outlook for investment banking

24
April 1, 2008 Outlook for Investment Banking & Capital Market Financials The industry is facing the most severe investment banking crisis in 30 years. Morgan Stanley and Oliver Wyman — in this joint report — estimate that six quarters of industry earnings will have been wiped out from marks and weaker revenues to April 2008. We forecast underlying investment banking revenue pools to be down ~(20)% in 2008 before a further US$75 billion+ of marks in our base case. Our base case includes credit revenues down 60% and IBD down 40%. Our bear case has total revenues including marks down 45% on 2007. We expect longer term RoEs to fall as banks seek to delever and regulators ask banks to hold more cushion. We estimate half of the increase in RoEs in the last four years has come from higher leverage, which we think will start to be reduced when ‘log-jammed’ credit clears. While cautious near term, we are optimistic further out as the cycle turns and we see numerous opportunities for rebound and growth, including the return of credit distribution, albeit in a very different form. Nick Studer [email protected] +44 (0) 20 7 333 8333 James Davis [email protected] +44 (0) 20 7 333 8333 Morgan Stanley has revised its estimates for CSG, DBK and UBS. Please contact Morgan Stanley for details on new estimates of earnings, book value and valuation discussion. This valuation section solely reflects the views of Morgan Stanley Research, not Oliver Wyman Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. Customers of Morgan Stanley in the US can receive independent, third-party research on companies covered in Morgan Stanley Research, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 1-800-624-2063 to request a copy of this research. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-US affiliates are not registered pursuant to NASD/NYSE rules Morgan Stanley & Co. International plc+ Huw van Steenis [email protected] +44 (0)20 7425 9747 MORGAN STANLEY RESEARCH EUROPE Industry View Cautious

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Page 1: Outlook for Investment Banking

April 1, 2008

Outlook for Investment Banking & Capital Market Financials

• The industry is facing the most severe investment banking crisis in 30 years. Morgan Stanley and Oliver Wyman — in this joint report — estimate that six quarters of industry earnings will have been wiped out from marks and weaker revenues to April 2008.

• We forecast underlying investment banking revenue pools to be down ~(20)% in 2008 before a further US$75 billion+ of marks in our base case. Our base case includes credit revenues down 60% and IBD down 40%. Our bear case has total revenues including marks down 45% on 2007.

• We expect longer term RoEs to fall as banks seek to delever and regulators ask banks to hold more cushion. We estimate half of the increase in RoEs in the last four years has come from higher leverage, which we think will start to be reduced when ‘log-jammed’ credit clears.

• While cautious near term, we are optimistic further out as the cycle turns and we see numerous opportunities for rebound and growth, including the return of credit distribution, albeit in a very different form.

Nick Studer [email protected] +44 (0) 20 7 333 8333 James Davis [email protected] +44 (0) 20 7 333 8333

Morgan Stanley has revised its estimates for CSG, DBK and UBS. Please contact Morgan Stanley for details on new estimates of earnings, book value and valuation discussion. This valuation section solely reflects the views of Morgan Stanley Research, not Oliver Wyman

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. Customers of Morgan Stanley in the US can receive independent, third-party research on companies covered in Morgan Stanley Research, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 1-800-624-2063 to request a copy of this research. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-US affiliates are not registered pursuant to NASD/NYSE rules

Morgan Stanley & Co. International plc+

Huw van Steenis [email protected] +44 (0)20 7425 9747

M O R G A N S T A N L E Y R E S E A R C H E U R O P E

Industry View Cautious

Page 2: Outlook for Investment Banking

2

M O R G A N S T A N L E Y R E S E A R C H

April 1, 2008 Outlook for Investment Banking & Capital Market Financials

Investment Case The global securities markets are in the midst of profound cyclical and structural change. This joint Morgan Stanley- Oliver Wyman research project seeks to explore the outlook and implications for the leading capital market banks, although includes wider implications for a variety of financials. While the industry conclusions are largely joint, any stock-specific or valuation sections solely reflect the views of Morgan Stanley Research, not Oliver Wyman. We would like to express our thanks to the business leaders who shared their views and feedback on our forecasts.

The current crisis in 2008

Investment banking and capital markets competitors look set to experience the worst hit to earnings in twenty years.

• We estimate that already nearly six quarters of industry earnings will have been wiped out, largely by MTM losses,

in the first three quarters of the downturn to Easter 2008. This already starts to rival the 1989/90 downturn, which was the most severe of the five crises in the last 20 years, wiping out six-and-a-half quarters of industry earnings. It also looks more severe than the Dot Com or 94/95 Mexican crises (see Exhibit 1 and 7).

• A number of the industry leaders we’ve interviewed share our sense of some parallels to the 1989 crisis: after a long period of rising leverage, a sharp deterioration in credit (then LBOs, now US mortgages), the liquidity crisis that put Drexel out of business, as well as broader bank funding and credit issues (the S&L crisis). As in 1989-92, today banks’ credit spreads trade outside the equivalently rated industrials, leading to further credit contraction and substantial yield curve steepening and fiscal response was needed.

Exhibit 1 Severity of recent capital market crises

4.1Q (excludes 2-3Q offines and legal fees)7Dot.com, Enron

(2000-01)

6.6Q6Junk Bond(1989-90)

3 so far8-10 est. total

2

4

1

Duration of crisisTime (in quarters) until earnings returned to pre-crisis levels

5.9Q so far7.5-9.5Q est. total

Sub-prime, Liquidity(2007-)

1.3QAsia, LTCM, and Russia(1997-99)

5.1QMexico (1994-95)

4.1QBlack Monday (1987)

Total crisis severity Earnings lost (in no. of pre-crisis quarter earnings) during duration of crisisCrisis

50%

400%

300%

150%

300%

500%

Depth of crisisTotal industry earnings in the worst quarter as % of pre-crisis earnings

-500% -250% 0% 0 5 100 5 10

Source: Company data, SIFMA, Oliver Wyman Analysis

Page 3: Outlook for Investment Banking

3

M O R G A N S T A N L E Y R E S E A R C H

April 1, 2008 Outlook for Investment Banking & Capital Market Financials

Our industry forecasts for 2008 suggest strength in a number of areas, but these will not be enough to rescue revenues or earnings, which are likely to be once again held back by major MTM losses and a pronounced fall in credit and IBD revenues.

• 1H07 and ongoing growth pockets in 2H significantly dampened the effect of the losses last year (see Exhibit 2).

• In our 2008 base case we are forecasting a reduction in revenues of ~20% before marks, incremental marks of US$60-100 billion, and overall post-mark revenues down a further 18% in 2008 (Exhibit 3).

• Global imbalances are creating a strong market for FX, rates, commodities, and equities: high volatility is driving strong volumes, and reduced risk capital from some weakened players is leading to a material widening in bid/offer spreads. Those players with strong and efficient flow businesses and the capital to express proprietary trades (yield curve steepening) will have a useful natural hedge for earnings in 2008. This said, we do expect a slowing from the 1Q growth rate.

• Asia, emerging markets and FIG funding are also likely to perform well in 2008, we think, together with multiple niche growth areas. However, it is clear that credit and IBD will be sharply weaker. We forecast IBD revenues to be down ~45% in our base case and credit revenues down ~60% in our base case.

• The substantial and sharp moves in credit markets, intense funding pressures, and a reduction in aggregate leverage continue to cause us real concern, driving our near-term caution. Low visibility and a wide range of outcomes perhaps make estimating tougher than most years.

• The biggest risks to our view are around liquidity and deleveraging, with potential for major downside, but we feel swift and repeated policy intervention is reducing the tail risks in markets. Our bull case has revenues before losses down 15% or post losses up 12% in 2008. Our bear case, on the other hand, has revenues before losses falling 30%, or including losses 45%.

Exhibit 2 2005-08 industry revenue evolution: bear, base and bull case scenarios

0

50

100

150

200

250

300

350

Pre- and post- loss revenues by productIndustry revenues 2005-08 Base case, $BN

Pre- and post- loss revenue scenariosIndustry revenues 2008, $BN

IBD

EMG

Equities

CommodsCredit

Volatility

$255BN$210BN $315BN$275BN

-55%

-10%

-10%

-15%-70%

-15%

-5%

-45%

-5%

0%

-60%

-10%

-35%

10%

10%

5%-60%

-5%

Rev NetRev

Bear-30% -45%

Base-20% -18%

Bull-15% 12%

Rev NetRev

Rev NetRev

2005 2006 2007 NetRev

2008Base

NetRev

$112BN

$80 BN

$80 BN

$110 BN

$40 BN

Source: Oliver Wyman data and analysis, Morgan Stanley Research

Page 4: Outlook for Investment Banking

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M O R G A N S T A N L E Y R E S E A R C H

April 1, 2008 Outlook for Investment Banking & Capital Market Financials

Exhibit 3

Revenue outlook

Investor demand continues to drive growth in Oil, P&G, precious metalsRisks lie in deleveraging bursting price bubbleGrowth in niche adjacencies, but small overall

10Flat to slightly down (-5%)

Commodities

Trading environment less benevolent but growth across client segmentsAsia particularly strong

70Shrinkage(-5-10%)

FX and Rates

Growth in local products to local clients as demand increases in sophisticationDramatic growth in intra-EM flows

15 Modest Shrinkage (-5%)

Emerging markets

Volatility drives volumes; Tough prop market and margin pressureStability in structured product, less so in Prime Brokerage

95 Flat(0%)

Equities

-18%

-20%

Continued contraction(Down -60%)

Contraction(Down -45%)

07-08 growth

170

(60-100)

250

15

45

08 revs $BN

Total ex losses

Total inc losses

Further write-downs in lev fin, US CRE and ABS and monolinesCredit losses

Decline in large-ticket lev fin, M&A and ECMMove into smaller-ticket deals, “recovery” buy-outs, carve-outsSmaller markets (esp Asia) remaining strong

Corporate finance

Flow trading supported by volatility and hedgingDeterioration in EU residential and global commercialGrowth in distressed, stressed and principal, private placement models, FIG

Credit

Key areasProduct area

Investor demand continues to drive growth in Oil, P&G, precious metalsRisks lie in deleveraging bursting price bubbleGrowth in niche adjacencies, but small overall

10Flat to slightly down (-5%)

Commodities

Trading environment less benevolent but growth across client segmentsAsia particularly strong

70Shrinkage(-5-10%)

FX and Rates

Growth in local products to local clients as demand increases in sophisticationDramatic growth in intra-EM flows

15 Modest Shrinkage (-5%)

Emerging markets

Volatility drives volumes; Tough prop market and margin pressureStability in structured product, less so in Prime Brokerage

95 Flat(0%)

Equities

-18%

-20%

Continued contraction(Down -60%)

Contraction(Down -45%)

07-08 growth

170

(60-100)

250

15

45

08 revs $BN

Total ex losses

Total inc losses

Further write-downs in lev fin, US CRE and ABS and monolinesCredit losses

Decline in large-ticket lev fin, M&A and ECMMove into smaller-ticket deals, “recovery” buy-outs, carve-outsSmaller markets (esp Asia) remaining strong

Corporate finance

Flow trading supported by volatility and hedgingDeterioration in EU residential and global commercialGrowth in distressed, stressed and principal, private placement models, FIG

Credit

Key areasProduct area

Source: Oliver Wyman data and analysis, Morgan Stanley research

Exhibit 4 Explanation of industry revenues 2006-2007

0 100 200 300 400

-$72BN

$276

- $112

$204

- $17

Positive / neutral Impact

Negative Impacts

2007 Revenue

Asset write-downs

Adversely impacted products

Positively or unaffected products

2006 Revenue

2006-7 revenue evolution, $BN

$57

Strong performance in volatility products - Rates rebound from weak 06, strong growth in H2; FX with significant growth in H2

Good growth in Equities (24%) – both cash & derivatives strong; Prime Brokerage with mixed results in Q3/4 –refocus on tier 1 funds

Commodities flat – Strong Q1 offset by a deterioration in 2H Power & Gas and Oil

EMG - foreign capital inflows in Q3/4, rebound of EEMEA, continued boom in BRIC

IBD: Record H1 slowed in H2, overall up 25%

Credit: Very strong H1 followed by collapse in structured in H2, flow CDS better than expected causing overall annual decline of ~25-30%

Securitised Products: Very strong H1, but utter collapse in H2, causing overall annual decline of 40-45%

Total write-downs of $112 BN across the industry

0 100 200 300 400

-$72BN

$276

- $112

$204

- $17

Positive / neutral Impact

Negative Impacts

2007 Revenue

Asset write-downs

Adversely impacted products

Positively or unaffected products

2006 Revenue

2006-7 revenue evolution, $BN

$57

Strong performance in volatility products - Rates rebound from weak 06, strong growth in H2; FX with significant growth in H2

Good growth in Equities (24%) – both cash & derivatives strong; Prime Brokerage with mixed results in Q3/4 –refocus on tier 1 funds

Commodities flat – Strong Q1 offset by a deterioration in 2H Power & Gas and Oil

EMG - foreign capital inflows in Q3/4, rebound of EEMEA, continued boom in BRIC

IBD: Record H1 slowed in H2, overall up 25%

Credit: Very strong H1 followed by collapse in structured in H2, flow CDS better than expected causing overall annual decline of ~25-30%

Securitised Products: Very strong H1, but utter collapse in H2, causing overall annual decline of 40-45%

Total write-downs of $112 BN across the industry

-$72BN

$276

- $112

$204

- $17

Positive / neutral Impact

Negative Impacts

2007 Revenue

Asset write-downs

Adversely impacted products

Positively or unaffected products

2006 Revenue

2006-7 revenue evolution, $BN

$57

Strong performance in volatility products - Rates rebound from weak 06, strong growth in H2; FX with significant growth in H2

Good growth in Equities (24%) – both cash & derivatives strong; Prime Brokerage with mixed results in Q3/4 –refocus on tier 1 funds

Commodities flat – Strong Q1 offset by a deterioration in 2H Power & Gas and Oil

EMG - foreign capital inflows in Q3/4, rebound of EEMEA, continued boom in BRIC

IBD: Record H1 slowed in H2, overall up 25%

Credit: Very strong H1 followed by collapse in structured in H2, flow CDS better than expected causing overall annual decline of ~25-30%

Securitised Products: Very strong H1, but utter collapse in H2, causing overall annual decline of 40-45%

Total write-downs of $112 BN across the industry

Source: Oliver Wyman data and analysis

Page 5: Outlook for Investment Banking

5

M O R G A N S T A N L E Y R E S E A R C H

April 1, 2008 Outlook for Investment Banking & Capital Market Financials

Investment banking revenues continue to tilt further to EMEA and Asia in 2008

• The US now represents under half of industry profit pools and we forecast Asia + Europe could represent some ~60% of industry pre-mark revenues by the end of 2008 (more post marks — Exhibit 5). However, given the size of the marks, geographic growth alone is not enough to offset a decline at the industry level. While we see obvious risks in some regions, we think that growth rates will remain reasonable — as testified by the early reporters in 1Q.

Exhibit 5 2006-08 pre-loss revenues by region (US$ billion)

0

50

100

150

200

250

300

350

2006 2007 2008 base

$275 BN $315 BN $255 BN15% -20%

Americas

Europe

Asia16%

37%

47%

21%

40%

39%

19%

38%

42%

Source: Oliver Wyman data and analysis

One of our biggest concerns is regarding the shape and earnings power of the credit businesses, which today looks in some ways like the equities business in 2000/01 — with much restructuring ahead. We forecast credit revenues could be down (60)% in 2008 in our base case.

• High-margin businesses have evaporated revealing an overburdened cost base for flow business — and it took several years to ‘right size’ in equities.

• We see a need for fundamental changes in distribution models (more underlying transparency, more basic structures, and fund vehicles — fulfilling transparency and data needs). We also see a return of the importance of the

balance sheet — the debate we were having on the Investment banks a number of years ago until the credit super-cycle overtook events.

• On the other hand, the more diversified equities business (cash, delta one, structured products, prime brokerage, etc.) appears in far better health, more focussed on Europe, Asia and emerging markets, and with far lower staffing to revenues than at many times in history; the same cannot be said for credit, which looks set for multi-year change.

• Winners will be distinguished by selected principal activities, advantaged distribution, innovative design of new distribution products (a process not financial engineering oriented) and cost reengineering.

Another major concern is the funding environment. Like in 1989-92, the cost of bank funding has gapped out and trades wider than comparable investment grade industrials/ corporates. See Exhibit 7.

• Our base case is that funding remains expensive. In part, this is a demand-driven issue as SIVs and other levered buyers of senior bank debt have exited the market, but banks have also been unable to reduce assets and leverage as fast as they would have liked going into this crisis (Exhibit 6). As many credit assets are stuck and some off-balance sheet assets have had to be brought on, balance sheets have remained bloated and leverage ratios remained high (particularly for those that saw material losses); reduced engagement in the inter-bank and senior debt markets has been one lever to reduce balance sheets.

• The pace of readjustment as banks manage down their risk continues to depend critically on how ‘logjammed’ the credit markets remain.

• While on its own not sufficient, we think that firms with diverse sources of funding — with retail and commercial deposits clearly helping — and a diversified business will have a funding advantage over the coming years, and this may lead to a material reassessment of business models over time.

Page 6: Outlook for Investment Banking

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M O R G A N S T A N L E Y R E S E A R C H

April 1, 2008 Outlook for Investment Banking & Capital Market Financials

Exhibit 6 Aggregate change in assets and leverage for large US broker-dealers: US brokers attempted to de-lever in 4Q07, but failed

1998Q4

2007Q3

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

-0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2Change in Leverage (Log Change)

Cha

nge

in T

otal

Ass

ets

(Log

Cha

nge)

1998Q4

2007Q3

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

-0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2Change in Leverage (Log Change)

Cha

nge

in T

otal

Ass

ets

(Log

Cha

nge)

2007Q4

Note: Growth rates are asset-weighted. Data 1992 to 4Q07 Source: Leveraged Losses, Lessons from the Mortgage Market Meltdown, Greenlaw, Hatzius, Kashyap and Shin. Updated by Morgan Stanley Research

Exhibit 7 Echoes of late 1980s/early 1990s when IG FIG spreads also traded outside IG industrials, leading to credit contraction and recession — a steeper yield was key to drive banks out

0

50

100

150

200

250

300

Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-080

200

400

600

800

1000

1200

1400

IG Financial IG IndustrialHY (RHS)Financials Traded

Wide to Industrials for Fully 3 Years in this Cycle

In the last Credit Cycle, Financials Traded Tighter than Industrials

Feb-91: US invades Iraq

195

279

22

176

225

245

Source: Company data, FactSet, Morgan Stanley Research

Going forward

While we are cautious in the near term, we are more upbeat further out since brokers are essentially geared plays on global growth and our analysis of past crises offers caution on being too bearish (Exhibit 9)

• Major crises in the last 20 years have lasted just four to seven quarters before industry earnings have hit the prior

run rate — far shorter than in many other areas of banking or commerce, as capital can be re-allocated quickly and risk duration is shorter than at wholesale or retail banks.

• Only once in twenty years have revenues fallen for two years in a row (2001/02) as we think is likely to happen in 2007/08 (including marks).

• A much steeper yield curve and low real rates have always helped re-start revenue momentum. In fact, the strongest correlation of Investment banking growth is to these two factors and global growth. Moreover, balance sheet repair has been faster than prior cycles given the SWF investments (Exhibit 8).

• In the more event-driven products (M&A, ECM, Leverage Finance) the time for activity levels to return to previous peaks has typically been of the order of four to six years, and sometimes longer — recovery should be trading-led in the short term. One GCM head reminded us that it took 19 years to beat the prior LBO record (RJRNabisco by TXU).

• Overall, while we are naturally acutely worried by the recent market developments and think that this crisis will run longer than many previous events, given global growth and the intense policy response we are hopeful that a return to prior earnings levels is still possible in the next six to eight quarters from now.

Exhibit 8 SWF have invested US$43 billion in capital markets capital infusions in the last six months, helping the process of balance sheet repair

28.4

14.4

4.8 2.6 0.7 1.1 0.2

7.614.1

5.8

1.2

0.6

10.2

3.8

0

5

10

15

20

25

30

35

40

45

50

Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108TD

$bn

SWF (Investment/Cap Mkt Banks) SWF (Other) Chinese Financials

4.82.6

0.72.3

0.2

7.6

14.7

44.5

18.2

Source: Company data, WSJ, FT, Morgan Stanley Research

Page 7: Outlook for Investment Banking

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M O R G A N S T A N L E Y R E S E A R C H

April 1, 2008 Outlook for Investment Banking & Capital Market Financials

Exhibit 9 Investment banking revenues and key drivers in 1986-2007 — a geared play on growth rates and equities

-100

0

100

200

300

400

500

600

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

-1

0

1

2

3

4

5

6OW Investment bank pre-tax earnings index (1997=100)

Global GDP growth (IMF)

10Yr - 2Yr T-Bill Spread

MSCI world equities

Black Monday Mexico Asia, LTCMand Russia

Dot-com, Enron and 9/11

Indi

ces

GD

P growth %

Junk Bond/LBO

Prediction of Industry earnings (R2=85%)Prediction of Industry revenues (R2=90%)

-100%

50%

60%

Effective Weight

40%

20%

5%

65%

Single factor R2

-90%

70%

-150%

120%

Effective Weight

70%

40%

80%

Single factor R2

Treasury Yield

Global GDP Growth

Root VXO

MSCI Global Equities

Explanatory variables

-100

0

100

200

300

400

500

600

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

-1

0

1

2

3

4

5

6OW Investment bank pre-tax earnings index (1997=100)

Global GDP growth (IMF)

10Yr - 2Yr T-Bill Spread

MSCI world equities

Black Monday Mexico Asia, LTCMand Russia

Dot-com, Enron and 9/11

Indi

ces

GD

P growth %

Junk Bond/LBO

Prediction of Industry earnings (R2=85%)Prediction of Industry revenues (R2=90%)

-100%

50%

60%

Effective Weight

40%

20%

5%

65%

Single factor R2

-90%

70%

-150%

120%

Effective Weight

70%

40%

80%

Single factor R2

Treasury Yield

Global GDP Growth

Root VXO

MSCI Global Equities

Explanatory variables

Prediction of Industry earnings (R2=85%)Prediction of Industry revenues (R2=90%)

-100%

50%

60%

Effective Weight

40%

20%

5%

65%

Single factor R2

-90%

70%

-150%

120%

Effective Weight

70%

40%

80%

Single factor R2

Treasury Yield

Global GDP Growth

Root VXO

MSCI Global Equities

Explanatory variables

Source: Oliver Wyman data and analysis, company reports, Bloomberg, Federal Reserve

We believe sustainable RoEs have to come down, as they have been boosted by several hundred bps in the last five years

• Industry RoEs in the last five years have been 17.5% vs. 15.4% in the prior five years for the leading players (and clearly at lower levels for the wider industry — Exhibit 10); banks have enjoyed high-margin sweet spots, a high velocity of credit and increases in balance sheet leverage.

Page 8: Outlook for Investment Banking

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M O R G A N S T A N L E Y R E S E A R C H

April 1, 2008 Outlook for Investment Banking & Capital Market Financials

Exhibit 10 RoE for major investment banks

-30%

-20%

-10%

0%

10%

20%

30%

40%

200720062005200420032002200120001999199819971996199519941993

Maximum Median Minimum

RoE for major investment banksReported RoE, 1993-2006*

Cycle 1993-99Ave RoE = 15.4%

Cycle 2000-06Ave RoE = 17.5%

-30%

-20%

-10%

0%

10%

20%

30%

40%

200720062005200420032002200120001999199819971996199519941993

Maximum Median Minimum

RoE for major investment banksReported RoE, 1993-2006*

Cycle 1993-99Ave RoE = 15.4%

Cycle 2000-06Ave RoE = 17.5%

Source: Oliver Wyman analysis, company reports * sample includes Citi, CS, DBK (CIB for 2006-1998), GS (2006-1999), JPM (I-Bank for 2006-2003), LEH, ML (CIB only), MS (2006-1997), BSC, UBS

• Leverage alone appears to have driven almost half of the RoE growth from 2003-07, with improving business mix the majority of the rest. We expect that selective deleveraging, greater capital buffer requirements (especially for off-balance sheet obligations) and cyclical reduction in credit turns will reduce longer-term RoE expectations by ~150-200bps, although with a cyclical undershoot first.

• However, rapid deleveraging is very hard in the short term for continuing businesses because the most liquid balance sheets are in the more attractive growth and profit areas, and much of the rest have been essentially stuck (in RMBS, CMBS, leverage loans, etc.). It is also true that the highest growth markets are also the most highly capital intensive — so competitors will be forced to increasingly choose their spots.

• Winners will be distinguished by successful shifting of the growth portfolio (spot picking), advantaged third-party money and distribution capabilities, and clear metrics and MIS on financial resources. Significant advantage will also come to those players that have risk management, investment skills and free capital to take advantage of the opportunities that arise.

Exhibit 11 We expect banks to delever from the increases in the last four years

18

22

26

30

34

38

42

46

50

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Broker/Dealer Assets-to-Equity(BSC, LEH, GS, MS, MER)

Assets / Tangible Equity

Assets / Equity

Assets to Equity

18

22

26

30

34

38

42

46

50

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Broker/Dealer Assets-to-Equity(BSC, LEH, GS, MS, MER)

Assets / Tangible Equity

Assets / Equity

Assets to Equity

Source: Company data, Morgan Stanley Research

One key aspect to any forecasting is the nature of regulatory (and investor) response to the current crisis.

• We think we are on fairly solid ground to suggest regulators will focus far more on liquidity risk against on- and off-balance sheet obligations via either revisions to Basel II regulation or national regulations. Our meetings suggest many regulators are already considering making banks add more capital via Pillar 2 requirements or an additional piece of regulation. This would dilute RoEs from increased cash (as opposed to capital) drag.

• What is less clear is the regulatory impact on specific products and markets (securitisation, for example), although we expect that far greater attention will be paid to the underlying levels of true risk transfer in credit risk transfer and funding vehicles. It is also possible that risk weightings could change (for mortgages for instance) or the nature of using external credit ratings in the adjudication of risk capital — given recent problems, regulators may wish to review whether its a good thing to hardwire rating agencies' views into the capital ratio requirements for banks, as some aspects of Basel II are already in.

RoEs have also been boosted by operational gearing and an improvement in cost: income ratios of 5 percentage points in the last five years — but more structural cost improvements will be required in the near term (Exhibit 11).

• Overall, through-cycle cost discipline for much of the industry has been relatively poor as margins are generally fat — cost cuts are often short term and tactical and

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April 1, 2008 Outlook for Investment Banking & Capital Market Financials

improvement has always come from growing into profitable new sweet spots.

• Over the last few years cost: income ratios have been particularly boosted by a business shift towards fixed income and international businesses — fixed income in particular now looks set to retreat.

• Winners will be distinguished by success in reengineering the cost base front-to-back and side-to-side, including a once-and-for-all shift to more sustainable, risk-adjusted compensation models and redeployment of talent to growth areas.

RoEs have clearly also been boosted by the rapid growth of capital light asset and wealth management businesses. We think these too will see cyclical slowing, although brokers will continue to expand these areas.

• Falls in markets, a shift by retail investors out of higher-margin products, lower activity levels and operational leverage will challenge profit growth, and Morgan Stanley currently forecast a fall in earnings for all asset and wealth management divisions of the capital market banks.

• Our sense from interviews with industry leaders is that the downturn is, if anything, making brokers accelerate their plans to grow their asset and wealth management units, particularly to take advantage of Asian, European and emerging market growth (both inflows and strategies).

Entry into a mark-to-market world by such a large number of participants has created a much more acute crisis in this cycle — it is impossible now to put the cat back in the bag, and the net effect will be lower notional risk appetite by intermediaries

While securitisation has been viewed as reducing risk for any one player, risk concentrations and mark-to-market accounting forcing institutions to eat losses incredibly quickly makes the system more intense in the heart of the crisis than in previous cycles; previously, time was the healer to work out difficult assets. See Exhibit 13, which suggests this cycle has been far quicker than previous ones. In addition, banks, as long-term holders of assets, knew they had to hold a more market-based system where so many participants are subject to mark-to-market disciplines. This means there are fewer steady hands with deep pockets to dampen the volatility.

Exhibit 12 Investment bank industry earnings and cost volatility

-30

-20

-10

0

10

20

30

40

50

60

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

50%

60%

70%

80%

90%

100%

110%Change in revenues (indexed ) Change in costs (indexed) Cost-income

Investment bank industry earnings and cost volatility 1987-2006Index: 1987 = 100

-30

-20

-10

0

10

20

30

40

50

60

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

50%

60%

70%

80%

90%

100%

110%Change in revenues (indexed ) Change in costs (indexed) Cost-income

Investment bank industry earnings and cost volatility 1987-2006Index: 1987 = 100

Source: Oliver Wyman data and analysis, company reports

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April 1, 2008 Outlook for Investment Banking & Capital Market Financials

• Synthetic mechanisms (especially indices) in thin asset classes have increased price volatility for intermediaries, and particularly for investors.

• Beyond any issues relating to credit-assessment ability and trust, we expect a repricing of the price of risk to reflect this higher mark-to-market volatility — and intermediaries will be forced to take less notional risk in these businesses as a result.

Exhibit 13 Spreads already at recessionary levels: this credit bear market was shorter but far more violent than previous ones

17028811019Median

17929011134Average

209323114133/13/2008Feb-07231387156113Nov-02Jun-99

13925011121Jan-91Apr-89

14127613516Jan-83Sep-81

1462257918May-80Nov-78

2212997818Feb-75Aug-73

19330210921Dec-70Mar-69

Total Widening

Peak Spread (BBB)

Trough Spread (BBB)

Duration (Months)Credit PeakCredit Trough

17028811019Median

17929011134Average

209323114133/13/2008Feb-07231387156113Nov-02Jun-99

13925011121Jan-91Apr-89

14127613516Jan-83Sep-81

1462257918May-80Nov-78

2212997818Feb-75Aug-73

19330210921Dec-70Mar-69

Total Widening

Peak Spread (BBB)

Trough Spread (BBB)

Duration (Months)Credit PeakCredit Trough

Source: Morgan Stanley, the Yield Book, Moody’s, Bloomberg

One of the big questions on all managements’ minds is whether this crisis will substantially challenge the long-term trend towards securisation of assets. In the medium term, we believe the return of fixed income must be driven by a return to credit distribution/securitisation, but we expect some major changes.

• There are no new geographies or (non-credit intense) asset classes with the depth and breadth to drive significant fixed-income growth.

• The benefits to investors (as well, obviously, to banks) remain choice of exposure to specific asset classes and risk types, diversification, and avoiding double taxation of investing in credit via a bank.

• Some of the market failings are addressable (sloppy underwriting standards, asset-liability mismatch in warehousing, and overcomplexity, underscrutiny and poor research of structured products).

• Solutions will likely include:

o Greater transparency on underlying assets through specialist credit investment funds with emphasis on due diligence on underlyings.

o Greater transparency on underlying assets through better loan-level performance data.

o Greater participation of own balance sheet to mitigate moral hazard.

o Greater control of the risks of the whole value chain — including liquidity risk and third parties whose risk management and conduct may pass on economic and reputational damage

o We do think the development of new categories (SME, insurance) will be pushed out materially.

o Winners should be the players (underwriters, data providers or issuers) able to build the necessary transparent infrastructure, while maintaining resourcing levels to suffer a lengthy market rebuild; losers will attempt a return to greater product complexity.

Client landscape

We expect this downturn will put pressure on a number of players and strategies, but we still think the broad polarisation of cheap beta by scale providers (that is, index, ETFs, swaps) and alpha or alternative beta by modern asset managers will continue (our asset management barbell).

• We think advantage will turn to larger hedge fund groups with road-tested risk management and provide fiduciary comfort. The top-50 hedge fund groups will continue to take share in the sector (Exhibit 14). But as large, sophisticated groups grow, there will be competitive tension on margins, what they in-source, and thus the need for such a high-touch prime brokerage businesses. Some alternatives groups will also look to pick other investment banking sweet spots. This said, we do expect material rationalisation of opportunistic credit funds and credit strategies, as investment banks change the terms of funding to reflect higher credit and liquidity risk.

• There will be intense focus on long-only investors in the credit and fixed-income markets as paper is passed from highly levered to unlevered and lightly levered investors, as well as a search to distribute the huge issuance needed from the FIG sector. This re-assertion of long-only and traditional investors will help sell-side players with broad and deep footprints.

• We expect another round of asset management consolidation, particularly as players globalise or seek scale. We also think that a number of deals will be

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prompted by banks’ and some insurers’ need for capital and funding.

• We think the longer-term trend of HNW investors and aggregators (private banks, brokers) becoming more important as capital markets and asset management will continue after a cyclical slowdown. This said, we expect a material slowing in the sales of structured products to clients in Europe as funding pressures will mean banks cannibalise funds for deposits or their own bonds.

• We see ongoing cyclical and secular rise in importance of FIG clients — which many players believe will be the single largest growing pool of revenues in 2008.

• Naturally, we expect private equity sponsors’ influence to wane, although given their deep pools of capital raised, we expect a shift in emphasis to international and smaller deals.

• SWF clients will remain influential but still more important for investment management and trading revenues pools than IBD.

Exhibit 14 ‘Big getting bigger’ global industry AUM (%)

2638 35 40 46

11

1817

1820

63

44 48 4234

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007

Top 50 Funds 51-100 All Other Funds Source: Absolute Return, Alpha, Morgan Stanley Prime Brokerage

Competitive landscape

We think this cycle could lead to another major reshaping driven by outsized losses, shareholder pressure and the change in funding dynamics. We expect a number of players to re-examine their commitment and business models, although the majority of the global players will stay the course.

• ‘Bulge Bracket’ players in general have significant advantages due to their access to the deepest and stickiest

pools of liquidity, but ongoing turmoil will lead to significant changes in order within this group.

o Players hit hardest by the write-downs also suffered the most dramatic declines in sales and trading revenues in other businesses — despite infusions of equity, bouncing back is challenging.

o As competitors are forced to choose their spots through the cost and balance sheet pressures highlighted above, we view selected business/division divestiture (some to PE, some to competitors) and shutdown of other businesses as inevitable.

o However, some players should surprise on the upside — aggressive capital re-deployers will double down in growth pockets, while activities in stressed assets should give some players payback in 2008 (as liquidity constraints diminish) rather than the two to three years or more that true distressed will achieve.

• Scope for more mergers involving the global players, delivering potentially huge synergies in costs and funding is possible, but still not very likely, in our view. Broker-dealers seeking cheap and reliable deposit funding may be tempted into deals, but as with credit cards post 1998, this transformation may be gradual and take several years (note that Capital One’s first depository merger with Hibernia occurred seven years after the funding crisis).

• We think universal banking players (of all sizes) will diverge — some will choose to jettison the wholesale business (in response to shareholder pressures), some will use the opportunity to grow market share, and some will retrench to a sustainable niche.

o For the damaged regional players, the collapse of fixed-income profitability may be the last straw after a decade of disappointment.

o However, undamaged regionals and domestics are somewhat bolstered (not present in most challenged businesses; more exposed to areas now booming; benefiting from relative gain in importance of balance sheet and local customer franchise).

o Additionally, there will likely be new entrants as leading banks from resource-rich countries seek stakes (beyond the SWFs); further potential for a recombining of deposit-holders and I-Banking.

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In parallel with crisis management, overall institutional strategies will have to be refocused.

• Adapting and accelerating programmes are already in-flight (selective deployment of principal activity, shift onshore in emerging markets, choices in asset origination vs distribution, convergence of IB and asset management business models).

• Refocusing group structure and extraction of group synergies will be increasingly critical — less than 20% of group synergy efforts are typically successful and many destroy value.

• All players under pressure to create more sustainable, risk-adjusted compensation models.

Additionally, players elsewhere along the capital markets activity chain may benefit.

• The need for increased transparency in OTC markets will give exchanges a boost in their attempts to take over these markets, particularly those with Central Clearing Counterparts for derivatives, as banks look to reduce risk and improve efficiency. Challenges lie in defending valuations and fending off increasing attacks from new competitors such as Inter-Dealer Brokers (IDBs) or bank consortia — especially as pricing power reduces in the data business.

• IDBs will continue to benefit from trading levels as well as growth in the niche asset classes; challenges remain in competing with the exchanges for OTC markets as well as in investing carefully across growth businesses.

• Data and research providers have new markets to cover from the increasing demands for information on underlying performance; the key challenge will be to cheaply and quickly craft the necessary infrastructure.

• Processing banks, with generally low credit intensity, are less threatened. Significant growth opportunities exist, with alternative investors, emerging markets, derivatives processing, new traded products, and extended risk and performance management services all high on the agenda; significant challenges remain however, particularly around building new services while managing creaking and expensive infrastructure, as well as in handling regulatory changes (especially in Europe).

Path to recovery

History including 1989-92 suggests a common checklist for a marked recovery: these are still only partially checked, suggesting that rocky conditions will continue.

• A steeper yield curve and other policy response to cut off tails. We believe swift and repeated Fed and US policy intervention is helping this, although Europe (particularly the UK) has been behind on this agenda and the inflation debate overhangs.

• The process of balance sheet repair starting in earnest to enable the banks to sustain their balance sheets (the Investment banks are well ahead of many European banks).

• Greater transparency on where the risks lie (progress, although still too much idiosyncratic risk and surprises undermining the best-practice attempts).

• Alleviation of funding pressures (which in part is a function of the above, but also could come from fewer forced sellers of banks paper such as the SIVs).

• Capitulation by some sellers and long-only/unlevered investors picking up the paper from the levered sellers (again, in the last month we have started to see examples of this).

While we do not wish to appear panglossian, we are of the view that we are perhaps a little further through the issues than some may think, although we see plenty of risks ahead. Exhibit 15 Steeper yield curve was critical to help in 1989, and we think will be key in this cycle too

40%

50%

60%

70%

80%

90%

100%

1/19

90

1/19

91

1/19

92

1/19

93

1/19

94

1/19

95

1/19

96

1/19

97

1/19

98

1/19

99

1/20

00

1/20

01

1/20

02

1/20

03

1/20

04

1/20

05

1/20

06

1/20

07

1/20

08

-100

-50

0

50

100

150

200

250

300

350Large Cap Bks Avg. Rel P/E to SPX 10Y-2Y 5Y-3M

100bps of +ive carry was critical in 91

Source: FactSet, Morgan Stanley Research

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Valuation and Recommendations This valuation section solely reflects the views of Morgan Stanley Research, not Oliver Wyman

This section is intentionally blank - please contact Morgan Stanley directly for valuation and recommendations.

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Appendix: Review of Prior Investment Banking Crises

-100

0

100

200

300

400

500

600

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

-1

0

1

2

3

4

5

6

OW Investment bank pre-tax earnings index (1997=100)

Global GDP growth (IMF)

10Yr - 2Yr T-Bill Spread

MSCI world equities

Investment bank industry earnings 1987-2006

Source: Company reports, Oliver Wyman analysis;

Before recent market events, 5 major financial crises have impacted the securities industry over the last 20 years, with varying degrees of impact on earnings

Black Monday Mexico Asia, LTCM& Russia

Dot-com, Enron & 9/11

Indices GDP growth %

Junk Bond/LBO

Those crises that also impacted the broader economy have tended to last longer and inflict greater damage to earnings

Length: 6QDepth: ~400% Severity: 6.6Q

Sustained reduction in Fed funds rate and steeper yield curve

IBD slowdownHigh yield inventory write-downs (bankruptcy of Drexel, ML large losses)

Collapse of Junk Bond market and end of LBO boom

Junk Bond(1989-90)

Dot-Com bubble burst in Q1 2000Worldcom, Enron and other accounting scandals rocked investor confidence9/11 terrorist attacks further hit confidence and world economy (global GDP growth slowed to 1% in 2001-02)

Asian currency crisis in 1997Russian sovereign debt default in Q3 1998 triggered implosion of LTCM

Series of unexpected US rate hikes in 1994Lead to devaluation of Mexican Peso and subsequent investor flight from other emerging markets

The largest ever percentage fall on Wall Street (DJIA fell over 25%)

Synopsis

Length: 7QDepth: ~50% Severity: 4.1Q

Length: 2QDepth: ~150% Severity: 1.3Q

Length: 4QDepth: ~300% Severity: 5.1Q

Length: 1QDepth: ~500% Severity: 4.1Q

Severity1

Equity bear market and declining margins meant slow recovery for equitiesAggressive rate cuts and product innovation helped fixed income lead recovery from 2003

Equity crash ( DJIA lost 38%) hit equity revenuesIBD activity also down

Dot.com, Enron(2000-01)

Rates cuts fuelled FI and DCM GrowthEquity boom followed: by May 1999 Dow reached 11,000 for the first time ever

Direct asset losses– $4 BN bailout package.– UBS $700 MM LTCM lossMarket Volatility (highest ever recorded VIX of 44%)

Asia, LTCM, and Russia(1997-99)

Mexico bail-out contained damageWorld GDP growth recovered: in 94-95 was 3.8%

Rates rises caused RMBS inventory losses as defaults rose, hit bank carry positions and reduced corporate banking revenuesEmerging Market losses on Mexican exposure and wider volatility

Mexico (1994-95)

Limited real economy impactDepressed equity prices spurred M&A and LBO boom; equity prices rallied and recovered peak in 2 yrs

Large proprietary trading lossesDecline in underwriting activity

Black Monday (1987)

Recovery factorsImpacts on IB earningsCrisis

1. Severity is measured as the number of quarters of pre-crisis earnings lost due to the crisis

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April 1, 2008 Outlook for Investment Banking & Capital Market Financials

Fixed income revenues have historically benefited from post crisis monetary loosening – >5% rates cut and over 100bps of

positive carry aided recovery in 1991-3– Rates of <2% and positive carry of

>100bps in 2001-3

2000-6 saw extremely rapid fixed income growth as favourable macro conditions combined with product innovation– Growth in credit and commodities as

investable asset classes– Narrowing spreads and low yields fuelled

demand for alternative risks– Innovation in structuring opened up new

risk types to traditional investors

Equities and IBD revenues have been highly cyclical, closely following equity price and GDP movements– In equities S&T prop, dealer carry and

commissions (EU) revenues are all closely linked to equity prices

– In IBD, corporate profit levels and the perceived ‘value’ of equity finance influence ECM and M&A activity

Fixed income revenue growth and drivers

Source: Company reports, Oliver Wyman analysis, SIFMA data, *Celent Research Report

Fixed income has historically benefited from post-decline monetary easing, whilst equities and IBD have been more cyclical

Fed target rate

10yr – 2yr spread

BAA SpreadGro

wth

inde

x

Interest rates (%)

Perspectives

G7 GDP growth

MSCI World

Equities and IBD revenue growth and drivers

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Gro

wth

inde

x

GD

P Grow

th Rate %

0

200

400

600

800

1,000

-2

0

2

4

6

8

10

0100200300400500600700800900

1,000

-4

-2

0

2

4

6

8

10

IBD index Equity index

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

In 2007, the CDO and securitisation markets were the two most directly impacted product areas and represent key (~15%) revenue streams

Source: SDC, Oliver Wyman research1 range indicates ∆ US spreads on AAA - BBB (e.g. 50 bps in AAA CDO tranche to 400 bps in BBB CDO tranche) 2 RMBS data includes issuance by FNMA, GNMA, and FHLMA in N.A`

0

200400

600800

10001200

14001600

1800

H1

01H

2 01

H1

02H

2 02

H1

03H

2 03

H1

04H

2 04

H1

05H

2 05

H1

06H

2 06

H1

07H

2 07

06 H2 - 07 H2 growth

Δ spreads since Aug’

07, bps

Securitization issuance, 2001-7US$ BN

ABS -35% 35-2001

CMBS -30% 50-2201

RMBS2 -55% 70-4701

CDO -60% 50-4001

05

10152025303540

2003

2004

2005

2006

2007

E

Structured credit and CDO revenue growth 2003-07$BN

Structured credit

Securitised products

2006 market revenues

$35-40BN

Securitization and structured products have been key revenue growth areas for the industry and are now a major source of earnings– Revenues doubled from 2003 to ~$35BN in 2006– Structured credit in particular has also been highly

profitable with C:Is around 55-65% for leading players

Issuance volumes collapsed in H2 07 as spreads widened and investors turned away– Total issuance halved from H1 07– Pipeline and secondary activity has dried up

Impact worst in those areas directly associated with the sub-prime losses, but splill-over into adjacent areas– RMBS and CDO issuance fell more than 50% and

H2 and spreads widened 300-500 bps– CMBS issuance fell hit by market-wide increase in

spreads (150+bps) but issuance still continued in H2 2007 (down ~30%) and secondary market still has some liquidity

– ABS hit primarily in commercial credits on fears of corporate slowdown, some reliance in consumer as spending still strong and defaults low

Perspectives

9% 10% 12% 9% % of total IB revenues13%

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0

50

100

150

200

250

300

89 91 93 95 97 99 01 03 05 07

Corporates Financials

However, the knock on effect of funding markets drying up implies that this crisis will bite deeper – similarities with 89-90 are striking

Interbank to T-Bill spread, 1984 -20073 month US LIBOR – 3 month Treasury Bill yield*

The crisis has created some of the most severe dislocations to the bank funding markets in 20yrs– The premium charged on the interbank market

over T-Bills has hit its highest level since 1987– Spreads on IG debt moved higher for FIGs than

corporates for the first time since 1991

This has combined with the direct balance sheet impact of the credit losses to prompt FIG deleveraging, with deleterious knock-on effects for investment banking revenue streams– Constraints on principal activity– Reduced ability to provide hedge fund financing– Drop-off in demand for securitised products as

SIVs disappear– Downward pressure on asset prices as portfolios

are unwound – Reduced appetite for providing debt finance to

corporates – with implications for both DCM and associated hedging revenue streams

– Feedback into the real economy as reduced credit depresses activity

– Lev Finance*Sources: BBA, US Federal Reserve, Yield Book, Morgan Stanley, Oliver Wyman

0

0.5

1

1.5

2

2.5

3

84 86 88 90 92 94 96 98 00 02 04 06

Typical spread is <0.8%;

Financial spreads trading outside corporates in’91 and ‘07

Spreads (%)

Corporate and Financial Institution credit spreadsOAS on IG debt 1989-2007*

Spike in ‘87 hit 2.825%H2 ’07: 2 –2.375%,

Delevaraging and its impact

2007 in context: Looking worse than any other crisis in 20 years and several deeper challenges than in previous crises

Similarities with previous crashes– Financial shock on the back of long asset

price bull-run– Spill-over onto the real economy through

equity & house prices and credit rationing– Contagious loss in investor confidence – Questioning of regulatory and quasi-

regulatory bodies (accounting firms, rating agencies, regulators)

Differences– Asset write-downs not lost earnings – large

“one-off” hits to the balance sheet and immediate impact on the top line

– Challenges to whole business models for the banks (originate to distribute)

– Scale and depth of loss in investor confidence in the sector

Source: Bloomberg, Oliver Wyman data and analysis, SIFMA

Perspectives on the current crises

-500

-400

-300

-200

-100

0

100

200

300

Q0 Q1 Q2 Q3 Q4 Q5 Q6

Timeline: Q0 = quarter before crisis

Comparison of bank earnings impactInvestment bank earnings index, Q0 =100*

Mexico: Q0 = '93 Q4

LTCM: Q0 = '98 Q2

Current crisis: Q0 = ’07 Q2

Black Monday: Q0 = '87 Q3

Dot.com bust: Q0 = '00 Q1

Junk Bond/LBO collapseQ0 = ’89 Q2

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Document number

AppendixDetailed review of historical crises

We measure severity in terms of the number of quarters of earnings lost

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

85:Q

1

85:Q

4

86:Q

3

87:Q

2

88:Q

1

88:Q

4

89:Q

3

90:Q

2

91:Q

1

91:Q

4

92:Q

3

93:Q

2

94:Q

1

94:Q

4

95:Q

3

96:Q

2

97:Q

1

97:Q

4

98:Q

3

99:Q

2

00:Q

1

00:Q

4

01:Q

3

02:Q

2

03:Q

1

03:Q

4

04:Q

3

05:Q

2

06:Q

1

06:Q

4US securities industry quarterly earnings 1986-2006SIFMA top 25 US security houses pre tax income, $MM

4.1 6.6 5.1 1.3 4.4Severity*

Black Monday

Junk Bond/

LBO Crash

Mexican Peso Crisis

Asia & LTCM

Dotcom, 9/11 & accounting scandals

*Severity measures the impact of the crisis as the sum of all earnings below a reference quarterly earnings level, expressed in terms of that quarter’s earnings. The reference earnings rate for each period is shown as the horizontal line on the chart, the red bars are those that are counted as “lost”. The measure is expressed in terms of reference quarters to normalise for trend growth

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-400

-300

-200

-100

0

100

200

300

87:Q3 87:Q4 88:Q1 88:Q2 88:Q3 88:Q4

Case study 1: Black Monday, 19 October 1987 Short and deep: stock market collapse but rapid recovery

Key macro indicators

Indexed Securities Industry earnings impact

Perspectives

1987 saw the largest percentage fall on Wall Street in history (<25% fall): there was no clear trigger, but programme trading and portfolio insurance strategies were blamed for the severity of the decline.

Banks hit by prop losses, volatilty and volume reductions– Decline in underwriting activity (US esp.)– Losses on prop equity positions and falling

commissions revenues– Spike in inter-bank funding rates (LIBOR)

Recovery was however full and rapid: the crisis did not lead to sustained bear run or wider recession– Rates cut aggressively, DJIA and S&P500

returned to August 1987 peaks within two years

– Undervalued stocks led to a surge in M&A and leveraged buyouts in 1988

– Start of five year bull run on the Nikkei

80

85

90

95

100

105

110

Jun-87 Sep-87 Dec-87 Mar-88 Jun-88 Sep-88 Dec-880.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

MSCI World

Fed Target Rate

5yr – 3Mth US T-Bill Spread

Index 100=Jun 1987 Rates (%)

G7 GDP Growth

Reference earnings level

Total severity: 4.1Q Length: 1Q

Depth: ~500%

Case study 2: The end of the Junk Bond/LBO Boom 1989 Inventory losses, revenue stagnation and prolonged recession

-300

-200

-100

0

100

200

300

88:Q

4

89:Q

1

89:Q

2

89:Q

3

89:Q

4

90:Q

1

90:Q

2

90:Q

3

90:Q

4

91:Q

1

91:Q

2

Key macro indicators

Indexed Securities Industry earnings impact

PerspectivesUndervalued stocks lead to a boom in M&A and LBO’s, often financed using high yield (junk) bonds – in ’89 this turned sour– The first eight months of 1989 saw $4BN in

junk bond defaults or debt moratoriums– September ’89: liquidity problems revealed at

indebted Canadian retailer Campeau– October ’89 Chase and Citibank failed to

syndicate a $7.2BN bond issue for the LBO of United Airlines

Investment banks were hit by reduced IBD activity, the drying up of secondary markets and losses on high yield inventory – Drexel, the junk bonds leader filed for chapter

11 bankruptcy protection in February 1990– Merrill Lynch, the market no. 2 took a $470

MM restructuring charge and $213 MM loss for the full year of 1989

– Over 10% of Junk Bonds defaulted in 1990-91 and lack of market liquidity pushed spreads even higher before the impending recession.

Recovery was slow and weak– High rates and flat yield curve through 1989

and early 1990 reduced interest margins and curtailed corporate lending

– This, combined with sliding house and equity prices contributed to a recession in the US and global economy in 1990-91

– Sustained reduction in the Fed funds rate helped bring recovery in 1991

80

90

100

110

120

130

140

Oct-88 Jan-89 Apr-89 Jul-89 Oct-89 Jan-90 Apr-90 Jul-90 Oct-90 Jan-91 Apr-91-3.5

0.0

3.5

7.0

10.5

MSCI World

Fed Target Rate

5Yr – 3 Mth US T-Bill Spread

Index 100=Oct 1988Rates (%)

G7 GDP Growth

High Yield Bond Spreads

Reference earnings level

Total severity: 6.6Q

Length: 5Q

Depth: ~400%

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40

80

120

160

200

Jan-94 Apr-94 Jul-94 Oct-94 Jan-95 Apr-95 Jul-950

1

2

3

4

5

6

-200-150-100-50

050

100150200250

94:Q1 94:Q2 94:Q3 94:Q4 95:Q1 95:Q2 95:Q3

Case study 3: Mexican Peso crisis and US rates hike 1994-1995Volatility, investor fear and emerging markets losses

Key macro indicators

Indexed Securities Industry Earnings Impact*

Perspectives

A series of unexpected US rates hikes and the devaluation of the Mexican Peso rocked markets in 1994– 2.5% rise in US rates over 10 months from

February 1994, steeply inverted yield curve– Large and growing current account deficit in

Mexico led to currency attacks, with revaluation on December 20th 1994

Losses and volatile trading conditions impacted profits in the sector– Direct losses on MBS and Emerging Markets

exposures– Dramatic drop-off in corporate finance

activity (~40% yoy fall in revenues)– Reduced trading activity as investors

withdrew

Recovery was relatively quick, with quarterly earnings improving throughout ’95 and recovering pre-crisis levels in two years– Mexico problem regionally contained and

addressed by $52 BN bailout package from IMF and World Bank

– Limited impact on equity market and real economy growth led to rapid pick-up in equity and IBD revenues

MSCI World

FED Target RateVIX volatility

Sources: Bloomberg, data stream, BBA, Federal Reserve, SIFMA; * SIFMA top 25 US securities houses

Index 100=Jan 1994 Rates (%)

US Rate Hikes Peso Devaluation

5YR-3mth Spread

G7 GDP Growth

Reference earnings level

Total severity: 5.1Q Length: 6Q

Depth: ~300%

-25

25

75

125

175

225

97:Q2 97:Q3 97:Q4 98:Q1 98:Q2 98:Q3 98:Q4 99:Q1 99:Q2 99:Q3 99:Q4

0

50

100

150

200

250

Jul-97 Oct-97 Jan-98 Apr-98 Jul-98 Oct-98 Jan-99 Apr-99 Jul-99 Oct-99-1

0

1

2

3

4

5

6

Case study 4: Asian crisis, the Russian default and LTCM Liquidity crunch & asset write-downs, but limited real economy impact & rapid recovery

Key macro indicators

Asian crisisstarts in Thailand

Indexed Securities Industry Earnings Impact*

Two main trigger events provoked exceptional market volatility– Asian exchange rate crisis and ensuing

contagion in H2 1997– Russian default and $4 BN collapse of

LTCM in Autumn 1998

Sector earnings hit by direct asset losses and below expectation volumes– Large asset losses on LTCM limited to a

handful of players (UBS largest at $700 MM, ML and Salomon also implicated), but bail out sapped capital across the street

– Some direct losses on Russian and Asian exposures

– Sticky cost base accentuated impact on earnings as revenue growth in other products dipped (IBD, equities)

Recovery of pre-crisis earnings levels within two quarters as global economy reverted to growth trend– Inversion of yield curve quickly followed by

Fed Rate cut spurred economy and fuelled fixed income and DCM growth

– Equity markets dipped but recovered quickly leading into the ECM, M&A and equity boom in 1999-2000

Perspectives

MSCI World

5YR-3Mth Spread

VIX

Russian crisisand LTCM

Sources: Bloomberg, data stream, BBA, Federal Reserve, SIFMA; * SIFMA top 25 US securities houses

Index 100=Jun 1997 Rates (%)

FED Target RateG7 GDP Growth

Total severity: 1.3Q

Length: 2Q

Depth: ~150%

Reference earnings level

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Dot com boom goes bust

9/11 & accounting scandals

0

20

40

60

80

100

00:Q1 00:Q2 00:Q3 00:Q4 01:Q1 01:Q2 01:Q3 01:Q4 02:Q1

60

80

100

120

140

160

180

200

Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02-2-1012345678

Case study 5: 2000-2002 dot com bust, 9/11 and corporate accounting scandals Prolonged bear market and spillover into the real economy

Key macro indicators

Multiple trigger events combined to create long equity bear run– Burst of dot-com bubble – Corporate accounting scandals– 9/11 creates peak in volatility and further

undermines confidence– Global GDP growth slows from ~5% in 2000

to 1 - 2% from Q2 2001 to Q2 2002

Impact on banks mainly through depressed equity and advisory markets– Impact on equity trading amplified by the

decimalization and electronification of the business – ticket volumes rose but margins slumped

– Corporate finance volumes collapsed: M&A fell ~50% and ~30% in 2001 and 2002, ECM fell ~ 25% in both years

– Earnings impact compounded by stickiness of cost base

Recovery lead by growing fixed income revenues– Aggressive monetary loosening and wide

yield curve helps prop up fixed income– Impact on credit spreads less dramatic than

current crisis or LTCM

Severity of $4.4 excludes 2-3Q worth of legal fees and fines suffered in subsequent years

Perspectives

Indexed Securities Industry Earnings Impact*

MSCI World

VIXFed Target Rate

Sources: Bloomberg, data stream, BBA, Federal Reserve, SIFMA; * Oliver Wyman earnings index

Index 100=Jan 2000 Rates (%)

G7 GDP growth 5YR-3Mth Spread

Reference earnings level

Total severity: 4.4Q Length: 7Q

Depth: ~50%

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Disclosure Section Morgan Stanley & Co. International plc, authorized and regulated by Financial Services Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. As used in this disclosure section, Morgan Stanley includes RMB Morgan Stanley (Proprietary) Limited, Morgan Stanley & Co International plc and its affiliates. For important disclosures, stock price charts and rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Equity Research Management), New York, NY, 10036 USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Huw Van Steenis. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies As of February 29, 2008, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Aareal Bank AG, Anglo Irish Bank, Banco Popolare, Banco Popular (ES), Barclays Bank, BBVA, BCP, BNP Paribas, Bradford & Bingley, Citigroup Inc., Climate Exchange, Commerzbank, Credit Suisse Group, Danske Bank, Deutsche Bank, Deutsche Boerse, DnB NOR, Garanti Bank, GLG Partners Inc., HBOS, HSBC, Hypo Real Estate Group, ICAP, Intesa Sanpaolo, Julius Baer, Lloyds TSB, Man Group, Postbank, Royal Bank of Scotland, Santander, Societe Generale, Tullett Prebon, UBS, Unicredit, National Bank Of Greece. As of February 29, 2008, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in Morgan Stanley Research (including where guarantor of the securities): ABN AMRO, Alliance & Leicester, Allied Irish Banks, Anglo Irish Bank, Banco Popular (ES), Banco Sabadell, Banesto, Bank of Ireland, Bankinter, Barclays Bank, BBVA, BCP, BNP Paribas, Bradford & Bingley, Citigroup Inc., Commerzbank, Credit Agricole S.A., Credit Suisse Group, Deutsche Bank, Deutsche Boerse, DEXIA, DnB NOR, EFG Eurobank, Erste Bank, Garanti Bank, HBOS, Hypo Real Estate Group, ICAP, Intesa Sanpaolo, Kaupthing Bank, Lloyds TSB, Man Group, Monte dei Paschi di Siena, National Bank of Greece, Natixis, Northern Rock, Postbank, Royal Bank of Scotland, Santander, SEB, Societe Generale, Standard Chartered Bank, Svenska Handelsbanken, Swedbank, UBS, Unicredit. Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of ABN AMRO, Alliance & Leicester, Allied Irish Banks, Bank of Ireland, BBVA, BCP, BES, BNP Paribas, Citigroup Inc., Commerzbank, Credit Agricole S.A., Danske Bank, Deutsche Bank, Gottex Fund Management Holdings Ltd, Greek Postal Saving Bank, HBOS, Kaupthing Bank, Natixis, Northern Rock, Santander, Societe Generale, Svenska Handelsbanken, Swedbank, UBS, Unicredit. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Aareal Bank AG, ABN AMRO, Alliance & Leicester, Allied Irish Banks, Alpha Bank, Anglo Irish Bank, Banco Popular (ES), Banco Sabadell, Banesto, Bank of Ireland, Bankinter, Barclays Bank, BBVA, BCP, BES, BNP Paribas, Bradford & Bingley, Citigroup Inc., Commerzbank, Credit Agricole S.A., Credit Suisse Group, Danske Bank, Deutsche Bank, Deutsche Boerse, DnB NOR, EFG Eurobank, GLG Partners Inc., Gottex Fund Management Holdings Ltd, Greek Postal Saving Bank, HBOS, Hypo Real Estate Group, Intesa Sanpaolo, Julius Baer, Kaupthing Bank, Lloyds TSB, Man Group, Monte dei Paschi di Siena, National Bank of Greece, Natixis, Nordea, Northern Rock, Postbank, Royal Bank of Scotland, Santander, SEB, Societe Generale, Standard Chartered Bank, Svenska Handelsbanken, Swedbank, UBS, National Bank of Greece. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Aareal Bank AG, ABN AMRO, Alliance & Leicester, Allied Irish Banks, Alpha Bank, Anglo Irish Bank, Banco Popular (ES), Banco Sabadell, Banesto, Bank of Ireland, Bankinter, Barclays Bank, BBVA, BCP, BES, BNP Paribas, BPI, Bradford & Bingley, Citigroup Inc., Climate Exchange, Commerzbank, Credit Agricole S.A., Credit Suisse Group, Danske Bank, Deutsche Bank, Deutsche Boerse, DnB NOR, EFG Eurobank, Erste Bank, Garanti Bank, GLG Partners Inc., Gottex Fund Management Holdings Ltd, Greek Postal Saving Bank, HBOS, Hypo Real Estate Group, Intesa Sanpaolo, Julius Baer, Kaupthing Bank, Lloyds TSB, Man Group, Monte dei Paschi di Siena, National Bank of Greece, Natixis, Nordea, Northern Rock, Postbank, Royal Bank of Scotland, Santander, SEB, Societe Generale, Standard Chartered Bank, Svenska Handelsbanken, Swedbank, UBS, Unicredit, National Bank of Greece. Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from Aareal Bank AG, ABN AMRO, Alliance & Leicester, Allied Irish Banks, Alpha Bank, Anglo Irish Bank, Banco Popular (ES), Banco Sabadell, Banesto, Bank of Ireland, Bankinter, Barclays Bank, BBVA, BCP, BES, BNP Paribas, BPI, Bradford & Bingley, Citigroup Inc., Commerzbank, Credit Agricole S.A., Credit Suisse Group, Danske Bank, Deutsche Bank, DEXIA, DnB NOR, EFG Eurobank, Erste Bank, First Gulf Bank, GLG Partners Inc., Greek Postal Saving Bank, HBOS, HSBC, Hypo Real Estate Group, ICAP, Intesa Sanpaolo, Julius Baer, Kaupthing Bank, Lloyds TSB, Man Group, Monte dei Paschi di Siena, National Bank of Greece, Natixis, Nordea, Northern Rock, Postbank, Royal Bank of Scotland, Santander, SEB, Societe Generale, Standard Chartered Bank, Svenska Handelsbanken, Swedbank, UBS, Unicredit, Piraeus Bank, National Bank Of Greece, Marfin Popular Bank.. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Aareal Bank AG, ABN AMRO, Alliance & Leicester, Allied Irish Banks, Alpha Bank, Anglo Irish Bank, Banco Popular (ES), Banco Sabadell, Banesto, Bank of Ireland, Bankinter, Barclays Bank, BBVA, BCP, BES, BNP Paribas, BPI, Bradford & Bingley, Citigroup Inc., Climate Exchange, Commerzbank, Credit Agricole S.A., Credit Suisse Group, Danske Bank, Deutsche Bank, Deutsche Boerse, DnB NOR, EFG Eurobank, Erste Bank, Garanti Bank, GLG Partners Inc., Gottex Fund Management Holdings Ltd, Greek Postal Saving Bank, HBOS, Hypo Real Estate Group, Intesa Sanpaolo, Julius Baer, Kaupthing Bank, Lloyds TSB, Man Group, Monte dei Paschi di Siena, National Bank of Greece, Natixis, Nordea, Northern Rock, Postbank, Royal Bank of Scotland, Santander, SEB, Societe Generale, Standard Chartered Bank, Svenska Handelsbanken, Swedbank, UBS, Unicredit, National Bank of Greece. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Aareal Bank AG, ABN AMRO, Alliance & Leicester, Allied Irish Banks, Alpha Bank, Anglo Irish Bank, Banco Popular (ES), Banco Sabadell, Banesto, Bank of Ireland, Bankinter, Barclays Bank, BBVA, BCP, BES, BNP Paribas, BPI, Bradford & Bingley, Citigroup Inc., Commerzbank, Credit Agricole S.A., Credit Suisse Group, Danske Bank, Deutsche Bank, Deutsche Boerse, DEXIA, DnB NOR, EFG Eurobank, Erste Bank, First Gulf Bank, Garanti Bank, GLG Partners Inc., Gottex Fund Management Holdings Ltd, Greek Postal Saving Bank, HBOS, HSBC, Hypo Real Estate Group, ICAP, Intesa Sanpaolo, Julius Baer, Kaupthing Bank, Lloyds TSB, London Stock Exchange, Man Group, Monte dei Paschi di Siena, National Bank of Greece, Natixis, Nordea, Northern Rock, Postbank, Royal Bank of Scotland, Santander, SEB, Societe Generale, Standard Chartered Bank, Svenska Handelsbanken, Swedbank, UBS, Unicredit. Within the last 12 months, an affiliate of Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from Deutsche Bank, Kaupthing Bank, UBS, Piraeus Bank, National Bank Of Greece, Marfin Popular Bank. The research analysts, strategists, or research associates principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Within Europe, Morgan Stanley makes a market in the securities of Hypo Real Estate Group, Postbank.

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Stock Rating Category Count % of Total Count

% of Total IBC

% of Rating Category

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The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst's view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. 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© 2008 Morgan Stanley

M O R G A N S T A N L E Y R E S E A R C H

Industry Coverage:Banks

Company (Ticker) Rating (as of) Price (03/31/2008)

Solveig Babinet ABN AMRO (AAH.AS) NA (07/25/2007) €38.15Steven Hayne Bradford & Bingley (BB.L) U-V (02/13/2008) 187pMichael Helsby Alliance & Leicester (ALLL.L) U-V (02/21/2008) 519pBarclays Bank (BARC.L) E (02/29/2008) 453pHBOS (HBOS.L) O (12/03/2007) 560pHSBC (HSBA.L) E (01/22/2008) 830pLloyds TSB (LLOY.L) U (02/25/2008) 451pRoyal Bank of Scotland (RBS.L) U (02/29/2008) 337pStandard Chartered Bank (STAN.L) O (01/22/2008) 1,722pEva Hernandez BBVA (BBVA.MC) O (01/17/2008) €13.95Banco Popular (ES) (POP.MC) U (01/17/2008) €11.5Banco Sabadell (SABE.MC) U (01/17/2008) €6.95Banesto (BTO.MC) E (01/17/2008) €12.02Bankinter (BKT.MC) U (01/29/2008) €10.05Santander (SAN.MC) O (01/17/2008) €12.62Maxence Le Gouvello du Timat BNP Paribas (BNPP.PA) O (10/23/2006) €63.89Credit Agricole S.A. (CAGR.PA) E (10/17/2007) €19.6DEXIA (DEXI.BR) U (11/29/2006) €18.05Natixis (CNAT.PA) NA (11/22/2007) €10.19Societe Generale (SOGN.PA) O (02/22/2007) €62.02Per K Lofgren Danske Bank (DANSKE.CO) U (02/08/2008) DKr174.25DnB NOR (DNBNOR.OL) O (10/16/2007) NKr77.3Kaupthing Bank (KAUP.ST) U (08/08/2007) SKr62.75Nordea (NDA.ST) E (03/17/2008) SKr96.3SEB (SEBa.ST) E (02/08/2008) SKr155.5Svenska Handelsbanken (SHBa.ST)

NA (10/15/2007) SKr173

Swedbank (SWEDa.ST) O (06/22/2007) SKr166.5Andrea Papadopoulos Alpha Bank (ACBr.AT) E (03/26/2007) €21BCP (BCP.LS) NA (09/17/2007) €2.06BES (BES.LS) ++ €11.01BPI (BBPI.LS) NA (09/17/2007) €3.35EFG Eurobank (EFGr.AT) E (09/18/2006) €19.24Greek Postal Saving Bank (GPSr.AT)

O (02/01/2007) €11.6

National Bank of Greece (NBGr.AT) O (09/18/2006) €33.42Ronny Rehn

Aareal Bank AG (ARLG.DE) O (06/05/2007) €20.67Commerzbank (CBKG.DE) E (11/07/2007) €19.8Hypo Real Estate Group (HRXG.DE)

E-V (01/16/2008) €16.46

Postbank (DPBGn.DE) E (02/06/2007) €60.47Huw Van Steenis Allied Irish Banks (ALBK.I) NA (06/22/2007) €13.5Anglo Irish Bank (ANGL.I) NA (06/22/2007) €8.5Bank of Ireland (BKIR.I) NA (06/22/2007) €9.42Credit Suisse Group (CSGN.VX) O (11/29/2006) SFr50.55Deutsche Bank (DBKGn.DE) E (09/03/2007) €71.7Julius Baer (BAER.VX) O (11/22/2005) SFr73.2Northern Rock (NRK.L) NA (06/22/2007) 90pUBS (UBSN.VX) U (01/31/2008) SFr28.86Guglielmo Zadra Banco Popolare (BAPO.MI) O (04/05/2002) €10.49Intesa Sanpaolo (ISP.MI) O (03/20/2007) €4.46Monte dei Paschi di Siena (BMPS.MI)

U (11/12/2007) €2.8

Unicredit (CRDI.MI) E (04/03/2007) €4.24

Stock Ratings are subject to change. Please see latest research for each company.

The Americas 1585 Broadway New York, NY 10036-8293 United States Tel: +1 (1) 212 761 4000

Europe 25 Cabot Square, Canary Wharf London E14 4QA United Kingdom Tel: +44 (0) 20 7 425 8000

Japan 4-20-3 Ebisu, Shibuya-ku Tokyo 150-6008 Japan Tel: +81 (0) 3 5424 5000

Asia/Pacific Three Exchange Square Central Hong Kong Tel: +852 2848 5200