barcap - brave or foolish - roe targets by european banks (mar11)

EQUITY RESEARCH 21 March 2011

BRAVE OR FOOLISH? ROE targets by European Banks

Targets are back: Recent weeks have seen a flurry of new, post-crisis ROE targets set or reaffirmed by 11 major European banks.

Ambitious: At 17.5%, the average tangible ROE targets set by these 11 banks looks high. For reference, the sector achieved a tangible ROE of 10% in the 1980s and 1990s, rising to 18% over 2000-07. The idea that – post crisis – the sector could almost match the ROE achieved in the leverage-induced 2000s looks ambitious.

Harder without leverage: As leverage falls post crisis, so return on assets (ROA) needs to expand to achieve the same level of tangible ROE. The 18% ROE of the 2000-07 period was achieved with an ROA of 55bp levered 32x. If leverage returned to the 1990s level of 26x (as we broadly forecast), then ROA would need to expand to 72bp to reach the ROE targets – higher than in any year since 1980. We don’t dispute that ROA will rise, but are doubtful it will rise enough.

What’s in the price?: Faced with these numbers, we and the market are sceptical. We estimate that the market-implied tangible ROE for these banks is just 11%, significantly below their targets. Our own forecast is for 13%. Bringing together factors such as historical profitability, management, businesses mix, regulatory changes, we would cite ROE targets at HSBC, BNP Paribas and (relative to what the market is discounting) RBS as the most realistic. By contrast, we would be most sceptical on ROE targets set by UBS, SocGen and (by virtue of the impact of Basel III) Credit Suisse.

Figure 1: Target return on equity (tangible) vs history*

6%

8%

10%

12%

14%

16%

18%

20%

22%

UBS

Stan

dard

C

Cre

dit S

uiss

e

SocG

en

Swed

bank

Deu

tsch

eBa

nk

Lloy

ds B

G(P

ro F

orm

a)

HSB

C

BNP

Parib

as

RBS

(Pro

Form

a)

Barc

lays

Target ROEROE 1980-2007Market Implied RoE

*We do not show a market implied RoE for Barclays since all references to Barclays are historic and provided for context purposes only. Source: Barclays Capital

Barclays Capital does and seeks to do business with companies covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA.

PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 22.

INDUSTRY UPDATE European Banks 2-NEUTRAL Unchanged Simon Samuels +44 (0)20 3134 3364 [email protected] Barclays Capital, London Mike Harrison +44 (0)20 3134 3056 [email protected] Barclays Capital, London European Banks Simon Samuels Mike Harrison Jeremy Sigee Rohith Chandra-Rajan Kiri Vijayarajah Antonio Rizzo Carlos Cobo Catena Nimish Rajkotia

Barclays Capital | Brave Or Foolish?

21 March 2011 2

Brave or foolish?

The recent spate of profitability targets announced or reaffirmed by European banks have been calculated and presented in a wide range of ways – some on reported equity, some on a tangible basis, some with explicit capital ratios, others without, some for specific years, others simply to be achieved over the “medium term”. Figure 2 shows ROE (on both a reported and tangible basis), as disclosed by 11 major banks.

Figure 2: ROE target by bank

Bank Target ROE (rptd)

Target ROE (tang)

By When?

Target set in….

Capital Ratio on which is based…. Comments

UBS1 15% to 20% 19% to 25% "Medium Term" November 2010 Core Tier 1 Capital SFr45-50bn Our translation of reported to tangible RoE

Standard C2 "Mid Teens" 20% Unspecified March 2009 Unspecified "mid teens ROE" is 16% equates to 20% ROTE

Credit Suisse3 Above 15% Above 19% Unspecified February 2011 "Compliance with Swiss TBTF" i.e. 19% Our translation of reported to tangible RoE

SocGen4 14% to 15% 18% to 19% 2012 June 2010 Core Tier 1 "above 8%" Our translation of reported to tangible RoE

Swedbank5 15% 18% Unspecified February 2011 Core Tier 1 "at least 13%" until 2013 Our translation of reported to tangible RoE

Deutsche Bank6 12% 17% 2011 December 2009 Refers to Core Tier 1 ">8%" from 2013 Target of €10bn from operating divisions in 2011

Lloyds7 "Above 15%" Above 16.5% "Medium term" July 2010 Unspecified Our translation of reported to tangible RoE

HSBC8 12% to 15% 15% to 18% Unspecified March 2011 Core Tier 1 between 9.5% to 10.5% Our translation of reported to tangible RoE

BNP Paribas9 "15%" "15%" Unspecified Not officially set Unspecified Verbal only, in response to question

RBS10 None "15% +" 2013 for Core February-09 Core Tier 1 "above 8%" -

Barclays11 At least 13% At least 15% 2013 February 2011 Core Tier 1 9% -

1 Investor Day, November 2010 ; 2 2009 Report and Accounts; 3 2010 full-year results announcement; 4 Investor Day launching "Ambition SG 2015"; 5 Capital Markets Day, February 2011; 6 December 2009 Investor Day 7 2010 Interim results 8 2010 full-year results announcement 9 Q4 2010 results call. Not officially confirmed or clarified whether it is on a tangible or reported basis; 10 Various results announcements 112010 full-year results announcement;

Source: Company reports, Barclays Capital.

Some comments on Figure 2:

In six cases (HSBC, Credit Suisse, UBS, Swedbank, SocGen, Lloyds), the profitability target is based on reported equity. We have confirmed that to be the case with each bank and then converted it into a return on tangible equity basis using our own estimates.

In the case of BNP Paribas, the ROE target has only been communicated verbally and has not been confirmed/endorsed by the company.

In the case of Deutsche Bank, the target is an absolute pre-tax profit (€10bn) for just the operating divisions. We have then taken that number and converted it into a group reported/tangible ROE after making assumptions around the losses incurred by the non-operating divisions.

For the remainder of this report all references to “ROE” will be to Return on Equity on a tangible, not a reported, basis.

One initial observation on Figure 2 is that the ROE targets look ambitious. The simple average ROE target for these 11 banks is 17.5%; this compares to an average ROE between 1980-2007 for this group of 14%. Indeed, the only period in which ROE has consistently been in excess of 17% was the period immediately preceding the financial crisis. For reference, our 2013 forecast is for a 13.6% ROE.


21 March 2011 3

Figure 3: Return on tangible equity target for eleven major European banks

20.9%

17.5%

14.1% 13.6%

11.0% 10.2%

0%

5%

10%

15%

20%

25%

Average ROE2000-07

Post CrisisROE Target

Average ROE1980-07

Our 2013Forecast

Average ROE1990s

Average ROE1980s

Source: Barclays Capital

Figure 4 shows how each of these ROE targets compare to historical levels of profitability by bank. For four UK banks the target ROE is below the average level achieved over the 1980-2007 period, but for the other seven banks the targeted ROE is higher than that achieved previously. The most significant targeted improvement in profitability is to be found at Credit Suisse, UBS, Deutsche Bank and SocGen. Indeed, for all four their target ROE is actually above that generated during the 2000-2007 period. At the other extreme, the most modest ROE ambitions – at least relative to history – are to be found at RBS.

Figure 4: ROE targets compared to history

ROE in……… ROE Target vs Average in:

ROE

Target 1980s 1990s 2000-07 1980-07 1980s 1990s 2000-07 1980-07

Credit Suisse 19.0% 8.1% 6.5% 12.5% 8.8% +134% +194% +52% +116%

SocGen 18.5% 13.0% 9.5% 16.7% 12.8% +43% +96% +11% +45%

Deutsche Bank 17.0% 8.3% 7.9% 15.4% 10.2% +104% +116% +10% +67%

UBS 22.0% - 5.7% 20.8% 12.4% - +288% +6% +78%

Standard Chartered 20.0% 5.2% 16.2% 22.4% 14.1% +282% +23% -11% +42%

Swedbank 18.0% - 8.1% 22.0% 14.6% - +122% -18% +23%

BNP Paribas 15.0% 13.3% 6.9% 19.4% 12.7% +13% +118% -23% +18%

HSBC 16.5% - 17.1% 22.4% 19.7% - -3% -26% -16%

Lloyds Banking Group (Pro Forma)1 16.5% 8.7% 21.2% 22.5% 17.1% +90% -22% -27% -4%

RBS (Pro Forma)1 15.0% 12.1% 9.9% 27.2% 15.9% +24% +52% -45% -6%

Barclays 15.0% 13.0% 12.4% 28.4% 17.2% +15% +21% -47% -13%

Simple Average of Eleven Banks 17.5% 10.2% 11.0% 20.9% 14.1% +71% +59% -16% +24%


To emphasise how ambitious many of these ROE targets look, Figure 5 shows the percentage of years in preceding decades each bank has achieved an ROE higher than its new, post-crisis target. The message is the same – the ROE targets look challenging for several banks.

1 Note that both here and in subsequent analysis, Lloyds and RBS are shown as if the HBOS and Natwest acquisitions had taken place at the beginning of the period shown.


21 March 2011 4

Figure 5: Percentage of years that ROE exceeded the new post-crisis target level

1980s 1990s 2000-07 1980-07

Deutsche Bank 0% 0% 27% 11%

Credit Suisse 0% 0% 36% 14%

SocGen 0% 0% 36% 15%

BNP Paribas 0% 0% 73% 29%

UBS - 10% 55% 33%

Standard Chartered 0% 40% 64% 36%

RBS (Pro Forma) 20% 30% 82% 50%

Swedbank - 44% 64% 53%

Lloyds Banking Group (Pro Forma) 30% 60% 82% 57%

Barclays 40% 60% 100% 64%

HSBC - 63% 91% 81%


Clearly, however, any debate on ROE needs to be had in the context of leverage. Banks can generate a wide range of ROE depending on their chosen level of leverage, and post crisis leverage has fallen dramatically. Figure 6 shows how simple leverage has fallen from 48x at the 2008 peak to 32x in 2010 and is forecast to fall further to 25x by 2013.

Figure 6: Leverage (Assets/Equity) for European Bank Sector

20x

25x

30x

35x

40x

45x

50x

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012


Banks can only achieve similar or higher levels of ROE to the past whilst simultaneously deleveraging via an expansion in the return on assets. ROA expansion is not impossible; indeed the industry’s ROA trended higher from the 35-40bp range achieved in the 1980s/1990s to nearer 50bp in the pre crisis 2000s. From 27bp currently, we do indeed expect ROAs to recover to around 50-55bp by 2012/2013.


21 March 2011 5

Figure 7: Return on Assets for European Bank Sector

-0.10%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012


But is that enough? At an ROA of c50bp, for the sector to achieve an ROE of 17.5% would require leverage of c35x. That would be a return to 2007 levels of leverage, something we would consider remote in the extreme. So how much more would ROAs need to rise to hit these ROE targets? The answer depends on the level of leverage taken.

Figure 8 takes the ROE targets and converts them into an ROA target based on the assumption that the leverage for each bank returns to the level of the 1990s (giving a simple average leverage of 26x). On this basis, the sector’s ROA would need to rise to 72bp. For reference, the highest ROAs generated by the sector were 70bp in 2000 and 69bp in 2006 (the Appendix shows full annual details of ROA, leverage and ROE by bank). If sector leverage was set at 20x, then the required ROA would need to reach 88bp, to meet the ROE targets.

Figure 8: Implied return on assets target for eleven major European banks

0.88%

0.72%0.62%

0.55% 0.53% 0.50%0.43%

0.00%0.10%0.20%0.30%0.40%0.50%0.60%0.70%0.80%0.90%1.00%

Post CrisisROA Target

(on 20xLeverage)

Post CrisisROA Target(on 1990sLeverage)

AverageROA 2000-

07

Our 2013Forecast

AverageROA 1980-

07

AverageROA 1990s

AverageROA 1980s



21 March 2011 6

At the individual bank level, the required ROA similarly gets very challenging. Figure 9 shows required ROAs assuming (1) leverage returns to the 1990s levels and (2) the leverage we include in our 2013 forecasts. As with the ROE targets, whilst the required ROA at most UK banks is not dissimilar from historical levels, the implied ROAs at the Swiss banks, French banks and Deutsche Bank all look ambitious.

Figure 9: Implied ROA from ROE target

Assume Leverage of 1990s, ROE target implies: Implied ROA

ROA of: Leverage of: ROA in 1980s

ROA in 1990s

ROA in 2000-07

ROA in 1980-07

vs 1980s

vs 1990s

vs 2000-07

vs 1980-07

Credit Suisse 0.76% 25x 0.51% 0.28% 0.33% 0.38% +49% +169% +134% +102%

UBS 0.95% 23x - 0.33% 0.45% 0.38% - +187% +113% +148%

Deutsche Bank 0.60% 28x 0.32% 0.29% 0.42% 0.34% +87% +112% +45% +80%

SocGen 0.56% 33x 0.23% 0.28% 0.45% 0.32% +141% +98% +23% +77%

Standard Chartered 0.97% 21x 0.32% 0.80% 0.88% 0.65% +206% +21% +10% +49%

RBS (Pro Forma) 0.68% 22x 0.65% 0.47% 0.62% 0.57% +6% +45% +10% +20%

HSBC 1.04% 16x - 1.07% 0.98% 1.03% - -3% +6% +1%

Lloyds Banking Group (Pro Forma) 0.74% 22x 0.56% 0.99% 0.77% 0.77% +32% -25% -4% -4%

Barclays 0.57% 26x 0.64% 0.48% 0.61% 0.58% -12% +18% -7% -1%

BNP Paribas 0.44% 34x 0.23% 0.20% 0.52% 0.30% +88% +120% -16% +45%

Swedbank 0.57% 31x - 0.32% 0.75% 0.52% - +78% -23% +10%

Simple Average of 11 Banks 0.72% 26x 0.43% 0.50% 0.62% 0.53% +65% +43% +17% +35%

Assume our 2013 Leverage forecast, ROE target

implies: Implied ROA


ROA in 1990s

ROA in 2000-07

ROA in 1980-07

Vs 1980s

vs 1990s

vs 2000-07

vs 1980-07

UBS 0.92% 24x - 0.33% 0.45% 0.38% - +176% +104% +139%

Credit Suisse 0.62% 31x 0.51% 0.28% 0.33% 0.38% +22% +120% +91% +65%

SocGen 0.71% 26x 0.23% 0.28% 0.45% 0.32% +204% +149% +55% +123%


Lloyds Banking Group (Pro Forma) 1.02% 16x 0.56% 0.99% 0.77% 0.77% +81% +4% +33% +32%

Swedbank 0.91% 20x - 0.32% 0.75% 0.52% - +182% +21% +73%

RBS (Pro Forma) 0.74% 20x 0.65% 0.47% 0.62% 0.57% +14% +56% +19% +29%

HSBC 1.02% 16x - 1.07% 0.98% 1.03% - -5% +4% -1%

Deutsche Bank 0.42% 41x 0.32% 0.29% 0.42% 0.34% +30% +47% +1% +25%

BNP Paribas 0.51% 30x 0.23% 0.20% 0.52% 0.30% +118% +154% -2% +67%



Finally, Figure 10 shows the implied ROA that these ROE targets require based on a standardised 20x leverage. Again, the message is clear – that the implied ROA consistent with the ROE targets looks ambitious, and to be achieved would likely require an increase in leverage, which is extremely unlikely2.

2 Note that the leverage analysis is based on balance sheets as disclosed, which means it will be distorted over time by changes in accounting regimes, the biggest of which was the move from local GAAP to IFRS and with it the grossing up of derivative exposures. Restating the balance sheets on a net basis would have the effect of lowering the leverage and increasing the required ROA which would make these implied ROA targets look even more demanding.


21 March 2011 7

Figure 10: Implied ROA from ROE target, on leverage of 20x

Assume Leverage of 20x, ROE target implies: Implied ROA


ROA in 1990s

ROA in 2000-07

ROA in 1980-07

Vs 1980s

vs 1990s

vs 2000-07

vs 1980-07

Credit Suisse 0.95% 20x 0.51% 0.28% 0.33% 0.38% +86% +236% +192% +152%

UBS 1.10% 20x - 0.33% 0.45% 0.38% - +231% +145% +187%

Deutsche Bank 0.85% 20x 0.32% 0.29% 0.42% 0.34% +163% +198% +105% +153%

SocGen 0.93% 20x 0.23% 0.28% 0.45% 0.32% +299% +226% +103% +192%

BNP Paribas 0.75% 20x 0.23% 0.20% 0.52% 0.30% +221% +275% +44% +147%

Barclays 0.75% 20x 0.64% 0.48% 0.61% 0.58% +16% +55% +23% +30%

RBS (Pro Forma) 0.75% 20x 0.65% 0.47% 0.62% 0.57% +16% +59% +21% +32%

Swedbank 0.90% 20x - 0.32% 0.75% 0.52% - +180% +20% +72%


Lloyds Banking Group (Pro Forma) 0.83% 20x 0.56% 0.99% 0.77% 0.77% +46% -16% +7% +7%

HSBC 0.83% 20x - 1.07% 0.98% 1.03% - -23% -16% -20%



The interplay of ROA, leverage and ROE It is clear that there is an important interplay between ROA, leverage and ROE. The level of one may directly impact the other. For example, rarely do we see evidence of bank management explicitly targeting ROA (although Citigroup has, see below). Instead, the debate is usually around ROE; except for Deutsche Bank, all of the recent profitability targets from European banks have been based on ROE, not ROA. That matters since to some extent management will “solve” their profit ambitions around ROE – by which we mean that if they have lots of leverage they may be willing to accept a lower ROA since they can still achieve their ROE target. Or vice versa.

Put another way, as leverage increased during the decade prior to the crisis, so we believe management were increasingly relaxed about accepting low ROA business since it still generated an acceptable ROE. But the key point for going forward is that the opposite is also true – the withdrawal of leverage will in turn mean that CEOs will focus more on extracting higher ROA. In practice, that means rejecting low ROA business and focussing on high ROA activities. So the idea that ROA may expand to help achieve these ROE targets is, in our judgement, reasonable. It’s just the degree of expansion that looks unrealistic. On our forecasts, we see leverage settling at around 25x for the sector. The last time leverage was at that level – in 1998 – the sector generated an ROA of 52bp and an ROE of 12%. Indeed, for the entire 1990s, leverage averaged 25x and ROA averaged 40bp, generating an ROE of 10%. Moving that ROA higher on the same leverage to achieve an ROE almost double that achieved historically looks unlikely.

Why have management set such high ratios? In the face of this analysis, one obvious question is why have management set such ambitious profitability targets, ones that the market clearly doesn’t believe (see later)? There are several possible explanations:

They are trying to galvanise their organisation to strive for higher returns.


21 March 2011 8

They believe they can control their ROA to largely compensate for lower levels of leverage. This might in turn reflect the extent to which they (voluntarily) diluted their ROA pre crisis, hence providing confidence in their ability to improve it post crisis.

They don’t believe leverage will be forced down on a permanent basis to such low levels.

However, it’s perhaps worth observing that regulators appear sceptical of banks’ ability to achieve some ROE targets. In their recent ‘Prudential Risk Outlook (2011)3’, the FSA note that:

“Although major UK banks continue to target returns on equity of 12 to 15%, those may not be achievable in future, even if economic growth remains on track. The logical corollary of higher equity capital requirements, which will reduce the riskiness of banks, is that shareholders should be willing to accept lower returns on equity”

Interestingly, it’s not just in Europe that ROE targeting is returning. At their investor day on 8 March 2011, Bank of America announced a return on tangible equity target of 15%. This compares to their 17-year average return of 15%. Previously, Citigroup announced a ROA target of between 1.25% and 1.50% for Citicorp (ie, excluding Citi Holdings). This compares to a ROA for the Citigroup/Citicorp business of 1%.

Figures 13 to 15 show the targeted ROE and implied ROA targets for each bank into an historical context.

3 See: http://www.fsa.gov.uk/Pages/Library/Corporate/pro/index.shtml , (page 12),

Figure 11: Citigroup ROA Targets

Figure 12: Bank of America ROE Targets

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

Average 1990-2007 Target

Citigroup Targeting a

ROA of between 1.25%

to 1.50% (on Citicorp)

14.9% 15.0%

0%1%2%3%4%5%6%7%8%9%

10%11%12%13%14%15%16%17%18%

Average 1990-2007 Target

Source: Company reports, Barclays Capital Source: Company reports, Barclays Capital


21 March 2011 9

Barclays

0%

5%

10%

15%

20%

25%

30%

Average ROE2000-07

Average ROE1980-07


Average ROE1980s

Average ROE1990s

Barclays

0.00%0.20%0.40%0.60%0.80%1.00%1.20%

AverageROA

1990s

AverageROA

1980-07

AverageROA

2000-07

Post CrisisROA

Target (on20x

Leverage)

Post CrisisROA

Target (on1990s

Leverage)

AverageROA

1980s

RBS (Pro Forma)

0%

5%

10%

15%

20%

25%

30%

Average ROE2000-07

Average ROE1980-07


Average ROE1980s

Average ROE1990s

RBS (Pro Forma)

0.00%0.20%0.40%0.60%0.80%1.00%1.20%

AverageROA

1990s

Post CrisisROA

Target (on20x

Leverage)

AverageROA

1980-07

AverageROA

2000-07

Post CrisisROA

Target (on1990s

Leverage)

AverageROA

1980s

Lloyds Banking Group (Pro Forma)

0%

5%

10%

15%

20%

25%

Average ROE2000-07

Average ROE1990s

Average ROE1980-07


Average ROE1980s

Lloyds Banking Group (Pro Forma)

0.00%0.20%0.40%0.60%0.80%1.00%1.20%

Post CrisisROA

Target (on20x

Leverage)

AverageROA

2000-07

AverageROA

1990s

AverageROA

1980-07

Post CrisisROA

Target (on1990s

Leverage)

AverageROA

1980s

HSBC

0%

5%

10%

15%

20%

25%

Average ROE2000-07

Average ROE1980-07

Average ROE1990s


Average ROE1980s

HSBC

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

Post CrisisROA

Target (on20x

Leverage)

AverageROA

2000-07

Post CrisisROA

Target (on1990s

Leverage)

AverageROA

1980-07

AverageROA

1990s

AverageROA

1980s

Source for all charts: Barclays Capital

Figure 13: ROE and implied ROA targets vs history


21 March 2011 10

Standard Chartered

0%

5%

10%

15%

20%

25%

Average ROE2000-07


Average ROE1990s

Average ROE1980-07

Average ROE1980s

Standard Chartered

0.00%0.10%0.20%0.30%0.40%0.50%0.60%0.70%0.80%

Post CrisisROA

Target (on20x

Leverage)

Post CrisisROA

Target (on1990s

Leverage)

AverageROA

2000-07

AverageROA

1980-07

AverageROA

1980s

AverageROA

1990s

Swedbank

0%

5%

10%

15%

20%

25%

Average ROE2000-07


Average ROE1980-07

Average ROE1990s

Average ROE1980s

Swedbank

0.00%0.20%0.40%0.60%0.80%1.00%1.20%

Post CrisisROA

Target (on1990s

Leverage)

Post CrisisROA

Target (on20x

Leverage)

AverageROA

1980s

AverageROA

2000-07

AverageROA

1980-07

AverageROA

1990s

UBS

0%

5%

10%

15%

20%

25%


Average ROE2000-07

Average ROE1980-07

Average ROE1990s

Average ROE1980s

UBS

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

Post CrisisROA

Target (on1990s

Leverage)

Post CrisisROA

Target (on20x

Leverage)

AverageROA 2000-

07

AverageROA 1980-

07

AverageROA

1990s

AverageROA

1980s

Credit Suisse

0%2%4%6%8%

10%

12%14%16%18%20%


Average ROE2000-07

Average ROE1980-07

Average ROE1980s

Average ROE1990s

Credit Suisse

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

Post CrisisROA

Target (on20x

Leverage)

Post CrisisROA

Target (on1990s

Leverage)

AverageROA

1980s

AverageROA 1980-

07

AverageROA 2000-

07

AverageROA

1990s


Figure 14: ROE and implied ROA targets vs history (Continued…)


21 March 2011 11

Deutsche Bank

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%


Average ROE2000-07

Average ROE1980-07

Average ROE1980s

Average ROE1990s

Deutsche Bank

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

Post CrisisROA

Target (on20x

Leverage)

Post CrisisROA

Target (on1990s

Leverage)

AverageROA 2000-

07

AverageROA 1980-

07

AverageROA

1980s

AverageROA

1990s

BNP Paribas

0%

5%

10%

15%

20%

25%

Average ROE2000-07


Average ROE1980s

Average ROE1980-07

Average ROE1990s

BNP Paribas

0.00%0.15%0.30%0.45%0.60%0.75%0.90%

Post CrisisROA

Target (on20x

Leverage)

Post CrisisROA

Target (on1990s

Leverage)

AverageROA

1980s

AverageROA

2000-07

AverageROA

1980-07

AverageROA

1990s

SocGen

0%2%4%6%8%

10%12%14%16%18%20%


Average ROE2000-07

Average ROE1980s

Average ROE1980-07

Average ROE1990s

SocGen

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

Post CrisisROA

Target (on20x

Leverage)

Post CrisisROA

Target (on1990s

Leverage)

AverageROA

2000-07

AverageROA

1980-07

AverageROA

1990s

AverageROA

1980s


Figure 15: ROE and implied ROA targets vs history (Continued…)


21 March 2011 12

Who do we believe and what’s in the price?

We share the market’s apparent scepticism about the ROE targets that have been recently announced across the sector. To estimate the degree of the market’s scepticism, Figure 16 attempts to calculate the implied ROE for each bank versus the target level. To do this, we have made cost of equity estimates (specific for each bank) and terminal growth assumptions (standardised at 3% except for the two Asian focussed banks where we estimate 5% for Standard Chartered and 4% for HSBC). The simple average of this exercise shows that current share prices are discounting an ROE of 11%, which is 37% below the average targeted ROE level (17.5%). The greatest degree of market scepticism is to be found at UBS, Deutsche Bank and SocGen, where the market is discounting an ROE around half the target level. By contrast, current share prices appear to give the greatest credibility to Standard Chartered’s and Credit Suisse’s targets. Put another way, the greatest upside from achieving these targets (the final column) would be found at UBS, Deutsche Bank and SocGen and the least at Standard Chartered and Credit Suisse.

Figure 16: What’s in the price?

ROE achieved in….…. Applying company

ROE, gives

P/TBV

Co Target

ROE COE Terminal Growth

Market Implied

ROE

Implied ROE vs Target 1980s 1990s

2000s (to 2007)

target P/TBV

Price Upside

UBS 1.48x 22.0% 8.6% 3.0% 11.3% -49% - 5.7% 20.8% 3.40x 130%

Deutsche Bank 0.94x 17.0% 9.3% 3.0% 8.9% -48% 8.3% 7.9% 15.4% 2.23x 137%

SocGen 0.96x 18.5% 10.0% 3.0% 9.8% -47% 13.0% 9.5% 16.7% 2.20x 129%

RBS (Pro Forma) 0.71x 15.0% 11.4% 3.0% 9.0% -40% 12.1% 9.9% 27.2% 1.43x 102%

Swedbank 1.40x 18.0% 8.5% 3.0% 10.7% -40% - 8.1% 22.0% 2.72x 94%

Lloyds BG(Pro Forma) 0.97x 16.5% 10.8% 3.0% 10.5% -36% 8.7% 21.2% 22.5% 1.73x 79%

BNP Paribas 1.08x 15.0% 9.4% 3.0% 9.9% -34% 13.3% 6.9% 19.4% 1.88x 75%

HSBC 1.57x 16.5% 8.4% 4.0% 10.9% -34% - 17.1% 22.4% 2.84x 81%

Credit Suisse 1.78x 19.0% 9.5% 3.0% 14.5% -24% 8.1% 6.5% 12.5% 2.48x 39%

Standard Chartered 2.02x 20.0% 10.3% 5.0% 15.7% -22% 5.2% 16.2% 22.4% 2.84x 41%

Simple Average 1.25x 17.5% 9.8% 3.4% 11.0% -37% 10.2% 11.0% 20.9% 2.33x 92%


Who would we back? The starting place is to think about where the target ROE appears most realistic – in part relative to history, in part in absolute terms. In addition, there is the issue of the quality of management, the portfolio of businesses and the potential regulatory changes. Figure 17 summarises the company-targeted ROE, the market-implied ROE, historical ROE and our own 2013 forecast ROE, but importantly note that our forecast does not incorporate Basel III. Bringing all of this together, we would cite ROE targets at HSBC, BNP Paribas and (relative to what the market is discounting) RBS as the most realistic. By contrast, we would be most sceptical on ROE targets set by UBS, SocGen and (reflecting the impact of Basel III) Credit Suisse.


21 March 2011 13

Figure 17: Company-targeted, market-implied and our ROE forecasts

ROE Our forecast vs:

Company

Target 1980 - 2007 Market Implied

Our Forecast (2013, Not

Basel III) Company

Target Market Implied History

UBS 22.0% 12.4% 11.3% 11.7% -10.3% +0.4% -0.7%

Standard C 20.0% 14.1% 15.7% 15.6% -4.4% -0.1% +1.5%

Credit Suisse 19.0% 8.8% 14.5% 17.8% -1.2% +3.3% +9.0%

SocGen 18.5% 12.8% 9.8% 11.7% -6.8% +1.9% -1.1%

Swedbank 18.0% 14.6% 10.7% 10.3% -7.7% -0.5% -4.4%

Deutsche Bank 17.0% 10.2% 8.9% 11.2% -5.8% +2.3% +1.0%

Lloyds BG (Pro Forma) 16.5% 17.1% 10.5% 12.6% -3.9% +2.0% -4.5%

HSBC 16.5% 19.7% 10.3% 15.3% -1.2% +4.9% -4.5%

BNP Paribas 15.0% 12.7% 9.9% 13.1% -1.9% +3.2% +0.4%

RBS (Pro Forma) 15.0% 15.9% 9.0% 11.1% -3.9% +2.1% -4.8%

Simple Average 17.8% 13.8% 11.1% 13.0% -4.7% +2.0% -0.8%

Source: Barclays Capital, Company data.


21 March 2011 14

APPENDIX


21 March 2011 15

Figure 18: EUROPEAN BANK SECTOR – DECOMPOSITION OF PROFITABILITY

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Pre provision profits as % Assets 0.97% 1.08% 1.09% 1.13% 1.05% 1.11% 1.25% 1.01% 1.18% 1.19% 1.11% 1.32% 1.27% 1.33% 1.04% 1.05% 1.07% 0.97% 1.10% 1.08%

Impairments as % Loans -0.43% -0.57% -0.71% -0.74% -0.66% -0.61% -0.65% -0.69% -0.49% -0.85% -0.80% -1.00% -1.22% -1.13% -0.71% -0.53% -0.44% -0.51% -0.58% -0.47%

Impairments as % Assets -0.32% -0.43% -0.55% -0.59% -0.52% -0.47% -0.49% -0.51% -0.37% -0.63% -0.59% -0.73% -0.85% -0.77% -0.46% -0.33% -0.26% -0.28% -0.30% -0.23%

Tax, minorities, other as % Assets -0.28% -0.28% -0.24% -0.25% -0.27% -0.30% -0.33% -0.22% -0.30% -0.22% -0.21% -0.25% -0.20% -0.29% -0.21% -0.26% -0.37% -0.30% -0.28% -0.28%

=Return on Assets 0.37% 0.36% 0.31% 0.29% 0.27% 0.35% 0.43% 0.29% 0.51% 0.33% 0.32% 0.35% 0.22% 0.27% 0.37% 0.46% 0.45% 0.40% 0.52% 0.57%

x Leverage (Assets/Tangible Equity) 29x 30x 32x 34x 38x 34x 28x 26x 26x 25x 25x 25x 24x 25x 23x 24x 26x 25x 24x 27x

= Return on Tangible Equity 10.5% 11.1% 9.9% 10.0% 10.3% 11.6% 12.3% 7.7% 13.0% 8.3% 7.9% 8.5% 5.4% 6.7% 8.5% 11.0% 11.5% 10.1% 12.4% 15.4%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1980s 1990s 2000s

(to 2007) 1997-07 1980-07

Pre provision profits as % Assets 1.15% 0.96% 0.88% 0.97% 1.03% 1.04% 1.07% 0.90% 0.45% 0.83% 0.95% 0.99% 1.05% 1.10% 1.11% 1.14% 1.00% 1.01% 1.09%

Impairments as % Loans -0.40% -0.52% -0.60% -0.57% -0.42% -0.39% -0.42% -0.49% -1.11% -1.63% -1.17% -0.90% -0.71% -0.63% -0.64% -0.74% -0.48% -0.49% -0.63%

Impairments as % Assets -0.19% -0.25% -0.28% -0.26% -0.19% -0.16% -0.18% -0.20% -0.44% -0.65% -0.48% -0.36% -0.29% -0.25% -0.49% -0.48% -0.21% -0.23% -0.41%

Tax, minorities, other as % Assets -0.26% -0.28% -0.27% -0.27% -0.25% -0.22% -0.20% -0.15% -0.09% -0.03% -0.20% -0.22% -0.27% -0.30% -0.27% -0.26% -0.24% -0.25% -0.26%

=Return on Assets 0.70% 0.43% 0.33% 0.44% 0.59% 0.65% 0.69% 0.55% -0.09% 0.15% 0.27% 0.41% 0.49% 0.55% 0.35% 0.39% 0.55% 0.53% 0.42%

x Leverage (Assets/Tangible Equity) 30x 30x 33x 31x 31x 32x 35x 36x 48x 38x 32x 30x 27x 25x 30x 25x 32x 30x 29x

= Return on Tangible Equity 20.8% 13.1% 10.8% 13.5% 18.3% 21.2% 23.7% 19.8% -4.2% 5.8% 8.6% 12.1% 13.3% 13.6% 10.5% 9.8% 17.7% 16.3% 12.3%



21 March 2011 16

Figure 19: BARCLAYS – DECOMPOSITION OF PROFITABILITY

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999





=Return on Assets 0.90% 1.02% 0.61% 0.47% 0.42% 0.63% 0.85% 0.22% 0.92% 0.39% 0.45% 0.01% -0.22% 0.20% 0.72% 0.82% 0.92% 0.61% 0.59% 0.74%


= Return on Tangible Equity 16.8% 21.4% 13.0% 10.3% 12.6% 12.1% 16.3% 4.0% 15.9% 7.7% 8.9% 0.3% -6.7% 5.9% 18.6% 20.1% 22.2% 17.2% 17.3% 19.9%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1980s 1990s 2000s

(to 2007) 1997-07 1980-07

Pre provision profits as % Assets 1.44% 1.41% 1.24% 1.23% 1.17% 0.94% 0.88% 0.87% 0.49% 0.67% 0.89% 1.60% 1.40% 1.15% 1.17% 1.40%

Impairments as % Loans -0.59% -0.66% -0.76% -0.62% -0.49% -0.65% -0.77% -0.88% -1.28% -1.69% -1.68% -0.76% -1.01% -0.68% -0.61% -0.83%

Impairments as % Assets -0.29% -0.34% -0.39% -0.32% -0.23% -0.22% -0.22% -0.25% -0.32% -0.46% -0.59% -0.58% -0.65% -0.28% -0.26% -0.52%

Tax, minorities, other as % Assets -0.28% -0.34% -0.26% -0.26% -0.27% -0.25% -0.18% -0.22% 0.08% -0.03% 0.03% -0.37% -0.26% -0.26% -0.29% -0.30%

=Return on Assets 0.88% 0.73% 0.59% 0.65% 0.68% 0.47% 0.48% 0.40% 0.25% 0.18% 0.33% 0.64% 0.48% 0.61% 0.62% 0.58%

x Leverage (Assets/Tangible Equity) 32x 31x 35x 37x 46x 71x 76x 77x 58x 43x 30x 21x 26x 51x 45x 31x

= Return on Tangible Equity 28.2% 22.6% 20.5% 23.9% 31.0% 33.5% 36.4% 30.8% 14.4% 7.6% 10.0% 13.0% 12.4% 28.4% 25.6% 17.2%

Figure 20: RBS (PRO FORMA) – DECOMPOSITION OF PROFITABILITY 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Pre provision profits as % Assets - - 1.34% 1.41% 1.55% 1.60% 1.65% 1.62% 1.57% 1.60% 1.41% 1.48% 1.65% 1.51% 1.44% 1.43% 1.02% 0.98% 1.45% 1.53%

Impairments as % Loans - - -0.52% -0.51% -0.64% -0.68% -0.67% -1.10% -0.39% -1.49% -1.13% -1.77% -1.74% -1.08% -0.56% -0.53% -0.45% -0.46% -0.54% -0.35%

Impairments as % Assets - - -0.45% -0.44% -0.50% -0.49% -0.47% -0.77% -0.30% -1.20% -0.92% -1.43% -1.39% -0.85% -0.41% -0.35% -0.28% -0.28% -0.32% -0.20%

Tax, minorities, other as % Assets - - -0.09% -0.30% -0.57% -0.47% -0.41% -0.26% -0.35% -0.11% -0.22% 0.01% -0.15% -0.29% -0.33% -0.35% -0.37% -0.26% -0.29% -0.49%

=Return on Assets - - 0.79% 0.68% 0.48% 0.64% 0.77% 0.59% 0.93% 0.29% 0.27% 0.06% 0.11% 0.37% 0.71% 0.72% 0.37% 0.43% 0.84% 0.83%

x Leverage (Assets/Tangible Equity) - - 20x 20x 25x 20x 17x 15x 16x 19x 18x 22x 26x 26x 24x 23x 23x 25x 13x 19x

= Return on Tangible Equity - - 15.5% 13.9% 12.2% 12.8% 12.9% 9.0% 15.1% 5.6% 4.9% 1.3% 2.7% 9.9% 17.0% 16.7% 8.4% 10.7% 10.8% 16.2%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1980s 1990s 2000s

(to 2007) 1997-07 1980-07

Pre provision profits as % Assets 1.50% 1.80% 1.86% 1.83% 1.50% 1.37% 1.37% 0.65% -0.04% 0.39% 0.81% 0.99% 1.08% 1.13% 1.54% 1.39% 1.49% 1.44% 1.47%



Tax, minorities, other as % Assets -0.69% -0.95% -1.00% -0.97% -0.42% -0.39% -0.39% -0.07% -0.66% 0.12% -0.23% -0.30% -0.48% -0.59% -0.32% -0.27% -0.61% -0.54% -0.39%

=Return on Assets 0.61% 0.56% 0.52% 0.52% 0.80% 0.74% 0.75% 0.44% -1.01% -0.18% -0.07% 0.22% 0.32% 0.33% 0.65% 0.47% 0.62% 0.64% 0.57%


= Return on Tangible Equity 25.5% 19.1% 19.4% 16.6% 34.8% 43.2% 35.2% 24.1% -83.5% -12.2% -3.2% 8.9% 11.1% 11.1% 12.1% 9.9% 27.2% 23.2% 15.9%



21 March 2011 17

Figure 21: LLOYDS BANKING GROUP (PRO FORMA) – DECOMPOSITION OF PROFITABILITY

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Pre provision profits as % Assets 1.74% 2.02% 1.78% 1.64% 1.72% 1.80% 1.95% 2.12% 2.16% 2.42% 2.40% 2.91% 2.71% 2.15% 2.14% 1.85% 1.86% 2.21% 2.42% 2.60% 1.71%

Impairments as % Loans -0.44% -0.48% -0.90% -0.71% -0.74% -0.76% -0.67% -3.78% -0.44% -5.29% -1.76% -2.06% -1.70% -1.05% -1.43% -0.85% -0.38% -0.59% -0.61% -0.61% -0.34%

Impairments as % Assets -0.33% -0.37% -0.71% -0.60% -0.66% -0.59% -0.47% -2.76% -0.33% -3.87% -1.38% -1.72% -1.32% -0.72% -0.80% -0.44% -0.22% -0.35% -0.36% -0.36% -0.22%

Tax, minorities, other as % Assets -0.43% -0.57% -0.29% -0.28% -0.50% -0.46% -0.46% 0.14% -0.56% 0.37% -0.50% -0.52% -0.59% -0.57% -0.39% -0.68% -0.57% -0.33% -0.76% -0.78% -0.52%

=Return on Assets 0.98% 1.09% 0.78% 0.76% 0.56% 0.75% 1.02% -0.49% 1.27% -1.07% 0.52% 0.67% 0.79% 0.86% 0.95% 0.73% 1.07% 1.53% 1.30% 1.46% 0.97%

x Leverage (Assets/Tangible Equity) 14x 15x 17x 18x 22x 17x 16x 17x 17x 24x 23x 22x 23x 23x 15x 32x 28x 25x 22x 9x 28x

= Return on Tangible Equity 13.9% 16.7% 13.6% 13.3% 12.6% 12.9% 16.8% -8.5% 21.8% -26.3% 11.8% 14.6% 18.1% 20.0% 14.6% 23.2% 29.9% 38.3% 29.1% 12.7% 27.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1980s 1990s 2000s

(to 2007) 1997-07 1980-07




Tax, minorities, other as % Assets -0.52% -0.55% -0.52% -0.25% -0.39% -0.32% -0.30% -0.54% 0.78% 1.39% 0.17% -0.06% -0.19% -0.30% -0.30% -0.57% -0.42% -0.48% -0.43%

=Return on Assets 0.97% 0.76% 0.64% 0.93% 0.82% 0.72% 0.74% 0.58% -0.58% 0.25% 0.07% 0.44% 0.71% 0.78% 0.56% 0.99% 0.77% 0.95% 0.77%



Figure 22: HSBC – DECOMPOSITION OF PROFITABILITY

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Pre provision profits as % Assets - - - - - - - - - - - - 1.94% 1.86% 1.52% 1.78% 1.96% 2.02% 1.89% 1.90%

Impairments as % Loans - - - - - - - - - - - - -1.62% -0.78% -0.19% -0.39% -0.33% -0.46% -1.07% -0.82%

Impairments as % Assets - - - - - - - - - - - - -0.99% -0.59% -0.14% -0.19% -0.17% -0.24% -0.55% -0.40%

Tax, minorities, other as % Assets - - - - - - - - - - - - -0.02% -0.35% -0.37% -0.43% -0.46% -0.50% -0.44% -0.47%

=Return on Assets - - - - - - - - - - - - 0.94% 0.92% 1.01% 1.15% 1.34% 1.29% 0.90% 1.03%

x Leverage (Assets/Tangible Equity) - - - - - - - - - - - - 12x 15x 16x 16x 15x 16x 18x 20x

= Return on Tangible Equity - - - - - - - - - - - - 11.6% 13.4% 16.6% 18.5% 19.5% 20.8% 15.8% 20.4%

HSBC 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1980s 1990s 2000s

(to 2007) 1997-07 1980-07

Pre provision profits as % Assets 1.76% 1.57% 1.52% 2.19% 2.21% 2.05% 1.87% 1.73% 1.24% 1.41% 1.38% 1.38% 1.45% 1.51% - 1.86% 1.86% 1.88% 1.86%

Impairments as % Loans -0.34% -0.67% -0.39% -1.41% -1.05% -1.11% -1.28% -1.80% -2.22% -2.61% -1.64% -1.35% -1.12% -0.96% - -0.71% -1.01% -0.95% -0.86%

Impairments as % Assets -0.15% -0.30% -0.18% -0.71% -0.56% -0.57% -0.62% -0.80% -0.88% -1.00% -0.62% -0.50% -0.41% -0.36% - -0.41% -0.49% -0.46% -0.45%

Tax, minorities, other as % Assets -0.51% -0.46% -0.46% -0.46% -0.51% -0.38% -0.33% -0.04% -0.16% -0.20% -0.16% -0.16% -0.19% -0.21% - -0.38% -0.39% -0.41% -0.39%

=Return on Assets 1.09% 0.81% 0.87% 1.02% 1.14% 1.10% 0.92% 0.89% 0.20% 0.21% 0.60% 0.72% 0.84% 0.94% - 1.07% 0.98% 1.01% 1.03%

x Leverage (Assets/Tangible Equity) 23x 22x 23x 21x 23x 21x 26x 25x 36x 29x 22x 20x 18x 16x - 16x 23x 22x 19x

= Return on Tangible Equity 25.1% 17.5% 19.8% 21.5% 26.0% 23.2% 23.6% 22.3% 7.0% 6.1% 13.0% 14.6% 15.2% 15.3% - 17.1% 22.4% 21.5% 19.7%



21 March 2011 18

Figure 23: STANDARD CHARTERED – DECOMPOSITION OF PROFITABILITY

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Pre provision profits as % Assets 1.83% 1.82% 1.48% 1.52% 1.47% 1.18% 1.43% -0.13% 1.50% 0.93% 1.34% 1.53% 2.17% 1.86% 1.69% 1.99% 2.19% 2.26% 2.40% 1.78%




=Return on Assets 0.68% 0.78% 0.52% 0.43% 0.32% 0.42% 0.49% -1.12% 0.79% -0.15% 0.13% 0.45% 0.27% 0.85% 0.87% 1.21% 1.42% 1.27% 0.94% 0.58%


= Return on Tangible Equity 15.7% 14.9% 10.9% 9.5% 8.5% 9.6% 11.5% -42.9% 18.6% -3.9% 2.8% 10.9% 5.2% 16.6% 21.7% 25.2% 25.7% 24.6% 18.3% 11.4%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1980s 1990s 2000s

(to 2007) 1997-07 1980-07





=Return on Assets 0.67% 0.62% 0.68% 0.85% 1.24% 1.11% 0.93% 0.93% 0.79% 0.77% 0.93% 0.85% 0.90% 0.92% 0.32% 0.80% 0.88% 0.89% 0.65%


= Return on Tangible Equity 21.1% 15.4% 17.7% 21.4% 24.7% 30.3% 26.5% 22.1% 21.1% 17.6% 15.3% 15.1% 15.6% 15.6% 5.2% 16.2% 22.4% 21.2% 14.1%

Figure 24: SWEDBANK – DECOMPOSITION OF PROFITABILITY

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Pre provision profits as % Assets - - - - - - - - - - - 1.33% 2.81% 1.56% 1.63% 1.42% 1.42% 0.53% 1.06% 0.92%

Impairments as % Loans - - - - - - - - - - - -0.33% -4.74% -2.75% -0.94% -0.56% -0.39% -0.27% -0.17% -0.11%

Impairments as % Assets - - - - - - - - - - - -0.30% -4.31% -2.39% -0.80% -0.48% -0.33% -0.23% -0.14% -0.08%

Tax, minorities, other as % Assets - - - - - - - - - - - -0.31% 0.83% 0.05% -0.02% -0.23% -0.30% -0.24% -0.25% -0.25%

=Return on Assets - - - - - - - - - - - 0.72% -0.67% -0.78% 0.81% 0.71% 0.80% 0.06% 0.67% 0.59%

x Leverage (Assets/Tangible Equity) - - - - - - - - - - - 52x 31x 45x 24x 24x 22x 25x 27x 32x

= Return on Tangible Equity - - - - - - - - - - - 37.3% -21.1% -35.4% 19.1% 17.0% 17.7% 1.5% 18.1% 18.7%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1980s 1990s 2000s

(to 2007) 1997-07 1980-07

Pre provision profits as % Assets 1.19% 0.98% 0.87% 1.07% 1.10% 1.36% 1.10% 1.09% 1.05% 0.89% 0.75% 0.71% 0.77% 0.78% - 1.41% 1.10% 1.03% 1.26%

Impairments as % Loans -0.19% -0.21% -0.24% -0.13% -0.07% -0.04% 0.02% -0.06% -0.25% -1.86% -0.42% -0.22% -0.21% -0.19% - -1.14% -0.11% -0.13% -0.66%

Impairments as % Assets -0.13% -0.14% -0.17% -0.10% -0.05% -0.03% 0.02% -0.04% -0.18% -1.30% -0.28% -0.14% -0.13% -0.12% - -1.01% -0.08% -0.10% -0.57%

Tax, minorities, other as % Assets -0.34% -0.29% -0.27% -0.33% -0.14% -0.28% -0.27% -0.24% -0.25% -0.15% -0.15% -0.13% -0.14% -0.15% - -0.08% -0.27% -0.26% -0.17%

=Return on Assets 0.72% 0.55% 0.43% 0.65% 0.91% 1.06% 0.85% 0.81% 0.62% -0.55% 0.33% 0.44% 0.50% 0.52% - 0.32% 0.75% 0.66% 0.52%


= Return on Tangible Equity 23.4% 17.5% 12.8% 17.5% 24.3% 31.2% 24.2% 25.1% 18.9% -16.1% 7.9% 10.4% 10.7% 10.3% - 8.1% 22.0% 19.5% 14.6%



21 March 2011 19

Figure 25: UBS – DECOMPOSITION OF PROFITABILITY

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Pre provision profits as % Assets - - - - - - - - - - 0.79% 1.26% 1.26% 1.92% 0.78% 0.93% 0.91% 0.93% 0.72% 0.99%

Impairments as % Loans - - - - - - - - - - -0.35% -0.89% -1.14% -1.49% -0.43% -0.76% -0.95% -0.83% -0.48% -0.37%

Impairments as % Assets - - - - - - - - - - -0.20% -0.51% -0.64% -0.80% -0.23% -0.36% -0.37% -0.27% -0.14% -0.10%

Tax, minorities, other as % Assets - - - - - - - - - - -0.19% -0.23% -0.13% -0.45% -0.17% -0.16% -1.15% -0.72% -0.15% -0.20%

=Return on Assets - - - - - - - - - - 0.40% 0.52% 0.49% 0.67% 0.38% 0.42% -0.61% -0.06% 0.43% 0.68%

x Leverage (Assets/Tangible Equity) - - - - - - - - - - 16x 17x 17x 16x 13x 18x 33x 45x 22x 34x

= Return on Tangible Equity - - - - - - - - - - 6.4% 8.9% 8.5% 10.4% 5.2% 7.4% -19.9% -2.8% 9.7% 22.9%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1980s 1990s 2000s

(to 2007) 1997-07 1980-07

Pre provision profits as % Assets 1.01% 0.62% 0.39% 0.62% 0.67% 0.61% 0.63% -0.15% -1.15% 0.02% 0.60% 0.59% 0.64% 0.70% - 1.05% 0.55% 0.64% 0.83%

Impairments as % Loans 0.05% -0.21% -0.05% -0.05% 0.08% 0.15% 0.05% -0.07% -0.90% -0.58% -0.05% -0.18% -0.19% -0.19% - -0.77% -0.01% -0.16% -0.43%

Impairments as % Assets 0.01% -0.04% -0.01% -0.01% 0.01% 0.02% 0.01% -0.01% -0.14% -0.11% -0.01% -0.04% -0.04% -0.04% - -0.36% 0.00% -0.05% -0.20%

Tax, minorities, other as % Assets -0.24% -0.15% -0.09% -0.14% -0.16% 0.11% -0.07% -0.04% 0.29% -0.08% -0.06% -0.15% -0.17% -0.18% - -0.35% -0.10% -0.17% -0.24%

=Return on Assets 0.78% 0.42% 0.29% 0.47% 0.52% 0.74% 0.56% -0.20% -1.01% -0.17% 0.52% 0.40% 0.44% 0.49% - 0.33% 0.45% 0.42% 0.38%


= Return on Tangible Equity 26.7% 16.9% 12.6% 23.9% 30.8% 42.5% 33.7% -20.8% -78.5% -8.9% 18.1% 12.8% 12.0% 11.7% - 5.7% 20.8% 17.8% 12.4%

Figure 26: CREDIT SUISSE – DECOMPOSITION OF PROFITABILITY

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999


Impairments as % Loans - - - - - - - - - - -2.32% -1.19% -1.02% -1.63% -0.69% -0.85% -0.54% -1.03% -1.27% -0.88%

Impairments as % Assets - - - - - - - - - - -1.10% -0.60% -0.52% -0.80% -0.33% -0.38% -0.23% -0.39% -0.39% -0.22%

Tax, minorities, other as % Assets - - - - - - - - - - 0.13% -0.32% -0.37% -0.51% -0.26% -0.19% -1.03% -0.67% 0.13% -0.15%

=Return on Assets 0.47% 0.40% 0.41% 0.47% 0.52% 0.59% 0.58% 0.50% 0.51% 0.66% 0.12% 0.45% 0.44% 0.58% 0.36% 0.30% -0.56% 0.07% 0.46% 0.62%


= Return on Tangible Equity 6.7% 5.8% 6.4% 8.1% 9.4% 8.8% 8.6% 7.7% 9.1% 10.4% 1.8% 12.5% 11.5% 12.1% 7.8% 7.0% -18.5% 1.9% 12.6% 15.9%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1980s 1990s2000s

(to 2007) 1997-07 1980-07

Pre provision profits as % Assets 0.96% 0.09% -0.17% 0.24% 0.64% 0.43% 0.81% 0.70% -0.91% 0.85% 0.68% 0.74% 0.83% 0.93% 0.67% 1.10% 0.46% 0.59% 0.77%

Impairments as % Loans -0.59% -0.89% -1.31% -0.31% -0.05% 0.07% 0.05% -0.10% -0.35% -0.22% -0.01% -0.18% -0.22% -0.27% N/A -1.14% -0.39% -0.57% -0.81%

Impairments as % Assets -0.12% -0.17% -0.25% -0.06% -0.01% 0.01% 0.01% -0.02% -0.07% -0.05% 0.00% -0.04% -0.05% -0.06% N/A -0.50% -0.08% -0.15% -0.31%

Tax, minorities, other as % Assets -0.30% 0.02% -0.02% -0.10% -0.08% 0.04% 0.04% -0.10% 0.32% -0.17% -0.16% -0.23% -0.26% -0.30% N/A -0.32% -0.06% -0.11% -0.21%

=Return on Assets 0.54% -0.07% -0.43% 0.08% 0.55% 0.48% 0.87% 0.58% -0.66% 0.63% 0.51% 0.47% 0.52% 0.58% 0.51% 0.28% 0.33% 0.34% 0.38%


= Return on Tangible Equity 16.0% -2.9% -19.1% 4.7% 22.8% 20.0% 34.8% 24.0% -36.7% 23.8% 19.6% 17.4% 17.6% 17.8% 8.1% 6.5% 12.5% 11.9% 8.8%



21 March 2011 20

Figure 27: DEUTSCHE BANK – DECOMPOSITION OF PROFITABILITY

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999





=Return on Assets 0.25% 0.22% 0.17% 0.31% 0.30% 0.47% 0.43% 0.25% 0.41% 0.41% 0.28% 0.33% 0.38% 0.41% 0.24% 0.33% 0.27% 0.10% 0.30% 0.22%



2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1980s 1990s2000s

(to 2007) 1997-07 1980-07

Pre provision profits as % Assets 0.81% 0.34% 0.74% 0.50% 0.60% 0.68% 0.66% 0.52% -0.24% 0.47% 0.33% 0.45% 0.46% 0.48% 1.34% 1.04% 0.61% 0.61% 1.02%



Tax, minorities, other as % Assets 0.78% -0.21% -0.45% -0.18% -0.25% -0.25% -0.16% -0.10% 0.11% -0.06% -0.12% -0.13% -0.14% -0.15% -0.57% -0.44% -0.10% -0.14% -0.39%

=Return on Assets 1.53% 0.02% 0.05% 0.17% 0.30% 0.39% 0.48% 0.38% -0.19% 0.27% 0.14% 0.24% 0.26% 0.28% 0.32% 0.29% 0.42% 0.36% 0.34%



Figure 28: BNP PARIBAS – DECOMPOSITION OF PROFITABILITY

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999




Tax, minorities, other as % Assets -0.09% -0.15% -0.21% -0.19% -0.15% -0.21% -0.19% -0.16% -0.19% -0.11% -0.02% -0.02% -0.07% 0.01% -0.05% -0.09% -0.06% -0.20% -0.19% -0.26%

=Return on Assets 0.18% 0.20% 0.18% 0.18% 0.19% 0.22% 0.33% 0.30% 0.28% 0.27% 0.11% 0.20% 0.14% 0.07% 0.11% 0.12% 0.22% 0.30% 0.33% 0.39%



2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1980s 1990s2000s

(to 2007) 1997-07 1980-07





=Return on Assets 0.59% 0.53% 0.43% 0.50% 0.55% 0.52% 0.54% 0.50% 0.14% 0.26% 0.36% 0.40% 0.44% 0.44% 0.23% 0.20% 0.52% 0.47% 0.30%





21 March 2011 21

Figure 29: SOCGEN – DECOMPOSITION OF PROFITABILITY

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Pre provision profits as % Assets - 0.98% 1.02% 0.99% 0.84% 1.06% 1.52% 1.11% 1.10% 1.09% 0.98% 0.95% 0.86% 0.82% 0.61% 0.66% 0.67% 0.80% 0.83% 0.94%

Impairments as % Loans - -0.88% -0.97% -1.05% -0.85% -1.01% -1.27% -0.81% -0.65% -0.64% -0.85% -0.66% -0.77% -0.88% -0.57% -0.60% -0.58% -0.89% -1.08% -0.52%

Impairments as % Assets - -0.66% -0.74% -0.80% -0.65% -0.76% -0.97% -0.63% -0.50% -0.49% -0.64% -0.47% -0.47% -0.46% -0.29% -0.30% -0.27% -0.36% -0.38% -0.17%

Tax, minorities, other as % Assets - -0.14% -0.12% -0.05% -0.08% -0.14% -0.23% -0.17% -0.25% -0.23% -0.09% -0.19% -0.14% -0.11% -0.07% -0.11% -0.14% -0.16% -0.18% -0.30%

=Return on Assets - 0.18% 0.17% 0.14% 0.12% 0.16% 0.31% 0.30% 0.35% 0.36% 0.25% 0.29% 0.25% 0.25% 0.25% 0.25% 0.27% 0.29% 0.27% 0.47%

x Leverage (Assets/Tangible Equity) - 72x 72x 81x 77x 65x 54x 46x 44x 42x 38x 31x 30x 31x 30x 28x 29x 34x 42x 37x

= Return on Tangible Equity - 13.0% 12.3% 11.1% 9.0% 10.3% 16.8% 14.0% 15.1% 15.3% 9.6% 9.0% 7.6% 7.7% 7.6% 7.0% 7.7% 9.7% 11.4% 17.3%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1980s 1990s2000s

(to 2007) 1997-07 1980-07




Tax, minorities, other as % Assets -0.35% -0.20% -0.18% -0.28% -0.32% -0.30% -0.31% -0.57% -0.15% 0.02% -0.20% -0.27% -0.30% -0.33% -0.16% -0.15% -0.31% -0.29% -0.20%

=Return on Assets 0.60% 0.44% 0.28% 0.48% 0.55% 0.61% 0.58% 0.09% 0.18% 0.03% 0.32% 0.37% 0.41% 0.45% 0.23% 0.28% 0.45% 0.42% 0.32%





21 March 2011 22

ANALYST(S) CERTIFICATION(S)

We, Simon Samuels, Mike Harrison, Jeremy Sigee, Rohith Chandra-Rajan, Kiri Vijayarajah, Antonio Rizzo and Carlos Cobo Catena, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuersreferred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer tohttp://publicresearch.barcap.com or call 1-212-526-1072.

The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's totalrevenues, a portion of which is generated by investment banking activities.

Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA.These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSERule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account.

On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private investmentmanagement businesses. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc.

Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in othertypes of research products, whether as a result of differing time horizons, methodologies, or otherwise.

Materially Mentioned Stocks (Ticker, Date, Price)

BNP Paribas (BNPP.PA, 18-Mar-2011, EUR 52.00), 1-Overweight/2-Neutral

Credit Suisse Group AG (CSGN.VX, 18-Mar-2011, CHF 38.01), 3-Underweight/2-Neutral

Deutsche Bank AG (DBKGn.DE, 18-Mar-2011, EUR 40.41), 1-Overweight/2-Neutral

HSBC Holdings PLC (HSBA.L, 18-Mar-2011, GBP 6.23), 1-Overweight/2-Neutral

Lloyds Banking Group PLC (LLOY.L, 18-Mar-2011, GBP 0.60), 3-Underweight/2-Neutral

Royal Bank of Scotland Group PLC (RBS.L, 18-Mar-2011, GBP 0.41), 1-Overweight/2-Neutral

Société Générale (SOGN.PA, 18-Mar-2011, EUR 46.44), 2-Equal Weight/2-Neutral

Standard Chartered PLC (STAN.L, 18-Mar-2011, GBP 15.93), 2-Equal Weight/2-Neutral

Swedbank AB (SWEDa.ST, 21-Mar-2011, SEK 108.80), 1-Overweight/2-Neutral

UBS AG (UBSN.VX, 18-Mar-2011, CHF 16.31), 3-Underweight/2-Neutral

Guide to the Barclays Capital Fundamental Equity Research Rating System:

Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitionsbelow) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the “sectorcoverage universe”).

In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investorsshould carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.

Stock Rating

1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable orto comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisorycapacity in a merger or strategic transaction involving the company.

Sector View

1-Positive - sector coverage universe fundamentals/valuations are improving.

2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.

3-Negative - sector coverage universe fundamentals/valuations are deteriorating.


21 March 2011 23

IMPORTANT DISCLOSURES CONTINUED

Below is the list of companies that constitute the "sector coverage universe":

European Banks

Allied Irish Banks PLC (ALBK.I) Banca Monte dei Paschi di Siena (BMPS.MI) Banco Bilbao Vizcaya Argentaria S.A. (BBVA.MC)

Banco Popular (POP.MC) Banco Sabadell (SABE.MC) Banco Santander SA (SAN.MC)

Bank of Ireland (BKIR.I) Bankinter (BKT.MC) BNP Paribas (BNPP.PA)

Commerzbank AG (CBKG.DE) Credit Agricole SA (CAGR.PA) Credit Suisse Group AG (CSGN.VX)

Deutsche Bank AG (DBKGn.DE) Deutsche Postbank AG (DPBGn.DE) HSBC Holdings PLC (HSBA.L)

Intesa Sanpaolo (ISP.MI) Julius Baer (BAER.VX) KBC (KBC.BR)

Lloyds Banking Group PLC (LLOY.L) Royal Bank of Scotland Group PLC (RBS.L) Skandinaviska Enskilda Banken AB (SEBa.ST)

Société Générale (SOGN.PA) Standard Chartered PLC (STAN.L) Swedbank AB (SWEDa.ST)

UBI Banca (UBI.MI) UBS AG (UBSN.VX) UniCredit (CRDI.MI)

Distribution of Ratings:

Barclays Capital Inc. Equity Research has 1728 companies under coverage.

43% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 54% ofcompanies with this rating are investment banking clients of the Firm.

43% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 46% ofcompanies with this rating are investment banking clients of the Firm.

12% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 36% ofcompanies with this rating are investment banking clients of the Firm.

Guide to the Barclays Capital Price Target:

Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock willtrade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price target over the same 12-month period.

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Barclays Capital Canada Inc. (BCC, Toronto)

Johannesburg

Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg)

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