April 11, 2013 BLUE PAPER
MORGAN ST ANLEY RESEARCH
Global Banks 1 Huw van Steenis +44 (0)20 7425 9747
Bruce Hamilton
1
+44 (0)20 7425 7597
Betsy Graseck
2
+1 212 761 8473
1
Hubert Lam
+44 (0)20 7425 3734
Michael Cyprys
2
+1 212 761 7619
Ted Moynihan +44 (0)20 7852 7555
James Davis
+44 (0)20 7852 7631
Wholesale & Investment Banking Outlook Global Banking Fractures: The Implications
Maria Blanco
The bad news: The fracturing of global banking driven by Balkanisation has become one of the largest challenges for wholesale banks, taking 2-3% points off RoEs. Disjointed international policies pose the biggest threat. This presents a major challenge for non-US players who face higher costs to access the single most profitable market in the world – the US. It makes a profitable hub and spoke model in Asia and emerging markets much more challenging.
Hiten Patel
The good news: We think the market has overestimated the impact of the transformation of OTC markets on banks earnings. We estimate a 3-5% point base case fall in sales and trading revenues by 2015 vs. investors pricing in 10-20%, a thesis supported by our recent investor survey. We also see potential for collateral management earnings to offset lost revenues, though we think only a small number of firms will really benefit. The fixed cost challenge: Much higher fixed costs against subdued revenues are proving a huge challenge. Many banks have started to embrace our “Decision Time” thesis, but the focus must shift from RWAs, capital and funding to managing the operational gearing. The quest for economies of scale/scope, and lower platform costs will lead to more tough portfolio decisions, particularly for mid-sized wholesale banks. The bottom line: We think 12-14% returns on allocated capital are plausible in 2014-16 through restructuring and some cyclical recovery, but that the skew of winners and losers will be even greater as some firms fail to successfully clear these three key hurdles.
+1 646 364 8428
Matthew Austen +44 (0)20 7852 7539 +44 (0)20 7852 7816
1 2
Morgan Stanley & Co. International plc+ Morgan Stanley & Co. Incorporated
Oliver Wyman is a global leader in management consulting. For more information, visit www.oliverwyman.com. Oliver Wyman is not authorised nor regulated by the FSA and as such is not providing investment advice. Oliver Wyman authors are not research analysts and are neither FSA nor FINRA registered. Oliver Wyman authors have only contributed their expertise on business strategy to the first part of this report. The second part of the report is the work of Morgan Stanley only and not Oliver Wyman. For disclosures specifically pertaining to Oliver Wyman please see the Disclosure Section, located at the end of this report.
Download our initial Blue Paper Morgan Stanley Blue Papers focus on critical investment themes that require coordinated perspectives across industry sectors, regions, or asset classes.
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. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. * = This Research Report has been partially prepared by analysts employed by non-U.S. affiliates of the member. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
Table of Contents
MORGAN STANLEY BLUE PAPER Joint Executive Summary: The Three Biggest Challenges
3
Key Findings of Our Proprietary OTC Survey
6
Morgan Stanley: Stock Implications of Our Joint Findings
7
1) Impact of Balkanisation/subsidiarisation on returns and models
10
2) Impact of the transformation of OTC markets: winners and loser
11
3) “Decision Time” – One year on: much done, much still to do. Operating gearing and scale are now the issues
14
Chapter 1: Structural Reform and De-globalisation
19
Chapter 2: Shifting Sources of Value
27
Chapter 3: Returns and Industry Structure
38
Key Stock Calls
47
Impact of OTC transformation is overestimated for leading banks
58
Balkanisation: a major headache for European firms, US firms advantaged
69
“Decision Time” – 1 year on: much done, much still to do. Addressing operating gearing and scale dominate
75
Appendix
84
2
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
Joint Executive Summary: The Three Biggest Challenges
MORGAN STANLEY BLUE PAPER
Challenge 1: The Bad News – Balkanisation of wholesale banking markets. We think the industry and the market have yet to get to grips with the forces fracturing global wholesale banking. In particular we now anticipate a 2-3% point drag on RoE from regulatory Balkanisation. While ring-fencing is getting a lot of attention, we see national subsidiarisation gathering pace quickly. With diverging national regulatory agendas, it poses a major risk to the global banking model. The Balkanisation of banking markets will drive starker regional distinctions and participation choices. Regulators seeking to reduce the interdependence of their banking systems with perceived higher-risk overseas lending and markets activities are introducing a large and diverse number of new proposals. We think that in isolation the proposals for ring-fencing banking activity could take ~3% points off RoEs in a realistic worst case, with significant skews across banks. However, we argue that banks can meet regulators’ objectives and see a much more limited impact on RoE (0.5% in our best case) through rethinking legal entity design, funding strategies and operating models. Much depends on the details of the final rules. We believe the real challenge lies in the complexity and cost of dealing with multiple subsidiarisation demands across jurisdictions. The interplay of constraints imposed by host regulators in local markets, regulators in key hubs, and home market regulators creates an optimisation puzzle that is hard to solve. We estimate a total industry-wide RoE drag of 2-3% points, with limited scope for mitigation unless we start to see a more organised global policy response. The breakdown of the hub-spoke model in Asia is accelerating. The revenue pools accessible to local business models are growing faster than the regionally accessible pools. This means the need for local funding sources is increasing. Finally, we are approaching the tipping point where the USD, the dominant regional currency, gives way to the RMB. The US Foreign Banking Organisation (FBO) proposals are a particularly severe challenge given the importance of the US market. Funding and stressed capital are both potentially difficult to navigate and could lower returns for the Americas region by 2-4% for the most affected banks, albeit with heavy skews. And this is in a vital market that is already challenging for foreigners. We estimate the Americas delivered 55-60% of
global profit in 2012 (vs. 45-50% of global revenues), with 60% of this accruing to US banks. Differing stances across jurisdictions of key policies including financial transaction taxes and bonus caps are likely to further fracture the global industry. While not settled yet, the more aggressive stance of Europe on these issues would in time drive a less attractive environment for transaction settlement and for talent in Europe, and of course, call an end to the relatively fluid movement of personnel between regions that exists today.
Challenge 2: The Good News – OTC reform: We anticipate a bounded 1% drag on RoE for the industry at large – which is less severe than the market expects. The restructuring of OTC markets is accelerating; while the value shifts will be dramatic, the overall effect will be bounded. However, the unintended consequence of limited inter-operability of regional clearing houses will be to fragment markets regionally, and to place even greater strain on the chronic shortage of collateral, driving new opportunities in collateral financing. We believe the market actually over-estimates the extent of likely revenue erosion in Fixed Income. We anticipate the reforms will force $5-10bn of current revenue to migrate out of the sell-side by 2015. While this represents a 10-20% reduction in revenues in the most heavily affected areas (and still poses significant challenges for those like the IDBs with limited ability to offset), it is only 6-12% of the total OTC derivative pools of $75bn, and 3-5% of total sales & trading revenues. This compares with our proprietary investor survey which suggests investors expect 10-20% of FICC trading revenues to be affected by 2015. However, this is not to under-estimate the extent of value shift; the challenge for dealers in cleared markets is getting payback on the capital costs of providing clearing services, which is likely to underscore the importance of depth over breadth in client relationships. Much of this is still up for grabs – In our joint proprietary survey of institutional investors (see page 6) around 70% of buy-side firms had only completed on-boarding with one clearing member to date, despite around 65% indicating a plan to clear with multiple members. The regional fragmentation of OTC markets is emerging as an unintended consequence, driving up end-user costs for collateral and funding. Participation choices have an increasingly clear regional dimension, since netting occurs at 3
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
the regional legal entity level and since the CCP landscape is MORGAN STANLEY BLUE PAPER fragmenting regionally, and since margining requirements drive up the importance of funding. Inter-operability between OTC CCPs is unlikely, resulting in the trapping of collateral at the clearing entity level. While few banking providers will participate across the full set of clearing markets, these trends are actually increasing the likelihood that regional competitor segments emerge. The chronic shortage in collateral, agitated by market fragmentation, will drive new opportunities around collateral demand and financing. We anticipate new revenue opportunities of $5-8bn, with Global Custodians and the sell-side well-positioned to take around 80% of this. The latest regulatory proposals imply a more gradual – but still massive – squeeze on collateral. We estimate +$750bn by 2015 and +$1.4trn by 2018. Access to stable sources of liquidity and the ability to integrate infrastructure solutions with risk intermediation will be vital competitive advantages. Market infrastructure providers are equipped to fulfill a central utility role; but we expect revenues to concentrate among 3-5 CCPs and 2-3 ICSDs. The overall upside for these players is likely to be lower than hoped given the incremental revenue opportunities will be divided among all participants, meaning the remaining impact will be marginal.
Challenge 3: Operational gearing – the fixed cost challenge. The industry has to find ~3% points of additional RoE through greater economies of scale and scope. With much progress on financial resources, managing operational leverage is now the driving force of portfolio rationalisation, as banks struggle to achieve economies of scale and scope in their cost structures. More innovation is needed here. Many banks have started to embrace our “Decision Time” thesis of last year – but attention must shift from financial resources towards managing the operational gearing of the business. We've seen significant capacity reduction to help enhance returns. The greatest progress has been on RWAs, which fell ~25% as the industry worked through legacy credit books and improved velocity and RWA discipline in the core businesses. However, there has been much less progress on cost where we have only seen a 4% reduction, as increasing regulatory, restructuring and infrastructure costs have offset steep cuts in compensation.
Business line dynamics have shifted materially as a result, returning FICC to reasonable returns and pressuring IBD and equities. Persistently low client volumes, the shift to electronic trading channels and higher fixed platform costs have left many equities franchises overly operationally geared and unprofitable. In banking the issues are concentrated in Europe and Asia, where most banks are simply not generating sufficient income to cover their platform costs. By contrast, faster reaction on RWAs in Fixed Income has positioned it to deliver strong economics, although structural concerns remain. We believe investors now undervalue the quality of FICC earnings as RWA release and footprint rationalisation play out. It is becoming increasingly challenging for any bank without scale in the US to sustain a global footprint. The US is significantly more profitable than Europe or Asia, and crucially offers scalability. This is an earnings engine that allows economies of scale to be achieved in delivering infrastructure and risk management support to a broad global business footprint. The industry must do more on reshaping the cost structure, particularly infrastructure. However, linear bank-by-bank cost reduction efforts are unlikely to achieve the cost flexibility needed – the industry has to focus more on reducing the duplication in basic processes by finding or creating third-party providers that can deliver these services in supply chains industry-wide. We believe there will be interesting opportunities for market infrastructure players to mutualise elements of the cost base – potentially a $1.5-3bn opportunity, and an improvement on industry RoE of ~0.5%. Exhibit 1
Evolution of industry RoE 2012
12% ~1%
OTC reform Structural reform
2-3%
Solvency and liquidity
~0.5%
Strategic response
~2% ~1%
Structural cost work Revenue growth
~2%
2015 base
12-14%
2015 bull 2015 bear
15-17% 8-10%
Source: Oliver Wyman analysis
4
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
Outlook for industry returns, and winners / losers
MORGAN STANLEY BLUE PAPER Despite the significant challenges facing the industry, we believe that industry-wide 12-14% RoE is possible in the 2014-16 window. Returns hit 12% in 2012, lofty by recent standards. There is also significant positive news: industry restructuring is in full swing now, albeit the reaction is faster on financial resources than operational leverage; regulatory costs yet to be absorbed have fallen as parts of the solvency and liquidity program have been moderated; revenue trends are cautiously positive (though muted in 2013), with margins improving as capacity is released; as we argue above, the impact of OTC reform industry-wide will be more bounded than many believe. Offsetting these trends, de-globalisation and sticky cost structures are proving increasingly difficult challenges. Waiting in the wings, conduct risk and financial transaction taxes could yet emerge as more significant drags on returns. Sources of value in the business are shifting, driving new paradigms around economies of scale and scope with new winning models emerging. In this industry advantages now centre on at-scale financial intermediation in flow markets, expansion into post-trade / infrastructure and transaction banking business, credit market intermediation, true corporate and FIG content / advisory capabilities as well as leveraging group linkages to wealth and commercial banking. The squeeze is beginning to hurt in Europe. Ring-fencing, subsidiarisation, becoming a structurally less profitable region, increasing headwinds to share capture for Europeans in the US, the spectre of financial transaction taxes, and bonus caps driving up fixed costs, are all making life increasingly difficult for European wholesale banks. Many banks are managing two major European centres, both a home market and London, with the attendant costs and regulatory burdens. US banks face different challenges, in particular with faster implementation of market structure reforms in Dodd-Frank.
product excellence and / or regional depth. Capital release and cost reduction have to be delivered along lines that protect or enhance economies of scope. Strategic risks are the size and stickiness of the infrastructure cost base and the inherent volatility of a less broad product base and risk envelope. The gains for the winners from market share consolidation are only just beginning to accrue. For those able to consolidate market share around areas of true scale, while reducing the cost and complexity of the platform, the rewards could be high. At the same time increased operational gearing, combined with multiple regulatory challenges to navigate mean the risks of failure for this approach are also high. Whether firms can compete successfully on a regional or product level for clearing business will be a key issue to watch. Market infrastructure players are in a battle to grasp new revenue streams as the existing businesses remain under pressure. OTC reform presents new opportunities but in many cases these are smaller than hoped and will not fully recover lost execution revenues. The advantaged will be those with a first mover edge or differentiating capabilities as second movers in collateral solutions and back office outsourcing. The spread of returns will remain wide as banks that achieve economies of scale or scope deliver improved returns. The differential impact of the three forces we centre on in this report – subsidiarisation, OTC market structure reform, and operating leverage – are all high. Some firms will feel the impact much more severely than others. Our analysis suggests that returns for the winners could be up to 3-4% points higher than the average and up to 8% points higher than the losers. Importantly, our analysis indicates that the multipliers from the wholesale banking business into the rest of a universal banking group can drive an additional 2-4% points of RoE, as measured on the wholesale banking capital base, partially explaining why many wholesale banks are willing to live with structurally lower returns.
Among the mid-sized banks we see substantial further value to be unlocked through strategic refocusing around areas of
5
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
Key Findings of Our Proprietary OTC Survey
MORGAN STANLEY BLUE PAPER
We conducted a survey of institutional investors in March 2013 to assess the level of readiness and expected impact on user behavior of OTC regulatory reform. Respondents included hedge funds, asset managers, insurers, pension funds and SWFs. Key takeaways are: 1) Phasing of client clearing suggests that the major impact will not be felt until 2015. Around 60% of respondents expect to be clearing 100% of eligible trades by 2015, but varied levels of preparedness suggest some risks to execution. Only around 40% considered themselves fully or very prepared. 2)
5)
IR swaps hurt the most; government bonds, futures and swap futures benefit most. Around 60% of respondents expect a reduction in volumes of swaps, with associated increases expected in US Treasuries, US Treasury futures and swap futures.
Exhibit 3
OTC swaps hurt the most; US Treasuries, UST futures and swap futures to benefit % respondents expecting change in trading volume Decrease
25%
US Treasury Futures
25%
Impact on client behavior will be profound. Critically, around 70% of institutional investors we polled said they thought the reforms would materially change their trading behavior and how they choose bank partners.
Swaps
59%
CDS index options and tranches Corporate Bonds
74%
28%
6%
33%
6% Credit
18% 12%
Source: Morgan Stanley Research
6)
Client clearing mandates concentrated among brokers. Around 70% of buy-side firms had only completed on-boarding with one clearing member to date. However, around 65% ultimately plan to clear with 2-4 clearing brokers.
Change the way of choosing bank partners
7)
Client margining requirements will rise significantly and costs will be only partially passed on. More than 50% of respondents expect a significant increase in initial margin requirements (around 25% expect a marginal increase). Only around 40% expect to pass on the additional costs, of whom only half expect to fully pass on costs.
Need for collateral optimisation services but only limited appetite for re-use. 40% of buy-side respondents are currently performing collateral optimisation on a piecemeal basis. Only around 10% plan to permit re-hypothecation on margin posted and around 50% are not willing to lend securities (30% undecided).
8)
Interest in transforming collateral is greatest in corporate bonds and equities. Around 30% of respondents said they would require transformation services. These respondents indicated that they were most interested in transforming corporate bonds (~25%), equities (~25%) and agency MBS (~20%).
9)
OTC SEF execution to be more price-driven. Around 60% of respondents expect to become more price-driven when selecting executing dealers under SEFs.
30%
Change trading behavior/product use
Require transformation services
22% Present with new opportunities
Source: Morgan Stanley Research
4)
24%
CDS single name CDS indices
Rates
6% 29%
Swaptions
Changes to trading behavior and dealer selection % respondents
3)
5%
Swap futures
Exhibit 2
70%
Increase
US Government Bonds
Margining costs expected to reduce OTC trading volumes materially. Around 45% of respondents expect margining costs to result in a reduced level of activity, as well as typically reducing the size of trade and frequency of trade. 8% expect volumes to decline by greater than 20%, 12% expect volumes to decline by 10-20% and 27% expect volumes to decline by 1-9%.
6
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
Morgan Stanley: Stock Implications of Our Joint Findings
MORGAN STANLEY BLUE PAPER
This valuation section solely reflects the views of Morgan Stanley Research, not Oliver Wyman.
Three things we have learned from this work 1) Balkanisation: a major headache for European firms, US firms advantaged The Balkanization of banking markets disproportionately hurts European banks, whilst broadly benefitting US firms. A flurry of new regulations – US FBO proposals, Liikanen (German and French versions), Vickers – alongside a number of other rules has a disproportionate impact on European banks. We believe proposed FBO (Foreign Banking Organisations) proposals in the US could place additional capital and earnings pressure on foreign banks with large US subsidiaries given the need to ring-fence capital and USD funding. This benefits US banks with large deposits bases, and home country advantage in a large, profitable market. This is a particular issue as the US has become a larger percentage of industry profit pools again, as Europe has become less profitable and EM markets have also waned. On the other hand, given the PRA already has stiff rules, we don’t see as many new rules affecting US firms. Key stock conclusions: DBK (EW) appears the most affected given it has the largest skew of group assets and revenues from the US and largest proportion of EUR funding swapped to USD. JPM (OW) is the most advantaged. Exhibit 4
2) OTC transformation: impact overestimated for leading banks The market has overestimated the impact of OTC collateralization rules on wholesale bank earnings and RoEs for the next 3 years. Our investor poll suggests a 10-20% impact to FICC revenues is anticipated by 2015. However in view of slower phasing (e.g. of bilateral collateral rules) and a smaller percentage of affected areas (up to 40% of FICC), despite a large impact in these areas, our base case assumes a 3-5% revenue loss in FICC by 2015. Our joint work includes a proprietary survey of institutional investors that gives us higher conviction that the impact will be phased. This is not to say there won’t be major changes: the survey undertaken jointly by MS’s Rates and Financials research teams (see page 6) also suggests a massive shift likely from OTC swaps to futures, but the banks that have an edge in futures are also the ones with large swap books. Hence, we increase our 2013-15 FICC estimates for a number of the major banks (JPM, BAC, C, GS, DBK) on the back of this note. By contrast, we think the inter-dealer brokers (IDBs) are more heavily affected by these moves: Our estimates for the IDBs (EPS 5-6% below consensus for 2014e) suggest that the market still underestimates the impact on IDB earnings from OTC market reform.
Who is the most exposed to draft FBO rules? Key stock conclusions: This supports our OW on BARC and JPM and our UW on ICAP.
(% of group assets in US subsidiaries) 37%
35%
Exhibit 5
We believe the net loss of revenues in FICC is only 3-5% in 2015e
23%
Rev Loss of ~20% on impacted areas
17% 14%
100
10%
DBK
CS
BARC
UBS
HSBC
BNP
9%
~40% of FICC
8
Phase in will reduce net impact by ~60% 5
Net revenues lost 95
40
RBS
Note: For Barclays, US data is for 1H12. For others, end 2012 Source: Company Data, Morgan Stanley Research, SNL Financial.
Baseline Revenues FY 2015
Post Impact Revenues - FY 2015
Source: Morgan Stanley Research estimates
7
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
Exhibit 6
Exhibit 7
M Estimated O R G A N Simpact T A N L to E Ygroup B L U earnings E PAPER from
collateralisation in FICC: We expect DBK and GS to be most affected in our base case in 2015 UBS
CS
DB
BARC
JPM
BAC
GS
Citi
0% 0% 0%
Scale is critical in FICC, hence the need for smaller players to focus or exit CIB ROE (%) - FY2012 20%
JPM
HSBC BAC
16%
0% -1%
-1%
0%
0%
0%
-1%
-1% -2%
0%
0%
BARC
SOGN 12%
DBK Citi
GS
BNPP RBS
-1%
8%
CSG
UBS
-2%
FICC revenues continue to have strong correlation with CIB ROEs. Investments banks can be segregated into distinct groups based on FICC market shares
4%
-2%
Nomura 0%
-3%
-3%
-3%
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
FICC Revenues ($bn) - FY2012
Source: Company Data, Morgan Stanley Research
-4%
2013e
2015e
Our base case: Cyclical recovery in equities and IBD
Source: Morgan Stanley Research estimates
3) “Decision Time” one year on: Much done, much still to do – addressing of operating gearing and scale dominate
Banks still need to seek scale or downsize where they can’t achieve relevant scale and significantly reduce platform costs. Our work has reinforced our conviction about how much of the cost base has become semi-fixed or driven by transactional volumes, leaving less room for error. The source of competitive advantage is even more driven by relevant scale. New analysis for this note suggests scale has become even more important in driving FICC and Equities returns. Given higher fixed cost base requirements of electronic trading, firms need to have relevant scale on each platform to achieve target efficiencies, or they need to downsize or exit. Put another way, the flowmonster thesis is subtly shifting. To achieve our aspired returns of 12-15%, European banks need to take out 10-25% of costs, and 15-20% of RWAs by 2015. For the US banks, we model group RWAs +3% to -10% by 2015. We think this is plausible, and have given some banks we cover, such as CS and Barclays, more credit than the market has for substantial cost adjustment programmes.
Key stock conclusions: CS (OW) on cost saves as has made most progress lowering its platform costs; JPM (OW) on market share gains and C (OW) on ramping expense cuts.
In our base case, our underlying 2013 total investment bank forecasts (FICC and Equities sales & trading plus IBD revenues) are up ~4%. We model FICC revenues up ~1% in 2013, as we expect stronger revenues against weaker comparables in Q2-Q3. This however is offset by increased regulatory challenges from mandatory clearing starting in March. In equities we expect revenues to be up ~2% from greater cyclical rebound, though this has yet to occur in Q1 as equity trading volumes in the US and Europe are down ~5% YoY. Similarly, we expect stronger YoY performance in equities in Q2-Q3. In IBD, we expect revenues to be up ~5% YoY, as ECM and M&A have a cyclical rebound while DCM issuance remains resilient, as interest rates remain low.
What’s priced in? Our reverse sum-of-the-parts analysis suggests that most CIB divisions are valued at 0.7-1.0x book value, implying 8-11% returns on equity using ~11% CoE and minimal growth. We think 12-14% returns are plausible. Our central case for the top 13 wholesale banking divisions is 13-14% in 2013-14 (see Exhibit 8), albeit this may exclude excess capital and funding at the group level. But every year banks will have to work harder to offset the increasing pressure from industry and regulatory change. Our base case is still slightly below the 15% return on stated equity at a group level that banks have committed to the market (typically 15-19% on tangible equity). We think, however, the range of returns will be wide.
8
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
Exhibit 8
M The O R Gmarket A N S TisAassuming N L E Y B Lcorporate UE PAPE R investment and
banking divisions will fail to make management targets or even their cost of equity 0%
4%
8%
12%
16%
Implied RoE from market
20%
we are 10-15% ahead of market expectations. We are below consensus on the French banks given higher provisions and slower top-line growth from weakening macro, while we think RBS has weaker earnings power due to its shrinking balance sheet.
Implied range
In North America our top picks are JPM and Citi among the large cap banks. We are above consensus on JPM on expectations for share gains and above consensus on Citi on incremental cost cutting and footprint rationalization.
MSe bottom up RoE 2014 MSe bottom up RoE 2013 Management targets Average RoE 2012
Exhibit 10
Average RoE 2011
What’s priced in? We think a cyclical rebound and banks executing their restructuring and cost save plans could drive valuation higher
Average RoE 2009-10 Average RoE 2000-06
1.4 x
Average RoE 1993-99
1.3 x
Exhibit 9
We think banks can hit 12-14% returns in CIB as they normalize in 2013 and 2014, driving valuations potentially higher CIB Return on Equity (%) 18.2% 17.5%
HSBC
BAC SOGN UBS
12.8%
15.7% 14.5% 14.8%
Europe Avg
Group Avg BARC
13.5%
CSG
13.4%
10.9%
BNPP RBS GS Nomura
0.8 x
C
0.7 x
BNPP
0.6 x
Natixis RBS
0.5 x
SocGen 6.0%
8.0%
10.0%
DBK
12.0%
BARC
14.0%
16.0%
18.0%
2014e Return on Tangible Equity
CSGN
7%
2014e
Source: Morgan Stanley Research estimates. Average is weighted. ROE is calculated on clean underlying numbers hence excluding DVA/CVA and other one off expenses in the form of restructuring charges etc. Refers to returns of CIB divisions, excluding non-core/legacy divisions.
Citi
4%
JPM
4%
-3%
3% 3%
DBK DB1
-1%
BAC
-2% -3%
STT
-2% -3% -4%
RBS
In Europe, we prefer those wholesale banks with strong restructuring and cost save potential that are also trading on undemanding valuations. Our top picks are CS, BARC, UBS, BNP. Our thesis means we are at the high end of expectations for most of the banks we cover, such as CS and BARC, where
BK
-5%
-1%
-6% -10%
GS -16%
2014FY 2013FY
-3%
-5%
TLPR
BNP
2%
-4% -4%
ICAP SG
15%
8%
5% 6%
UBS
Top picks
13% 12%
BARC 17.3%
6.9% 7.5% 2013e
BAC
Where we are relative to consensus on earnings
11.7% 11.7% 11.4% 10.1% 10.0% 9.2% 10.0% 10.8%
Citi
GS
0.9 x
CSG
Exhibit 11
13.5% 13.6% 13.5% 13.5%
US Avg
1.0 x
Underlying UBS
Note: Underlying UBS refers to 2015e ROTE post-restructuring Source: Morgan Stanley Research estimates
14.7% 14.5% 14.2% 14.1%
JPM
JPM
1.1 x
0.4 x 4.0%
17.3% 18.0% 16.6% 16.3%
DBK
HSBC
UBS
1.2 x Price/ 2013e Tangible Equity
Source: Company Data, Morgan Stanley Research estimates (e). Average is weighted. ROE is calculated on clean underlying numbers hence excluding DVA/CVA and other one off expenses in the form of restructuring charges etc. Refers to returns of CIB divisions, excluding non-core/legacy divisions
-1% -3% -3%
-12%
Source: Company Data, Morgan Stanley Research, Thomson One
9
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
European banks are most affected in the next phase given FBO proposals, Vickers reforms, Liikanen (including German and French varieties) and other responses to Eurozone stress. Therefore, we believe US banks to be advantaged as regulation for US banks within the US and outside (i.e. PRA) is more clear. For this note we have done a deep dive on the European banks most affected. We believe proposed FBO (Foreign Banking Organisations) proposals in the US could place capital and earnings pressure on foreign banks with large US subsidiaries. For example, 37% of DBK’s balance sheet is in its US subsidiaries (and a further 20% in its branch). CS and BARC are also highly exposed.
We believe DBK and BARC to be the most affected by capital rules as current capital positions in the US imply a shortfall Capital Shortfall in US Subsidaries
30%
20
20
25% 20%
15
20% 15%
10
10
10%
5
5% 0 0%
0 DBK
BARC
Note: For Barclays, US data is for 1H12 Source: Company Data, Morgan Stanley Research, SNL Financial.
Exhibit 14
At DBK, US subsidiarisation still implies a capital gap of $7-9bn on our estimates post restructuring and future earnings – but also requires DBK to shrink US subsidiaries by 1/3 from $440bn to $300bn 35
DBK potential US Capital Gap 30.0
30
9.4
25 20.6
20
7.3
15
2.3 3.7
Who is the most exposed to potential draft FBO rules? (% of group Assets in US subsidiaries) 35%
0 Capital gap at Move to IHC Taunus on last data
IHC Q3
i-bank restructuring
Earnings
DTAs used
Min net gap
Source: Morgan Stanley Research estimates
Shrinking US balance sheet ($100m) Higher US funding costs: 25-75bps higher on €90bn of intragroup funding Coco cost - $7bn @ 7.6%
17% 14% 10%
CS
DBK: Including lost revenues from balance sheet reduction and cost of new CoCo issuance to bridge the capital gap, we think the potential hit to 2015 underlying group PBT could be 1-12% Lost revenues/higher costs
23%
DBK
7.3
5
Exhibit 15
Exhibit 12
37%
0%
CS
10
Although we estimate a capital gap at DBK and BARC under the FBO proposals, we expect it to be addressed through substantial balance sheet shrinkage (e.g. by one-third at DBK) as well as filled by CoCo and/or hybrid issuance rather than by straight equity. We think ring-fenced funding will be a more meaningful issue for earnings.
Capiral Shortfall (%Tier 1 Capital)
30%
25
Capital Shortfall (US$bn)
Global banks remain under pressure from the Balkanization of banking markets. It poses a risk to cross border finance from ring-fencing as national policymakers look to reduce interdependence of their banking markets to other markets and perceived risky areas. We think domestic regulators will seek to “trap” more liquidity and capital. Some new regulations are regional (such as US FBO proposals) others are by business line (like Vickers, Liikanen, German/French rules).
Exhibit 13
$bn
1) Impact of Balkanisation/subsidiarisation on returns and models
MORGAN STANLEY BLUE PAPER
BARC
UBS
HSBC
BNP
9%
Total PBT lost
PBT €m
80 200-650 0-400 80-1130
Source: Morgan Stanley Research
RBS
Note: For Barclays, US data is for 1H12 Source: Company Data, Morgan Stanley Research, SNL Financial.
10
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
We think funding costs could go up. Our work suggests MORGAN STANLEY BLUE PAPER DBK will feel the greatest impact from FBO USD proposals. For instance it could cost DBK 25-75bps more to fund the current €90bn line from parent to subsidiaries, which could add €200-650m more interest cost p.a. (or 5-15% of investment bank PBT). Including lost revenues from balance sheet shrinkage (mostly in repo) and cost of new CoCo issuance to bridge the capital gap, we think the hit to earnings could be €80-1130m or 1-12% of group PBT. More broadly, given the focus in FBO on reducing use of local funding and swapping to USD, many European banks without a natural source of dollars will become less relevant in dollar markets as it remains the functional currency of commodity finance, trade finance, and so on. European banks have already reduced their USD portfolios materially, but we expect this will continue. The Vickers reforms in the UK are likely to shave several percentage points off returns for UK banks. The key goal of ring-fencing retail banking operations is likely to cause funding costs to increase, as non-ring-fenced operations are explicitly not benefiting from a government guarantee. The splitting of the banks, duplication of systems and processes and monitoring of the fence is also likely to increase costs. At this stage, we believe the potential impact from Liikanen-like proposals on French and German banks to be less adverse than implied by the report. Although we believe the potential reforms to be similar in philosophy to the US Volcker, Vickers or Liikanen proposals (i.e. aiming to remove moral hazard from the banking system while maintaining enough resources to finance the economy), we think they will be more limited in scope. We believe the outcome is closest to the US Volcker rule (i.e. ring-fencing proprietary trading activities) including other limitations (i.e. banks not allowed to own a hedge fund or provide them with unsecured funding) rather than going as far as the UK Vickers or Liikanen proposals on ring-fencing. We do not expect a drastic change to the universal banking model. Advantaged: Major US players, such as JPM, GS, Citi, BAC, will be able to take advantage of the exit or downsizing of European players from the attractive US market as they face higher regulatory standards and funding costs than in the past. US players will also have the opportunity to acquire portfolios that European banks may be pressured to sell (i.e. recent sale of loan portfolios by RBS, BNP). Potentially challenged: 1) Foreign banks in the US that may require greater standalone funding or capital and/or are facing risks of higher funding costs, such as DBK, and less so for BARC, CS. 2) Those that are exiting US dollar activity given funding pressures, such as French banks, as they also face greater competition from local players.
2) Impact of the transformation of OTC markets: winners and losers We argue in the joint section of this note that the economics of facilitating OTC derivatives are about to change significantly. US regulation (Dodd-Frank Act) has seen the first phase of mandatory buy-side clearing commence (March 2013). This is driving increased initial margin collateral requirements, with transparency also set to increase under SEF requirements. We expect an impact from European mandatory clearing requirements from 2014 (post EMIR), whilst rules governing pre-trade transparency are unlikely to be implemented until 2015 (MiFID II). Margin posting for uncleared derivatives is also delayed until 2015. We explore the impact for banks, IDBs and other players. First, Rates trading is likely to see the biggest impact. But we believe the market overestimates the impact of OTC collateralization rules on the earnings and ROEs of the investment banks. Respondents to our investor poll suggest the market anticipates a 10-20% revenue loss in FICC. However, our detailed work suggests only a 3-5% impact to FICC revenues by 2015 in our base case. This is because we believe the percentage of affected areas within FICC is likely lower than the market expects at up to 40% for the most exposed players, and the slower phasing (e.g. of bilateral collateral rules) means the full impact won’t be felt for some Exhibit 16
We expect Rates to be the most affected by collateralization rules out of our base case of $1.4trn of new collateral needed Equity derivatives, 21%
Commodity , 2%
FX, 10%
Credit, 2%
Rates, 65% Note: chart shows % of net incremental collateral required. Source: Morgan Stanley Research
11
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
years. On the back of the work in this note, we assume only MORGAN STANLEY BLUE PAPER 10% of the phasing is in 2013 and 60% by 2015. This equates to a 1-2% drag on FICC and equity trading revenues in 2013. We expect another 2-3% drag in 2014 and a 1% or so drag in 2015. Overall, we are looking for FICC trading revenues to grow 1% in 2013, 1% in 2014 and 3% in 2015 as OTC clearing weighs on revenue growth, partially offset by rising GDP expanding capital markets into Europe and Latin America. We increase our FICC estimates for the US banks and DBK on the back of this note. GS and DBK prima facie look most affected by OTC transformation rules at the group level (Exhibit 19). Our base case for them assumes a ~3% hit to group earnings in 2015 using our joint assumptions about phasing. Key assumptions in our analysis: For all the wholesale banks, our base case assumes a 20% reduction in revenues for the relevant OTC products from both lower volumes (10%) and tighter bid/ask spreads (10%). For the most exposed players, we assume 40% of FICC revenues is affected. Our bear case is 30% lower revenues implying a 30% reduction in volumes and 20% squeeze in bid/ask spreads as more clients disengage due to costs associated with clearing and margin posting as well as greater transparency reducing margins. Our bull case assumes a 5% uplift to revenues as we assume no change to trading volumes with client activity not affected by clearing and collateral posting. But we assume bid-ask spreads widen by 5% as some clients shift to higher margin trades that are not subject to clearing requirements and are not yet required to post collateral (i.e. bilateral collateral requirements). Relatively Advantaged: Dealers with a lower skew to FICC revenue (as a percentage of group revenues) will suffer less under the OTC derivative rules, such as JPM, BAC, and CS. UBS, with less rates business and more FX and equities, should also be less affected. BARC is also less affected than expected. Disadvantaged: Banks with a weighted average skew towards rates and greater investment banking (FICC) earnings as a proportion of the group will feel a larger negative impact on trading volumes and spreads, such as DBK and GS. IDBs like ICAP and TLPR are also likely to see a decline in revenues.
Exhibit 17
“How much do you think overall FICC revenues could still shrink from the transformation of OTC markets by 2015?” We think markets are too fearful according to our investor poll as we think market overestimates % of affected areas and phasing 0%
5%
10%
15%
20%
25%
30%
0-5% 5-10% 10-15% 15-20% >20% Source: Morgan Stanley Research. Based on investor poll taken at Morgan Stanley European Financials Conference March 2013
Exhibit 18
We believe the net loss of revenues in FICC is only 3-5% in 2015e Rev Loss of ~20% on impacted areas
100
Phase in will reduce net impact by ~60%
8
~40% of FICC
Net revenues lost
5
95
40
Post Impact Revenues - FY 2015
Baseline Revenues FY 2015
Source: Morgan Stanley Research
Exhibit 19
Estimated impact on group earnings from collateralisation in FICC: We expect DBK and GS to be most affected in our base case in 2015e UBS
CS
DB
BARC
JPM
BAC
GS
Citi
0% 0% 0%
0% -1%
-1%
0%
0%
-1%
-1% -2%
-3%
0%
0%
0%
-1% -2%
-2% -3%
-3%
-4%
2013e
2015e
Source: Morgan Stanley Research estimates
12
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
Impact on OTC transformation is even bigger on IDBs MORGAN STANLEY BLUE PAPER We estimate that 7-10% of IDB revenues at ICAP and TLPR will be affected by the Dodd-Frank rules for US OTC derivatives. We estimate that this rises to 25-30% of group revenues as European rules are implemented. We see risks to IDB revenues arising from a drop in overall OTC market volumes as collateral costs of doing business for the buy-side increase post Dodd-Frank. We also expect an associated shift from swaps to futures (given differentials in capital costs of clearing) could see a 10-25% reduction in swaps business. Meanwhile, increased pre-trade transparency, which drives reduced spreads for investment banks, is likely to drive pressure on IDB commission levels as banks seek to offset pressures on their own profitability. Against this, we expect the requirement for a significant part of OTC volumes to be transacted via a swap execution facility (SEF or OTF in Europe) will increase intermediated vs. bank bilateral business, providing some potential offset for the IDBs.
Exhibit 20
IDBs – reducing ICAP & TLPR estimates 3-5% for 2014 places us 5-6% below consensus £mn
2012
ICAP Voice revs
990
970
-7%
966
-8%
963
Other revs
476
522
4%
557
5%
596
4%
-3% 1,523
-4% 1,558
-5%
-4%
-5%
35.7
-8%
-4%
Group revs EPS (p)
2013e % Chg
1,466 1,491 31.4
32.4
2014e % Chg
33.9
Cons EPS (p)
33.7
35.5
Difference to cons
-4%
-4%
TLPR Voice revs
2015e % Chg
-10%
805
796
0%
792
-2%
789
Other revs
53
58
0%
63
0%
69
0%
Group revs
858
853
0%
855
-2%
858
-4%
EPS (p)
40.4
36.3
0%
37.5
-3%
40.9
-4%
Cons EPS (p)
37.3
40.0
Difference to cons
-3%
-6%
Note: for ICAP, 2013e = March 2014 year end; same for 2014 and 2015 Source: Morgan Stanley Research, Bloomberg
Who wins? Market infrastructure players – but we expect upside to be limited
Reflecting the above impact of US rules on IDBs in isolation leads to a 1-3% decline in IDB top-line revenue for ICAP and TLPR, on our estimates. Assuming lower associated broker comp offset would imply a 2-6% hit to group profits. Extending this to reflect a similar impact for Europe would increase the total impact over 3+ years to 3-10% to top line and 8-20% to profits.
We see opportunities for market infrastructure providers in two key areas: 1) clearing infrastructure given mandatory OTC clearing requirements (per Dodd-Frank and EMIR); and 2) collateral management and transformation services given the growing requirement for collateral (which Oliver Wyman estimates at an incremental $1.4 trillion by 2020 for cleared and non-cleared OTC trading).
Our base case estimates take into account, in addition to the above, i) the phasing of regulations; ii) some evidence of cyclical improvement in activity YTD (especially in FX and rates); and iii) the possibility of an increased share of OTC being intermediated by IDBs. We model in our base case a decrease in voice broking revenues of 0-1% pa 2012-15e.
Whilst we see attractive incremental revenue opportunities from OTC clearing, we expect that the need to share profits with users may limit potential – overall we expect that the global OTC clearing opportunity is no more than $1 billion revenues and could be less depending on pricing approach/economic share with users.
Advantaged/disadvantaged: This is a key part of the reason why we remain cautious on the IDB sector (UW ICAP, EW TLPR). On the back of this work we have lowered our 2015 voice broking revenue assumptions by 5-10%, reflecting the ongoing drag from the above regulatory phasing and in view of expected swaps to futures migration. Despite some modest cyclical improvement noted in FX and rates, this still results in a 3-5% cut to 2014 EPS, leaving us 5-6% below consensus.
LCH and ICE appear well placed as the effective incumbents in interest rate (IR) and credit default swaps, respectively. LCH generated €72m of clearing fees in 2012 (up 62% on prior year) from clearing ~75% of the dealer-to-dealer market in IR swaps via OTC Swapclear, while ICE generated $66m from ICE Clear Credit and ICE Clear Europe. The introduction of mandatory buy-side clearing in the US from March 2013 and in Europe (likely from 1H14) also presents opportunities for CME and DB1 given their credentials in IR futures clearing. DB1 hopes to provide a compelling offering via i) cross-margining offsets (futures vs. swaps) and ii) client collateral segregation. However we see competitive pressures, plus the strength of incumbent LCH (>$24 trillion of buy-side notional cleared to date) as limiting upside. Our survey on client clearing suggests LCH and CME are in a stronger position. 13
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
Collateral management offers a potentially bigger top-line MORGAN STANLEY BLUE PAPER opportunity, though we suspect this is more likely to accrue to the sell-side and some of the large global custodians, rather than ICSDs (International Central Securities Depositories) given the large “collateral-acceptable” bond inventories that US money center and trust banks have and their desire to generate incremental revenues on these under-earning assets. We see BNY Mellon, JPMorgan, Citigroup as US beneficiaries of collateral management, although the revenue opportunity is not yet meaningful. These companies carry high liquidity and high levels of acceptable collateral for futures exchanges like US government and agency bond. Collateral management should drive incremental fees as insurance companies and other investors seek to transform unacceptable collateral (like corporate debt) to acceptable collateral (US Governments). The ultimate profitability is a function of quality of collateral transformed and duration of the investment. We estimate that this service will be priced like securities lending or repo products. For now, ahead of the finalization of the rules, we assume a revenue pool of about $1-2bn which likely grows higher as short-term rates rise. We think this translates to about a $300m revenue opportunity for the largest players. We see a more compelling opportunity for DB1 in collateral optimization services vs. OTC clearing, given capabilities in clearing allied to larger ~€11 trillion custody balances. However based on license and volume related fees and in view of competition (Euroclear is also planning to offer a “collateral super highway”); we model a ~€60 million revenue opportunity for DB1 (~2% of group) by 2015. Potential upside could come from increased custody fees to the extent that users allocate increased balances to Clearstream to benefit from the network effect. For DB1 we increase 2014 EPS estimates ~2% and 2015 ~3% given explicit forecasting of the above in our base case. Exhibit 21
DB1: Impact on estimates from OTC clearing and collateral management – modest 2-3% increase to 2014/15e €mn
2012
2013e
% chg
2014e
% chg
Eurex revs
912
973
1%
1,076
2%
1,140
3%
Clearstream revs
768
779
0%
839
2%
905
5%
2,209
2,256
0%
2,441
1%
2,594
2%
3.85
1%
4.46
3%
5.09
3%
Group revs EPS (€)
3.59
Cons EPS (€) Difference to consensus
2015e % Chg
3.86
4.30
4.86
0%
4%
5%
Advantaged/disadvantaged: In OTC clearing we view incumbents LCH and ICE as well placed in IR swaps and CDS clearing respectively given existing success with dealers driven by a strong partnership approach. Whilst DB1’s credentials in IR futures clearing offer potential to benefit from buy-side clearing of IR swaps, we do not expect this to be meaningful to group profitability given the degree of competition for the opportunity and the head start of LCH. We model €20m revenue contribution by 2015 (10% Core Tier 1 / RWA) and leverage (de facto 7% vs. GAAP assets) requirements US stress test requirements (internal company run and CCAR)
Shrinking US balance sheet - Leverage constrained: Repo, corporate loans - Stressed capital constrained: mortgages Injection of capital into the US entity
$0-150mn1
Operational
Governance: new US Risk Committee and CRO function Risk processes: Compliance with CCAR process, Fed approval for risk models Reporting: Annual, quarterly and monthly report submissions
Ongoing systems, processes, tools and resources to manage CCAR process and other US regulatory requirements Establishment of US risk committee and appointment of US Chief Risk Officer
$20-100mn
1. Assuming cost of capital of 12% Source: Oliver Wyman analysis.
21
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
Exhibit 32
M Diverging ORGAN S T A N L E Y BtoL moral UE PA P E R and risk-taking activities approaches hazard UK
EU
Applicability
Independent Commission on Banking (Vickers) “Banking reform” paper UK banks with >£25bn mandated deposits Likely to affect 2-5 UK banks
Ring-fence type
Retail ring-fence
Explicitly segregated into trading entity
Most wholesale / Prop trading investment banking Market making activities including Alternative investment market-making and funding (HFs, PE, SIVs) underwriting Non-EEA activity Transactions with other FIs except permitted activities
Timing
2019
TBD
RoE impact1
0.5-3% drag Worst case: Additional capital and funding required Best case: Mitigated via new funding structures
0.5-3% drag Impacts and mitigation levers similar to UK ICB Political process less certain
Regulation
Liikanen report (EU High-Level Expert Group) EU banks >15–25% or €100bn of HFT2 & AFS3 assets Likely to apply to 15–20 large EU banks Trading entity
France
Germany
US
Banking Reform Bill (Dec German draft legislation; in Dodd-Frank Act (DFA) 2012); in close cooperation close cooperation with the §619: The Volcker Rule with German regulation French regulation DFA §716: Swap Push-Out French banks >20% or German banks >20% or §619: All US banks and €100bn of HFT2 & AFS3 >€100bn of HFT2 & AFS3 FBOs with $1bn+ in global assets assets (only for banks trading assets Likely to apply to 3 French >€90bn total assets) §716: FDIC insured banks Likely to apply to 2-4 large institutions German banks Speculative trading Speculative trading §619: Not explicit ring-fence activities unrelated to activities unrelated to §716: Swaps dealer financing economy financing economy Prop. trading (without Prop. trading (without §619: Ban on proprietary direct client context) direct client context) trading and investment activity, subject to (High-risk) Trading (High-risk) Trading exemptions (e.g. US activities above threshold activities above threshold government securities) Market making without Market making without §716: Trading in derivatives direct client context direct client context subject to exemptions Lending & guarantee Lending & guarantee business with HF & PE business with HF & PE Examined by parliament Law expected Jan 2014, §619: July 2014, dependent on final rule Feb 2013, enforced by July enforced by July 2015 2015 §716: July 2013 0-1% drag 0-1% drag 0-1% drag Impact on RoE muted by Impact on RoE muted by Significant impact already limited scale of activity in limited scale of activity in absorbed the impacted areas the impacted areas Depending on final rules, risks remain to core market-making activities
1. Range reflects regulatory uncertainty on average industry impact; 2. Held for trading; 3. Available for sale
Moral hazard reforms are manageable in isolation but add complexity to the puzzle Regulators have drafted a range of widely varying regulations aiming to insulate deposit-insured retail banking from the risks arising from trading activities, ranging from the Volcker rule in the US, to the Independent Commission on Banking (ICB) proposals in the UK. We believe that taken in isolation the regulatory goals of these ‘moral hazard’ reforms may be addressable with only limited incremental impact on wholesale banking RoEs. However much remains dependent on the final specification of the rules. Furthermore, the US, the UK and wider European rules add complexity to the design of international legal entity structures and funding models. The UK is the most committed to ring-fencing and is pressing ahead with the ICB proposals to ring-fence the retail bank, although key details remain to be defined. In Europe, the Liikanen proposals suggested a comprehensive ring-fencing of trading activities, although national proposals (e.g. France and Germany) are somewhat more narrowly focused. There has been much talk of trapped capital and liquidity from ICB/Liikanen-type separations – and a first pass analysis can indeed lead one to be nervous. But we think that overall effects
Source: Oliver Wyman analysis
will be muted with a maximum average loss of 2-3% off RoE on the wholesale bank and a best case impact of near zero. Careful positioning of funding sources across entities is the key lever in managing down financial costs, with much depending on the final details of the proposals.
In a realistic worst case, loss of sovereign support and structural subordination effects would result in a 2-notch downgrade to senior ratings, with a knock-on impact on short-term ratings and the ability to issue AAA covered bonds. In such a scenario, we envisage banks raising additional capital to reduce the rating impact and suffering a funding cost hit to senior unsecured funding – translating into a 2-3% points loss of RoE on average to European trading entities, albeit with significant skews across banks.
At the other end of the spectrum, positioning of funding at a mix of holding company and operating subsidiary levels could mitigate the prima facie impact of Liikanen-type separation on earnings diversity; rating agencies may continue to view holding companies and trading entities as enjoying some degree of sovereign support and the financial impact could be near zero.
22
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
Operational separation would inevitably create some MORGAN STANLEY BLUE PAPER duplication, while increasing the complexity of management. However, we believe that more extreme operational impacts can be effectively mitigated through use of operating subsidiary structures separate from the financial subsidiaries as well as shared services and service level agreements consistent with a carefully considered recovery and resolution plan. If this were well managed, we would expect the operational cost impact to be 20%
Market view • Our recent investor poll at the Morgan Stanley European Financials Conference on market views reveals market believes FICC revenues to be negatively impacted by 10-20% from the transformation of OTC markets • Our detailed analysis suggests the market is too fearful as we think market overestimates % of affected areas and phasing
Baseline Revenues FY 2015
Post Impact Revenues - FY 2015
MS view • In view of slower phasing (e.g. of bilateral collateral rules) and a smaller % of affected areas (up to 40% of FICC), despite hefty hit on affected areas (~20% drop in revenues in our base case), our work suggests ~3-5% impact to FICC revenues by 2015 in our base case • We increase our US estimates (and DBK) for FICC on the back of this note
Source: Company Data. Morgan Stanley Research
60
The Three Biggest Challenges April 11, 2013
Who is most affected by collateralisation in FICC? We expect DBK, GS to feel the greatest impact as a % of group earnings Local currency FICC Revenues - Current FICC Revenues - Pre-impact ow Impacted areas Impacted areas (% FICC) % Phasing % of Impacted lost - BULL % of Impacted lost - BASE % of Impacted lost - BEAR Revenues Impact - BULL Revenues Impact - BASE Revenue Impact - BEAR % of FICC rev lost - BASE Operating Magin (%) - Rates PBT Impact - BULL PBT Impact - BASE PBT Impact - BEAR IB PBT - Pre-impact % of IB PBT - BULL % of IB PBT - BASE % of IB PBT - BEAR Group PBT - Pre-impact % of Group PBT - BULL % of Group PBT - BASE % of Group PBT - BEAR
UBS 2013e 2015e 1,780 1,852 1,787 1,896 356 370 20% 20% 10% 60% 5% 5% -20% -20% -30% -30% 2 11 (7) (44) (11) (67) 0% -2% 60% 60% 1 7 (4) (27) (6) (40) 1,087 1,402 0% 0% 0% -2% -1% -3% 5,051 8,550 0% 0% 0% 0% 0% 0%
Credit Suisse 2013e 2015e 5,310 5,470 5,342 5,667 1,593 1,641 30% 30% 10% 60% 5% 5% -20% -20% -30% -30% 8 49 (32) (197) (48) (295) -1% -3% 60% 60% 5 30 (19) (118) (29) (177) 2,634 3,647 0% 1% -1% -3% -1% -5% 6,730 9,174 0% 0% 0% -1% 0% -2%
Deutsche Bank 2013e 2015e 9,600 9,333 9,677 9,781 3,840 3,733 40% 40% 10% 60% 5% 5% -20% -20% -30% -30% 19 112 (77) (448) (115) (672) -1% -5% 60% 60% 12 67 (46) (269) (69) (403) 4,402 4,860 0% 1% -1% -6% -2% -8% 6,977 9,580 0% 1% -1% -3% -1% -4%
Barclays 2013e 2015e 7,200 7,350 7,258 7,703 2,880 2,940 40% 40% 10% 60% 5% 5% -20% -20% -30% -30% 14 88 (58) (353) (86) (529) -1% -5% 60% 60% 9 53 (35) (212) (52) (318) 4,063 4,863 0% 1% -1% -4% -1% -7% 8,635 11,188 0% 0% 0% -2% -1% -3%
JP Morgan 2013e 2015e 16,083 17,145 16,212 17,968 6,433 6,858 40% 40% 10% 60% 5% 5% -20% -20% -30% -30% 32 206 (129) (823) (193) (1,234) -1% -5% 60% 60% 19 123 (77) (494) (116) (741) 13,199 16,208 0% 1% -1% -3% -1% -5% 33,312 39,509 0% 0% 0% -1% 0% -2%
Bank of America 2013e 2015e 10,956 10,989 11,043 11,517 4,382 4,396 40% 40% 10% 60% 5% 5% -20% -20% -30% -30% 22 132 (88) (527) (131) (791) -1% -5% 60% 60% 13 79 (53) (316) (79) (475) 15,909 18,312 0% 0% 0% -2% 0% -3% 17,750 29,090 0% 0% 0% -1% 0% -2%
Goldman Sachs 2013e 2015e 10,937 11,420 11,025 11,968 4,375 4,568 40% 40% 10% 60% 5% 5% -20% -20% -30% -30% 22 137 (87) (548) (131) (822) -1% -5% 60% 60% 13 82 (52) (329) (79) (493) 7,586 8,922 0% 1% -1% -4% -1% -6% 10,767 11,871 0% 1% 0% -3% -1% -4%
Citigroup 2013e 2015e 13,845 14,475 13,956 15,170 5,538 5,790 40% 40% 10% 60% 5% 5% -20% -20% -30% -30% 28 174 (111) (695) (166) (1,042) -1% -5% 60% 60% 17 104 (66) (417) (100) (625) 8,428 9,728 0% 1% -1% -4% -1% -6% 20,591 27,403 0% 0% 0% -2% 0% -2%
Total (US$) 2013e 2015e 82,593 84,930 83,235 88,890 32,097 32,999 39% 39% 10% 60% 5% 5% -20% -20% -30% -30% 160 990 (642) (3,960) (963) (5,940) -1% -4% 60% 60% 96 594 (385) (2,376) (578) (3,564) 60,880 72,134 0% 1% -1% -3% -1% -5% 116,947 155,913 0% 0% 0% -2% 0% -2%
Source: Company Data. Morgan Stanley Research
• Our coverage universe assumes ~$4bn reduction from new regulation in our base case for FICC revenues vs. total projected revenue decline of $510bn for the industry by 2015 and $10-15bn by 2018. FICC covers ~90% of total lost industry revenues we think. • Our base case assumes 20% reduction in FICC revenues from swap clearing driven by 10% decline in trading volumes as clients disengage as they begin posting collateral on derivative trades. We also assume a 10% decline in bid-ask spreads as greater pre/post trade transparency reduces margins • We assume a phasing of regulation of 10% in 2013 and rising to 60% in 2015 in view of slower phasing of bilateral collateral rules • Our assumption on affected areas within FICC ranges from 20% (for UBS given low exposure to rates) and up to 40% for most exposed players • We believe DBK and GS to be the most negatively affected with new rules trimming ~3% off 2015e group earnings given exposure to affected areas and to investment banking • Risks to the downside for our bear case include greater decline in trading volumes and tighter bid-ask spreads while upside is lower impact on trading volumes and wider spreads as clients shift to higher margin trades that are not subject to clearing requirements
61
The Three Biggest Challenges April 11, 2013
Impact of collateralisation: Deutsche Bank DBK FICC Revenues
DBK CB&S Revenues (2012)
Other 11%
Equity 15%
EM 5%
IBD 16%
Other 5%
Credit 30% Macro 60%
FICC 58%
Quantifying the impact: Deutsche Bank • We believe DBK to be one of the most affected by new collateralisation rules given its greater skew to FICC (~60% of 2012 revenues) and within that ~60% to macro including rates, on our estimates. • Given DBK is one of the top global players in US and European fixed income (top 3 in both) including interest rate derivatives, we believe the % affected in FICC is at the top end of the range at ~40% exposed to affected areas (i.e. swaps and other OTC products like IRS, CDS, FX options, commodities).
What it means for our estimates • We estimate ~5% off FICC revenues lost in our base case in 2015e assuming 20% revenue decline from a combination of volume and spread reduction in our base case. • This implies a ~6% fall in i-bank PBT at DBK and ~3% lower group PBT when ~60% of the rules come into full effect globally and across products in 2015. • If we look at a range of outcomes, our bear case implies a potential reduction in i-bank PBT of ~8% assuming 30% reduction in revenues and bull case accretion of ~1%.
Source: Company Data. Morgan Stanley Research
62
The Three Biggest Challenges April 11, 2013
Impact of collateralisation: Barclays Barclays Investment Bank Revenues - 2012
IBD 18%
Other 2%
Equities 17%
FICC 63%
Quantifying the impact: Barclays
Barclays FICC Revenues - 2012
EM 13%
Other 6%
Macro 28%
Credit 53%
What it means for our estimates
• We believe Barclays will be modestly affected by new collateralisation rules given greater skew to FICC (~63% of 2012 revenues) and within that ~28% to macro including rates.
• We estimate ~5% off FICC revenues lost in our base case assuming 20% revenue decline from a combination of volume and spread reduction.
• Although Barclays’ disclosure on FICC breakdown implies its exposure to impacted areas is low, we believe in fact Barclays is a top 5 player in rates given differences in reporting. Therefore, we estimate the % of FICC in impacted areas to be at the high end of 40%
• This implies a ~4% fall in i-bank PBT at BARC and ~2% lower group PBT in 2015 in our base case. This is less than at DBK and GS. • If we look at a range of outcomes, our bear to bull cases imply potential reduction in group PBT of ~3% and no change in the bull case
Source: Company Data. Morgan Stanley Research
63
The Three Biggest Challenges April 11, 2013
Impact of collateralisation: Goldman Sachs GS Firm Revenues (2012) Inv Mgmt 15%
Exposure to FICC and Impacted Revenues 32%
Equity 23%
Inv & Lending 17%
17%
16% 13% IBD 14%
FICC 31%
Quantifying the impact: GS • We believe GS to be one of the most affected by new collateralisation rules given its greater skew to FICC (~30% of 2012 revenues). FICC drives the highest proportion of group revenues
12% 7%
6%
GS
JPM
FICC Rev as % of Group Rev
C
5%
BAC
Impacted Rev as % of Group Rev
What it means for our estimates • We estimate ~5% off FICC revenues lost in our base case in 2015e assuming 20% revenue decline from combination of volume and spread reduction in impacted areas • This implies ~4% fall in i-bank PBT at GS and ~3% lower group PBT in 2015 in our base case • If we look at a range of outcomes, our bear to bull cases imply potential reduction in group PBT of 4% to up 1% in our bull case
Source: Company Data. Morgan Stanley Research
64
The Three Biggest Challenges April 11, 2013
Opportunity from collateral management – BNY Mellon Industry-wide collateral needs are expected to rise, creating opportunities in infrastructure supporting clearing, collateral management and tangential services • We expect the impact of the flatter yield curve resulting from global monetary easing to intensify competition in collateral management. This could see custodian banks moving up into traditional prime brokerage services as they try to gain incremental business to offset pressure on margins.
Estimated Collateral Shortfall ($bn) Bull
Base
Central Clearing IM
800
Bilateral IM
1,692
3,130
Bear
Source: Company data 2012, Morgan Stanley Research, BIS, CME, ICE, LCH
Quantifying the impact: Industry-wide • We see a wide range of possible outcomes for collateral management revenue pools. If we assume the entire $1.7 trillion is secured with corporate securities at a 20% haircut that is reinvested at 25-50bp, this yields a $1-2bn revenue opportunity from collateral transformation services (equivalent to a 6-13bp fee on collateral transformed).
Quantifying the impact: BNY Mellon • Collateral transformation revenue opportunity is upside to our current earnings forecasts for BK • We estimate the potential revenue opportunity is worth $100200m for every 10% points of collateral transformation market share captured by BK. That’s worth about 7-13c per share or 25% of our 2015 earnings forecast.
• A wide range of companies are likely to seek incremental collateral management revenues, including broker/dealers, custodians, execution venues, etc.
65
The Three Biggest Challenges April 11, 2013
Impact of collateralisation on OTC: Inter Dealer Brokers (IDBs) – ICAP ICAP FY13e Revenues Post Trade & Information, £208m, 14%
Potential Voice Revenue Exposure to Regulation
Interest Rates, £369m, 25%
EU Impacted OTC, £267m, 27%
FX, £97m, 7% Credit, £93m 6%
Electronic, £270m, 18%
Equities, £104m, 7%
US Impacted OTC, £150m, 15%
EM, £140m, 10%
Other Voice, £573m, 58%
Commod., £186m, 13% Source: Company Data, Morgan Stanley Research Estimates
Quantifying the impact: ICAP • Voice broking represents 67% of ICAP’s revenues • Of voice revenues we estimate ~40% relates to swaps and other OTC products (IRS, CDS, FX options, commodities, equities) impacted by Dodd Frank and associated EU regulations, with ~15% related to US business in these areas. • Collateralisation rules and potential substitution of swaps to futures could affect 10-25% of relevant revenues near term in the US with a longer dated impact on Europe depending on timing/detail of final rules, we estimate.
What it means for our estimates • We estimate 1.5-4.0% off voice broking revenues or 1.0-2.5% off group revenues related to US business. Adjusted for broker comp costs (~60% of costs) would imply 2-5% group profit impact. • Applying the above to capture global impact (e.g. as European regulations have an impact in 2014/15 onwards) would increase voice broking revenue loss to 4-10% and group profit impact to 513%. • We forecast voice revenues down 0-1% pa in FY13-15e (March Y/E) as cyclical improvements in part offset the above drag in relevant product areas.
66
The Three Biggest Challenges April 11, 2013
Impact of collateralisation on OTC: Inter Dealer Brokers (IDBs) – Tullett Prebon Potential Revenue Exposure from Regulation
Tullett Prebon - FY13e Revenues
Equities, 40 , 5%
Information sales, 50 , 6%
Treasury Products, 229 , 27% EU Impacted OTC, £155m, 18%
Energy, 108 , 13%
Interest Rate Derivatives, 179 , 21%
Other voice, £580m, 69%
US Impacted OTC, £61m, 7%
Fixed Income Information, Securities, £50m, 6% 239 , 28% Source: Company Data, Morgan Stanley Research Estimates
Quantifying the impact: Tullett Prebon • Voice and hybrid broking drive 94% of Tullett Prebon’s revenues. • Of this we estimate ~25% relates to swaps and other OTC products (IRS, CDS, FX options, commodities, equities) impacted by Dodd Frank and associated European regulations and ~7% to US business in the above areas.
What it means for our estimates • We estimate 1-2% off voice broking revenues and group revenues related to US business. Assuming broker comp cost saves (~60% of total costs) would imply 2-6% hit to profits. • Applying the above to capture global impact (e.g. as European regulations have an impact in 2014/15 onwards) would increase voice broking revenue loss to 2.5-6.0% and group profit impact to 8-20%. • We forecast ~0-1% revenue decline per annum in 2013-15e as cyclical improvements partly offset regulatory/structural impacts.
67
The Three Biggest Challenges April 11, 2013
Opportunity from collateral management and OTC clearing – Clearstream GSF & Other Revenue (€m)
Data & Analytics, 234 , 11%
Custody, 438 , 20%
Collateral Growth Initiatives
Settlement , 111 , 5%
Underlying Revenue
Xetra, 230 , 10%
30
4
GSF & Other, 219 , 10%
Eurex, 912 , 41%
62
219
223
2012
2013e
239
255
NII & Other, 64 , 3%
Source: Company data, Morgan Stanley Research Estimates
Quantifying the impact: Deutsche Boerse • Clearstream accounts for ~38% of group revenues, of which Global Securities Financing (stock loan, GC pooling, triparty repo) is ~26%. • Within GSF & Other we estimate >1/3 of revenues are from stock lending with 10% as it holds ~40% of the group’s tier 1 capital. • We expect the capital position to improve further even considering the impact from Basel 3 as we expect the balance sheet to reduce further.
• Potential increase in funding costs for CS (USA), Inc. if it is required to raise funding at subsidiary level. • Though incremental funding cost will be mitigated we think from existing credit rating (A+ by S&P), smaller balance sheet, implicit guarantee by parent (if maintained), and strong capitalization. • We estimate higher funding costs could cut Group 2015e PBT by up to ~5% in our base case.
Source: Company data, Morgan Stanley Research estimates
73
The Three Biggest Challenges April 11, 2013
Cheaper funding costs broadly leads to higher FICC market share, which poses a risk to European banks if their US entities are forced to ring-fence and funding costs rise Senior CDS 5Y (Avg Last 12 months) vs FICC Market Share (%) - FY12 FICC Market Share (%) - FY12
16%
JPM Citi
12%
DBK
BAC
BARC
GS
8% HSBC
CSG
BNPP
RBS
4%
SOGN UBS
0% 100
130
160
190
220
250
280
Senior CDS 5Y (Avg Last 12 months)
Source: Company Data, Morgan Stanley Research. Excludes DVA/CVA
74
The Three Biggest Challenges April 11, 2013
“Decision Time” – 1 year on: much done, much still to do. Addressing operating gearing and scale dominate
•
Banks still need to seek scale or downsize where they can’t achieve relevant scale and significantly reduce platform costs.
•
The cost base has become semi-fixed or driven by transactional volumes, leaving less room for error.
•
Given higher fixed cost base requirements of electronic trading in FICC and Equities, firms need to have relevant scale on each platform to achieve target efficiencies, or they need to downsize or exit.
•
To get to 12-15% RoE, European banks need to take out 10-25% of costs, and 15-20% of RWAs by 2015. We think this is plausible.
75
The Three Biggest Challenges April 11, 2013
“Decision Time” – 1 year on, much is done but we expect I-bank Basel 3 RWAs to shrink a further 15-20% RWA reductions in Investment Banks - BASEL 3 ($bn) 710 655
615 565
393
386 330
306 188
179 101
UBS
187 175 120
RBS
CS
DBK FY12
BARC
JPM
GS
Target
Source: Company Data, Morgan Stanley Research. For UBS, DB includes legacy + non-core + i-bank RWA. Target dates are: UBS 2017, CS 2013, DBK 2015. For GS, the 'target' represents management's estimates for simulated passive run-off and does not represent an actual target
76
The Three Biggest Challenges April 11, 2013
Operating leverage has grown in importance in FICC as the top players continue to gain share at the expense of sub-scale banks, forcing smaller players to exit or focus CIB ROE (%) - FY2012 20%
JPM
HSBC BAC
16%
BARC
SOGN 12%
DBK Citi
GS
BNPP RBS
8%
CSG
UBS
FICC revenues continue to have strong correlation with CIB ROEs. Investments banks can be segregated into distinct groups based on FICC market shares
4% Nomura 0% -
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
FICC Revenues ($bn) - FY2012 Source: Company Data, Morgan Stanley Research
•
We think banks still need to seek scale or downsize where they can’t achieve relevant scale and dramatically reduce platform costs. This work has reinforced our conviction about how much of the cost base has become semi-fixed or driven by transactional volume, leaving less room for error. The source of competitive advantage is even more driven by relevant scale.
•
We believe scale and operating leverage in FICC are key drivers of CIB ROE as FICC comprises ~55% of total investment banking revenues in 2012. We can see banks segregated into two groups based on market share as those with stronger FICC revenues (‘flow monsters’) have distinctly higher returns, such as JPM, BARC, DBK, BAC, Citi.
•
On the other hand, smaller FICC players have lower returns and need to exit areas where they have low market share (i.e. UBS in rates) and/or focus in segments where they have competitive advantage (i.e. UBS in FX, CS in credit) in order to improve ROE.
•
Other factors determining share include best-in-class electronic execution, strong client relationships that pull in client facilitation, capital to pull in the non-exchange traded business, funding costs, cross-sell opportunities. 77
The Three Biggest Challenges April 11, 2013
Gearing is also important in equities where we estimate only the top 3-4 players make their cost of capital of 11% 18% GS
Equity Division ROE (%)
15% 12%
JPM
CSG
9% 6% 3% BAC
0% Citi
-3% -
1.0
2.0
UBS DBK BARC
3.0 4.0 5.0 Equity Revenues ($bn)
6.0
7.0
8.0
Source: Company Data, Morgan Stanley Research. Based on 2012 data. Assume $2bn fixed cost per player and 45% variable cost margin
• Our new analysis suggests scale is also a driving factor for Equities returns. Given higher fixed cost base requirements of electronic trading, firms need to have relevant scale on each platform to achieve target efficiencies or else need to downsize or exit. • In Equities, we estimate only the top 3-4 players make their cost of capital given cost, competitive and volume pressure. • Competition was especially intense in 2012 as Equities revenues fell ~9% in 2012 YoY, where we saw marginal players gaining share from other players retrenching. Keeping control of costs will be ever more important, where we think CS has started to cut 20-25% of its cost base. • We have seen smaller Equities players downsize or exit all or parts of Equities altogether such as RBS and Nomura, and we expect more restructuring to come as we still believe there is overcapacity in the sector given low returns for many smaller players and fixed cost base, despite low capital requirements relative to FICC. • We believe banks with smaller market shares will continue to reconsider their broader strategy (i.e. focus on specific product segments or regions) or consider further cost cuts as competition intensifies in the sector, unless equities volumes pick up dramatically. 78
The Three Biggest Challenges April 11, 2013
We forecast Q113 revenues to be down 0-5% YoY, but full-year 2013 to be up modestly
$80bn
4
4 5
$70bn
3 2
3
$60bn
44
$50bn
5
41
47 $40bn
49
4
3
4
3
42 24
29
30
20
23
2
18
13
17
14 $10bn $0bn
8
12
10
13
14
10
12
13
9
10
14
4 5
2
39
27
$30bn $20bn
4
1
41
18
12
17
16
11
10
8
8
15 13
26
29
27
22
12
10
14
11
10
9
10
12
11
Q112
Q212
Q312
Q412
15
30
12
13
10
11
(2)
-$10bn
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Source: Company Data, Morgan Stanley Research
Q2 10
Q3 10 IBD
Q4 10 Q1 11 Q2 11 Equities FICC
Q311 Q411 Other
Q113e Avg Q2- Avg Q1Q4 13e Q4 14e
• In our base case, our underlying 2013 total i-bank revenue forecasts are up ~4% YoY. • We model FICC revenues in 2013 up ~1% as we think stronger revenues against weaker comparables in Q2-Q3, offsetting increased regulatory challenges from mandatory clearing, which started to come into effect in the US in March. • In Equities, we expect revenues up ~2% in 2013 from greater cyclical rebound, though this has yet to occur in Q1 as equity trading volumes in the US and Europe are down ~5% YoY, though we expect YoY outperformance similarly in equities in Q2-Q3. • In IBD, we also expect revenues up ~5% YoY as ECM and M&A have a cyclical rebound while DCM issuance remains resilient as interest rates remain low
79
The Three Biggest Challenges April 11, 2013
2013e and Q113e forecasts Local currency (ex DVA) 2012 Equities FICC IBD Total IB Revenues
JPM 4,406 15,412 5,769 35,256
BAC 3,257 11,008 5,309 33,183
Citi 2,417 13,967 3,641 22,232
GS 8,015 10,331 4,926 23,271
BARC 1,991 7,403 2,123 11,772
RBS 1,318 3,625 224 4,483
HSBC 2,342 6,391 NA 11,804
CSG 4,330 5,277 3,211 12,486
UBS 2,869 1,772 2,422 7,468
DBK 2,327 9,367 2,524 15,354
Local currency (ex DVA) 2013e Equities FICC IBD Total IB Revenues
JPM 4,685 16,083 6,118 37,111
BAC 3,307 10,956 6,034 36,132
Citi 2,354 13,845 4,217 23,626
GS 7,696 10,937 5,659 24,292
BARC 2,100 7,200 2,200 11,750
RBS 1,120 3,302 112 3,928
HSBC 2,459 6,711 NA 12,394
CSG 4,440 5,310 2,937 12,547
UBS 2,910 1,780 2,359 7,469
DBK 2,300 9,600 2,536 15,476
YoY (ex DVA) 2013e Equities FICC IBD Total IB Revenues
JPM 6% 4% 6% 5%
BAC 2% 0% 14% 9%
Citi -3% -1% 16% 6%
GS -4% 6% 15% 4%
BARC 5% -3% 4% 0%
RBS -15% -9% -50% -12%
HSBC 5% 5% NA 5%
CSG 3% 1% -9% 0%
UBS 1% 0% -3% 0%
DBK -1% 2% 0% 1%
Local currency (ex DVA) 1Q13e Equities FICC IBD Total IB Revenues
JPM 1,423 5,020 1,564 10,452
BAC 1,014 4,087 1,701 10,649
Citi 637 4,065 1,150 6,581
GS 2,042 3,405 1,551 6,998
BARC 600 2,300 700 3,663
RBS 302 892 30 1,061
HSBC 615 1,678 0 3,099
CSG 1,260 1,800 627 3,652
UBS 930 580 649 2,264
DBK 650 3,000 613 4,523
YoY (ex DVA) 1Q13e Equities FICC IBD Total IB Revenues
JPM 0% 0% 14% 2%
BAC -4% -1% 40% 6%
Citi -29% -14% 33% -1%
GS -14% -5% 34% -1%
BARC 9% -4% 38% 5%
RBS -29% -34% -75% -39%
HSBC 6% -35% NA -20%
CSG -7% -7% -15% -8%
UBS -7% -6% 2% -2%
DBK -10% -5% -4% -7%
Source: Morgan Stanley Research estimates
80
The Three Biggest Challenges April 11, 2013
We expect Basel 3 Core Tier 1 ratios to continue to improve as RWA in the i-bank and legacy assets reduce BASEL 3 Core Tier 1 Ratio (%)
14.1%
2014FY
2013FY
12.4%12.2% 11.4% 11.4% 11.0% 11.2% 10.8% 10.7% 10.7% 10.3% 10.3% 10.3% 9.8% 9.6% 8.9%
UBS
Citi
HSBC
BAC
CSGN
BNP
GS
RBS
10.3% 10.1% 10.0% 9.7% 9.7% 9.3% 9.1% 9.1%
JPM
DBK
BARC
SG
Source: Morgan Stanley Research estimates
81
The Three Biggest Challenges April 11, 2013
On TCE/TA, we have seen a strong improvement as balance sheets shrink as banks delever and meet higher standards TCE/TA - FY12 vs FY09 Citi
6.5% 7.1% 5.8%
US Avg GS BAC
4.7%
JPM HSBC
4.5%
3.3%
UBS
3.0%
European Avg
DBK CSGN
6.4% 5.4% 6.0%
4.6%
4.5% 4.0% 4.4% 3.6%
BARC
SG
6.9% 7.0% 6.7%
5.8% 5.1% 5.0%
RBS BNP
8.4%
3.9% 3.4% 3.4% 3.0% 2.9% 2.7% 2009
2012
Source: Company Data, Morgan Stanley Research
82
The Three Biggest Challenges April 11, 2013
The difference in Tier 1 Leverage ratios has diminished between US and European banks but US is on average still c.2% higher Tier 1 Leverage Ratio (%) - FY12 vs FY09
US Avg
7.5% 7.0% 7.3% 6.9% 7.2% 7.4%
GS
7.2% 7.7%
Citi BAC
6.9% 6.7%
JPM RBS
5.8%
HSBC UBS CSGN BNP European Avg
5.9%
DBK
6.6%
6.3%
3.2%
5.8%
3.5%
5.7%
4.3% 4.5%
BARC SG
6.7%
4.4% 4.5% 4.3% 3.9%
5.5%
5.3% 5.1%
2009
2012
Source: Company Data, Morgan Stanley Research
83
The Three Biggest Challenges April 11, 2013
Appendix
84
The Three Biggest Challenges April 11, 2013
Q1 constructive in issuance, rates, FX and resilient credit trading – a positive vs. market expectations Market volumes and IBD revenues for Q1 2013 to date
Capital Market Proxies US Equities ADV (shares bn) US Equity Options ADV (contracts m) European Equities ADV (€ bn) ECM ($bn) DCM ($m) M&A ($m) Total IBD Revenues ($m) US FI Average Value Traded ($bn) Government ($bn) Mortgage-Backed ($bn) Corporate ($bn) ICAP Treasuries Value Traded ($tn) Eurex Interest Rates ADV (€m) CME FX ADV (contracts m) ICAP FX Value Traded ($tn)
1Q12 -7% -4% -3% 12% 1% -8% 2% 1% 5% -5% -2% 13% 24% 20% 13%
1Q13 vs 4Q12 2012 Avg 7% -1% 6% 3% 24% 8% 4% 19% 13% 18% -33% -22% -5% 5% 7% 4% 12% 9% 0% -5% 13% 7% 30% 22% 43% 27% 33% 21% 42% 22%
FX and rates up double-digit YoY in Q1, while cash bond volumes incl. credit remain resilient YoY on a strong comp. Issuance revenues in both ECM and DCM are up year YoY. But Equities volumes are down YoY. Our trading proxies suggest greatest strength in rates and FX as both up double-digit YoY and QoQ. FX has benefited from stronger volatility with DB, Citi, BARC & UBS, the greatest beneficiaries we think. US cash bond volumes in Q1 are up marginally YoY on a strong comp led by credit and government bonds as DCM revenues remain resilient, up 1% YoY. On the other hand, cash equities volumes continue to be down YoY with US & Europe weaker YoY by 7% and 3% respectively. ECM revenues were strong in Q1 up 12% YoY, while M&A revenues remain lackluster down 8% YoY. Our outlook on private banking margins is mixed with greater benefit at Baer so far while rebound at UBS/CS slower due to higher UHNW skew which take longer to shift allocation.
Source: Company data, Bloomberg, Datastream, BATS Europe, Dealogic, Federal Reserve Bank of New York. Data as at Mar 29th, 2013.
85
The Three Biggest Challenges April 11, 2013
Investment banking comparison table All in $m. Adjusts for CVA/DVA IBD 1Q09 2Q09 JPM 1,380 2,239 BAC 1,055 1,646 GS 823 1,440 MS 812 1,123 CSG 393 634 BARC 476 999 C 982 1,160 DBK 454 989 UBS 601 885 Nomura 125 305 HSBC 195 282 RBS BNP 294 365 Soc Gen 111 177 CA CIB 110 201 Natixis 34 49 IBD subtotal 7,846 12,494 Equities 1Q09 2Q09 GS 2,504 3,793 MS 1,508 1,533 CSG 2,012 2,041 JPM 1,557 1,034 BARC 772 1,160 BAC 1,489 1,198 DBK 359 1,384 UBS 1,182 1,312 Nomura (325) 1,066 C 1,244 1,795 Soc gen 844 1,408 HSBC 565 462 BNP (54) 780 RBS CA CIB 361 567 Natixis 109 174 Equities sub-total 14,126 19,708 FICC 1Q09 2Q09 JPM 5,721 5,127 C 7,807 5,667 BARC 3,564 3,465 GS 6,749 7,095 DBK 4,897 3,503 BAC 4,789 5,584 Nomura 961 880 UBS (1,698) (53) CSG 3,191 3,036 MS 1,472 2,354 HSBC 2,482 2,482 RBS BNP 3,568 2,452 Soc gen 2,085 1,519 CA CIB 1,091 765 Natixis 531 579 FICC sub-total 47,209 44,455 Total revenues 1Q09 2Q09 GS 8,668 13,139 JPM 8,658 8,400 DBK 5,552 6,505 C 10,033 8,622 BAC 7,333 8,428 BARC 4,812 5,624 MS 3,278 5,258 CSG 5,378 5,658 UBS (254) 1,905 Nomura 761 2,251 HSBC 3,851 3,749 BNP 3,808 3,597 RBS 2,278 1,851 Soc Gen (core) 3,040 3,104 CA CIB 1,562 1,534 Natixis 674 802 Total sub-total 69,432 80,426
3Q09 1,658 1,254
4Q09 1,892 1,255
899 1,039 734 774
1,680 1,480 1,171 975
1,163 911 821 167 244
1,458 715 807 489 294
257
246
143 115 28 10,207 3Q09 3,302 1,392
110 148 33 12,752 4Q09 2,173 994
1,756 1,284 894 1,265 1,367 1,096 947 1,324 1,512
1,104 971 545 949 941 929 790 732 1,023
595 768
439 550
510 182 18,194 3Q09 5,006 4,582
444 142 12,728 4Q09 2,066 2,952
3,232 6,211
4,156 3,353
3,147 4,480 1,040
1,926 2,507 922
929 2,539 3,279
289 1,019 1,463
2,003
1,336
2,079 1,338 659 367 40,892 3Q09 11,673 7,948
1,203 380 570 219 24,359 4Q09 8,577 4,929
6,505 7,069 6,999
4,268 5,142 4,711
4,900 5,823 4,997 2,684 2,155
5,677 4,037 3,217 2,148 2,200
3,328 3,105 2,438
2,506 1,999 2,660
2,993 1,284 577 74,478
1,512 1,162 394 55,139
1Q10 1,446 1,240 1,203 887 823 1,024 1,057 779 575
2Q 10 1,405 1,319 941 885 889 694 674 688 437 224 155 278 160 61
3Q 10 1,502 1,371 1,159 1,008 869 807 930 728 418 290 217 320 203 83
4Q 10 1,833 1,590 1,507 1,515 1,253 1,327 1,167 1,098 929 412 280 359 203 128
1Q 11 1,779 1,613 1,269 1,008 986 993 851 982
2Q 11 1,922 1,743 1,448 1,473 1,091 1,010 1,085 1,028
3Q 11 1,039 1,104 781 864 728 770 736 530
4Q 11 1,119 1,128 857 883 558 796 638 579
725
686
570
648
337 237 367 258 132
168 277 307 178 90
175 193 221 157 41
223 198 211 142 62
93 28 8,929 2Q10 1,534 1,286 1,368 847 840 852 771 1,247 585 620 453 528 257 269 466
113 33 10,050 3Q10 2,012 1,121 1,254 1,231 557 974 888 895 641 1,062 826 478 599 195 407
128 39 13,767 4Q10 2,033 1,184 1,382 1,090 987 789 1,169 964 881 808 929 591 765 190 461
125 52 11,714 1Q 11 2,322 1,732 1,712 1,478 873 1,239 1,225
108 66 12,680 2Q 11 1,876 1,801 1,341 1,145 918 1,077 727
79 20 8,008 3Q 11 2,189 1,341 685 1,047 544 754 398
61 26 8,127 4Q 11 1,669 1,277 807 806 480 652 670
1,459
1,259
852
763
659 1,103 1,210 760 930 346 456
653 776 886 706 875 298 416
288 289 666 691 341 122 366
354 232 550 477 483 186 311
220 12,142 2Q10 3,166 3,488 3,190 3,047 2,710 2,316 555 1,166 1,790 2,495 1,260 2,715 1,730 2,428 1,918 3,108 1,914 2432 1,521 1,078 720
142 13,284 3Q10 3,272 3,385 2,750 2,857 2,890 3,527 1,332 969 1,593 1,311 1,453 1,706 1,435 848
276 14,499 4Q10 2,895 2,302 3,209 1,726 2,130 1,800 953 864 904 820 1,109 1,504 1,321 615
188 17,691 1Q 11 5,143 3,986 3,527 4,285 4,934 4,003 830
210 14,965 2Q 11 4,216 2,922 2,797 1,539 3,120 2,576 1,154
145 10,719 3Q 11 2,799 2,271 2,316 1,423 2,152 314 669
65 9,779 4Q11 2,626 1,717 1,527 1,363 1,697 1,303 1,137
529
491
840
2,734 1,929 2,152 2,898 2,047 976
640 1,901 1,528 1,533 1,519 753
295 1,083 592 614 540 225
656 412 359 206 49,257 29,319 1Q10 2Q10 11,580 7,308 8,213 5,744 8,293 4,614 7,714 5,700 8,285 4,487 6,073 4,724 4,974 3,801 4,895 3,456 3,561 2,849 1,834 1,365 3890 3,073 1,938 3,762 4,199 2,954 2,260 1,234
415 224 29,967 3Q10 7,825 5,598 5,438 5,494 5,872 4,113 3,099 3,704 2,282 2,263 2,645 2,237 2,750 1,757
255 185 22,592 4Q10 7,254 6,195 5,003 4,571 4,179 5,523 3,521 3,547 2,757 2,246 2,847 2,289 2,267 1,672
536 368 40,879 1Q 11 10,581 8,067 7,601 6,241 6,855 5,393 4,211 5,390 2,883 1,826 3,149 3,235 3,611 2,317
397 279 27,367 2Q 11 5,907 6,940 5,175 5,324 5,396 4,725 4,665 3,058 2,582 1,975 2,511 2,572 2,138 1,729
305 92 16,529 3Q 11 1,914 4,198 3,595 4,835 2,172 3,630 2,845 1,674 2,246 1,133 1,476 1,038 957 932
338 210 380 228 94 107 42 10,435 1Q10 2,470 1,371 1,548 1,415 769 1,530 1,306 1,195 781 1,218 1,088 669 1,102 384 496 146 17,488 1Q10 5,405 5,084 4,280 5,937 5,259 5,515 716
1,259 548 81,341
970 454 54,671
935 400 56,412
844 500 55,214
1,117 609 73,087
922 555 56,174
750 258 33,652
4Q12 vs. Q/Q
Y/Y
1Q 12 1,375 1,282 1,154 851 801 800 865 837 692 185 307 269 222 137
2Q 12 1,245 1,178 1,203 884 677 793 854 653 567 128 180 209 127 71
3Q 12 1,429 1,365 1,164 969 898 769 926 846 610 217 260 180 162 71
4Q 12 1,720 1,629 1,405 1,225 1,055 1,005 996 909 723 282 265 243 142 86
114 59 9,949 1Q 12 2,364 1,833 1,479 1,424 864 1,059 948 1,083 486 902 859 580 587 193 342
59 30 8,858 2Q 12 1,695 1,144 1,161 1,043 670 780 650 663 423 550 603 634 424 144 286
90 36 9,993 3Q 12 2,105 1,228 1,022 1,044 844 715 747 757 359 510 719 521 495 120 273
94 36 11,815 4Q 12 1,851 1,271 977 895 777 713 649 585 575 455 501 607 363 (106) 221
140 15,143 1Q12 5,016 4,737 3,765 3,571 4,150 4,131 1,513 620 668 (311) 2,092 1,204 2,594 1,192 2,563 918 2,539 387 2,140 496 1,302
159 11,030 2Q12 3,493 2,818 3,115 2,194 2,734 2,555 1,302 481 1,197 770 1,557 1,616 998 611
111 11,569 3Q12 3,726 3,697 2,498 2,449 3,086 2,534 1,481 429 1,483 1,458 1,681 1,594 1,313 848
120 10,454 4Q12 3,177 2,710 2,342 2,117 2,081 1,788 1,340 321 953 811 590 1,171 1,404 836
-1%
69%
331 288 26,059 2Q12 5,295 5,709 4,364 5,207 4,513 4,578 2,787 2,971 1,880 1,853 2,371 1,549 1,969 1,285
448 265 28,989 3Q12 7,522 6,185 5,003 5,569 4,614 4,111 3,638 3,309 1,899 2,057 2,462 1,970 1,894 1,638
353 212 22,204 4Q 12 7,846 5,773 5,190 4,803 4,130 4,124 3,462 2,862 1,728 2,073 1,462 1,909 1,307 1,423
-21%
149%
667 368 49,126
141 229 16,246 4Q11 4,761 4,586 3,229 3,267 3,083 2,802 3,447 1,004 2,094 1,714 1,867 1,012 1,314 1,107 513 319 36,120
645 362 41,787 1Q12 8,999 8,009 6,362 6,651 6,472 5,429 4,992 4,298 2,505 2,184 3,450 2,949 3,001 2,298 1,101 561 69,261
676 476 47,484
811 413 53,095
20%
54%
19%
44%
21%
64%
26%
39%
17%
89%
31%
26%
8%
56%
8%
57%
18%
12%
30%
26%
2%
34%
35%
15%
-12%
0%
22%
39%
4%
55%
-1%
40%
18%
45%
Q/Q -12%
Y/Y 11%
4%
0%
-4%
21%
-14%
11%
-8%
62%
0%
9%
-13%
-3%
-23%
-23%
60%
62%
-11%
96%
-30%
-9%
17%
27%
-27%
-25%
-188%
-157%
-19%
-29%
8% -10%
85% 7%
Q/Q -15%
Y/Y 21%
-27%
58%
-6%
53%
-14%
55%
-33%
23%
-29%
37%
-9%
18%
-25%
-48%
-36%
-406%
-44%
-33%
-65%
-51%
-27%
28%
7%
263%
-20%
-7%
-23%
37%
Q/Q 4%
Y/Y 65%
-7%
26%
4%
61%
-14%
47%
-10%
34%
0%
47%
-5%
0%
-14%
185%
-9%
-17%
1%
21%
-41%
-22%
-3%
89%
-31%
-1%
-13%
28%
-18%
30%
-11%
15%
-7%
36%
Source: Dealogic, Morgan Stanley Research
86
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 The Three Biggest Challenges
Morgan Stanley Blue Papers
MORGAN STANLEY BLUE PAPER Morgan Stanley Blue Papers address long-term, structural business changes that are reshaping the fundamentals of entire economies and industries around the globe. Analysts, economists, and strategists in our global research network collaborate in the Blue Papers to address critical themes that require a coordinated perspective across regions, sectors, or asset classes.
Recently Published Blue Papers Releasing the Pressure from Low Yields Should Insurers Consider Re-risking Investments? March 15, 2013
Key Secular Themes in IT
Global Autos Clash of the Titans: The Race for Global Leadership January 22, 2013
Chemicals ‘Green is Good’ – The Potential of Bioplastics August 22, 2012
Big Subsea Opportunity Deep Dive January 14, 2013
MedTech & Services Emerging Markets: Searching for Growth August 6, 2012
eCommerce Disruption: A Global Theme Transforming Traditional Retail January 6, 2013
Commercial Aviation Navigating a New Flight Path June 26, 2012
China – Robotics Automation for the People December 5, 2012
Mobile Data Wave Who Dares to Invest, Wins June 13, 2012
Global Emerging Market Banks On Track for Growth November 19, 2012
Global Auto Scenarios 2022 Disruption and Opportunity Starts Now June 5, 2012
Any Monetizing Big Data September 4, 2012
87
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 The Three Biggest Challenges
Gambling M O R G A N S T A N L E Y B L U Social E PAP ER Click Here to Play November 14, 2012
Tablet Landscape Evolution Window(s) of Opportunity May 31, 2012
Financials: CRE Funding Shift EU Shakes, US Selectively Takes May 25, 2012
Asian Inflation Consumers Adjust As Inflation Worsens March 31, 2011
The China Files The Logistics Journey Is Just Beginning April 24, 2012
Wholesale & Investment Banking Reshaping the Model March 23, 2011
Solvency The Long and Winding Road March 23, 2012
Global Gas A Decade of Two Halves March 14, 2011
Wholesale & Investment Banking Outlook Decision Time for Wholesale Banks March 23, 2012
Tablet Demand and Disruption Mobile Users Come of Age February 14, 2011
Banks Deleveraging and Real Estate Implication of a €400-700bn Financing Gap March 15, 2012
The China Files China’s Appetite for Protein Turns Global October 25, 2011
The US Healthcare Formula Cost Control and True Innovation June 16, 2011
The China Files Chinese Economy through 2020 November 8, 2010
Cloud Computing Takes Off Market Set to Boom as Migration Accelerates May 23, 2011
The China Files Asian Corporates & China’s Megatransition November 8, 2010
88
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 The Three Biggest Challenges
Rail M O R G A N S T A N L E Y B L U China E P A High-Speed PER On the Economic Fast Track May 15, 2011
The China Files European Corporates & China’s Megatransition October 29, 2010
Petrochemicals Preparing for a Supercycle October 18, 2010
The China Files US Corporates and China’s Megatransition September 20, 2010
Solvency 2 Quantitative & Strategic Impact, The Tide is Going Out September 22, 2010
Brazil Infrastructure Paving the Way May 5, 2010
To find downloadable versions of these publications and information on Other Morgan Stanley reports, visit www.morganstanley.com
89
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
Morgan Stanley has agreed to sell its EMEA Private Wealth Management business in the United Kingdom, United Arab Emirates and MORGAN STANLEY BLUE PAPER Italy to Credit Suisse Group AG, as announced on March 27, 2013. Please refer to the notes at the end of the report.
Morgan Stanley & Co. Limited ("Morgan Stanley") is acting as financial adviser to London Stock Exchange Group plc ("LSEG") in relation to its discussions with LCH.Clearnet Group Limited regarding a potential transaction, as announced on 2 September, 2011. LSEG has agreed to pay fees to Morgan Stanley for its financial services. Please refer to the notes at the end of the report.
Morgan Stanley is acting as lead financial advisor to IntercontinentalExchange, Inc. ("ICE") with respect to its definitive agreement to acquire NYSE Euronext, as announced on December 20, 2012. The proposed transaction is subject to approval by both companies' shareholders, US and European regulators, and other customary closing conditions. This report and the information provided herein is not intended to (i) provide voting advice, (ii) serve as an endorsement of the proposed transaction, or (iii) result in the procurement, withholding or revocation of a proxy or any other action by a security holder. ICE has agreed to pay fees to Morgan Stanley for its financial advice, including transaction fees that are contingent upon the consummation of the proposed transaction. Please refer to the notes at the end of the report.
90
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
MORGAN STANLEY BLUE PAPER
Disclosure
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 equity 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: Research Management), New York, NY, 10036 USA. For valuation methodology and risks associated with any price targets referenced in this research report, please email
[email protected] with a request for valuation methodology and risks on a particular stock or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: 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 http://www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies The following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Michael Cyprys - Bank of America(common or preferred stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their industry as defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition. Citigroup may be deemed to control Morgan Stanley Smith Barney LLC due to ownership, board membership, or other relationships. Morgan Stanley Smith Barney LLC may participate in, or otherwise have a financial interest in, the primary or secondary distribution of securities issued by Citigroup or an affiliate of Citigroup that is controlled by or under common control with Morgan Stanley Smith Barney LLC. As of February 28, 2013, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: BNP Paribas, Deutsche Bank, Deutsche Boerse, Nomura Holdings. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Bank of America, Bank of New York Mellon Corp, Barclays Bank, Citigroup Inc., Deutsche Bank, Deutsche Boerse, HSBC, J.P.Morgan Chase & Co., Nomura Holdings, Northern Trust Corp., Royal Bank of Scotland, Societe Generale, State Street Corporation, UBS. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Bank of America, Bank of New York Mellon Corp, Barclays Bank, BNP Paribas, Citigroup Inc., Credit Suisse Group, Deutsche Bank, Deutsche Boerse, Goldman Sachs Group Inc, HSBC, J.P.Morgan Chase & Co., Nomura Holdings, Northern Trust Corp., Royal Bank of Scotland, Societe Generale, State Street Corporation, UBS. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Bank of America, Bank of New York Mellon Corp, Barclays Bank, BNP Paribas, Citigroup Inc., Credit Suisse Group, Deutsche Bank, Deutsche Boerse, Goldman Sachs Group Inc, HSBC, J.P.Morgan Chase & Co., Nomura Holdings, Northern Trust Corp., Royal Bank of Scotland, Societe Generale, State Street Corporation. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Bank of America, Bank of New York Mellon Corp, Barclays Bank, BNP Paribas, Citigroup Inc., Credit Suisse Group, Deutsche Bank, Deutsche Boerse, Goldman Sachs Group Inc, HSBC, ICAP, J.P.Morgan Chase & Co., Nomura Holdings, Northern Trust Corp., Royal Bank of Scotland, Societe Generale, State Street Corporation, Tullett Prebon, UBS. 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: Bank of America, Bank of New York Mellon Corp, Barclays Bank, BNP Paribas, Citigroup Inc., Credit Suisse Group, Deutsche Bank, Deutsche Boerse, Goldman Sachs Group Inc, HSBC, J.P.Morgan Chase & Co., Nomura Holdings, Northern Trust Corp., Royal Bank of Scotland, Societe Generale, State Street Corporation, UBS.
91
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
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
MORGAN STANLEY BLUE PAPER
has entered into an agreement to provide services or has a client relationship with the following company: Bank of America, Bank of New York Mellon
Corp, Barclays Bank, BNP Paribas, Citigroup Inc., Credit Suisse Group, Deutsche Bank, Deutsche Boerse, Goldman Sachs Group Inc, HSBC, ICAP, J.P.Morgan Chase & Co., Nomura Holdings, Northern Trust Corp., Royal Bank of Scotland, Societe Generale, State Street Corporation, Tullett Prebon, UBS. Morgan Stanley & Co. LLC makes a market in the securities of Bank of America, Bank of New York Mellon Corp, Barclays Bank, Citigroup Inc., Credit Suisse Group, Deutsche Bank, Goldman Sachs Group Inc, HSBC, J.P.Morgan Chase & Co., Nomura Holdings, Northern Trust Corp., Royal Bank of Scotland, State Street Corporation, UBS. Morgan Stanley & Co. International plc is a corporate broker to Royal Bank of Scotland. The equity research analysts or strategists 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. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of March 31, 2013)
Stock Rating Category
Coverage Universe Investment Banking Clients (IBC) % of % of % of Rating Count Count Total IBC Category Total
Overweight/Buy
1031
36%
402
39%
39%
Equal-weight/Hold
1250
44%
480
47%
38%
Not-Rated/Hold
105
4%
27
3%
26%
Underweight/Sell
467
16%
113
11%
24%
Total
2,853
1022
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed 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.
92
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
Equal-weight (E). The stock's total return is expected to be in line with 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.
MORGAN STANLEY BLUE PAPER
Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to 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. Underweight (U). 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. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. Important Disclosures for Morgan Stanley Smith Barney LLC Customers Citi Research publications may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to view any available Citi Research publications in addition to Morgan Stanley research reports. Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures. For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures and https://www.citigroupgeo.com/geopublic/Disclosures/index_a.html. Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest. Other Important Disclosures Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of Bank of America, Bank of New York Mellon Corp, Barclays Bank, BNP Paribas, Citigroup Inc., Credit Suisse Group, Deutsche Bank, Deutsche Boerse, Goldman Sachs Group Inc, HSBC, J.P.Morgan Chase & Co., Nomura Holdings, Royal Bank of Scotland, Societe Generale, State Street Corporation, UBS. Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com. Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the circumstances and objectives of those who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Research is not an offer to buy or sell any security/instrument or to participate in any trading strategy. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments.
93
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
The fixed income research analysts, strategists or economists principally responsible for the preparation of Morgan Stanley Research have received
MORGAN STANLEY BLUE PAPER
compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks. Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives of securities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons. With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved by authorized members of Research management. Morgan Stanley may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. Information on any securities/instruments issued by a company owned by the government of or incorporated in the PRC and listed in on the Stock Exchange of Hong Kong ("SEHK"), namely the H-shares, including the component company stocks of the Stock Exchange of Hong Kong ("SEHK")'s Hang Seng China Enterprise Index is distributed only to Taiwan Securities Investment Trust Enterprises ("SITE"). The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulated activities in Hong Kong. If you have any queries concerning Morgan Stanley Research, please contact our Hong Kong sales representatives. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments. Morgan Stanley is not incorporated under PRC law and the research in relation to this report is conducted outside the PRC. Morgan Stanley Research does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses, verifications and/or registrations from the relevant governmental authorities themselves. Morgan Stanley Research is disseminated in Brazil by Morgan Stanley C.T.V.M. S.A.; in Japan by Morgan Stanley MUFG Securities Co., Ltd. and, for Commodities related research reports only, Morgan Stanley Capital Group Japan Co., Ltd; in Hong Kong by Morgan Stanley Asia Limited (which accepts responsibility for its contents); in Singapore by Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan
Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research); in Australia to "wholesale clients" within the meaning of the Australian Corporations Act by Morgan Stanley Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents; in Australia to "wholesale clients" and "retail clients" within the meaning of the Australian Corporations Act by Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents; in Korea by Morgan Stanley & Co International plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited; in Indonesia by PT Morgan Stanley Asia Indonesia; in Canada by Morgan Stanley Canada Limited, which has approved of and takes responsibility for its contents in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main and Morgan Stanley Private Wealth Management Limited, Niederlassung Deutschland, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin); in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that Morgan Stanley Research has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the US by Morgan Stanley & Co. LLC, which accepts
94
MORGAN STANLEYMORGAN STANLEY RESEARCH April 11, 2013 Global Banking Fractures: The Implications
responsibility for its contents. Morgan Stanley & Co. International plc, authorized and regulated by the Financial Services Authority, disseminates in the
MORGAN STANLEY BLUE PAPER
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. Morgan Stanley Private Wealth Management Limited, authorized and regulated by the Financial Services Authority, also disseminates Morgan Stanley Research in the UK. Private UK investors should obtain the advice of their Morgan Stanley & Co. International plc or Morgan Stanley Private Wealth Management representative about the investments concerned. RMB Morgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited. Morgan Stanley Bank AG currently acts as a designated sponsor for the following securities: Deutsche Bank. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at Professional Clients only, as defined by the DFSA. The financial products or financial services to which this research relates will only be made available to a customer who we are satisfied meets the regulatory criteria to be a Professional Client. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA. As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley bases projections, opinions, forecasts and trading strategies regarding the MSCI Country Index Series solely on public information. MSCI has not reviewed, approved or endorsed these projections, opinions, forecasts and trading strategies. Morgan Stanley has no influence on or control over MSCI's index compilation decisions. Morgan Stanley Research or portions of it may not be reprinted, sold or redistributed without the
written consent of Morgan Stanley. Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities/instruments is available on request. Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley Research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities/instruments is available on request. Other Important Disclosures from Oliver Wyman Copyright © 2013 Oliver Wyman. All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. This report is not a substitute for tailored professional advice on how a specific financial institution should execute its strategy. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisers. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. This report may not be sold without the written consent of Oliver Wyman. The Oliver Wyman employees that contributed to this report are neither FSA nor FINRA registered. Oliver Wyman is not authorised nor regulated by the FSA. As a consultancy firm it may have business relationships with companies mentioned in this report and as such may receive fees for executing this business. References herein to the FSA shall be deemed to include both the FCA and PRA. Please refer to www.oliverwyman.com for further details.
95
The Americas 1585 Broadway New York, NY 10036-8293 United States Tel: +1 (1)212 761 4000
Europe 20 Bank Street, Canary Wharf London E14 4AD United Kingdom Tel: +44 (0)20 7425 8000
Japan 4-20-3 Ebisu, Shibuya-ku Tokyo 150-6008 Japan Tel: +81 (0)3 5424 5000
EMEA
Americas 1166 Avenue of the Americas 29th Floor New York, NY 10036 United States Tel: +1 212 541 8100
[email protected]
Asia Pacific
55 Baker Street London W1U 8EW United Kingdom Tel: +44 20 7333 8333
[email protected]
© 2013 Morgan Stanley and Oliver Wyman Group
8 Cross Street, #24-01 048424 Singapore Tel: +65 6510 9700
[email protected]
Asia/Pacific 1 Austin Road West Kowloon Hong Kong Tel: +852 2848 5200