Is the-investment-banking-business-model-broken  

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Is the-investment-banking-business-model-broken  

  1. 1. June 21, 2012 U.S. Capital MarketsIs the Investment Banking Business Model Broken? Brad Hintz • Senior Analyst • +1-212-756-4590 • brad.hintz@bernstein.com Luke Montgomery, CFA • Analyst • +1-212-969-6714 • lucas.montgomery@bernstein.comGabriel Farajollah • Research Associate • +1-212-756-4167 • gabriel.farajollah@bernstein.comSee Disclosure Appendix of this report for important Disclosures and Analyst Certifications
  2. 2. U.S. Capital Markets: Brokerage Coverage Target 6/18/2012 EPS P/E Rating Price Price 2011 2012E 2013E 2011 2012E 2013E BV/Share P/BV TBV/Share P/TBV MS O 24.00 24 00 $13.82 $13 82 $1.26 $1 26 $1.44 $1 44 $2.36 $2 36 11.0x 11 0x 9.6x 9 6x 5.9x 5 9x 30.74 0.45x 30 74 0 45x 25.25 0.55x 25 25 0 55x GS O 170.00 $93.63 $4.56 $13.29 $14.63 20.5x 7.0x 6.4x 138.44 0.68x 127.59 0.73x AMTD M 20.00 $17.11 $1.11 $1.14 $1.34 15.4x 15.0x 12.8x LPLA M 40.00 $33.66 $1.95 $2.23 $2.70 17.3x 15.1x 12.5x SCHW M 15.00 $12.58 $0.70 $0.66 $0.92 18.0x 19.1x 13.7x S&P 500 $1,344.78 $ $96.04 $ $103.98 $ $117.03 $ 14.0x 12.9x 11.5xNote: AMTD 2011 EPS represents actual resultsSources: Bloomberg, Bernstein Estimates 2 U.S. Capital Markets
  3. 3. U.S. Capital Markets: Futures Exchange Coverage Market Target 6/18/2012 EPS* P/E TTM Perf Cap Rating Price Price 2011 2012E 2013E 2011 2012 2013 Abs. Rel. Dividends Yield ($Bn)CME O 420.00 $282.21 $17.04 $17.40 $20.20 16.6x 16.2x 14.0x 2.7% -3.1% $5.60 2.0% 18.6ICE O 155.00 $136.24 $5.64 $7.95 $8.90 24.2x 17.1x 15.3x 15.4% 9.6% $0.00 0.0% 9.9 Sources: Bloomberg, Corporate Reports, Bernstein Analysis 3 U.S. Capital Markets
  4. 4. Institutional ConcernsThe capital markets b k are uninvestable! Their business model i b k Th i l k banks i bl ! Th i b i d l is broken. The stocks are trading as ‘honorary EU banks.’What portion of their problems is cyclical and what portion is secular?Will any firms profit from the industry changes?What must buy-side trading desks do to adjust to the future? 4 U.S. Capital Markets
  5. 5. U.S. Brokerage – Industry Outlook US Securities Industry - Domestic Net Revenues $180,000.0 $160,000.0 $140,000.0 $120,000.0 , $100,000.0 $80,000.0 $60,000.0 $60 000 0 7.6% Revenue CAGR $40,000.0 Over 30 Years $20,000.0 $0.0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: SIFMA Database, Bernstein analysis 5 U.S. Capital Markets
  6. 6. Capital Under Basel I 18% 16.6% 16% 13.6% 13.8% 14% 13.0% 12.4% % 12.3% 12.1% 11.8% 12% 11.3% 9.9% 10.0% 10% 9.5% 8% 6% BAC WFC JPM C GS MS Tier 1 Common Ratio Tier 1 RatioSources: Company disclosures, Bernstein analysis 6 U.S. Capital Markets
  7. 7. Capital Markets Pre-Tax Margins 75% 65% 55% 45% 35% 25% 15% 5% -5% Sources: Dealogic, Bernstein Analysis 7 U.S. Capital Markets
  8. 8. The Lessons from the CrisisAll major financial institutions are bound together through trading, settlement and derivatives relationships. Thus, a credit event at one firm is passed through to all the o e firms like a line o do e other s e e of dominos. osWholesale funding at a bank can unwind very quickly. Commercial paper, uncommitted bank lines, demand notes, tri-party repo, securities lending, bond borrows and prime brokerage customer cash can and likely will be withdrawn during "black swan" tail events.Elegant hedges and sophisticated risk management metrics can fail when markets become illiquid or when market sectors become near-perfectly correlated.Regulatory rules do not always work as designed. Regulators do not have unlimited authority to save financial institutions. There is little appetite in financial and political centers around the world to save the banks a second time. 8 U.S. Capital Markets
  9. 9. Fixed Income Sales and Trading 9 U.S. Capital Markets
  10. 10. Fixed Income Net Revenues $100,000 WorldCom Mexico Enron $80,000 Crash 87 $60,000 $40,000 lions $20,000 $20 000$, mill $0 ‐$20,000 Russia Credit  Credit ‐$40,000 Crisis ‐$60,000 :Q1  0:Q1 1:Q1 2:Q1 3:Q1 4:Q1 5:Q1 6:Q1 7:Q1 8:Q1 9:Q1 0:Q1 1:Q1 2:Q1 3:Q1 4:Q1 5:Q1 6:Q1 7:Q1 8:Q1 9:Q1 0:Q1 1:Q1 2:Q1 3:Q1 4:Q1 5:Q1 6:Q1 7:Q1 8:Q1 0:Q1 09: 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 10Sources: SIFMA Database, Company Disclosure and Bernstein Analysis 10 U.S. Capital Markets
  11. 11. FICC – Facing a Change in the Business Model Revenue Return on FICC Trading Assets FICC Trading Assets10.0% $ , , $4,500,0008.0% $4,000,000 $3,500,0006.0% $3,000,0004.0% $2,500,0002.0% $2,000,000 $1,500,0000.0% $1,000,000‐2.0% $500,000 $500 000‐4.0% $0 80:Q1 82:Q4 85:Q3 88:Q2 91:Q1 93:Q4 96:Q3 99:Q2 02:Q1 04:Q4 07:Q3 10:Q2 80:Q1 82:Q2 84:Q3 86:Q4 89:Q1 91:Q2 93:Q3 95:Q4 98:Q1 00:Q2 02:Q3 04:Q4 07:Q1 09:Q2 8 8 8 8 8 9 9 9 9 0 0 0 0 0 Source: SIFMA Database and Sanford Bernstein Analysis 11 U.S. Capital Markets
  12. 12. OTC Derivatives OTC Derivatives Market  Derivatives make up approximately 15% of Tailored T il d fixed income net revenues and generate 20% of institutional equity net revenues. swaps 20 to 30% of Notional  Expect 70% of derivatives notional amounts to Generic Swaps; 70 to 80%Notional trade in new venue; this portion of the Centrally Traded and Settled derivatives market generates 50% of total earnings. Positive for ICE, CME, LCH.  Hi hl t il d b Highly tailored bespoke d i ti k derivatives will remain ill i bilateral, albeit with higher capital charges – Trading and these generate 50% of current earnings. Opportunities; Volumes Increase, Lower Margins  Derivatives pricing will fall and margins will Cash Equity Futures & Fixed Income contract in a ‘new’ electronic market; PTM falls Market Markets from ≈35% to ≈23% for originators.Source: Bernstein Analysis 12 U.S. Capital Markets
  13. 13. Fixed Income Challenges “…The E.F. Hutton check kiting scheme, First Boston’s bridge loans, Drexel Burnham Lamberts bankruptcy, Salomon Brothers treasury trading scandal, the Mexican crisis, the Baring Brothers’ failure, the Asian emerging market crisis, the Russian credit default, LTCM, Lehman Brothers 1998 funding run, the Internet bubble, Enron and WorldCom, REFCO, Bear Stearns and Merrill Lynch and the Lehman bankruptcy in 2008, the MS and GS funding runs and the MF Global failure. This doesn’t look like a Aa rated industry.”Proprietary trading prohibited; market making revenues reduced by 20%Fixed income derivative central trading and settlementLeverage downRisk constrainedCarry costs rise due to liquidity/funding changesLower credit ratings Source: Bernstein Analysis 13 U.S. Capital Markets
  14. 14. InstitutionalEquity 14 U.S. Capital Markets
  15. 15. Institutional Equities Net Revenues $35,000.0 $30,000.0 $30 000 0 Total Rev. $25,000.0 ons $20,000.0 $20 000 0 $ Millio $15,000.0 $10,000.0 $10 000 0 Commission $5,000.0 Rev. $0.0 $0 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: SIFMA and Sanford Bernstein Analysis 15 U.S. Capital Markets
  16. 16. Institutional Equities Institutional Equity Execution Rate (Cents Per Share) 2001 - 20115.004.50 “Best Execution” DMA and Algo Trading4.00 Expand3.503.002.502.002 001.501.000.500.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: MSIED, Bernstein Analysis 16 U.S. Capital Markets
  17. 17. Prime Brokerage Net Revenues Prime Brokerage Net Revenues $MM $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 , $0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Prior to 2008 MS, P i t 2008, MS GS and JPM d i t d b i d dominated business with 60% market share. ith k t h After Lehman, hedge funds have diversified prime brokers; DB, CS and BAC. Margins have declined due to loss of free collateral and weaker sec lending sec. lending.Source: Global Custodian and Bernstein Analysis 17 U.S. Capital Markets
  18. 18. Institutional EquityProprietary trading banned; statistical arbitrage, risk arbitragePrime brokerage – changed business model means lower returns g gEquity derivatives move to central trading and clearingReliance on allocated ECM revenues to beat cost of equity 18 U.S. Capital Markets
  19. 19. InvestmentBanking 19 U.S. Capital Markets
  20. 20. Investment Banking Margins Are Driven By Business Mix  Mergers and Acquisitions (35 to 65 bp) High Margin  IPO (400 to 700 bp) O ( 00 00  Convertible Underwriting (≈300 bp)  Secondary Equity Underwriting (150-200 bp)  High Yield Underwriting (≈300 bp but Underwriters’ Liab.)  Investment Grade Debt Underwriting (35 to 45bp)  Fairness Opinions  Bankruptcy Advisory g Low MarginSource: Bernstein Analysis. 20 U.S. Capital Markets
  21. 21. IPO Volumes Global IPO Volume IPO Volume = F(Corporate Earnings, $350 Treasury Bond Rates, Internet & Sarbox Dummy Variables) R2 = 85% $300 Volum ($ bill ions) $250 $200 $150 me $100 $50 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Sources: DRI, Bernstein Analysis, DealogicNote: 2012 figure as of April 4, 2012 21 U.S. Capital Markets
  22. 22. IPO League Table 2011 Rank Bank Net Rev. ($M) # Deals % Share 1 Morgan Stanley g y 413 85 7.2% 2 Goldman Sachs 344 58 6.0% 3 JPMorgan 301 69 5.3% 4 Deutsche Bank 296 68 5.2% 5 Credit Suisse 272 60 4.8% 4 8% 6 Citi 246 65 4.3% 7 Bank of America Merrill Lynch 223 46 3.9% 8 Ping An Securities Co Ltd 201 36 3.5% 9 Barclays 173 47 3.0% 10 Guosen Securities Co Ltd 165 32 2.9% Subtotal 2,632 285 45.9% Total , 5,730 1,306 , 100.0%Source: Dealogic and Bernstein estimates and analysis 22 U.S. Capital Markets
  23. 23. Mergers & Acquisitions Global Announced M&A Volume $5,000 $4,000 M&A Vol ume ($Bn) $3,000 $2,000 $1,000 $0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *2012Sources: DRI, Bernstein AnalysisNote: 2012 figure is annualized 23 U.S. Capital Markets
  24. 24. Mergers and Acquisition Advisory Outlook Historical and Projected U.S. M&A Volumes Emerging Markets M&A Volume Growth – 5-Yr CAGR 2,000  12% M) Volume ($MM 10% 1,500  8% M&A Volume - 5 Year CAGR 1,000  6% 4% U.S. M&A V Y 500  2% ‐ 0% -2% (500) 2013E -4% 2016E 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 -6% -8% Actual Regression Base Optimistic PessimisticSource: Federal Reserve Bank of St. Louis, Global Insight, Bernstein estimates and analysis 24 U.S. Capital Markets
  25. 25. Global M&A League Table 2011 Rank Bank Volume ($M) # Deals % Share 1 Goldman Sachs 671,106 , 379 24.0% % 2 JPMorgan 516,062 329 18.5% 3 Morgan Stanley 441,933 312 15.8% 4 Credit Suisse 405,549 287 14.5% 5 Bank of America Merrill Lynch 401,189 297 14.4% 6 Barclays 363,662 179 13.0% 7 Citi 341,370 231 12.2% 8 Deutsche Bank 293,276 254 10.5% 9 UBS 292,800 242 10.5% 10 Lazard 276,628 220 9.9% Subtotal 1,681,987 1 681 987 1,820 1 820 60.3% 60 3% Total 2,791,551 44,829 100.0%Source: Dealogic and Bernstein estimates and analysis 25 U.S. Capital Markets
  26. 26. Global Debt Underwriting League Table 2011 Rank Bank Net Rev. ($M) # Deals % Share 1 JPMorgan 1,145 1,809 6.9% 2 Bank of America Merrill Lynch 1,074 1,953 6.5% 3 Deutsche Bank 999 1,891 6.0% 4 Citi 919 1,643 5.5% 5 Credit Suisse C dit S i 798 1,506 1 506 4.8% 4 8% 6 Barclays 777 1,503 4.7% 7 Morgan Stanley 701 1,673 4.2% 8 Goldman Sachs 691 1,033 1 033 4.2% 4 2% 9 UBS 516 2,126 3.1% 10 RBS 482 1,132 2.9% Subtotal 8,102 8 102 9,094 9 094 48.7% 48 7% Total 16,630 24,073 100.0%Source: Dealogic and Bernstein estimates and analysis 26 U.S. Capital Markets
  27. 27. RetailBrokerage 27 U.S. Capital Markets
  28. 28. Overview of the US Retail Brokerage ChannelsWirehouse. Large national branch networks. Emphasis on fee-based pricing of managed accounts. Payout 30% - 50%. Oligopoly. Wirehouses control 50,200 FAs with $4.5 Tn. in assets.Independent B/D. Sales effort focuses on packaged products, mutual funds and annuities. Advisors are considered contractors (not employees) and FA’s assume all costs of business and most risks. Payout is 70%-100%. There are 113,000 y , independent FAs with assets of $2.0 Tn.Registered Investment Advisors. Small, fee-based firms targeting the (>$1 MM) affluent market. Operating as fiduciaries. There are 34,000 RIA with t t l assets of ffl t k t O ti fid i i Th 34 000 RIAs ith total t f $2.0 Tn.Regional Brokers. Regional brokers with retail segments and private wealth Brokers segment of large I-banks. Payout 40%-60%. FAs total 37,000 and assets are $1.8 Tn. Sources: SNL, Cerulli, Company Reports, Bernstein Analysis 28 U.S. Capital Markets
  29. 29. Retail Brokerage For retail, revenues are a function of client assets. Cross selling reduces client turnover– transaction accounts, 401K services, mortgages, middle market l di t iddl k t lending. High operating leverage – full service retail is 26% fixed cost versus institutional 19% fixed costs Discount fixed cost is >35% costs. >35%. Power of the Channel – “They want the load, the 12b1 and one-half the management fee for three years.” AMTD Charges 25 bps SCHW Charges 40 bps BAC Charges 50 bpsSource; Sanford Bernstein Analysis 29 U.S. Capital Markets
  30. 30. Full Service Economics – Client Assets and FA Headcount Client Assets Assets Per FA Market Brokers ($Mln) ($Mln) Production Share Morgan Stanley Smith Barney 17,193 $ 1,744,000 $ 101 $ 787,000 25.3% Merrill Lynch 17,512 $ 1,841,106 $ 105 $ 905,000 26.7% Wells Fargo Financial Advisors 15,134 $ 1,200,000 $ 79 $ 610,000 E 17.4% UBS 7,015 $ 807,000 $ 115 $ 842,000 11.7% Edward Jones 11,670 $ 543,400 $ 47 $ 297,977 7.9% Raymond James 1,311 1 311 $ 85,100 85 100 $ 65 $ 546,000 546 000 1.2% 1 2% $ 0.15Sources: SNL, Company Reports, Bernstein Analysis 30 U.S. Capital Markets
  31. 31. The Full Service Model – Scale DrivenSources: Company disclosures, Bernstein analysis 31 U.S. Capital Markets
  32. 32. Retail Trading Volumes – Volumes Remains Constrained 10.0 9.0 8.0 7.0 6.0 5.0 4.0 Trading Volumes have 9.4% Growth grown at a 6.4% CAGR since 3.0 Q2 2007 2.0 20 1.0 0.0Sources: SIFMA, SCHW, Bernstein Analysis 32 U.S. Capital Markets
  33. 33. Retail – The Last Sector to Recover $30,000Cyclical decline in trading volume and adverse asset management mix shift $25,000 es  kerage Revenue $20,000Fee based accounts average ≈30% of client assets $15,000 Retail BrokRetail trading volumes are correlated with $10,000 movements in equity market indices $5,000 lagged five to eight months $0Retail investment flows are correlated with 80 100 120 140 160 U.S. Unemployment. Retail revenues Employment ‐ Non‐Farm Payrol (MM) correlated with non farm payroll non-farm 33 U.S. Capital Markets
  34. 34. Challenges 34 U.S. Capital Markets
  35. 35. Regulatory Changes Impact Business Model Basel III -- Minimum capital ratio for common equity increases to 4.5%. New capital conservation buffer will be required; 2.5% of common equity; 3% tier 1 leverage limit effective 2018; SIFI buffer of 2% to 3% Volcker -- Proprietary trading is banned; trading in US government securities is exempt; total investment in all hedge funds and private equity funds must not exceed 3% of tier 1 capital Derivatives -- All OTC derivatives selected by the CFTC / SEC must be centrally cleared; all transactions involving OTC derivatives that are subject to clearing requirements must be traded on an execution facility 2011 2012 2013 2014 2015 2016 2017 2018 2019Leverage ratio Monitor Monitor Monitor Monitor Effective Effective Effective Effective EffectiveMin. Common EquityRatio 3.50% 4.00% 4.50% 4.50% 4.50% 4.50% 4.50%Capital Conservation 0.63% 1.25% 1.88% 2.50%Min. Common Equity plusCapital Conservation 3.50% 4.00% 4.50% 5.13% 5.75% 6.38% 7.00%Minimum total Capitalplus Conservation 8.00% 8.00% 8.00% 8.63% 9.13% 9.88% 10.50%Liquidity coverage ratio Monitor Monitor Monitor Monitor Effective Effective Effective Monitor MonitorStable Funding Monitor Monitor Monitor Monitor Monitor Monitor Monitor Monitor Source: Davis Polk and Bernstein review 35 U.S. Capital Markets
  36. 36. Trading ROE 40.0% 30.0% 20.0% 10.0% 0.0% 10 0% ‐10.0% Credit Crisis 2007-09 ‐20.0% 5:Q1 5:Q4 6:Q3 7:Q2 8:Q1 8:Q4 9:Q3 0:Q2 1:Q1 1:Q4 2:Q3 3:Q2 4:Q1 4:Q4 5:Q3 6:Q2 7:Q1 7:Q4 8:Q3 9:Q2 0:Q1 0:Q4 1:Q3 95 95 96 97 98 98 99 00 01 01 02 03 04 04 05 06 07 07 08 09 10 10 11 FICC EquitiesSource: Company Disclosure, SIA Database, Bernstein Analysis 36 U.S. Capital Markets
  37. 37. Leverage Decline Reduces Trading ROE Indexed Capital Markets Leverage 1990=1.0 2.5  Higher RWA capital charges charges, 2.0 lower leverage limits, and more matched funding will negatively impact the ability to achieve p returns over cost of capital 1.5 1.0 0.5 0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: Company Disclosure, SIA Database, Bernstein Analysis 37 U.S. Capital Markets
  38. 38. Pro Forma Trading Returns Do Not Exceed Cost of Capital ROE versus Return and Leverage RRONA 1.0% 2.0% 3.0% 4.0% 5.0% 30 5.6% 11.2% 16.8% 22.3% 27.9% erage (x) 25 4.7% 9.3% 14.0% 18.6% 23.3% 20 3.7% 7.4% 11.2% 14.9% 18.6% Leve 15 2.8% 5.6% 8.4% 11.2% 14.0% 10 1.9% 3.7% 5.6% 7.4% 9.3% Source: Bernstein SIFMA and Company disclosure 38 U.S. Capital Markets
  39. 39. Expense Reduction  Only alternatives Wall Street will have are to cut compensation, reengineer the business, limit capital in trading books and push for higher commissions in equities and wider bid offer spreads in fixed income  Compensation - Bernstein expects the average compensation of an MD in sales and trading to drop by 20% and the p g p y percent of MDs in a trading operation to decline from g p <15% of staff to ≈10%; SVP compensation will decline by 15%; this will reduce the compensation ratio to ≈40%  Trading will implement a major re-engineering of its business model. Bernstein expects re engineering model improved collateral management systems and straight through trading technology to reduce middle office costs and drive down operation costs by ≈3 to 5%. Automation of trading activities will facilitate direct client execution. Matching engines will increasingly be tested in FICC.Source: Sanford Bernstein 39 U.S. Capital Markets
  40. 40. Post Reengineering Trading Returns Still Do Not Beat Cost of Equity Expense reductions are not enough. Technology is not enough. Balance sheet changes and related business repricing are required. At 40% Compensation to Net Revenue  RRONA 1.0% 0% 2.0% 3.0% 2 0% 3 0% 4.0% 0% 5.0% 0% 30 eragee  6.3% 12.6% 18.9% 25.2% 31.5% 25 5.3% 10.5% 15.8% 21.0% 26.3% 20 Leve 4.2% 4 2% 8.4% 8 4% 12.6% 12 6% 16.8% 16 8% 21.0% 21 0% 15 3.2% 6.3% 9.5% 12.6% 15.8% 10 2.1% 4.2% 6.3% 8.4% 10.5%Source: Bernstein SIFMA and Company disclosure 40 U.S. Capital Markets
  41. 41. Balance Sheet Reduction of 15% to 20% Needed Expect a substantial change in balance allocations. New capital allocation models will be established. Low return businesses will find position taking authority limited and allocated inventories constrained constrained. Linkages between businesses will be identified to ensure that balance sheet is used to maximize profitable customer execution. Repo books and margin lending will be tightly limited. limited Inventory turnover discipline will be enforced and aged inventory will be tightly monitored. Expect fixed income balance sheet/capital use to decline by 20% and equities to decline by 10% Thi b >10%. This means wider bid offer spreads, hi h equity commissions and l id ff d higher it i i d less liquidity. This opens up opportunities for new competitors. 41 U.S. Capital Markets
  42. 42. Thinking About the FutureE Expect reduced ROE f t d d ROEs from balance sheet i t b l h t intensive b i i businesses. B k with l Banks ith larger credit dit businesses and those with relatively larger FICC franchises will be impacted more seriously than those with larger FX and equity franchises. At low leverage, trading revenues will grow only with the global capital markets (7%-9% CAGR according to McKinsey Global Research Institute). The Street will free capital from trading as low return inventory positions are reduced. Revenue growth rate of the capital markets banks falls, EVA falls, cost of equity falls -- but ROE remains above cost of equity. Cyclical or Basel Secular? Volcker Changes Dodd Frank Investment Banking ECM Cyclical DCM Secular Credit Spreads Credit Spreads M&A Cyclical Instutional Equities Equity Execution Secular Reduction Rise Equity Derivatives Secular CCP FICC Fixed Income Market Making Secular Reduction Rise Fixed Income Derivatives Secular CCP Retail Brokerage Cyclical Asset Management Cyclical 42 U.S. Capital Markets
  43. 43. Regulation Drives Changes in Business Mix ROE Versus Capital Intensity 45% Low Capital Intensity The Null Set 40% High ROE 35% 30% 25% ROE 20% 15% % 10% Badly Managed High Capital Intensity 5% Low ROE 0% 20% 30% 40% 50% 60% 70% 80% Capital IntensitySource; Companies Disclosures, FactSet and Bernstein Analysis 43 U.S. Capital Markets
  44. 44. Disclosure ADi l Appendix diSRO REQUIRED DISCLOSURESReferences to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and Sanford C. Bernstein (business registration number 53193989L), a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, collectively.Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in or contributions to, generating investment banking revenues in, to revenues.Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise specified. We have three categories of ratings: Outperform: Stock will outpace the market index by more than 15 pp in the year ahead. Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead ahead. Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead. Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.As of 06/13/2012, Bernsteins ratings were distributed as follows: Outperform - 41.3% (1.5% banking clients) ; Market-Perform - 49.8% (0.4% banking clients); Underperform - 8.9% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve (12) months.Brad Hintz, as a former Managing Director at Morgan Stanley Group (MS), owns an equity position in MS that is held in a Morgan Stanley Group ESOP Trust at Mellon Bank as convertible preferred stock. These MS ESOP securities were awarded to him as compensation and are fully vested. Mr. Hintz is also an investor in Morgan Stanley Capital Partners III, LP — a merchant banking fund where Morgan Stanley maintains an equity interest as a limited partner. Mr. Hintz participates in the Morgan Stanley Pre Tax Investment Plan, which is a deferred compensation plan structured as a note to Mr. Hintz from Morgan Stanley with the return on the note tied to one of many alternative asset classes. In addition, as a result of the complete spin-off of Discover from Morgan Stanley on June 30, 2007, Mr. Hintz received a long position in Discover stock as a beneficiary of the Morgan Stanley ESOP. These shares of Discover will ultimately be distributed to Mr. Hintz by the ESOP trustee.Mr. Hintz maintains a long position in Chicago Mercantile Exchange Holdings Inc. (CME).Bernstein currently makes a market in the following companies SCHW / Charles Schwab Corp, AMTD / TD Ameritrade Holding Corp, LPLA / LPL Investment Holdings.The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment banking-securities related services and received compensation for such services GS / Goldman Sachs, MS / Morgan Stanley, SCHW / Charles Schwab Corp, AMTD / TD Ameritrade Holding Corp.An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companies GS / Goldman Sachs, MS / Morgan Stanley, SCHW / Charles Schwab Corp, AMTD / TD Ameritrade Holding Corp.In the past twelve (12) months, Bernstein or an affiliate managed or co-managed a public offering of securities of LPLA / LPL Investment Holdings.In the past twelve (12) months, Bernstein or an affiliate received compensation for investment banking services from LPLA / LPL Investment Holdings.In the next three (3) months, Bernstein or an affiliate expects to receive or intends to seek compensation for investment banking services from LPLA / LPL Investment Holdings.This research publication covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com, you can also write to either: Sanford C. Bernstein & Co. LLC, 44 U.S. Capital Markets
  45. 45. Director f C Di t of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105 or Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, London W1J 8SB, U it d Ki d li A f th A i N Y k NY S f dC B t i Li it d Di t fC li B k l St t L d 8SB United Kingdom; or Sanford C. Bernstein (Hong Kong) Limited, Director of Compliance, Suites 3206-11, 32/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong, or Sanford C. Bernstein (business registration number 53193989L) , a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, Director of Compliance, 30 Cecil Street, #28-01 Prudential Tower, Singapore 049712.12-Month Rating History as of 06/18/2012Ticker Rating ChangesAMTD M (IC) 08/12/09CME O (RC) 01/10/11GS O (RC) 06/04/09ICE O (IC) 06/19/07LPLA M (IC) 12/28/10MS O (RC) 08/09/07SCHW M (RC) 02/02/09Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not RatedRating Actions: IC ‐ Initiated Coverage, DC ‐ Dropped Coverage, RC ‐ Rating Change OTHER DISCLOSURES A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and when coverage of securities commences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its coverage policies. Although the definition and application of these methods are based on g generally accepted industry p y p y practices and models, p , please note that there is a range of reasonable variations within these models. The application of models typically depends on forecasts of a g pp yp y p range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and risk factors that are subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts carrying out this valuation. This document may not be passed on to any person in the United Kingdom (i) who is a retail client (ii) unless that person or entity qualifies as an authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act 2000 (the "Act"), or qualifies as a person to whom the financial promotion restriction imposed by the Act does not apply by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or is a person classified as an "professional client" for the purposes of the Conduct of Business Rules of the Financial Services Authority. To our readers in the United States: Sanford C. Bernstein & Co., LLC is distributing this publication in the United States and accepts responsibility for its contents. Any U.S. person receiving this publication and wishing to effect securities transactions in any security discussed herein should do so only through Sanford C. Bernstein & Co., LLC. To our readers in the United Kingdom: This publication has been issued or approved for issue in the United Kingdom by Sanford C. Bernstein Limited, authorised and regulated by the Financial Services Authority and located at 50 Berkeley Street, London W1J 8SB, +44 (0)20-7170-5000. To our readers in member states of the EEA: This publication is being distributed in the EEA by Sanford C. Bernstein Limited, which is authorised and regulated in the United Kingdom by the Financial Services Authority and holds a passport under the Markets in Financial Instruments Directive. To our readers in Hong Kong: This publication is being distributed in Hong Kong by Sanford C. Bernstein (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission (Central Entity No. AXC846). This publication is solely for professional investors only, as defined in the Securities and Futures Ordinance (Cap. 571). To our readers in Singapore: This publication is being distributed in Singapore by Sanford C. Bernstein, a unit of AllianceBernstein (Singapore) Ltd., only to accredited investors or 45 U.S. Capital Markets
  46. 46. institutional ii tit ti l investors, as d fi d i th S t defined in the Securities and F t iti d Futures A t (Ch t 289). Recipients in Singapore should contact Alli Act (Chapter 289) R i i t i Si h ld t t AllianceBernstein (Si B t i (Singapore) Ltd i respect of matters arising f ) Ltd. in t f tt i i from,or in connection with, this publication. AllianceBernstein (Singapore) Ltd. is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C.It is regulated by the Monetary Authority of Singapore and located at 30 Cecil Street, #28-01 Prudential Tower, Singapore 049712, +65-62304600. The business name "Sanford C. Bernstein"is registered under business registration number 53193989L.To our readers in Australia: Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited and Sanford C. Bernstein (Hong Kong) Limited are exempt from the requirement to hold anAustralian financial services licence under the Corporations Act 2001 in respect of the provision of the following financial services to wholesale clients:providing financial product advice;dealing in a financial product;making a market for a financial product; andproviding a custodial or depository service.Sanford C. Bernstein & Co., LLC., Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited and AllianceBernstein (Singapore) Ltd. are regulated by, respectively, the ( g g) ( g p ) g y p ySecurities and Exchange Commission under U.S. laws, by the Financial Services Authority under U.K. laws, by the Hong Kong Securities and Futures Commission under Hong Kong laws, andby the Monetary Authority of Singapore under Singapore laws, all of which differ from Australian laws.One or more of the officers, directors, or employees of Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, Sanford C. Bernstein(business registration number 53193989L) , a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with CompanyRegistration No. 199703364C, and/or their affiliates may at any time hold, increase or decrease positions in securities of any company mentioned herein.Bernstein or its affiliates may provide investment management or other services to the pension or profit sharing plans, or employees of any company mentioned herein, and may give advice toothers as to investments in such companies. These entities may effect transactions that are similar to or different from those recommended herein.Bernstein Research Publications are disseminated to our customers through posting on the firms password protected website, www.bernsteinresearch.com. Additionally, Bernstein ResearchPublications are available through email, postal mail and commercial research portals. If you wish to alter your current distribution method, please contact your salesperson for details.Bernstein and/or its affiliates do and seek to do business with companies covered in its research publications. As a result, investors should be aware that Bernstein and/or its affiliates mayhave a conflict of interest that could affect the objectivity of this publication. Investors should consider this publication as only a single factor in making their investment decisions.This publication has been published and distributed in accordance with Bernsteins policy for management of conflicts of interest in investment research, a copy of which is available fromSanford C. Bernstein & Co., LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105, Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, , , p , , , , , p , y ,London W1J 8SB, United Kingdom, or Sanford C. Bernstein (Hong Kong) Limited, Director of Compliance, Suites 3206-11, 32/F, One International Finance Centre, 1 Harbour View Street,Central, Hong Kong, or Sanford C. Bernstein (business registration number 53193989L) , a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities andFutures Act and registered with Company Registration No. 199703364C, Director of Compliance, 30 Cecil Street, #28-01 Prudential Tower, Singapore 049712. Additional disclosures andinformation regarding Bernsteins business are available on our website www.bernsteinresearch.com.CERTIFICATIONSI/(we), Brad Hintz, Luke Montgomery, CFA, Senior Analyst(s)/Analyst(s), certify that all of the views expressed in this publication accurately reflect my/(our) personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or will be directly or indirectly, related to the specific recommendations or views in this publication. was is be, indirectly publicationCopyright 2012, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and AllianceBernstein (Singapore) Ltd., subsidiaries of 46 U.S. Capital Markets
  47. 47. AllianceBernstein L P ~1345 Avenue of the Americas ~ NY NY 10105 ~212/756 4400 All rights reserved L.P. NY, ~212/756-4400. reserved.This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction wheresuch distribution, publication, availability or use would be contrary to law or regulation or which would subject Bernstein or any of their subsidiaries or affiliates to any registration or licensingrequirement within such jurisdiction. This publication is based upon public sources we believe to be reliable, but no representation is made by us that the publication is accurate or complete.We do not undertake to advise you of any change in the reported information or in the opinions herein. This publication was prepared and issued by Bernstein for distribution to eligiblecounterparties or professional clients. This publication is not an offer to buy or sell any security, and it does not constitute investment, legal or tax advice. The investments referred to hereinmay not be suitable for you. Investors must make their own investment decisions in consultation with their professional advisors in light of their specific circumstances. The value ofinvestments may fluctuate, and investments that are denominated in foreign currencies may fluctuate in value as a result of exposure to exchange rate movements. Information about p y g y p g pastperformance of an investment is not necessarily a guide to, indicator of, or assurance of, future performance. 47 U.S. Capital Markets

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