
6.6
0.0
11.5

P/BV (x)
2.7
2.5
1.1
2.4
3.1
1.6
2.7
1.0
2.0

11.9

1.8

Source: J.P. Morgan estimates, Company data.

Valuation Methodology
Our target price of 1800p is based on our sum of the parts analysis fully adjusted for
Basel III.
Risks to Our View
We believe the key risks that could prevent our price target and OW rating from
being achieved, both to the upside and downside, include the following: Being a
global universal bank, Standard Chartered is exposed to general macro economic
variables such as a slowdown or rebound in world GDP growth, higher or lower
interest rates in all of the economic regions, changes in FX rates and cross-border
and political risks.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Eugenio Cicconetti

UniCredit

AC

(44-20) 7325-1523

eugenio.cicconetti@jpmorgan.com

Please see our notes:

Step by step improvements


and an undemanding
valuation,
published 10th January 2012
The Capital Dilemma,
published 12th Oct 2011

Figure 110: CIB Run-off portfolio


(timing) RWA- bn (JPMe)
13

14
12
10
8

10

9
7.5

Going in the right direction: rationalising the IB structure


UCG INVESTMENT BANKING STRATEGY:
The Corporate & Investment Banking (CIB) division is dedicated to corporate
customers with revenues of over 50 million and institutional customers of the
UniCredit Group, offering services in the 22 countries where it has a presence.
The CIB Product Lines, responsible for the whole range of products and services,
are:
Financing & Advisory (F&A): this is the product line responsible for loan-related
operations and advisory services provided to businesses and institutional customers.
The range of offerings extends from plain vanilla to more sophisticated products such
as Corporate Finance & Advisory, Syndications, Leveraged Buy-Out Finance,
Project & Commodity Finance, Real Estate Finance, Shipping Finance and Principal
Investments.
Markets: this is the centre of competence for products and activities related to Rates,
FX, Equities, Capital Markets and Credit and is also the channel that gives UniCredit
preferential access to those markets.

7.5

6
4
2
0
Run -off by 2012 Run -off by 2013 Run -off by 2014 Run -off by 2015 Run -off after 2015

Source: Company Data, J.P. Morgan estimates.

Figure 111: CIB Run-off portfolio


(asset mix) RWA - bn (JPMe)
25
19

20

21

15

IB Contribution: In the first nine months of 2011, revenues generated by the


Markets area, which is mainly representative of the IB operations at UCG, felt
the effects of the negative situation on financial markets during the third quarter.
Through September 2011, Markets revenues came in at 1,810 million, down 11.5%
y/y and 67.5% q/q.
In terms of business lines:

10
5

Global Transaction Banking (GTB): this is the product line related to products
such as Cash Management, Trade Finance, Structured Trade and Export Finance, and
Global Securities Services.

0
Other CIB

Leasing

CIB-Markets

CIB-FA & GTB

Fixed Income and Currencies through September 2011 recorded revenues


down 140 million y/y, while the third quarter showed a decrease of 65%
relative to the period before, due above all to Rates operations. Driving this
performance was mainly the sudden collapse of OIS rates, the resort to the
ECB for the refinancing of IRM activities, and the opening of credit spreads
on bonds and derivatives.

Credit Related Business through September 2011 reported revenues 26


million lower than in 2010. The performance of the business was strongly
marked by high volatility tied to fears over sovereign debt and the credit
markets general aversion to risk.

The growing turbulence on equities markets has resulted in increased


volatility for securities, leading to a significant pullback in the revenues of
Equities (-5% y/y). This has significantly impacted Derivative Trading,

Series1

Source: Company Data, J.P. Morgan estimates.

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Kian Abouhossein
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kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

stemming from further deterioration of the macro-economic environment in


the third quarter and the consequent reduction in business with clients.

Capital Markets in the first nine months of 2011 posted revenues that were
down 21% y/y and 42% q/q.

INVESTMENT CASE AND VALUTION:


The Groups capital position is now in line with EU peers (B3-2012E Core Tier 1
ratio 9.2% ), and the management team is currently implementing a restructuring
plan which should improve the cost base (1.5bn of savings, 10% of the cost base by
2015) and support the bottom line in the medium term. The CIB (40% of the PBT in
2013E) division headed by Mr. Mustier is changing its profile exiting from some
unprofitable business (i.e. cash equity) and revisiting the capital allocation within the
division (i.e. 35bn of RWA reduction by 2015). The diversified franchise of the
bank is a plus, but further rationalization is needed in our view. UCG is currently
trading at 0.5x P/NAV 12E, for an expected ROTE13 of 7%, valuation that in our
view fairly reflect the risk/reward embedded in the bank.
Table 122: UniCredit 2013 Sum-of-the-Parts
Euro million
Division
Retail division
CIB + F&SME product factories
Private banking
Asset management
CEE
Total operating Business (A)
Corporate centre (B)
Group Value (C= A+B))

Valuation Tool
ROE-COE
ROE-COE
PE
PE
ROE-COE
ROE-COE

Net
Profit
2013E
1,092
2,689
220
254
1,467
5,722

Allocated
Equity
2013E
8,674
24,595
353
211
10,722
44,555

-2,464
3,259

7,492
52,047

88,140
554,086

8.5%

52,047
54,772
9.3%

554,086
554,086

9.4%
9.9%

Required core capital (D)


B2 Core Tier 1 Capital 2013e
Pro Forma Basel III 2013
Coverage shortfall
Capital Shortfall/Excess (Eur bn
and %)
DIVIDEND (E)
2012
2013
Fair value (C-D-E)
# shares
Fair value (C-D-E) p.s.
PT 12M FWD

812
52,858

3,259

Divisional JPM required


RWA
ratio
2013E
99,519
9.0%
258,890
10%
5,018
7.0%
2,113
10.0%
100,406
11.0%
465,946
9.6%

0.15%

(%)
RoE
2013E
13%
11%
62%
120%
14%
13%

Sust.
RoE
(%)
10%
10%
62%

2.0%
2.0%
2.0%

14%
12%

(%)
CoE
2013E
11.0%
11.5%
10.2%
9.0%
14.0%
12.8%

nm
6.3%

(%)
g

nm
6.0%

12.8%
12.8%

( million)

Value
/ Share

(x)
PE

(x)
P/BV

4.7%
1.0%

8,058
19,417
2,672
2,035
10,707
42,889

1.39
3.35
0.46
0.35
1.85
7.41

7.4
7.2
12.1
8.0
7.3
7.5

0.9
0.8
7.6
9.6
1.0
1.0

2.6%
2.6%

-18,464
24,425

-3.19
4.22

7.5
7.5

-2.5
0.5

-2,400

-0.43

812

0.14

457
652
23,900
5,789
4.1
3.5

0.08
0.11
4.20

1.0

554,086

554,086

Source: J.P. Morgan estimates.

Valuation Methodology
We assign UCG a Dec 12 TP of 3.50 on a 2013E earnings-based SOP valuation.
We assign capital requirements in terms of Core Tier 1 at 9% for retail, 10% for CIB,
and 11% for international operations, and an average group CoE of c.12%.
Risks to Our View
We believe the key risks that could keep our N rating and target price from being
achieved include the following:
On the downside: 1) UCGs profitability could still be subject to volatility and
deterioration of the sovereign risks affecting European peripheral economies, which
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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

could further impact the bank's cost of funding and LLP levels. 2) CEE contributes a
significant portion to UCG's earnings; consequently a deterioration of the macro
environment in the region and currency movements could adversely impact UCG
earnings. 3) The company could require increased capital requirements due to
Regulator demands.
Upside risks include 1) accelerated cost efforts, 2) steeper interest rate hikes and 3) a
more rapid normalization of provisions.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

SEB

Sofie PeterzensAC
(44-20) 7777-9063

sofie.c.peterzens @jpmorgan.com

Nana Francois, CFA


(44-20) 7325-6424

nana.a.francois@jpmorgan.com

Please see our notes:


Nordic banks: Outlook for 2012
resilient but not unaffected from a
European recession; Swedbank
remains our top pick published
13th Dec 2011

Figure 112: SEB: Trading and


Capital Markets, income by main
product type, 2013E
%

Struct
ured
derivs
etc,
5%

Equiti
es,
26%

Cap
mkts,
26%
FX,
44%

Solid consistency and quality of IB revenues through local


focus, supported by robust capital position
SEB INVESTMENT BANKING STRATEGY:
IB Contribution and Outlook: SEBs Corporate Merchant Bank contributes 51% of
Group Net Income in 2013E in our estimate, having remained stable ~50% over the
past 5 years. We estimate that SEB generates SEK18.8bn in Merchant Banking
revenues in 2013E, split ~40% Trading & Capital Markets, ~40% Corporate Banking
and ~20% Global Transactions.
Equity brokerage: Being the largest broker not only on the Stockholm Stock
Exchange, but also on the Nordic and Baltic Stock Exchanges (market share of
8.4% in 2011), we estimate Equities to generate revenues of ~SEK2.1bn in
2013E.
Fixed Income: In 2011 SEB was the largest book runner for Nordic ECM
transactions (19 deals; EUR2.9bn), largest issuer of corporate bonds (21 issues;
EUR14.1bn) and 2nd largest Nordic syndicated loans MLA (10.1% market
share). We believe SEB will remain one of the leading players in the Nordic
Fixed Income market with revenues of ~SEK1.9bn in 2013e.
Foreign Exchange: As the largest FX bank for trading in SEK and the only
Nordic bank among the 20 largest FX banks in the world, SEB is well positioned
to maintain its market stronghold and we estimate the business to generate
earnings of ~SEK3.2bn in 2013E.
Wealth Management: With a ~12% market share, SEB is the 2nd largest player
in the Swedish wealth management market with earnings generation of
~SEK5.0bn in 2013E.
Figure 113: SEB: Trading and Capital Markets, income by main product type, 1Q07-4Q12E
%

Source: J.P. Morgan estimates

Figure 114: SEB: Profit before tax


by main business division, 2013E
%

SEB
Life
12%
WM
11%
Baltic
8%

Retail
17%
Source: J.P. Morgan estimates.

4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
-500

Structured derivs etc


Merch
ant
Bank
52%

Capital mkts

FX

Equities

Source: Company reports and J.P. Morgan estimates.

SEB is looking to expand its balance sheet by increasing its loan commitments by
SEK200bn in 2012and attracting >400 new clients in the Nordics and Germany. This
combined with SEBs ambition to maintain flat costs until 2014 (at SEK23.1bn)
should help profitability going forward. We estimate SEB to generate an adjusted
RoNAV of 13.5% in 2013E.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Figure 115: SEB: Capital allocation


by business area at YE2011
%

SEB
Life
14%
WM
7%
Baltic
12%

Retail
16%

Corp
MB
51%

INVESTMENT CASE AND VALUTION:


We continue to favor SEB for its fee generation potential from its corporate franchise
(~1/2 of PBT) and its wealth exposure through Life and Wealth Mgt (~1/3 of group
PBT), as well as growing low risk Swedish retail business (~1/5 of group PBT). We
see upside potential on the cost line with SEB's new ambition to maintain flat costs
until 2014. Whilst Sweden has tougher capital rules compared to rest of Europe
(minimum B3 ET1 of 10% by Jan 2013 and 12% by Jan 2015) and mortgage risk
weights are expected to be increased (20% assumed in our model vs. 12% currently),
we believe SEB is well positioned to meet higher capital requirements with a JPM
2013e B3 ET1 of 12.9%.
We see upside in SEB trading below book at 1.0x 2013e P/NAV vs. our 2013e target
valuation of 1.3x P/NAV for an adj. RoNAV of 13.5% (unadjusted 12.1%) and
enjoying a solid capital position with a 12.9% 2013e JPM B3 ET1 ratio.
Valuation Methodology
Our target price of SEK68 is based on our sum of the parts analysis. This represents a
valuation of 1.3x P/NAV for an adj. RoNAV of 13.5% (unadjusted 12.1%).

Source: Company reports.

Table 123: Dec 2013E: Sum of the parts valuation


SEK
SOTP
SEK m
Merchant Banking
Trading and Capital
Markets
Corp. Banking
Global Transaction
Retail
Retail - Sweden
Retail - Germany
Retail - Cards
Baltics
Estonia
Latvia
Lithuania
SEB Wealth Mgt
SEB Life
Other and elims
Unallocated capital
Total

Adj Profit
2013E
6,564
2,203

% of
group
51%
17%

P/E
9.3 x
9.0 x

Capital

3,241
1,119
2,353
1,514
0
838
1,208
401
347
460
1,604
2,878
-1,624

25%
9%
18%
12%
0%
6%
9%
3%
3%
4%
12%
22%
-13%

9.5 x
9.5 x
9.8 x
10.0 x
0.0 x
9.5 x
8.3 x
9.0 x
8.0 x
8.0 x
12.0 x
10.0 x
7.5 x

12,983

100%

11.5 x

51,321
15,396
25,661
10,264
14,484
10,863
0
3,621
12,249
3,321
3,677
5,251
5,623
11,280
16,204
16,204
111,160

as %
of group
46%
14%

P/NAV
1.2x
1.3x

RoNAV %
2013E
13%
14%

Value SEK
Per share
28
9

23%
9%
13%
10%

1.2x
1.0x
1.6x
1.4x

13%
11%
16%
14%

3%
11%
3%
3%
5%
5%
10%
15%

2.2x
0.8x
1.1x
0.8x
0.7x
3.4x
1.4 x
-0.8x
1.0 x
1.3 x

23%
10%
12%
9%
9%
29%
26%
na

14
5
11
7
0
4
5
2
1
2
9
14
-6
7
68

100%

12.1%

Source: J.P. Morgan estimates.

Risks to Our View


Key risks to our OW rating and PT being achieved include the following:
Downside risk from uncertainty in the sustainability of performance in Trading and
Capital markets (35%-45% FX, 25%-35% equities, 20%-30% Capital Markets,
around 5% Structured derivatives etc).
Downside risk if there is no recovery in corporate loan growth, this would
proportionately impact SEB more than the peers, as approx 50% of the group's value
is in Merchant Banking.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Alex KantarovichAC, CFA

VTB

+7 495 967 3172

alex.kantarovich@jpmorgan.com

Ekaterina Petrovich
+7 495 967 3103

ekaterina.a.petrovich@jpmorgan.com

VTB Investment Banking Strategy


Since its inception in 2008, VTB Capital, the investment banking arm of the VTB
Group, has been expanding aggressively to become one of the key players in the
Russian investment banking industry.
VTB Capital is currently engaged in a wide range of investment banking activities,
including sales, trading, research, ECM, DCM, M&A, private equity as well as asset
management, among others. According to the management, VTB Capital will
continue boosting its presence across various segments, especially in equity,
derivatives and debt.
Headquartered in Moscow, VTB Capital operates both domestically and globally
with offices the US, the UK, Austria, OAE, Singapore, strengthening positions in the
Asia Pacific region; a new office was opened in Hong Kong in 2011. As part of its
expansion strategy, VTB Capital is also planning to further expand its business
across all VTB branches in Europe.
9M11 Financial highlights. Assets attributable to VTB Capital amounted to
RUB1,172 bn (+26% q/q, +156% y/y). Equity soared to RUB99 bn (+64% q/q,
+133% y/y). Revenue slid to RUB16 bn (-30% q/q, -36% y/y) with EBT declining
RUB0.4 bn (-94% q/q, -96% y/y) reflecting adverse market conditions resulting in a
sizeable loss on the securities portfolio. Opex dynamics have shown RUB5.5 bn in
2Q11 reversing to an income item of RUB2.8 bn in 3Q11 implying that VTB may
have used the bonus pool to cushion the negative revenue impact.

Please see our note:


Russian banks: leading into
recovery, rerating and earnings
surprises likely
published 01 February 2012

Investment case
Despite competitive pressure from large local and international players as well as
highly volatile market conditions, VTB Capital attained top rankings in core IB
segments in 2011 (see the charts further). With an expected increase in debt and
equity capital markets activity in 2012, we believe VTB Capital remains wellpositioned to participate in a lions share of the deals owing to its size and support
from the state. Specifically, with a large-scale multi-year privatization program
ahead, VTB may be able to secure a substantial portion of the fees from the pie. By
various estimates in the media (Vedomosti, Kommersant, Bloomberg, Interfax, FTSE
Global Markets), Russia may privatize stakes with the total value in the $60-80 bn
range. On the fixed income side, we expect a major pick up in activity; 2012 should
be a bumper year after the markets reopen post 2011 freeze while the corporates may
want to take advantage of the window ahead of the planned introduction of the
punishing taxation on Eurobonds. The negative impact on 2013 issuance may still be
mitigated by corporates switching to the local issuance.
Given the evolution of competitive landscape, VTB IB is facing challenges from
Sberbank, its main rival on the commercial banking side, following the acquisition of
Troika in 2011. Over time we expect the two to compete for deals on a relatively
equal basis. However for VTB we would expect only a moderate erosion of market
share over time as other competitors may cede grounds.
All considered, given the inherent risks of the IB model (as evident from the losses in
2008 and 2011), in our view valuing IB requires an elevated cost of equity, 20% in
our SOP model.

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Alternative valuations
Our end-2012 VTB TP of$5.81 per share is based on the Gordon growth valuation
methodology with terminal growth of 5% and COE of 16%.
Alternatively, we use sum-of-parts valuation approach allowing for better granularity
of assumptions and modeling. We apply 2013 estimates of BV and ROE to derive
2012 values assuming different COE for main revenue segments of the VTB Group:
15% for both retail and corporate lines of business and 20% for investment banking,
thus adjusting for higher risks associated with the business. With VTBs Capital
expansion strategy in mind, we assume a higher terminal growth of 6% due to a
shorter valuation horizon (2013 as opposed to 2016 in our Gordon Growth model).
The implied exit P/BV multiples are 1.6x for retail, 1x for the corporate and 1.2x for
IB. The estimated SOP-implied valuation is $5.6 per share..
Table 124: VTB SOP Valuation
Key SOP assumptions

2012E

2013E

Retail

20%

20%

Corporate

14%

15%

IB

20%

23%

Aggregate

16%

18%

Terminal

Target ROE

COE
Retail

15%

Corporate

15%

IB

20%

Growth in perpetuity
SOP valuation (RUB bn)

6%
2012

2013

Target P/BV

Retail

217

250

1.6

Corporate

482

554

1.0

IB

152

183

1.2

Aggregate

852

987

1.2

2012 p.s. (RUB)


2012 p.s. $

163
5.6

Source: Company data, J.P. Morgan estimates.

Risks to Our View


The key downside risks to our target price and N rating include lower than expected
loan growth, and pressure on NIM resulting from aggressive lending to large
corporates. Share overhang due to the government stake privatization and possible
equity issuance is a risk for 2012 and beyond. The upside risk include possible
provision recoveries and opex cuts.

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Naresh Bilandani

EFG Hermes

AC

(971) 4428-1763

naresh.n.bilandani@jpmorgan.com

EFG Hermes is the #1 standalone MENA-focused investment bank with a


diversified IB product offering of brokerage, which has historically been the primary
earnings contributor on the IB side, IB advisory (ECM, DCM, M&A), asset
management and private equity within the MENA region. EFG's IB b/s is
characterized by low leverage with assets to eq at c.1.1x vs. the 3.5x avg. of the top100 EM peer universe.
Following the 2H10 acquisition of controlling stake in Credit Libanais
Lebanon, EFG is now gradually shifting to a universal banking model to benefit
from the relatively stable commercial banking revenue stream offered by CL vs.
volatility in EFGs MENA markets income stream, cross-sell EFGs brokerage/AM
products to CLs sizeable retail client base and enhance ROE by deploying CLs
banking b/s as a platform for further organic and inorganic growth in MENA. CL
contributed to 57% of group revenues in 9M11.
EFG stock has however been out of favor, with Egyptian macro over-hang
resulting in a -63% performance in FY11, though since the beginning of the year,
helped by the risk-on rally in global equity markets, it has managed to rise
+45%YTD outperforming MSCI EM +24%. Given the significant presence of $pegged currency denominated revenues in the business mix, EFG Hermes could
potentially benefit from forecasted weakening of EGP vs. USD over FY12 thereby
benefitting reported group revenues.

Table 125: Snapshot of EFG Hermes group revenue break-up by business lines
E mn (unless stated)
Brokerage: Egypt
Brokerage: UAE
Brokerage: KSA
Brokerage: Oman
Brokerage: Kuwait
Brokerage: Jordan
Total brokerage
Asset mgmt: Egypt
Asset mgmt: Regional
Total asset mgmt.
Private equity
IB advisory: Egypt
IB advisory: Regional
Total IB advisory
Total IB fee revenues
Cap mkts & treasury ops.
Comml. banking revenues
Total group revenues
Asset mgt. AUM, $bn
Pvt. equity AUM, $bn

9M'11
125
15
8
5
20
4
177
33
67
100
111
47
48
95
483
58
732
1,273
3.2
1.1

% of total
10%
1%
1%
0%
2%
0%
14%
3%
5%
8%
9%
4%
4%
7%
38%
5%
58%
100%

FY10
266
36
13
9
51
1
377
65
101
166
145
156
11
167
855
1,052
556
2,463
4.7
0.9

% of total
11%
1%
1%
0%
2%
0%
15%
3%
4%
7%
6%
6%
0%
7%
35%
43%
23%
100%

9M'10
205
28
9
7
43
0
292
43
68
111
110
133
11
144
657
997
256
1,910
4.6
0.9

% of total
11%
1%
0%
0%
2%
0%
15%
2%
4%
6%
6%
7%
1%
8%
34%
52%
13%
100%

FY09
300
66
18
14
66
0
464
55
99
154
131
40
3
43
792
638
0
1,430
4.4
1.0

% of total
21%
5%
1%
1%
5%
0%
32%
4%
7%
11%
9%
3%
0%
3%
55%
45%
0%
100%

9M/9M
-39%
-46%
-11%
-29%
-53%
-39%
-23%
-1%
-10%
1%
-65%
336%
-34%
-26%
-94%
186%
-33%
-30%
22%

FY/FY
-11%
-45%
-28%
-36%
-23%
-19%
18%
2%
8%
11%
290%
267%
288%
8%
65%
72%
7%
-10%

Source: EFG Hermes

Key upside catalysts for EFG stock going forward?


Improvement in MENA exchange volumes YTD benefitting brokerage revenues
Given EFGs dominant brokerage positioning in the region (Top-3 brokerage mkt
share position in almost all key MENA exchanges), the potential secular pick up in
exchange ADTV in nearly all MENA exchanges especially Egypt, UAE and Saudi
is positive for EFGs brokerage business and will be reflected in its Q112 and
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Kian Abouhossein
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kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

future IB revenues. Further catalysts to a continuing improvement of MENA


exchange ADTV lies in investor expectations of Saudi market opening up to QFIs (as
of now FIs can only trade Saudi via Delta 1 access products like swaps/pnotes/LEPOs) and currently frontier markets of UAE and Qatar being upgraded to
MSCI EM status, both of which could significantly enhance foreign investor flows
into MENA.
Figure 116: Increasing ADTV in MENA exchanges YTD *

Figure 117: EFG Hermes brokerage market share (& mkt ranking)

400
350

44.3%
Egypt

Saudi

Kuwait

Qatar

Dubai

Abu Dhabi

300
250

23.4%

200

19.2%
14.8%

150

12.5%

100
50
0
Apr-11 May-11 Jun-11 Jul-11

0.4%
Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12

Source: Bloomberg; * indexed to 1 Apr 2012

Egypt (#1)

Dubai (#1)

Abu Dhabi (#3) Saudi Arabia (#1*)

Oman (#3)

Kuwait (#2)

Source: EFG Hermes, Bloomberg; * off-shore market share only

Potential for growth in asset management revenues


The 'risk-on trade has, in our view, a significant potential to attract new money
into MENA markets like UAE (which is relatively high beta vs. defensiveness of
Qatar), Egypt (which under-performed last year and is seeing increasing interest
despite volatility) and Saudi Arabia (given investors expectations of market opening
to QFIs as is being reflected in market performance) which, apart from fundamental
performance positively impacting AUMs, benefits EFGs AM segment performance
fees that are not constrained by high watermarks. EFG branding also has significant
scope to rally in further discretionary portfolio new money from Saudi Arabia and
UAE as economic conditions improve in the coming years and both household
wealth and corporate confidence improve in these countries.
Figure 118: Performance of GCC index vs. global indices, rebased
120

BGCC200

MSCI World

MSCI EM

Figure 119: Fee structure in select EFG Hermes funds


15%

15%
Performance fee

Mgmt fee

110
100
90

5%

80

1.40%

70
Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12

Source: Bloomberg

MEDA fund

1.75%

1.75%

2.00%
0.25%

MENA Telco fund

Egypt fund

Saudi fund

Alexandria fund

Source: Bloomberg

Higher focus on DCM post CL acquisition


Despite a few DCM deals (Mobinil and OCI), EFG has historically lagged in this
space constrained on the 'pay-to-play' factor lacked by a banking b/s. Post Credit
Libanais acquisition, EFG can potentially deploy CLs rich b/s liquidity (31% L/D)
to enhance IB offering esp. on the DCM side especially in the North and SubSaharan African markets where penetration of DCM offering has been traditionally
low (most corporates bilaterally / captively financed).

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Valuation Methodology
We value EFG at E36.50 based on our SOTP model.

Key risks to our view


Higher focus on commercial banking could lead EFG to be an acquirer
EFG has stated in the past that it aims to use the CL banking b/s (where it has an
option to purchase addnl. 25% stake) for further financials-sector acquisitions in
North/West African space; while the market valuations appear attractive and the
space is characterized by an under-penetration of financial products (raising scope of
ROE expansion post acquisition), investors should be aware of the execution risks
that would follow such an M&A.
Competitive & political risks
The MENA IB space is seeing an increasing focus from global players like GS,
BofA-ML, DB, CS to name a few. Despite EFG's domestic expertise (reflected in its
IB presence in Egypt) and potential target client segment being somewhat different
from the global competition (e.g. mid-cap corporates and retail brokerage clients
which foreign banks do not target) an increasingly competitive regional IB industry
will potentially continue to tighten future business yields. On the other hand, upshots
of the Arab Spring, especially in EFG's domestic market Egypt, could raise political
risks impacting EFG's franchise.

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kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

ICICI

AC

Seshadri K Sen
(91-22) 6157-3575

seshadri.k.sen@jpmorgan.com

key drivers: asset quality and margins

Dibin Korath

Asset quality could surprise

(91-22) 6157-3576

dibin.m.korath@jpmorgan.com

Management aims to contain credit costs at ~70bp for FY12 and ~75bp for FY13,
including potential losses on Rs13B in loans already in the restructuring pipeline.
Our credit cost estimates, however, are conservative at 125bp for FY13/14 given the
pressures on the economy. Any surprise in asset quality would be a key driver for the
stock.
NIMs driven by falling rates and shrinking international share

Figure 120: Loan break up, 3Q 12


%

NIMs have been above 2.6% in the last 4 quarters. Management hopes to hold NIMs
at ~2.8%, though we think that falling interest rates may create the opportunity for a
positive surprise there. The key drivers will be a) the shrinking share of the
international book and b) falling interest rates driving up domestic NIMs in FY13.

7%
5%
34%

Loan growth issues persist

26%

The significant challenge in FY13 will be the international book, given that the bank
faces $2bn in run-offs - we see no re-fi risk but feel that it will be hard to replace.
However the growth signs in retail are an important positive.

28%

Retail

International

Domestic corporates

SME

Fee income: We also estimate the fee income to remain muted due to the drop in the
wholesale loan origination driven by slowdown in the economy.

Rural

Valuation still looks attractive: The 33% YTD run in the stock has knocked some
of the valuation support out (subs-adjusted PBV is now 1.6x), but the overall
operating environment is improving with a) falling interest rates and b) some policy
momentum. We maintain OW and retain the stock as a top pick.

Source: Company reports

Figure 121: Quarterly credit cost and net NPA has reduced

Figure 122: Historical NIM quarterly

3.00%

2.75%

2.50%

2.70%

2.00%

2.65%

1.50%

2.60%

1.00%

2.55%

0.50%

2.50%

2.70%
2.60% 2.60%
2.50%

2.60% 2.60%

2.70%
2.60% 2.60%

2.50%

2.45%

0.00%
2Q10

3Q10

4Q10

1Q11

Net NPA ratio

2Q11

3Q11

4Q11

1Q12

Loan loss prov/average loans

2Q12

3Q12

2.40%
2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

Net Interest Margin

Source: Company reports & J.P. Morgan calculated


Source: Company reports

Price target and valuation analysis


Our Mar-13 PT for ICICI Bank of Rs 950 is based on a 2-stage Gordon growth
model implying 1.7x FY13E book and a Rs208/share valuation for the subsidiaries.
Our valuation factors in a Cost of Equity at 14.3%, Normalized ROE of ~20% and
terminal growth of 5%.
The key risks are large losses from infrastructure-related exposure and a slow rampup in retail lending.
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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Saul Martinez

AC

Itau Unibanco

saul.martinez@jpmorgan.com

IB business benefits from the banks corporate and privatebank platforms

Thomas Strakos

ITAU INVESTMENT BANKING STRATEGY:

(55-11) 4950-3474

The fully owned subsidiary Itau BBA consolidates Itau Unibancos treasury,
corporate banking and IB platforms. It is difficult to measure the IBs performance
on a stand-alone basis, especially considering the highly successful cross-selling
strategy adopted by Itau.

(1-212) 622-3602

thomas.f.strakos@jpmorgan.com
Christopher Delgado
(1-212) 622-6601
christopher.delgado@jpmorgan.com

Itau is a leading player in all capital markets divisions. According to


Dealogic, Itau BBA ranked 1st in the ECM and DCM market in 2011 (by # of
deals), generating $107mm in revenues for Itau. In M&A, it ranked 3rd,
generating $56mm in revenues.
Main strategy consists in maintaining close relationships with clients. By
maintaining close interaction with clients offering plain vanilla products such as
cash management, treasury services, and others, Itau strengthens ties with clients
and has access to the opportunities that lead to IB businesses. Itaus large balance
sheet also allows it to generate more business by attracting clients with credit
opportunities.
Having generated R$19bn in fees in 2011, IB revenues remain a small portion of
Itaus revenues.
INVESTMENT CASE AND VALUTION:
We see Itau as a high-quality franchise capable of continuing to post healthy low20% ROEs. However, the shares have been the best performers in our coverage
universe since the Central Bank began its current easing cycle at the end of August
2011 and we no longer see the valuation as attractive. Itau shares are at 10.2x 12E
and 2.0x 12 BV. The company trades at only a 6.0% discount to its historical
average price to next twelve months earnings multiple since 2006, which we feel is
justified given likely slower growth prospects in the coming years. We also believe
that sustaining double-digit bottom line growth could ultimately become more
difficult for Itau given its already ample earnings base, dominant position in select
businesses, and relative regional concentration in the southeast in retail banking.
Valuation Methodology
As with all our Brazilian banks valuations, we value Itau based on 1) a residual
income model; and 2) a regression of risk-adjusted ROE (ROE estimates for 2012
and 2013 divided by estimated cost of equity) to price to book value using a
crosssection of Latin American banks. The valuation methodologies are equally
weighted. For Itau we use target multiples of 2.4 P/BV 12E and 10.5 P/E 13E.

Risks to Rating and Price Target


For Itau Unibanco, the principal risks to our price target and Neutral rating are both
to the upside and to the downside. Downside risks include greater than expected
competition, which drives down net interest margins more quickly than expected; the
inability to improve operating efficiency as quickly as expected; continued increases
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amit.x.ranjan@jpmorgan.com

in asset quality; weaker trading results; value-destructive international expansion;


and Itau increasing its offer price for the remaining 50% stake in Redecard it does
not own to a level that makes the transaction dilutive to EPS. Upside risks include a
faster-than expected improvement in asset quality; better-than-expected efficiency;
greater-than-expected loan growth; and better-than-expected synergies from the
pending acquisition of the remaining 50% stake in Redecard that it does not already
own.

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amit.x.ranjan@jpmorgan.com

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amit.x.ranjan@jpmorgan.com

Company financials

Company financials

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Equity Ratings and Price Targets


Company
UBS
Credit Suisse Group
Deutsche Bank
Barclays
Goldman Sachs
Morgan Stanley
Citigroup Inc.
Bank of America
Nomura Holdings (8604)
Macquarie Group Limited
Investec Plc
BNP Paribas
Socit Gnrale
Credit Agricole
Royal Bank of Scotland
HSBC Holdings plc
Standard Chartered
UniCredit
SEB
VTB
EFG Hermes
ICICI Bank
Itau Unibanco

Symbol
UBSN.VX
CSGN.VX
DBKGn.DE
BARC.L
GS
MS
C
BAC
8604.T
MQG.AX
INPJ.J
BNPP.PA
SOGN.PA
CAGR.PA
RBS.L
HSBA.L
STAN.L
CRDI.MI
SEBa.ST
VTBRq.L
HRHO.CA
ICBK.BO
ITUB4.SA

Mkt Cap ($ mn)


51,022.13
31,187.31
43,353.10
46,023.50
63,453.89
35,398.73
99,997.38
84,814.57
17,800.92
9,677.77
5,330.41
58,548.68
24,862.87
15,516.86
45,266.05
156,438.30
58,654.66
30,020.34
15,858.26
25,732.93
965.18
21,136.13
96,713.66

Price CCY
CHF
CHF
EUR
GBp
USD
USD
USD
USD
JPY
AUD
ZAc
EUR
EUR
EUR
GBp
GBp
GBp
EUR
SEK
USD
EGP
INR
BRL

Price
12.44
24.41
35.45
241
117.29
18.37
34.20
8.05
384
26.25
4,803
36.95
24.42
4.73
26
557
1,573
3.95
49.17
4.92
15.21
914.20
38.38

Rating
OW
OW
N
OW
N
N
OW
OW
N
N
OW
N
OW
UW
N
OW
OW
N
OW
N
OW
OW
N

Price Target
16.00
28.00
36.00
265
120.00
23.00
46.50
10.50
380
30.06
6,466
41.00
26.00
5.00
30
650
1,800
3.50
68.00
5.81
36.50
950.00
43.00

Source: Company data, Bloomberg, J.P.Morgan estimates. All prices as of 09 Mar 12.

UBS

Overweight
Company Data
Price (SF)
Date Of Price
Price Target (SF)
Price Target End Date
52-week Range (SF)
Mkt Cap (SF bn)
Shares O/S (mn)

12.44
09 Mar 12
16.00
31 Dec 12
18.25 - 9.34
46.9
3,768

UBS (UBSN.VX;UBSN VX)


FYE Dec
Adj. EPS FY (SF)
Adj P/E FY
Headline EPS FY (SF)
NAV/Sh FY (SF)
P/NAV FY
Tier One Ratio FY
Dividend (Net) FY (SF)
RoNAV FY

2010A
1.73
7.2
1.99
9.6
1.3
17.8%
0.00
22.4%

2011A
0.56
22.2
1.12
11.5
1.1
16.0%
0.10
10.4%

2012E
1.33
9.4
1.42
12.3
1.0
12.2%
0.25
11.8%

2013E
1.60
7.8
1.62
13.3
0.9
15.7%
0.90
12.4%

2011A
1.59
15.3
1.40
20.3
0.75
1.2
15.2%
8.0%

2012E
2.78
8.8
2.45
23.1
0.75
1.1
14.7%
12.1%

2013E
3.30
7.4
3.18
25.9
0.75
0.9
16.0%
12.7%

Source: Company data, Bloomberg, J.P. Morgan estimates.

Credit Suisse Group

Overweight
Company Data
Price (SF)
Date Of Price
Price Target (SF)
Price Target End Date
52-week Range (SF)
Mkt Cap (SF bn)
Shares O/S (mn)

24.41
09 Mar 12
28.00
31 Dec 12
40.17 - 19.53
28.7
1,174

Credit Suisse Group (CSGN.VX;CSGN VX)


FYE Dec
2010A
Adj. EPS FY (SF)
4.09
Adj P/E FY
6.0
Headline EPS FY (SF)
4.22
NAV/Sh FY (SF)
20.8
Dividend (Net) FY (SF)
1.30
P/NAV FY
1.2
Tier One Ratio FY
17.2%
RoNAV FY
20.5%
Source: Company data, Bloomberg, J.P. Morgan estimates.

196

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13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Deutsche Bank

Neutral
Company Data
Price ()
Date Of Price
Price Target ()
Price Target End Date
52-week Range ()
Mkt Cap ( bn)
Shares O/S (mn)

35.45
09 Mar 12
36.00
31 Dec 12
45.02 - 20.79
33.0
932

Deutsche Bank (DBKGn.DE;DBK GR)


FYE Dec
2010A
Adj. EPS FY ()
2.72
Headline EPS FY ()
3.18
Adj P/E FY
13.0
BV/Sh FY ()
50
P/BV FY
0.7
P/NAV FY
1.0
Dividend (Net) FY ()
0.75
ROE FY
5.5%
NAV/Sh FY ()
33.9
Tier One Ratio FY
12.3%
RoNAV FY
8.0%

2011A
4.35
5.18
8.2
55
0.6
0.9
0.75
8.2%
39.2
12.9%
11.1%

2012E
4.65
4.76
7.6
59
0.6
0.8
0.75
8.1%
44.3
11.1%
10.8%

2013E
4.80
4.91
7.4
63
0.6
0.7
0.75
7.8%
48.3
12.1%
10.2%

2010A
28.54
8.4
30.41
3,564

2011A
23.55
10.2
24.67
3,007

2012E
27.57
8.7
28.87
3,521

2013E
35.19
6.8
36.82
4,492

341.0
0.7
9.2%
10.8%

369.4
0.7
5.2%
11.0%

390.3
0.6
7.6%
11.0%

417.1
0.6
9.1%
10.2%

2011A
4.82
24.3
4.82
116.2
1.0
4.3%
1.40
13.9%

2012E
10.95
10.7
11.46
125.8
0.9
9.1%
1.40
10.2%

2013E
12.20
9.6
12.77
136.7
0.9
9.4%
1.40
11.2%

Source: Company data, Bloomberg, J.P. Morgan estimates.

Barclays

Overweight
Company Data
Price (p)
Date Of Price
Price Target (p)
Price Target End Date
52-week Range (p)
Mkt Cap ( bn)
Shares O/S (mn)

241
09 Mar 12
265
31 Dec 12
311 - 134
29.4
12,199

Barclays Plc (BARC.L;BARC LN)


FYE Dec
Adj. EPS FY (p)
Adj P/E FY
Headline EPS FY (p)
Net Attributable Income FY
( mn)
NAV/Sh FY (p)
P/NAV FY
RoNAV FY
Core Tier One Ratio FY

Source: Company data, Bloomberg, J.P. Morgan estimates.

Goldman Sachs

Neutral
Company Data
Price ($)
Date Of Price
Price Target ($)
Price Target End Date
52-week Range ($)
Mkt Cap ($ bn)
Shares O/S (mn)

117.29
09 Mar 12
120.00
31 Dec 12
164.40 84.27
63.5
541

Goldman Sachs Group (GS;GS US)


FYE Dec
2010A
Adj. EPS FY ($)
12.56
Adj P/E FY
9.3
Headline EPS FY ($)
14.23
NAV/Sh FY ($)
108.9
P/NAV FY
1.1
RoNAV FY
12.4%
Dividend (Net) FY ($)
1.40
Tier One Ratio FY
16.9%

Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg
consensus estimates.

Morgan Stanley

Neutral
Company Data
Price ($)
Date Of Price
Price Target ($)
Price Target End Date
52-week Range ($)
Mkt Cap ($ bn)
Shares O/S (mn)

18.37
09 Mar 12
23.00
31 Dec 12
28.92 - 11.58
35.4
1,927

Morgan Stanley & Co. Inc. (MS;MS US)


FYE Dec
2010A
Adj. EPS FY ($)
2.39
Adj P/E FY
7.7
Headline EPS FY ($)
3.31
BV/Sh FY ($)
31
NAV/Sh FY ($)
27.2
Dividend (Net) FY ($)
0.20
P/NAV FY
0.7
Tier One Ratio FY
16.0%

2011A
2.89
6.4
1.36
33
29.1
0.20
0.6
16.7%

2012E
2.00
9.2
2.00
33
29.6
0.20
0.6
12.6%

2013E
2.10
8.7
2.10
35
31.5
0.20
0.6
13.4%

Source: Company data, Bloomberg, J.P. Morgan estimates.

197

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Citigroup Inc.

Overweight
Company Data
Price ($)
Date Of Price
52-week Range ($)
Mkt Cap ($ mn)
Fiscal Year End
Shares O/S (mn)
Price Target ($)
Price Target End Date

34.20
09 Mar 12
46.90 - 21.40
99,997.38
Dec
2,924
46.50
31 Dec 12

Citigroup Inc. (C;C US)


FYE Dec
EPS Reported ($)
Q1 (Mar)
Q2 (Jun)
Q3 (Sep)
Q4 (Dec)
FY
Bloomberg EPS FY ($)
P/E FY

2010A

2011A

2012E

1.51
0.91
0.73
0.44
3.56
9.6

0.99
1.09
1.23
0.31
3.62
9.4

1.08
1.02
1.05
1.13
4.28
8.0

Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg
consensus estimates.

Bank of America

Overweight
Company Data
Price ($)
Date Of Price
52-week Range ($)
Mkt Cap ($ mn)
Fiscal Year End
Shares O/S (mn)
Price Target ($)
Price Target End Date

8.05
09 Mar 12
14.69 - 4.92
84,814.57
Dec
10,536
10.50
31 Dec 12

Bank of America (BAC;BAC US)


FYE Dec
EPS Reported ($)
Q1 (Mar)
Q2 (Jun)
Q3 (Sep)
Q4 (Dec)
FY
Bloomberg EPS FY ($)
P/E Recurring FY

2010A

2011A

2012E

0.28
0.27
(0.77)
(0.16)
(0.36)
9.1

0.17
(0.90)
0.56
0.14
0.01
59.0

0.07
0.17
0.19
0.23
0.65
11.2

Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg
consensus estimates.

Nomura Holdings (8604)


Company Data
Price ()
Date Of Price
Market Cap ( bn)
Shares O/S (mn)
52-week Range ()
TOPIX
DPS ()
Div Yield
ROE

384
12 Mar 12
1,467.9
3,822.6
467 - 223
845.28
8
2.1%
-0.1%

Nomura Holdings, Inc. (Reuters: 8604.T, Bloomberg: 8604 JT)


in mn, year-end Mar
FY10A
FY11A
FY12E
Net Revenue ( mn)
1,150,822
1,130,698
1,407,938
Pretax Profit ( mn)
105,247
93,255
34,839
Adjusted Pretax Income (
194,264
133,584
-34,895
mn)
Net Profit ( mn)
67,798
28,661
-1,987
Adjusted Net Profit ( mn)
62,236
40,018
-20,937
Diluted EPS ()
21.7
7.9
-0.5
Diluted P/E (x)
17.7
48.6
NM
BPS ()
580
578
561
P/B (x)
0.66
0.66
0.68

FY13E
1,570,076
149,267
149,267

FY14E
1,678,499
233,166
233,166

102,994
89,560
28.1
13.7
581
0.66

160,885
139,900
43.9
8.7
617
0.62

FY13E
6,579.0
890.0
2.542
10.3
1.500
5.7%
30.0%
864.1
2.434
15.9%
10.8

FY14E
6,766.8
900.7
2.561
10.3
1.500
5.7%
30.0%
874.8
2.453
0.8%
10.7

J.P.

Macquarie Group Limited


Company Data
52-week range (A$)
Market capitalisation (A$ bn)
Market capitalisation ($ bn)
Fiscal Year End
Price (A$)
Date Of Price
Shares outstanding (mn)
ASX100
ASX200-Bnk
NTA/Sh^ (A$)
Tier 1 Ratio

36.90 - 19.94
9.15
9.68
Mar
26.25
12 Mar 12
348.6
3,413.7
5,651.2
28.84
12.3%

Macquarie Group Limited (Reuters: MQG.AX, Bloomberg: MQG AU)


Year-end Mar (A$)
FY10A
FY11A
FY12E
Total Revenue (A$ mn)
6,854.0
7,772.0
6,775.7
Net profit after tax (A$ mn)
1,071.0
982.0
747.0
EPS (A$)
3.266
2.902
2.207
P/E (x)
8.0
9.0
11.9
Dividend (A$)
1.860
1.860
1.500
Net Yield (%)
7.1%
7.1%
5.7%
Franking (%)
0.0%
0.0%
0.0%
Normalised* Profit (A$ mn)
1,050.0
956.0
721.0
Normalised* EPS (A$)
3.174
2.759
2.100
Normalised* EPS chg (%)
2.6%
-13.1%
-23.9%
Normalised* P/E (x)
8.3
9.5
12.5
Source: Company data, Bloomberg, J.P. Morgan estimates.

198

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Investec Plc

Overweight
Company Data
Price (c)
Date Of Price
Price Target (c)
Price Target End Date
52-week Range (c)
Mkt Cap (R bn)
Shares O/S (mn)

4,803
09 Mar 12
6,466
30 Nov 12
5,772 - 4,143
40.3
840

Investec Plc (INPJ.J;INP SJ)


FYE Mar
Adj. EPS FY (c)
Headline P/E FY
BV/Sh FY (c)
ROE FY
ROA FY
Adj P/E FY
P/BV FY
Dividend (Net) FY (c)
NAV FY ( mn)
Dividend (Gross) FY (c)
Operating profit FY ( mn)
Net Attributable Income FY
( mn)

2011E
43.15
9.4
450
11.2%
0.8%
9.4
0.9
17.00
3,647
17.00
423
328

2012E
40.49
10.0
437
10.5%
0.6%
10.0
0.9
15.57
3,841
15.57
463
342

2013E
47.56
8.5
460
11.8%
0.7%
8.5
0.9
18.29
4,090
18.29
548
406

Source: Company data, Bloomberg, J.P. Morgan estimates.

BNP Paribas

Neutral
Company Data
Price ()
Date Of Price
52-week Range ()
Mkt Cap ( bn)
Shares O/S (mn)
Price Target ()
Price Target End Date

36.95
09 Mar 12
55.44 - 22.72
44.6
1,208
41.00
31 Dec 12

BNP Paribas (BNPP.PA;BNP FP)


FYE Dec
Adj. EPS FY ()
Adj P/E FY
Headline EPS FY ()
BV/Sh FY ()
NAV/Sh FY ()
P/NAV FY
ROE FY
Tier One Ratio FY
P/BV FY

2010A
6.61
5.6
6.58
54
41.7
0.9
11.9%
11.4%
0.7

2011A
6.83
5.4
5.05
57
45.2
0.8
9.1%
11.6%
0.7

2012E
5.05
7.3
4.66
60
48.5
0.8
8.0%
12.5%
0.6

2013E
5.30
7.0
5.35
63
51.6
0.7
8.7%
13.5%
0.6

2011A
3.61
6.8
3.16
62
42.6
0.6
6.0%
10.7%

2012E
3.30
7.4
2.59
65
45.1
0.5
4.7%
11.7%

2013E
3.65
6.7
3.65
68
48.8
0.5
6.3%
12.5%

Source: Company data, Bloomberg, J.P. Morgan estimates.

Socit Gnrale

Overweight
Company Data
Price ()
Date Of Price
Price Target ()
Price Target End Date
52-week Range ()
Mkt Cap ( bn)
Shares O/S (mn)

24.42
09 Mar 12
26.00
31 Dec 12
49.47 - 14.32
18.9
776

Socit Gnrale (SOGN.PA;GLE FP)


FYE Dec
2010A
Adj. EPS FY ()
5.34
Adj P/E FY
4.6
Headline EPS FY ()
5.33
BV/Sh FY ()
61
NAV/Sh FY ()
38.9
P/NAV FY
0.6
ROE FY
11.0%
Tier One Ratio FY
10.6%
Source: Company data, Reuters, J.P. Morgan estimates.

199

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(44-20) 7325-1523
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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Credit Agricole

Underweight
Company Data
Price ()
Date Of Price
Price Target ()
Price Target End Date
52-week Range ()
Mkt Cap ( bn)
Shares O/S (mn)

4.73
09 Mar 12
5.00
31 Dec 12
12.38 - 3.98
11.8
2,498

Credit Agricole (CAGR.PA;ACA FP)


FYE Dec
2010A
Adj. EPS FY ()
0.82
Adj P/E FY
5.8
Headline EPS FY ()
0.53
Headline P/E FY
8.9
NAV/Sh FY ()
10.3
P/NAV FY
0.5
P/BV FY
0.2
Dividend (Net) FY ()
0.45
ROE FY
2.8%
Tier One Ratio FY
10.6%

2011E
1.23
3.9
(0.48)
NM
9.7
0.5
0.3
0.00
-2.7%
9.8%

2012E
0.75
6.3
0.59
8.0
10.2
0.5
0.3
0.00
3.3%
9.8%

2013E
0.85
5.5
0.85
5.5
11.1
0.4
0.3
0.00
4.6%
10.1%

2012E
1.79
14.6
0.72
782

2013E
2.35
11.1
2.11
2,316

48.1
0.5
1.5%
10.5%

49.8
0.5
4.2%
10.3%

Source: Company data, Bloomberg, J.P. Morgan estimates.

Royal Bank of Scotland

Neutral
Company Data
Price (p)
Date Of Price
Price Target (p)
Price Target End Date
52-week Range (p)
Mkt Cap ( bn)
Shares O/S (mn)

26
09 Mar 12
30
31 Dec 12
45 - 17
28.9
110,228

Royal Bank of Scotland Group Plc (RBS.L;RBS LN)


FYE Dec
2010A
2011A
Adj. EPS FY (p)
0.57
(0.19)
Adj P/E FY
46.0
NM
Headline EPS FY (p)
(1.05)
(1.85)
Net Attributable Income FY
(1,125)
(1,997)
( mn)
NAV/Sh FY (p)
50.0
47.7
P/NAV FY
0.5
0.5
RoNAV FY
-2.1%
-3.7%
Core Tier One Ratio FY
10.7%
10.6%

Source: Company data, Bloomberg, J.P. Morgan estimates. Current and previous Adj EPS estimates are
calculated differently

HSBC Holdings plc

Overweight
Company Data
Price (p)
Date Of Price
Price Target (p)
Price Target End Date
52-week Range (p)
Mkt Cap ( bn)
Shares O/S (mn)

557
09 Mar 12
650
31 Dec 12
674 - 456
99.8
17,922

HSBC Holdings plc (HSBA.L;HSBA LN)


FYE Dec
2010A
Adj.EPS $ FY
Adj. EPS FY (p)
0.74
Adj P/E FY
11.9
Net Attributable Income FY
12,746
($ mn)
NAV/Sh FY ($)
6.66
P/NAV FY
1.3
RoNAV FY
12.0%
Core Tier One Ratio FY
10.5%
Headline EPS FY (p)
0.73

2011E
0.71
12.3
16,224

2012E
0.83
10.5
17,676

2013E
0.95
9.2
17,865

7.10
1.2
10.4%
10.1%
0.92

7.66
1.1
11.4%
11.0%
0.98

8.15
1.1
12.2%
10.3%
0.96

Source: Company data, Bloomberg, J.P. Morgan estimates.

200

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Standard Chartered

Overweight
Company Data
Price (p)
Date Of Price
Price Target (p)
Price Target End Date
52-week Range (p)
Mkt Cap ( bn)
Shares O/S (mn)

1,573
09 Mar 12
1,800
31 Dec 12
1,706 - 1,142
37.4
2,379

Standard Chartered (STAN.L;STAN LN)


FYE Dec
2010A
Adj.EPS $ FY
2.03
Adj P/E FY
12.2
Headline EPS $ FY
2.11
Net Attributable Income FY
4,231
($ mn)
NAV/Sh FY ($)
13.30
P/NAV FY
1.9
RoNAV FY
16.3%
Core Tier One Ratio FY
11.8%

2011A
1.98
12.4
2.05
4,748

2012E
2.10
11.8
2.18
5,105

2013E
2.29
10.8
2.38
5,664

14.12
1.7
14.6%
11.8%

15.39
1.6
14.4%
12.0%

16.75
1.5
14.4%
11.5%

2011E
(0.08)
NM
6.6
0.00
-0.8%
9.5%
-1.3%
8.6%

2012E
0.45
8.8
8.7
0.08
4.2%
10.5%
6.1%
9.3%

2013E
0.62
6.4
9.2
0.11
5.2%
10.6%
7.1%
9.5%

Source: Company data, Bloomberg, J.P. Morgan estimates.

UniCredit

Neutral
Company Data
Price ()
Date Of Price
Price Target ()
Price Target End Date
52-week Range ()
Mkt Cap ( bn)
Shares O/S (mn)

3.95
09 Mar 12
3.50
31 Dec 12
12.44 - 2.20
22.9
5,789

UniCredit (CRDI.MI;UCG IM)


FYE Dec
Adj. EPS FY ()
Adj P/E FY
NAV/Sh FY ()
Dividend (Net) FY ()
ROE FY
Tier One Ratio FY
RoNAV FY
Core Tier One Ratio FY

2010A
0.07
57.9
20.0
0.03
1.9%
9.4%
3.6%
8.5%

Source: Company data, Bloomberg, J.P. Morgan estimates.

SEB

Overweight
Company Data
Price (Skr)
Date Of Price
Price Target (Skr)
Price Target End Date
52-week Range (Skr)
Mkt Cap (Skr bn)
Shares O/S (mn)
Mkt Cap ($ bn)

49.17
09 Mar 12
68.00
31 Dec 13
59.75 - 30.72
107.9
2,194
15.9

Skandinaviska Enskilda Banken AB (SEBa.ST;SEBA SS)


FYE Dec
2009A
2010A
2011A
Adj. EPS FY (Skr)
1.10
3.97
5.68
Adj P/E FY
44.8
12.4
8.7
NAV/Sh FY (Skr)
39.1
39.3
43.6
P/NAV FY
1.3
1.3
1.1
ROE FY
2.3%
8.8%
11.9%
ROA FY
0.1%
0.4%
0.5%
Dividend (Gross) FY (Skr)
1.00
1.50
1.75
Net Attributable Income FY
1,114
6,745
11,124
(Skr mn)
Gross Yield FY
2.0%
3.1%
3.6%

2012E
5.43
9.1
47.0
1.0
10.5%
0.5%
2.00
11,905

2013E
5.92
8.3
50.7
1.0
10.8%
0.5%
2.25
12,983

4.1%

4.6%

2012E
0.68
3.76
7.3
1.3
8,575
1,718
3,541
10.0%

2013E
0.89
4.58
5.6
1.1
10,088
2,195
4,635
10.5%

Source: Company data, Bloomberg, J.P. Morgan estimates.

VTB

Neutral
Company Data
Price ($)
Date Of Price
Price Target ($)
Price Target End Date
52-week Range ($)
Mkt Cap ($ bn)
Shares O/S (mn)

4.92
09 Mar 12
5.81
31 Dec 12
7.15 - 3.51
25.7
5,230

VTB Bank OJSC (VTBRq.L;VTBR LI)


FYE Dec
2009A
Adj. EPS FY ($)
(0.46)
BV/Sh FY ($)
3.15
Adj P/E FY
NM
P/BV FY
1.6
NII FY ($ mn)
4,795
Fees & comms FY ($ mn)
662
Net Att. Income FY ($ mn)
(1,997)
Tier One Ratio FY
14.8%

2010A
0.37
3.35
13.4
1.5
5,633
813
1,916
12.4%

2011E
0.63
2.99
7.8
1.6
7,057
1,260
3,284
9.8%

Source: Company data, Bloomberg, J.P. Morgan estimates.

201

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

EFG Hermes

Overweight
Company Data
Price (E)
Date Of Price
Price Target (E)
Price Target End Date
52-week Range (E)
Mkt Cap (E bn)
Shares O/S (mn)
Mkt Cap ($ bn)
Average Volume

15.21
11 Mar 12
36.50
31 Dec 11
19.02 - 9.25
5.8
383
1.0
39,750,000.00

Egyptian Financial Group-Hermes Holding (HRHO.CA;HRHO EY)


FYE Dec
2009A
2010E
Adj. EPS FY (E)
1.44
2.65
Adj P/E FY
10.5
5.7
P/NAV FY
0.7
0.9
P/BV FY
0.7
0.6
ROA FY
5.1%
3.7%
RoNAV FY
7.2%
13.7%
Gross Yield FY
6.6%
7.9%
Net Attributable Income FY
552
1,016
(E mn)

2011E
2.10
7.3
0.9
0.6
1.8%
11.9%
6.9%
803

2012E
2.85
5.3
0.8
0.6
2.3%
15.8%
9.4%
1,091

Source: Company data, Bloomberg, J.P. Morgan estimates.

ICICI Bank
Company Data
52-wk range (Rs)
Market cap (Rs mn)
Market cap ($ mn)
Shares outstanding (mn)
Fiscal Year End
Price (Rs)
Date Of Price
Avg daily value (Rs mn)
Avg daily value ($ mn)
Avg daily vol (mn)
NIFTY
Exchange Rate

1,139.00 641.00
1,053,742
21,136
1,153
Mar
914.20
09 Mar 12
2,297.2
46.1
3.4
5,334
49.86

ICICI Bank (Reuters: ICBK.BO, Bloomberg: ICICIBC IN)


Year-end Mar (Rs in mn)
FY10A
FY11A
FY12E
Operating Profit (Rs mn)
88,658
92,498
104,696
Net Profit (Rs mn)
40,248
51,514
63,006
Cash EPS (Rs)
36.10
44.72
54.70
Fully Diluted EPS (Rs)
28.33
46.48
56.87
DPS (Rs)
12.00
14.00
19.00
EPS growth (%)
6.9%
23.9%
22.3%
ROE
8.0%
9.7%
11.1%
P/E
25.3
20.4
16.7
BVPS (Rs)
462.99
478.29
510.77
P/BV
2.0
1.9
1.8
Div. Yield
1.3%
1.5%
2.1%

FY13E
132,091
72,271
62.75
61.01
24.00
14.7%
11.9%
14.6
545.43
1.7
2.6%

FY14E
162,770
89,922
78.07
76.33
29.00
24.4%
13.8%
11.7
589.57
1.6
3.2%

Source: Company data, Bloomberg, J.P. Morgan estimates.

Itau Unibanco

Neutral
Company Data
Price (R$)
Date Of Price
52-week Range (R$)
Mkt Cap (R$ bn)
Fiscal Year End
Shares O/S (mn)
Price Target (R$)
Price Target End Date

38.38
09 Mar 12
39.47 - 25.15
173.23
Dec
4,514
43.00
31 Dec 12

Ita Unibanco Holding SA (ITUB4.SA;ITUB4 BZ)


FYE Dec
2010A
EPS - Recurring (R$)
Q1 (Mar)
0.70
Q2 (Jun)
0.73
Q3 (Sep)
0.70
Q4 (Dec)
0.75
FY
2.88
Bloomberg EPS FY (R$)
2.86

2011A

2012E

2013E

0.80
0.73
0.87
0.83
3.24
3.20

0.85
0.88
0.93
0.94
3.59
3.65

4.05
4.22

Source: Company data, Bloombereg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg
consensus estimates.

202

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Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

UBS: Summary of Financials


Profit and Loss Statement
SF in millions, year end Dec
Net interest income
% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)
Balance sheet
SF in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Other assets
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Other liabilities
Retirement benefit liabilities
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity

FY10A

FY11A

FY12E

FY13E

6,215
-3.6%
25,844
17,158
-3.1%
7,471
-2399.5%
1,215
32,059
31.2%
-6,586
5.4%
(17,954)
7,519
1812.7%
-65
7,454
-390.9%
381
(5.1%)
(303)
7,532

6,826
9.8%
21,147
15,432
-10.1%
4,258
-43.0%
1,457
27,973
-12.8%
-5,961
-9.5%
(16,478)
5,534
-26.4%
-83
5,451
-26.9%
(952)
17.5%
(269)
4,230

6,963
2.0%
20,744
15,149
-1.8%
4,795
12.6%
800
27,706
-1.0%
-6,126
2.8%
(15,117)
6,464
16.8%
-36
6,913
26.8%
(1,318)
20.5%
(250)
5,344

7,032
1.0%
21,472
15,288
0.9%
5,234
9.2%
950
28,504
2.9%
-6,098
-0.4%
(14,454)
7,952
23.0%
-25
7,927
14.7%
(1,585)
20.0%
(245)
6,096

FY10A

FY11A

FY12E

FY13E

262,877
266,604
267,137
269,274
-14.3%
1.4%
0.2%
0.8%
2,390
1,626
1,832
1,832
75,558
53,969
54,077
54,510
737,036
875,395
877,146
884,163
-5.9%
18.8%
0.2%
0.8%
1,277,400 1,236,684 1,217,522 1,212,734
9,822
9,695
9,695
9,695
131,626
102,233
102,457
103,354
1,317,245 1,419,312 1,422,151 1,433,528
332,301
342,409
338,985
335,595
-19.0%
3.0%
-1.0%
-1.0%
130,271
140,617
140,617
140,617
41,490
30,201
30,261
30,503
782,940
739,354
742,667
740,568
122,643
128,852
130,469
135,268
262,877
266,604
267,137
269,274
5,043
4,406
4,406
4,406
1,317,245 1,419,312 1,422,151 1,433,528

Ratio Analysis
SF in millions, year end Dec
Per Share Data
EPS Reported
EPSAdjusted
% Change Y/Y
DPS
% Change Y/Y
Dividend yield
Payout ratio
BV per share
NAV per share
Shares outstanding
Return ratios
RoRWA
Pre-tax ROE
ROE
RoNAV
Revenues
NIM (NII / RWA)
Non-IR / average assets
Total rev / average assets
NII / Total revenues
Fees / Total revenues
Trading / Total revenues
SF in millions, year end Dec
Cost ratios
Cost / income
Cost / assets
Staff numbers
Balance Sheet Gearing
Loan / deposit
Investments / assets
Loan / assets
Customer deposits / liabilities
LT Debt / liabilities
Asset Quality / Capital
Loan loss reserves / loans
NPLs / loans
LLP / RWA
Loan loss reserves / NPLs
Growth in NPLs
RWAs
% YoY change
Core Tier 1
Total Tier 1

FY10A

FY11A

FY12E

FY13E

1.99
1.73
2354.9%
0.00
0.0%
12
9.6
3,847.4

1.12
0.56
-67.7%
0.10
0.8%
8.9%
14
11.5
3,822.0

1.42
1.33
137.2%
0.25
150.0%
1.9%
17.6%
15
12.3
3,822.0

1.62
1.60
20.1%
0.90
260.0%
6.8%
55.6%
16
13.3
3,822.0

0.04
17.0%
15.1%
22.4%

0.02
10.9%
4.3%
10.4%

0.02
11.7%
9.2%
11.8%

0.02
13.5%
10.4%
12.4%

3.13%
1.94%
2.41%
19.39%
53.52%
23.30%

2.83%
1.55%
2.04%
24.40%
55.17%
15.22%

2.05%
1.46%
1.95%
25.13%
54.68%
17.31%

2.42%
1.50%
2.00%
24.67%
53.63%
18.36%

FY10A

FY11A

FY12E

FY13E

76.5%
0.0
64,423

80.2%
0.0
64,547

76.7%
0.0
63,376

72.1%
0.0
62,316

79.1%
5.7%
20.0%
25.2%
9.9%

77.9%
3.8%
18.8%
24.1%
9.9%

78.8%
3.8%
18.8%
23.8%
9.9%

80.2%
3.8%
18.8%
23.4%
9.8%

0.9%
0.6%
0.7%
0.7%
1.6%
1.1%
1.2%
1.2%
0.0%
0.0%
0.0%
0.0%
57.0% 57.0%
57.0%
57.0%
(10.1%) (32.0%)
12.7%
0.0%
198,875 240,962 340,135 290,135
-3.7% 21.2%
41.2% -14.7%
15.3% 14.1%
10.9%
14.2%
17.8% 16.0%
12.2%
15.7%

Source: Company reports and J.P. Morgan estimates.

203

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Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Credit Suisse Group: Summary of Financials


Profit and Loss Statement
SF in millions, year end Dec

FY10A

FY11A

FY12E

Net interest income


% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)

6,541
-5.1%
24,084
14,078
2.4%
9,338
-23.2%
668
30,625
-8.9%
-9,205
-4.1%
(14,699)
6,721
-26.1%
79
6,800
-20.8%
(1,548)
22.8%
(135)
5,098

6,433
-1.7%
18,996
12,952
-8.0%
5,020
-46.2%
1,024
25,429
-17.0%
-9,398
2.1%
(12,304)
3,727
-44.5%
-187
2,693
-60.4%
(671)
24.9%
(125)
1,897

7,748
20.4%
17,627
12,125
-6.4%
5,120
2.0%
382
25,375
-0.2%
-8,998
-4.3%
(11,207)
5,171
38.7%
-190
4,581
70.1%
(1,191)
26.0%
(125)
3,265

FY10A

FY11A

FY12E

218,842
-7.7%
1,017
24,879
546,671
0.7%
802,856
8,585
118,355
1,032,006

233,413
6.7%
910
18,386
518,788
-5.1%
780,490
8,591
121,742
1,049,165

232,246
-0.5%
919
18,294
516,194
-0.5%
768,661
8,591
121,133
1,043,919

325,057
0.7%
173,752
168,394
818,985
123,960
33,282
9,733
1,032,006

353,548
8.8%
162,655
176,559
834,761
131,251
33,674
7,411
1,049,165

351,780
-0.5%
162,655
175,676
844,928
130,595
38,262
7,374
1,043,919

Balance sheet
SF in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Other assets
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Other liabilities
Retirement benefit liabilities
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity

Ratio Analysis
FY13E SF in millions, year end Dec
Per Share Data
8,132 EPS Reported
5.0% EPSAdjusted
17,922
% Change Y/Y
12,247 DPS
1.0%
% Change Y/Y
5,222 Dividend yield
2.0% Payout ratio
453 BV per share
26,054 NAV per share
2.7% Shares outstanding
-9,012
0.2% Return ratios
(10,716) RoRWA
6,327 Pre-tax ROE
22.4% ROE
-190 RoNAV
6,137 Revenues
34.0% NIM (NII / RWA)
(1,596) Non-IR / average assets
26.0% Total rev / average assets
(126) NII / Total revenues
4,415 Fees / Total revenues
Trading / Total revenues
FY13E SF in millions, year end Dec
Cost ratios
229,923 Cost / income
-1.0% Cost / assets
928 Staff numbers
18,111
511,032 Balance Sheet Gearing
-1.0% Loan / deposit
762,900 Investments / assets
8,591 Loan / assets
119,922 Customer deposits / liabilities
1,033,480 LT Debt / liabilities
Asset Quality / Capital
348,262 Loan loss reserves / loans
-1.0% NPLs / loans
162,655 LLP / RWA
173,919 Loan loss reserves / NPLs
839,815 Growth in NPLs
129,289 RWAs
% YoY change
43,575 Core Tier 1
7,300 Total Tier 1
1,033,480

FY10A

FY11A

FY12E

FY13E

4.22
1.40
4.09
1.59
-30.8% -61.0%
1.30
0.75
(35.0%) (42.3%)
5.3%
3.1%
30.8%
53.8%
28
28
20.8
20.3
1,173.9 1,220.3

2.45
2.78
74.8%
0.75
0.0%
3.1%
30.6%
30
23.1
1,270.3

3.18
3.30
18.4%
0.75
0.0%
3.1%
23.6%
33
25.9
1,340.3

0.02
19.2%
14.4%
20.5%

0.01
8.0%
5.7%
8.0%

0.01
12.7%
9.1%
12.1%

0.02
15.0%
10.8%
12.7%

2.99%
2.33%
2.97%
21.36%
45.97%
30.49%

2.66%
1.83%
2.44%
25.30%
50.93%
19.74%

2.74%
1.68%
2.42%
30.53%
47.78%
20.18%

2.78%
1.73%
2.51%
31.21%
47.00%
20.04%

FY10A

FY11A

FY12E

FY13E

78.1%
0.0
-

85.3%
0.0
-

79.6%
0.0
-

75.7%
0.0
-

67.3%
2.4%
21.2%
32.9%
17.6%

66.0%
1.8%
22.2%
35.1%
16.1%

66.0%
1.8%
22.2%
35.2%
16.3%

66.0%
1.8%
22.2%
35.4%
16.6%

0.5%
0.4%
0.4%
0.4%
0.9%
0.7%
0.9%
0.9%
(0.0%)
0.1%
0.1%
0.1%
54.6%
53.0%
45.6%
46.1%
(18.9%) (7.8%)
17.3%
0.0%
218,702 241,753 282,753 292,083
-1.3%
10.5%
17.0%
3.3%
10.6%
9.3%
9.6% 11.1%
17.2%
15.2%
14.7%
16.0%

Source: Company reports and J.P. Morgan estimates.

204

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Deutsche Bank: Summary of Financials


Profit and Loss Statement
in millions, year end Dec

FY10A

FY11A

FY12E

Net interest income


% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)

15,582
25.1%
12,983
10,669
19.7%
3,353
-52.8%
28,565
2.3%
-12,239
12.6%
(10,645)
5,224
-33.2%
-1,277
3,947
-23.9%
(1,646)
43.9%
2,301

17,444
12.0%
15,785
11,544
8.2%
3,059
-8.8%
33,229
16.3%
-12,806
4.6%
(12,863)
7,038
34.7%
-1,838
5,200
31.8%
(1,064)
21.0%
4,136

17,899
2.6%
16,671
11,574
0.3%
4,950
61.8%
34,571
4.0%
-13,573
6.0%
(12,054)
8,997
27.8%
-1,951
6,964
33.9%
(2,538)
34.0%
4,426

FY10A

FY11A

FY12E

407,729
58.0%
3,296
15,594
1,905,630

412,838
1.3%
4,162
15,462
2,164,000

421,076
2.0%
4,245
15,462
2,142,360

533,984
55.1%
48,146
1,905,630

535,314
0.3%
52,703
2,164,000

539,337
0.8%
56,433
2,142,360

Balance sheet
in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Other assets
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Other liabilities
Retirement benefit liabilities
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity

Ratio Analysis
FY13E in millions, year end Dec
Per Share Data
18,210 EPS Reported
1.7% EPSAdjusted
16,743
% Change Y/Y
11,690 DPS
1.0%
% Change Y/Y
4,950 Dividend yield
0.0% Payout ratio
- BV per share
34,953 NAV per share
1.1% Shares outstanding
-13,063
-3.8% Return ratios
(12,875) RoRWA
9,167 Pre-tax ROE
1.9% ROE
-1,976 RoNAV
7,108 Revenues
2.1% NIM (NII / RWA)
(2,544) Non-IR / average assets
33.0% Total rev / average assets
- NII / Total revenues
4,565 Fees / Total revenues
Trading / Total revenues
FY13E in millions, year end Dec
Cost ratios
429,478 Cost / income
2.0% Cost / assets
4,330 Staff numbers
- Balance Sheet Gearing
- Loan / deposit
- Investments / assets
15,462 Loan / assets
- Customer deposits / liabilities
2,142,360 LT Debt / liabilities
Asset Quality / Capital
542,034 Loan loss reserves / loans
0.5% NPLs / loans
- LLP / RWA
- Loan loss reserves / NPLs
- Growth in NPLs
- RWAs
% YoY change
60,301 Core Tier 1
- Total Tier 1
2,142,360

FY10A

FY11A

FY12E

FY13E

3.18
2.72
-37.6%
0.75
0.0%
2.2%
23.5%
50
33.9
960.0

5.18
4.35
59.7%
0.75
0.0%
2.2%
14.5%
55
39.2
951.0

4.76
4.65
7.1%
0.75
0.0%
2.2%
15.7%
59
44.3
951.0

4.91
4.80
3.1%
0.75
0.0%
2.2%
15.3%
63
48.3
951.0

0.01
8.9%
5.5%
8.0%

0.01
10.1%
8.2%
11.1%

0.01
12.4%
8.1%
10.8%

0.01
11.7%
7.8%
10.2%

4.50%
0.76%
1.68%
54.55%
37.35%
11.74%

4.58%
0.78%
1.63%
52.50%
34.74%
9.21%

3.67%
0.77%
1.61%
51.78%
33.48%
14.32%

3.83%
0.78%
1.63%
52.10%
33.45%
14.16%

FY10A

FY11A

FY12E

FY13E

80.1%
77.2%
74.1%
74.2%
0.0
0.0
0.0
0.0
102,062 102,062 102,062 102,062

77.1%
21.6%
-

77.9%
19.3%
-

78.9%
19.9%
-

80.0%
20.2%
-

0.8%
1.0%
1.0%
1.0%
2.0%
2.7%
2.3%
2.2%
0.4%
0.5%
0.4%
0.4%
39.1%
36.7%
44.2%
44.7%
(5.4%)
34.6% (15.5%)
0.9%
346,000 381,000 487,246 475,904
26.7%
10.1%
27.9%
-2.3%
8.7%
9.5%
8.7%
9.7%
12.3%
12.9%
11.1%
12.1%

Source: Company reports and J.P. Morgan estimates.

205

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Barclays: Summary of Financials


Profit and Loss Statement
in millions, year end Dec
Net interest income
% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)
Balance sheet
in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity

FY11A

FY12E

FY13E

12,201
-2.6%
17,066
8,622
-2.8%
5,024
-35.7%
3,420
29,267
-8.4%
-19,777
-1.0%
9,904
-10.9%
-4,025
0
5,879
-3.1%
1,928
32.8%
944
3,007

12,266
0.5%
17,529
8,717
1.1%
5,369
6.9%
3,443
29,795
1.8%
-18,770
-5.1%
10,344
4.4%
-3,963
0
6,381
8.5%
1,878
29.4%
982
3,521

12,455
1.5%
18,185
8,925
2.4%
5,760
7.3%
3,501
30,641
2.8%
-18,457
-1.7%
11,501
11.2%
-3,718
0
7,784
22.0%
2,270
29.2%
1,021
4,492

FY11A

FY12E

FY13E

431,934
0.9%
11,303
105,867
47,446
25.5%
585,247
7,846
1,563,527

443,618
2.7%
10,624
108,324
48,552
2.3%
600,494
7,846
1,563,537

455,128
2.6%
10,081
107,901
48,361
-0.4%
611,390
7,846
1,574,555

366,032
5.9%
129,736
91,116
222,929
9,607
-

384,071
4.9%
127,378
89,460
232,570
9,607
-

392,071
2.1%
127,349
89,439
238,443
9,607
-

Ratio Analysis
in millions, year end Dec
Per Share Data
EPS Reported
EPSAdjusted
% Change Y/Y
DPS
% Change Y/Y
Dividend yield
Payout ratio
BV per share
NAV per share
Shares outstanding
Return ratios
RoRWA
Pre-tax ROE
ROE
RoNAV
Revenues
NIM (NII/Loans)
Total rev / average assets
NII / Total revenues
Fees / Total revenues
Trading / Total revenues
in millions, year end Dec
Cost ratios
Cost / income
Cost / assets
Balance Sheet Gearing
Loan / deposit
Investments / assets
Loan / assets
Customer deposits / liabilities
LT Debt / liabilities
Asset Quality / Capital
Loan loss reserves / loans
NPLs / loans
LLP/ Loans
Loan loss reserves / NPLs
Growth in NPLs
RWAs
% YoY change
Core Tier 1
Total Tier 1

FY11A

FY12E

FY13E

24.67
23.55
-17.5%
6.00
8.9%
3.4%
24.3%
456
369.4
12,199.0

28.87
27.57
17.1%
8.00
33.3%
3.4%
27.7%
477
390.3
12,199.0

36.82
35.19
27.7%
10.00
25.0%
4.3%
27.2%
503
417.1
12,199.0

0.8%
8.4%
5.6%
5.2%

0.8%
8.8%
6.2%
7.6%

0.9%
10.6%
7.5%
9.1%

3.12%
1.87%
42.77%
30.23%
17.17%

2.96%
1.86%
42.22%
30.00%
18.02%

2.59%
1.91%
41.66%
29.85%
18.80%

FY11A

FY12E

FY13E

69.3%
0.0

64.6%
0.0

61.7%
0.0

118.0%
115.6%
27.6%
24.4%
8.7%

115.5%
215.6%
28.4%
25.7%
8.5%

116.1%
215.6%
28.9%
26.1%
8.5%

2.6%
5.6%
0.9%
51.6%
8.6%
390,999
-1.8%
11.0%
12.9%

2.4%
4.9%
0.9%
53.9%
(10.0%)
414,965
6.1%
11.0%
12.8%

2.2%
4.3%
0.8%
56.9%
(10.0%)
480,479
15.8%
10.2%
11.7%

Source: Company reports and J.P. Morgan estimates.

206

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Goldman Sachs: Summary of Financials


Profit and Loss Statement
$ in millions, year end Dec

FY10A

FY11A

FY12E

FY13E

Net interest income


% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)

39,161
-13.3%
10,428
14.0%
15,841
12,892
-35.0%
12,892
-35.0%
4,538
35.2%
641
7,713

28,811
-26.4%
10,389
-0.4%
12,223
6,199
-51.9%
6,199
-51.9%
1,727
27.9%
1,908
2,540

33,361
15.8%
11,086
6.7%
13,509
8,767
41.4%
8,767
41.4%
2,806
32.0%
140
5,822

34,410
3.1%
10,900
-1.7%
13,764
9,746
11.2%
9,746
11.2%
3,119
32.0%
140
6,487

FY10A

FY11A

FY12E

FY13E

67,703
22.4%
911,332

66,281
-2.1%
923,000

66,281
0.0%
923,000

66,281
0.0%
923,000

187,270
3.8%
11,212
38,569
77,356
6,957
911,332

213,845
14.2%
8,689
41,799
70,379
3,100
923,000

213,845
0.0%
8,689
41,799
75,490
3,100
923,000

213,845
0.0%
8,689
41,799
81,265
3,100
923,000

Balance sheet
$ in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Other assets
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Other liabilities
Retirement benefit liabilities
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity

Ratio Analysis
$ in millions, year end Dec
Per Share Data
EPS Reported
EPSAdjusted
% Change Y/Y
DPS
% Change Y/Y
Dividend yield
Payout ratio
BV per share
NAV per share
Shares outstanding

FY10A

FY11A

FY12E

FY13E

14.23
12.56
-35.4%
1.40
0.0%
11.5%
9.8%
118
108.9
631.0

4.82
4.82
-61.6%
1.40
0.0%
3.3%
29.1%
127
116.2
531.8

11.46
10.95
127.1%
1.40
0.0%
9.7%
12.2%
136
125.8
531.8

12.77
12.20
11.4%
1.40
0.0%
11.4%
11.0%
147
136.7
531.8

Return ratios
RoRWA
Pre-tax ROE
ROE
RoNAV

0.02
16.7%
10.0%
12.4%

0.01
8.8%
3.6%
4.3%

0.01
11.6%
7.7%
9.1%

0.01
12.0%
8.0%
9.4%

Revenues
NIM (NII / RWA)
Non-IR / average assets
Total rev / average assets
NII / Total revenues
Fees / Total revenues
Trading / Total revenues

4.45%
-

3.14%
-

3.61%
-

3.73%
-

FY10A

FY11A

FY12E

FY13E

67.1%
0.0
35,700

78.5%
0.0
33,300

73.7%
0.0
33,300

71.7%
0.0
33,300

30.9%
7.4%
22.5%
1.3%

30.9%
7.2%
25.1%
1.0%

30.9%
7.2%
25.2%
1.0%

30.9%
7.2%
25.4%
1.0%

444,290
2.9%
14.2%
16.9%

457,000
2.9%
12.1%
13.9%

668,966
46.4%
9.0%
10.2%

665,621
-0.5%
9.9%
11.2%

$ in millions, year end Dec


Cost ratios
Cost / income
Cost / assets
Staff numbers
Balance Sheet Gearing
Loan / deposit
Investments / assets
Loan / assets
Customer deposits / liabilities
LT Debt / liabilities
Asset Quality / Capital
Loan loss reserves / loans
NPLs / loans
LLP / RWA
Loan loss reserves / NPLs
Growth in NPLs
RWAs
% YoY change
Core Tier 1
Total Tier 1

Source: Company reports and J.P. Morgan estimates.

207

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Morgan Stanley: Summary of Financials


Profit and Loss Statement
$ in millions, year end Dec

FY10A

FY11A

FY12E

FY13E

Net interest income


% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)

31,614
35.4%
9,474
17.5%
16,051
6,178
620.9%
6,178
620.9%
716
11.6%
198
4,506

32,518
2.9%
9,980
5.3%
16,501
6,037
-2.3%
6,037
-2.3%
1,400
23.2%
1,846
2,256

31,353
-3.6%
9,393
-5.9%
15,628
6,331
4.9%
6,331
4.9%
1,899
30.0%
96
3,845

31,985
2.0%
9,536
1.5%
15,841
6,608
4.4%
6,608
4.4%
1,982
30.0%
96
4,050

FY10A

FY11A

FY12E

FY13E

35,258
27.8%
11,406
807,698

34,175
-3.1%
11,079
749,898

34,346
0.5%
11,079
757,397

34,518
0.5%
11,079
764,971

187,061
4.3%
29,094
57,211
9,597
807,698

209,901
12.2%
27,785
62,049
1,508
749,898

210,033
0.1%
27,785
65,316
1,508
757,397

210,166
0.1%
27,785
68,981
1,508
764,971

Balance sheet
$ in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Other assets
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Other liabilities
Retirement benefit liabilities
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity

Ratio Analysis
$ in millions, year end Dec
Per Share Data
EPS Reported
EPSAdjusted
% Change Y/Y
DPS
% Change Y/Y
Dividend yield
Payout ratio
BV per share
NAV per share
Shares outstanding

FY10A

FY11A

FY12E

FY13E

3.31
2.39
-406.4%
0.20
17.7%
1.1%
6.0%
31
27.2
1,786.5

1.36
2.89
21.0%
0.20
0.0%
1.1%
14.7%
33
29.1
1,850.0

2.00
2.00
-30.9%
0.20
0.0%
1.1%
10.0%
33
29.6
1,927.0

2.10
2.10
5.3%
0.20
0.0%
1.1%
9.5%
35
31.5
1,927.0

Return ratios
RoRWA
Pre-tax ROE
ROE
RoNAV

0.01
10.8%
7.9%
11.6%

0.01
9.7%
3.6%
4.4%

0.01
9.7%
5.9%
6.9%

0.01
9.6%
5.9%
6.9%

Revenues
NIM (NII / RWA)
Non-IR / average assets
Total rev / average assets
NII / Total revenues
Fees / Total revenues
Trading / Total revenues

4.00%
-

4.18%
-

4.16%
-

4.20%
-

FY10A

FY11A

FY12E

FY13E

80.5%
0.0
62,542

81.4%
0.0
61,899

79.8%
0.0
60,299

79.3%
0.0
60,299

18.8%
4.4%
24.9%
-

16.3%
4.6%
30.5%
-

16.4%
4.5%
30.3%
-

16.4%
4.5%
30.2%
-

329,560
8.1%
9.2%
16.0%

316,000
-4.1%
13.1%
16.7%

446,000
41.1%
10.0%
12.6%

446,000
0.0%
10.9%
13.4%

$ in millions, year end Dec


Cost ratios
Cost / income
Cost / assets
Staff numbers
Balance Sheet Gearing
Loan / deposit
Investments / assets
Loan / assets
Customer deposits / liabilities
LT Debt / liabilities
Asset Quality / Capital
Loan loss reserves / loans
NPLs / loans
LLP / RWA
Loan loss reserves / NPLs
Growth in NPLs
RWAs
% YoY change
Core Tier 1
Total Tier 1

Source: Company reports and J.P. Morgan estimates.

208

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Citigroup Inc.: Summary of Financials


Income Statement - Annual

FY10A

FY11A

FY12E

FY13E

Income Statement - Quarterly

1Q12E

2Q12E

3Q12E

4Q12E

Net interest income


Provisions
Noninterest income
Total revenues
Expenses
Earnings before taxes
Income taxes
Net income - reported
Nonrecurring income (losses) (AT)
Discontinued operations
Net income - Recurring
Diluted shares outstanding
EPS - Reported
EPS - Recurring
Dividends

54,186
26,042
32,415
86,601
47,375
13,184
2,233
10,593
0
(68)
10,661
2,968
3.56
3.58
0.04

48,447
12,796
29,906
78,353
50,933
14,624
3,521
10,862
5
112
10,750
2,999
3.62
3.58
0.04

48,847
11,680
29,503
78,350
48,495
18,174
5,014
12,809
8
0
12,809
2,990
4.28
4.28
0.20

52,861
12,607
29,316
82,177
49,581
19,989
5,504
14,144
2
0
14,144
2,889
4.90
4.90
0.60

Net interest income


Provisions
Noninterest income
Total revenues
Expenses
Earnings before taxes
Income taxes
Net income - reported
Nonrecurring income (losses) (AT)
Discontinued operations
Net income - Recurring
Diluted shares outstanding
EPS - Reported
EPS - Recurring
Dividends

12,078
3,183
8,279
20,357
12,432
4,742
1,389
3,259
2
0
3,259
3,014
1.08
1.08
0.05

12,119
2,893
6,996
19,115
11,967
4,255
1,120
3,051
2
0
3,051
3,004
1.02
1.02
0.05

12,217
2,813
6,935
19,152
11,915
4,423
1,195
3,143
2
0
3,143
2,983
1.05
1.05
0.05

12,434
2,791
7,293
19,726
12,182
4,754
1,310
3,357
2
0
3,357
2,958
1.13
1.13
0.05

FY10A

FY11A

FY12E

FY13E

Balance Sheet

1Q12E

2Q12E

3Q12E

4Q12E

Balance Sheet
Securities
Total gross loans
Loan loss reserves
Total net loans
Total earning assets
Total assets
Total deposits
Total liabilities
Common equity
Shareholders' equity

318,164
293,413
309,876
322,271
648,794
647,242
697,079
754,143
40,655
30,115
25,712
23,208
608,139
617,127
671,368
730,935
1,724,597 1,691,799 1,711,275 1,760,487
1,913,902 1,873,878 1,887,774 1,941,933
844,968
865,936
928,128
983,815
1,748,113 1,694,305 1,699,969 1,752,242
163,156
177,494
185,726
187,612
165,789
179,573
187,805
189,691

Securities
Total gross loans
Loan loss reserves
Total net loans
Total earning assets
Total assets
Total deposits
Total liabilities
Common equity
Shareholders' equity

299,281
303,770
306,808
309,876
653,831
667,209
678,623
697,079
28,878
27,730
26,676
25,712
624,953
639,479
651,947
671,368
1,700,913 1,707,813 1,700,702 1,711,275
1,885,035 1,893,342 1,879,428 1,887,774
883,255
892,087
909,929
928,128
1,701,150 1,708,451 1,693,488 1,699,969
181,806
182,812
183,861
185,726
183,885
184,891
185,940
187,805

Ratio Analysis (%)

FY10A

FY11A

FY12E

FY13E

Ratio Analysis (%)

1Q12E

2Q12E

3Q12E

4Q12E

Average loan growth


Average earning assets growth
Average deposit growth
Avg loans / avg deposits
Net interest margin
Efficiency ratio
Return on assets (ROA)
Return on equity (ROE)
Tangible common equity ratio
Tier I ratio
NPAs / gross loans, OREO
Net chargeoffs / average loans
Loan loss reserves / loans
Loan loss reserves / NPLs

5.9%
8.7%
4.4%
93.1
3.2%
54.7
0.5%
6.9%
6.89
12.91
3.25
4.51
6.27
209.49

(6.0%)
(2.2%)
(1.5%)
88.9
2.9%
65.0
0.6%
6.3%
7.90
13.55
1.82
3.11
4.65
268.26

3.8%
0.5%
(4.0%)
96.1
2.9%
61.9
0.7%
7.1%
8.31
15.63
1.67
2.25
3.69
233.93

8.6%
2.0%
2.0%
102.3
3.0%
60.3
0.7%
7.7%
8.19
16.58
1.69
1.98
3.08
189.64

Average loan growth


Average earning assets growth
Average deposit growth
Avg loans / avg deposits
Net interest margin
Efficiency ratio
Return on assets (ROA)
Return on equity (ROE)
Tangible common equity ratio
Tier I ratio
NPAs / gross loans, OREO
Net chargeoffs / average loans
Loan loss reserves / loans
Loan loss reserves / NPLs

0.8%
2.8%
2.0%
91.2
2.9%
61.1
0.7%
7.4%
8.09
14.26
1.75
2.47
4.42
266.36

1.5%
0.5%
(1.9%)
94.4
2.9%
62.6
0.6%
6.8%
8.12
14.43
1.70
2.31
4.16
259.02

1.9%
(0.1%)
(1.4%)
97.6
2.9%
62.2
0.7%
7.0%
8.24
15.06
1.71
2.18
3.93
243.24

2.2%
0.1%
(1.4%)
101.3
2.9%
61.8
0.7%
7.4%
8.31
15.63
1.67
2.07
3.69
233.93

Source: Company reports and J.P. Morgan estimates.


Note: $ in millionsMillions (except per-share data).

209

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Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Bank of America: Summary of Financials


Income Statement - Annual
Net interest income
Provisions
Noninterest income
Total revenues
Expenses
Earnings before taxes
Income taxes
Net income - reported
Nonrecurring income (losses) (AT)
Discontinued operations
Net income - Recurring
Diluted shares outstanding
EPS - Reported
EPS - Recurring
Dividends

Balance Sheet

FY10A

FY11A

FY12E

FY13E

Income Statement - Quarterly

1Q12E

2Q12E

3Q12E

4Q12E

51,524
28,435
58,697
110,221
83,108
(1,322)
915
(3,586)
(12,399)
8,813
10,012
(0.36)
0.88
0.04

44,616
13,410
48,838
93,454
80,274
(230)
(1,676)
85
3,883
(3,798)
10,466
0.01
0.14
0.04

43,241
11,001
47,349
90,590
67,197
12,392
3,663
7,529
(735)
8,264
11,545
0.65
0.72
0.04

45,389
10,721
50,820
96,209
63,573
21,915
6,574
14,140
0
14,140
12,245
1.15
1.15
0.10

Net interest income


Provisions
Noninterest income
Total revenues
Expenses
Earnings before taxes
Income taxes
Net income - reported
Nonrecurring income (losses) (AT)
Discontinued operations
Net income - Recurring
Diluted shares outstanding
EPS - Reported
EPS - Recurring
Dividends

10,726
2,842
11,472
22,198
17,868
1,487
446
741
(735)
1,476
11,335
0.07
0.13
0.01

10,706
2,792
11,950
22,656
16,760
3,104
916
1,888
0
1,888
11,423
0.17
0.17
0.01

10,801
2,753
11,697
22,498
16,226
3,519
1,038
2,181
0
2,181
11,603
0.19
0.19
0.01

11,008
2,614
12,230
23,238
16,342
4,282
1,263
2,719
0
2,719
11,820
0.23
0.23
0.01

Balance Sheet

FY10A

FY11A

FY12E

FY13E

338,054
940,440
41,885
898,555
1,897,802
2,264,909
1,010,430
2,036,661
211,686
228,248

311,416
926,200
33,783
892,417
1,834,877
2,129,046
1,033,041
1,898,945
211,704
230,101

314,436
964,872
30,841
934,031
1,745,909
2,046,216
1,049,050
1,808,714
219,105
237,502

336,447
1,042,359
29,172
1,013,187
1,788,472
2,104,600
1,090,655
1,854,731
231,473
249,870

Ratio Analysis (%)

FY10A

FY11A

FY12E

FY13E

Average loan growth


Average earning assets growth
Average deposit growth
Avg loans / avg deposits
Net interest margin
Efficiency ratio
Return on assets (ROA)
Return on equity (ROE)
Tangible common equity ratio
Tier I ratio
NPAs / gross loans, OREO
Net chargeoffs / average loans
Loan loss reserves / loans
Loan loss reserves / NPLs

1.0%
3.7%
0.8%
97.0
2.8%
63.3
0.4%
4.5%
5.86
11.24
3.47
3.58
4.45
136.48

(2.1%)
(3.3%)
4.8%
90.6
2.5%
78.8
0.2%
2.0%
6.52
12.40
2.98
2.22
3.65
134.57

(0.1%)
(4.8%)
2.7%
88.0
2.5%
72.6
0.4%
4.1%
7.24
14.28
2.48
1.45
3.20
141.70

5.1%
2.1%
1.5%
91.6
2.6%
65.3
0.7%
6.3%
7.69
15.93
1.88
1.16
2.80
163.05

Securities
Total gross loans
Loan loss reserves
Total net loans
Total earning assets
Total assets
Total deposits
Total liabilities
Common equity
Shareholders' equity

1Q12E

2Q12E

3Q12E

4Q12E

308,302
923,223
32,767
890,457
1,750,268
2,093,616
1,039,051
1,862,356
212,863
231,260

305,219
932,978
31,995
900,982
1,740,101
2,057,376
1,041,854
1,824,410
214,569
232,966

308,271
945,592
31,388
914,204
1,741,173
2,039,528
1,044,757
1,804,562
216,568
234,965

314,436
964,872
30,841
934,031
1,752,092
2,046,216
1,049,050
1,808,714
219,105
237,502

Ratio Analysis (%)

1Q12E

2Q12E

3Q12E

4Q12E

Average loan growth


Average earning assets growth
Average deposit growth
Avg loans / avg deposits
Net interest margin
Efficiency ratio
Return on assets (ROA)
Return on equity (ROE)
Tangible common equity ratio
Tier I ratio
NPAs / gross loans, OREO
Net chargeoffs / average loans
Loan loss reserves / loans
Loan loss reserves / NPLs

(0.9%)
(1.9%)
1.5%
88.2
2.5%
76.7
0.3%
3.1%
6.71
12.63
2.90
1.61
3.55
135.43

0.4%
(0.6%)
1.1%
87.6
2.5%
73.1
0.4%
3.8%
6.93
13.20
2.78
1.49
3.43
137.07

1.2%
0.1%
1.0%
87.8
2.5%
71.3
0.5%
4.2%
7.11
13.71
2.64
1.40
3.32
139.43

1.7%
0.6%
0.9%
88.5
2.6%
69.5
0.6%
5.1%
7.24
14.28
2.48
1.30
3.20
141.70

Securities
Total gross loans
Loan loss reserves
Total net loans
Total earning assets
Total assets
Total deposits
Total liabilities
Common equity
Shareholders' equity

Source: Company reports and J.P. Morgan estimates.


Note: $ in millionsMillions (except per-share data).

210

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Nomura Holdings: Consolidated Results and Projections (U.S. GAAP)


FY10

FY11 E

FY12 E

FY13 E

3Q FY10

4Q FY10

1Q FY11

2Q FY11

3Q FY11

Net operating revenue


Commissions
Brokerage commissions
Commissions for distribution and redemption
of investment trust certificates
Fees from investment banking
Asset management and portfolio service fees
Profit (loss) on trading
Gains/losses on hedge positions on MTN to which
hedge accounting are not applicable (a)
Profit (loss) on investments in equity securities (b)
Private equity investment gains
Private equity entities product sales
Other
Net interest and dividend income

1,130,698
405,463
207,600
166,400

1,407,938
335,271
179,082
124,000

1,570,076
350,874
199,680
117,562

1,678,499
399,527
231,906
131,217

295,867
100,041
50,900
39,800

299,384
103,824
59,300
34,800

330,365
96,780
45,400
43,100

301,589
85,926
46,800
31,000

404,937
73,983
41,300
24,900

107,005
143,939
336,503
2,290

63,210
143,365
244,131
10,453

88,500
151,979
343,176
0

99,500
156,858
387,066
0

33,974
37,119
104,878
5,168

27,773
38,254
68,663
-2,087

13,770
39,055
67,500
-1,505

13,819
36,712
25,984
4,221

17,246
33,398
80,147
7,737

-16,677
19,292
0
43,864
91,309

-5,919
27,286
0
480,116
120,478

0
8,000
0
567,548
60,000

0
8,000
0
567,548
60,000

2,106
-2,386
0
3,422
16,713

-2,755
23,587
0
12,172
27,866

-597
-5,950
0
83,365
36,442

-2,544
-2,315
0
112,977
31,030

-2,778
34,551
0
141,887
26,503

Non-interest expenses
Compensation and benefits
Commissions and floor brokerage
Information processing and communications
Occupancy and related depreciation
Business development expenses
Private equity entities cost of goods sold
Other

1,037,443
518,993
92,088
182,918
87,843
30,153
0
125,448

1,373,099
529,442
92,602
176,988
99,431
44,391
0
430,245

1,420,809
471,132
98,253
180,000
92,000
40,000
0
539,424

1,445,332
485,455
108,453
180,000
92,000
40,000
0
539,424

268,093
143,131
24,013
44,209
20,507
7,429
0
28,804

261,971
127,081
23,037
47,794
21,739
8,785
0
33,535

296,007
136,307
24,058
43,547
20,692
9,335
0
62,068

346,221
142,569
22,939
43,544
26,371
12,333
0
98,465

370,464
127,783
22,521
46,397
26,184
12,723
0
134,856

93,255
61,330
31,925
28,661
40,018
133,584
120,485

34,839
27,998
6,841
-1,987
-20,937
-34,895
-62,181

149,267
46,273
102,994
102,994
89,560
149,267
141,267

233,166
72,282
160,885
160,885
139,900
233,166
225,166

27,774
14,483
13,291
13,389
7,200
12,000
14,386

37,413
23,747
13,666
11,899
17,313
28,855
5,268

34,358
16,320
18,038
17,771
-444
-740
5,210

-44,632
-373
-44,259
-46,092
-34,865
-58,109
-55,794

34,473
9,923
24,550
17,822
7,988
13,314
-21,237

36,692,990
2,082,754
1,965,920
116,834
17.6
1,915,000
1,715,000
16.4%
22.2%

34,238,724
2,055,336
1,894,407
160,929
16.7
2,050,861
1,850,861
---

37,312,417
2,129,029
1,968,100
160,929
17.5
2,124,554
1,924,554
---

40,444,000
2,260,612
2,099,683
160,929
17.9
2,256,137
2,056,137
---

33,300,907
2,061,486
1,946,339
115,147
16.2
1,963,000
1,763,000
17.3%
24.9%

36,692,990
2,082,754
1,965,920
116,834
17.6
1,915,000
1,715,000
16.4%
22.2%

39,713,079
2,101,667
1,984,833
116,834
18.9
2,134,000
1,934,000
16.2%
19.9%

36,935,671
2,037,558
1,876,629
160,929
18.1
2,050,000
1,850,000
15.8%
19.6%

33,494,863
2,061,475
1,900,546
160,929
16.2
2,057,000
1,857,000
12.9%
15.5%

8.2%
2.5%
91.8%
46.3%
54.3%
3.1%
1.4%
1.9%
3.4%

2.5%
-0.1%
97.5%
38.3%
68.5%
4.1%
-0.1%
-1.1%
-1.8%

9.5%
6.6%
90.5%
30.0%
73.7%
4.2%
4.9%
4.6%
4.1%

13.9%
9.6%
86.1%
28.9%
74.2%
4.2%
7.3%
6.9%
6.2%

9.4%
4.5%
90.6%
49.9%
57.4%
3.6%
2.6%
1.5%
1.8%

12.5%
4.0%
87.5%
43.7%
57.5%
3.3%
2.6%
3.5%
0.6%

10.4%
5.4%
89.6%
50.1%
62.9%
3.3%
3.4%
-0.1%
0.6%

-14.8%
-15.3%
114.8%
65.0%
59.2%
3.3%
-8.6%
-7.2%
-6.9%

8.5%
4.4%
91.5%
40.2%
78.6%
4.8%
4.8%
1.7%
-2.7%

5.7%

6.0%

5.7%

5.6%

6.2%

5.7%

5.3%

5.5%

6.2%

7.9
7.9
8.0
578
578
546

-0.5
-0.5
8.0
561
561
517

28.1
28.1
8.0
581
581
537

43.9
43.9
8.0
617
617
573

3.7
3.7
0.0
573
573
541

3.3
3.3
4.0
578
578
546

4.9
4.9
0.0
583
583
551

-12.6
-12.6
4.0
557
557
513

4.9
4.9
0.0
563
563
519

million

Income before income taxes


Total income tax expenses
Net income from continued operation
Net income
Adjusted net income (excluding (a) and (b) )*
Adjusted pretax income (excluding (a) and (b) )*
(excl. PE gains/losses and losses due to various
one-time factors due to financial crisis)
Balance sheet items
Total assets
Shareholders' equity (excluding minority interest)
Tangible equity
Goodwill and intangible
Total assets to tangible equity (x)
Tier 1 capital
Core Tier 1 capital
Tier 1 ratio
Basel II capital ratio
Profitability and capitalization
Pretax margin (consolidated)
Net margin (consolidated)
Expense ratio
Compensation ratio (% of adj. net revenues)
Revenue to capital
Revenue to assets
RoE (consolidated)
Adjusted RoE (cons., adj. NP/ tangible equity)
(excl. PE gains/losses and losses due to various
one-time factors due to financial crisis)
Equity as % of total assets
Per share data ()
EPS (consolidated)
Diluted EPS (consolidated)
Dividend per share
BPS (consolidated)
Adjusted BPS (consolidated)
Adjusted tangible BPS (consolidated)

Source: Company data and J.P. Morgan estimates.


Note: *Adjusted net income = net income before the cumulative effect of accounting changes, excluding profits/losses on investments in equities and profits/losses on MTN hedges not applicable to
hedge accounting rules.

211

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Macquarie Group
2009

2010

2011

2012E

2013E

2014E

938
4,045

1,080
3,721

1,275
3,891

1,396
3,350

1,366
3,361

1,221
3,653

409
583
132
85
1,209
-666
4,588
5,526

590
665
145
144
1,544
293
5,558
6,638

392
553
192
222
1,359
1,119
6,369
7,644

258
435
250
-83
860
1,048
5,258
6,655

278
490
282
0
1,050
688
5,099
6,465

306
540
311
0
1,157
631
5,441
6,662

-2,359
-4,537

-3,101
-5,344

-3,890
-6,373

-3,407
-5,683

-3,135
-5,339

-3,235
-5,522

989
-15
-70
904
-33
871

1,294
-201
-22
1,071
-21
1,050

1,271
-282
-7
982
-26
956

971
-248
23
747
-26
721

1,126
-263
27
890
-26
864

1,140
-266
27
901
-26
875

149,144
9,560
70,221

145,940
11,769
73,754

157,568
11,932
84,550

176,711
11,977
87,723

180,861
12,369
89,783

185,241
12,769
91,958

0.58

0.86

0.82

0.61

0.69

0.69

Effective Tax Rate


Cost To Income

1.6
82.10

15.8
80.51

22.7
83.37

26.3
85.40

24.0
82.58

24.0
82.89

Rates Of Return
ROA
ROE

0.51
9.96

0.70
10.16

0.61
8.94

0.45
6.48

0.53
7.49

0.53
7.32

Per Share Data


Normalised Basic EPS ()
Normalised Fully Diluted EPS ()
Operating Dividend Per Share ()
Book Value Per Share ()
NTA Per Share ()
PER Basic EPS (x)
PER Fully Diluted EPS (x)
Dividend Yield (%)
Dividend Franking (%)
Franking Rate (%)
Normalised Payout Ratio (%)
DRP Participation (%)

310.4
309.4
185
3,057
2,789
8.2
8.2
7.2
70
30
59.8
17.6

320.2
317.4
186
3,263
2,840
8.0
8.0
7.3
0
30
60.0
21.7

282.5
275.9
186
3,288
2,891
9.0
9.3
7.3
0
30
67.4
12.2

213.1
210.0
150
3,283
2,884
12.0
12.2
5.9
0
30
72.6
10.0

246.8
243.4
150
3,378
2,981
10.3
10.5
5.9
30
30
60.9
10.0

248.7
245.2
150
3,477
3,082
10.3
10.4
5.9
30
30
60.4
10.0

Issued Shares (m)


Period End
Ordinary Weighted Average
Diluted Weighted Average
Dilution Factor (%)

283.4
280.6
281.5
100%

344.2
327.9
340.8
100%

346.8
338.4
359.2
100%

349.2
338.4
343.3
100%

351.0
350.2
355.1
100%

352.5
351.8
356.7
100%

Profit & Loss Account


Net Interest Income
Net Fee & Commission Income
Trading Income
Equities
Commodities
Foreign Exchange
Interest Rate Products
Total Trading Income
Total Other Income
Total Non Interest Revenues
Total Income
Expenses
Employment Expenses
Total Expenses
Profit Before Tax
Income Tax Expense
Minority Interests
Net Profit After Tax
Less Preference Dividends
Normalised Earnings
Balance Sheet Details
Group Assets
SHFunds
Risk Weighted Assets
KEY RATIOS
Profitability (%)
To Av Assets
- Pre Tax Earnings

Source: Company data, J.P. Morgan estimates

212

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Investec Plc: Summary of Financials


Profit and Loss Statement
mn millions, year end Mar
Net interest income
% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Other nonrecurrent items
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)
Balance sheet
mn millions, year end Mar
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Other assets
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Other liabilities
Retirement benefit liabilities
Shareholders' equity
Minorities
Total liabilities

FY11A

FY12E

FY13E

681
11.2%
1,274
855
45.8%
419
-8.5%
1,955
18.0%
1,197
30.0%
785
12.7%
311
466
13.8%
58
13.8%
(13)
328

761
11.6%
1,305
1,028
20.3%
276
-34.0%
2,065
5.7%
1,305
9.0%
704
-10.3%
327
451
-3.3%
88
19.0%
(11)
342

805
5.8%
1,456
1,152
12.0%
304
10.0%
2,260
9.4%
1,435
10.0%
763
8.4%
339
536
18.9%
110
20.0%
(11)
406

FY11A

FY12E

FY13E

20,907
5.7%
311

21,952
5.0%
327

23,379
6.5%
339

593
50,941

581
53,093

570
55,880

24,441
11.4%
4,434
3,961
314
46,980

27,374
12.0%
4,966
4,144
303
48,949

30,933
13.0%
5,612
4,382
292
51,498

Ratio Analysis
FY14E mn millions, year end Mar
Per Share Data
880 EPS Reported
9.3% EPSAdjusted
1,615
% Change Y/Y
1,287 DPS
11.7%
% Change Y/Y
328 Dividend yield
8.0% Payout ratio
- BV per share
2,494 NAV per share
10.4% Shares outstanding
1,579
10.0% Return ratios
- RoRWA
208 Pre-tax ROE
-72.8% ROE
346 RoNAV
- Revenues
641 NIM (NII / RWA)
19.6% Non-IR / average assets
131 Total rev / average assets
0.0% NII / Total revenues
(12) Fees / Total revenues
491 Trading / Total revenues
FY14E mn millions, year end Mar
Cost ratios
25,483 Cost / income
9.0% Cost / assets
346 Staff numbers
- Balance Sheet Gearing
- Loan / deposit
- Investments / assets
558 Loan / assets
- Customer deposits / liabilities
59,610 LT Debt / liabilities
Asset Quality / Capital
35,263 Loan loss reserves / loans
14.0% NPLs / loans
- LLP / RWA
6,397 Loan loss reserves / NPLs
- Growth in NPLs
- RWAs
% YoY change
4,672 Core Tier 1
280 Total Tier 1
54,938

FY11A

FY12E

FY13E

FY14E

35.92
43.15
-4.4%
17.00
6.3%
47.3%
450
450.3
810.0

34.19
40.49
-6.2%
15.57
-8.4%
45.5%
437
436.5
880.0

44.45
47.56
17.5%
18.29
17.5%
41.2%
460
460.1
888.8

53.35
0.20
-99.6%
21.88
19.6%
41.0%
489
489.3
897.7

0.01
11.2%
7.3%

0.01
10.5%
7.4%

0.01
11.8%
9.1%

0.02
13.5%
10.4%

2.49%
2.61%
4.01%
34.86%
43.73%
21.42%

2.67%
2.51%
3.97%
36.83%
49.79%
13.38%

2.69%
2.67%
4.15%
35.60%
50.95%
13.45%

2.75%
2.80%
4.32%
35.26%
51.58%
13.16%

FY11A

FY12E

FY13E

FY14E

62.1%
0.0
-

65.4%
0.0
-

65.7%
0.0
-

65.5%
0.0
-

86.8%
41.7%
52.0%
12.0%

81.4%
42.0%
55.9%
7.5%

76.7%
42.4%
60.1%
2.8%

73.2%
43.3%
64.2%
(1.7%)

1.5%
1.3%
1.1%
78.3%
27,314
9.4%
-

1.5%
1.4%
1.1%
11.8%
28,468
4.2%
-

1.4%
1.5%
1.1%
9.6%
29,962
5.3%
-

1.3%
1.4%
1.1%
8.1%
31,962
6.7%
-

Source: Company reports and J.P. Morgan estimates.

213

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Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

BNP Paribas: Summary of Financials


Profit and Loss Statement
in millions, year end Dec

FY10A

FY11A

FY12E

FY13E

Net interest income


% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)

21,384
1.7%
16,392
9,334
25.0%
7,059
16.0%
6,103
43,880
9.2%
-19,213
5.0%
(7,304)
17,363
3.0%
-4,802
13,018
44.6%
(3,856)
29.6%
(1,321)
7,841

20,567
-3.8%
17,492
10,080
8.0%
7,412
5.0%
4,325
42,384
-3.4%
-20,174
5.0%
(5,952)
16,258
-6.4%
-6,797
9,651
-25.9%
(2,757)
28.6%
(844)
6,050

18,655
-9.3%
18,541
10,685
6.0%
7,856
6.0%
2,370
39,566
-6.7%
(26,152)
13,413
-17.5%
-4,449
9,348
-3.1%
(2,804)
30.0%
(930)
5,614

17,999
-3.5%
19,654
11,326
6.0%
8,328
6.0%
2,356
40,009
1.1%
(25,218)
14,791
10.3%
-4,348
10,834
15.9%
(3,250)
30.0%
(1,000)
6,584

FY10A

FY11A

FY12E

FY13E

Balance sheet
in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Other assets
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Other liabilities
Retirement benefit liabilities
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity

684,686
665,834
621,889
615,670
0.9%
-2.8%
-6.6%
-1.0%
26,671
27,958
32,407
36,756
1,074,433 1,037,266
985,403
936,133
96,286
107,751
102,363
97,245
-33.6%
11.9%
-5.0%
-5.0%
1,875,379 1,833,128 1,760,253 1,679,352
11,324
11,406
11,406
11,406
131,429
143,026
64,613
35,937
1,998,158 1,965,283 1,785,674 1,696,390
580,913
546,284
546,284
546,284
-4.0%
-6.0%
0.0%
0.0%
208,669
157,786
157,786
157,786
170,108
150,385
135,347
121,812
1,000,914
907,073
846,936
832,649
842,460
919,893
836,768
755,896
63,635
65,114
69,295
74,417
10,997
10,256
10,256
10,256
1,912,529 1,879,657 1,785,674 1,696,390

Ratio Analysis
in millions, year end Dec
Per Share Data
EPS Reported
EPSAdjusted
% Change Y/Y
DPS
% Change Y/Y
Dividend yield
Payout ratio
BV per share
NAV per share
Shares outstanding
Return ratios
RoRWA
Pre-tax ROE
ROE
RoNAV
Revenues
NIM (NII / RWA)
Non-IR / average assets
Total rev / average assets
NII / Total revenues
Fees / Total revenues
Trading / Total revenues
in millions, year end Dec
Cost ratios
Cost / income
Cost / assets
Staff numbers
Balance Sheet Gearing
Loan / deposit
Investments / assets
Loan / assets
Customer deposits / liabilities
LT Debt / liabilities
Asset Quality / Capital
Loan loss reserves / loans
NPLs / loans
LLP / RWA
Loan loss reserves / NPLs
Growth in NPLs
RWAs
% YoY change
Core Tier 1
Total Tier 1

FY10A

FY11A

FY12E

FY13E

6.58
5.05
6.61
6.83
30.3%
3.3%
2.10
1.20
40.0% (42.9%)
5.7%
3.3%
31.9% 23.8%
54
57
41.7
45.2
1,191.4 1,198.5

4.66
5.05
-26.2%
1.20
0.0%
3.3%
25.7%
60
48.5
1,204.0

5.35
5.30
5.0%
1.20
0.0%
3.3%
22.4%
63
51.6
1,230.4

0.01
12.9%
8.0%
10.8%

0.01
14.0%
8.7%
10.7%

0.01
20.4%
11.9%
16.6%

0.01
14.2%
9.1%
15.7%

3.56%
0.81%
2.16%
48.73%
21.27%
16.09%

3.35%
0.88%
2.14%
48.53%
23.78%
17.49%

3.35%
3.35%
1.30% 101.30%
2.11%
2.30%
48.53% 48.53%
23.78% 23.78%
17.49% 17.49%

FY10A

FY11A

FY12E

FY13E

58.8%
0.0
-

51.9%
0.0
-

63.8%
0.0
-

63.0%
0.0
-

117.9%
53.8%
39.1%
30.4%
10.9%

121.9%
52.8%
39.4%
29.1%
8.4%

113.8%
55.2%
40.6%
30.6%
8.8%

112.7%
55.2%
42.0%
32.2%
9.3%

3.7%
4.0%
5.0%
5.5%
6.3%
6.5%
0.8%
1.1%
0.7%
75.8% 67.6%
70.0%
5.0% 12.0% (3.4%)
601,271 614,000 609,718
-3.1%
2.1%
-0.7%
9.2%
9.6% 10.5%
11.4% 11.6%
12.5%

5.6%
6.5%
0.7%
70.0%
(0.0%)
607,894
-0.3%
11.5%
13.5%

Source: Company reports and J.P. Morgan estimates.

214

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Socit Gnrale: Summary of Financials


Profit and Loss Statement
in millions, year end Dec
Net interest income
% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)
Balance sheet
in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Other assets
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Other liabilities
Retirement benefit liabilities
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity

FY10A

FY11A

FY12E

FY13E

11,970
2.9%
14,447
7,485
-4.2%
5,374
467.5%
1,588
26,417
21.6%
-6,986
5.7%
(9,559)
9,872
65.5%
-4,160
5,831
4351.2%
(1,542)
26.9%
385
3,916

12,207
2.0%
13,431
7,179
-4.1%
4,432
-17.5%
1,820
25,638
-2.9%
-7,370
5.5%
(9,666)
8,602
-12.9%
-4,330
4,366
-25.1%
(1,323)
32.9%
405
2,384

9,356
-23.4%
14,425
7,323
2.0%
4,521
2.0%
2,582
23,781
-7.2%
-7,239
-1.8%
(9,666)
6,876
-20.1%
-3,795
3,225
-26.1%
(863)
28.0%
407
1,956

8,743
-6.6%
15,818
7,762
6.0%
4,792
6.0%
3,264
24,560
3.3%
-7,148
-1.3%
(9,763)
7,649
11.3%
-3,425
4,387
36.0%
(1,183)
28.0%
446
2,758

FY10A

FY11A

FY12E

FY13E

401,013
396,842
380,968
380,968
7.4%
-1.0%
-4.0%
0.0%
14,723
16,111
19,906
23,331
84,349
130,403
130,403
130,403
2.8%
54.6%
0.0%
0.0%
1,033,457 1,017,804 1,068,264 1,086,318
7,431
6,973
6,973
6,973
54,341
68,460
68,460
68,460
1,132,072 1,181,372 1,181,372 1,181,372
337,447
340,172
340,172
340,172
12.5%
0.8%
0.0%
0.0%
141,385
108,583
108,583
108,583
80,089
112,245
110,473
107,716
541,791
543,743
559,075
558,735
427,006
475,721
475,721
475,721
401,013
396,842
380,968
380,968
4,554
4,045
4,045
4,045
1,132,072 1,181,372 1,181,372 1,181,372

Ratio Analysis
in millions, year end Dec
Per Share Data
EPS Reported
EPSAdjusted
% Change Y/Y
DPS
% Change Y/Y
Dividend yield
Payout ratio
BV per share
NAV per share
Shares outstanding
Return ratios
RoRWA
Pre-tax ROE
ROE
RoNAV
Revenues
NIM (NII / RWA)
Non-IR / average assets
Total rev / average assets
NII / Total revenues
Fees / Total revenues
Trading / Total revenues
in millions, year end Dec
Cost ratios
Cost / income
Cost / assets
Staff numbers
Balance Sheet Gearing
Loan / deposit
Investments / assets
Loan / assets
Customer deposits / liabilities
LT Debt / liabilities
Asset Quality / Capital
Loan loss reserves / loans
NPLs / loans
LLP / RWA
Loan loss reserves / NPLs
Growth in NPLs
RWAs
% YoY change
Core Tier 1
Total Tier 1

FY10A

FY11A

FY12E

FY13E

5.33
3.16
5.34
3.61
-1184.4%
-32.3%
1.75
0.00
600.0% (100.0%)
7.5%
0.0%
32.8%
61
62
38.9
42.6
737.4
756.0

2.59
3.30
-8.7%
0.00
0.0%
65
45.1
756.0

3.65
3.65
10.5%
0.00
0.0%
68
48.8
756.0

0.02
22.9%
11.0%
14.4%

0.01
15.5%
6.0%
8.9%

0.01
11.6%
4.7%
7.5%

0.01
14.1%
6.3%
7.8%

3.58%
1.34%
2.45%
45.31%
28.33%
20.34%

3.49%
1.16%
2.22%
47.61%
28.00%
17.29%

2.79%
1.22%
2.01%
39.34%
30.79%
19.01%

2.08%
1.34%
2.08%
35.60%
31.60%
19.51%

FY10A

FY11A

FY12E

FY13E

62.5%
0.0
-

63.4%
0.0
-

67.9%
0.0
-

68.9%
0.0
-

99.2%
50.0%
42.9%
29.8%
12.5%

102.7%
47.3%
44.6%
28.8%
9.2%

2.9%
5.4%
1.3%
54.1%
11.6%
334,795
3.3%
8.3%
10.6%

98.7% 123.7%
48.6% 48.7%
43.3% 43.3%
28.8% 28.8%
9.2%
9.2%

3.1%
4.0%
4.0%
5.4%
7.2%
7.2%
1.3%
1.1%
0.9%
57.4% 55.8% 55.8%
1.7% 27.7%
0.0%
349,300 335,838 420,886
4.3%
-3.9% 25.3%
9.0% 10.0% 10.8%
10.7% 11.7% 12.5%

Source: Company reports and J.P. Morgan estimates.

215

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Credit Agricole: Summary of Financials


Profit and Loss Statement
in millions, year end Dec

FY09A

FY10A

FY11E

FY12E

Net interest income


% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)

14,290
18.0%
9,659
4,776
8.6%
5,055
-158.6%
17,943
12.5%
5,762
73.6%
-4,690
1,497
28.0%
(209)
14.0%
(322)
1,124

14,894
4.2%
7,196
4,896
2.5%
5,447
7.8%
20,130
12.2%
6,943
20.5%
-3,776
2,609
74.3%
(875)
33.5%
(489)
1,266

15,670
5.2%
7,950
5,190
6.0%
5,260
-3.4%
20,595
2.3%
7,136
2.8%
-4,884
565
-78.4%
(1,390)
246.1%
(382)
(1,193)

14,716
-6.1%
8,641
5,605
8.0%
5,536
5.3%
18,559
-9.9%
5,599
-21.6%
-4,124
2,622
364.2%
(664)
25.3%
(482)
1,476

FY09A

FY10A

FY11E

FY12E

Balance sheet
in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Other assets
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Other liabilities
Retirement benefit liabilities
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity

321,827 343,085 356,007 338,206


2.9%
6.6%
3.8%
-5.0%
11,819
13,768
13,767
14,042
-19,432 -18,960 -17,766 -17,766
1,557,300 1,593,529 1,792,200 1,702,590
591,800 597,900 655,928 688,272
5.8%
1.0%
9.7%
4.9%
610,822 640,555 681,148 641,806
174,214 185,721 195,008 204,758
798,200 801,783 803,823 759,831
13,000
12,964
12,800
12,800
6,500
6,482
6,400
6,400
1,557,300 1,593,529 1,792,200 1,702,590

Ratio Analysis
FY13E in millions, year end Dec
Per Share Data
16,260 EPS Reported
10.5% EPSAdjusted
8,641
% Change Y/Y
5,605 DPS
0.0%
% Change Y/Y
4,736 Dividend yield
-14.5% Payout ratio
- BV per share
19,015 NAV per share
2.5% Shares outstanding
- Return ratios
- RoRWA
6,262 Pre-tax ROE
11.9% ROE
-3,834 RoNAV
3,583 Revenues
36.7% NIM (NII / RWA)
(947) Non-IR / average assets
26.4% Total rev / average assets
(510) NII / Total revenues
2,126 Fees / Total revenues
Trading / Total revenues
FY13E in millions, year end Dec
Cost ratios
321,296 Cost / income
-5.0% Cost / assets
14,323 Staff numbers
- Balance Sheet Gearing
- Loan / deposit
- Investments / assets
-17,766 Loan / assets
- Customer deposits / liabilities
1,617,461 LT Debt / liabilities
Asset Quality / Capital
655,112 Loan loss reserves / loans
-4.8% NPLs / loans
603,701 LLP / RWA
214,996 Loan loss reserves / NPLs
717,443 Growth in NPLs
- RWAs
% YoY change
12,800 Core Tier 1
6,400 Total Tier 1
1,617,461

FY09A FY10A

FY11E FY12E FY13E

0.49
0.53
-0.48
0.59
0.85
0.67
0.82
1.23
0.75
0.85
41.7% 22.2% 49.5% -39.0% 13.9%
0.45
0.45
0.00
0.00
0.00
0.0%
0.0% (100.0%)
9.2%
9.2%
0.0%
0.0%
0.0%
91.5% 84.2%
19
19
18
18
19
9.7
10.3
9.7
10.2
11.1
2,285.9 2,367.6 2,469.3 2,492.1 2,492.1

0.00
3.4%
2.6%
7.2%

0.01
5.8%
2.8%
8.3%

0.01
1.3%
-2.7%
12.4%

0.00
5.8%
3.3%
7.5%

0.01
7.6%
4.6%
8.0%

71.45%
0.23%
1.12%
79.64%
26.62%
27.21%

82.24%
0.33%
1.28%
73.99%
24.32%
11.43%

82.47%
0.29%
1.22%
76.09%
25.20%
13.40%

77.45%
0.22%
1.06%
79.29%
30.20%
16.36%

85.58%
0.17%
1.15%
85.51%
29.48%
15.97%

FY09A FY10A

FY11E FY12E FY13E

68.5% 66.6%
0.0
0.0
71,725 77,648

76.1% 73.7% 67.1%


0.0
0.0
0.0
79,201 80,785 82,401

85.3%
44.0%
45.0%
38.4%
11.5%

82.4%
43.3%
46.6%
38.4%
5.2%

87.8%
42.9%
46.9%
41.2%
10.7%

82.4%
43.1%
46.7%
38.5%
4.9%

82.5%
42.9%
46.8%
38.6%
4.5%

1.1%
0.8%
1.0%
0.8%
0.7%
3.6%
4.3%
4.0%
4.0%
4.0%
1.4%
1.1%
1.3%
1.0%
0.9%
42.9% 33.0% 33.0% 32.4% 31.8%
22.7% 30.2% (0.2%)
2.0%
2.0%
326,400 371,700 385,700 417,843 415,608
-3.6% 13.9%
3.8%
8.3% -0.5%
9.3%
8.4%
8.1%
8.2%
8.5%
9.5% 10.6%
9.8%
9.8% 10.1%

Source: Company reports and J.P. Morgan estimates.

216

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Royal Bank of Scotland: Summary of Financials


Profit and Loss Statement
in millions, year end Dec
Net interest income
% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)
Balance sheet
in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity

FY11A

FY12E

FY13E

12,689
-10.6%
10,832
8,484
3.4%
3,636
-33.6%
24,809
-11.0%
-15,778
-5.6%
9,031
-19.1%
7,439
0
-1,010
27.5%
1,250
(123.8%)
28
(1,997)

12,578
-0.9%
9,854
7,786
-8.2%
3,337
-8.2%
23,701
-4.5%
-14,758
-6.5%
8,942
-1.0%
5,098
0
2,050
-303.0%
940
45.9%
28
782

12,445
-1.1%
9,694
6,791
-12.8%
2,911
-12.8%
22,147
-6.6%
-13,296
-9.9%
8,851
-1.0%
3,990
0
4,312
110.3%
1,568
36.4%
28
2,316

FY11A

FY12E

FY13E

454,112
-9.7%
19,451
753,881
478,430
14,858
1,506,867

468,147
3.1%
18,505
718,340
461,130
14,858
1,476,730

436,146
-6.8%
16,451
732,206
452,147
14,858
1,461,962

414,143
-3.4%
162,621
69,113
645,877
1,234
-

443,701
7.1%
151,548
64,407
659,655
1,234
-

437,733
-1.3%
149,513
63,542
650,788
1,234
-

Ratio Analysis
in millions, year end Dec
Per Share Data
EPS Reported
EPSAdjusted
% Change Y/Y
DPS
% Change Y/Y
Dividend yield
Payout ratio
BV per share
NAV per share
Shares outstanding
Return ratios
RoRWA
Pre-tax ROE
ROE
RoNAV
Revenues
NIM (NII/Loans)
Total rev / average assets
NII / Total revenues
Fees / Total revenues
Trading / Total revenues
in millions, year end Dec
Cost ratios
Cost / income
Cost / assets
Balance Sheet Gearing
Loan / deposit
Investments / assets
Loan / assets
Customer deposits / liabilities
LT Debt / liabilities
Asset Quality / Capital
Loan loss reserves / loans
NPLs / loans
LLP/ Loans
Loan loss reserves / NPLs
Growth in NPLs
RWAs
% YoY change
Core Tier 1
Total Tier 1

FY11A

FY12E

FY13E

-1.85
(0.19)
-133.5%
0.00
0.0%
68
47.7
110,228.0

0.72
1.79
-1029.3%
0.00
68
48.1
111,028.0

2.11
2.35
31.3%
0.00
70
49.8
111,828.0

(0.4%)
(3.7%)
-2.7%
-3.7%

0.2%
1.0%
1.5%

0.5%
3.0%
4.2%

2.65%
1.68%
51.15%
34.20%
14.66%

2.73%
1.59%
53.07%
32.85%
14.08%

2.75%
1.51%
56.19%
30.67%
13.14%

FY11A

FY12E

FY13E

56.8%
0.0

55.5%
0.0

59.8%
0.0

109.7%
0.0%
30.1%
27.5%
10.8%

105.5%
0.0%
31.7%
30.0%
10.3%

99.6%
0.0%
29.8%
29.9%
10.2%

4.5%
8.1%
(1.7%)
53.0%
(5.0%)
439,000
-5.7%
10.6%
13.0%

4.1%
6.3%
(1.1%)
63.1%
(20.0%)
473,923
8.0%
10.5%
12.8%

3.9%
5.4%
(0.8%)
70.1%
(20.0%)
504,458
6.4%
10.3%
12.5%

Source: Company reports and J.P. Morgan estimates.

217

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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

HSBC Holdings plc: Summary of Financials


Profit and Loss Statement
$ in millions, year end Dec
Net interest income
% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)
Balance sheet
$ in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity

FY11A

FY12E

FY13E

40,662
3.1%
43,385
17,160
-1.1%
8,537
18.4%
2,735
68,119
-0.6%
-41,545
10.2%
2,735
42,502
0.4%
-12,127
21,872
14.9%
(3,928)
18.0%
(1,147)
16,224

38,703
-4.8%
39,507
17,034
-0.7%
7,190
-15.8%
3,029
67,620
-0.7%
-39,530
-4.9%
3,029
38,681
-9.0%
-10,233
24,436
11.7%
(4,977)
20.4%
(1,189)
17,676

38,651
-0.1%
39,249
17,284
1.5%
6,976
-3.0%
3,247
68,369
1.1%
-38,442
-2.8%
3,247
39,458
2.0%
-9,204
24,848
1.7%
(5,123)
20.6%
(1,240)
17,865

FY11A

FY12E

FY13E

940,429
-1.9%
17,511
1,107,730
2.2%
2,048,159
29,034
2,555,579

986,051
4.9%
17,375
1,125,392
1.6%
2,111,443
29,034
2,639,850

1,038,860
5.4%
16,755
1,208,999
7.4%
2,247,859
29,034
2,776,367

1,253,925
2.1%
161,619
7,368
2,555,579

1,339,639
6.8%
161,619
7,368
2,639,850

1,425,047
6.4%
161,619
7,368
2,776,367

Ratio Analysis
$ in millions, year end Dec
Per Share Data
EPS Reported
EPSAdjusted
% Change Y/Y
DPS
% Change Y/Y
Dividend yield
Payout ratio
BV per share
NAV per share
Shares outstanding
Return ratios
RoRWA
Pre-tax ROE
ROE
RoNAV
Revenues
NIM (NII/Loans)
Total rev / average assets
NII / Total revenues
Fees / Total revenues
Trading / Total revenues
$ in millions, year end Dec
Cost ratios
Cost / income
Cost / assets
Balance Sheet Gearing
Loan / deposit
Investments / assets
Loan / assets
Customer deposits / liabilities
LT Debt / liabilities
Asset Quality / Capital
Loan loss reserves / loans
NPLs / loans
LLP/ Loans
Loan loss reserves / NPLs
Growth in NPLs
RWAs
% YoY change
Core Tier 1
Total Tier 1

FY11A

FY12E

FY13E

0.92
0.71
-3.7%
0.40
17.7%
5.2%
43.6%
9
7.1
17,868.0

0.98
0.83
17.9%
0.45
12.5%
5.0%
46.0%
9
7.7
18,287.0

0.96
0.95
14.2%
0.50
11.1%
5.6%
51.8%
10
8.2
18,763.5

1.4%
14.3%
10.6%
10.4%

1.4%
14.8%
10.7%
11.4%

1.3%
13.9%
10.0%
12.2%

4.28%
2.72%
59.69%
25.19%
11.10%

4.02%
2.60%
57.24%
25.19%
13.09%

3.82%
2.52%
56.53%
25.28%
13.44%

FY11A

FY12E

FY13E

49.4%
-0.0

50.5%
-0.0

49.3%
-0.0

75.0%
36.8%
49.1%
-

73.6%
37.4%
50.7%
-

72.9%
37.4%
51.3%
-

1.4%
42.1%
48.0%
1,209,514
9.7%
10.1%
11.5%

1.4%
81.3%
(48.6%)
1,233,692
2.0%
11.0%
12.4%

1.2%
80.4%
(2.4%)
1,448,190
17.4%
10.3%
11.4%

Source: Company reports and J.P. Morgan estimates.

218

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Standard Chartered: Summary of Financials


Profit and Loss Statement
$ in millions, year end Dec
Net interest income
Non-interest income
Total operating revenues
% change Y/Y
Operating Costs
% YoY change
Pre-provision operating profit
% YoY change
Loan loss provisions
Other provisions
Pretax profit
% change Y/Y
Tax
Minorities and Prefs
Net Income (Reported)
% YoY change
Balance sheet
$ in millions, year end Dec
ASSETS
Net customer loans
Total assets
LIABILITIES
Customer deposits
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity
Source: Company reports and J.P. Morgan estimates.

FY11A

FY12E

FY13E

10,153
7,484
17,637
9.8%
-9,917
9.9%
7,720
9.7%
-908
-111
6,775
10.7%
(1,842)
(185)
4,748
12.2%

10,934
8,239
19,173
8.7%
-10,665
7.5%
8,508
10.2%
-1,092
0
7,515
10.9%
(2,179)
(230)
5,105
7.5%

11,921
9,081
21,003
9.5%
-11,570
8.5%
9,433
10.9%
-1,201
0
8,349
11.1%
(2,421)
(264)
5,664
11.0%

FY11A

FY12E

FY13E

263,765
599,070

295,374
660,633

342,701
661
599,070

382,339
661
660,633

Ratio Analysis
$ in millions, year end Dec
Per Share Data
EPS Reported
EPSAdjusted
DPS
BV per share
NAV per share
Shares outstanding
Return ratios
RoRWA
ROE
RoNAV
Revenues
NIM (NII / Average Loans)
NII / Total revenues
Total rev / average assets

$ in millions, year end Dec


Balance Sheet Gearing
322,679 Loan / deposit
722,492 Customer deposits / liabilities
Capital
415,429 RWAs
% YoY change
661 - Core Tier 1
722,492 - Core Tier 1 Ratio

FY11A

FY12E

FY13E

2.05
1.98
68
17.08
14.12
2,384

2.18
2.10
83
18.31
15.39
2,420

2.38
2.29
90
19.61
16.75
2,463

14.6%

14.4%

14.4%

FY11A

FY12E

FY13E

270,510
10.4%
11.8%

294,302
8.8%
12.0%

341,527
16.1%
11.5%

219

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

UniCredit: Summary of Financials


Profit and Loss Statement
in millions, year end Dec

FY09A

FY10A

FY11E

FY12E

Net interest income


% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)

17,616
-9.1%
9,956
7,781
-14.4%
1,803
-191.6%
373
27,572
2.6%
-9,098
-8.3%
(6,227)
12,248
20.3%
-8,313
-609
3,300
-39.5%
(1,009)
30.6%
(332)
1,702

16,128
-8.5%
9,946
8,455
8.7%
1,053
-41.6%
438
26,074
-5.4%
-9,205
1.2%
(6,119)
10,750
-12.2%
-6,892
-1,128
2,412
-26.9%
(595)
24.7%
(321)
1,321

15,959
-1.1%
9,628
8,542
1.0%
758
-28.0%
328
25,587
-1.9%
-9,325
1.3%
(6,197)
10,065
-6.4%
-6,366
-9,520
-6,377
-364.4%
(1,652)
(25.9%)
(352)
(9,180)

16,503
3.4%
10,000
8,929
4.5%
743
-2.0%
328
26,503
3.6%
-9,296
-0.3%
(6,054)
11,153
10.8%
-6,070
-260
4,827
-175.7%
(1,866)
38.6%
(357)
2,285

FY09A

FY10A

FY11E

FY12E

Balance sheet
in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Other assets
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Other liabilities
Retirement benefit liabilities
Shareholders' equity
Minorities
Total liabilities & Shareholders
Equity

564,986
555,653
567,550
583,109
-7.8%
-1.7%
2.1%
2.7%
8,313
6,892
6,366
6,070
133,894,000,0 122,551,000,0 122,551,000,0 122,551,000,0
00
00
00
00
64,273
96,148
96,148
96,148
-1.5%
49.6%
0.0%
0.0%
853,409
850,981
862,878
878,437
25,823
25,592
16,693
16,693
49,528
928,760

52,913
929,486

52,913
932,484

52,913
948,042

381,623
-1.8%
214,773
106,800
888,409
34,336
0
59,689
3,202

390,239
2.3%
193,000
111,735
827,177
38,965
0
64,224
3,479

381,104
-2.3%
176,618
149,402
828,895
38,965
0
55,070
3,479

378,944
-0.6%
190,508
141,151
836,709
38,965
0
67,150
3,479

928,760

929,488

932,484

948,042

Ratio Analysis
FY13E in millions, year end Dec FY09A FY10A FY11E
Per Share Data
17,322 EPS Reported
0.10
0.07
-1.59
5.0% EPSAdjusted
0.11
0.07 (0.08)
10,292
% Change Y/Y
-73.8% -35.1% -224.5%
9,221 DPS
0.03
0.03
0.00
3.3%
% Change Y/Y
0.0% (100.0%)
743 Dividend yield
1.7%
1.7%
0.0%
0.0% Payout ratio
29.6% 43.8%
328 BV per share
2
20
7
27,614 NAV per share
2.0
20.0
6.6
4.2% Shares outstanding
16,779.7 1,929.0 5,789.1
-9,335
0.4% Return ratios
(5,968) RoRWA
0.00
0.00
-0.02
12,311 Pre-tax ROE
5.4%
3.7% (10.1%)
10.4% ROE
2.9%
1.9% -0.8%
-5,987 RoNAV
5.7%
3.6% -1.3%
-260
6,067 Revenues
25.7% NIM (NII / RWA)
3.89% 3.53% 3.44%
(2,085) Non-IR / average assets
34.4% Total rev / average assets
2.79% 2.81% 2.75%
(404) NII / Total revenues
63.89% 61.85% 62.37%
3,259 Fees / Total revenues
28.22% 32.43% 33.38%
Trading / Total revenues
6.54% 4.04% 2.96%
FY13E in millions, year end Dec FY09A FY10A FY11E
Cost ratios
599,874 Cost / income
55.6% 58.8% 60.7%
2.9% Cost / assets
0.0
0.0
0.0
5,987 Staff numbers
122,551,000,0
00
96,148 Balance Sheet Gearing
0.0% Loan / deposit
148.0% 142.4% 148.9%
895,202 Investments / assets
6.9% 10.3% 10.3%
16,693 Loan / assets
60.8% 59.8% 60.9%
Customer deposits /
52,913 liabilities
44.1% 45.3% 43.6%
964,808 LT Debt / liabilities
24.8% 22.4% 20.2%
Asset Quality / Capital
376,910 Loan loss reserves / loans
5.3%
5.9%
6.2%
-0.5% NPLs / loans
9.7% 11.4% 11.5%
205,008 LLP / RWA
1.8%
1.5%
1.4%
142,648 Loan loss reserves / NPLs
51.5% 49.0% 50.7%
845,431 Growth in NPLs
37.9% 16.9%
2.8%
38,965 RWAs
452,388 456,662 463,876
0
% YoY change
-7.2%
0.9%
1.6%
69,951 Core Tier 1
7.6%
8.5%
8.6%
3,479 Total Tier 1
8.6%
9.4%
9.5%

FY12E

FY13E

0.39
0.45
-627.6%
0.08
3.0%
20.0%
9
8.7
5,789.1

0.56
0.62
37.6%
0.11
42.6%
4.3%
20.0%
9
9.2
5,789.1

0.00
7.5%
4.2%
6.1%

0.01
8.4%
5.2%
7.1%

3.09%
2.82%
62.27%
33.69%
2.80%

3.13%
2.89%
62.73%
33.39%
2.69%

FY12E

FY13E

57.9%
0.0
-

55.4%
0.0
-

153.9%
10.1%
61.5%

159.2%
10.0%
62.2%

43.2%
21.7%

42.3%
23.0%

6.3%
6.3%
11.1%
10.5%
1.1%
1.1%
53.5%
56.4%
(1.0%) (2.0%)
534,152 554,086
15.2%
3.7%
9.3%
9.5%
10.5%
10.6%

964,808

Source: Company reports and J.P. Morgan estimates.

220

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

SEB: Summary of Financials


Profit and Loss Statement
Skr in millions, year end Dec

FY10A

FY11A

FY12E

Net interest income


% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)

16,010
-11.3%
20,869
14,160
6.6%
3,166
-29.5%
288
36,879
-11.3%
23,951
-5.0%
0
12,928
-21.1%
1,837
11,105
155.2%
(2,521)
22.7%
(53)
6,745

16,952
5.9%
20,837
14,185
0.2%
3,564
12.6%
-110
37,789
2.5%
23,225
-3.0%
0
14,564
12.7%
-982
15,546
40.0%
(3,045)
19.6%
(37)
11,124

17,733
4.6%
22,373
14,696
3.6%
3,869
8.6%
468
40,106
6.1%
23,385
0.7%
0
16,721
14.8%
1,198
15,523
-0.2%
(3,570)
23.0%
(48)
11,905

FY10A

FY11A

FY12E

Balance sheet
Skr in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Other assets
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Other liabilities
Retirement benefit liabilities
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity

Ratio Analysis
FY13E Skr in millions, year end Dec
Per Share Data
18,497 EPS Reported
4.3% EPSAdjusted
23,617
% Change Y/Y
15,428 DPS
5.0%
% Change Y/Y
4,243 Dividend yield
9.7% Payout ratio
461 BV per share
42,114 NAV per share
5.0% Shares outstanding
23,896
2.2% Return ratios
0 RoRWA
18,218 Pre-tax ROE
9.0% ROE
1,275 RoNAV
16,943 Revenues
9.2% NIM (NII / RWA)
(3,897) Non-IR / average assets
23.0% Total rev / average assets
(63) NII / Total revenues
12,983 Fees / Total revenues
Trading / Total revenues

FY13E Skr in millions, year end Dec


Cost ratios
1,074,879 1,186,223 1,233,672 1,283,019 Cost / income
-9.5%
10.4%
4.0%
4.0% Cost / assets
-15,966
-11,606
-11,901
-12,625 Staff numbers
868,422 1,027,986 1,018,222
961,391 Balance Sheet Gearing
-8.6%
18.4%
-1.0%
-5.6% Loan / deposit
2,119,265 2,141,795 2,291,865 2,309,023 Investments / assets
13,292
13,564
13,564
13,564 Loan / assets
- Customer deposits / liabilities
2,179,821 2,362,653 2,409,906 2,434,005 LT Debt / liabilities
Asset Quality / Capital
711,541
861,682
887,532
914,158 Loan loss reserves / loans
-11.2%
21.1%
3.0%
3.0% NPLs / loans
530,483
589,873
607,569
619,721 LLP / RWA
212,624
201,274
207,312
196,947 Loan loss reserves / NPLs
1,750,671 1,770,207 1,913,352 1,959,422 Growth in NPLs
- RWAs
% YoY change
- Core Tier 1
0
0
0
0 Total Tier 1
2,179,821 2,362,653 2,409,906 2,434,005

FY10A

FY11A

FY12E

FY13E

3.07
3.97
261.8%
1.50
50.1%
3.2%
48.8%
45
39.3
2,194.0

5.07
5.68
43.0%
1.75
16.7%
3.7%
34.5%
50
43.6
2,194.0

5.43
5.43
-4.5%
2.00
14.3%
4.2%
36.9%
53
47.0
2,194.0

5.92
5.92
9.1%
2.25
12.5%
4.7%
38.0%
57
50.7
2,194.0

0.01
11.2%
8.8%
10.1%

0.02
14.9%
11.9%
13.7%

0.02
13.7%
10.5%
12.0%

0.02
14.0%
10.8%
12.1%

0.76%
0.93%
1.64%
43.41%
43.41%
8.58%

0.79%
0.92%
1.66%
44.86%
44.86%
9.43%

0.77%
0.94%
1.68%
44.22%
44.22%
9.65%

0.80%
0.98%
1.74%
43.92%
43.92%
10.08%

FY10A

FY11A

FY12E

FY13E

64.9%
0.0
-0

61.5%
0.0
-0

58.3%
0.0
-0

56.7%
0.0
-0

151.1%
3.2%
49.3%
34.2%
25.5%

137.7%
2.5%
50.2%
38.2%
26.2%

139.0%
2.5%
51.2%
38.7%
26.5%

140.3%
2.6%
52.7%
39.6%
26.8%

(1.5%) (1.0%) (1.0%) (1.0%)


2.2%
1.5%
1.5%
1.5%
0.3% (0.1%)
0.2%
0.2%
65.8%
64.2%
64.8%
64.1%
(15.1%) (25.5%) (1.0%) (1.0%)
804,680 752,337 788,795 804,046
-6.5%
4.9%
1.9%
10.9%
12.4%
12.1%
12.9%
-

Source: Company reports and J.P. Morgan estimates.

221

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

VTB: Summary of Financials


Profit and Loss Statement
$ in millions, year end Dec
Net interest income
% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)
Balance sheet
$ in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Other assets
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Other liabilities
Retirement benefit liabilities
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity

FY09A

FY10A

4,795
5,633
5.1% 17.5%
454
1,574
662
813
1.1% 22.9%
-636
484
-760.2% -176.0%
428
277
5,248
7,207
-13.1% 37.3%
-2,407 -3,131
-11.2% 30.1%
0
0
2,842
4,076
-14.6% 43.4%
-4,873 -1,699
-2,152
2,341
-396.0% -208.8%
274
(537)
12.7% 22.9%
(120)
112
(1,997)
1,916

FY09A

FY10A

FY11E

FY12E

7,057
8,575
25.3% 21.5%
2,640
2,889
1,260
1,718
54.9% 36.4%
129
650
-73.4% 404.4%
1,251
520
9,696 11,464
34.6% 18.2%
-4,359 -5,191
39.2% 19.1%
0
0
5,338
6,273
31.0% 17.5%
-1,203 -1,745
4,183
4,528
78.7%
8.3%
(938)
(906)
22.4% 20.0%
39
(81)
3,284
3,541

FY11E

FY12E

76,907 91,214 144,032


-11.6% 18.6% 57.9%
-7,821 -8,979 -9,890
13,341 14,789 19,841
20,966 21,345 27,943
-15.8%
1.8% 30.9%
104,031 109,608 146,889
263
652
4,413
8,743 12,516 20,190
120,220 140,515 216,419

173,056
20.2%
-10,709
19,792
31,946
14.3%
191,279
4,633
21,351
250,778

52,232 72,466 123,791 152,363


39.3% 38.7% 70.8% 23.1%
38,352 32,233 42,825 44,967
9,556 13,010 21,270 20,100
103,259 108,925 152,798 202,658
3,270
3,871
7,651
8,033
0
0
0
0
16,724 18,152 20,032 24,323
87
783
851
992
120,220 140,515 216,419 250,778

Per Share Data & Ratio Analysis


FY13E $, year end Dec
Per Share Data
10,088 EPS Reported
17.7% EPS Adjusted
3,678
% Change Y/Y
2,195 DPS
27.7%
% Change Y/Y
733 Dividend yield
12.8% Payout ratio
750 BV per share
13,766 NAV per share
20.1% Shares outstanding
-5,844
12.6% Return ratios
0 RoRWA
7,922 Pre-tax ROE
26.3% ROE
-2,087 RoNAV
5,835 Revenues
28.9% NIM (NII / RWA)
(1,167) Non-IR / average assets
20.0% Total rev / average assets
(33) NII / Total revenues
4,635 Fees / Total revenues
Trading / Total revenues
FY13E Year end Dec
Cost ratios
198,667 Cost / income
14.8% Cost / assets
-11,213 Staff numbers
20,286
33,386 Balance Sheet Gearing
4.5% Loan / deposit
219,461 Investments / assets
4,633 Loan / assets
21,610 Customer deposits / liabilities
278,582 LT Debt / liabilities
Asset Quality / Capital
177,596 Loan loss reserves / loans
16.6% NPLs / loans
44,967 LLP / RWA
18,090 Loan loss reserves / NPLs
229,041 Growth in NPLs
8,234 RWAs
0
% YoY change
28,595 Core Tier 1
1,101 Total Tier 1
278,582

FY09A

FY10A

FY11E

FY12E

FY13E

-0.46
0.37
0.63
0.68
0.89
(0.46)
0.37
0.63
0.68
0.89
-910.8% -178.8% 71.4%
7.8% 30.9%
0.04
0.04
0.06
0.07
0.09
27.0% (1.6%) 62.7% 12.3% 27.7%
0.8%
0.8%
1.3%
1.5%
1.9%
-8.3% 10.4%
9.9% 10.3% 10.0%
3.15
3.35
2.99
3.76
4.58
3.1
3.3
3.0
3.8
4.6
5,230.3 5,230.3 5,230.3 5,230.3 5,230.3

-0.02
(14.4%)
-14.5%
-14.5%

0.02
13.4%
11.3%
11.3%

0.02
21.9%
19.8%
19.8%

0.02
20.4%
20.1%
20.1%

0.02
22.1%
21.2%
21.2%

4.44% 4.77% 4.45% 4.17% 4.28%


0.39% 1.21% 1.47% 1.24% 1.39%
4.56% 5.54% 5.42% 4.92% 5.20%
91.36% 78.16% 72.78% 74.80% 73.28%
-12.12% 6.72% 1.33% 5.67% 5.33%
21.13% 13.39% 12.93% 16.69% 17.76%
FY09A

FY10A

FY11E

FY12E

FY13E

45.9%
0.0
40,447

43.4%
0.0
51,781

44.9%
0.0
64,726

45.3%
0.0
64,726

42.5%
0.0
64,726

147.2% 125.9% 116.4% 113.6% 111.9%


11.1% 10.5%
9.2%
7.9%
7.3%
64.0% 64.9% 66.6% 69.0% 71.3%
50.5% 59.6% 63.3% 67.6% 71.4%
37.1% 26.5% 21.9% 19.9% 18.1%
9.2%
9.0%
6.4%
5.8%
5.3%
9.8%
8.6%
5.8%
5.1%
4.5%
7.2%
6.2%
4.9%
4.5%
4.2%
94.2% 104.2% 110.0% 115.0% 120.0%
422.8%
5.5%
7.6% (1.4%)
0.4%
109,339 144,520 200,228 238,239 264,653
-8.5% 32.2% 38.6% 19.0% 11.1%
14.8% 12.4%
9.8% 10.0% 10.5%
14.8% 12.4%
9.8% 10.0% 10.5%

Source: Company reports and J.P. Morgan estimates.

222

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

EFG Hermes: Summary of Financials


Profit and Loss Statement
E in millions, year end Dec

FY08A FY09A

Net interest income


% Change Y/Y
Non-interest income
Fees & commissions
% change Y/Y
Trading revenues
% change Y/Y
Other Income
Total operating revenues
% change Y/Y
Admin expenses
% change Y/Y
Other expenses
Pre-provision operating profit
% change Y/Y
Loan loss provisions
Other provisions
Earnings before tax
% change Y/Y
Tax (charge)
% Tax rate
Minorities
Net Income (Reported)

123
-41.1%
2,032
1,620
-5.8%
85
-74.3%
2,220
-14.1%
-913
11.7%
1,242
-28.1%
-148
1,095
-32.2%
(101)
9.3%
(60)
933

Balance sheet
E in millions, year end Dec
ASSETS
Net customer loans
% change Y/Y
Loan loss reserves
Investments
Other interest earning assets
% change Y/Y
Average interest earnings assets
Goodwill
Other assets
Total assets
LIABILITIES
Customer deposits
% change Y/Y
Long term funding
Interbank funding
Average interest bearing liabs
Other liabilities
Retirement benefit liabilities
Shareholders' equity
Minorities
Total liabilities & Shareholders Equity

75
-39.2%
1,345
772
-52.3%
136
61.0%
1,463
-34.1%
-743
-18.6%
676
-45.6%
-58
618
-43.6%
(20)
3.2%
(46)
552

FY08A FY09A
0
0
5,945 6,494
699
701
1,883 2,213
10,419 11,020
0
0
737
696
0
0
1,496 1,383
214
206
10,419 11,020

Ratio Analysis
FY10E FY11E FY12E E in millions, year end Dec
Per Share Data
828
981 1,043 EPS Reported
1010.2% 18.4% 6.3% EPSAdjusted
2,273 1,731 2,109
% Change Y/Y
1,123 1,487 1,841 DPS
45.5% 32.4% 23.8%
% Change Y/Y
1,145
238
261 Dividend yield
738.9% -79.2% 9.7% Payout ratio
- BV per share
4,558 4,303 4,890 NAV per share
211.6% -5.6% 13.7% Shares outstanding
-1,346 -1,419 -1,510
81.1%
5.4% 6.4% Return ratios
- RoRWA
1,756 1,293 1,641 Pre-tax ROE
159.8% -26.4% 26.9% ROE
-178
-101
-85 RoNAV
1,578 1,192 1,557 Revenues
155.4% -24.4% 30.6% NIM (NII / RWA)
(364) (173) (227) Non-IR / average assets
23.1% 14.5% 14.6% Total rev / average assets
(198) (216) (239) NII / Total revenues
1,016
803 1,091 Fees / Total revenues
Trading / Total revenues
FY10E FY11E FY12E E in millions, year end Dec
Cost ratios
8,945 10,370 11,805 Cost / income
- 15.9% 13.8% Cost / assets
- Staff numbers
20,052 21,083 21,835
- Balance Sheet Gearing
- Loan / deposit
- Investments / assets
2,233 2,233 2,233 Loan / assets
3,401 3,698 4,002 Customer deposits / liabilities
43,516 46,063 48,492 LT Debt / liabilities
Asset Quality / Capital
30,143 32,275 34,085 Loan loss reserves / loans
7.1% 5.6% NPLs / loans
696
658
642 LLP / RWA
441
530
636 Loan loss reserves / NPLs
- Growth in NPLs
2,208 2,609 2,763 RWAs
% YoY change
- Core Tier 1
1,024 1,024 1,024 Total Tier 1
43,516 46,063 48,492

FY08A

FY09A

2.41
1.44
2.41
1.44
-27.7% -40.1%
0.64
1.00
(41.1%) 57.3%
2.2%
3.4%
26.4% 69.4%
21
23
18.8
21.0
387.9
382.7

12.7%
10.8%
11.3%

7.4%
6.6%
7.2%

FY10E

FY11E

FY12E

2.65
2.10
2.65
2.10
84.1% -21.0%
1.19
1.05
19.5% (12.2%)
4.1%
3.6%
45.0% 50.0%
24
23
17.7
17.6
382.7
382.7

2.85
2.85
35.9%
1.43
35.9%
4.8%
50.0%
24
18.6
382.7

17.8%
11.5%
13.7%

17.0%
11.9%
15.8%

13.3%
8.9%
11.9%

17.26% 12.54% 8.34% 3.86% 4.46%


18.30% 13.24% 11.38% 6.05% 6.67%
5.69% 5.26% 26.71% 36.18% 33.08%
75.17% 54.40% 36.20% 54.82% 58.42%
3.93% 9.62% 36.91% 8.78% 8.29%
FY08A

FY09A

FY10E

FY11E

FY12E

42.4%
0.1
-

52.4%
0.1
-

43.4%
0.0
-

52.3%
0.0
-

47.9%
0.0
-

57.1%
-

58.9%
-

29.7%
46.1%
20.6%
90.0%
-

32.1%
45.8%
22.5%
89.5%
-

34.6%
45.0%
24.3%
89.4%
-

Source: Company reports and J.P. Morgan estimates.

223

This document is being provided for the exclusive use of Rathiesh Chandran at PREMJI INVEST.

Europe Equity Research


13 March 2012

Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com
Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

ICICI Bank: Summary of Financials


Income Statement
Rs in millions, year end Mar
NIM (as % of avg. assets)
Earning assets/assets
Margins (% of earning assets)

FY10
2.3%
93.2%
2.2%

FY11
2.5%
94.3%
2.3%

FY12E
2.6%
95.1%
2.4%

FY13E
2.8%
95.3%
2.7%

Net Interest Income


Total Non-Interest Income
Fee Income

81,141
66,115
52,001

90,169
68,501
59,259

106,805
75,352
65,185

134,586
86,654
74,963

Other Operating Income


Total operating revenues

14,114
147,256

9,242
158,670

10,166
182,157

11,691
221,241

Operating costs

-58,598

-66,172

-77,461

-89,150

Pre-Prov. Profits
Provisions
Other Inc/Exp. (treasury Income)
Exceptionals

88,658
-43,969
8,662
0

92,498
-22,868
-2,023
0

104,696
-16,473
-2,500
0

132,091
-34,406
2,000
0

53,351
13,103
40,248
FY10
36.10
12.00
33.2%
462.99
1,114.89

67,607
16,093
51,514
FY11
44.72
14.00
31.3%
478.29
1,151.82

85,723
22,717
63,006
FY12E
54.70
19.00
34.7%
510.77
1,151.82

99,684
27,413
72,271
FY13E
62.75
24.00
38.2%
545.43
1,151.82

Key Balance sheet Rs in millions


Net Loans
LLR
Gross Loans
NPLs
Investments
Other earning assets
Avg. IEA
Goodwill
Assets

FY10
1,924,847
56,395
1,868,451
94,807
523,247
192,807
3,461,539
3,634,655

FY11
2,316,197
76,269
2,239,928
100,333
696,384
163,476
3,630,570
4,062,336

FY12E
2,730,603
88,742
2,641,860
113,772
765,857
171,650
4,166,192
4,702,057

FY13E
3,160,553
112,234
3,048,319
143,890
838,887
205,717
4,824,275
5,424,745

Deposits
Long-term bond funding
Other Borrowings
Avg. IBL
Avg. Assets
Common Equity
RWA
Avg. RWA

2,020,826
942,635
252,559
3,039,247
3,713,832
516,184
2,941,806
3,253,218

2,256,021
1,095,543
312,172
3,157,512
3,848,496
550,909
3,414,980
3,178,393

2,614,497
1,315,407
357,172
3,640,734
4,382,197
588,311
4,029,676
3,722,328

3,167,013
1,418,074
357,172
4,257,495
5,063,401
628,239
4,634,128
4,331,902

Pre-tax
Tax
Minorities
Other Distbn.
Attributable Income
Per Share Data Rs
EPS
DPS
Payout
Book value
Fully Diluted Shares

Growth Rates
FY14E
2.8% Loans
95.3% Deposits
2.7% Assets
Equity
161,023 RWA
105,718 Net Interest Income
91,455 Non-Interest Income
of which Fee Grth
14,263 Revenues
266,741 Costs
Pre-Provision Profits
-103,972 Loan Loss Provisions
Pre-Tax
162,770 Attributable Income
-40,739 EPS
2,000 DPS
0
Balance Sheet Gearing
124,030 Loan/deposit
34,108 Investment/assets
- Loan/Assets
- Customer deposits/liab.
89,922 LT debt/liabilities
FY14E Asset Quality/Capital
78.07 Loan loss reserves/loans
29.00 NPLs/loans
37.1% Specific loan loss reserves/NPLs
589.57 Growth in NPLs
1,151.82 Tier 1 Ratio
Total CAR
FY14E Du-Pont Analysis
3,853,094 NIM (as % of avg. assets)
135,535 Earning assets/assets
3,717,559 Margins (as % of Avg. Assets)
173,763 Non-Int. Rev./ Revenues
935,986 Non IR/Avg. Assets
254,956 Revenue/Assets
5,705,767 Cost/Income
- Cost/Assets
6,552,346 Pre-Provision ROA
LLP/Loans
3,982,889 Loan/Assets
1,628,355 Other Prov, Income/ Assets
357,172 Operating ROA
5,098,165 Pre-Tax ROA
5,988,545 Tax rate
679,079 Minorities & Outside Distbn.
5,653,636 ROA
5,143,882 RORWA
Equity/Assets
ROE

FY10
-16.4%
0.4%
-4.2%
4.2%
-17.5%
-3.0%
5.0%
-12.8%
(7.4%)
-16.8%
16.3%
15.5%
7.1%
6.9%
9.1%

FY11
19.9%
7.8%
11.8%
6.7%
16.1%
11.1%
3.6%
14.0%
11.6%
12.9%
4.3%
-48.0%
28.0%
23.9%
16.7%

FY12E FY13E FY14E


17.9% 15.4% 22.0%
14.8% 21.5% 20.6%
15.7% 15.4% 20.8%
6.8% 6.8% 8.1%
18.0% 15.0% 22.0%
18.5% 26.0% 19.6%
10.0% 15.0% 22.0%
10.0% 15.0% 22.0%
15.9% 21.1% 25.8%
17.1% 15.1% 16.6%
13.2% 26.2% 23.2%
-28.0% 108.9% 18.4%
22.3% 14.7% 24.4%
22.3% 14.7% 24.4%
35.7% 26.3% 20.8%

FY10
92.5%
14.4%
49.9%
64.8%
25.9%
FY10
-3.0%
5.1%
-59.5%
-1.8%
14.0%
19.4%
FY10
2.3%
93.2%
2.2%
41.0%
1.8%
4.0%
39.8%
-1.6%
2.4%
-2.1%
55.2%
0.2%
2.4%
1.4%
0.0%
1.1%
1.2%
13.6%
8.0%

FY11
99.3%
17.1%
53.3%
64.3%
27.0%
FY11
-3.4%
4.5%
-76.0%
5.8%
13.2%
19.5%
FY11
2.5%
94.3%
2.3%
40.8%
1.8%
4.1%
41.7%
-1.7%
2.4%
-1.1%
53.4%
-0.1%
2.4%
1.8%
0.0%
1.3%
1.6%
13.9%
9.7%

FY12E
101.0%
16.3%
54.3%
63.6%
28.0%
FY12E
-3.4%
4.3%
-78.0%
13.4%
13.2%
20.3%
FY12E
2.6%
95.1%
2.4%
39.2%
1.7%
4.2%
42.5%
-1.8%
2.4%
-0.7%
55.7%
-0.1%
2.4%
2.0%
0.0%
1.4%
1.7%
13.0%
11.1%

FY13E
96.3%
15.5%
54.1%
66.0%
26.1%
FY13E
-3.7%
4.7%
-78.0%
26.5%
12.3%
18.5%
FY13E
2.8%
95.3%
2.7%
37.2%
1.7%
4.4%
40.3%
-1.8%
2.6%
-1.2%
56.2%
0.0%
2.6%
2.0%
0.0%
1.4%
1.7%
12.0%
11.9%

FY14E
93.3%
14.3%
54.7%
67.8%
24.9%
FY14E
-3.6%
4.7%
-78.0%
20.8%
11.0%
16.1%
FY14E
2.8%
95.3%
2.7%
37.6%
1.8%
4.5%
39.0%
-1.7%
2.7%
-1.2%
56.5%
0.0%
2.7%
2.1%
0.0%
1.5%
1.7%
10.9%
13.8%

Source: Company reports and J.P. Morgan estimates.

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13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Itau Unibanco: Summary of Financials


Income Statement
Interest Income
Interest Expense
Net interest Income
LL Provision
Net Interest Income after Provision
Fee Income
Other Non Interest Income
Personnel Expenses
Non Interest Expenses
Other Non Interest Expense
Non-Operating Income/(Expenses)
Pretax income
Taxes
Statutory Profit Sharing
Minority Interests
Extraordinary
Net Income
Recurring Net Income
Dividends
Operating Data, Ratios
Per share analysis
EPS
EPADR
BVPS
Dividend per Share
BVADR
Dividend/ADR
Growth
EPS growth
Fee income
Non interest expenses
Loan
Deposits
Ratios
NIM
Fees/Expenses
PDL/Loans
LL Reserves/Total Loans
LL Reserves/NPL
Cost/Income
Loans/Deposits
Loans/Assets
Equity/Assets
Dividend Payout

FY11A
49,614
(1,4423)
35,191
19,047.0
3,540
(32,621)
(3,840)
191
21,508
(5,860)
(192)
(813)
(20)
14,623
14,643
4387.34
FY11A

FY12E
53,229
(1,6548)
36,681
21,340.6
4,103
(34,511)
(3,941)
100
23,773
(6,419)
(357)
(780)
0
16,217
16,217
5676.10
FY12A

FY13E
59,046
(1,8256)
40,790
23,688.1
4,578
(37,617)
(4,296)
0
27,143
(7,600)
(407)
(842)
0
18,293
18,293
7317.39
FY13E

3.24
1.80
15.81
0.97
8.47
0.52

3.59
1.96
18.14
1.26
10.08
0.70

4.05
2.19
20.57
1.62
10.83
0.85

12.6%
11.4%
10.1%
17.1%
19.7%

10.9%
12.0%
5.8%
15.1%
15.8%

12.8%
11.0%
9.0%
14.6%
15.9%

11.7%
(58.4%)
6.5%
(0.07)
1.14
(39.6%)
1.4
40.6%
0.1
30.0%

10.7%
(61.8%)
6.4%
(0.07)
1.15
(38.7%)
1.4
41.1%
0.1
35.0%

10.5%
(63.0%)
6.2%
(0.07)
1.15
(38.0%)
1.4
41.7%
0.1
40.0%

Balance Sheet
Securities
Cash and Due from Banks
Interbank Investment
Loan and Leasing Operatings
Other Receivables and Assets
Permanent Asset
Total assets
Total deposits
Demand deposits
Savings deposits
Interbank deposits
Time deposits
Interest bearing liabilities
Other Current Liabilities
Total Liabilities
Shareholders' equity

Valuation, Macro
P/E
P/BV
Dividend yield
ROE
ROA
Shares
ADRs

FY11A
187,880
10,633
21,5005
319,711
106,193
11,910
851,332
242,638
2,8933
6,7170
2066
14,4469
381,587
155,760
779,985
71,347

FY12E
211,461
11,968
24,1990
368,537
119,521
12,892
966,368
281,052
3,3101
7,6845
2364
16,8743
421,176
182,252
884,480
81,888

FY13E
236,836
13,404
27,1029
423,344
135,059
14,181
1,093,852
325,642
3,8066
8,9141
2694
19,5742
463,293
212,052
1,000,988
92,864

FY11A
11.9
2.3
2.5%
22.7%
1.9%

FY12A
10.7
2.0
3.3%
21.6%
1.8%

FY13E
9.5
1.8
4.2%
20.9%
1.8%

4,514
4,514

4,514
4,514

4,514
4,514

Source: Company reports and J.P. Morgan estimates.


Note: R$ in millions (except per-share data).Fiscal year ends Dec

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Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report.

Important Disclosures

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Suisse Group, Deutsche Bank, Barclays, Goldman Sachs, Morgan Stanley, Macquarie Group Limited, Investec Plc, BNP Paribas, Socit
Gnrale, Credit Agricole, Royal Bank of Scotland, HSBC Holdings plc, Standard Chartered, UniCredit, VTB, Itau Unibanco within the
past 12 months.

Director: A senior employee, executive officer or director of JPMorgan Chase & Co. and/or J.P. Morgan is a director and/or officer of
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Analyst Position: The following analysts (and/or their associates or household members) own a long position in the shares of UBS:
Kian Abouhossein. The following analysts (and/or their associates or household members) own a long position in the shares of Nomura
Holdings (8604): Natsumu Tsujino.

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UniCredit, SEB, VTB, EFG Hermes, ICICI Bank, Itau Unibanco.

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UniCredit, SEB, VTB, EFG Hermes, Itau Unibanco.

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services in the next three months from UBS, Credit Suisse Group, Deutsche Bank, Barclays, Goldman Sachs, Morgan Stanley, Citigroup
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Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
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Broker: J.P. Morgan Securities Ltd. acts as Corporate Broker to Standard Chartered.

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"J.P. Morgan Securities Ltd. is acting as a joint bookrunner to Macquarie Bank Limited (a subsidiary of Macquarie Group Ltd
(MQG)), acting through its London Branch (MBL) on its Reg S US$ Tier 1 offering as announced on 6 March 2012. J.P. Morgan will
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"J.P. Morgan Securities LLC (J.P. Morgan) is acting as financial advisor to HSBC on the sale of 195 Upstate New York and
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Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months,
we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage
universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks
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Coverage Universe: Abouhossein, Kian: Credit Suisse Group (CSGN.VX), Deutsche Bank (DBKGn.DE), Deutsche Postbank
(DPBGn.DE), Goldman Sachs (GS), Mediobanca (MDBI.MI), Morgan Stanley (MS), Natixis (CNAT.PA), UBS (UBSN.VX)
J.P. Morgan Equity Research Ratings Distribution, as of January 6, 2012

J.P. Morgan Global Equity Research Coverage


IB clients*
JPMS Equity Research Coverage
IB clients*

Overweight
(buy)
47%
52%
45%
72%

Neutral
(hold)
42%
45%
47%
62%

Underweight
(sell)
12%
36%
8%
58%

*Percentage of investment banking clients in each rating category.


For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a
hold rating category; and our Underweight rating falls into a sell rating category.

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Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based
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Kian Abouhossein
(44-20) 7325-1523
kian.abouhossein@jpmorgan.com

Europe Equity Research


13 March 2012

Amit Ranjan
(44-20) 7325-4780
amit.x.ranjan@jpmorgan.com

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