Financial Pacific - In shape, or not Europe's banks after the workout (third party)
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Financial Pacific - In shape, or not Europe's banks after the workout (third party) Document Transcript

  • 1. Wealth Management Research 15 September 2011Financials Barry McAlinden, CFA, strategist, UBS FSIn shape, or not: Europes banks barry.mcalinden@ubs.com, +1 212 713 3261after the workout Claudia Sigl, analyst, UBS AG Fabio R.J. Trussardi, analyst, UBS AG Jens Anderson, FRM, analyst, UBS AG • Following the European Banking Authority (EBA) stress test, we have conducted our own WMR stress test which uses more conservative assumptions on sovereign exposures for banking This report that was originally published outside books and trading books. of the US on 26 July 2011. This report has been • We simulate a base and a worst-case scenario which show customized for US distribution. that banks participating in the EBA stress test need between EUR 92bn and EUR 138bn capital, which we believe should be manageable over the next 18 months, in our view. • Based on our analysis, each isolated event is not a problem for the sector, the challenge is if multiple sovereign losses occur simultaneously under a contagion scenario. European leaders recently agreed to an expanded framework aimed at stemming contagion, but the political risks remain high.Executive Summary Related publicationsOne of the major criticisms of the official European Banking Authority • The debt crisis: Next hurdles for the(EBA) banking stress test was that only positions held in the trading Eurozone, 14 Septemberbook, which are subject to fair value accounting, were realistically • Greek debt deal placates markets, 22 Jultested. However, most positions in peripheral European government 2011bonds are held in the banking book. In our scenario analysis, we • Credible stress test results, 19 Jul 2011adjusted for this fact by using the data on sovereign debt exposure • The debt crisis: Timing of a Greek default andand calculating the impact of adverse developments with alternative contagion effects, 18 Jul 2011methodologies , setting a Core Tier 1 (CT1) threshold of 7% andsimulating a base and worst case scenario. • European bank and insurance exposure to Greece, 21 June 2011Institutions most affected by capital shortfalls are domiciled in oneof the European peripheral countries. Excluding the non-peripherybanks, French and German banks have the highest sensitivity toperipheral government bonds. Nevertheless, the total capital shortfallof up to EUR 138bn should be manageable over an 18-monthhorizon, mitigating all other regulatory challenges and second-ordereffects. However, we believe that the underlying problems withinthe banking sector will remain in the medium to long term, mostprominently emphasizing the contagion effects from the Eurozonedebt crisis.This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosuresthat begin on page 18.
  • 2. Financials The crisis is here to stay Fig. 1: Distribution of direct net peripheral The European sovereign debt crisis has entered a phase in which even sovereign exposures, held by EBA banks major economies are challenged by their high debt levels. The piecemeal Total EUR 678bn approach employed by European political leaders since early 2010 no 12% longer suffices to ease the pressure and prevent contagion into core 2% 5% Greece European economies. We currently see little room for large-scale 39% Ireland initiatives that would rapidly improve the situation considering political, Portugal economic and legal constraints. The EU leader summit failed to ease Italy market participants concerns. Spain 42% Direct sovereign exposure is not the only issue It is quite difficult to identify all parties holding sovereign government Source: UBS WMR; EBA, as of 26 July 2011 debt. According to the recent (EBA) data, banks are holding net direct exposure to stressed sovereigns with a total amount of EUR 678bn (Fig. 1). We appreciate the additional disclosures from the 2011 bank Fig. 2: Banks total net direct sovereign exposure and share of domestic banks stress test which we attach in a detailed list (see Appendix, table 4). The in EUR mn participating banks account for 65% of the European banking sector. 300 Using this data, banks domiciled in the periphery (so called periphery 250 banks) constitute 51 out of 90 banks in the EBA sample and hold almost 200 EUR 460bn (two-thirds) of the outstanding total peripheral debt. For a 150 detailed distribution please refer to Fig. 2. 100 50 These figures have not changed significantly to those of the previous year, 0 but have increased slightly. The combined exposure of banks not Greece Ireland Portugal Italy Spain domiciled in one of the periphery countries (so called non-periphery Banks total net direct sovereign exposure banks) is roughly EUR 220bn and is significantly concentrated in banks Share of domestic banks net direct sovereign exposure exposure to Italy (EUR 124bn; Fig. 3). Source: UBS WMR; EBA, as of 26 July 2011 We think other weak countries would suffer from an increased risk aversion and see their funding costs rise following a restructuring Fig. 3: Distribution of direct net peripheral sovereign exposures held by non-periphery announcement of Greece. Besides the other peripheral countries, banks Portugal, Ireland, Spain and Italy, we would expect a further widening of Total EUR 220bn risk premiums for weak borrowers. 19% 13% We think the most important difference compared to the default of 3% Greece Lehman Brothers in 2008 is that markets were caught by surprise, other 8% Ireland banks were in a similarly critical situation and the exposures of investors Portugal and business partners to the broker firm were entirely unclear. By Italy supporting Greece for a prolonged period, the Eurozone grants market Spain participants time to prepare for the event. Transparency on exposures was 57% increased with the recently published 2011 banking stress test results. Theoretically mitigating contagion risk, most European non-periphery Source: UBS WMR; EBA, as of 26 July 2011 financial institutions should hold a manageable direct exposure to Greek government bonds. Market disruptions and another temporary freeze of global credit markets resulting from a default event on the periphery of this scale should not be underestimated and including all second-order effects of a sovereign default, we think there would be a sizable economic impact on the Eurozone as a whole and beyond. Periphery banks are heavily hit by their challenged sovereign. Historically, banks domiciled in a stressed or defaulted country experienced multiple factors of pressure, arising from direct and indirect exposure and further Wealth Management Research 15 September 2011 2
  • 3. Financials deterioration of their operating environment. In addition to the above mentioned contagion risks, those banks had to face bank-runs, dried-up refinancing channels, extremely high funding costs and last but not least, a dramatic asset deleveraging if not a wind-down. In a best-case scenario, such a bank could be recapitalized by a foreign investor after a deleveraging process. Stressing European banks – the WMR approach The official stress test only stressed positions held in the trading book, which are subject to fair value accounting. Only negligible fair value changes were considered in the banking book where, in fact, most positions in peripheral European government bonds are held. The largest portion of the banking book is held to maturity, i.e. banks would only need to realize losses on these positions in case of a haircut or longer- dated valuation losses. These drawbacks leave room for improvement, which we intend to capture by using data on sovereign debt exposures and to calculate the impact of adverse developments with alternative methodologies simulating a base and worst case scenario. Our views for the European periphery As a baseline scenario we assume that Greece will default on its debt and that such an event may occur any time, driven either by reluctance of its official creditors to continue extending new loans or unwillingness by the Greek government to continue with its austerity program. In light of high political uncertainty, our base case estimate for the timing of a default event is March 2012. We think there is no obvious reason why a Greek default would consequently trigger a default by Portugal or Ireland, and we are convinced that both countries would refuse to participate in a private sector involvement initiative such as has been recently concluded for Greece. For Spain, the overall debt situation is sustainable and debt levels are even much lower compared to peers like Italy and Belgium. Hence, in our opinion, a default by Spain or Italy is highly unlikely. However, a possible Spanish request for funding support following a disruptive Greek default would trigger a sharp and persistent rise in bond risk premiums, also for Italy, triggering sizable valuation losses. We refer to our recent publication "The debt crisis: Timing of a Greek default and contagion effects" for a more detailed view on each country. WMRs stress test approach – tuning our assumptions Compared to the official stress test, we apply stricter loss assumptions to reflect our bleak sovereign outlook. In our base scenario, we assume that Greece defaults on its debt, causing an additional 40% loss on current book values of Greek government bonds. We assume this event to trigger a widening of bond risk premiums for Portugal and Ireland by 500 basis points (current 5-year premiums are around 1300 and 1000 basis points, respectively), and by 200 basis points for Spain and Italy (from currently about 300 basis points). For a worst case scenario we assume a 60% additional loss on Greek government bonds, defaults by Portugal and Ireland causing an additional Wealth Management Research 15 September 2011 3
  • 4. Financials loss of 30% and an increase in bond risk premiums for Spain and Italy of 500 basis points. Table 1: Summary of WMR scenarios 5-year bond durations assumed Greece Ireland Portugal Spain Italy 40% haircut +500 bp spread widening +500 bp spread widening +200 bp spread widening +200 bp spread widening WMR base scenario (~25% fair value loss) (~25% fair value loss) (~10% fair value loss) (~10% fair value loss) WMR worst case 60% haircut 30% haircut 30% haircut +500 bp spread widening +500 bp spread widening scenario (~25% fair value loss) (~25% fair value loss) Source: UBS WMR. Based on the disclosures from the EBA stress test, we treated the held-to- Major WMR stress test assumptions maturity positions (HTM) differently from the trading book and the • a portfolio duration of 5 years on average for available-for-sale category (AfS). Moreover, we summarized the Fair- each exposure stressed Value-Option (FVO) for banking book holdings in the trading book. • haircuts were applied to EBA reported Default haircuts were applied across all books, as such an event would exposures as of first quarter end 2011 trigger a write-down need for the banking book, too. We calculated • heuristically applied duration rule ignoring changes in market values for the trading book, the FVO in the banking convexity effects book and the AfS book only. Our approach is in line with IFRS accounting • partial analysis: ignores any hedges and rules. diversification effects • static holdings until 2012, no further • The first step we had to prepare was to recalculate the sovereign loss provisioning ex-interim assumptions already applied by EBA. For instance Greek government • no change in the forecasted earnings to built- bonds were EBA-stressed across maturities ranging from one month up capital base to 15 years with unrealistically low losses ranging from 0.5% to • only sovereign exposure was stressed, loan 26.2%. Similarly, fair value changes for Irish, Portuguese and Italian book was stressed in the EBA stress tests government bonds were too modest in the EBA stress test and have • linear adjustment of CT1 equity and risk- already been materialized in reality. weighted assets (RWA) • Next, we applied our scenarios as outlined in table 1 whereby we simply assumed the same losses or haircuts across maturities (EBA Haircut has used more differentiated losses based on market rates). A haircut is frequently defined as a discount to • For the spread impacts we assumed on average a 5-year duration the nominal value of an asset. While calculating which translates into 5% loss per 100-basis points widening (100bp scenarios for the WMR stress test we faced the = 1%), i.e. a 200-basis points widening would result in a loss of 10% difficulty that book values of assets are on Spanish and Italian governments bonds in our baseline scenario. unknown. For simplicity we applied haircuts, i.e. Equivalently, a 500bp widening results in a 25% loss. Please see on valuation discounts, on reported book values. In the right for major WMR stress test assumptions. some cases this may overstate estimated capital shortfalls. Because the largest amounts of sovereign debt are held in the banking books (of which approximately half are held-to-maturity) and medium-term government bonds of Spain and Italy were trading close to par at the EBA reporting date, we believe that our approach generates reasonable results. Source: UBS WMR Wealth Management Research 15 September 2011 4
  • 5. Financials Table 2: Banks falling below the 7% CT1 ratio threshold in the WMR stress test in EUR mn; sorted by WMR worst case scenario Banks Country Core Tier 1 (CT1) ratio Capital Shortfall Pre-Stress EBA WMR WMR WMR WMR 2010 stressed base scenario 2012 worst case scenario base scenario worst case scenario Unicredit Italy 7.8% 2012 6.7% 5.9% 2012 4.9% - 5590 - 10973 Royal Bank of Scotland (RBS) United Kingdom 9.7% 6.3% 6.2% 6.0% - 5788 - 6841 EFG Eurobank Greece 9.0% 4.9% -2.4% -6.4% - 4627 - 5926 Agricultural Bank of Greece (ATEbank) Greece 6.3% -0.8% -35.0% -62.7% - 5212 - 5352 Commerzbank Germany 10.0% 6.4% 5.9% 5.4% - 3560 - 5019 Societe Generale France 8.1% 6.6% 6.2% 5.9% - 3737 - 4996 Deutsche Bank Germany 8.8% 6.5% 6.3% 6.0% - 3676 - 4987 BNP Paribas France 9.2% 7.9% 7.1% 6.4% - - 3969 Banco Santander Spain 7.1% 8.4% 7.4% 6.6% - - 2358 NordLB Germany 4.6% 5.6% 5.2% 4.9% - 1898 - 2264 DZ Bank Germany 8.2% 6.9% 6.1% 5.2% - 1117 - 2244 Banco de Sabadell Spain 6.2% 5.7% 4.6% 3.0% - 1348 - 2217 HSH Nordbank Germany 10.7% 5.5% 5.4% 5.2% - 1156 - 1281 WestLB Germany 8.7% 6.1% 5.8% 5.6% - 794 - 934 Bank of Ireland Ireland 8.4% 7.1% 5.9% 5.6% - 712 - 860 Banco Pastor Spain 7.6% 3.3% 3.1% 2.7% - 720 - 785 LBBW Germany 8.2% 7.1% 6.7% 6.4% - 318 - 719 Barclays United Kingdom 10.0% 7.3% 7.1% 6.9% - - 698 Intesa Sanpaolo Italy 7.9% 8.9% 8.1% 6.9% - - 346 Bayerische Landesbank Germany 9.3% 7.1% 7.1% 7.0% - - 28 Sources: UBS WMR; EBA; MS; RBS Overall assessment of WMR stress test results Our sample includes all banks participating in the 2011 EBA stress test. Table 2 shows non-periphery banks that have the highest exposures to peripheral government bonds according to the 2011 banking stress test, considering both the highest absolute positions and highest positions relative to the banks Core Tier 1 equity. Table 2 is the reference for the selection on issuers we comment further below. Applying a CT1 threshold of 7%, 49 banks need to raise a total capital of roughly EUR 92bn in our base scenario. Applying our worst case scenario with a 7% CT1 hurdle, 69 banks need to raise a total capital of up to EUR 138bn. Most of the affected institutions are domiciled in one of the periphery countries. The relevant banks from Greece and Cyprus show a capital shortfall of EUR 26.6bn (base scenario) and EUR 33.3bn (worst case scenario), the ones from Portugal roughly EUR 7.2bn and EUR 10bn respectively, while the Irish banks would only need EUR 712mn and EUR 860mn, respectively. Excluding the non-periphery banks, French and German banks have the highest sensitivity to peripheral government bonds. The three most affected banks are Unicredit, RBS and Commerzbank (table 2). How sensitive are our scenarios? When assessing the sensitivity of our scenarios applying partial analysis, i.e. assuming all other factors do not change, we gain interesting though not unexpected insights. Wealth Management Research 15 September 2011 5
  • 6. Financials When increasing the CT1 threshold from 5% to 7%, the capital shortfall increases from EUR 2.5bn to EUR 41bn, i.e. a further capital shortfall of EUR 50bn arises when testing our WMR base scenario. The capital Fig. 4: WMR stress test sensitivities shortfall even increases from EUR 92bn to EUR 138bn under WMRs Partial analysis of capital shortfalls worst-case scenario. Change in Change in Increase in capital haircut spreads shortfall in EUR bn Assessing WMRs worst-case scenario, all else equal: Geeece +20% +12 • an increase of a haircut on Greek government bonds by 20% Ireland +30% +2 increases the capital requirements for European banks only by EUR 12bn; Portugal +30% +7 • a 30% haircut on Portuguese government bonds increases the Spain +500bp +18 sectors capital shortfall by less than EUR 2bn; Italy +500bp +25 • a 30% haircut on Portuguese government bonds increases the total Source: UBS WMR; EBA capital shortfall by EUR 7bn; • each 500bp additional spread widening on Spanish government bonds increases the capital shortfall by EUR 18.2bn; • each 500bp additional spread widening on Italian government bonds increases the capital shortfall for stressed banks by EUR 25.2bn. In essence, each isolated event is not a problem for the sector. The challenge is if events occur simultaneously or in chain reactions, which can be reasonably assumed, since defaults are usually clustered. Further, the results confirm what markets already knew: Contagion to Spain and Italy has to be stopped because both an incremental spread widening of 500bp for Spanish and Italian government bonds would, according to our scenarios (with simplified assumptions), erode capital in the magnitude of more than EUR 25bn (excluding held-to-maturity holdings!). This is more than double the amount of a scenario in which haircuts on Greek (60%), Portuguese (30%) and Irish (30%) sovereign bonds are taken simultaneously (including held-to-maturity assets). Banks - country by country We only focus on the banks treated in table 2 failing the WMR stress test hurdle. Peripheral issuers from Greece, Portugal and Ireland Two Greek banks, Agricultural Bank of Greece and EFG Eurobank, did not pass the stress test, while Piraeus and Marfin Popular Bank (Cyprus) passed it with a slight margin. We also highlight that generic provisions were considered as a mitigation measure (only Spanish banks and Greek banks did it) and we think that it partially invalidated the results comparability across the banking sector. Irrespective of the very weak stress test data, the Greek banks would most likely default along with the sovereign and public entities. Under the EBA stress test scenario, all four Portuguese banks passed the exercise with limited margins even if accounting for the mitigation measurers. The two major listed banks are Banco Comercial Portugues (CT1 of 5.4% at 2012 under the EBA stress scenario) and Espirito Santo Financial Group (CT1 of 5.1% at 2012 under the EBA stress scenario). The four banks are all loss-making under the stress scenario in 2012, and hence consuming capital. The four banks will have to implement the Wealth Management Research 15 September 2011 6
  • 7. Financials already declared actions in order to achieve the required 6% CT1 level by September 2011.In terms of sovereign exposures, the largest holdings are of Portuguese bonds, while the exposures to the other peripheral countries appear manageable. German banks The 12 participating German banks passed the official EBA stress test. However, we believe that one of the main factors having contributed to the good result is the assumption of no credit spread widening in all the maturities for the German sovereign bonds. Obviously German banks have a high exposure to their domestic sovereign bonds and an assumed shock to sovereign credit spreads would have penalized them, resulting in worse outcomes than the stress test assumes. Referring to the official test, we do not see any particular implication for German banks. Applying WMRs scenarios, German banks have the highest sensitivity to peripheral government bonds, 8 German banks need to raise a total capital of roughly EUR 12.6bn in our base scenario. Applying our worst case scenario, 9 banks need to raise a total capital of up to EUR 18bn. Even if these capital needs should be manageable and the German banking capitalization is well below European peers, the critical aspect is within the tighter capital requirements according to Basel 3. Especially Landesbanks are most vulnerable, as the treatment of existing silent participations, which form a major part of their current T1 capital, will mostly not meet the eligibility criteria for T1 capital under Basel 3 (except for the grandfathering period). The uncertainty about the German banking sector comes on top of an already long list of concerns. The critical problems of high fragmentation, obstacles to consolidation, structurally poor profitability, weak business models and the future of the Landesbanken remain as yet unresolved. According to Moodys, revenues in German retail banking have fallen by more than 20% over the past nine years and are likely to stagnate in the medium term. This is clearly a credit negative for banks counting on the domestic market to make up for lost longer-term earnings potential in international banking or capital market activities. Deutsche Bank, a globally active player in the banking segment, passed the official test with a CT1 ratio of 6.5% in the adverse scenario, accounting for a tough 44% increase in RWA. However in Deutsche Banks case we argue that the provisioning impact under the adverse scenario was not really severe, assuming a debatable 8% decline in 2011 and an almost flat value for 2012 compared to the 2010 value. Referring to a capital need of EUR 3.6bn to EUR 5bn resulting from WMRs stress scenarios we judge the position of Germanys market leader comfortable. We expect a strong organic capital generation due to the benefits from recent market share gains. Commerzbank: passed the official test with a ratio of 6.4%; hit by its commercial real estate exposure and legacy assets. More realistically, Commerzbank had to face a significant increase of provisions (roughly +58% in 2012 versus the 2010 level) in the adverse scenario. Nevertheless, Commerzbank should be able to withstand a loss scenario without further capital injection needs and funding difficulties, given the Wealth Management Research 15 September 2011 7
  • 8. Financials recent conversion of the majority of silent participations into core capital and the continued government support. Applying our base and worse case loss rates would hit core capital significantly. Under the terms of the state aid approval, Pfandbriefe subsidiary Eurohypo needs to be sold by 2014. BayernLB is required by the EC to reduce its balance sheet by 2013 to 40-50% compared to 2008 level due to state aid approval. In our view, capitalization levels are sufficient but not above average. Applying a 7% CT1 ratio will result in a capital shortfall of EUR 28mn, which is quite comfortable. The threat of privatization is remote for the time being. DZ Bank passed our stress test wit a capital shortfall in the worst case scenario of EUR 561bn. As an integral part of the cooperative Financial Services Network (FinanzVerbund) DZ Bank serves the local cooperative banks and benefits from the integration and the comprehensive protection scheme within the cooperative sector. HSH Nordbank passed the official test with a CT1 of 5.5%, which is close to the minimum requirement. This could put the bank under the closer scrutiny of the regulator and market participants. EBA requested specific steps to strengthen the banks capital position. HSHN has a highly capital-intensive lending franchise and limited access to capital. Consequently, the bank needs to shrink its balance sheet to release capital. Its dependence on costly support from owners implies major uncertainties given the support providers’ own stretched financial flexibility (the state of Schleswig-Holstein and the city-state of Hamburg). LBBW already received the EC state aid approval that requires a total asset reduction of 40% from 2008 to 2013. A mandatory haircut for all deep subordinated bonds is imposed. Furthermore, the bank should be converted into a joint-stock company by 2013. The capital shortfall of up to EUR 719 bn in WMRs stress scenarios should be manageable. NordLB passed the official test with a CT1 of 5.6%, which is close to the minimum requirement. This could put the bank under further. EBA requested specific steps to strengthen the banks capital position. In our scenario, NordLB has to face a capital shortfall from EUR 1.9 to EUR 2.3bn. Nevertheless, NordLB continues to benefit from a very high probability of cross-sector, owner or systemic support. WestLB passed our worst case scenario with a capital short-fall of roughly EUR 930mn, mitigating the deleveraging activities currently passing on. Uncertainties prevail as to whether or not WestLBs business model will stand the test of time. In our view, its viability is questionable despite the restructuring efforts. As time is running out for an earnest search of equity investors or merger candidates, we cannot exclude an orderly liquidation of WestLB, which we consider as the most sensible solution. Helaba decided to step back from the official test, as EBA did not recognize bindingly agreed measures by its owners for restructuring and adapting the silent participations in the amount of EUR 1.92 billion to the Basel 3 criteria. From the point of view of the EBA, the silent participation Wealth Management Research 15 September 2011 8
  • 9. Financials by the State of Hesse would have to be reported together with the "non- hardened silent participations" and would have brought their CT1 ratio below the 5% hurdle. In our view, Helaba has relatively stable financial fundamentals and franchise compared with other Landesbanks. Due to its conservative business profile, the banks comparatively low capitalization level is mitigated. UK banks UK banks did well in the EBA stress test. An explanation for this is their higher starting CT1 ratio, on average near 10%, compared to the pool average of 8.9%. We highlight however, that under the EBA adverse scenario, the average UK CT1 ratio fell to 7.6%, close to the average of 7.7% of the 91 measured banks. Obviously the UK banks are more then averagely leveraged to a potential economic UK downturn. The 2012 core capital position under the adverse scenario was 7.5% across the four major UK banks (RBS, Barclays, Lloyds, HSBC). An offsetting factor is that EBA methodology used static balance sheets that do not reflect the deleveraging process currently ongoing among the UK banks. For most UK banks, loan losses have peaked and started to decline. However, a recovery to "normal" levels may be protracted by a sluggish economic development. Another challenge is refinancing the large share of short- term bond market funding. In the WMR worst scenario, the UK banks will come up with a capital shortfall of up to EUR 7.5bn, which should be manageable. RBS passed the EBA test, but with a CT1 ratio of 6.3%, but assumed a debatable 26% decline in provisions for 2012 under the adverse scenario compared to the 2010 level. RBS will come up with a capital shortfall of up to EUR 6.8bn in our worst case scenario which is 91% of the total UK banks capital need. The bank announced a five-year restructuring plan, but we think even after its planned reduction of non-core assets, RBS would maintain a huge balance sheet and a high sensitivity to stress events. That said, we think RBS may manage to improve its stand-alone credit profile towards the start of the gradual introduction of Basel 3 by 2013. Barclays passed the EBA test with a CT1 ratio of 7.3%, but assumed declining provisions for 2012 under the EBA adverse scenario compared to the 2010 level (-1% for 2011 and -5% for 2012). Barclays will come up with only a capital shortfall of up to EUR 700mn in our worst case scenario. French banks All French banks passed the official EBA test. Nevertheless, the picture looks different when applying our WMR worst case scenario, under which most French banks would need EUR 11.8bn of fresh capital. For BNP Paribas and Societe Generale, the magnitude of decline in CT1 ratios already under the EBA stress test is remarkable. Apart from the stress test results, we still have doubts about the likely aggressive RWA calculation of the French banks, as the ratio of RWA to total assets, for all of them, is much lower than the sector average. BNP Paribas showed a comfortable CT1 of 7.9% in the EBA adverse scenario, despite an almost nil profit calculated for 2012. The CT1 ratio Wealth Management Research 15 September 2011 9
  • 10. Financials shrinks to 7.1% in WMR base case scenario. BNP Paribas does not score particularly well on the sovereign exposure as it has the highest average duration of its peripheral exposure (mostly to Italy) among the French banks with 8 years. Hence, WMRs worst case scenario sheds different light on BNPs capital position under which the bank would need nearly EUR 4bn capital. We judge the WMR worst-case capital shortfall as manageable, even though we had expected higher profitability resilience (just EUR 61mn profit in 2012 under the EBA adverse scenario). In addition, BNP Paribas has close to 50% of its debt obligations maturing over the next two years, which increases refinancing risk. We do not feel comfortable with its likely aggressive RWA calculation that could lead to capital shortfall given the current regulatory uncertainty. Societe Generale passed the EBA test with a capital position of 6.6%, compared the other French banks. We additionally highlight that the assumed increase in provisions under the adverse scenario was not particularly severe (+33% vs. 2010 level for 2011E, but just +6% for 2012E). Under our WMR worst case scenario, Societe Generale would need EUR 5bn, the largest amount among French banks due to the mediocre results on its loan books. The exposure to troubled sovereigns appears comparatively moderate and the duration to these sovereign bonds is at 3 years below the 6-year sector average. Credit Agricole passed the EBA adverse scenario with a sound 8.5% CT1 ratio, even increased compared to the 8.2% starting point. In WMRs worst-case scenario, Credit Agricoles CT1 ratio declines to 7.1% (8.2% in our base scenario). Peripheral exposure is less than for BNP thanks to lower holdings in Italian government bonds. However, the 4-year duration of its peripheral sovereign portfolio is below sector average (6 years). Regarding the RWA calculation, Credit Agricole has the lowest RWA compared to the sector average which could be an indication that the banking groups CT1 is overstated. We do not feel comfortable with Credit Agricoles likely aggressive risk-weighted assets calculation that could lead to capital shortfall given the current regulatory uncertainty. Italian banks All the five Italian banks participating in the official EBA stress test passed it with an average 7.3% CT1 ratio under the adverse scenario, accounting for rights issues decided by April 2011 (roughly EUR 10mn), but excluding some hybrid instruments usually considered part of regulatory capital. It is worth mentioning that all the Italian banks were loss-making in the adverse EBA scenario and hence consuming capital. Moreover, Italian banks did not include the generic provision as a mitigation measure to boost the capital adequacy, while Spanish and Greek banks did. As a reference, generic provisions for the two major Italian banks would have been roughly EUR 3bn for Unicredit and EUR 2.8bn for Intesa Sanpaolo. Italian banks stressed the broad definition of defaulted assets (stated non- performing loans, past-due loans and restructuring loans) while other EU peers just focused on a part of them (i.e., Spanish banks focused on the stated non-performing loans only). In our WMR worst-case scenario, we estimate a total capital shortfall of EUR 23bn for Italian banks. Intesa Sanpaolo showed the best result with a CT1 ratio of 8.9% in the EBA stress test. Intesas CT1 would deteriorate materially to 6.9% Wealth Management Research 15 September 2011 10
  • 11. Financials (marginally below the 7% threshold) under our WMR worst case scenario, mainly due to its large exposure to Italian government bonds which accounts for 220% of CT1. Intesas sovereign exposure to Greece, Ireland and Portugal is negligible with 3% of CT1. Unicredit passed the EBA stress test with a CT1 ratio of 6.7% in the adverse scenario in 2012. However, it failed both the WMR base and worst case scenarios, mainly due to its weaker lending portfolio. Unicredit did not include the EUR 3bn convertible in its capital calculation, but just indicated it as a mitigation measure (unlike Santander for example). Thus, excluding the convertible, Unicredit would need about EUR 11bn to meet the 7% hurdle in our WMR worst case scenario and still EUR 6bn under the WMR base case scenario. As for all Italian banks, Unicredits Achilles heel is clearly the material sovereign bond exposure. Spanish banks Five Spanish banks failed the EBA stress test with a threshold of 5% CT1, and in total 12 banks fall below the 6% level. The EBAs 2010 starting point definition of core capital disadvantaged Spanish banks as it did not allow the use of mandatory convertible notes or existing anti-cyclical provisions. However, we note that generic provisions were considered as an allowed mitigation measure (besides Spanish banks, only Greek banks used generic provisions as mitigation measure) and the treatment of the convertibles differs bank by bank, i.e., Santander included it for the 2012 capital calculation whereas BBVA did not. We also point out that in the stress test, the Spanish banks just considered the stated non-performing loans, without including sub-standard loans, past-due loans, restructuring loans and real estate repossessed assets. As other EU banks have used a more stringent approach, we think that all these discrepancies invalidate the comparability of results across the banks and possibly draw a better portrait of the Spanish banking system than exists in reality. As the outcome from the stress test, Banco Pastor and four Cajas (Catalunacaica, CAM, Unnim and Caya3) failed the test. The remaining Spanish domestic banks were between 5% and 6% capital under the EBA adverse scenario. Applying WMRs worst-case scenario, Spanish banks would need EUR 31.5bn to fulfil the 7% CT1 criteria. Santander, while having passed the EBA adverse scenario under which the bank stays profitable, did not pass the WMR worst case scenario. Under the EBA stress test the calculated 2010 CT1 ratio was 7.1% versus the 8.8% CT1 calculated by the company itself. The difference mainly comes from the roughly EUR 4bn of intangibles and EUR 7bn mandatory convertible bond with EUR 14 strike price and maturity in 2012, which is fully accounted as core capital in the EBA stress test. As the convertible was sold to Santanders retail clients, we doubt that Santander will finally ask its clients to convert at current adverse conditions and bear the full loss. That is why our stress test considered just EUR 4bn instead of EUR 7bn (55% of the EUR 14 conversion price, market price of EUR 7.98 per share). On the positive side, Santanders international presence mitigates the performance pressure coming from the Spanish market. The banking group has a market share around 20% in Spain, including some 5% through its subsidiary Banco Espanol de Credito (Banesto). Based on our WMR worst case scenario, we estimate that Santander Wealth Management Research 15 September 2011 11
  • 12. Financials would need at least EUR 2.3bn fresh core capital outright plus an additional EUR 3bn we think it would need in order to refinance part of the above described convertible note out of the money. Should Santander take an active role in supporting the Spanish banking sector, i.e., through bailouts or takeovers of Cajas (probable through its subsidiary Banesto), capital amounts would be higher. BBVA remained profitable under the EBA adverse scenario and passed the WMR worst case scenario. We highlight that BBVA, unlike Santander, did not include a mandatory convertible of EUR 2bn issued in July this year in its calculation. The convertible was just indicated as a mitigation measure (same treatment of the convertible as Unicredit). Similar to Santander, BBVAs credit quality is also supported by its international diversification but suffers from elevated NPLs in Spain. Despite the fact that our WMR stress test did not reveal any immediate capital needs for BBVA, we are cautious on the name due to sovereign contagion concerns and potential headline risks from the Caja sector. Moreover, loan-loss coverage ratios particularly on commercial real estate are below sector average as for all Spanish banks. Banco Pastor didnt pass the WMR stress scenario test, ending it with a CT1 of just 2.7% and a consequent capital need of roughly 785mn. Similarly the bank had not passed the EBA stress test, achieving a CT1 of just 3.3% under the adverse scenario. We believe that Banco Pastor’s profitability is likely to remain under pressure, as the bank is exposed to Spain’s property bubble and overleveraged economy, leading to major asset quality issues and subdued or even negative loan growth. We expect loan loss provisions to remain high for some time, even though we acknowledge that the anti-cyclical generic provisions might ease some of the pressure, and are concerned that a rising interest rate environment could hamper the fragile stabilization in asset quality. Banco de Sabadell passed the EBA stress test with a stretched CT1 ratio of 5.7% even accounting for the recognized mitigating measures under the adverse scenario. However in the WMR stress scenario, the bank failed, showing a capital shortfall of EUR 2.2bn. We believe that Sabadell’s profitability is likely to remain under pressure as the bank is exposed to Spain’s property bubble and overleveraged economy, leading to major asset quality issues and subdued or even negative loan growth. We expect loan loss provisions to stay high for some time, even though we acknowledge that the anti-cyclical generic provisions might ease some of the pressure, and are concerned that a rising interest rate environment could hamper the fragile stabilization in asset quality. We expect high funding costs to abide, owing to the very competitive deposit market. Dexia Group is heavily exposed to peripheral sovereign debt, to Greece in particular. The group passes our worst case scenario which builds on a EBA CT1 of 15.2bn. Excluding the phasing-in of deductions according to future Basel 3 regulations will significantly weigh on Dexias capitalization needs: given our worst case scenario, Dexia would face a capital shortfall of another EUR 5bn. Even if capital injections and liquidity facilities provided by the majority owners – the French and Belgian governments – should help Dexia Group to withstand our worst-case scenario, we remain negative on Dexias fundamentals. Wealth Management Research 15 September 2011 12
  • 13. Financials Conclusion We think the low EBA stress test headline capital need of EUR 2.5bn does not help make market participants more comfortable with banks risks in light of a sovereign debt crisis. As stated, the test results provided a sugar-coated picture of the banking industrys stress resistance. However, a 7% CT1 ratio requirement instead of the used 5%, and tougher assumptions on government bond losses should enhance the value of such a stress test. Validity of WMR stress test results Each stress test is based on assumptions. Therefore, we stress that absolute loss amounts and amounts of capital needed shall be interpreted rather as an indication and not used as the exact number. Despite the usage of simplified assumptions, we do think that our results give a good indication regarding the vulnerability and sensitivity of banks to the various peripheral European sovereign exposures. Concerns within the banking sector remain Our largest concern regarding the debt crisis and a Greek default is contagion to other weak peripheral countries. Further, we are concerned by second-order effects (renewed disruptions in the interbank market in Europe; general rise in risk premiums). We believe that the underlying problems within the banking sector will remain in the medium term: a lack of growth, a large dependence on wholesale funding, regulatory pressure, significant exposure to sovereign risk, high risk of political intervention, protracted subdued profitability and a lack of accounting comparability. Uncertainty about the banking sector comes on top of an already long list of concerns. Weaker banks will likely face lower net interest income owing to higher funding costs as a result of possible rating downgrades, and owing to shrinking loan books as result of resized balance sheets. Wealth Management Research 15 September 2011 13
  • 14. Financials Table 3: Overview of WMR stress test results in EUR mn; by country Banks Country Core Tier 1 (CT1) ratio Capital Shortfall Pre-Stress 2010 EBA stressed WMR WMR WMR WMR 2012 base scenario worst case scenario base scenario worst case scenario 2012 2012 Oesterreichische Volksbank AG Austria 6.4% 4.5% 4.3% 4.2% - 909 - 958 Erste Bank Austria 8.7% 8.1% 8.0% 7.8% - - RBI (Raiffeisen Bank International) Austria 8.1% 7.8% 7.8% 7.8% - - Dexia Belgium 12.1% 10.4% 8.6% 7.0% - - KBC Bank Belgium 10.5% 10.0% 9.4% 8.6% - - Marfin Popular Bank Cyprus 7.3% 5.3% 0.5% -2.0% - 1,851 - 2,399 Bank of Cyprus Cyprus 8.1% 6.2% 2.6% 0.3% - 1,165 - 1,666 Danske Bank Denmark 10.0% 13.0% 12.9% 12.8% - - Jyske Bank Denmark 12.1% 12.8% 12.6% 12.4% - - Nykredit Denmark 8.8% 9.4% 9.3% 9.3% - - Sydbank Denmark 12.4% 13.6% 13.6% 13.6% - - OP-Pohjola Group Finland 12.2% 11.6% 11.6% 11.6% - - Societe Generale France 8.1% 6.6% 6.2% 5.9% - 3,737 - 4,996 BNP Paribas France 9.2% 7.9% 7.1% 6.4% - - 3,969 BPCE France 7.8% 6.8% 6.6% 6.4% - 2,171 - 2,889 Credit Agricole France 8.2% 8.5% 8.2% 7.9% - - Commerzbank Germany 10.0% 6.4% 5.9% 5.4% - 3,560 - 5,019 Deutsche Bank Germany 8.8% 6.5% 6.3% 6.0% - 3,676 - 4,987 NordLB Germany 4.6% 5.6% 5.2% 4.9% - 1,898 - 2,264 DZ Bank Germany 8.2% 6.9% 6.1% 5.2% - 1,117 - 2,244 HSH Nordbank Germany 10.7% 5.5% 5.4% 5.2% - 1,156 - 1,281 WestLB Germany 8.7% 6.1% 5.8% 5.6% - 794 - 934 LBBW Germany 8.2% 7.1% 6.7% 6.4% - 318 - 719 WGZ Bank Germany 10.8% 8.7% 6.6% 4.4% - 91 - 561 Bayerische Landesbank Germany 9.3% 7.1% 7.1% 7.0% - - 28 Dekabank Germany 13.0% 9.2% 9.0% 8.8% - - Hypo Real Estate Germany 28.4% 10.0% 9.3% 8.2% - - Landesbank Berlin Germany 14.6% 10.4% 10.0% 9.7% - - Landesbank Hessen-Thüringen (Helaba) Germany 0.0% - - - National Bank of Greece Greece 11.9% 7.7% 0.4% -3.6% - 4,738 - 6,831 EFG Eurobank Greece 9.0% 4.9% -2.4% -6.4% - 4,627 - 5,926 Agricultural Bank of Greece (ATEbank) Greece 6.3% -0.8% -35.0% -62.7% - 5,212 - 5,352 Piraeus Bank Greece 8.0% 5.3% -3.3% -8.2% - 4,028 - 5,206 TT Hellenic Postbank Greece 18.5% 5.5% -37.4% -77.6% - 3,023 - 3,068 Alpha Bank Greece 10.8% 7.4% 3.2% 0.9% - 1,916 - 2,852 OTP Bank Hungary 12.3% 13.6% 13.6% 13.6% - - Bank of Ireland Ireland 8.4% 7.1% 5.9% 5.6% - 712 - 860 Allied Irish Banks (AIB) Ireland 3.7% 10.0% 10.0% 8.2% - - Irish life & Permanent Ireland 10.6% 20.4% 17.8% 17.3% - - Unicredit Italy 7.8% 6.7% 5.9% 4.9% - 5,590 - 10,973 Monte dei Paschi die Siena Italy 5.8% 6.3% 4.1% 0.8% - 3,239 - 6,656 Banco Popolare SC Italy 5.8% 5.7% 4.7% 3.3% - 2,230 - 3,545 UBI Banca (Unione die Banche Italiane) Italy 7.0% 7.4% 6.5% 5.1% - 480 - 1,800 Intesa Sanpaolo Italy 7.9% 8.9% 8.1% 6.9% - - 346 Banque et Caisse dEpargne de LEtat (BCEE) Luxembourg 12.0% 13.3% 11.3% 8.8% - - Bank of Valletta Malta 10.5% 10.4% 10.2% 10.1% - - SNS Bank Netherlands 8.4% 7.0% 6.3% 5.7% - 134 - 263 ABN Amro Bank NV Netherlands 9.9% 9.2% 9.1% 8.9% - - ING Bank Netherlands 9.6% 8.7% 8.4% 8.1% - - Rabobank Nederland Netherlands 12.6% 10.8% 10.7% 10.7% - - DnB NOR Bank Norway 8.3% 9.0% 9.0% 9.0% - - PKO Bank Polski Poland 11.8% 12.2% 12.2% 12.2% - - Banco Commercial Portuguese (BCP) Portugal 5.9% 5.4% 3.5% 1.9% - 2,391 - 3,373 Caixa Geral De Depósitos, SA Portugal 8.5% 6.2% 5.0% 3.7% - 1,639 - 2,548 Wealth Management Research 15 September 2011 14
  • 15. Financials Table 3: Overview of WMR stress test results in EUR mn; by country Banks Country Core Tier 1 (CT1) ratio Capital Shortfall Pre-Stress 2010 EBA stressed WMR WMR WMR WMR 2012 base scenario worst case scenario base scenario worst case scenario 2012 2012 Espirito Santo Financial Group (ESFG) Portugal 6.4% 5.1% 4.3% 3.8% - 2,106 - 2,443 Banco BPI Portugal 8.2% 6.7% 3.2% 0.4% - 1,017 - 1,667 Nova Ljubljanska Slovenia 5.2% 5.3% 5.2% 5.1% - 280 - 301 Nova Kreditna Slovenia 7.4% 8.0% 8.0% 8.0% - - BFA-Bankia Spain 6.9% 5.4% 4.5% 3.1% - 5,450 - 8,242Caja de Ahorros y Pensiones de Barcelona (La Spain 6.8% 6.4% 5.9% 5.1% - 1,834 - 3,103Caixa) Banco Popular Espanol Spain 7.1% 5.3% 4.7% 3.9% - 2,172 - 2,926 Caja Ahorros Del Mediterraneo (CAM) Spain 3.8% 3.0% 2.6% 2.0% - 2,124 - 2,412 Banco Santander Spain 7.1% 8.4% 7.4% 6.6% - - 2,358 Banco de Sabadell Spain 6.2% 5.7% 4.6% 3.0% - 1,348 - 2,217Caixa DEstalvis De Catalunya, Tarragona I Spain 6.4% 4.8% 4.3% 3.5% - 1,343 - 1,734Manresa Caixa De Aforros De Galicia, Vigo, Ourense E Spain 5.2% 5.3% 5.0% 4.6% - 1,097 - 1,326Pontevedra Grupo Banca Civica Spain 8.0% 5.6% 5.2% 4.4% - 859 - 1,183 Caixa DEstalvis Unio De Caixes De Manlleu, Spain 6.3% 4.5% 3.1% 0.8% - 678 - 1,022Sabadell I Terrassa (Unnim) Grupo BMN (Banco Mare Nostrum) Spain 8.3% 6.1% 5.5% 4.6% - 613 - 962 Bankinter Spain 6.2% 5.3% 4.9% 4.4% - 673 - 843 Banco Pastor Spain 7.6% 3.3% 3.1% 2.7% - 720 - 785Caja España De Inversiones, Salamanca Y Soria, Spain 8.2% 7.3% 5.9% 3.8% - 269 - 776Caja De Ahorros Y Monte De Piedad Grupo Caja3 Spain 8.6% 4.0% 3.2% 2.0% - 528 - 682Caja De Ahorros Y M.P. De Zaragoza, Aragon Y Spain 9.7% 6.7% 6.0% 4.8% - 252 - 510Rioja (Ibercaja) Effibank (Grupo Banco Área) Spain 8.3% 6.8% 6.5% 6.1% - 160 - 276 Monte De Piedad Y Caja De Ahorros De Ronda, Spain 12.5% 9.4% 8.1% 6.1% - - 169Cadiz, Almeria, Malaga, Antequera Y Jaen(Unicaja) Caja De Ahorros Y M.P. De Ontinyent Spain 8.9% 5.6% 5.5% 5.4% - 10 - 11 Colonya - Caixa DEstalvis De Pollensa Spain 11.2% 6.2% 6.2% 6.2% - 1 - 1 Banca March Spain 22.2% 23.5% 23.5% 23.4% - - BBVA Spain 8.0% 9.2% 8.6% 7.6% - - Caja De Ahorros De Vitoria Y Alava Spain 12.5% 8.7% 8.0% 7.0% - - Caja De Ahorros Y M.P. De Gipuzkoa Y San Spain 13.2% 10.1% 9.9% 9.5% - -Sebastian (Kutxa) Grupo BBK Bank Spain 10.2% 8.8% 8.1% 7.1% - - Nordea Bank Sweden 8.9% 9.5% 9.5% 9.5% - - SEB Sweden 11.1% 10.5% 10.4% 10.3% - - Svenska Handelsbanken Sweden 7.7% 8.6% 8.6% 8.6% - - Swedbank Sweden 8.7% 9.4% 9.4% 9.4% - - Royal Bank of Scotland (RBS) United Kingdom 9.7% 6.3% 6.2% 6.0% - 5,788 - 6,841 Barclays United Kingdom 10.0% 7.3% 7.1% 6.9% - - 698 HSBC Holdings United Kingdom 10.5% 8.5% 8.4% 8.3% - - Lloyds Banking Group United Kingdom 10.2% 7.7% 7.7% 7.7% - -Total 91,724 138,001Sources: UBS WMR; EBA Stress Test 2011; RBS; MS Wealth Management Research 15 September 2011 15
  • 16. Financials Table 4: Net direct exposure to stressed periphral sovereigns per country in EUR mn Issuer Domicile of the Greece Ireland Portugal Italy Spain Total exposure Total exposure issuer as % of FY10 CT1 Erste Bank Austria 346 39 106 604 139 1,234 11.7% bi RBI (Raiffeisen Bank International) Austria 1 0 2 449 3 455 6.0% bi Oesterreichische Volksbank AG Austria 113 13 29 149 64 368 20.9% Dexia Belgium 3,462 0 1,927 15,010 1,444 21,843 128.5% bi KBC Bank Belgium 443 269 159 5,569 1,419 7,859 67.1% bi Marfin Popular Bank Cyprus 3,407 39 0 0 0 3,446 171.0% Bank of Cyprus Cyprus 2,406 322 0 36 58 2,822 132.2% Danske Bank Denmark 1 368 41 350 111 871 6.0% bi Jyske Bank Denmark 64 22 19 0 15 120 7.1% Sydbank Denmark 0 0 0 0 0 0 0.0% Nykredit Denmark 7 0 0 88 0 95 1.4% OP-Pohjola Group Finland 3 40 0 0 0 43 0.8% BNP Paribas France 4,985 407 2,033 24,115 3,901 35,441 64.0% bi Credit Agricole France 655 136 1,109 10,122 2,772 14,794 32.0% bi BPCE France 1,262 312 318 3,495 380 5,767 18.1% Societe Generale France 2,651 442 631 3,042 2,219 8,985 32.3% bi Deutsche Bank Germany 1,510 476 86 3,436 2,083 7,591 25.0% bi Commerzbank Germany 3,044 26 976 10,133 3,166 17,345 64.9% bi LBBW Germany 768 0 95 1,412 512 2,787 28.3% DZ Bank Germany 731 51 992 2,710 4,126 8,610 118.0% Bayerische Landesbank Germany 145 20 0 507 662 1,334 11.6% bi NordLB Germany 150 41 256 1,873 498 2,818 70.9% Hypo Real Estate Germany 0 44 494 7,139 3,394 11,071 199.9% WestLB Germany 343 35 0 1,103 746 2,227 52.8% HSH Nordbank Germany 101 0 62 658 178 999 22.5% Landesbank Berlin Germany 449 0 0 327 371 1,147 22.2% Dekabank Germany 86 30 31 262 165 574 17.1% WGZ Bank Germany 315 221 359 1,402 1,169 3,466 182.0% EFG Eurobank Greece 8,763 0 0 100 0 8,863 206.3% bi National Bank of Greece Greece 12,882 18 0 0 0 12,900 158.2% bi Alpha Bank Greece 5,476 0 0 0 0 5,476 103.8% Piraeus Bank Greece 8,114 0 0 0 0 8,114 267.0% Agricultural Bank of Greece (ATEbank) Greece 7,850 0 0 0 0 7,850 991.2% TT Hellenic Postbank Greece 5,313 0 0 0 0 5,313 434.3% OTP Bank Hungary 0 0 0 0 0 0 0.0% Allied Irish Banks (AIB) Ireland 0 0 0 0 0 0 0.0% bi Bank of Ireland Ireland 0 3,269 0 30 0 3,299 46.9% bi Irish life & Permanent Ireland 0 1,852 0 0 0 1,852 110.2% Intesa Sanpaolo Italy 639 114 70 57,622 763 59,208 226.3% bi Unicredit Italy 636 58 84 47,446 1,909 50,133 140.4% bi Monte dei Paschi die Siena Italy 8 0 202 32,018 284 32,512 516.0% Banco Popolare SC Italy 87 0 0 11,758 199 12,044 220.0% UBI Banca (Unione die Banche Italiane) Italy 25 0 0 9,944 0 9,969 152.0% Banque et Caisse dEpargne de LEtat (BCEE) Luxembourg 84 0 179 2,387 171 2,821 181.9% Bank of Valletta Malta 10 7 3 4 0 24 6.8% ING Bank Netherlands 745 90 692 5,700 1,762 8,989 29.1% bi Rabobank Nederland Netherlands 376 59 37 431 154 1,057 3.8% bi ABN Amro Bank NV Netherlands 0 128 0 1,310 99 1,537 13.3% SNS Bank Netherlands 47 157 0 763 57 1,024 57.5% DnB NOR Bank Norway 0 0 0 0 0 0 0.0% PKO Bank Polski Poland 0 0 0 0 0 0 0.0% Caixa Geral De Depósitos, SA Portugal 51 23 6,531 0 197 6,802 104.5% Banco Commercial Portuguese (BCP) Portugal 727 213 5,828 50 0 6,818 193.7% bi Espirito Santo Financial Group (ESFG) Portugal 309 0 2,685 0 54 3,048 67.4% bi Banco BPI Portugal 325 283 3,895 972 0 5,475 256.7% Nova Ljubljanska Slovenia 20 15 15 96 26 172 21.2% Nova Kreditna Slovenia 0 0 0 0 0 0 0.0% Banco Santander Spain 177 0 3,632 260 42,258 46,327 110.3% bi BBVA Spain 128 0 647 3,898 53,452 58,125 233.1% bi BFA-Bankia Spain 55 0 0 0 25,387 25,442 183.5% Caja de Ahorros y Pensiones de Barcelona (La Caixa) Spain 0 0 26 1,269 34,332 35,627 320.7% bi Wealth Management Research 15 September 2011 16
  • 17. Financials Table 4: Net direct exposure to stressed periphral sovereigns per country in EUR mn Issuer Domicile of the Greece Ireland Portugal Italy Spain Total exposure Total exposure issuer as % of FY10 CT1 Effibank (Grupo Banco Área) Spain 37 0 16 0 2,925 2,978 112.1% Banco Popular Espanol Spain 0 0 643 210 8,874 9,727 145.2% Banco de Sabadell Spain 0 38 91 0 7,295 7,424 211.7% Spain Caixa DEstalvis De Catalunya, Tarragona I Manresa 0 0 0 0 2,839 2,839 91.5% Caixa De Aforros De Galicia, Vigo, Ourense E Spain 0 0 134 151 3,813 4,098 143.9% Pontevedra (Banco Mare Nostrum) Grupo BMN Spain 0 0 88 0 3,619 3,707 112.2% Bankinter Spain 0 0 0 1 2,533 2,534 132.0% Spain Caja España De Inversiones, Salamanca Y Soria, Caja 0 0 27 0 7,557 7,584 365.3% De Ahorros Y Civica De Piedad Grupo Banca Monte Spain 5 0 0 0 4,747 4,752 128.9% Caja De Ahorros Y M.P. De Zaragoza, Aragon Y Spain 0 0 0 384 2,909 3,293 143.2% Rioja (Ibercaja) Monte De Piedad Y Caja De Ahorros De Ronda, Spain 6 0 0 309 2,950 3,265 130.5% Cadiz, Pastor Malaga, Antequera Y Jaen (Unicaja) Spain Banco Almeria, 41 0 116 103 2,182 2,442 175.0% Grupo BBK Bank Spain 0 4 3 0 3,112 3,119 104.6% Caixa DEstalvis Unio De Caixes De Manlleu, Spain 0 13 0 11 2,574 2,598 243.9% Sabadell Ahorros Y (Unnim) Gipuzkoa Y San Caja De I Terrassa M.P. De Spain 0 0 0 0 1,512 1,512 78.2% Sebastian (Kutxa) Grupo Caja3 Spain 0 8 0 0 1,514 1,522 130.8% Banca March Spain 0 0 0 0 150 150 7.1% Caja De Ahorros De Vitoria Y Alava Spain 0 0 0 0 598 598 77.5% Caja De Ahorros Y M.P. De Ontinyent Spain 0 0 0 0 6 6 10.5% Colonya - Caixa DEstalvis De Pollensa Spain 0 0 0 0 26 26 127.4% Caja Ahorros Del Mediterraneo (CAM) Spain 0 15 5 20 5,585 5,625 305.2% Nordea Bank Sweden 0 1 0 97 64 162 0.8% bi SEB Sweden 122 0 132 288 86 628 6.5% bi Svenska Handelsbanken Sweden 0 0 0 0 0 0 0.0% Swedbank Sweden 0 0 0 0 0 0 0.0% Royal Bank of Scotland (RBS) United Kingdom 1,154 403 208 4,654 379 6,798 11.5% bi HSBC Holdings United Kingdom 919 134 320 3,856 636 5,866 6.7% bi Barclays United Kingdom 93 407 1,174 2,915 5,495 10,085 21.8% bi Lloyds Banking Group United Kingdom 0 0 0 32 63 95 0.2% bi Total 82,672 10,662 37,209 283,081 264,742 678,365Sources: UBS WMR; EBA Stress Test 2011; RBS; MSbi = bi-annual risk-assessment by EBA Wealth Management Research 15 September 2011 17
  • 18. FinancialsAppendixTerms and AbbreviationsTerm / Abbreviation Description / Definition Term / Abbreviation Description / DefinitionA actual i.e. 2010A NV Neutral View: The stock is expected to neither outperform nor underperform the relevant benchmark nor significantly appreciate or depreciate in absolute terms.p.a. Per annum (per year) Shares o/s Shares outstandingUP Underperform: The stock is expected to WMR UBS Wealth Management Research underperform the sector benchmark Wealth Management Research 15 September 2011 18
  • 19. FinancialsAppendixGlobal DisclaimerWealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions ofUBS AG (UBS) or an affiliate thereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is notintended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein is basedon numerous assumptions. Different assumptions could result in materially different results. Certain services and products are subject to legalrestrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information andopinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty,express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). All information andopinions as well as any prices indicated are currently only as of the date of this report, and are subject to change without notice. Opinionsexpressed herein may differ or be contrary to those expressed by other business areas or divisions of UBS as a result of using different assumptionsand/or criteria. At any time UBS AG and other companies in the UBS group (or employees thereof) may have a long or short position, or deal asprincipal or agent, in relevant securities or provide advisory or other services to the issuer of relevant securities or to a company connected withan issuer. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment andidentifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control the flow of informationcontained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is consideredrisky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and largefalls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in FX rates may havean adverse effect on the price, value or income of an investment. We are of necessity unable to take into account the particular investmentobjectives, financial situation and needs of our individual clients and we would recommend that you take financial and/or tax advice as to theimplications (including tax) of investing in any of the products mentioned herein. This document may not be reproduced or copies circulatedwithout prior authority of UBS or a subsidiary of UBS. UBS expressly prohibits the distribution and transfer of this document to third parties forany reason. UBS will not be liable for any claims or lawsuits from any third parties arising from the use or distribution of this document. Thisreport is for distribution only under such circumstances as may be permitted by applicable law.Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBS AG and an affiliateof UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate whenit distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through aUS-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report have not been and will not beapproved by any securities or investment authority in the United States or elsewhere.Version as per June 2011.© 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved Wealth Management Research 15 September 2011 19