Outlook for Global Wholesale and Investment Banking - BlackRock ...

March 16, 2010BanksIn this report:1) Framing Industry Returns – 2010 likely to see a shrinking revenue pool, but still a reasonable year as falling lossesoffset2) Margins – Tighter margins mean scale in core flow products is critical3) Longer-Term Growth – EM, disintermediation, FIG and commodities4) Regulatory Change – significant impact by 2012, but range of outcomes is wide5) Funding – driving a dramatic rethinking of portfolios, with regulation the swing factor6) Derivatives Markets – structural change could be slow in 2010, but ultimately profound7) Sustainable Industry Returns? Regulatory impact means management will have to act decisively to rebuildreturns8) Spread Of Returns – likely to stay wider for longer9) Compensation – a key lever to improve returns and align risk to reward10. Who Will Be the Winners? Flow monsters, EM regionals, transaction banks and non-banks stand outPart 2: Morgan Stanley’s Investment Thesis and Top Picks4

March 16, 2010Banks1) Framing Industry Returns – 2010 likely to see a shrinking revenuepool, but still a reasonable year as falling losses offsetOur base case for 2010 assumes underlying fixed incometrading revenues slip 20-25% as extraordinary revenues(especially in rates) and margins pass through the system.However, lower marks are likely to make good much of thisfall. We look for equity trading to edge up 5-10%. The result isindustry revenues down 10% pre marks and near flat postmarks. We see mid-teens ROEs as plausible for 2010 in ourbase case, below the ~18% of 2002-2007, but roughly in linewith the ~14% in 2009. We discuss our mid- to long-termindustry returns in point 7 below. A stronger market recoverycould drive upside to our base case, but we see the skew ofmacro risks as to the downside, in the form of a falteringeconomic recovery and sovereign or interest rate risk. Weoutline two plausible bear cases (see Exhibit 8).Trading and management action drove a dramaticrecovery in 2009Investment Banks made ~20% pre-tax returns (ex DVA) witha median of ~27%, implying ~14% post-tax returns on equity,although the range was very wide at -25% to +47% (seeExhibit 28). Booming revenues in rates drove most of this, onthe back of the steep yield curve and quantitative easing.However, we also saw longer lasting positives from balancesheet restructuring and management action on costs, whichsuccessfully improved underlying ROAs.Exhibit 3Banks made ~14% ROE post-tax in 2009, below the~18% in 2000-0620%15%10%5%0%'00-06 avgCrisis impactsDeleverageWritedownsRestructuring and re-pricingSample banks: GS, MS, BoA-ML, JPM, CS, DB, UBS, Barcap, Nomura, BNPP, SG, RBS,HSBCSource: Company data; Oliver Wyman and Morgan Stanley Research estimatesh1 boomImproved Rev / assetsImproved cost and comp2009Exhibit 4Revenues ($bn) for a sample of leading investment banks350300250200150100500-50-100-40 93 135 574850 290 -40 250DVAIBDEquitiesFixed IncomeDVA2008Reported2008marks2008 exmarksQ4 '08lossesH1 09rates /creditCoregrow th2009 core Marks andinternallegacy2009reported* Trading losses include H2 losses in structured derivatives (rates, equities) and credit and equity trading, Lehman-related and other counterparty losses, and losses on legacy “toxic” inventorySource: Company data, Oliver Wyman data and analysis. Sample includes: DB, UBS, JPM, MS, ML (2008), GS, Citi, Lehman (2008), CS, BC, BoA, SG, BNPP, RBS5

March 16, 2010Banks2009 core revenues (ex DVA) were up ~110% on 2008 exmarks. Rebounding markets, facilitated by policy response,helped drive ~$48bn of windfall gains in H1 in rates, FX andcredit. Wide margins, strong volumes, trending spreads andyield curve plays delivered exceptional trading conditions.Dragging against this were ~$40bn of crisis-related lossesacross announced write-downs and internal ring-fenced winddownportfolios. Elsewhere, fortunes were mixed. DCM, ECM,emerging markets, credit and equity derivative reboundsdrove the biggest improvements, while cash equities, M&Aand commodities saw declines on weaker volumes.New normal for post-tax ROEs looks to be emerging inthe ~11-16% range (although our scenarios are wider thanthis), if we strip out the P&L volatility of legacy losses and the(related) rates/credit boom in H1. After a ~30% reduction over2008-09 – or €4 trillion of US GAAP (according to MorganStanley Research) – balance sheets stabilized for the top 15firms. Although retained earnings, capital raising and naturalbalance sheet roll-off pushed capitalisation levels to all-timehighs at the bank level, equity allocations to wholesaledivisions were cut. The net effect was a further reduction inwholesale bank leverage to 22x in 2009, down from 34x precrisis.The exceptionally strong H1 results flatter Revenue/Assets,but stripping out these gains, we estimate underlyingRevenue/Assets rose by ~30%, as management teamsmaterially restructured balance sheets and got out of (or rolledoff) poor Revenue/Assets positions and businesses. Coststructures evolved, with comp/revenue (ex DVA) on average35% down from the 45% norm of recent years. In part thisreflected high revenues, but it also spoke to managements’desire to boost ROEs.Industry likely to shrink in 2010 as rates revenuesnormaliseOur 2010 base case is for FICC down ~20-25%. Volatilityshould mean rates/FX have a respectable year, albeit withoutthe massive trading gains on steepening yield curves. Therewill be no repeat of the bumper trading gains in credit,although we expect a strong issuance pipeline and continuedinvestor allocations to credit to fuel client-led growth (seeExhibit 6).The fundamental growth story in emerging marketsremains in tact. Economic growth and increasingsophistication are driving growth in both client andinternational investor business, but growth will likely be moresubdued this year given the exceptional results of 2009.In commodities, revenue growth is dependent oncontinued price volatility, as spreads revert to pre-2008levels. Investor interest should continue to grow, with apotential shift to physical structures providing some upside.Our base case assumes equities and IBD are up 5%,although this is very market dependent. Q1 has beensluggish so far, with equity issuance ~50% off the average of2009 (and even more from the bumper Q2-Q309 period).Markets have been challenging, and there are fewer US FIGrecaps, although the pipeline remains strong. M&A is alsosofter than 2009 to date (by about 13%) while debt issuanceis up ~10% 2009. Hedge fund returns, often a good proxy forthe industry, are flat on the year.In equity derivatives, market revenues were still ~30% belowpeak 2007 levels last year, as structured derivatives and salesof retail products were lower. We expect a modest pick-up inretail structures, institutional flow and corporate trades, but areturn to 2007 levels is unlikely near term.Marks and revenue bleed from legacy portfolios should bematerially lower, as legacy assets are mostly worked through.Taken together, this means revenues may actually be flattishpost marks.Significant risks and challenges still lie ahead, and werun a range of scenarios around our estimates for 2010.We paint three alternative scenarios around our base case:disorderly policy unwind, G10 stagnation, and a bullish returnto growth. See Exhibit 8.Exhibit 5After the longest crisis, a sharp reboundInvestment bank earnings index, Q0 =100*3002001000Q0 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10-100-200-300-400-500LTCM: Q0 = '98 Q2Junk Bond/LBO collapseQ0 = ’89 Q2Black Monday: Q0 = '87 Q3Mexico: Q0 = '93 Q4Timeline: Q0 = quarter before crisisDot.com bust: Q0 = '00 Q1Current crisis: Q0 = ’07 Q2Source: Bloomberg, Oliver Wyman data and analysis, SIFMA, Morgan Stanley Research6

March 16, 2010BanksExhibit 6Base case outlook for FICC09e/082009 performance driversRates$83 BN• Very strong flow rates sales driven by wide+20%margins and strong flows on market volatility,with excellent trading conditions (trending rates,steepening curves)• Some “bounce-back” growth in structured• Another bumper year in pass-throughs driven bymarket dislocations, weaker in repoFXEmergingMarketsCredit &SecuritisationCommoditiesFICC$17 BN-35%$26 BN+10%$60 BNn.m.• Strong Q1 driven by spiking volatility and strongly$18 BNtrending G10 FX rates+5%• Volumes and margins coming in as marketsstabilised driving a steep drop-off in revenuesin H2• Strong rates/FX trading conditions continued asmarkets stabilised and asset outflows reversed• Credit losses in 2008 turned to gains in 2009 forseveral banks as pricing recovered• Dubai/Greece not enough to stopping a recordyear - mainly impacting banking books• Record year as credit spreads came in ~50%,client activity returned and issuance spiked• Some significant losses in legacy positions withvarying treatments across banks• Securitisation remained subdued although someprofited from new Government-backed securities$13 BN• Massive trading returns in Q1-2 driven by Oil-15%contango, but revenues down heavily in h2• Continued investor interest and supply sideinvestment (outside Phibro / Sempra)$192 BN+90%10e/09e$59 BN-30%$28 BN+10%$33 BN-40%$12 BN-5%$149 BN-20%-25%Source: Underlying data based on Oliver Wyman data. Forecasts triangulate Oliver Wyman and Morgan Stanley views2010 performance drivers• Narrowing of bid-ask spreads already evidentin H209; increasing competition in flow productlikely to continue trend• Trading conditions likely to be much lessfavourable – flat interest rates, yield curvesmore likely to flatten• Downside risk of rate moves hittingpositioning; potential upside in repo as centralbanks retreat• Base case is for reduced volatility and rangeboundFX rates driving less active markets, butpolicy surprises would be a positive here• Increased economic trade likely a positive• Bid-asks may fall further but have alreadycome in a long way• Fundamental growth story remains in tact:economic growth and increasing sophisticationdriving growth in local issuer and FIG clients• International appetite also likely to stay strongas investors seek yield in simple structures• Some risk of bubble and/or correction• Growth drivers: client demand in flow creditand repackaging, opportunities in distressed• But trading gains of ’09 unlikely to be repeated,and major regulatory threats to securitisationand credit derivatives (capital, OTC clearing)• Risk of second wave of credit problems• Correction in Oil - loss of gains from ’09contango and ’08 price spike, exit of Phibro• Metals also likely down, but growth in P&G,investor products, niche asset classes7

March 16, 2010BanksExhibit 7Base case outlook for Equity Trading and IBDProductEquities cash&propEquityderivativesPrimeBrokerageTotal equitiesInvestmentBankingTotalunderlyingincome09e/08$32 BN+45%$21 BN+100%$14 BN-20%$66 BN+35%$56 BN+15%$315 BN+55%2009 performance drivers• Recovering equity markets driving sharplyimproving revenues in equities prop risktakingafter a disastrous 2008• Volumes on the client business moresubdued, particularly in h2• Bounce-back revenues from 2008, in partdue to the absence of losses write-ups in q1• Some genuine growth as margins remainedwide and volatility came in• Some recovery in retail structured products,but well below historic highs• Margins remained strong in prime financing,whilst capital outflows were contained in h1and then reversed in h2• Mixed results in synthetics / delta one• Equity issuance fees up 40% from 2008 dueto h2 activity, BRIC IPO’s and record incomefrom APAC• Debt issuance at pre-crisis levels due toextraordinary performance from IG and HYEuropean corporate bonds• M&A down 40% from 2008 due to lowestmarket activity since 200310e/09e$33 BN+5%$24BN+15%$15 BN+10%$73 BN+10%$57 BN+5%$280 BN-10-15%Source: Underlying data based on Oliver Wyman data. Forecasts triangulate Oliver Wyman and Morgan Stanley views2010 performance drivers• Exceptional growth in prop trading resultsunlikely to be repeated• Stabilisation of markets but volume growthlikely limited and trading conditions weaker• Significant potential for rebound and growth inretail investment products• Institutional demand (and supply) likely tocontinue to migrate away from complexity,whilst less volatile, flatter markets potentiallyalso a drag on flow• ECM-linked corporate/FIG opportunities• Financing margins likely to remain robust ascapital remains constrained• Hedge fund flows expected to remain positive• Challenges to synthetic and yieldenhancement business models• Incentives to lock-in low interest rates anddisintermediate constrained banking sectorlikely to continue to keep DCM issuance high• Recapitalisations also likely to continue aspricing improves and corporates and someFIGs continue to restructure balance sheets• Opportunistic M&A likely to return, with privateequity also likely to remerge as a theme8

March 16, 2010BanksExhibit 8Four scenarios for 2010 – Pre- and post-credit write-down revenues by product (industry revenues, $bn)2010 scenarios400152180 215278308205315280 235 245 28033035030025020015 0$115 BN$35BN-15%0%-15%-70%-5%5%10%10%35%30%25%10 050$220BN0-5%-15%-40%-45%5%-70%0%5%-40%-25%15%-15%-25%05020032004 2005 20062007 Net2008 Net*2009 Net2010BaseG10DisorderlystagnationunwindBaseBullVolatility Credit Commods Equities EM G IBDMacroscenarioG10GDPCharacteristicsImpact on pools2010market sizeBull+3%• Pick up in global GDP driven by BRIC growth,consumer spending in “saver countries”• Inflation subdued, interest rates rise slowly• Credit easing as emergency funding is withdrawngradually and liquidity rules are weakened• Equity markets remain strong; commodities rally• Positive for: IBD, credittrading, EM, equities• Negative for: rates, FX$330 BNBase case1-2%• Modest G10 growth as emergency funding iswithdrawn and interest rates rise gradually• BRIC growth remains strong• Equity and commodities avoid major corrections• Continued corporate defaults but no major shocks$280 BNG10stagnation0-1%• Pressure on G10 govt debt forces fiscal support tobe withdrawn, interest rates to rise• BRIC growth is positive but not enough supportG10• Inflation subdued, marginal dollars pay down debt• Constrained banks force continued deleveraging;corporate and household defaults increase• Equities, commodities stagnate• Positive for: Structuredrates, distressed• Negative for: credit,equities, rates, FX, IBD,commodities$235 BNDisorderly

March 16, 2010Banks2) Margins – Tighter margins mean scale in core flow products is criticalMargins in fixed income trading were ~3x wider in Q109 thanin Q108, we estimate, but are now much closer to pre-crisislevels in core flow products (although still far wider in non-flowand some parts of credit). As banks have delevered andaddressed bad assets, margins have compressed materially,and our base case is that they end 2010 pretty much flat. It isplausible margins widen from here, depending on regulation.The race for scale to cover fixed costs and trading efficiencyto extract bid-ask spreads is likely to become ever moreimportant. For the top 15 investment banks, we think being a‘flow monster’ – with scale, leading edge technology andoutstanding risk management in key categories – is a winningstrategy. More regionally focused players can look for scale intheir own markets.Key to success in 2009 was trading well and extractingbid/ask spread. In the client franchise, the main developmentswere a rebound in hedge fund assets and spend, limitedgrowth in long only, and a boom in FIG capital raising. Retail,insurance, public sector and pensions were relatively benign.Overall “pure” client value growth (as measured by salescredits) was limited by muted volume growth and only partialcapture of wider bid-asks, with a higher proportion of valueattributed to market-making and related principal activities.Revenues earned in ring-fenced prop trading groups fell to10% in 2009 from 15% in 2006, as many banks disbandedring-fenced prop groups after poor 2008 results and/or movedthem closer to the client-facing desks. The dramatic marginexpansion in Q408 was driven by three factors: 1) inefficientprice discovery; 2) retraction of supply; and 3) increased costof risk.1. Price discovery was linked to volatility anddiscontinuity, and is likely to have normalized.2. The retraction of supply drove a significant shift inmarket share at the product level, as the few firmswith balance sheet to be price takers took anoutsized share of activity. We believe the marketshare of the leading three to five firms in eachbusiness typically increased by 5-10%.3. The increased cost of risk has, in our view, likelyrepriced to current risk conditions for the time being.Exhibit 9Example: European credit bid-offer spreads (*) inQ110 are ~75% lower than in Q109, although ~200%above the 2006 level16001400120010008006004002000Jun-06Sep-06-7%Dec-06+2%0%Mar-07Jun-07+98%Sep-07+14%+36%+39%Dec-07Mar-08Jun-08+83%Sep-08+39%Dec-08+31%Mar-09-25%Jun-09-43%Sep-09-36%-17%Source: Bloomberg, Markit, Oliver Wyman, Morgan Stanley Research. (*)Grey area: dailyevolution of bid/ask spread on Iboxx EUR corporate incl. financials and non-financials; Blueline: average bid/ask spread on EUR corp. Iboxx per quarterDec-09Exhibit 10Bid-ask spreads have tightened a lot alreadyBid-ask spread - indexed Pre - crisis Crisis 2010 CommentUnderwriting (DCM, ECM) 100 150-200 100-150Balance sheet commitment still at a meaningfulpremium to risk pre-crisisCommodities 100 125-150 75-125 In some cases margins below pre-crisisFX 100 150-225 100-125 For major currencies, liquidity very goodRates 100 200-250 100-125Credit 100 400-600 150-225Source: Bloomberg, Markit, Oliver Wyman, Morgan Stanley ResearchFor large orders, liquidity still constrained leading towider spreads especially in single name10

March 16, 2010BanksWe think margins could be flattish in 2010, without amarket discontinuity (e.g. sovereign default). However, withsuch potential sweeping shifts in the regulatory andcompetitive landscape, we see tremendous scope for changefurther out.Impending regulatory change (see section 4 below)will certainly result in a further capital and fundingimpact on returns. If punitive, margins could have toincrease to allow banks to deliver shareholder value.In some products (primarily flow OTC derivatives),discontinuity in the competitive landscape could leadto price war and margin erosion, as the banksposition for scale.All in all we believe scale in flow products will thereforebe key. Pre-crisis some below-scale banks failed to covercosts in flow businesses, and we see scale once againbecoming key to cover infrastructure costs and to achieveadvantaged pricing and trading. Competition to capture andextract value from client flow will focus on four dimensions:calendar, where coordination between issuance andtrading teams is key in pricing and winning keymandates; andclient footprint – sheer breadth and depth of flowcapture from the client base.This does not necessarily mean being all things to all people.Additionally, we do think scale can be achieved along certainclient-product axes, and that some regional banks canachieve scale in home markets, particularly if they are able tolever better domestic cost structures.Exhibit 11Change in market share of top 5 players in keyproducts (2006 to 2009)Rates/FX/EMCredit4%21%capital, the key differentiator in the crisis, will remaina factor given regulation;content, across both research/ideas and structuresthat codify these;connectivity, in proprietary platforms, internalisationand algorithmic execution (and prop), as well as tothird party platforms and venues;Equities10%-10% -5% 0% 5% 10% 15% 20% 25%Source: Oliver Wyman analysis; Oliver Wyman proprietary data11

March 16, 2010BanksExhibit 13We saw ~4% growth in HF industry assets in 4Q09;our base case sees ~12% growth in 2010Hedge fund industry assets ($bn)2,0001,8001,6001,4001,2001,00080060040020006255408201,110970Bull 1,950Base 1,8001,535 1,6001,870 1,9301,4601,410 1,4301,330Bear 12502001200220032004200520062007H1082008Q109Q209Q309Q4092010ee = Morgan Stanley Research estimates Source: HFR, Morgan Stanley Research estimatesExhibit 14Investment Banking revenue vs. World MSCI IndexInvestment Bank Revenue ($bn)MSCI world equity index (1997 = 100)Investment BankRevenue ($BN)120100806040200-20MSCI world equityindex (1997 = 100)20018016014012010080604020sector. This re-assertion of long-only and traditional investorswill help sell-side players with broad and deep footprints.We have already seen another round of asset managementconsolidation, particularly as players globalise or seek scale,and we think this process will continue. We also expect anumber of deals to be prompted by banks’ and insurers’ needfor capital and funding.3. Capital markets – particularly credit marketsWe still see upside in European corporates. Bond marketshave stepped in where weakened banks were struggling tolend. This effect was very pronounced in Europe, where banklending to corporates shrank. We remain of the view that verylow policy rates and a weak banking system will lead tocorporates wanting to term out or re-fi their funding, while thethirst for yield from investors will lead to good appetite, barringmajor lurches or macro hiccups. This leads us to expectseveral years of strong debt underwriting, when many otheraspects of the economy have anemic growth. Our coverage ofasset managers also shows demand for corporate bondfunds, driven by the thirst for yield. For this reason, we feel itis critical that any new regulations reflect the fact thatcorporates have become more, not less, capital marketdependent in the recovery. It is also clear that many hedgefunds have proved to be critical risk takers. For instance, weestimate that ~35% of all equity capital raising by US andEuropean banks in 2009 came from hedge funds.Exhibit 15European bond markets have taken over wherebanks have shrunk their corporate lending60504030-4019971998199920002001200220032004200520062007200820092010e0£bn20100EquityEMCommoditiesMSCI IndexSource: Oliver Wyman, Morgan Stanley ResearchRates & FXCredit & SecuritizationIBDThere will be intense focus on long-only investors in the creditand fixed-income markets, as paper is passed from highlylevered to unlevered and lightly levered investors, as well as asearch to distribute the huge issuance needed from the FIG-10-20-302007 January2007 February2007 March2007 April2007 May2007 June2007 July2007 August2007 September2007 October2007 November2007 December2008 January2008 February2008 March2008 April2008 May2008 June2008 July2008 August2008 September2008 OctoberLoan BondSource: BoE, Dealogic, Morgan Stanley Research2008 November2008 December2009 January2009 February2009 March2009 April2009 May2009 June2009 July2009 August2009 September2009 October2009 November2009 December2010 January13

March 16, 2010Banks4. FIG and shift towards ALMWe see an ongoing cyclical and secular rise in the importanceof FIG clients. Many players believe these will be the singlelargest growing pool of revenues yet again in 2010, given theextensive need for restructuring and refinancing. Largeplayers with strength in capital raising and advice are likely totake the fullest advantage of this trend.5. CommoditiesWith commodities markets stabilising after the price boom of2008 and steep contango in early 2009, the short-term tradingoutlook appears to be relatively subdued. Regulation ofposition limits in the US may have an impact on tradingrevenues if proposals are not modified, as they would limitbanks’ and brokers’ ability to trade prop and facilitatecustomer flow.In the medium term, however, commodities remains a growthstory. Consumption will continue to grow in line with economicgrowth and urbanisation in emerging markets, with China setto consume over half of the world's base metals. This growthis leading to the emergence of new pricing points and tradableproducts, which can be traded by the banks. We see themarket leaders continuing to invest in their commoditiestrading franchises, adding specialist trading and salesexpertise, and acquiring physical infrastructure in energy,metals and agricultural products.Associated with the growth in consumption, huge investmentis required to build production, storage and transmissioninfrastructure in Asia and other emerging markets. There isalso an increasingly pressing need to replace ageing energyinfrastructure in the US. Financing this new infrastructure andthe underlying commodities flows will be highly attractive forbanks, given strong collateral and capital efficiency.14

March 16, 2010Banks4) Regulatory Change – significant impact by 2012, but range ofoutcomes is wideThere is a raft of regulatory change under consideration.Although the terms of engagement are now set, there is still ahigh degree of uncertainty around the outcome. Somechanges are likely to hit 2011 (for example, taxes, IRC,progression derivatives moves) although many may notactually bite until 2012-14. Regulation will drive higher capitallevels, and the growing desire to ring-fence capital andfunding (rather than separate) should reinforce this. Our basecase suggests regulation could take ~4% off returns on equity(~8% in our bear case, ~2% in our bull case). This is prior tomanagement reaction, which will need to be decisive to drivehealthy returns.Exhibit 16Estimated impact of regulatory scenarios on ROE0%-2%-4%Punitive Measured Incremental3. Structural reform: Regulations could limit the risktakingactivities of the banks and force banks torestructure to allow resolution in case of failure. Theseeffects generally reduce cost, balance sheet andcapital efficiency, but will be the least significant of thethree, in our view, although they will generatesignificant management distraction.4. Adjacent industries: Regulation of the alternativesand insurance sectors could impact the banks inserving these customer groups.5. Tax: We also believe a balance sheet tax is likely.Although we think the basis and rate for the USproposal is being reconsidered, post IMF discussionsin April, we believe a bank tax, probably based onRWAs or loans, looks likely to be adopted by manyWestern markets (Morgan Stanley has arguedelsewhere that this could result in an extra ~2% on theeffective tax rate).-6%-8%We outline three scenarios to bound the scale of regulatoryimpact on returns (see Exhibit 17).Solvency & Liquidity Structural reform Market profileSource: Oliver Wyman, Morgan Stanley Research estimatesWe group the range of regulatory proposals into five distinctareas, where regulatory change will affect bank financialperformance.1. Solvency and capital: The main regulatory vehiclesare increased capital, narrower definitions of Tier I,leverage caps, funding ratio targets; Basel III (to beimplemented by 2012) and enhancements to Basel II.These changes directly affect ROE and ROA. Weestimate these effects will be most significant, with adrag of 2-4% under our three scenarios.2. Market profile: Markets that will be materially affectedby new proposals include OTC derivatives, CDSreforms, securitization, retail structured products andcommodities. These changes generally limit marketsizes, though in several cases (e.g. OTC) wouldimprove balance sheet efficiency. In our base case,these effects are bounded with a ~2% drag on returns.‘Punitive’ scenario – parameterisation of existingregulatory proposals generates a ~8% drag onnormalised ROEs. This includes, for example, a highlydraconian implementation of Basel III, full implementationof reforms along the lines of Volcker, very restrictiveLiving Wills causing substantial trapped liquidity andcapital, and significant limitations imposed on derivativeand securitization markets. We see this ‘worst of allworlds’ combination as highly unlikely.Our base case of ‘Measured’ implementation leads toa ~4% drag on ROEs. This is the scenario we expectand believe to be most sensible. It assumesimplementation of all the elements of Basel III but underreasonable parameterization and elements of theObama-Volcker proposals (i.e. applied only to ring-fencedproprietary desks and stakes in alternatives held withinsecurities divisions). Living wills are implemented, butwith a view to balance sheet fungibility. OTC shifts toCCP structures, but not to exchange on the executionlayer.15

March 16, 2010BanksIn an ‘Incremental change’ scenario we estimate onlya further ~2% drag on ROEs. This scenario includesvery limited impact on OTC markets from consumerprotection, from the Obama-Volcker proposals or LivingWills. It does, however, assume a relatively looseimplementation of Basel III. Again, we see this end of thespectrum as unlikely.Capital is a linear but very significant issue. This is ahighly dense set of issues, most of which have verysubstantive impact. We have laid out some of ourassumptions in Exhibits 17-18, but do not go into great detailacross all elements. For example, Capital comes out of theanalysis as a critical issue for the industry. As shown inExhibit 19, many businesses under the new capital regimeswill shrink Revs/RWA ratios by 2-4x. Combining Basel IIenhancements and Basel III under current parameterisation,we believe the Investment Banking industry will have a capitalshortfall in the range of $30-40bn. Banks will be forced to redirectcapital to more capital-efficient businesses.Exhibit 17Assessing the regulatory impact1. Solvency &liquidity2. Reducingsystematicrisk/structuralindustryreformBasel IIIBasel IIenhancementsNarrow banking/Obama-VolckerLiving willsAll banksAll banksUS banks (e.g.JPM, Citi)Systematicallyimportant FIs• Higher quality / quantity of tier 1 capital, liquidity, funding• Improving risk measurement for capital purposes –counterparty credit risk measurement changes• Treatment of securitisation in Pillar 1• Market risk enhancements including use of stressedVaR; IRCs, reducing banking / trading book reg arbincentives• Deposit taking institutions to be precluded formparticipating in Hedge Funds, PE and Prop Trading• HMT proposals to ringfence certain businesses, createwind down plans; France & Germany also consideringRoE, RoAFunding CostLevg CapsRoE dragRoA dragOTC derivsreformIB, CCP,exchanges,non-corp clients• Migrate all standardised OTC derivatives to centralcounterparty clearing / exchanges• Punitive capital charges for non CCP OTCMarket size change3. MarketprofileCommoditiesregulationUS IBs• Hedging restrictions, restrictions on IBs owningcommodities infrastructureIncreases RoA ofsmaller marketConsumerprotectionRatingsagencies, IBs• Reduction of rating agency arb opportunities• Constraints on cap mkts linked retail business; limits onbusiness with publics / pension funds4. Regulation inadjacentindustriesAIFM directive/US HF regsSolvency IIHFs, banksindirectlyInsurance,banks indirectly• Protectionist regulation in Europe; similar aspects in US• Heavy constraints on IBs could lead to disintermediation• Levelling of playing field between banks and insurancewith new capital requirements• Loss of certain advantages / arbitrage (e.g. capitaladvantages on credit risk reinsurance)Client economicsEntry or partnershipopportunitiesSource: Oliver Wyman16

March 16, 2010BanksExhibit 18Regulatory impactA. Punitive(RoE impact: -8%)B. Measured(RoE impact: -4.5%)C. Incremental(RoE impact: -2%)1. Solvency &liquidity1a. Risk-taking,capital andleverage1b. Liquidity andfunding• Major de-risking through enforcedsegregation of trading• Punitive counterparty charges• Gross leverage ratio binding(10-15% lower than current levels– ~18/20x)• Basel 3 liquidity proposals areimplemented as currently proposed• Increased cost of funding by 10-15% (20bps)• Changes to market riskRWA calculation forcesup capital held againsttrading books (2-3xceteris paribus)• 5-10% decrease inleverage (~20/21x)• Basel 3 liquidityproposals softened inparameterisation process• Increased cost of funding(15bps)• Further capitalcharges limited• Leverage restrictionsnot applied to nonUS banks• Leverage in line withcurrent levels(~22/23x)• Limitedimplementation offunding ratios• Increased cost offunding by 5-10%(10bps)2. Reducingsystematicrisk/structuralindustryreform2. Recovery andresolution• Large liquidity and capital buffersrules at the local entity level tosupport Living Will structures –increase in funding costs due tolack of “implicit governmentguarantee” (~15% of net income)• Reduction of $5-10 BN of proprevenues (~10% of US players rev)• “Playbook”implementation of LivingWills results in sometrapped liquidity butlimited additional required• Increased cost toeliminate “implicitgovernment guarantee”(~10% income)• Lack of internationalcoordination meansweak or easilyarbitraged rules3a. OTCderivativemarkets• Heavily penal approach to CCR onnon CCP trades forcing migrationtowards standardised products• Enforced migration of standardisedproducts to third party tradingvenues and opening up ofprice discovery – we estimate aloss of 10% of total OTC revenues(~$6 BN)• Central clearing reducescounterparty RWAs butoverall weight of capitalonly modestly falls fromincreased capitalrequirements on OTC• Accelerated growth ofelectronic platformswithout intervention• Flow productscentrally cleared, butlittle change to marketstructure of tradingwith differencesacross Regions3. Market profile3b. Securitisation/structured• As measured, plus material “skinin the game” requirements withIRC driving RWAs up on vanillasecuritisations• Re-securitisations all butkilled off by capitalcharges• Increased transparencyand use of internal ratings• Softening of approachto re-securitisationsallow some recoveryin leveraged products3c. Consumerprotection• Punitive pricing disclosure andlegal risk on Corporate, PublicSector and Retail derivativeproduct –10% decrease in RSPmargins ($3-5 BN impact) anddecrease in publics and PFsrevenues ($3 BN impact)• Retail restrictions whichmaterially impact thestructured equity andstructured ratesbusinesses – 5%decrease in RSP marginsand limited decrease inpublics / PFs revenues($3-5BN total impact)• Tightening up of basicdisclosurerequirements onlySource: Oliver Wyman17

March 16, 2010BanksHow will regulatory change impact business mix?We expect significant reshaping of activity based on theoutcome of the various proposals. Some examples would be:Re-weighting of the optimal business mix based onvery different capital requirements under Basel IIenhancements (see Exhibit 19), and cost of funding bybusiness line (see Exhibit 21).Re-weighting of attractiveness of different clientgroups based on 1) new counterparty risk charges underBasel III; 2) shifting demand economics based onconsumer protection regulation (largely negative for retailand potentially for public sector and corporates); and 3)changing demand based on regulation to adjacentindustries (UCITs, hedge fund regulation, solvency II forinsurance companies).Re-weighting of country priorities based on localregulatory regimes, extent of required liquidity and capitalbuffers.Re-weighting of the calculus on competitivedifferentiation of operations, e.g. in OTC derivativeswhere outsourcing and offshoring options may becomemore attractive as these activities simplify and pressure tocut costs intensifies.Exhibit 19Regulatory impact of capital and funding bybusiness lineWho will be advantaged and disadvantaged byregulatory change?The package of regulatory change under any scenario ofseverity will have very different implications for firms,depending on starting point. Summary observations would be:Large advisory/agency corporate financiers:Advantaged due to low impact of regulatory change onbusiness model.Former US broker-dealers: Advantaged due to rapid andclean deleverage, highly liquid balance sheets, goodstable funding ratios, long history of building clientfranchise on content, increasing ability to deliver creditthrough partnering fund vehicles.Global transaction banks: Advantaged due to G10 andEM networks, strong funding and ability to sourceadditional funds; watchpoint in their ability to deliverscalable growth.Emerging markets banks: Advantaged due to alignmentto growth/deepening markets and scope to tap savingsrichdepositor client base.Universal banks & hybrid investment banks:• Many disadvantaged: Particularly severalEuropeans impacted by new leverage caps,several with large stable funding ratio problems,dramatic reduction of Tier I under Basel III.KeyMovement reflects funding changes (down) or CCP clearing (up)Revenue / AssetsDramatic impactModerate impactLimited impactIlliquid creditProp tradingStructured ratesPrime brokerageCash equitiesG10 FXEMEquityCCPderivativesIBDCredit flowFlow ratesNon CCPCommoditiesFinancing• Some advantaged: Shortlist of Europeans andseveral US firms based on strong deposit-basedfunding, good asset quality post-crisis, wellpositionedbusiness mix.Commercial banks: Highly dependent on capital andfunding position, for example those with high loan todeposit ratios, poor stable funding, and large mortgagebooks will be disadvantaged.Revenue / RWAsMovement reflects increased market risk and CCR chargesSource: Oliver Wyman estimates18

March 16, 2010Banks5) Funding – driving a dramatic rethinking of portfolios, with regulationthe swing factorFunding has already driven a major review of the industryportfolio, and we think funding constraints will remain criticalto business choices, particularly as stable funding ratio targetskick in. Against this backdrop, the critical drivers for theinvestment banks and, we think, key issues for policymakersare: 1. whether or not securitisation resumes; and 2. theflexibility given to banks to perform maturity transformation.One of most fundamental shifts resulting from the liquiditycrisis is an ongoing rethinking of the businesses, shapedaround the quality of collateral generated, especially given theongoing cost of wholesale funding. Today, there are threeclusters of funding markets (see Exhibit 20):securities that can be pledged to central banks;other good quality collateral that can be funded(e.g. equities in Europe that are pledgable in the US); andthose that require unsecured funding.The cost and scarcity of unsecured funding has alreadydriven banks to shrink units that are heavy consumers ofunsecured funds – such as warehousing, non-investmentgrade, prop, illiquid fixed income, some prime brokerage. Ithas also significantly amplified the shift to liquid flow markets.On the other hand, businesses such as flow rates, FX, cashequities, and flow derivatives have been re-emphasised in thebusiness portfolio.Impending regulatory change will reinforce these trendsover the coming three years. Morgan Stanley haselsewhere estimated the net stable funding ratio for theEuropean banks sector at large at about 87%, implying afunding gap of approximately €1.5 trillion in Europe, ontoday’s accounts. This is a dramatic gap, and there is a widedispersion in the health of the banks operating in this sectoraround the net stable funding ratio. Given the scarcity andcosts of matched funding for both well funded and less wellfunded banks, there will be tremendous scrutiny applied tohow scarce unsecured term funding is deployed. This is likelyto continue to drive a reshaping of the industry portfolio andthe competitive landscape around four segments ofbusinesses (Exhibit 21).• Low Return on Asset (ROA), high asset intensitybusinesses which are largely self-funded throughaccess to the repo market. This is primarily PrimeBrokerage, but also includes some niche such as FundLinked. Firms without pressure on leverage ratio andbalance sheet size (which may be a null set) could takeoutsized share of the rebound in hedge fund demand;others (most) will be highly selective on fund financing.• Medium ROA business which are net consumers ofunsecured funding, such as fixed income, warehousing,illiquids. Only those with strong access to a diversity offunding sources across the term structure are able tocompete here at the moment, and there are veryattractive opportunities available for these firms.• High ROA, medium ROE, low funding demandbusinesses such as structured rates, structured equity,structured FX. These are attractive from a fundingperspective, but are effectively pushing banks higher upthe risk-return curve in search of funding-free returns.While most firms have run to the flow side of the boat, afew firms will continue to reap an outsized share of theFIG restructuring and long-dated ALM business, inparticular.• High ROA, medium or low funding demand: Flowrates, FX, cash equities, and flow derivatives. These areall highly attractive to all banks, and a key driver of theflow monster strategy. Note, however, that it is difficult todeliver alpha growth in these businesses; as a result,somewhat ironically, risk taking is becoming a biggerfeature in all of these markets.Sovereign risk remains a key risk to funding. Assuming thisstabilizes, over the medium to long term, deposit gatheringand terming out debt may help. Put another way, banks willwant to rethink their funding model so they have the capacityto enjoy higher-margin businesses that need unsecuredfunding. Deposit gathering, expansion of transaction bankingbusinesses, regulatory impact of inclusion or exclusion ofcorporate deposits, re-intermediation of money market fundsin retail deposit gathering strategies will all be key drivers ofsuccess at the industry and firm level.19

March 16, 2010BanksExhibit 20Funding pressures are shaping portfolio change across the industryTypical balance sheet consumption per $ revenueCentralbankeligiblecollateralLiquidcollateralNo liquidcollateralCollateral examples• G10 government bonds• Major international agencybonds• Currently also AAA tranchesof MBS, pfandbriefe, CMBS,ABS and senior ABCP• Cash equities (liquid names)• Corporate bonds (liquidnames)• Emerging market sovereignbonds• Precious metals• Thinly traded equities andbonds• Flow derivatives – swaps,options• Structured derivatives• Physical assets• UnsecuredHighRatesflowCredit flowtradingEquity primebrokerageFixed incomeprime brokerageDCM, ABS/MBSissuanceStructuredderivativesMediumABS/MBS tradingCommoditiesCMBS/real estateFXEmergingmarketsLowCashequitiesFlow derivativesECM, M&AKey:Most playersreducingMixedresponsesMost playersgrowingSource: Oliver Wyman and Morgan Stanley ResearchExhibit 21Funding will help drive a prioritisationKey120%100%Under pressure by fundingUnder pressure by leverage capsLimited funding pressureIlliquid credit80%Bubble = Size of the industry balance sheetIBDUnfunded proportion60%40%20%0%Prime brokerageFinancingStructured fixed incomeCommoditiesFlow ratesCredit flowProp tradingEMEquityderivativesCash EquitiesG10 FX-20%Rev / AssetsSource: Oliver Wyman20

March 16, 2010Banks6) Derivatives Markets – structural change could be slow in 2010, butultimately profoundWe expect the OTC flow markets to be dramatically reshaped.The political and practical complexities of getting centralclearing into place in the OTC markets may hold penetrationback over the next year or two, but we expect a shift toclearing for >85% of flow trades to CCPs. This will potentiallyreduce the advantage of balance sheet in some core flowproducts and drive a change in industry structure. In our basecase, we assume the sell-side margin erosion is largely offsetby increased volumes, improved cost structure and balancesheet efficiency. However, the bear case scenario ofregulatory enforced exchange trading or severe loss ofliquidity via badly thought through CCP solutions remains adistinct possibility.The changes afoot in the OTC derivatives market willhave a profound impact on the structure of the industry.Over the next three years, we expect a large proportion offlow volumes/notionals to move for central clearing (100%street-side in flow, 75%+ of buy-side in flow). However, thereare a significant number of hurdles to clear first. There is alack of clarity on whether regulatory intervention will stretch toexecution as well as clearing. We also sense that Europe’scentral banks are naturally concerned about agglomeratingrisks in the clearing houses and the setting of new standards,and currently this looks like it will hold back reform in Europe.Several political, technological and economic issues wouldneed to be hammered through before we see dramaticallyhigher adoption in Europe. Given we do not see a quickresolution to the European issues, we think the US market islikely to lead all aspects of clearing (note recent comments byFannie Mae and Freddie Mac that they intend to start usingcentral clearing for their interest rate swaps portfolios withinmonths). Although some high-profile investors, includingPimco, have spoken out in favour of clearing, many others onthe buy-side are waiting to see how the regulatory debateevolves. Also, the corporate sector may suffer from needing topost collateral regularly (versus the OTC markets), while alack of operational readiness on the part of the banks couldslow near-term adoption.The ultimate impact on the competitive landscapedepends on the CCP structures. Very open solutions withwide membership would result in fragmentation, as FCMs andnew entrants compete (not necessarily good for defaultmanagement). We suspect that ultimately there will be areconsolidation, as the balance sheet advantage of aroundfive players that currently characterises the market shiftstowards a cost, infrastructure, and distribution advantage for~15 firms. (we note the example of CLS, where the number ofmembers is very small).Exhibit 22OTC derivatives market is 10x the size of theexchange-traded derivatives market7006005004003002001000$ Tr48.80.2437.252.7OTC Traded6.6 4.9 3.7Exchange Traded26.172.3594.7FX Interest Rate Equities Commodity CDS Unallocated TotalNote: CDS OTC data as of October 30, 2009; rest as of June 30, 2009Source: BIS, DTCC, Morgan Stanley ResearchEarly signs are that the sell-side will offer clearingservices for free to avoid pricing out execution separately;but, as competition intensifies and the investment banks withmore to gain start to push for market share, margin erosion onflow business seems inevitable. There will be significantoffsetting benefits to the banks as well: costs will be shed inthe operations and pricing teams that monitor the vast array ofbilateral clearing contracts. Balance sheet efficiency willincrease significantly (For example, ROAs in Repo in the US,long a CCP market, have been double ROAs in Europe.)Our base case assumes a bounded drag on industryreturns of -1% by 2012. There is a plausible bear case,however, particularly if capital requirement or collateral rulesmaterially reduce liquidity, or if regulation forces executionthrough exchanges. At this point, we see neither of these asthe most likely outcome, as they would increase rather thandecrease systemic risks.For the CCPs, the revenue opportunity again depends onthe structure of the outcome. A user-owned closed utilitywill price to maintain operations and default fund; a privatelyowned open structure will price for profitability. We expect the57.921

March 16, 2010Banksrevenue to be in the region of $0.3-1.0bn split among anumber of CCPs in the US and Europe (where it is less clearwho the winners will be). The CCPs may have to assumesome more of the risk involved. Although we expect thatclearing houses will look to increase margin requirements (vizOCC’s latest proposals), it is possible clearing housesthemselves will need to be better capitalized, which couldimply additional capital as well as significant investmentprograms.Understandably, many leading derivatives players feelthe strongest defence is to be a scale player prior topotential discontinuity, although the uncertain outcome meansfew new players are likely to enter today.A much greater proportion of equity derivatives arealready centrally cleared. We think the bigger risks arearound regulation and the demand side. For instance,consumer protection may make the sale of structuredproducts far more difficult. We also think that with improvedmargins in flow, profitability will be reasonable in the mediumterm, although scale is becoming the competitive driver on theflow side, and new capital charges could be a swing factor.22

March 16, 2010Banks7) Sustainable Industry Returns? Regulatory impact meansmanagement will have to act decisively to rebuild returnsDespite heavy marks, industry returns in 2009 were ~14% –below the 18% average of 2002-06, but not far off the 15.5%average in 1987-99. Given the likely tightening of regulation,maintaining 15%+ returns will depend more than ever onstrategic positioning of the business portfolio, consciousadjustment to compensation to offset higher capital andfunding costs, and outstanding management execution toimprove revenue on assets.The range of possible outcomes by 2012 is clearly wide, giventhe flux in regulatory debate and uncertainty on underlyingWestern economic growth as policy response is withdrawn.We have taken a scenario-based approach, and highlight fivepotential outcomes for returns in 2012, of which we see threeas plausible, framing returns in the 12% to 16% range.Our base case assumes industry level returns of ~15%.We estimate that this would require a stabilization of theunderlying compensation as a proportion of revenues at 2009levels (equivalent to absolute compensation levels flat toslightly down), which we see as achievable without undulyforcing material additional talent migration to the lessregulated sector. It would also require a shift in the businessmodel (see below) that improves revenue/assets by ~20%from today. Again, we think this is achievable, although itwould probably require very proactive management, withmargins maintained at (or close to) current levels to offset theregulatory impact.The severity of regulatory response will probably be tiedto macro conditions. In looking at other scenarios, we haveassumed a strong correlation between the severity ofregulatory response and underlying state of the economy. Forthis reason, of the five combinations of these two factorsoutlined in Exhibit 26, we see only two as plausiblealternatives to our base case.caps on industry leverage to reduce gearing to growth tobelow historical levels, effectively bounding returns below17%, on average.‘Regulatory Fragmentation’ scenario. We see the mostlikely ‘Incremental Change’ scenario for the industry asone of G10 stagnation on growth and dissipatingregulatory cohesion and conviction. As this is a low growthenvironment, despite a lesser regulatory drag, we wouldstill expect returns to be around ~14%.Exhibit 23Reported ROE for major investment banks40%30%20%10 %0%'93'94-10%-20%-30%//-40%-100%'95'96'97'98'99'00'01'02'03'04'05'06'07'08'09Cycle ‘93-’99Avg RoE = 15.4%MaximumMedianMinimumCycle ‘00-’06Avg RoE = 17.5%Source: Annual reports, Oliver Wyman, Morgan Stanley Research; Sample includes Citi, CS,DBK (CIB Only, 2006-1998), GS (2008-1999), JPM (I-Bank Only 2008-2003), LEH, ML (CIBOnly), MS(2008-1997), BSC, UBS‘Punish the Banks’ scenario. A draconian regulatoryoutcome would require dramatic industry shrinkage andwould require margins to rise 50-150% from today’s levelsto have any hope of rebuilding returns to north of 11%. Wenote, however, that in this dramatically lower riskenvironment, sub-15% returns may be acceptable toinvestors. In a robust growth outcome combined withstrong regulation (a plausible combination, we believe, aspolicy makers are to some extent setting the parametersfor regulation based on economic health) we would expect23

March 16, 2010BanksExhibit 24Mapping the scenarios for sustainable ROEs20%15%10%5%0%-5%~11%15%~14%>17%

March 16, 2010BanksExhibit 26We have analysed five scenarios, of which we see only three as plausible outcomesRegulatory scenariosEconomic scenarios1. Bull2. Base case3. G10stagnation4. DisorderlyunwindA. PunitiveB. MeasuredC. Incremental(RoE impact: -8%)(RoE impact: -4.5%)(RoE impact: -2%)1“Punish the Banks”4“Bull case”• Co-ordinated and harshregulations targeted atrecovering banks• Returns: ~11%• Wide performance skewsdriven by extent of businessmodel evolution and bank-levelbalance sheet health• Strong growth with limitedregulation• Returns: >17%, reduced skews2“Base Case”• Modest revenue shrinkage,measured regulatory response• Returns: ~15%, achievablewith managed compensationrestructuring and moderatebusiness model evolution5 “Negative feedback loop”3“Regulatory fragmentation”• • Weak economy accentuated bypenal regulationReturns: 17%3.3%2238%Negativefeedback loop

March 16, 2010Banks8) Spread of Returns – likely to stay wider for longerAll firms have made progress in deleveraging and addressingdislocated assets, but it has been an uneven process.Although many players thought the opportunity to win sharefrom dislocated players would have passed by now, we thinkbanks with strong funding and capital advantages can stillgain share in 1H10. For this reason, we believe the spread ofwinners and losers – while narrowing – is likely to remainwider than after prior crises due to asset quality, as those whocan seize the day with healthy balance sheets and cheaperfunding.In 2009, based on Morgan Stanley’s coverage of large capbanks, pre-tax returns on equity ranged from -27% to +47%.Although we hope this range will tighten, we think lingeringconcerns on asset quality, the need to reinvest to gain scaleor rebuild alongside funding mix and capital base will exert ahuge impact on returns. It means that some of the winners oflast year can remain winners for longer than many mightexpect.Exhibit 28Distribution of returns – wider distribution duringtimes of downward pressure on the industryExhibit 292009 investment banking pre-tax ROEs – showedmassive dispersal-30% -20% -10% 0% 10% 20% 30% 40% 50%BNPPTD47%43%RYJPMCSG39%36%35%GSBARCHSBCBNSGroup MedianBMO31%30%29%29%27%25%DBKGroup AverageBAC21%20%20%RBS5%Nomura-5%CM-9%UBS-17%Soc Gen-27%Source: Company data, Morgan Stanley ResearchExhibit 30Banks have already delevered a lot$BN2006Assets7,6574,019Equity22416 7-4% 57% 1% 15%LeveragePre tax-RoAIn the wholesale bank34x0.8%25%20077,3566,30122619 233x0.4%20%-13% 15% 0% -3%15%20086,3697,24522618 528x-1.1%10%2009e-27% -21% -6% 36%4,6375,74821325122x1.0%5%RoE0%-5%-10%1994-1996 1997-1998 1999-2000 2001-2002 2003-2006 2007-2009Median 1st quartile 3rd quartileWholesale division Rest of groupNote: Equity is total common equity; Sample banks are BoA, ML, Credit Suisse, DeutscheBank, Goldman Sachs, JP Morgan, Bear Stearns, Morgan Stanley, UBS, BarCap, Nomura,Lehman BrothersSource: Bloomberg; Oliver Wyman analysis, Morgan Stanley Research-15%-20%Source: Oliver Wyman analysis, Morgan Stanley Research26

March 16, 2010Banks9) Compensation – a key lever to raise returns and align risk to rewardThe industry has taken significant steps in 2009 to movetowards aligning to the FSB’s compensation principles;however, there is further to go in transmitting the cost of riskand funding to the practitioners. In some areas, regulatorsand shareholders can do more to help the industry break thecycle of compensation inflation.Net headcount has fallen since the onset of the crisis as theindustry has gone through a relatively painful downsizingprocess, particularly in the US. As a result, headcountproductivity has improved, and absolute compensation levelshave been maintained within closer bounds. Compensationper unit of revenue dropped heavily from the historicalaverage of 45% to 31% in 2009, though if revenues areadjusted for the gains in rates that figure rises to 35%Exhibit 31Industry compensation, 2004-09Cost/revenues(ex write downs, CVAs)75%Average compOliver Wyman is conducting an update of the IIF and FSBsurveys of industry compensation practices. Early findingsreveal the industry now largely aligns to (and is uniformly atleast moving towards) the compensation principles set out bythe FSB in 2009. However, implementation is proving difficult,particularly in the area of pushing risk-adjustment ofcompensation down to the desk or individual level.We see important structural shifts still to come that arecritical to the long-term health of the industry. Theindustry has yet to fully pass on (or be forced to pass on)either the cost of additional capitalisation (proxy for risktaking)or cost of liquidity risk (proxied by funding costs) to thepractitioners. Once done, we think this will lead tocompensation levels stabilising at ~35% of revenues over thecoming three years, a necessary precondition to offsetting thelikely capital/funding drag on returns.58%50%46% 45% 45%42%31%35%25%0%2004 2005 2006 2007 2008 2009 2009 adjComp / revenues (LHS)Average comp. (RHS)e: Oliver Wyman estimates; Source: company report; Oliver Wyman analysis; Sample banks:GS, MS, BoA-ML, JPM, CS, DB, UBS, Barcap and NomuraNote: 2009 adjusted excludes extraordinary growth coming from abnormal market conditions27

March 16, 2010Banks10. Who Will Be the Winners? Flow monsters, EM regionals, transactionbanks and non-banks stand outWe estimate that 15-20% of market share has changed handssince the onset of the crisis and arguably remains ‘up forgrabs’. This will be a key competitive battleground over thenext year or two. We see the biggest risk for incumbents as adraconian regulatory environment that caps upside andpushes more industry profits to migrate to the non-bank sectoror creates any sort of two tier regulatory regime. The risks oftalent and assets migrating to less regulated entities remainshigh.Key trends – the rise of the non-banksWe think greater regulation of deposit-regulated institutions islikely to drive more talent and opportunity into the non-banksector. The key issue is how much regulation of the non-bankfinancials will develop. Our hunch is that protection oftaxpayer supported deposit institutions will be key, andseveral waves of reforms on market infrastructure (clearing,funding ratios, supervision, alternative fund managerregulation and so on) as well as new capital and fundingrules, will drive the detail of where the balance will lie.Blossoming of boutiques. Near term, we expect theindustry shake-out to result in a host of boutiques (supplydriven) and niche firms gaining market share. This isparticularly likely in agency businesses, where the abilityto offer a transparent and mechanistic compensationstructure will be highly attractive. Capital-light areas, suchas research, some sales and trading and advisory (bothM&A and restructuring), are all areas where we see anincreasing pull of boutiques.Shift of principal investment to the buy-side and fundmodels. Shareholder pressure, regulation, and talentpressures will drive much embedded private equity andreal estate investing to the buy-side. This will be driven inpart by banks looking to reduce capital allocation toprincipal investment. In addition, disintermediation, riskreduction and balance sheet reduction from the bankscreates an array of opportunities. The next wave is likely toinclude: 1) purchases of assets in shipping, infrastructure,commodity finance; 2) direct fixed income investment inthe loan sector; and 3) a further shift in alpha-tradingplatforms from the banks into the alternatives sector.IDBs. As a result, we expect the interdealer brokers willevolve their business models to pseudo-exchanges with aheavy bias in electronic platforms and seek greater posttradeopportunities. We see the risks of discontinuitiesfrom mandated exchange trading as low, though broaderregulatory pressures (for example, on bank capital) couldsubdue OTC market recovery.Trading specialists. High capital requirements for tradingbusinesses in systemically relevant firms may acceleratetwo processes: 1. the transition of proprietary tradingbusinesses into asset management constructs; and 2. thetransition of client facilitation businesses to technologydrivenspecialists.Exchanges. Exchanges have seen material pressure fromMTFs on their privileged position of flow. In our view, thisbattle for price, scale and efficiency has few easy answers,and competition for low-cost execution will remain veryintense. Building scale through M&A is a plausibleoutcome.Asset managers. Greater disintermediation of corporatecredit is likely to provide yet more opportunities for creditmanagers. Asset managers should be readyingthemselves to be more active in derivatives as marketsbecome more centrally cleared. We also think thepolarisation of cheap beta by scale providers (that is,index, ETFs, swaps) and alpha or alternative beta(particularly absolute returns or thematic investing) bymodern asset managers will persist. We believe firmsshould look to take decisions along this range and avoidthe muddling middling.Key trends – the regional and large cap banksThere has been a material reshuffling in the competitiveenvironment over the past two years, and there is plenty ofevidence to suggest a shake-out is still under way. At thispoint, we estimate that 15-20% of market share has changedhands and arguably remains ‘up for grabs’. This is likely to bea key competitive battleground over the next year or two (seeExhibit 32).Repositioning of the IDBs. We think regulatory trendsover time will reinforce the shift to electronic trading at28

March 16, 2010BanksExhibit 32Competitive Landscape in sales and trading for thelargest players: we think 15-20% is up for grabsMarket share100%90%80%70%60%50%40%30%20%10%0%ExpandingRegionals“Bank the profit”Domestics /RegionalsGlobalslooking torecommitGlobalwinners2007 2009e 2010eSource: Oliver Wyman data and analysis1. Excludes write-downsMarket share“up for grabs”(~$50-70 BN)CorefranchiseThe primary drivers of outperformance in the past two yearshave arguably been balance sheet strength, fundingadvantages, consistency of support from group and continuityof management team. This has been reinforced by breadthand depth of footprint in the critical FICC businesses, withrelatively few firms well placed to replace falling G10 ratesand FX revenues with commodities, rebounding Credit andEmerging Markets.Among the Globals, while there is clearly a group of crisis‘winners’, the remaining firms in that group have recommittedto the business, and the strong tailwinds in 2009 haveensured cash flow available to re-engage in the talent war(Exhibit 33). We now see a relatively uniform commitment toreposition among the top 5 for these firms, as a prevailingview that the shake-out is still under way is pushing the banksto work hard to maintain or gain share.“Expanding Regionals” targeting growth. There is arelatively long list of regional banks who intend to leverage thegood conditions they have enjoyed for the past two years andrecapture market share from the globals as a basis to launchambitious growth strategies. Where these are based tightlyaround fundamental competitive advantages (e.g. balancesheet, or emerging markets footprint) we see scope forsuccess. However, there is almost certainly too wide a groupof banks in this category, and we anticipate some failedexperiments here. Clarity of objectives, managementcohesion and commitment, and speed of execution will becritical to the few firms who succeed in repositioning.Regionals ‘banking the profits’ and Domestics. For manybanks, particularly in continental Europe and North America,we anticipate a retraction to domestic footprints “plus”, wherethese firms will be under much more shareholder pressure tojustify the rationale behind any non-domestic activity.Overall, we expect banks with strong funding to leverage theprimacy of balance sheet. We note that this is driven more bynet funding position, sophistication in collateral managementand ability to liquefy, than it is about size. In this regard, wesee the former investment banks as reasonably wellpositioned.We expect focus to become a greater driver of returns, givenbalance sheet constraints. Banks that channel scarcemarginal resources to business segments where they have anexisting edge and do not need to compete on price shouldoutperform.Finally, as we argued above, we are likely to see greaterdeviation in performance within the sector over the comingyears, as a subset of competitors deliver performanceimprovements to offset widely applied regulatory measures.29

March 16, 2010BanksExhibit 33Typology of playersSell-side/intermediarysegmentClear crisis winnersamong the GlobalsGlobals withdifficult crisis butre-committingExpandingRegionalsRegionals “bankingthe profits” orretrenchingDomestics mostly“banking theprofits”Boutiques makinghaySource: Oliver WymanExamples• JPM, Barcap, GS,CS• UBS, ML-BoA, Citi• StandardChartered,Standard Bank,BNPP, Santander,Nomura, RBC,Japanese,Australians• BBVA, ING,Commerz, Calyon• Wide list• Trading specialists• Advisory specialistsDynamicsBusiness model evolution for the big banks• Consolidating gains and exploitingclosing window as advantagedattractors of talent• 2009 conditions have provided alife-line and critical investmentdollars• Wholesale divisions exploitingstrategic freedom and loosercompetitive environment to takeshare• Expanding growth strategies,particularly focused on EmergingMarkets• Banking groups largely looking totake the profits from marginexpansion and yield curve anduse to consolidate franchise, buildcapital, pay dividends• Limited medium term ambitions inthe wholesale business• Repricing and reduction ofcompetition in domestic marketsimproving outlook• Some froth but several of thesebusiness models look advantagedand sustainable, particularly techbased and middle marketGiven the sheer breadth of change and the range ofuncertainty in outcome on regulatory issues, banks clearlywant to maintain strategic optionality at this point. At the sametime, delivering the required ROA improvements to offsetregulatory drag will demand significant evolution of thebusiness model in the next two to three years. While theanswer for every bank will be different, we see the followingas a reasonable starting check-list for business modelevolution:DeltaCapital’07-’09+55%NM~30%~30%FlatUpDeltaBalanceSheet ’07-09~(15)%~(40)%~15%~5%FlatLimitedDeltaRevenues’07-09+25%~(25)%+60%~5%FlatMixedinnovative sourcing in middle and back office andthrough down-skilling work-force in some areas (e.g.flow sales)Return characteristics – low profitability, dependenton success on risk; returns low in balance sheetintensive businesses, but likely to improve underCCPs; high in exchange traded businesses.Non-organic play – acquisitions of dark pools orplatforms, insourcing/whitelabelling JVs, furtherconsolidation of FCMs.1. Gain scale in flow businesses – taking market share,cutting costs and getting past the bar-bell economics inflow2. Mine the seams as business transitions betweenbanking and the buy-sideSeek more wallet share in core client base and newways to access tail clients (third party andinsourcing); expand and invest in electronic tradingand distribution platforms; cut costs throughManaged fund structures for transfer of creditbalance sheet and re-intermediation of illiquidinvestments; battle for structured and synthetic assetmanagement.30

March 16, 2010BanksReturn characteristics dependent on level of alphagearing versus fees structure in product.4. Grow the Emerging Markets franchise with locallyfunded modelsNon-organic play – JVs with managed fund vehicles,acquisitions of fund vehicles in structured credit,synthetic and discretionary quant.3. Build post-trade, transaction banking and corporatebanking as franchise safe-havens and sources ofliabilitiesMore interest in full universal banking onshore tobuild local currency liability funding, throughpayments and cash-led corporate banking; JVs withlocal distributors or universal banking acquisitions.Non-organic play – wholesale-retail acquisitions orstakes in India, Russia, Saudi, Brazil, Indonesia.Post trade clearing and asset servicing capabilitiesas hedge against OTC and FIG disintermediation.Corporate cash management business to enhanceown deposit base through locked in funds.Trade and supply chain infrastructures withadvanced collateral valuation capabilities assubstitute for lending; helping high grade corporatesto co-finance their increasingly funding constrainedsuppliers.Return characteristics depend on the ability of thebank to deliver infrastructure and high end clientsolutions.Exhibit 34Business model evolutionBusiness modelimperatives1. Building scale inFlow business2. Improve leverageand liability structure3. Access to liabilityheavyhighgrowth marketsClient / ProductadjacencyStrategic responsesFinancial ResourceEfficiency• Release balancesheet, build AMbusinesses– Credit vehicles– Structured AMInfrastructureadjacency• Expanding flow capture– Electronic, liquidity search, internalisation– Expand sales, 3 rd party flow sourcing• Emerging Markets and Asia– Commercial and wholesalebanking– Full retail banking• TransactionBanking– Payments andcash– Trade Finance– Custody– SecuritiesSvcsNon-organic play – acquisitions of fundsadministration, corporate trust and clearing firms aswell as cooperation with service companies to thephysical supply chain.4. Lower volatilityincome streamsSource: Oliver Wyman• Distribution– Trust and wealth– Public distribution31

March 16, 2010Banks32

March 16, 2010BanksPart 2 – Investment Thesis and Top PicksThis valuation section solely reflects the views of MorganStanley Research, not Oliver Wyman.Key stock ideas – EuropeTop picksLeast preferredBarclays (1.0x TNAV) BME (10.5x 10e)CSG (8x 10e)CBK (1.1x TNAV)Soc Gen (1.2x TNAV) DX (1.0x TNAV)BNP (1.4x TNAV)Schroders (13x 10e ex-cash)Key stock ideas – North AmericaTop picksBAC (1.5x TNAV)JPM (1.6x TAV)TD (11.6x 10e)BX (15.3x 10e)AMTD (16.7x 10e),Key stock ideas – Japan, EMEATop picksNomura (1.0x TNAV)Standard Bank (1.6x TNAV)We have revised estimates for a number of the large capwholesale banks we cover: DBK, BNP, Soc Gen, BARC,UBS, CSG, BAC, JPM and C. See Exhibits 40-41 below.Key Themes~15% lower underlying revenues will make market shareeven more critical for successRefreshed by our project with Oliver Wyman, we expectunderlying revenues to be down in 2010. With this note, wetrim our outlook for equity trading and IBD. Equity issuance inQ1 is down 51% on the 2009 average, although DCM is up10% and M&A down 13%. We tweak our FICC forecastsbased on slightly stronger rates/FX from volatility in Q1.Across our European universe, we model equity tradingrevenues to be up ~9% in 2010/2009, FICC (ex marks/DVA)to be down ~26%, IBD up ~8% and total revenues down 15%(pre-marks/DVA). This equates to revenues +16% on areported basis. (See Exhibits 40 and 41 for estimate changesfor all our global coverage, which have similar drivers.) Thisputs pressure on those players pursuing re-invest for growthstrategies, and may lead to stronger refocusing as the yeargoes on if early wins are seen in H1.The spread of returns, although narrowing, will probablyremain – and put more pressure on those reinvestingIn 2009, our coverage universe made ~20% pretax returns (exDVA) with a median of ~27%, on our estimates, implying~14% post-tax returns on equity. But the range was very wide:from -27% pretax ROE at Soc Gen and -17% at UBS, to+47% at BNP and +35% at CSG. We model ~24% averagepre-tax ROE in 2011 in our base case, and think it likely thatsome divergence between players will persist. For instance,so far this year, JPMorgan is #1 in both ECM and DCM andsaid at its recent investor day that it aims to grow share inboth issuance and trading. Perhaps more notable, CSG is #5in ECM and #3 in DCM and #4 putting both together year todate – the highest position for CSG we have ever seen.Without wanting to overstate a 10-week run, we think thisdoes underscore the benefits of momentum that we havebeen highlighting in our research. Although we expect upsideExhibit 352009 investment banking pretax ROEs showed widedispersal …-30% -20% -10% 0% 10% 20% 30% 40% 50%BNPPTD47%43%RYJPMCSG39%36%35%GSBARCHSBCBNSGroup MedianBMO31%30%29%29%27%25%DBKGroup AverageBAC21%20%20%RBS5%Nomura-5%CM-9%UBS-17%Soc Gen-27%Exhibit 36Our expectations for pre-tax ROEs in 2011 showgreater normalization by 2011e, but still a spread0% 5% 10% 15% 20% 25% 30% 35% 40%BARCTD36%35%RYBNPP33%33%CMBNSRBSBMOJPMGroup MedianDBKCSGGroup AverageHSBC30%29%28%26%26%25%25%25%24%23%Soc Gen19%UBSNomura12%10%JPM pre-tax ROE on going forward capital of $40 bill, reported pre-tax ROE was 36%.Source: Company data, Morgan Stanley Research (2012)33

March 16, 2010Bankspotential in top lines from players reinvesting such as at UBS,we think the reinvestment means pre-tax margins will remainvery tight. In fact we forecast 50% comp/revenue at UBS, 10points or more higher than most other banks we cover givenneed to reinvest for revenues.We have undertaken what we think is the first in-depthanalysis of market shares pre and post crisis, given thecritical role of growthTake equities: from 1H07 to 2H09, we estimate UBS lost3.4% market share (from 9.8% to 6.4%) of the revenues of theleading investments banks in 1H 07 as they lost revenueshare in derivatives and so on. BAC pro forma with Merrill fellfrom 11% in 1H07 to 7% in 2H09. GS gained most share(~4.6%), followed by CSG (from 7.6% to 9.0%). Barclays (dueto Lehman) and HSBC also grew well. The point here is toshow not simply the historical trends, but how rivalrous thismarket will be.There are now nine firms that made $2-2.5bn in equities in2H09, all of which feel the potential to be in the industry’s top3, alongside GS and CSG. This is going to make revenueshare gains dependent on flawless execution, client intimacy,trading efficiency and collaboration. It also means we shouldnot expect massive share shifts in coming quarters, makingthis far more a call on the markets in equities and on whenHNW will look to buy structured derivatives, in our view.Exhibit 37Equity revenues – Changes in market share, 1H07-2H09GSCSGGLEDBKJPM PF BSCBAC PF MERMSCNOMUBSBARCBNPRBSHSBCLEH0% 5% 10% 15% 20%9.0%7.6%7.7%5.6%7.3%8.4%7.1%7.7%7.0%10.8%6.9%8.8%6.5%6.5%6.4%2.1%6.4%9.8%6.3%2.8%4.2%3.9%3.8%3.0%3.3%3.1%6.1%Source: Company data, Morgan Stanley Research13.8%18.1%2H091H07Another example is Fixed income. Players that were veryfocussed on LBOs, CDOs, CMBS, RMBS rather than flowclearly have lost share. These include UBS, which slippedfrom 4.1% to 1.9%. and DBK from 10.9% to 7.7%. Thegainers? Goldman Sachs increased share from 10.4% in1H07 to 15.9% in 2H09, while BNP moved from 2.7% to5.0%. Those that gained share are almost all the largebalance sheets that sustained flow franchises. Again, thepoint of the exercise is not to say there won’t be some strongsuccess stories among those reinvesting for growth, butrather that regaining share will be no easy exercise, given theintense competition for each unit of revenue.Exhibit 38FICC revenues: Changes in market share, 1H07-2H09GSCJPM PF BSCBAC PF MERDBKBARCMSCSGHSBCBNPRBSGLENOMUBSLEH0% 2% 4% 6% 8% 10% 12% 14% 16% 18%10.4%11.5%8.6%10.8%10.1%10.7%10.5%7.7%10.9%10.3%9.1%7.2%8.5%5.4%6.5%5.1%3.1%5.0%2.7%3.4%7.7%2.6%1.7%2.3%0.9%1.9%4.1%5.3%15.9%2H091H07Source: Company data, Morgan Stanley Research. Note: given different reporting styles forlosses (bad bank, IAS 39, provisions or negative revenues) this is not a clean comparisonRegulation is clearly the single biggest swing factorWe have already written extensively on this above and inmany recent notes (see Banks Regulation: European BanksMost Challenged - January 20, 2010). Rules on capital,funding, tax, “market profile”, risk-taking and resolution as wellas adjacencies are all key. We have factored in many aspectsto our bases cases – including higher risk weightings andmore capital. We also think it is very likely that a bank tax,based probably on RWAs or loans (not total liabilities), willbecome the norm by 2011 and that the IMF discussion afterEaster will be key for this.34

March 16, 2010BanksThe key point we want to underscore is that the more we havedug into the proposed funding rules, the more we areconcerned by the implications. We believe a measuredresponse needs to be taken, in the context of restarting loangrowth in Europe. We also think a reopening of thesecuritization market as one of the best ways to fundmortgages is key for banking. It strikes us that the currentproposals – on leverage, stable funding ratios andsecuritization rules – make this quite unlikely in Europewithout major reform. Also, in the UK, a market that for thelast 2.5 years we have argued has a massive mismatch, anational mortgage corporation (like that in Hong Kong) is onepossible solution.Non-banks should prosperWe think the odds are that asset managers and boutiques willblossom as the financial world is reshaped. Although there issill much flux and uncertainty ahead – and in Europeprotectionist measures such as the alternatives directivethreaten this – we think more talent and business will flow tospecialists. In the listed space, players such as Blackstoneand Partners Group strike us as good ways to play thischange.Top-line pressure will mean that progress towardsexchanges and derivative clearing will take time inEuropeWe remain Underweight BME and LSE and Equal-weightDeutsche Boerse. We think brokers’ desire to use MTFs willremain high – the key risk in our view for BME – and equityvolumes are lackluster. On derivatives, we argued previouslythat clearing could be a $0.3-1.0bn opportunity for clearinghouses. At a stock level though, we see this playing out farmore intensely in the US than in Europe (note recentcomments by Fannie Mae and Freddie Mac that they intend tostart using central clearing for their interest rate swapsportfolios within months). As we argued with Oliver Wymanearlier in this report, there are many obstacles to clear inEurope, not least of which are the natural reservations on thepart of central banks to agglomeration risk. Until this isresolved, we think players such as Eurex will struggle to getthe turbo charge seen by players such as ICE, which hasbeen particularly successful in CDS business. It is alsopossible there may be more capital needed, depending onhow regulations settle.Constructive rate and FX volumes should support IDBtop line, though regulatory and competitive uncertaintyremain issuesAlthough we believe that FICC I-bank revenues may be down~26% in 2010, this chiefly speaks to the tightening in bid-askspread. We believe that volume dynamics will be reasonablyconstructive in rates and FX (given macro volatility, debtissuance etc), which offers support for the IDBs’ top line,despite weaker tailwinds from currency versus the prior year.Recently reported bid interest (FT, 10th March) in Tullett,although unconfirmed, also speaks to the potential forvaluation support from private equity interest and/orconsolidation within the exchange/IDB space. That said, wesee some challenges to exchange/IDB deals, including risksof top-line attrition, execution risk (especially wherebusinesses are predominantly voice broking), and potentiallylimited cost synergies, unless IT represents a significantportion of the overall cost base.We have favoured TLPR (Overweight rated) on valuation (itwas trading at ~7x 2010e P/E prior to recently reported bidinterest) and as the vanilla skew in its business to governmentbonds, rates and FX played well to areas where we feltvolume dynamics were supportive. We recognise the longertermrisks, assuming electronic migration accelerates on theback of increased centralised clearing and straight throughprocessing of OTC derivatives, but view ICAP as betterpositioned than peers, given its stronger electronic capability.Our base case has been for regulators to mandate clearingbut not exchange trading (see Identifying winners from marketstructure change, 15th July, 2009), but we nonetheless seewild card risks that more hawkish views within the regulatorycommunity could represent risk on this front to businesscurrently intermediated by the IDBs. Meanwhile, an uncertainregulatory environment places risks to volume recovery, in ourview, given the risk that bank trading activities could becurtailed at the margin. We view the recent profit warning byICAP as chiefly due to execution challenges on new businessinitiatives (e.g. Brazil, cash equity) which we expect renewedfocus to resolve. However, we also see pressures on corebusiness from staff retention, from a shift to lower-marginvanilla business and from intense pressure from user bankson broker commissions in a more challenged environment. Assuch, we are Equal-weight on ICAP (see also Execution andregulatory risks keep us on the sidelines, 10th Feb, 2010),and more broadly see better risk/reward among a number ofthe asset managers (SDR, HGG)35

March 16, 2010BanksKey stock ideas – EuropeWe are concerned that many retail banks in Europe will beheld back by weak loan growth, lower-for-even-longer interestrates, funding costs and provisions stabilizing but not gappingdown quickly. We therefore have a bias to some capitalmarket banks among our preferred names.Exhibit 39BARC, BAC, JPM and CSG look the best value on 2year forward ROE vs price to bookPrice/ 09 Tangible Equity2.5 x2.0 x1.5 x1.0 x0.5 xCBNPPEuropean AverageDBKBARCSocGenUBSJPMUS Average0.0 x10% 12% 14% 16% 18% 20% 22% 24% 26% 28%2012e Return on Tangible EquitySource: Morgan Stanley Research estimatesBARC – Overweight, PT 440p. We think the marketunderestimates Barclays’ operating leverage once marksfall away. We calculate a Barclays Capital divisional 2011PBT of £7.0bn is achievable on a lower-than-guided costto net income ratio. Assuming non-recurrence of creditmarks, normalization of impairments and >25% compcost/head growth in 2011 vs 2009, we think BarCap canachieve a cost to net income ratio of 56% in 2011 (vsguidance 65-75%), delivering 72% of forecast group PBTof £9.7bn in 2011.CSG – Overweight, PT SFr71. We see a constructiveoutlook for the investment bank, where CSG appears to beholding and even winning share, even if in a shrinking topline. YTD CSG is #5 in ECM and #3 in DCM YTD.Although we think equity trading has been sluggish, weraise our EPS by 4-5%, largely due to FX. We also believethat CSG is likely to overtake UBS as the world’s largestprivate bank in the next 12 months and that inflows remainvery strong, even if margins will dip from the new businessstrain. We see good value in the shares, which are tradingon 7x 2011e EPS and 2.5x TNAV (implying the marketforecasts a 24% ROTE vs our 27% forecast for 2012).UBS – Equal-weight, PT SFr16.6. With the Europeanlarge cap investment banks, UBS is our least preferredBACCSGname, although in the wider context of pan-Europeanbanks, given our cautious view on trends on provisions,macro and regulation, there are other banks where we aremore bearish.We appreciate the turnaround potential in UBS led by astrong new management team, but we continue to thinkthat several headwinds will slow the bank’s turnaround,and we therefore see better value in other names. First,we think UBS continues to see outflows in 2009 andforecast ~SFr40bn of outflows (probably the highest sellsideestimate) and don’t expect inflows until 2010. We alsothink margins will remain subdued as the ‘dash the cash’and retention hurt gross margins. In the investment bank,we think the reasonable but challenging industry top linewill make major advances in revenues much morechallenging, despite material improvement year on year.February has been tough for most banks and investors,and we think the high expectations will take time toachieve, although we think they may have made someprogress in FICC. We also note monoline exposure,which, although well marked, could cause further materiallosses should any monolines restructure. SFr18bn instudent loans leaves another risk concentration.Despite the longer-term potential we see for turnaround, at~11.3x 10e and ~9.6x 11e we see less upside than forother European capital market banks we cover. For UBSand CSG we are increasing our 2010 estimates dueprimarily to FX. We raise our 2010 EPS for UBS by 11%and for CSG by 4%, reflecting the significant move in thedollar and markets since we last wrote. Moreover, we seelimited upside to our price target of SFr 16.6 and see littlecarry to hold without clear upside to the restructuring case.We also forecast no dividend until 2012. At 2.2x TNAV, thestock is implying 21% RoTE vs our 20% forecast for 2012,suggesting the stock is up with events. This said, we notethat, given such a high cost/income ratio in the investmentbank, the operational gearing of the investment bankmakes UBS in part a market call, rather than one wherewe see a lot of alpha.Soc Gen – Overweight, PT €63. In a report publishedalongside this note today (Roadmap to crystallize value),we explore potential to unlock value in the group throughrefocusing on the core franchises in Foreign Retail andbeefing-up underlying ROE in CIB from 20% to 25%through specialization rather than a global player strategy.Based on the strategic analysis we run, we believe thiscould lead to an upgrade of group RoTE from 17.4% to19%, implying a base case value ~€76 vs. €63 today. SGtrades on 1.1x last TNAV, which compares to our 17.4%36

March 16, 2010Banksestimated normalized return on tangible equity. Wecalculate this implies the market is pricing in 2.5x higherlosses on legacy assets than we estimate and 1.5x higherlosses than the most bearish estimates on the Street,which looks overdone to us.BNP – Overweight, PT €65. We continue to see upsidefrom the Fortis integration, decent market activity, stableretail and cost control. The stock trades at 1.4x last TNAV.We raise our estimates by an average 3%.BME – Underweight, PT €19.1. We still see material risksto earnings from proposed changes to the Spanish marketstructure, based on the losses other exchanges have seento MTFs. The stock trades on 10.5x 2010e, and our pricetarget implies ~5% downside potential from current levels.SDR – Overweight, PT £15.65. Schroders is our preferredasset manager, as we think sales momentum isbroadening from corporate bond focus to equities,commodities, alternatives and multi-asset. At 10x 2011e(adjusted for surplus cash) versus the sector on ~11.5x,we think valuation is undemanding given growth.CBK – Underweight, PT €4.43. We remain UnderweightCBK, as we think the company is still challenged in severalasset quality areas, exposed to sovereign risks in Europethrough ~€133bn public finance exposure (€28bn of whichis in Southern Europe) and with a thin capital base. Wewould want to see the common equity component ofCBK’s capital addressed before we turn more positive, andcurrently calculate a €15bn shortfall of core T1 capital (>2xmarket cap).DX – Underweight, PT €4. Dexia’s 4Q results confirmedour cautious view on the stock. With credit markets underpressure, we expect Dexia to suffer from the doubleimpact of higher cost of funding and higher cost ofdeleveraging, which will likely impair group earningsgeneration and erode excess capital. Deleveraging is likelyto be more challenging on the back of negative creditmigration, which will not ease further asset disposals.Although we believe much of this is priced in, we remainUnderweight on the stock due to: (1) low visibility ontiming/level of normalized earnings; (2) uncertainty overexcess capital in 2012; (3) the impact from wideningsovereign spreads and (4) the lack of upside to our pricetarget, which makes the stock a relative Underweightwithin the sector.Key stock ideas – North AmericaBAC – Overweight, PT $28. BAC is our top pick amongUS large cap banks. It has a skew to early cycle capitalmarkets revenues (25% of revenues) and card (18% ofmanaged loan balances). We expect provisions and NPLsto start declining in 2010. BAC should begin to regain lostcapital markets share as TARP has been paid back,management has stabilized and the US economyrebounds, driving corporate America to increaseinvestment, strategic and financing activities. We think BACis attractively priced at 0.7x book, 1.5x tangible and 5x2012e normalized EPS, versus peers on an average 1.0xbook and 7x 2012 normalized EPS.JPM – Overweight, PT $59. We expect JPM will be oneof the first banks with materially declining NPLs, given itsskew to early cycle card and below-average CRE. InInvestment Banking, we expect JPM will continue to takeincremental share beyond its already #1 position in IBfees, given recently increased IT investment, Asia focusand talent management. We expect that electronic tradingplatforms, equities and commodities will drive $1 billioneach in incremental revenue over time. The fixed incomeinvestment is more about cost saves at this point. Weexpect more investment in Asia, where JPM would like todouble its share. JPM is priced equal to the group at 1.1xbook, 1.6x tangible and 7x normalized 2012e EPS. Fasterexit from the credit cycle with lower NPLs, lower provisionsand faster dividend hikes drive our Overweight view.TD – Overweight, PT C$85. TD is our top pick inCanadian banks, with the most leverage to the USrecovery (25% of loan book). TD targets a 75% retail /25% capital markets business mix. Trading andunderwriting/advisory revenues remain strong. In fiscalQ110, fixed income trading increased 16% sequentiallyand underwriting/advisory was up 6%. Equities tradingcontracted 43% q/q, but only comprises roughly 20% oftrading. TD saw strong new issue origination on the debtside during the quarter. TD is trading at 11.4x 2010eversus Canadian peer group of the sector at 12.8x. Ourprice target implies ~20% upside from current levels.AMTD – Overweight, PT $28. We are Overweight AMTDbecause we believe the Street underappreciates thecompany’s asset gathering ability, and thus gives the stocka lower multiple, despite a similar growth profile to comps(management has eliminated past issues). In theDecember quarter, AMTD once again grew net new assets(NNA) at a higher rate than Schwab, the industry leader interms of total assets.BX – Overweight, PT $18. BX is a low capital intensivemodel with very low enterprise risk. Factoring ininvestment gains supports best-in-class pretax incomemargins of ~50%, high returns on equity (~20%) and37

March 16, 2010BanksExhibit 41US Banks: Changes to our estimates1Q10E 2010E 2011E 2012EEPS New Old New Old New Old New OldBAC $0.23 $0.28 $1.55 $1.63 $2.33 $2.37 $3.20 $3.20C $0.01 $0.00 $0.10 $0.09 $0.25 $0.24 $0.43 $0.44JPM $0.47 $0.50 $2.94 $3.02 $4.74 $4.78 $5.87 $5.93IB Fees New Old New Old New Old New OldBAC 1,369 1,716 6,797 7,343 8,126 8,321 9,749 9,384C 1,249 1,247 5,272 5,271 5,630 5,630 5,696 5,696JPM 1,315 2,041 7,558 8,470 8,724 8,992 9,715 9,416Trading Revs New Old New Old New Old New OldBAC 2,815 3,306 13,097 14,097 14,117 14,509 17,064 16,356C 2,958 2,958 13,362 13,362 14,090 14,090 14,794 14,794JPM 4,319 4,319 17,457 17,457 18,320 18,320 19,135 19,135ROE (Total Co) New Old New Old New Old New OldBAC (%) 4.4 5.6 7.3 7.7 10.2 10.2 13.0 12.7C (%) 0.0 0.0 1.8 1.8 4.6 4.6 7.9 7.9JPM (%) 4.8 5.1 7.4 7.4 11.3 11.3 13.1 13.1Source: Morgan Stanley ResearchCitigroup may be deemed to control Morgan Stanley Smith Barney LLC due to ownership, board membership, or otherrelationships. Morgan Stanley Smith Barney LLC may participate in, or otherwise have a financial interest in, the primary orsecondary distribution of securities issued by Citigroup or an affiliate of Citigroup that is controlled by or under common control withMorgan Stanley Smith Barney LLC.Exhibit 42US and European Banks: Comparative risk-reward150%100%64%BULL50%-50%48% 41%37% 35%29%29%26% 21%21%15% 13% 11%12% 10%4% 3%-1%-1% -3% -4% -5% -5% -9%BASEPT-25%BEAR-100%BA-MLAmeritradeSocGenJPMCSGNomuraBARCCitiBlackstoneTorontoSchrodersBNPPRBCDBKBMOUBSD.BoerseLSERBSTullettHSBCICAPBMEDexiaCommerz.Source: Morgan Stanley Research estimatesPrices for stocks mentioned: AMTD, $18.85; BAC, $16.86; Barclays, 351p; BME, €20; BMO, CAD59.75; BNP, € 57; BX, $14.65; CitiGroup, €3.90; Commerzbank, €6.10; CSG, SFr53; DBK, €53;Deutsche Boerse, €53; Dexia, €4.40; HGG, 138p; HSBC, 684p; ICAP, 377p; JPM, $43; LSE, 735p; Nomura, Yen685; Partners Group, SFr144; RBC, CAD58; RBS, 43p; Schroders, 1360p; SocGen,€44.30; Standard Bank, R11.45; TD, CAD72.3; Tullet, 371p; UBS, SFr16.439

March 16, 2010BanksExhibit 43Industry ComparablesGlobal Valuation CompsPrice EPS P/E (x) EPS P/E (x) EPS P/E (x)BVPS, 09P/09e Book (x) 2012e Core ROE (%)CompanyCcy12/03/2010 2009 2009 2010e 2010e 2011e 2011e Stated Tangible Stated Tangible Stated TangibleUBS CHF 16.4 0.30 nm 1.45 11.3 1.70 9.6 11.6 7.6 1.4 2.2 16% 20%CSG CHF 53.2 6.12 8.7 6.62 8.0 7.51 7.1 31.7 21.4 1.7 2.5 20% 27%DBK EUR 52.9 6.42 8.2 6.44 8.2 7.57 7.0 56.6 39.7 0.9 1.3 12% 16%European IB 8.5 9.2 7.9 1.3 2.0 16% 21%BARC p 351.9 32.9 10.7 23.7 14.8 47.8 7.4 414 337 0.8 1.0 12% 16%RBS p 42.6 (3.77) - (2.00) - 1.39 - 63.1 48.9 0.7 0.9 nm nmUK Wholesale 10.7 14.8 7.4 0.8 1.0 12% 16%SocGen EUR 44.3 4.75 nm 5.75 7.7 7.29 6.1 48.6 37.2 0.9 1.2 14% 17%BNPP EUR 57.0 4.92 11.6 5.33 10.7 6.96 8.2 51.9 40.8 1.1 1.4 12% 15%French Wholesale 11.6 9.2 7.1 1.0 1.3 16%European Average 9.8 10.1 7.6 1.1 1.5 14% 18%GS* USD 175.0 22.13 7.9 18.65 9.4 20.44 8.6 117.5 108.4 1.5 1.6 - -BAC USD 16.9 (0.40) nm 1.55 10.9 2.03 8.3 22.5 11.5 0.8 1.5 13% 23%MS* USD 29.9 (0.93) nm 3.04 9.8 3.52 8.5 27.3 21.7 1.1 1.4 - -C USD 4.0 (0.54) nm 0.10 39.7 0.25 15.9 5.4 4.2 0.7 1.0 8% 11%JPM USD 43.2 2.58 16.7 2.94 14.7 4.74 9.1 39.9 26.4 1.1 1.6 13% 20%US Average 12.3 16.9 10.1 1.0 1.4 11% 18%BMO CAD 59.8 4.09 14.6 4.60 13.0 5.76 10.4 32.5 28.4 1.8 2.1 14% 14%BNS CAD 49.5 3.77 13.1 3.94 12.6 5.01 9.9 21.0 17.8 2.4 2.8 19% 19%CM CAD 73.5 5.69 12.9 6.15 12.0 7.20 10.2 29.9 23.2 2.5 3.2 20% 20%NA CAD 61.5 6.22 9.9 6.10 10.1 6.75 9.1 34.6 30.0 1.8 2.0 17% 17%RY CAD 58.4 4.14 14.1 4.29 13.6 5.34 10.9 23.1 15.9 2.5 3.7 18% 22%TD CAD 72.3 5.30 13.6 6.25 11.6 7.40 9.8 41.9 21.8 1.7 3.3 14% 23%Canadian Average 13.0 12.1 10.0 2.1 2.8Total Average 11.8 12.8 9.2 1.4 1.9Note: Tangible calculations exclude accumulated fair value gains on own liabilities. Canadian banks year end is Oct.e = Morgan Stanley Research estimates*MS and GS based on FactSet consensus estimatesSource: FactSet, Morgan Stanley Research40

March 16, 2010BanksExhibit 44Global exchanges and interdealer brokers – key metrics and valuationPrice Mkt. Val. EPS (MSe cal.)P/E RatioPerformance (% ) EPS Growth (% )EPS CAGR Revenue (LTM)Rating 03/15/2010 (US$ bn) 2008 2009 2010e 2011e 2009e 2010e 2011e 1 W 1 M 3 M 12 M YTD 09 10e 11e 08-10e 09-11e (US$m) Growth y/yEuropean ExchangesDeutsche Börse Equal-Weight €53.36 14,298 5.41 3.97 3.96 4.63 13.4x 13.5x 11.5x 0 14 1 56 (8) -27% 0% 17% -14% 8% 3,515 1%LSE Underweight £7.34 3,022 0.73 0.60 0.62 0.66 12.2x 11.8x 11.1x 4 15 6 86 2 -17% 3% 6% -8% 5% 1,017 1%BME (Spain) Underweight €20.13 2,310 2.28 1.68 1.91 1.69 12.0x 10.5x 11.9x 1 (2) (11) 36 (11) -26% 14% -12% -8% 0% 448 -15%Hellenic Ex Equal-Weight €7.12 638 0.86 0.48 0.60 0.65 15.0x 11.9x 11.0x 2 7 (4) 58 (3) -45% 26% 8% -17% 17% 121 -42%Oslo Bors NC NOK65.00 479 1.05 6.80 8.10 9.10 9.6x 8.0x 7.1x (1) 6 1 28 2 NA 19% 12% NA 197 -1%European Median 2,310 12.2x 11.8x 11.1x 1 7 1 56 (3) -26% 14% 8% -11% 6% 448 -1%European Average 4,149 12.4x 11.1x 10.5x 1 8 (2) 53 (3) -29% 12% 6% -12% 7% 1,060 -11%Mkt Cap weighted Mean 13.1x 12.7x 11.4x 1 12 (0) 57 (6) -25% 3% 12% -13% 7% 2,629 -2%US/Canadian ExchangesCME Group Underweight $314.4 20,954 13.3 15.4 17.6 19.4 20.4x 17.9x 16.2x 1 8 (6) 56 (6) 16% 14% 10% 15% 12% 2,882 -1%ICE (ICE) Equalweight $110.2 8,114 4.50 5.43 6.18 6.87 20.3x 17.8x 16.1x 1 10 1 65 (2) 21% 14% 11% 17% 12% 837 28%NYSE Euronext Equalweight $28.8 7,517 2.04 2.34 2.75 3.11 12.3x 10.5x 9.3x 1 14 12 62 14 15% 18% 13% 16% 15% 4,476 19%Nasdaq OMX Overweight $20.3 4,292 1.83 2.00 2.24 2.54 10.2x 9.1x 8.0x 1 11 3 (15) 2 9% 12% 13% 11% 13% 1,603 17%Toronto Ex NC CAD 30.0 2,192 2.59 2.66 2.90 2.98 11.3x 10.3x 10.1x 4 2 (1) (10) (10) 3% 9% 3% 6% 6% 548 28%N American Median 7,517 12.3x 10.5x 10.1x 1 10 1 56 (2) 15% 14% 11% 15% 12% 1,603 19%N American Average 8,614 14.9x 13.1x 11.9x 2 9 2 32 (0) 13% 13% 10% 13% 12% 2,069 18%Mkt Cap weighted Mean 17.5x 15.3x 13.9x 1 9 (0) 49 (1) 15% 14% 11% 15% 13% 2,529 11%Other ExchangesHong Kong Ex Underweight HK$132.1 18,541 4.91 4.44 4.92 5.73 29.8x 26.9x 23.0x 3 3 (4) 127 (4) -10% 11% 17% 0% 14% 851 -29%BM&F Bovespa Equal-Weight R 11.78 13,634 0.41 0.43 0.57 0.71 27.5x 20.7x 16.6x (2) (2) (2) 73 (4) 5% 33% 25% 18% 29% 856 2%SingEx Overweight SGD 7.84 6,044 0.28 0.32 0.39 0.43 24.4x 20.3x 18.0x 4 2 (2) 84 (5) 13% 20% 12% 17% 16% 507 -24%Australian Stock Ex (ASX) Equal-Weight AUD 35.4 5,693 1.83 1.90 2.08 2.28 18.6x 17.0x NA 0 1 7 26 3 4% 9% NA 7% NA 563 11%Dubai Financial Mkt Equal-Weight AED 1.82 3,616 0.117 0.080 0.065 0.074 22.8x 28.0x 24.6x 18 4 6 42 (12) -32% -19% 14% -26% -4% 132 -52%Osaka Securities Ex NC ¥485,500 1,424 NA 21,821 25,183 27,203 22.2x 19.3x 17.8x 2 (3) 8 48 8 NA 15% 8% NA 12% 208 1%Jo'burg SE (JSE) Overweight ZAR 65.1 753 4.34 4.01 5.21 NA 16.2x 12.5x NA 3 9 9 68 9 -8% 30% NA 10% NA 132 32%Bursa Malaysia NC MYR 7.60 368 0.27 0.29 0.32 0.35 26.6x 24.0x 21.9x 4 4 (3) 76 (3) 6% 11% 10% 8% 10% 112 -25%New Zealand Ex NC NZD 2.0 169 0.09 0.10 0.12 0.13 19.9x 16.9x 15.1x 1 (9) (9) 55 (16) 6% 18% 12% 12% 15% 23 9%Other Exchange Median 2,520 22.8x 20.3x 18.0x 3 2 (2) 68 (4) 4% 15% 12% 9% 14% 170 1%Other Exchanges Average 5,121 23.1x 20.6x 19.6x 4 1 1 67 (3) -2% 14% 14% 6% 13% 348 -5%Mkt Cap weighted Mean 25.8x 22.4x 17.3x 2 1 (1) 84 (3) -3% 16% 15% 6% 15% 678 -14%Global ExchangesGlobal Exchange Median 3,616 19.2x 16.9x 15.6x 2 3 (0) 57 (3) 4% 14% 11% 8% 12% 548 1%Global Exchange Average 6,029 18.6x 16.6x 15.1x 3 4 1 55 (2) -4% 13% 10% 4% 11% 895 -3%Mkt Cap weighted Mean 20.4x 18.1x 14.6x 2 5 1 69 (3) -6% 13% 14% 3% 13% 1,531 -6%Interdealer BrokersICAP Equalweight £3.78 3,749 0.32 0.32 0.32 0.36 12.0x 11.9x 10.6x 4 15 (11) 52 (12) -2% 1% 13% -1% 6% 1,979 21%Tullett Overweight £3.66 1,214 0.47 0.48 0.41 0.46 7.7x 8.9x 7.9x 14 39 27 108 33 2% -14% 13% -6% -1% 1,432 25%Tradition NC SFr 122 702 16.9 5.5 8.2 9.51 22.0x 14.8x 12.8x 0 6 (0) 54 (1) -67% 48% 16% -30% 31% 1,442 13%GFI NC $6.12 725 0.32 0.45 0.59 0.70 13.5x 10.3x 8.7x 6 41 34 94 35 42% 31% 18% 36% 25% 1,078 16%BGC Partners NC $5.98 331 0.54 0.39 0.48 0.59 15.3x 12.4x 10.1x 6 44 37 201 29 -27% 23% 23% -5% 23% 1,118 12%Median 725 13.5x 11.9x 10.1x 6 39 27 94 29 -2% 23% 16% -5% 23% 1,432 16%Average 1,344 14.1x 11.7x 10.0x 6 29 17 102 17 -10% 18% 17% -1% 17% 1,410 17%Mkt Cap weighted Mean 12.6x 11.5x 10.1x 6 22 4 74 4 -5% 7% 14% -1% 10% 1,685 20%Brokers/otherIG Group NC £4.12 2,246 0.27 0.29 0.32 NA 14.0x 12.9x (5) 12 14 117 8 11% 9% NA 10% NA 279 51%MF Global NC $7.12 866 0.95 0.25 0.34 0.59 28.1x 21.2x 12.1x 1 11 17 63 2 -73% 33% NA -41% 52% 1,692 -8%Climate Exchange Overweight £5.24 371 (0.03) 0.03 0.21 0.50 161.0x 24.5x 10.4x 4 (8) (33) (38) (20) NA NA NA 21 251%Note: IBES/Consensus used for Toronto, NZX, GFI, Tradition, BGC, Bursa Malaysia, DFM, Bolsa Mex, IG Group.NA = Not applicable.e = Morgan Stanley Research estimates Source: FactSet, Morgan Stanley Research NB pricing for Friday intraday pricesWe think price to tangible book vs. two-year forward ROE hasbeen the best predictor of broker stock prices historically.Today, we still think this is helpful, although only when used“as diluted” tangible book value for companies. Naturally COEand growth expectations have moved enormously, and withelevated systemic risk we do not see major near-termcompression. This has had an R 2 of 0.84 2004–1H07 for USinvestment banks and 0.82 for the key European capitalmarket banks. Using a simple Gordon Growth model i.e.price/book = ((ROE - g) / (COE - g)) where g is long-termgrowth and COE is cost of equity, we can estimate the implicitcost of equity and long-term growth the market has beenusing.looser, but we can still sketch out some bands, with costsof equity from 12-20%, growth being viewed at 0-1% andtangible books needing to be diluted to get to the propercapital basis. Today we think we are back to COE of near12% and growth of 1-3%. The issue today drivingvaluation is once again longer-term ROE and book valuegrowth.Longer term, as delevered banks find their footing andregulation clearer, we think the betas could fall and cost ofequity narrow and growth expectations rise, but we don’texpect this soon.This suggests the market was looking at roughly a COE of~10% and growth of ~4% on average.In the first year of the crisis this shifted to cost of equity of12-14% and 0-1% growth. This relationship became much41

March 16, 2010BanksExhibit 45European wholesale bank valuation: today upsidemust come from higher ROEs or strong growthexpectations as COE largely normalisedP/B4.00Exhibit 46BARC, BAC, JPM and CSG look the best value on 2year forward ROE vs price to book2.5 x2.0 xUBSCSG3.503.002.50y = 16.34x - 0.68R 2 = 0.82Pre-crisisperiodPrice/ 09 Tangible Equity1.5 x1.0 xCBNPPEuropean AverageDBKSocGenBARCJPMUS AverageBAC2.000.5 x1.500.0 x1.0012% and14% CoEPost-crisis(dotted line)10% 12% 14% 16% 18% 20% 22% 24% 26% 28%2012e Return on Tangible Equity0.502-yr forwardROE0.000% 5% 10% 15% 20% 25%Source: Morgan Stanley Research estimatesNote: Regression for UBS, CSG, DBK and BARC. Source: FactSet, Morgan StanleyResearch42

March 16, 2010BanksBridging our joint industry conclusions into ourstock callsOur joint work gives us added conviction around a number ofkey issues that drive our stock views. We outline these issuesfirst and then go into our key stock ideas.1. Q1 is off to a respectable startin FICC post marks; lesspromising in equities/ECM/creditAcross our global coverage universe, we model totalrevenues down 14% (pre-marks/DVA) in 2010, driven byequity trading revenues up 6%, FICC (ex marks/DVA) down26% and IBD up 12%. This equates to +6% revenue growthon a reported basis.We edge up our forecasts for FICC, driven by volatility inQ1, and nudge down our numbers for equities/ECM forour large cap bank coverage. The run rate of equity issuancein Q1 so far is down ~50% on the 2009 average. M&A is down~13% although debt issuance is up ~10%, implying total IBDrun rate revenues are off by ~20% in Q1 on the 2009 average.Within the issuance data (see Exhibit 53 below), Barclays andTD are outperforming in Q1 versus the 2009 average –speaking in part to the strength of DCM and a lower share of2009’s bumper year of US FIG recaps. Credit Suisse iscurrently fifth in global equity issuance, reflecting its marketshare gains. RBS, Nomura and Soc Gen have delivered aworse performance in IBD YTD versus the 2009 average. SeeExhibits 53-56.The trading proxies we use are clearly impacted bymargins. Trading of European government bonds on MTSwere up 85% to end February versus the prior year period.US treasury volumes on ICAP’s Brokertec platform are up38% on the same basis. Trading of US equities is up 7%sequentially. Interest rate volumes are up 30% to endFebruary at Eurex versus the prior year period and on anaccelerating trajectory, supported by increasing growth inopen interest, which closed February 10 ~50% higher thanprior year. Against this, equity derivative volumes have beenlacklustre – equity index volumes at Eurex are ~2% lowerYTD versus the prior year period (with open interest down24%), while single stock option volume is down ~5% andopen interest broadly flat on the prior year.We also note that hedge fund performance (typically a goodproxy for equity revenues) is unexciting YTD.Exhibit 47Hedge fund performance has been modest YTDHFRI PerformanceFeb-10 2010 YTDFund Weighted Composite 0.52% -0.18%Equity Hedge 0.62% -0.58%Event Driven -0.11% 0.57%Macro 0.75% -1.00%Relative Value 0.22% 1.79%Emerging Markets -0.71% -1.76%Fund of Funds Composite 0.12% -0.25%Source: HFR estimatesExhibit 48Investment banking – underlying revenue outlookfor global universeEquitiesFICCAdvisoryTotal i-bank-26%-14%-30% -25% -20% -15% -10% -5% 0% 5% 10% 15%Source: Morgan Stanley Research estimates2010e/2009e 2011e/2010eExhibit 49Equities: we forecast 6% underlying growth globallyin 2010Equitiesin bn EUR 09 Reported Marks DVA 09 U/L 10e U/L 10e/09e 11e U/L 11e/10eCSG 5.0 0.0 0.0 5.1 5.3 4% 5.5 5%DBK 2.7 0.0 0.2 2.9 3.5 21% 3.7 5%UBS 3.3 0.0 0.0 3.3 3.3 0% 3.6 8%Investment Banks 11.1 0.0 0.2 11.3 12.1 7% 12.8 6%BARC 3.2 0.0 0.0 3.2 3.6 12% 4.3 20%RBS 1.7 0.0 0.0 1.7 1.4 -15% 1.5 5%UK Banks 4.9 0.0 0.0 4.9 5.0 3% 5.8 16%BNPP 1.4 0.0 0.0 1.4 2.0 37% 2.2 11%Soc Gen 2.7 0.6 0.0 3.3 3.6 10% 3.9 7%French 4.2 0.6 0.0 4.8 5.6 18% 6.1 8%European 20.1 0.6 0.2 20.9 22.7 9% 24.7 9%BAC 3.4 0.0 0.0 3.4 3.7 7% 4.9 35%C 2.2 0.0 0.5 2.7 1.9 -30% 2.2 15%JPM 3.1 0.0 0.3 3.4 4.0 19% 4.6 15%US 8.7 0.0 0.8 9.5 9.6 0% 11.7 23%BMO 0.2 0.0 0.0 0.2 0.2 5% 0.3 8%BNS NA 0.0 0.0 NA NA NM NA NMCM 0.2 0.0 0.0 0.2 0.2 5% 0.2 8%RY 0.7 0.0 0.0 0.7 0.4 -35% 0.5 9%TD 0.3 0.0 0.0 0.3 0.3 7% 0.4 5%Canadian 1.4 0.0 0.0 1.4 1.2 -14% 1.3 8%Nomura 2.1 0.0 0.0 2.1 2.7 24% 2.8 7%Global Banks Coverage 32.4 0.6 1.0 34.0 36.1 6% 40.6 12%e = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley Research0%6%6%8%12%12%43

March 16, 2010BanksExhibit 50FICC: we forecast underlying revenues down 26%FICCin bn EUR 09 Reported Marks DVA 09 U/L 10e U/L 10e/09e 11e U/L 11e/10eCSG 7.0 1.1 0.2 8.3 6.1 -26% 6.5 6%DBK 9.8 3.1 0.0 12.9 9.1 -29% 9.3 2%UBS -1.7 3.4 1.3 3.0 3.2 8% 3.4 4%Investment Banks 15.0 7.5 1.6 24.2 18.5 -24% 19.2 4%BARC 9.6 5.0 0.0 14.6 11.4 -22% 11.5 1%RBS 3.6 6.9 0.1 10.6 8.1 -24% 6.8 -15%UK Banks 13.3 11.9 0.1 25.2 19.4 -23% 18.4 -6%BNPP 6.8 0.0 0.0 6.8 4.6 -32% 4.8 5%Soc Gen 2.8 1.1 0.0 3.9 2.0 -50% 2.0 0%French 9.6 1.1 0.0 10.7 6.6 -39% 6.8 4%European 37.9 20.5 1.7 60.1 44.5 -26% 44.4 0%BAC 8.9 2.7 0.6 12.1 9.9 -19% 8.9 -9%C 15.0 -0.3 -0.1 14.6 7.4 -49% 7.6 3%JPM 11.5 0.4 0.6 12.5 9.9 -21% 10.3 4%US 35.4 2.8 1.0 39.2 27.2 -31% 26.9 -1%BMO 0.5 0.3 -0.1 0.8 0.5 -29% 0.6 13%BNS NA 0.0 0.0 NA NA NM NA NMCM -0.3 0.8 0.3 0.7 0.7 0% 0.7 2%RY 2.0 0.6 0.0 2.6 2.4 -8% 2.6 6%TD 1.2 0.0 0.0 1.2 0.9 -19% 1.0 5%Canadian 3.3 1.7 0.2 5.3 4.6 -12% 4.9 6%Nomura 1.5 0.0 0.4 1.9 2.1 9% 2.4 15%Global Banks Coverage 78.1 25.1 3.4 106.5 78.4 -26% 78.5 0%e = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley ResearchExhibit 51IBD: we forecast revenues up 12% yoyAdvisory/ECM/DCM Totalin bn EUR 09 Reported Marks DVA 09 U/L 10e U/L 10e/09e 11e U/L 11e/10eCSG 2.1 0.1 0.0 2.2 2.4 12% 2.5 4%DBK 2.2 0.0 0.0 2.2 2.4 10% 2.4 0%UBS 1.7 0.0 0.0 1.7 1.8 7% 2.1 18%Investment Banks 6.0 0.1 0.0 6.0 6.6 10% 7.0 6%BARC 2.3 0.0 0.0 2.3 2.8 20% 2.8 2%RBS 1.3 0.0 0.0 1.3 1.1 -15% 1.1 0%UK Banks 3.7 0.0 0.0 3.7 3.9 7% 4.0 1%BNPP 0.8 0.0 0.0 0.8 0.9 5% 0.9 5%Soc Gen 0.4 0.0 0.0 0.4 0.4 5% 0.4 5%French 1.2 0.0 0.0 1.2 1.3 5% 1.3 5%European 10.8 0.1 0.0 10.9 11.8 8% 12.3 4%BAC 4.4 0.0 0.0 4.4 4.7 9% 5.7 20%C 3.3 0.0 0.0 3.3 3.7 11% 3.9 7%JPM 5.0 0.0 0.0 5.0 6.0 20% 6.5 9%US 12.7 0.0 0.0 12.7 14.4 14% 16.1 12%BMO 0.3 0.0 0.0 0.3 0.3 29% 0.4 10%BNS 0.4 0.0 0.0 0.4 0.4 2% 0.5 10%CM 0.4 0.0 0.0 0.4 0.4 7% 0.5 12%RY 0.7 0.0 0.0 0.7 0.9 29% 1.0 12%TD 0.3 0.0 0.0 0.3 0.3 25% 0.4 10%Canadian 2.0 0.0 0.0 2.0 2.4 19% 2.7 11%Nomura 0.8 0.0 0.0 0.8 0.8 11% 0.7 -14%Global Banks Coverage 26.3 0.1 0.0 26.4 29.5 12% 31.9 8%e = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley ResearchExhibit 52In all we expect total underlying i-banking revs tobe down 14% yoyIbank Totalin bn EUR 09 Reported Marks DVA 09 U/L 10e U/L 10e/09e 11e U/L 11e/10eCSG 13.8 1.3 0.3 15.4 13.6 -12% 14.5 7%DBK 16.2 3.2 0.2 19.5 16.3 -16% 16.7 2%UBS 3.3 3.4 1.3 8.0 8.3 4% 9.1 8%Investment Banks 33.3 7.9 1.8 42.9 38.3 -11% 40.3 5%BARC 13.1 5.0 2.0 20.1 17.7 -12% 18.7 5%RBS 6.6 6.9 0.1 13.6 9.5 -30% 9.5 0%UK Banks 19.7 11.9 2.1 33.7 27.2 -19% 28.1 3%BNPP 9.1 0.0 0.0 9.1 7.5 -18% 8.0 7%Soc Gen 5.9 1.7 0.0 7.6 6.0 -21% 6.3 5%French 15.0 1.7 0.0 16.7 13.4 -19% 14.2 6%European 68.0 21.5 3.9 93.3 79.0 -15% 82.6 5%BAC 16.6 2.7 0.6 19.9 18.3 -8% 19.5 7%C 20.6 -0.3 0.4 20.7 13.0 -37% 13.7 6%JPM 19.6 0.4 0.9 20.9 19.9 -5% 21.5 8%US 56.8 2.8 1.9 61.4 51.2 -17% 54.7 7%BMO 1.0 0.3 -0.1 1.3 1.1 -10% 1.2 11%BNS 1.4 0.0 0.0 1.4 1.5 4% 1.5 6%CM 0.2 0.8 0.3 1.3 1.3 3% 1.4 6%RY 3.4 0.6 0.0 4.0 3.8 -6% 4.1 8%TD 1.7 0.0 0.0 1.7 1.6 -8% 1.7 6%Canadian 7.7 1.7 0.2 9.7 9.3 -4% 9.9 7%Nomura 6.3 0.0 0.4 6.7 8.2 22% 8.8 6%Global Banks Coverage 138.8 26.0 6.4 171.2 147.6 -14% 156.1 6%Source: Company data, Morgan Stanley Research44

March 16, 2010BanksExhibit 53Debt issuance Q1 run rate revenues are up 10% on2009 average, using Dealogic dataDCMUSD mm 1Q09 2Q09 3Q09 4Q09 1Q10 run run/4Q (%) run/1Q (%) Q1 run/09 aTDS 47 36 59 48 71 47% 51% 49%BARC 276 305 270 229 298 30% 8% 10%RY 54 106 101 118 136 16% 154% 44%BMO 18 21 15 19 26 38% 44% 42%DB 222 263 305 325 299 -8% 34% 7%CSG 193 258 264 263 322 23% 67% 32%Citi 248 359 298 259 326 26% 32% 12%UBS 164 176 184 166 245 47% 50% 42%GS 186 224 184 223 231 3% 24% 13%Other 174 250 211 194 231 19% 33% 12%BAC-MER 286 407 279 315 378 20% 32% 18%HSBC 162 192 155 125 137 9% -16% -14%BNPP 197 178 139 105 153 45% -22% -1%JPMorgan 366 432 363 383 385 1% 5% 0%CA 79 85 73 63 70 11% -11% -6%BNS 34 45 27 32 32 1% -5% -6%RBS 200 215 180 195 182 -7% -9% -8%SG 80 87 79 41 62 52% -23% -13%Nomura 53 61 83 67 61 -9% 17% -7%CM 23 13 18 14 10 -27% -55% -39%3,061 3,713 3,286 3,186 3,658 15% 20% 10%Source: Dealogic, Morgan Stanley Research. Data latest and grossed up for full quarterExhibit 54Equity issuance Q1 run rate revenues are down halfon 2009 average, using Dealogic dataECMUSD mm 1Q09 2Q09 3Q09 4Q09 1Q10 run run/4Q (%) run/1Q (%) Q1 run/09 aTDS 29 48 26 49 21 -56% -26% -43%BARC 35 199 96 92 138 50% 298% 31%RY 46 70 88 108 51 -53% 10% -35%BMO 47 46 48 58 31 -46% -34% -37%DB 126 285 315 286 159 -44% 26% -37%CSG 56 447 354 450 172.3 -62% 207% -47%Citi 140 324 202 596 163 -73% 16% -48%UBS 229 327 383 374 180 -52% -22% -45%GS 59 837 397 623 248 -60% 321% -48%Other 141 638 442 541 185.1 -66% 31% -58%BAC-MER 96 515 343 703 178 -75% 87% -57%HSBC 13 78 53 143 25 -83% 87% -65%BNPP 31 140 68 87 36 -59% 14% -56%JPMorgan 235 1119 591 525 279 -47% 18% -55%CA 20 103 32 68 17 -74% -14% -69%BNS 27 65 58 55 13 -76% -51% -74%RBS 48 185 173 113 16 -86% -66% -88%SG 26 65 56 51 6 -88% -76% -88%Nomura 112 185 145 599 104 -83% -8% -60%CM 31 44 37 58 16 -72% -47% -62%1,547 5,721 3,906 5,578 2,039 -63% 32% -51%Source: Dealogic, Morgan Stanley ResearchExhibit 55M&A Q1 run rate revenues are down 13% on 2009average, using Dealogic dataM&AUSD mm 1Q09 2Q09 3Q09 4Q09 1Q10 run run/4Q (%) run/1Q (%) Q1 run/09 aTDS 16 5 9 26 24 -10% 50% 69%BARC 66 56 77 186 99 -47% 49% 3%RY 20 17 58 55 22 -59% 12% -41%BMO 7 11 11 37 17 -54% 133% 3%DB 138 126 161 139 154 11% 12% 9%CSG 135 120 180 276 155 -44% 15% -13%Citi 223 196 144 207 198 -5% -11% 3%UBS 219 201 172 178 162 -9% -26% -16%GS 303 264 230 528 328 -38% 8% -1%Other 242 198 192 361 249 -31% 3% 0%BAC-MER 257 124 140 323 141 -56% -45% -33%HSBC 17 11 35 21 21 3% 24% 1%BNPP 66 46 50 53 9 -84% -87% -84%JPMorgan 246 242 283 373 210 -44% -15% -27%CA 11 13 10 17 1 -97% -95% -96%BNS 11 12 20 11 15 36% 43% 14%RBS 45 27 21 38 16 -58% -64% -51%SG 5 25 8 17 8 -54% 54% -42%Nomura 54 48 44 73 38 -47% -29% -30%CM 23 2 29 27 12 -56% -47% -40%2,104 1,745 1,872 2,948 1,880 -36% -11% -13%Source: Dealogic, Morgan Stanley ResearchExhibit 56Overall IBD Q1 run rate revenues are off ~20% on2009 average given soft ECM, using Dealogic dataTotal IBD (ECM+M&A+DCM)USD mm 1Q09 2Q09 3Q09 4Q09 1Q10 run run/4Q (%) run/1Q (%) Q1 run/09 avgTDS 92 89 93 123 116 -6% 26% 17%BARC 377 560 443 507 535 6% 42% 13%RY 120 194 248 281 209 -25% 75% 0%BMO 72 78 73 113 74 -35% 2% -12%DB 486 674 780 750 612 -18% 26% -9%CSG 384 824 797 989 650 -34% 69% -13%Citi 611 880 644 1063 687 -35% 12% -14%UBS 611 703 738 718 586 -18% -4% -15%GS 548 1324 811 1374 807 -41% 47% -20%Other 557 1086 845 1097 665 -39% 19% -26%BAC-MER 638 1046 762 1341 698 -48% 9% -26%HSBC 193 281 243 289 183 -37% -5% -27%BNPP 295 365 257 246 198 -20% -33% -32%JPMorgan 847 1794 1237 1280 874 -32% 3% -32%CA 110 202 115 149 88 -40% -20% -39%BNS 71 122 105 98 61 -38% -15% -39%RBS 293 427 373 346 215 -38% -27% -40%SG 112 177 143 110 76 -30% -32% -44%Nomura 219 294 272 739 204 -72% -7% -47%CM 77 59 84 100 39 -61% -50% -51%6,712 11,178 9,065 11,712 7,576 -35% 13% -22%Source: Dealogic, Morgan Stanley Research45

March 16, 2010BanksExhibit 57Our base case forecasts for European i-bankingrevenues down ~16% underlying but up ~16% on areported basisEUR bn1009080706068.021.5European Ibanking revenues3.916%93.3-16%79.082.6Exhibit 58Our base case forecasts for US i-banking revenuesEUR bn80706050403064.521.5US Ibanking revenues2.171.1-15%60.464.75040302010009 Reported 09 Marks 09 DVA 09 Underlying 10e Underlying 11e Underlying2010009 Reported 09 Marks 09 DVA 09 Underlying 10e Underlying 11e Underlyinge = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley Researche = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley Research2. Market share gains will be thekey in 2010 – and we thinkspread of returns is likely toremain wideWe expect scale to define the industry story post the crisis.Focus on market share will therefore be key in 2010, withsome banks still in recovery mode and trying to regain lostshare, while the ‘leaders’ are keen to press their advantage.‘Flow monsters’ – with scale, trading efficiency and electronicplatforms – are likely to see the greatest upside in thechanging industry structure.We see the race for scale as one of the most definingstories in 2010 and a key driver of longer term-valuation.The constructive start to 2010 in rates and FX clearly helpsthose players with strong market shares, straight-throughprocessing and outstanding risk management. Now thatmargins have broadly “normalized”, scale to cover fixed costsand trading efficiency to extract bid-ask spreads will becomeever more important. That is why players in the 5-10 positionin some categories are looking to rebuild (for example, UBS inrates and credit). It is also why leaders are looking to gainshare. JPMorgan is a good example: at its recent investorday, it said it would like to represent 15% of total sales andtrading revenues of the top 10 firms, up from ~12.4% in 2009(as well as 10% share of global IB fees versus 9.2% in 2009).To get there, it expects to invest in equities and commoditiesas well as electronic trading platforms and best-in-classsystems to get there. Deutsche and Barclays are now veryfocused on becoming top 3 players in equities. This race forscale will be one of the most defining stories in 2010, in ourview, and a key driver of longer-term valuation. This said, wewould have expected many players to be focusing theirportfolios more than they have to date, but we observe thatmost banks are trying to keep their options open in such anuncertain world and to pursue the revenues that are available.We therefore think some disappointment is likely.We see several key battle lines for market share:Between the relative ‘winners’ and ‘losers’ from thefinancial crisis – to what extent can those that havesuffered most in the crisis – UBS, BAC-MER, RBS – makeup their share; and to what extent can those that havegained share – GS, CS, JPM – hold or win further share. Itis clear from JPMorgan and CSG’s targets that they arekeen to gain more share in this transitionary year.Between the top 14 banks and the next group – Most ofthe latter are regionals, which have opportunities to gainshare in trading.We expect advisory boutiques to continue to takeM&A share from larger firms, as companies such asLazard and Greenhill have taken advantage of dislocationduring the financial crisis to hire key bankers. Forexample, Greenhill plans to almost double its MDheadcount from 35 at the end of 2007 to 69 at the end of2010. On a combined basis, we expect Greenhill andLazard to boost their M&A share from ~11% in 2006 to~16% in 2010. Continued regulatory uncertainty could46

March 16, 2010Banksdrive additional hiring and thus more share pressure onbulge bracket firms.The most obvious battles are in FICC, where the gapbetween leaders and laggards is very wide. UBS, forinstance, is looking for SFr6bn of annual FICC revenues inthe medium term, up from SFr 200m in Q4.Competition in equities will also be tough – There arenow nine firms that made $2-2.5bn in equities in 2H09(see Exhibit 60) all of which feel the potential to be in theindustry’s top 3 alongside GS and CSG.We believe small/mid-sized players will have to make somechoices on their positioning in fixed income: either to gainmarket share and sufficient scale (incurring a cost) or torefocus on their core activities. For example, in ouraccompanying report, we argue that a refocusing by SG CIBon its core equities activities (where it has a dominantposition) would most likely be well perceived by the market.BNP has scale in European fixed income markets, but wethink it will need to expand in US products to become a keyplayer in this market.Who has taken the most share since the crisis?We have undertaken what we think is the first in-depthanalysis of market shares pre and post crisis, given howcritical growth is to players.We have analysed the revenue market share of the top 15players from 1H07 to 2H09. Although these are far from cleancomparisons (for example, some banks taken legacy assetsout of i-bank, which flatters today’s estimates, and any twoquarters will have plenty of bumps), we think it is a reasonablyrepresentative way to show market shares pre and post crisis.For 1H07 we have pro forma’d Bear Stearns into JPMorganand Merrill into BAC, but we have not tried to split Lehmansinto Barclays and Nomura. Below are charts on IBD (M&A,ECM, DCM), Equities, FICC trading, total i-bank revenues.Exhibit 59IBD revenues: JPM, C and BARC gained mostshare; RBS and BAC-MER lost most, 1H07-2H09JPM PF BSCCGSMSBAC PF MERCSGBARCUBSDBKRBSNOMHSBCBNPGLELEH0% 2% 4% 6% 8% 10% 12% 14% 16%8.1%8.6%7.7%5.4%6.9%6.0%6.9%7.2%3.9%3.0%2.8%1.5%2.3%1.8%2.1%1.9%1.1%0.8%6.4%Source: Company data, Morgan Stanley Research11.1%9.4%10.8%10.9%10.7%10.0%10.6%15.1%13.6%13.4%2H091H07Exhibit 60Equity revenues: GS, CSG, GLE gained most share;UBS and BARC-MER lost most, 1H07-2H09GSCSGGLEDBKJPM PF BSCBAC PF MERMSCNOMUBSBARCBNPRBSHSBCLEH0% 5% 10% 15% 20%9.0%7.6%7.7%5.6%7.3%8.4%7.1%7.7%7.0%10.8%6.9%8.8%6.5%6.5%6.4%2.1%6.4%9.8%6.3%2.8%4.2%3.9%3.8%3.0%3.3%3.1%6.1%13.8%18.1%2H091H07Source: Company data, Morgan Stanley Research47

March 16, 2010BanksExhibit 61FICC revenues: GS, JPM gained most share; DBKlost most, 1H07-2H09GSCJPM PF BSCBAC PF MERDBKBARCMSCSGHSBCBNPRBSGLENOMUBSLEH0% 2% 4% 6% 8% 10% 12% 14% 16% 18%10.4%11.5%8.6%10.8%10.1%10.7%10.5%7.7%10.9%10.3%9.1%7.2%8.5%5.4%6.5%5.1%3.1%5.0%2.7%3.4%7.7%2.6%1.7%2.3%0.9%1.9%4.1%5.3%15.9%2H091H07Exhibit 63Total i-bank revenues, 2H09 vs 1H07$ bn- 5 10 15 20 25GS18.320.4JPM PF BSC12.915.9C12.212.8BAC PF MER11.717.7DBK10.815.3BARC10.610.12H09MS9.914.01H07CSG8.211.6HSBC5.84.5NOMBNP2.25.85.14.6UBS4.89.9GLE4.44.3RBSLEH4.48.39.1Source: Company data, Morgan Stanley ResearchSource: Company data, Morgan Stanley ResearchExhibit 62Total investment bank revenues (ex legacy in manycases): GS and HSBC gained most share; Soc Genand RBS lost most, 1H07-2H090% 2% 4% 6% 8% 10% 12% 14% 16% 18%GSJPM PF BSCCBAC PF MERDBKBARCMSCSGHSBCNOMBNPUBSGLERBSLEH11.5%10.1%10.0%9.6%8.0%9.2%11.1%8.5%9.7%8.3%6.3%7.8%8.9%6.5%7.3%4.6%2.8%4.6%1.4%4.0%2.9%3.8%6.3%3.5%2.7%3.4%5.2%5.7%16.1%2H091H07Source: Company data, Morgan Stanley Research48

March 16, 2010BanksExhibit 64Revenue performance and market shares in 2009All in $. Adjusts for FV/CVA but not marks% of revenues reportedIBD Q1 Q2 Q3 Q4 12 months Q1 Q2 Q3 Q4 FYJPM 1,380 2,239 1,658 1,892 7,169 15.9% 18.1% 16.0% 14.3% 16.1%BAC 1,055 1,646 1,254 1,255 5,210 12.2% 13.3% 12.1% 9.5% 11.7%GS 823 1,440 899 1,635 4,797 9.5% 11.6% 8.7% 12.4% 10.8%C 982 1,160 1,163 1,458 4,763 11.3% 9.4% 11.2% 11.0% 10.7%MS 812 1,123 1,039 1,480 4,454 9.4% 9.1% 10.0% 11.2% 10.0%BARC 688 943 758 1,053 3,442 7.9% 7.6% 7.3% 8.0% 7.7%UBS 601 885 821 807 3,113 6.9% 7.2% 7.9% 6.1% 7.0%DBK 454 989 911 715 3,068 5.2% 8.0% 8.8% 5.4% 6.9%CSG 393 634 734 1,171 2,932 4.5% 5.1% 7.1% 8.9% 6.6%RBS 756 175 295 614 1,840 8.7% 1.4% 2.9% 4.6% 4.1%BNP Paribas 294 365 257 246 1,163 3.4% 3.0% 2.5% 1.9% 2.6%Nomura 126 305 166 495 1,094 1.5% 2.5% 1.6% 3.7% 2.5%HSBC 193 281 243 289 1,006 2.2% 2.3% 2.3% 2.2% 2.3%Soc Gen 111 177 143 110 541 1.3% 1.4% 1.4% 0.8% 1.2%IBD subtotal 8,668 12,361 10,342 13,219 44,591 100.0% 100.0% 100.0% 100.0% 100.0%Equities Q1 Q2 Q3 Q4 12 months Q1 Q2 Q3 Q4 FYGS 2,504 3,793 3,302 2,431 12,030 17.2% 19.3% 18.1% 18.0% 18.2%CSG 2,012 2,041 1,756 1,104 6,913 13.8% 10.4% 9.6% 8.2% 10.5%C 1,244 1,795 1,324 732 5,095 8.5% 9.1% 7.3% 5.4% 7.7%MS 1,432 1,438 1,279 922 5,070 9.8% 7.3% 7.0% 6.8% 7.7%BAC 1,489 1,198 1,265 949 4,901 10.2% 6.1% 6.9% 7.0% 7.4%JPM 1,557 1,034 1,284 971 4,846 10.7% 5.3% 7.1% 7.2% 7.4%Soc gen (excl. legacy assets) 810 1,363 1,474 967 4,615 5.6% 6.9% 8.1% 7.2% 7.0%UBS 1,182 1,312 1,096 929 4,519 8.1% 6.7% 6.0% 6.9% 6.9%BARC 1,147 1,285 1,130 864 4,425 7.9% 6.5% 6.2% 6.4% 6.7%DBK 359 1,384 1,367 941 4,050 2.5% 7.0% 7.5% 7.0% 6.1%Nomura (219) 1,230 1,099 938 3,048 -1.5% 6.3% 6.0% 7.0% 4.6%RBS 532 564 463 746 2,305 3.7% 2.9% 2.5% 5.5% 3.5%HSBC (MSe) 565 462 595 439 2,061 3.9% 2.3% 3.3% 3.3% 3.1%BNP (54) 780 768 550 2,045 -0.4% 4.0% 4.2% 4.1% 3.1%Equity sub-total 14,559 19,680 18,202 13,484 65,924 100.0% 100.0% 100.0% 100.0% 100.0%FICC Q1 Q2 Q3 Q4 12 months Q1 Q2 Q3 Q4 FYGS 6,749 7,095 6,211 4,197 24,252 14.9% 15.8% 15.3% 19.4% 15.9%C 7,807 5,667 4,582 2,952 21,008 17.2% 12.6% 11.3% 13.6% 13.8%BARC (ex credit marks) 4,928 6,269 4,181 4,082 19,460 excluded excluded excluded excluded excludedJPM 5,721 5,127 5,006 2,066 17,920 12.6% 11.4% 12.4% 9.5% 11.8%BAC 4,789 5,584 4,480 2,507 17,360 10.6% 12.4% 11.1% 11.6% 11.4%RBS (ex credit marks) 5,136 3,294 2,950 2,332 13,712 excluded excluded excluded excluded excludedDBK 4,897 3,503 3,147 1,926 13,473 10.8% 7.8% 7.8% 8.9% 8.8%BARC (inc credit marks) 1,876 4,601 3,108 1,300 10,885 4.1% 10.2% 7.7% 6.0% 7.1%CSG 3,191 3,036 2,539 1,019 9,784 7.0% 6.7% 6.3% 4.7% 6.4%BNP 3,568 2,452 2,079 1,203 9,301 7.9% 5.4% 5.1% 5.6% 6.1%MS 2,274 2,315 2,610 1,186 8,385 5.0% 5.1% 6.4% 5.5% 5.5%HSBC (MSe) 2,482 2,482 2,003 1,336 8,303 5.5% 5.5% 4.9% 6.2% 5.4%Soc gen (excl. legacy assets) 2,080 1,515 1,330 377 5,301 4.6% 3.4% 3.3% 1.7% 3.5%RBS (inc credit marks) 990 1,112 1,680 570 4,351 2.2% 2.5% 4.1% 2.6% 2.9%Nomura 586 590 814 715 2,705 1.3% 1.3% 2.0% 3.3% 1.8%UBS (1,698) (53) 929 289 (533) NM NM 2.3% 1.3% NMFICC sub-total 45,310 45,025 40,519 21,642 152,496 100.0% 100.0% 100.0% 100.0% 100.0%Total revenues Q1 Q2 Q3 Q4 12 months Q1 Q2 Q3 Q4 FYGS 8,668 13,139 11,673 8,770 42,250 13.1% 16.5% 15.9% 16.3% 15.5%C 10,033 8,622 7,069 5,142 30,866 15.2% 10.8% 9.6% 9.6% 11.3%JPM 8,658 8,400 7,948 4,929 29,935 13.1% 10.5% 10.8% 9.2% 11.0%BAC 7,333 8,428 6,999 4,711 27,471 11.1% 10.6% 9.5% 8.8% 10.1%DBK 5,552 6,505 6,505 4,268 22,830 8.4% 8.2% 8.9% 8.0% 8.4%BARC 3,710 6,828 4,849 5,727 21,115 5.6% 8.6% 6.6% 10.7% 7.7%CSG 5,378 5,658 4,997 3,217 19,249 8.1% 7.1% 6.8% 6.0% 7.0%MS 3,278 5,258 5,823 4,037 18,396 5.0% 6.6% 7.9% 7.5% 6.7%HSBC (MSe) 3,644 3,582 3,935 2,356 13,516 5.5% 4.5% 5.4% 4.4% 4.9%BNP (advisory and markets) 3,808 3,597 3,105 1,999 12,509 5.8% 4.5% 4.2% 3.7% 4.6%Soc Gen (core, excl. legacy as 3,373 3,003 2,569 1,415 10,361 5.1% 3.8% 3.5% 2.6% 3.8%Nomura 758 3,038 2,829 2,996 9,621 1.1% 3.8% 3.9% 5.6% 3.5%RBS (incl credit marks) 2,278 1,851 2,438 1,930 8,497 3.4% 2.3% 3.3% 3.6% 3.1%UBS (254) 1,905 2,684 2,148 6,482 -0.4% 2.4% 3.7% 4.0% 2.4%Total sub-total 66,216 79,815 73,423 53,646 273,099 100.0% 100.0% 100.0% 100.0%Source: Company data, Morgan Stanley Research49

March 16, 2010Banks3. Regulatory outlook – a bumpyand winding road, but we expectpragmatism to prevail 1Concerns over increased regulation and higher capitalrequirements are weighing on US large cap bank stocks.Proposals generally aim to limit the risks taken by banks,reimburse taxpayers for losses on TARP, and increase capitalrequirements. Investors are questioning the ultimatenormalized ROA and ROE for the banking industry.Our view is that we are near the peak of perceived regulatoryrisk. We expect fear to fade between now and August, aspoliticians debate the financial service legislation andregulators give clarity to ultimate Basel III capitalrequirements. On the legislative front, we expect finallegislation will likely be more moderate than originallyannounced, as Democrats and Republicans need tocooperate to get a bill passed prior to the August recess. Intotal, we project the hit to normalized earnings will be 2-5%,less than the 6-10% we initially anticipated. On the Basel IIIfront, we expect regulators to reduce the “ask” as they hearresponses from the banks in April, which will likely includeless credit availability and higher cost of credit. Ultimately, weexpect normalized ROEs of 7-30% for the US banks underour coverage, with a median of 13%. We believe this is abovethe 10-12% that is implied by the stocks, which are trading at0.9x book.Obama/Volcker Proposal: Expect narrow definitionsPresident Obama and former Federal Reserve Chairman PaulVolcker have introduced a proposal to limit the risks taken bybanks. Specifically, “no bank or financial institution thatcontains a bank will own, invest in or sponsor a hedge fund ora private equity fund, or proprietary trading operationsunrelated to serving customers for its own profit”. Additionally,the proposal limits the size of the banking industry, placingbroader limits on excessive market share growth. (January21, 2010 White House Press Release.We believe the most likely outcome is a narrow definition,lowering 2012 earnings by 2-5%, which represents a $1-3hit to share price for C, BAC, and JPM. A wide definitionwould significantly raise the cost of credit and lower theavailability of credit. As the proposal is debated for inclusion inthe financial services legislation and uncertainty declines, weexpect the stocks will benefit, as the group declined 6-10%($0.21-4.24) in the two days following the Volckerannouncement.Our attempt to size this: We do not have perfect orcomparable information relating to earnings contribution fromprop trading or to private equity / hedge fund ownership forthe banks. However, we have attempted to draw up someestimates to help investors size the potential impact of theObama/Volcker proposal. We looked to the Canadian banksas a guide, as they indicate roughly 5-15% of their tradingrevenues are prop related. We know this could be flawed for avariety of reasons, including different capital structures, riskappetite, regulators and so on. However, it is our bestassessment, given that they are both commercial banks withsimilar corporate, mid-sized business and consumer businesslines. Only JPM discloses private equity net income. For BAC,we estimate private equity gains as the equity investmentgains line less an estimated $200m for CCB dividend. We donot have data for Citi’s private equity, or hedge fund data forany bank. Our analysis suggests the impact is 2-5% of EPSfor BAC, JPM and C. For more details, see our two notes onthis subject: Obama/Volcker Proposal Another Possible Dingon Bank EPS, January 21, 2010 and Market Concerns overProposal Are Overblown, January 25, 2010.Exhibit 65Sensitivity analysis to prop trading/PE/HFPotential 2012 ImpactProp Trading Sensitivity BAC C JPMProp 5% of Trading $0.03 $0.01 $0.07Prop 10% of Trading $0.07 $0.01 $0.14Prop 15% of Trading $0.10 $0.02 $0.21Total EPS Impact BAC C JPMProp 5% of Trading $0.11 $0.01 $0.19Prop 10% of Trading $0.14 $0.01 $0.26Prop 15% of Trading $0.17 $0.02 $0.33As % of EPS BAC C JPMProp 5% of Trading 3% 2% 3%Prop 10% of Trading 4% 3% 4%Prop 15% of Trading 5% 5% 5%Impact to Share Price BAC C JPMProp 5% of Trading ($1.09) ($0.07) ($1.89)Prop 10% of Trading ($1.42) ($0.14) ($2.57)Prop 15% of Trading ($1.74) ($0.21) ($3.25)Source: Morgan Stanley Research estimates1. See also Banks Regulation: European Banks Most Challenged -Dividends at Risk January 27, 2009, for an extensive discussion ofthe regulatory risks and potential impact on the sector50

March 16, 2010BanksExhibit 66Banks that have disclosed exposure to prop tradinggenerally have small exposureProp Trading as % of Trading (Co report) %BARC

March 16, 2010BanksBasel III: Expect ask to diminish as regulators hearQIS results from banks in AprilThe Basel proposal seeks to increase the quantity, quality,and transparency of Tier 1 capital. We expect a robustdiscussion to take place between banks and The BaselCommittee, centered on balancing the need for reducingsystemic risk with the need for economic growth.Basel III addresses five key issues.De-gearing of regulatory capital: Basel III capital isclose to tangible common equity adjusted for tax assets,excluding minorities, deducting capital in nonconsolidatedinsurance vehicles and increasingweightings of minority investments in other financials.Further, most forms of T1 hybrids will not be eligible inthe new world unless they are pari passu with commonequity (which most aren’t).Introduction of a leverage ratio: While the adjustmentsto capital are already a step change, the new proposalsalso include an absolute leverage ratio (on gross balancesheet items) taking into account off-balance sheet itemssuch as credit commitments and written CDS.Additional Background Information Basel Committee on Banking Supervision (BCBS)proposal on strengthening the resilience of the bankingsector: bcbs164[1].pdf BCBS proposal - International framework for liquidity riskmeasurement: bcbs165[1].pdfWe expect the “ask” to soften as regulators hear QIS resultsfrom banks in April. The current proposal includes certain offbalancesheet items in the leverage ratio. We expect the USbanks to debate most of these additions. The inherentbusiness risk is not changed by including new asset classesin this ratio, and we anticipate these off-balance sheet itemswill ultimately come on at a discounted risk weight.We would expect banks to present the following type ofcases:- A contingent asset does not have the same probability orseverity of default as an extended loan or line.- Written CDS enables more flow; lose it and you lose riskintermediation.New stable funding ratio and tighter ST liquiditybuffers: Basel intends to both strengthen the short-termresilience of the banking sector (which we think haslargely happened already, but will force higher costs forlonger) as well as reduce funding imbalances built up inthe last decade. This new ratio aims at weighing stabilityof funding vs. liquidity of assets, and thus goes beyondthe simplified loan to deposit concept applied forjudgment so far.Introduces countercyclical capital requirements:Current proposals discuss: a) dynamic minimum capitalrequirements (i.e. higher in good times and vice versa);b) through the cycle / forward looking provisioning; c)capital distribution (dividends, share buybacks) andbonus pay-out limitations, and d) limitations on excesscredit growth.Tighter supervision of cross border and systemicbanks: While proposals remain vague at this stage,regulators intend to impose higher capital requirementsfor systemically important banks or charge them taxes.As regards cross border banks, new regulation intends tostrengthen home vs. host country relationships andsuggest better individual capitalization and funding ofindividual entities. The ‘too big to fail issue’ will be acritical focus for regulators.- Contingent liabilities are not the same as owned risk.- Capital should exist to absorb unexpected risks. Expectedrisks should be covered through earnings.- Analysis should include the earnings on these products.We expect that the desire for growth will put a ceiling onthe demand for more capital in the banking system. Wethink the demand for growth and access to credit will trumpany desire for significantly higher and unprofitable levels ofcapital in the banking system. We believe regulators willultimately protect the viability of the industry.Overall, we believe the US banks are well positioned to meetthe Basel requirements and will not need to raise additionalcapital as a result. We expect the impact will be more mutedcompared to non-US counterparts, since US banks have longhad to manage to a total tangible assets ratio. The final set ofrules will likely be decided by the end of 2010, andimplemented by year-end 2012.There has been investor concern that requirements will be soburdensome that banks will be unable to cover their cost ofcapital. However, we disagree with this notion and forecastthat the US banks under our coverage will deliver normalized52

March 16, 2010BanksROE of 13.2%, sufficiently above the 10-12% cost of equitynecessary to attract investors.For some international banks we are also concernedabout the potential “subsidiarisation” of capital andfunding, and the timing for this. For instance, as we havenoted before, Deutsche Bank’s US Bank Holding Companyhas $(8)bn Tier 1 Capital (whilst domestic US banks need 5%Tier 1 leverage ratio). Clearly Deutsche operates as a globalfirm and therefore in the near term this is not a concern. Butshould the US wish to have more trapped capital – which is aplausible outcome longer term – Deutsche may have todownstream $29bn of capital (which 85% of Deutsche’s Tier 1capital) to its US BHC from the German parent, andreconsider the capital and business model it operates in theUS. Barclays would be the second most affected in thisscenario, and would need to stream $15bn, should thiseventuality come to pass.Exhibit 68International banks may have to downstreamcapital to subsidiariesAverage Total Assetsfor Leverage CapitalPurposesBank Holding Company (BHC) Foreign-owner Total assetsTier 1CapitalLeverageRatioBank of America Corporation - 2,225 160 2,322 6.9% 0JPMorgan Chase & Co. - 2,032 133 1,934 6.9% 0Citigroup Inc. - 1,857 127 1,844 6.9% 0Wells Fargo & Company - 1,244 94 1,192 7.9% 0Goldman Sachs Group, Inc. - 849 65 856 7.6% 0MetLife, Inc. - 539 29 533 5.4% 0HSBC North America Holdings Inc. HSBC Holdings plc 391 26 390 6.6% 0Taunus Corporation Deutsche Bank Aktie 369 (8) 420 -1.9% 29Barclays Group US Inc. Barclays PLC 366 4 384 1.2% 15U.S. Bancorp - 281 23 267 8.5% 0PNC Financial Services Group, Inc. - 270 27 263 10.1% 0Bank of New York Mellon Corporatio - 212 13 197 6.5% 0SunTrust Banks, Inc. - 174 18 166 10.9% 0GMAC Inc. - 172 22 176 12.7% 0Capital One Financial Corporation - 169 16 155 10.3% 0BB&T Corporation - 166 13 158 8.5% 0State Street Corporation - 157 12 141 8.5% 0Citizens Financial Group, Inc. UK Financial Investm 148 12 139 8.7% 0TD Bank US Holding Company Toronto-Dominion B 145 2 128 1.4% 5Regions Financial Corporation - 142 12 134 8.9% 0Source: Federal Reserve Q4 2009, Morgan Stanley ResearchTier 1Capital required asper Tier 1 LeverageRatio (1)Exhibit 69Comparative Capital RatiosTangible common equity ratiosBank regulatory ratiosTCE/TA (exc FVgains)TCE/TA (exc FVgains & deferredtax assets)Tier 1 capitalratioTier 1leverageratioCore Tier 1ratioTCE/TAUS Banks: US GAAP, Basel IPeriodBAC 4Q09 5.0% 5.0% 4.9% 10.4% 6.9% 7.8%Citi 4Q09 6.5% 6.4% 5.2% 11.7% 6.8% 9.6%JPM 4Q09 5.4% 5.3% 4.7% 11.1% 6.7% 8.8%BK 4Q09 5.2% 5.2% 5.2% 12.0% 6.2% 10.5%STT 4Q09 6.6% 6.6% 6.6% 17.5% 7.9% 15.3%WFC 4Q09 5.4% 5.4% 5.1% 9.3% 7.8% 6.5%USB 4Q09 5.1% 5.1% 4.8% 9.6% 8.5% 6.8%US Brokers: US GAAP, Basel IGS 4Q09 7.0% 15.0% 7.6% 12.2%IFRS Adjusted to US GAAP, Basel IIRoyal Bank of Scotland 4Q09 5.2% 5.1% 4.5% 14.4% 5.9% 11.0%Barclays 4Q09 4.0% 3.8% 3.5% 13.4% 4.6% 10.4%Deutsche Bank 3Q09 2.7% 2.7% 1.9% 12.6% 3.7% 8.7%BNP Paribas 4Q09 3.1% 3.1% 2.3% 10.1% 3.7% 8.5%Societe Generale 4Q09 3.2% 3.3% 2.7% 10.7% 4.1% 8.4%SEB 4Q09 4.4% 4.4% 4.1% 13.6% 5.2% 11.4%HSBC 4Q09 4.6% 4.1% 3.7% 10.8% 5.8% 9.4%US GAAP, Basel II (Leverage on Swiss method)Credit Suisse 4Q09 2.7% 2.6% 1.7% 16.3% 4.2% 11.2%Credit Suisse (adjusted for US method) 4Q09 3.6%IFRS, Basel II (Leverage on Swiss method)UBS 4Q09 3.3% 3.2% 2.3% 15.4% 3.9% 11.9%UBS (adjusted for US method) 4Q09 3.3%Note: Deutsche latest available (Q4 for Tier 1, Q3 for TA)Source: Company data, Morgan Stanley Research53

March 16, 2010Banks4. Derivatives marketstransformed – who is bestplaced?Our base case suggests that clearing of OTC derivativescould provide a $0.3-1.0 billion revenue opportunity forclearinghouses (on the basis of revenue sharingarrangements with broker-dealers), although this could belower at ~$300m if a utility approach is adopted. We expectsignificant levels of standardized OTC derivatives to becentrally cleared in two to three years (we assume as muchas ~60%, including key interest rate, FX and CDS products),driven by changes in legislation and regulation, decreasedtolerance for counterparty risk, increased demand fortransparency and reduction of systematic risk.Exhibit 70OTC derivatives market is 10x the exchange-tradedderivatives market7006005004003002001000$ Tr48.80.2437.252.7OTC Traded6.6 4.9 3.7Exchange Traded26.172.3594.7FX Interest Rate Equities Commodity CDS Unallocated TotalNote: CDS OTC data as of October 30, 2009; rest as of June 30, 2009Source: BIS, DTCC, Morgan Stanley ResearchWe believe ICE and LCH.Clearnet are best placed tobenefit, given ICE’s first mover advantage in central clearingof US and European CDS and given the key bank users todate are broadly supportive. Meanwhile LCH.Clearnet alreadyclears ~60% of the bank to bank market via its Swapsclearservice (which implies ~20% of notional interest rate OTCproducts globally). This said, we do not believe that firstmover advantage necessarily locks in the opportunity, as riskprotection and operational efficiency (especially as thebuyside get more involved) will ultimately be more important.As such, we see potential for CME and DB1 to benefit overtime depending on end user preferences. That said, theapproach of the DB1 to date suggests limited traction with theuser community, as evidenced by the disappointing57.9performance of its CDS clearing platform so far. This wouldsuggest to us that, absent a mandated role in Europeanclearing from the regulator, success here may prove elusive.Our work to date suggests that the authorities willmandate central clearing, as the resulting reduction incounterparty risks will meaningfully reduce systemic risk in thefinancial system. However, we are less convinced that theregulators will require exchange trading. We expect thatchanges in trading will probably be more evolutionary thanrevolutionary, though the move to increased central clearingand straight through processing could accelerate moves toelectronic trading in areas such as interest rate swaps.We believe that scale and leading edge technology in flowbusiness – as well as road-tested risk management – offersthe best hedge against margin erosion and movement tostraight through processing for the I-banks5. Hedge funds and absolutereturn funds are set to benefitfrom changes in the investmentbanking landscapeWe see 2010 as a pivotal year for hedge funds set tobenefit from rising demand for better risk-adjustedreturns. We see the early signs of a turnaround in industryflows, with redemptions normalized and our base case end-2010 AUM back to H107 levels at ~$1.75trn. However, weexpect that success will require not only strong risk-adjustedreturns, but also an ability to navigate changing demandsfrom investors as well as their operational and liquiditydemands. We believe the market may be underestimating thepotential for shifting market share within the industry, asstronger players tap into the following key themes:Demand for absolute return product as private clientsand smaller institutions look to access strong riskadjustedreturns in onshore (UCITS III) format. We alsosee these funds picking up a fair share of the upside thatFrench banks and others would have hoped would go toretail equity derivative products.Institutional flow dynamics to pension funds, SWFsand foundations are set to overtake HNW andendowments as key allocators, providing opportunity forthose able to offer institutional scale and riskmanagement.54

March 16, 2010BanksDemand for liquid, transparent strategies with roadtestedrisk management should drive flows to equitylong/short, macro, CTAs (and with growing interest inEM, distressed and event driven). We expect rotationaway from funds that gated or suffered reputationaldamage. See our note, Hedge funds: Where Next (II)?,November 2009.Although we think higher cost of trading from investmentbanking could be passed on, hedge funds and similarbusinesses would benefit.Exhibit 71We expect ~13% growth in HF industry assets in2010 split between ~5% net inflows and ~8%performanceExhibit 72Demand for absolute return products sawconsistent growth in 2H09 compared with otherasset classes in the UK sector£bn1.601.401.201.000.800.600.400.200.00-0.20-0.40Absolute return product sales increased >3x between Jul-09and Dec-09 to ~£1.2bn, outselling other sector categoriesJul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10Source: IMA, Morgan Stanley ResearchEquitiesBondsMoney marketAbsolute ReturnBalancedPropertyOther2,000Bull 1,950Hedge fund industry assets ($bn)1,8001,6001,4001,2001,0008006006255408209701,1101,4601,870 1,930 1,3301,410Base 1,8001,535 1,6001,430Bear 125040020002001200220032004200520062007H1082008Q109Q209Q309Q4092010ee = Morgan Stanley Research estimates Source: HFR, Morgan Stanley Research estimates55

March 16, 2010BanksKey stock callsBarclays Bank (OW, PT 440p)We think the market underestimates Barclays’ operatingleverage once marks fall away. We calculate a BarclaysCapital divisional 2011 PBT of £7.0bn is achievable on alower-than-guided cost to net income ratio. Assuming nonrecurrenceof credit marks, normalization of impairments and>25% comp cost/head growth in 2011 vs 2009, we thinkBarCap can achieve a cost to net income ratio of 56% in 2011(vs guidance 65-75%), delivering 72% of forecast group PBTof £9.7bn in 2011.Barclays Capital top line income to fall only 12% y/y in2010 and recover 5% in 2011, on our estimates... Drawingon our in-depth Morgan Stanley-Oliver Wyman report(published today), we forecast i-bank industry revenues to fall10-15% before marks in 2010 – as extraordinary gains passthrough (especially in rates) and margins tighten, leavingBarclays well positioned given its scale and growth ambitions.What could hold the stock back? Barclays still has £27.6bnof credit market exposures (~70% of TNAV at Dec 09), isskewed towards volatile investment banking earnings, andconcerns over changing regulations on funding / capital,uncertain economic conditions and strategic investor holdingsremain.Valuation at 1.0x tangible NAV (Dec 09 337p) is appealing:We view this as good value considering our forecastnormalised RoTE of ~15% should allow Barclays to achieve apremium to TNAV. The resulting 2012e P/E of 5.9 is a 16%discount vs European banks at around 7. We also seeBarclays as appealing vs RBS/LLOY (who have governmentstakes) and other i-banks trading at 1.3-2.7x TNAV.Valuation: For Barclays, we use a Gordon Growth Model on2012e book (discount rate 11.5%, growth 3.5%). Our 2012tangible book value assumes that all warrants have beenexercised. Our bear case scenario generates 207p, basecase 481p and bull case 660p. We derive our price targetfrom an average of our bull, base and bear cases applyingweights to each potential outcome. We weight the bear caseat 30%, base case at 50% and bull case at 20%, as we stillbelieve that economic risks are to the downside, but we arebecoming more positive about the potential outcomes. Weadd the NPV of the dividends to 2012.Exhibit 73Barclays had a strong 4Q09 - delivering the secondhighest revenues (net of marks) in the industry$2.1bn$3.2bn4Q09 investment banking revenues for top playersBarclays Capital 4Q09 out-performedpeers despite fears heading into theresults (primarily on lower credit marks)UBSCredit Suisse$3.3bnBNP (CIB)$4.0bn$4.3bnSource: Company data, Morgan Stanley ResearchMSDeutsche Bank$4.7bnBank of America$4.9bnJP Morgan$5.1bnCiti$5.7bnExhibit 74We expect Barclays Capital will show strongoperating leverage as marks drop out£20bn£15bn£10bn£5bn£0bn-£5bn9.9+80%17.9Barclays capital underlying revenues-11% 4% CAGR15.84.3 4.316.617.07.0 7.32008 2009 2010e 2011e 2012e-2.3Barclaysmarks$8.8bnGoldman SachsBar Height =revenuesimpairmentsstaff costother costsclean PBT(ex own credit)Source: Company data, Morgan Stanley Research (2010-12)Exhibit 75Barclays at 10.4% CT1 is well capitalised vs SocGen 8.4% and Deutsche Bank at 8.7%14%12%10%8%6%4%2%0%European Bank Core Tier 1 ratios (Dec 10e)UBSCredit SuisseHandelsbankenDexiaSEBDnB NORSwedbankNordeaBarclaysCredit AgricoleRBSAlpha BankHSBCBank of IrelandSt. CharteredSocGenPopularUniCreditBBVAEFGIntesa SPIDanske BankDeutsche BankSantanderSabadellBNP ParibasPiraeusLloyds BGBanestoBankinterAareal BankMonte dei PaschiKBCPostbankCommerzbankAllied Irish BanksSource: Morgan Stanley Research estimatesBarclays has top quartile core tier 1 byDec 10e and current core tier 1 ratioof 10.4% after the warrant exercise56

March 16, 2010BanksKey risks to our valuation stem from the likely outcomes ofeach of our bull, base and bear scenarios. Our bull case forBarclays assumes that government intervention continues towork and there is a quicker end to the current problems. Ourbase case factors in gradual recovery from the currentrecession in the UK but that bad debts remain elevated in2010. Our bear case assumes credit losses in the UK rise tolevels seen in the early 1990s. Revenue comes under morepressure due to lower interest rates and there is lower tradingrevenues. Cost cuts help but are not enough to offset thehigher bad debts. We also see the risk that the cost incomeratio in the investment bank does not meet our expectationsdue to a weaker revenue outcome or higher credit marketwrite-downs.CSG (OW, PT SFr71)We remain Overweight CSG against the European bankssector. In part this reflects a view that the trajectory forEuropean banks is subdued, given elevated sovereignspreads are likely to persist and lead to higher funding costs,potentially faster deleveraging and weaker returns. But wealso think CSG’s performance and the prospect of continuedmarket share gains gives potential for the shares tooutperform.We also think i-banking could perform well in 2010, eventhough we have pegged our numbers down. We also thinkliability risks – a key focus for us in Euro banks – is less of arisk at CSG. CSG has already issued 40% of 2010e term debt(with SFr ~7-8bn yet to raise). Best in class capital ratios, justSFr3.1bn of CMBS (and well marked), mean we feel risks onthe liability side are materially lower than for many Europeanbanks.Exhibit 76We forecast underlying investment bankingrevenues to be down ~12% yoy252015105020.5CSG Ibank revs (Sfr bn)2.309e Reported 09e Marks/Exit Biz 09e Underlying 10e Underlyinge = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley ResearchExhibit 77Credit Suisse i-bank earnings projection6.05.04.03.02.01.00.01.63.922.8CSG Fixed Income revenues, in CHF bn0.63.60.23.000.8Q109 Q209 Q309 Q409e 10e avg (perquarter)Net revenues Exit businessese = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley Research-12%20.22.3We think CSG’s PB momentum means it could become largerthan UBS in Swiss private banking going into 2011 (excl. retailbrokerage). This is in part driven by CSG’s record start (weinterpret it as better than SFr16bn or~ 8% NNM for Q1) andour view that UBS is likely to lose ~SFr37bn in 2010e (see ourFebruary 9 note, Headwinds Will Slow UBS's Turnaround).We note that, with this strength of new money, margins arelikely to slip from the new business strain (both gross marginsand costs). In our view, the street hasn’t fully factored this intonear-term estimates, although it has little impact on 2011eearnings.57

March 16, 2010BanksExhibit 78Gap has narrowed between size of UBS and CSGprivate banksCSG SFr bn UBS SFr bnEnd 2009 AUMEnd 2009 AUMWealth Mgmt 802.8 Swiss Clients 337.0CIC 112.1 International Clients 624.0Total 914.9 Total 961.0FlowsFlowsWealth Mgmt 52.7 Swiss Clients -6.8CIC 6.0 International Clients -32.0Total 58.7 Total -38.8Performance/FX/OtherPerformance/FX/OtherWealth Mgmt 48.4 Swiss Clients 24.8CIC 3.8 International Clients 41.3Total 52.2 Total 66.2End 2010 AUMEnd 2010 AUMWealth Mgmt 903.9 Swiss Clients 355.0CIC 121.9 International Clients 633.4CSG Total 1025.9 UBS Total 988.4Est US retail brokerage -30.0CSG Total excl est US brkg 995.9Source: Company data, Morgan Stanley Research estimates (2010). Excludes retailbrokerage. For UBS we do not estimate size of LATAM and Canada private banks.With this note we raise our earnings from SFr6.35 to SFr6.62for 2010 and from SFr7.19 to SFr7.51 for 2011e. Within thiswe raise our FICC forecasts and slightly trim Equities andECM. We assume ~6.5% NNM in 2010 against the group’slonger-term target of >6%. Note that we do think this stronggrowth will help mute margin declines, given a new businessstrain we think the market sometimes underestimates. Ourunderlying 2010 investment banking revenues are now down~12% yoy. We have reflected latest market and currencylevels in our model. We think the biggest risks remain i-banking and asset sensitive earnings, with regulation the keyrisk longer term.Our price target moves to SFr71 from SFr70. Our basecase fair value is SFr71, our bull case fair value is SFr94, andbear case fair value is SFr45. Our valuation is driven mostlyby 2010e tangible book value, which is SFr27. Oursustainable ROE is 27%, COE 11.7% and long-term growth~4%. To reach our valuation we use a P/BV multiple based onan adjusted Gordon growth model (which is our primarymethod, and looks to the longer-term earnings power of thefranchise). Second we test with a SoP, although this is not theprimary driver. Third, we crudely check with a one-yearforward P/E based on peers and historical trading ranges. Toreach our price target, we apply weightings to the resultingbull (15%), base (70%), and bear values (15%) that reflect ourview on the possibility of risks to the upside or downside.Exhibit 79CSG price target methodologyBaseCaseBullCaseBearCaseMW EPS 1 2 32007 4.58 4.58 4.582008 -11.46 -11.46 -11.462009 6.12 6.12 6.122010e 6.62 7.62 5.482011e 7.51 8.82 5.732012e 8.63 10.31 6.1708 Tang BV 15.9 15.9 15.909 Tang BV 21.4 21.4 21.410e Tang BV 27.1 28.1 25.911e Tang BV 30.0 31.7 28.112e Tang BV 33.7 36.5 30.4Valuation 1 2 3SOP PT 76 93 50Sustainable ROTE 27% 33% 20%Cost of Equity 11.7% 11.5% 12.3%Growth 3.8% 4.3% 3.0%Theoretical P/B 2.9 4.0 1.8Implied PT on P/B 71 100 42P/e multiple on 11e 10.5 11.0 9.0Implied value per share on p/e 69 84 49Implied Price 71 94 45Up/(Down)Side 35% 80% -14%Implied 10e P/E 10.7 12.4 8.2Implied 10e P/TB 2.1 2.6 1.5Weight 70% 15% 15%Price target (weighted) 71Source: Morgan Stanley Research estimatesSoc Gen (OW, PT €63)Strategic refocus and smoother legacy asset write-downsto drive upside. In a report published alongside this note, weexplore potential to unlock value in the group throughrefocusing on the core franchises in Foreign Retail andbeefing-up underlying ROE in CIB from 20% to 25% throughspecialization rather than a global player strategy. Based onthe strategic analysis we run, we believe this could lead to anupgrade of group RoTE from 17.4% to 19%, implying a basecase value ~€76 vs. €63 today.What’s in the price? SG trades on 1.19x last TNAV, whichcompares to our 17.4% estimated normalized return ontangible equity. We calculate this implies the market is pricingin 2.5x higher losses on legacy assets than we estimate and1.5x higher losses than the most bearish estimates on theStreet, which looks overdone to us.58

March 16, 2010BanksLegacy assets – we estimate a three-year cumulative lossof €2.6bn. Legacy assets remain a question mark for themarket. Based on our analysis, we calculate three-yearcumulative losses of €2.6bn, higher than managementguidance (more CMBS/CDO losses), but still manageable inour view.We cut our stated EPS by 7% on average for 2010-2012.However, we leave our ModelWare EPS broadly unchanged(-1% in 2012e). We keep our €63 target price unchanged.We expect an inflexion point on group strategy at theInvestor Day in June. If management strategy remainsunchanged at the Investor Day, we would expect the stock tounderperform. Our Overweight thesis would also be at risk iflegacy assets turn out to be higher than we expect.Exhibit 80Screening of SG’s core credit activities (*) – Greece,Bulgaria, Serbia, Slovenia and Croatia should bedeemed as non-core assets34%29%24%19%14%9%4%PBT marginCzech RepublicEgyptAlgeria/TunisiaRussiaFrench retailRomaniaMoroccoReunionGreeceCroatiaSerbiaBubble size represents Loan bookBulgariaSloveniaSpecialized finance-1%-7% 43% 93% 143% 193% 243% 293%Loan to deposit ratioSource: Company data, Morgan Stanley Research, (*) Specialized Finance businessgenerally has no deposits, we have assumed L/D of 250% for convenience, although weacknowledge this ratio should be much higherWe set our €63 TP as the average of our four valuationmethodologies: 1) Sum-of-the-parts, 2) P/tangible core equity,3) A normalized P/E and 4) A normalized P/PPP. Our pricetarget is weighted 80% to our Base, 15% to Bear and 5% toBull case. Risk to our target price stems from higher thanexpected legacy assets write-downs and a more negativemacro scenario.UBS (EW, PT SFr16.6)We appreciate the longer-term turnaround potential at UBS,but we continue to think that several headwinds will slow thespeed of the bank’s turnaround, and therefore see bettervalue in other names, including CSG.#1: Outflows. We have been bearish on the pace ofturnaround. We forecast ~SFr40bn of outflows in 2010 in ourbase case. We think ~200 client advisers leaving in Q4 (after~200 in Q3 and ~300 in Q2) could drive incremental outflows(e.g. 200 bankers at SFr175m and 40% attrition could implySFr14bn additional outflows from Q4 departures alone). Wethink outflows will reduce during the year but don’t forecastpositive net inflows until 2011.#2: Margins. We think the ‘dash to cash’ was most intense atUBS, and a combination of soft client activity, few sales ofhigher-margin products and soft NII mean top-line margins inthe PB will tiptoe rather than leap.#3: operating margins will remain constrained fromreinvestment: We estimate ~SFr1.5bn of deferredcompensation may need to be paid in 2010, potentially riskingcomp/revenue of in excess of 50% in the i-bank, when manybanks are guiding for 2010e payout lower than 2009.Although every i-bank has deferred, given lower profitability,the materiality is much higher to UBS. Whilst we see a realpotential for strong revenues at UBS from FICC and equities,we think for 2010 a material amount will need to be paid out.#4 dividend/capital: We assume no dividend until 2012 asthe company looks to build SFr 45-50bn of Tier 1. We alsothink USB will be prudent until more of the risk concentrationsfully worked through. For instance, we think UBS’s monolineexposure, which whilst well marked, could cause furthermaterial losses should any monolines restructure whilstSfr18bn student loans also leave another riskconcentration.Valuation: We still think the turnaround potential is attractiveon an 18-month view, as management pulls multiple levers.However, we see better value elsewhere. UBS trades at 11.3xour 2010e EPS and 9.6x our 2011e EPS and 2.2x 09 TNAV(of SF7.6). Given how critical the speed of turnaround is toUBS, we see better value at CSG and other banks. This said,we note given such a high cost/income ratio in the investmentbank, the operational gearing of the investment bank makesUBS in part a market call, rather than one where we see a lotof alpha.59

March 16, 2010BanksOur 2010e EPS moves to SFr1.45 from SFr1.30 and 2011eEPS is now SFr1.70 from SFr1.62. Higher deferred personnelcosts coming through are offset by our updated i-banking andprivate banking forecasts, where we now model ~SFr(40)bnoutflow in 2010e down from ~SFr(90)bn in 2009. Tangiblebook value per share, which drives our valuation, is now atSFr8.9 for 2010e. Our price target is SFr16.6 from SFr15.Exhibit 81We assume outflows until end 2010SFr bn100-10-20-30-40-50Private Banking Net inflow/(outflow)1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10e 2Q10e 3Q10e 4Q10e 2011erun rateSwiss ClientsInternational Clientse = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley ResearchTo reach our valuation we use a P/BV multiple based on anadjusted Gordon growth model (which is our primary method,and looks to longer-term earnings power of the franchise).The key input is a tangible book value per share. Second, wetest with a SoP, although this is not a primary driver. Third, wecrudely check with a one-year forward P/E based on peersand historical trading ranges. To reach our price target, weapply weightings to our bull, bear and base case values thatreflect our view on the probability of risks to the up ordownside. We assign a 12.5% weighting to our bull case,12.5% to our bear case and 75% to our base case to reflectthe equal probability we see on both the bull and bear cases.Our base case sustainable ROE is 20%. Our base case longtermgrowth rate is 3.3% and our cost of equity is 11.75%. Inour bear case, our cost of equity is 12%, our long-term growthrate is 2.8% and sustainable ROE is 18%. Our bull caseassumptions are cost of equity of 11.25%, long-term growthrate of 3.8% and sustainable ROE of 25%.The key upside risks to our view include a sharp andcontinued bounce in investment banking revenues across theindustry and far stronger private banking profits. The maindownside risks we see include higher book value erosion fromrisky assets and continued material client money outflows.Exhibit 82UBS price target methodologyBaseCaseBullCaseBearCaseMW EPS 1 2 32007 -3.78 -3.78 -3.782008 -9.82 -9.82 -9.822009 0.30 0.30 0.302010e 1.45 1.69 1.202011e 1.70 2.20 1.262012e 2.28 3.27 1.532008 Tang. BV PS (Dil) 6.9 6.9 6.92009 Tang. BV PS (Dil) 7.6 7.6 7.62010e Tang. BV PS (Dil) 8.9 9.1 8.62011e Tang. BV PS (Dil) 10.5 11.2 9.82012e Tang. BV PS (Dil) 12.7 14.4 11.2Valuation 1 2 3SOP PT 19 22 15Sustainable ROE 20% 25% 18%Cost of Equity 11.8% 11.3% 12.0%Growth 3.3% 3.8% 2.8%Theoretical P/TB 1.9 2.8 1.6Implied PT on P/TB 15 23 12P/e multiple on 11e 10.0 11.0 9.5Implied value per share on p/e 17 24 12Implied price 16 23 120% 45% -23%Weight 75% 13% 13%Price target 16.6Source: Morgan Stanley Research estimatesBNP (OW, PT €65)BNP is trading on 1.4x current TNAV and 7.0x our 2012eEPS, levels we find are attractive given the group’sstrong/clean balance sheet and its exposure to defensivemarkets (such as France and Belgium) which provideopportunities for market share gains and quicker decrease inLLPs. We recently upgraded BNP (Banks – ElevatedSovereign Funding Costs and European Banks, February 16)as we think it also offers the cleanest way to play the relativelygood performance of the French economy and constructive I-banking alongside cost cuts. BNP has no major capital issueson the back of regulation changes. The Fortis integrationshould bear fruit over the three coming years, and we see itslarge deposit base as a real competitive advantage in theongoing regulation changes. We believe that, as a leader infixed income, BNP should have a respectable year. However,one of the key conclusions of this report is that fixe incomeshould not be as bad as expected, and BNP could positivelysurprise the market in that area.60

March 16, 2010BanksExhibit 83BNP’s balance sheet deleveraging in 2009 – samelevel as in 2008, despite Fortis integration3000Exhibit 84Our 2010 base case against 20096.0DBK Debt Sales & Trading revenues, in EURbn2500+518-5365.04.00.91.02000150088412273.02.03.80.50.10.410001.02.62.20.21.32.350011928310.0Q109 Q209 Q309 Q409e 10e avg (perquarter)0Dec-08 Fortis Reduction Dec-09Trading Book Banking Book FortisNet revenues Mark-downs De-riskinge = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley ResearchSource: Company data, Morgan Stanley ResearchOur price target is set as the average of four methodologiescalculated on 2012 valuations (the first normal year withFortis) and discounted back to 2010. Those valuationmethodologies are (1) sum of the parts, (2) P/Tangible coreequity (1.4x 12e TNAV for RoTE of 14%), (3) Normalized P/Emultiple (9x 12e EPS) and (4) Normalized P/PPP multiple(4.5x 12e PPP). The main risks to our investment case andvaluation revolve around 1) the macro call – that the Frencheconomy may not pick up in 2010, in which case we wouldhave to cut our earnings estimates on French Retail Banking;2) the quality of the loan book – whether it will prove to bebetter or worse than expected; 3) a quicker (or slower) returnto normalized Investment Banking revenues; and 4)achievement of synergies from Fortis integration.Deutsche Bank (EW, PT €58)We raise our price target to €58 from €56 on strongerrevenues and slightly lower provisions.A key debate for the stock is the revenue outlook, both inthe investment bank and across the broader suite ofbusinesses, which were sluggish in 2009. We still see DBK asa key beneficiary of low rates, steep curves, normalization ofrisk spreads and recovery with reasonable prospects into2010. However, to reflect “normalization” of margins andvolatility, we think 10e pre-mark revenues are down on 2009ebut ahead of street. .Exhibit 85We expect DBK revenues to be flattish on areported basis but down 16% on an underlyingbasis252015105016.23.2flattish on areported basisDBK Ibank revs (EUR bn)19.509e Reported 09e Marks/de-risk 09e Underlying 10e Underlying Q309 Annualisede = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley ResearchThe second key debate is risk assets. The nub of the issueis that the benefit from IFRS represents ~14% of tangiblebook value (i.e. book value would be lower with transferringassets). The question is to what extent this leads to higherprovisions and how much stronger recovery values and goodmanagement will mean that the gap is closed without materiallosses. The good news from Q4 was IAS 39 troubled assetsonly grew 6% in Q4, although 21% of the legacy assets arebooked as “troubled loans”. In our view, until the market getsmore comfort on asset quality, it will hold back expectationson much larger book value and multiples.-16%16.317.861

March 16, 2010BanksExhibit 86Group cost of risk improving in 2010 and 2011160140Group - Cost of Risk (bps)this does bring down capital ratios pro-forma. This said, givenour constructive view on the top line, we think DBK is likely toremain above core Tier 1 of 8% prior to any additional M&A,although we continue to think investors would prefer DBK tobe nearer 8.5%-9%.1201008060402001Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 2010e 2011e 2012ee = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley ResearchAs we show below, we expect €1.5bn additional provisionsin 2010-2011 (bull €0.5bn, bear 3bn). Our estimatessuggests leverage loans moved to the banking book areheld at ~83c/$, but transferred CRE loans are held nearer~98c/$, which leads us to think provisions will remainelevated into 2010e. We update our estimate of losses forthese books and the group: we model ~80bps provisionsin 2010e being well covered by pre-provision profitability inour base case.Exhibit 87IAS 39 Assets - 21% “troubled”Cum Losses Exp Losses €bn Est taken ImpliedIAS 39 Reclassifed assets €bn % split ow IG Low High Low High So Far markLeveraged Finance 7 20% 0% 18% 25% 1.26 1.75 1.2 83%Commercial Real Estate 9 26% 70% 5% 15% 0.45 1.35 0.2 98%DB sponsored conduits 9 26% 98% 2% 5% 0.18 0.45 0.1 99%Collateralized/hedged transactions 5 14% 90% 2% 5% 0.10 0.25 100%Other 5 14% 61% 2% 15% 0.10 0.75 100%Total 35 100% 65% 6% 13% 2.09 4.55 1.5 96%of which troubled (bn) 7.201of which troubled (%) 21%Source: Company data Q4 2009, Morgan Stanley ResearchWe revise our 2010 EPS to €6.44 from €6.13 driven mainly bystronger trading revenues in the start of the year. We alsomove our 2011 EPS to €7.57 from €7.46.Our price target goes to €58 from €56. Our base case fairvalue is €59, our bull case fair value is €80, and bear case is€38. Our weighting to derive our price target is unchanged at70% base, 15% bear and 15% bull. DBK would normally tradeat a discount to its immediate peer group given its investmentbankingheavy franchise, which is not offset to the sameextent as peers with higher multiple franchises, such aswealth management.To reach our valuation we use a P/BV multiple based on anadjusted Gordon growth model (which is our primary methodand looks to longer-term earnings power of the franchise).Second, we test with a SoP, although this is not the primarydriver. Third, we crudely check with a one-year forward P/Ebased on peers and historical trading ranges. In our basecase we use an 11.8% COE, 3% growth and 16.3% post-taxROE. In our bear case we assume a COE of 12%, growth of2.3% and post-tax ROE of 12%. Our bull case has a ROE of19%, COE of 11.5% and growth of 3.8%.Exhibit 89Our scenarios for DBK’s sustainable returns ontangible equity and trajectory. 16% base case RoTE252015Exhibit 88Our forecast of provisions into IAS 39, PBC andotherProvisions (€m) IAS 39 PBC Other Total % IAS 39H208 257 384 186 827 31%H109 726 382 418 1,526 48%Q3 09 215 209 120 544 40%Q4 09 311 198 51 560 56%2010e 1,000 860 105 1,965 51%2011e 600 645 102 1,347 45%Total 3,109 2,679 982 6,770 46%e = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley Research10502002 2003 2004 2005 2006 2007 2008 2009 2010e 2011e 2012e-5-10-15-20-25ROTE - base ROTE - bull ROTE - beare = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley ResearchCapital and M&A are also key debates. We believe the SalOppenheim acquisition is earnings neutral for 2010e (~4%extra share count offset by ~€150m pre-tax run rate) althoughWe see risks from credit markets, equity market levels andvolumes, FX, the macro and regulatory environment, as wellas execution risk and risk management.62

March 16, 2010BanksExhibit 90DBK price target methodologyBasecaseBullCaseBearCaseMW EPS 1 2 32007 10.62 10.62 10.622008 -8.62 -8.62 -8.622009 6.42 6.42 6.422010e 6.44 7.66 8.562011e 7.57 8.73 3.742012e 8.49 9.75 4.9708 Tang BV 35.2 35.2 35.209e Tang BV 39.9 39.9 39.910e Tang BV 42.1 43.3 44.211e Tang BV 49.2 51.5 47.412e Tang BV 57.2 60.8 51.9Valuation 1 2 3SOP FV 59 70 80Sustainable ROTE 16.3% 19.0% 12.0%Cost of Equity 11.8% 11.5% 12.0%Growth 3.0% 3.8% 2.3%Theoretical P/TB 1.5 2.0 1.0Implied FV on P/B 57 76 39P/E 11e 8.5 10.0 9.0P/E based FV 64 87 34Fair value 59 80 38Up/(Down)Side 14% 53% -26%Implied 10e P/E 9.2 10.4 4.5Implied 09e P/B 1.5 2.0 1.0% weight for FV 70% 15% 15%Fair value (weighted scenarios) 58Source: Morgan Stanley Research estimatesCommerzbank (UW, €4.43)In our valuation, we run explicit forecasts until 2013, thenassume 3% earnings growth until 2020, and 4% RWA post2013. Thereafter, we converge the ROE with COE. We applya RWA weighted COE of 11.7% (revised up from 11.4%before on higher risk free rates). We assume a €15bn capitalshortfall (in 2013 i.e. after some profitable years) in our basecase and do not discount grandfathering of hybrids. Assumingcapital is raised at market values, we calculate our scenariovalue per share fully diluted for the new shares that would berequired. We would highlight that this is a crucial assumptionand raising at higher/lower levels is the single most importantdriver of a higher/lower share price. We weight our threescenarios to derive our price target of €4.43 per share. Weassign a 40% bear case weight, 10% bull case and 50% basecase. While this is a more adverse weighting compared toother banks, we see this as justified by the high beta nature ofCommerzbank and the particularly high uncertainties aroundits capital base.Dexia (UW, €4.43)We calculate our price target based on the valuation pershare implied by our Bear, Base and Bull case using fourvaluation methodologies (Sum-of-the-parts, Normalized P/E,Normalized P/PPP, P/tangible core equity). We apply a 20%discount rate in line with CASA to take into account the limitedvisibility on the group’s future earnings. We weight our threescenarios to derive our price target of €4 per share. Our pricetarget is weighted 60% to our Base, 30% to Bear and 10% toBull case. Risks to our target price would stem from animproved outlook for credit markets, as this would be positivefor Dexia both on the asset side (less deleveraging losses)and on the liabilities side (cheaper funding).BME (UW, €19.10)We moved Underweight BME in October 2009 (seeIBERCLEAR Rule Changes May Open the Door toCompetition, October 19, 2009), as we saw material risks toearnings from proposed changes to the Spanish marketstructure (removal of “trade put through” rules) which webelieve have protected the exchange from the onset of MFTcompetition. We find it anomalous that the BME hascontinued to enjoy ~100% market share in a post MiFIDenvironment, which has seen other European exchangeshave lost ~20% of market share in 2009 to new low-cost andefficient MTFs. Over time, we think investors should valueBME on the basis that it too will suffer some market sharelosses or margin reduction if it lowers price to retain shareOur view that better volume dynamics are likely to be seen inflow rates and FX reinforces our caution on the BME, giventhe principally cash equity skew of the business (equitytrading accounted for ~40% of revenues in 2009 and equityrelated activities two-thirds of revenues in total). The recentlyannounced Santander stake sale also highlights potentialoverhang risk, given ~30% of the stock is owned by Spanishbanks. Given broader pressures on the Spanish bankingsector (risk related to regulations, sovereign concerns), wewould not be surprised to see further stake sales.Where could we be wrong? We acknowledge we could betoo early on this call given the rules may not change until2011, the changes are not guaranteed and could evenpotentially be reversed if they prove too damaging to BMEearnings. We also see that the Spanish market structurecould make it harder for MTFs to gain share than in someother markets; other regulation/rule changes or tariffincreases could be used to defend BME’s revenues. We alsosee a talented management team who could implement cost-63

March 16, 2010Bankscutting measures to offset the loss of revenues in the cashequities business. BME also could generate significantrevenues from the Link Up Markets initiative or other avenues.Exhibit 91European cash equity exchanges have struggled tomaintain market share after low-cost competitionhas been introduced85%80%75%70%65%60%55%02 Feb 0902 Mar 0902 Apr 09MARKET SHARE OF PRIMARY EXCHANGE (20D AVG)02 May 09Source: Company data, Morgan Stanley Research02 Jun 0902 Jul 0902 Aug 0902 Sep 0902 Oct 0902 Nov 0902 Dec 0902 Jan 1002 Feb 10DAXCAC40FTSE100Exhibit 92We forecast LSE/DB1/NYX falling to ~40% marketshare by 2012e and BME falling to 75%IBEX 35DAXCAC40FTSE100Market shares of Primary Exchange40%40%40%59%70%70%75%76%81%79%100%100%100%100%100%100%02 Mar 101Q071Q091Q10FY12ee = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley ResearchThe stock trades on 10.5x 2010e P/E, which represents adiscount to the European sector average of ~12x, but the P/Emoves to 12x 2011e as the impact of competition begins to befelt, representing a ~10% premium to the sector average. Ourprice target of €19.1 implies ~5% downside from currentlevels.We derive our price target of €19.1 for BME using our basecase valuation of 12x calendar 2012e EPS discounted back ata 10% cost of equity. Our valuation is based on comparablemultiples analysis versus the peer group and BME’s ownhistory. We consider 12x appropriate (based on the 2001-03sector trough), given the significant uncertainty over long-termrevenues and changing business models in the sector.Standard Bank (OW, PT ZAR121)Our valuation is sum-of-the-parts models, in which we applyP/BV multiples based on cross-checking P/E values. For eachsegment, using Gordon Growth methodology (ROE –earnings growth/cost of equity – earnings growth), wedetermine the target price to book value, based on our view ofsustainable ROEs and sustainable growth to each division.Our price target is a weighted average of our bull, bear andbase case valuations that accounts for our levels of convictionin each case. We assume terminal growth of 5% for all fourbanks, cost of equity of 12.8% and beta of 0.8 across the SAbanks. Key risks include execution on the expansion plans,reversal of the commodity trends and volatility in emergingmarkets.Schroders (OW, PT £15.65)Our price target is based on a 20% weight to the bull case,60% to the base case and 20% to the bear case in line withour asset management coverage universe which implies aprice target of £15.65. Our base case is derived using a 15x2010 P/E multiple for asset management and private bankearnings (10% premium to the sector average given strongergrowth dynamics), 11% cost of equity and adjusted for surpluscash of ~£800m. Risks includes equity market movements,M&A, change in flow dynamics.Tullett Prebon (OW, PT £3.80)Our price target is based on a multiple of 10x 2009e P/E, adiscount to ICAP’s voice division, given ICAP’s strong brand.We then roll this out 12 months at 10% CoE. Risks includeUS$, market volatility’s impact on revenues, corporate activityand potential loss of key staff.Nomura Holdings (OW, PT Y850)Our price target assumes TOPIX level of 900 at the end ofMarch 2010, annual increase of 5% thereafter. PT set at fairvalue based on this TOPIX assumption using RIM and DDMof ¥850 (8.5% cost of capital [Rf2.0%, beta 1.3, MRP 5%]).This level is 1.4x end-F3/11 BPS, and 13x F3/11 EPS (¥62).ROE exceeds cost of capital from 4Q F3/10 (we assumesustainable ROE of 10%). Average historical P/E at timeswhen ROE has exceeded cost of capital is 16x. Risks include64

March 16, 2010Banksmacro conditions diverging from assumptions. For businessfundamentals, retail investor activity may prove slacker thanwe expect.JPMorgan (OW, PT $59)We believe the next leg up in US bank stocks will come asdelinquencies decelerate (we expect 1Q10) and as NPLsdecline meaningfully (we expect 2H10). We expect JPM willbe one of the first banks with materially declining NPLs, givenits skew to early cycle card and below average CRE. We areOverweight JPM, and our $59 target price is based onnormalized ROE of 13% and a normalized cost of equity of10.4%.Exhibit 93Proportion of EPS growth driven by Credit (2009-12)140%120%Portion of 2009-2012 EPS Growth Driven by Creditpricing models, saving time in maintenance costs and pricingchanges, and enabling tighter risk management. We expectthat equities and commodities will drive $1 billion each inincremental revenue over time. The fixed income investmentis more about cost saves at this point (although ifelectronification were to come more rapidly in fixed income,JPM would be ready for it). In addition, JPMorgan is investingin Asia to double share there, and is tightly controllingcompensation.Exhibit 942009 IB Volumes (M&A, ECM, DCM): JPM capturedroughly a 14.9% share for FY0925%20%15%10%Total IB Volume Share100%5%80%60%0%1Q062Q063Q064Q061Q072Q073Q074Q071Q082Q083Q084Q08JPM BAC C1Q092Q093Q094Q091Q1040%Source: Dealogic, Morgan Stanley Research20%0%CCOFJPMFITBDFSPNCRFKEYSTIBBTWFCUSBAXPWLBACBPFHNTRSSTTBKSource: Morgan Stanley Research estimatesOne question we get is whether the investment bank willoffset these credit improvements. Investors are concernedabout JPM losing share, as competitors regain their strength,and about declines in margins, as credit stabilizes andcompetition increases. In the IB, 2009 was already a“normalized” year, with earnings of $6.9 billion and an ROE of21% (17% on its new equity allocation, in line with its currentROE target).We expect JPM will continue to take incremental share givenrecently increased IT investment, Asia focus and talentmanagement. JPM has just recently brought on line a newFX/options electronic trading platform, which is driving higherflows. JPM will add equities, commodities, and fixed incomeelectronic trading platforms over the next two to three years.In equities, the plan is to have secondary share equal toprimary share. In commodities, the goal is to haveJPM/BSC/Sempra all fully integrated and functional. In fixedincome, the goal is to have one global feed on variables for allEstimate changesWe lowered our 1Q10 and 2010 FY estimate for JPM from$0.50 and $3.02 to $0.47 and $2.94, respectively. Ourrevisions reflect a more modest than expected primary marketin equities and a slow start to M&A.Our $59 price target is based on residual income valuation,using a normalized beta and cost of equity capital. We expectthat the market will start to value banks on longer-term,normalized earnings as nonperforming loans peak out, whichwe hope is in 1H 2010. Our bull case intrinsic values useresidual income valuation and our bear case intrinsic valuesuse last year’s bottom of the cycle price-to-tangible bookassuming all non-government preferred is converted tocommon shares. We assume a 5.5% risk-free rate and a4.5% equity market risk premium.For JPM shares specifically, upside risks include fasterexpense reductions, faster card improvement, slowerdeterioration in housing credit losses. Downside risks includelarger reserve hikes and higher credit losses than we arecurrently anticipating and thinner net interest margins, which65

March 16, 2010Banksis possible if rates don’t start to rise in August as oureconomists are currently forecasting.BAC (OW, PT $28)BAC is our top pick in US large cap banks. It has a skew toearly cycle capital markets revenues (25% of revenues) andcard (18% of managed loan balances). We expect that cardprovisions and NPLs will decline in 2010. Our call is alsodriven by a decline in regulatory and political uncertainty, ascapital rules and financial services reform are determined.US economic improvement should boost IB shareWe expect BAC to begin to claw back lost capital marketshare as the US economy rebounds faster than Europe.Seven straight monthly improvements in Industrial Productionpoint to rising investment spend and more M&A. BAC shouldbe able to reinvest a portion of its credit savings (lowerprovisions) in talent and infrastructure going forward.Exhibit 95Industrial Production: Improvement points to reboundin corporate America & more robust pipelines115113111109107105103101999795Feb‐99Mar‐00Apr‐01May‐02Industrial ProductionSource: Federal Reserve Board, Morgan Stanley ResearchJun‐03Jul‐04BAC poised for IB share gainsWe think BAC is poised to take IB share going forward for twoprimary reasons. First, its exit from TARP in 4Q09 eliminateda key overhang on its talent management/retention efforts.Second, the restructuring of management concluded with aAug‐05Sep‐06Oct‐07Nov‐08Dec‐09Jan‐11very strong, well-respected leader for the IB, something thatshould enable BAC to establish key client relationships andattract talent.Estimate changesWe lowered our 1Q10 and 2010 FY estimate for BAC from$0.28 and $1.63 to $0.23 and $1.55, respectively. Ourrevisions reflect a more modest than expected primary marketin equities and a slow start to M&A.Valuation and risksOur $28 price target is based on residual income valuation,using a normalized beta and cost of equity capital. We expectthat the market will start to value banks on longer-term,normalized earnings as nonperforming loans peak out, likelyin 1H 2010. Our bull case intrinsic values use residual incomevaluation and our bear case intrinsic values are based on lastyear’s bottom-of-cycle price-to-tangible book. We assume a5.5% risk-free rate and a 4.5% equity market risk premium.For BAC shares specifically, downside risks to our thesis andprice target include higher cum losses, particularly inconsumer asset classes; larger dilution from capital raisesand preferred share conversions; and integration challengesassociated with the MER. Upside risks include lowerconsumer losses, realization of any of several differentinvestments, such as China Construction Bank, Bank Itau,MER’s securities processor, and earlier and larger accretionfrom MER and CFC.Morgan Stanley is currently acting as financial advisor to anumber of investors, led by First Republic's existingmanagement, and including investment funds managed byColony Capital, LLC and General Atlantic LLC with respect totheir acquisition of First Republic Bank from Bank of AmericaCorporation. The proposed transaction is subject tocustomary regulatory approvals, as well as certain customaryclosing conditions. Morgan Stanley expects to receive fees forits financial services that are subject to the consummation ofthe proposed transaction. Please refer to the notes at the endof the report.66

March 16, 2010BanksExhibit 96BAC estimate changesNew vs. Old Forecast Comparison, 2010E ‐ 2011E($ millions) 2010 2010 Difference 2011 2011 DifferenceNew Old in EPS New Old in EPSNIM 2.96% 2.96% $ 0.00 2.96% 2.96% $ ‐Total Loan & Leases 985,168 985,168 $ ‐ 1,006,804 1,006,804 $ ‐Other Earning Assets 972,846 972,846 $ ‐ 1,002,032 1,002,032 $ ‐Earning Asset Volume 1,958,015 1,958,015 $ ‐ 2,008,836 2,008,836 $ ‐Net Interest Income 57,878 57,878 $ 0.00 59,425 59,425 $ ‐Service Charges 10,852 10,852 $ ‐ 11,069 11,069 $ ‐Investment and brokerage services 13,016 13,016 $ ‐ 14,574 14,574 $ ‐Mortgage banking income 8,029 8,029 $ ‐9,182 9,182 $ ‐Insurance Income 2,949 2,949 $ ‐3,037 3,037 $ ‐Investment banking income 6,797 7,364 $ (0.04) 8,126 8,497 $ (0.02)Equity investment gains 2,000 2,000 $ ‐2,150 2,150 $ ‐Card income 9,100 9,100 $ ‐9,330 9,330 $ ‐Trading account profits 13,097 13,964 $ (0.06) 14,117 14,607 $ (0.03)Other income 2,160 2,160 $ ‐2,268 2,268 $ ‐Securities gains 1,500 1,500 $ ‐750 750 $ ‐Fee Income 69,499 70,933 $ (0.10) 74,604 75,465 $ (0.06)Net Revenue 127,376 128,811 $ (0.10) 134,029 134,890 $ (0.06)Total NonInterest Expense 61,115 61,450 $ 0.02 63,106 63,453 $ 0.02Expense Ratio 48% 48% 47% 47%Provisions 41,929 41,929 $ ‐ 33,502 33,502 $ ‐Tax Rate 29% 29% $ ‐33% 33% $ ‐Preferred Dividend 1,360 1,360 $ ‐1,360 1,360 $ ‐Operating Income to Common 15,915 16,697 $ (0.08) 23,712 24,057 $ (0.03)Share Count 10,258 10,258 $ (0.00) 10,165 10,165 $ (0.01)EPS 1.55 1.63 $ (0.08) 2.33 2.37 $ (0.04)Source: Morgan Stanley ResearchTD Financial (OW, PT CAD$85)TD is our top pick in Canadian banks. We believe TD hasthe most upside of the Canadian banks as credit normalizes,due to the large US portfolio (25% of loan book). We look forconsensus estimates to increase on the back of strong 1Q10results, and continue to believe the Street is too negative on2010 provisions. TD has the most compelling valuation in ourcoverage group, trading at 11.4x our 2010 EPS estimate,below its historical average of 11.8x.TD targets a 75% retail / 25% capital markets business mix.Trading and underwriting/advisory revenues remain strong. Infiscal 1Q10, fixed income trading increased 16% sequentiallyand underwriting/advisory was up 6%. Equities tradingcontracted 43% q/q, but makes up a relatively smallpercentage of total trading (20%). TD saw strong new issueorigination on the debt side during the quarter.67

March 16, 2010BanksExhibit 971Q provisions 10% below consensusWe expect consensus provisions to declineProvisions for Credit Losses ($ CDN Millions)acquisitions. Downside risks include slower loan growth,particularly in Canadian consumer, a weakening US economyand later than anticipated rate increases, which wouldchallenge margin expansion.6506005505004504003503002502001Q10 2Q10E 3Q10E 4Q10EActual MS ConsensusAmeritrade (OW, PT $28)We remain strong believers in Ameritrade’s assetgathering ability. In the December quarter, AMTD onceagain grew net new assets (NNA) at a higher rate thanSchwab, the industry leader in terms of total assets. WhileAmeritrade is building off a much smaller base (approximatelyone-fifth the client assets of Schwab), Schwab generatedhigher NNA than Ameritrade until C3Q08, Ameritrade hasoutperformed since as it has fixed its service and otherissues.E = Morgan Stanley Research estimates; Source: Company data, Morgan Stanley ResearchExhibit 98TD Trading Multiples: We expect multiples to return tohistorical average by 2H1018.0 x16.0 x14.0 x12.0 x10.0 x8.0 x6.0 x4.0 x2.0 x0.0 xTD ‐ Trading / UW Multiples1Q09 2Q09 3Q09 4Q09 1Q10 2Q10E 3Q10E 4Q10E Hist.AvgFixed IncomeEquitiesE = Morgan Stanley Research estimatesSource: Dealogic, Company data, Morgan Stanley ResearchOur price target is based on residual income valuation, usinga normalized beta and cost of equity capital. Our bull caseintrinsic values are based on residual income valuation, usinga bull market beta and our bear case intrinsic value is basedon residual income valuation, using a bear market beta. Weassume a 5.25% risk-free rate, and a 4.5% equity market riskpremium and a beta of 1.1. We use price / normalized EPS asa secondary gauge of valuation. Our CAD$85 price targetimplies an 11.8x multiple on normalized earnings, in line withTD’s historical average.For TD specifically, upside risks include faster normalizationof US credit losses, higher than expected synergies from theCommerce acquisition and potential FDIC-assistedExhibit 99NNA Growth – AMTD vs. SCHW20.0%18.0%16.0%14.0%12.0%10.0%8.0%6.0%4.0%2.0%0.0%17.6%3.9%AMTD brought in $2.3b (+3%) of incrementalNNA in Dec 07 quarter from E*Trade8.9%2.6%10.8%3.8%12.0%11.0%11.4%9.2%7.5%5.2%7.0%3.6%AMTD NNA growth overtook SCHWbeginning in Dec 08 quarter11.2%6.7%10.9%8.9%12.3%6.3%8.2%6.5%11.5%1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09Schwab AmeritradeSource: Morgan Stanley Research; Company Reports. Note Calendar Year.We model net new asset growth coming from three areas:1) New retail clients. Ameritrade had 471,000 net newaccounts in F2009 (not including 197,000 accountspurchased in thinkorswim acquisition) versus 189,000 netnew accounts in F2007. We believe as potential retailinvestors gain confidence in the market, there will be anatural reversion to online brokerage, which shouldsupport growth.2) Wallet share growth. Ameritrade has only 10–15% of itsretail clients’ $1.2–1.8 trillion of investable assets (basedon June 2009 data in a company presentation), whereaspremier asset gatherer firms have 50–60% of theirclients’ investable assets. For every 5% increase in walletshare, Ameritrade estimates it would gain $60–90 billionin new assets (20–30% increase to current client assets).Ameritrade is building its wallet share by offering clients7.3%68

March 16, 2010Banksmore products and driving additional sales from itsservice-centers. We only model modest wallet sharegrowth (~35bps/year for next four years), so there couldbe upside to our estimates.3) Growth in RIA business. We are believers in the longtermviability of the RIA model, but think that assets willgradually move to this model rather than stampede in, assome expect.Exhibit 100Ameritrade: Drivers of asset growthFYE 9/30 F2008 F2009 F2010E F2011E F2012EBoP Total Client Assets ($b) $302.7 $278.0 $302.0 $351.3 $397.31) Retail businessBoP Retail AUM $217.9 $186.3 $202.3 $233.3 $261.1a) NNA from New CustomersNet New Accounts (000s) 648 738 723 685 634% Retail vs. RIA 80% 80% 80% 80% 80%Retail NNA / Net New Account ______ $1,493 $17,454 ______ $14,836 ______ $15,281 ______ $15,663 ______NNA from New Customers $0.8 $10.3 $8.6 $8.4 $7.9b) NNA from Increased Wallet ShareExisting Clients Investable Assets $1,552 $1,551 $1,746 $1,907 $2,071AMTD Wallet Share ______ 12.0% ______ 13.0% ______ 13.4% ______ 13.7% ______ 14.0%NNA from Additional Wallet Share $7.5 $8.1 $7.0 $6.5c) Market AppreciationChange in S&P500 -23.6% -9.4% 11.9% 8.0% 8.0%Multiple of Q-o-Q Change in S&P 0.7x 0.1x 0.6x 0.7x 0.7xMarket Appreciation (%) ______ -15.7% ______ -0.9% ______ 7.1% ______ 5.3% ______ 5.4% in AUM from Market Appreciation ($34.2) ($1.7) $14.3 $12.5 $14.1EoP Retail AUM $186.3 $202.3 $233.4 $261.1 $289.72) RIA businessBoP RIA AUM $84.8 $91.7 $99.7 $118.0 $136.2Total Industry Advisory AUM (1) $9,983 $9,728 $10,528 $11,358 $12,254RIA Market Share (2) ______ 16% ______ 18% ______ 19% ______ 20% ______ 21%RIA AUM (2) $1,593 $1,727 $1,967 $2,269 $2,614% AMTD ______ 5.8% ______ 5.8% ______ 6.0% ______ 6.0% ______ 6.0%EoP AMTD RIA AUM $91.7 $99.7 $118.0 $136.2 $156.8NNA - RIA business $22.0 $8.7 $11.3 $11.8 $13.4Market Appreciation - RIA business ($15.0) ($0.8) $7.1 $6.3 $7.3EoP Total Client Assets ($b) $278.0 $302.0 $351.3 $397.3 $446.5Year-over-year Growth -8% 9% 16% 13% 12%Growth from:NNA - Retail and RIA (%) 9.5% 9.3% 7.7% 7.0%Market Appreciation - Retail and RIA (%) -0.9% 7.1% 5.3% 5.4%Given best-in-class NNA growth, believe AMTDreached 6.0% market share in Dec Q (F1Q10)e = Morgan Stanley Research estimates;Source: Morgan Stanley Research; Company Reports3-year CAGR of 13.8%We believe AMTD unjustly trades at a discount to itspeers. As we outlined above, Ameritrade has become theleading asset gatherer in the online brokerage space, whichwe expect to be the key driver to long-term earnings growth.While the company had service, technology, etc. problemsafter its TD Waterhouse acquisition in 2006, it appears thoseissues have been remedied. Ameritrade currently trades at asignificant discount to Schwab, despite similar growth profiles– we expect 5-year EPS growth of 23% for AMTD vs. 29% forSCHW (SCHW benefits more from higher interest rates).Exhibit 101Online Brokers Comp MultiplesP/ECompany F2010 F2011 SourceAmeritrade - Current Value 15.3x 10.1x MS EstimateAmeritrade - Current Value 13.2x 10.7x ConsensusAmeritrade - Target Multiple 24.8x 16.3x MS EstimateOnline Retail BrokersCharles Schwab 26.4x 14.1x MS EstimateCharles Schwab 24.5x 16.4x ConsensusE*Trade N.M. 20.4x ConsensusTradeStation 20.4x 12.3x ConsensusoptionsXpress 13.9x 11.3x ConsensusSource: FactSet consensus; Morgan Stanley Research estimatesAmeritrade outsources all bank balance sheet risk, apositive in our view. AMTD does not take any risk in termsof investing its client deposits. The company outsources itsbank sweep accounts to TD Bank, in exchange for a minimalfee.Valuation methodology and risks:We have an Overweight rating and $28 price target on sharesof Ameritrade. Our valuation is based on the net present value(NPV) of Ameritrade’s projected free cash flow, assuming an11% cost of equity and terminal year growth of 1%. Wesupplement our NPV analysis with our residual income model(RIM) methodology. Residual income is earnings in excess ofthe cost of equity capital.Key risks include the risk the Street is underestimating thedrag on net interest from the significant insured depositaccount (IDA) balances invested at low interest rates.Ameritrade’s NNA growth may not be sustainable long term,and there is no guarantee online brokers will continue to takeshare of advisory assets from wirehouses. Transaction tax isalso a major risk, as is fiduciary duty legislation, if it limitedonline brokers from providing customer service to retailclients.BX (OW, PT $18)We continue to be Overweight BX in our US diversifiedfinancials coverage. In light of Morgan Stanley’s view that theequity markets will be range bound, we think it is a compellingstory.- In the worst case of range bound markets making it difficultto access the IPO market due to excessive volatility, and withfew if any strategic sales, we think BX could still see 7%pretax fee-related earnings growth due to the increase inAUM for both liquid and illiquid strategies (there is visibilitytoday into $15 billion of increased AUM, not accounting for69

March 16, 2010Banksupside to fundraising, additional FoHF assets, etc.). Inaddition, BX spent much of 2009 strengthening the balancesheets of its portfolio companies, and should not be in aposition where it is forced to make difficult decisions inregards to weaker companies due to capital structure issues.BX portfolio companies have no debt coming due in 2010 andvery little in 2011, and much of the debt they do have iscovenant lite.- In a bull case (again, in range-bound markets), we assumeBX would be able to monetize 12 of its portfolio companiesthrough strategic sale or IPO. In our view, the equity marketsdon’t need to be extraordinarily strong for BX to access theIPO market – but there does need to be some level of stabilityfor a company to make it through the process. BX’s earningsshould grow through the aforementioned growth in AUM, andperformance fees would be substantially higher than ourforecasts (our base case EPS is $0.98 in 2010 vs. $0.63 in2009).As a reminder, if the economy experiences a double-dip andthe capital markets fall sharply again, the bear case could besubstantially more dramatic than that associated with rangeboundequity markets – and the stock could trade to the midsingledigits. However, BX is better positioned than it was acouple of years ago, both from a corporate and portfoliocompany perspective. On the corporate side, BX has verylittle in the way of performance fees that could be reversed, soit would not see the dramatic negative performance fees thatit saw in 2008, though investment income could be negative.On the portfolio company side, as previously discussed, BXhas strengthened balance sheets.Our valuation is based on the net present value (NPV) ofBlackstone’s projected free cash flow, assuming an 11% costof equity and terminal year growth of 2.5%. We would typicallyuse ~10% cost of equity for a company of Blackstone’s netcash position but believe that a higher cost is warranted dueto volatility in earnings, etc. Beta analysis also supports the11% cost of equity.Key Risks: 1) Events that weaken capital markets – for thestock to perform, cap markets must be accessible, as BX islooking to sell or IPO several portfolio companies (PCs),continue to strengthen PC’s balance sheets; stronger capmarkets also help drive LP liquidity. 2) Faster implementationof higher tax rates would be negative, though we model the rateon carry increasing to corporate levels over time (and think theStreet does, too).Exhibit 102Private Equity and Real Estate OutlookPrivate EquityBX Outlook2010MS ForecastMonetizations Up to 12 $2.5binvestments of assetsFundraising Close Clean Close Cleantech, BCP VI tech ($500mm),($9b to date) BCP VI ($12b)Leverage 5-5.5x 5-5.5xMax Gross Debt $3b $3b/avg $600mmCapital Deployed $3-4b $3.0b($1.3b in 1H10)Real EstateCapital Deployed $2-3b $2.2bFund Raising $1.6b debt $1.6b debtfund fundSource: Company data, Morgan Stanley Research70

Disclosure SectionMorgan Stanley & Co. International plc, authorized and regulated by Financial Services Authority, disseminates in the UK research that it hasprepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared byany of its affiliates. As used in this disclosure section, Morgan Stanley includes RMB Morgan Stanley (Proprietary) Limited, Morgan Stanley & CoInternational 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 theMorgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative orMorgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA.Analyst CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed andthat they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views inthis report: Huw van Steenis, Betsy Graseck.Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.Global Research Conflict Management PolicyMorgan Stanley Research has been published in accordance with our conflict management policy, which is available atwww.morganstanley.com/institutional/research/conflictpolicies.Important US Regulatory Disclosures on Subject CompaniesThe following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers orrecommends in Morgan Stanley Research: Maxence Le Gouvello du Timat - UBS (common or preferred stock). Morgan Stanley policy prohibitsresearch analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global IndustryClassification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own suchsecurities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition.A household member of the following analyst or strategist is an employee, officer, director or has another position at a company named within theresearch: Cheryl Pate; J.P.Morgan Chase & Co..Citigroup may be deemed to control Morgan Stanley Smith Barney LLC due to ownership, board membership, or other relationships. MorganStanley Smith Barney LLC may participate in, or otherwise have a financial interest in, the primary or secondary distribution of securities issued byCitigroup or an affiliate of Citigroup that is controlled by or under common control with Morgan Stanley Smith Barney LLC.As of February 26, 2010, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies coveredin Morgan Stanley Research: American Express Company, Bank of America, Bank of New York Mellon Corp, Barclays Bank, BB&T Corporation,Commerzbank, Credit Suisse Group, Deutsche Bank, Deutsche Boerse, Fifth Third Bancorp, HSBC, J.P.Morgan Chase & Co., Northern TrustCorp., PNC Financial Services, Societe Generale, State Street Corporation, The Blackstone Group L.P., Tullett Prebon, U.S. Bancorp.As of February 26, 2010, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuerscovered in Morgan Stanley Research (including where guarantor of the securities): American Express Company, Bank of America, Bank of NewYork Mellon Corp, Bank of Nova Scotia, Barclays Bank, BB&T Corporation, BNP Paribas, Capital One Financial Corporation, Citigroup Inc.,Commerzbank, Credit Suisse Group, Deutsche Bank, Deutsche Boerse, DEXIA, Fifth Third Bancorp, HSBC, ICAP, J.P.Morgan Chase & Co.,Nomura Holdings, Northern Trust Corp., PNC Financial Services, Regions Financial Corp, Royal Bank of Canada, Royal Bank of Scotland, SocieteGenerale, State Street Corporation, SunTrust, TD Ameritrade Holding Corporation, The Blackstone Group L.P., Toronto Dominion Bank, U.S.Bancorp, UBS, Wells Fargo & Co..Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of American ExpressCompany, Bank of America, Bank of New York Mellon Corp, Bank of Nova Scotia, Barclays Bank, BB&T Corporation, BNP Paribas, Capital OneFinancial Corporation, Citigroup Inc., Credit Suisse Group, DEXIA, HSBC, Northern Trust Corp., PNC Financial Services, Royal Bank of Canada,Royal Bank of Scotland, Societe Generale, State Street Corporation, SunTrust, U.S. Bancorp, UBS, Wells Fargo & Co..Within the last 12 months, Morgan Stanley has received compensation for investment banking services from American Express Company, Bank ofAmerica, Bank of Montreal, Bank of New York Mellon Corp, Bank of Nova Scotia, Barclays Bank, BB&T Corporation, BNP Paribas, Capital OneFinancial Corporation, Citigroup Inc., Comerica Inc, Commerzbank, Credit Suisse Group, Deutsche Bank, Deutsche Boerse, DEXIA, Fifth ThirdBancorp, Henderson Group, HSBC, Huntington Bancshares, J.P.Morgan Chase & Co., KeyCorp, Northern Trust Corp., PNC Financial Services,Royal Bank of Canada, Royal Bank of Scotland, Societe Generale, State Street Corporation, SunTrust, The Blackstone Group L.P., U.S. Bancorp,UBS, Wells Fargo & Co., Zions Bancorp.In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from American ExpressCompany, Bank of America, Bank of Montreal, Bank of New York Mellon Corp, Bank of Nova Scotia, Barclays Bank, BB&T Corporation, BNPParibas, Canadian Imperial Bank of Commerce, Capital One Financial Corporation, Citigroup Inc., Comerica Inc, Commerzbank, Deutsche Bank,Deutsche Boerse, DEXIA, Fifth Third Bancorp, Henderson Group, HSBC, Huntington Bancshares, ICAP, J.P.Morgan Chase & Co., KeyCorp,London Stock Exchange, M&T Bank Corp., Northern Trust Corp., Partners Group, PNC Financial Services, Regions Financial Corp, Royal Bank ofCanada, Royal Bank of Scotland, Schroders, Societe Generale, Standard Bank, State Street Corporation, SunTrust, TD Ameritrade HoldingCorporation, The Blackstone Group L.P., Toronto Dominion Bank, U.S. Bancorp, UBS, Wells Fargo & Co., Zions Bancorp.Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment bankingservices from American Express Company, Bank of America, Bank of Montreal, Bank of New York Mellon Corp, Bank of Nova Scotia, BarclaysBank, BB&T Corporation, BNP Paribas, Canadian Imperial Bank of Commerce, Capital One Financial Corporation, Citigroup Inc., Comerica Inc,Commerzbank, Credit Suisse Group, Deutsche Bank, DEXIA, Fifth Third Bancorp, Henderson Group, Huntington Bancshares, ICAP, J.P.MorganChase & Co., KeyCorp, London Stock Exchange, M&T Bank Corp., Nomura Holdings, Northern Trust Corp., PNC Financial Services, RegionsFinancial Corp, Royal Bank of Canada, Royal Bank of Scotland, Schroders, Societe Generale, Standard Bank, State Street Corporation, SunTrust,The Blackstone Group L.P., Toronto Dominion Bank, Tullett Prebon, U.S. Bancorp, UBS, Wells Fargo & Co., Zions Bancorp.Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking clientrelationship with, the following company: American Express Company, Bank of America, Bank of Montreal, Bank of New York Mellon Corp, Bank ofNova Scotia, Barclays Bank, BB&T Corporation, BNP Paribas, Canadian Imperial Bank of Commerce, Capital One Financial Corporation, CitigroupInc., Comerica Inc, Commerzbank, Credit Suisse Group, Deutsche Bank, Deutsche Boerse, DEXIA, Fifth Third Bancorp, Henderson Group, HSBC,Huntington Bancshares, ICAP, J.P.Morgan Chase & Co., KeyCorp, London Stock Exchange, M&T Bank Corp., Northern Trust Corp., PartnersGroup, PNC Financial Services, Regions Financial Corp, Royal Bank of Canada, Royal Bank of Scotland, Schroders, Societe Generale, StandardBank, State Street Corporation, SunTrust, TD Ameritrade Holding Corporation, The Blackstone Group L.P., Toronto Dominion Bank, U.S. Bancorp,UBS, Wells Fargo & Co., Zions Bancorp.Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in thepast has entered into an agreement to provide services or has a client relationship with the following company: American Express Company, Bankof America, Bank of Montreal, Bank of New York Mellon Corp, Bank of Nova Scotia, Barclays Bank, BB&T Corporation, BNP Paribas, Canadian71

March 16, 2010BanksImperial Bank of Commerce, Capital One Financial Corporation, Citigroup Inc., Comerica Inc, Commerzbank, Credit Suisse Group, Deutsche Bank,Deutsche Boerse, DEXIA, Fifth Third Bancorp, Henderson Group, Huntington Bancshares, ICAP, J.P.Morgan Chase & Co., KeyCorp, London StockExchange, M&T Bank Corp., Nomura Holdings, Northern Trust Corp., Partners Group, PNC Financial Services, Regions Financial Corp, Royal Bankof Canada, Royal Bank of Scotland, Schroders, Societe Generale, Standard Bank, State Street Corporation, SunTrust, TD Ameritrade HoldingCorporation, The Blackstone Group L.P., Toronto Dominion Bank, Tullett Prebon, U.S. Bancorp, UBS, Wells Fargo & Co., Zions Bancorp.Within the last 12 months, an affiliate of Morgan Stanley & Co. Incorporated has received compensation for products and services other thaninvestment banking services from Deutsche Bank, UBS.Morgan Stanley & Co. Incorporated makes a market in the securities of American Express Company, Bank of America, Bank of New York MellonCorp, BB&T Corporation, Capital One Financial Corporation, Citigroup Inc., Comerica Inc, Fifth Third Bancorp, Huntington Bancshares, J.P.MorganChase & Co., KeyCorp, M&T Bank Corp., Northern Trust Corp., PNC Financial Services, Regions Financial Corp, State Street Corporation,SunTrust, TD Ameritrade Holding Corporation, U.S. Bancorp, Wells Fargo & Co., Zions Bancorp.The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensationbased upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overallinvestment banking revenues.The fixed income research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have receivedcompensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixedincome trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts' orstrategists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability orrevenues of particular trading desks.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 inMorgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in thisreport.Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.STOCK RATINGSMorgan 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 notthe equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, sinceMorgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan StanleyResearch, 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 asinvestment 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 February 28, 2010)For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sellalongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to thestocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommendedrelative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buyrecommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.Coverage Universe Investment Banking Clients(IBC)Stock RatingCategoryCount % ofTotalCount % ofTotalIBC% ofRatingCategoryOverweight/Buy 1035 41% 316 42% 31%Equal-weight/Hold 1091 43% 341 45% 31%Not-Rated/Hold 22 1% 5 1% 23%Underweight/Sell 382 15% 89 12% 23%Total 2,530 751Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individualcircumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom MorganStanley or an affiliate received investment banking compensation in the last 12 months.Analyst Stock RatingsOverweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basisover the next 12-18 months.Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a riskadjustedbasis over the next 12-18 months.Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Indexon a risk-adjusted basis, over the next 12-18 months.Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjustedbasis, 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 Views72

March 16, 2010BanksAttractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. therelevant 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 relevantbroad 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 relevantbroad 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 CustomersCiti Investment Research & Analysis (CIRA) research reports may be available about the companies or topics that are the subject of MorganStanley Research. Ask your Financial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanleyresearch reports.Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan StanleySmith Barney LLC, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barneydisclosure website at www.morganstanleysmithbarney.com/researchdisclosures.For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures andhttps://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 approvalis 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 DisclosuresMorgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may becontrary 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 toClient Link at www.morganstanley.com.For a discussion, if applicable, of the valuation methods and the risks related to any price targets, please refer to the latest relevant publishedresearch on these stocks.The recommendations of Subhojit Daripa in this report reflect solely and exclusively the analyst's personal views and have been developedindependently, including from the institution for which the analyst works.Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard tothe individual financial circumstances and objectives of persons who receive it. Morgan Stanley recommends that investors independently evaluateparticular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particularinvestment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed inMorgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all ofthem.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 anyparticular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists allcompanies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companiesmentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives ofsecurities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of MorganStanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives ofsecurities/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 personsWith the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes everyeffort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell youwhen opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage of a subjectcompany. 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 conduct site visits from time to time but are prohibited from accepting payment or reimbursement by thecompany of travel expenses for such visits.The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepaymentrates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitationson 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 onthe cover page is that of the primary exchange for the subject company's securities/instruments.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 orincorporated in the PRC and listed in on the Stock Exchange of Hong Kong ("SEHK"), namely the H-shares, including the component companystocks of the Stock Exchange of Hong Kong ("SEHK")'s Hang Seng China Enterprise Index; or any securities/instruments issued by a company that73

March 16, 2010Banksis 30% or more directly- or indirectly-owned by the government of or a company incorporated in the PRC and traded on an exchange in Hong Kongor Macau, namely SEHK's Red Chip shares, including the component company of the SEHK's China-affiliated Corp Index is distributed only toTaiwan Securities Investment Trust Enterprises ("SITE"). The reader should independently evaluate the investment risks and is solely responsiblefor their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media withoutthe express written consent of Morgan Stanley. Information on securities/instruments that do not trade in Taiwan is for informational purposes onlyand is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. 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For this reason, to make an investment decision by relying solely to this information stated here may not bring aboutoutcomes that fit your expectations.The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providersmake no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not haveliability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is theexclusive property of MSCI and S&P.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 WymanCopyright © 2010 Oliver Wyman. All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the writtenpermission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect.The information and opinions in the first section of this report were prepared by Oliver Wyman.This report is not a substitute for tailored professional advice on how a specific financial institution should execute its strategy. 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March 16, 2010BanksOliver 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 anyreports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of suchdamages.This report may not be sold without the written consent of Oliver Wyman.75

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