1. Research
  2. Products & Topics
  3. Periodicals
  4. Focus Europe
June 9, 2017
The reflection paper contains two stages for the evolution of EMU. The first stage is about completing processes that remain open, for example, the Banking Union (BU) and the Capital Markets Union (CMU). Even here the decisions are not without political controversy, such as deposit insurance and a fiscal back stop for the Single Resolution Fund. [more]
EMU reflection paper - mere “wish list” or plausible way forward? 9 June 2017 Focus Europe EMU reflection paper - mere “wish list” or plausible way forward? Barbara Boettcher Senior Economist (+49) 69 910-31787 barbara.boettcher@db.com Kevin Koerner Senior Economist (+49) 69 910-31718 kevin.koerner@db.com Figure 1: Popularity of single currency at record high For 72 Against 24 0 10 20 30 40 50 60 70 80 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 % Source: Eurobarometer 2017, Deutsche Bank Figure 2: Popular opinion on the single currency differs across Europe 85 81 81 78 77 74 71 68 68 62 53 9 15 16 20 22 23 25 30 28 34 37 0 10 20 30 40 50 60 70 80 90 100 IE DE SK FI NL PT ES EL FR AT IT For Against Source: Eurobarometer 2017, Deutsche Bank ■ Last week, the European Commission published a widely anticipated reflection paper outlining a “vision” for EMU. This is not a proposal. This is a paper designed to guide debate. ■ The reflection paper contains two stages for the evolution of EMU. The first stage is about completing processes that remain open, for example, the Banking Union (BU) and the Capital Markets Union (CMU). Even here the decisions are not without political controversy, such as deposit insurance and a fiscal back stop for the Single Resolution Fund. ■ The second stage would wait until after the European Parliament elections in 2019. Here the proposals are more far-reaching and fundamental, although there were no new ideas in the reflection paper. The ideas stretch from an EU Treasury and euro area finance minister to stabilization mechanisms and safe bonds. The reflection paper captures the complexity and contentiousness of these ideas. All the details are left for future discussion. ■ A Merkel-Macron partnership at the heart of Europe is a unique opportunity to strengthen European institutions. The path won’t be smooth. Not only do Germany and France need to find common ground on many issues, the other seventeen euro area members need to agree to changes as well, which will involve erosion of sovereignty. If Treaty change is required the EMU-outs have to agree also. Their resistance to an increasingly powerful EMU could rise as the UK exits their group. ■ What next? If market confidence in the quality of stage two developments is conditional on the completion of stage one, progress needs to be made on BU/CMU rapidly to open the door to more fundamental EMU reforms after 2019. The discussion of the Commission’s paper which should start at the December European Council promises to become very lively. However, Europe’s immediate priority is dealing with Brexit and probably security/defense issues. With Brexit looming and following the historical triggering of Article 50 by the United Kingdom in March, the discussion about the future of the European Union gained further pace. On March 25, when celebrating the 60th Birthday of the EU, European leaders signed the “Rome Declaration”, confirming also their commitment to “working towards completing the Economic and Monetary Union.” 1 Last week, the European Commission published a widely anticipated reflection paper outlining a “vision” for EMU  2 . The paper envisages a two step approach for 1 European Council (2015): “Completing Europe’s Economic and Monetary Union”. 2 European Commission (2017):"Reflection paper on the deepening of the Economic and Monetary Union". Page 2 Deutsche Bank AG/London 9 June 2017 Focus Europe deeper integration of the euro area by 2025. The first stage focuses on completing already existing proposals and projects between 2017 and 2019, including a European Deposit Insurance Scheme and a fiscal backstop for the Single Resolution Fund. The second stage goes much further by presenting proposals for a number of far-reaching and significant changes to the euro area framework, such as a European Treasury under the chair of an EU Finance Minister, the introduction of a European “safe asset”, a macroeconomic stabilization function as well as a European Monetary Fund. Figure 3: EC roadmap for completion of Economic and Monetary Union by 2025 (key measures) Period 2017-2019 Period 2020-2025 Setting up a fiscal backstop for the Single Resolution Fund, agreem ent on European Deposit Insurance Scheme (EDIS) Issuance of a European safe asset and changes to the reg ulatory treatment of sovereign exposures Finalisation of Capital Markets Union initiatives Agreement on central stabilization function (investment pr otection fund, unemployment reinsurance), euro area budget Stronger focus on support of reforms and convergence standar ds Eurogroup with a permanent chair and as official Council co nfiguration Integrating Fiscal Compact into EU legal framework Euro area Treasury and/or a European Monetar y Fund Source: European Commission (2017): Reflection paper on the deepening of the Economic and Monetary Union No groundbreaking new ideas, but a comprehensive framework for debate The paper is part of a series of proposals to reform the EMU, following the 2015 “Five Presidents Report” and the Commission’s March White Paper on the future of the EU  3  . None of the ideas presented in the 40 page paper break new ground and most proposals have been on the table in one form or the other over the years already. But rather than being a shortcoming, this is what the paper aims at – to provide a framework for discussion between member states in order to build political consensus on which direction the EMU should move; not as a “blueprint” but as a collection of potential actions, broadly focusing on three key areas for reform: ■ Complete Financial Union ■ Further integration of Economic and Fiscal Union ■ Strengthen democratic accountability and governance 2017-2019: starting small – ongoing work and existing proposal Aware of the risk that current reform momentum could be lost by a heated debate on the more audacious proposals in the paper, the Commission goes for a pragmatic approach: starting with the agenda points that are already work in 3 For a detailed discussion of the Commission’s White Paper see Deutsche Bank Focus Europe (24 March 2017): “The future of the EU: Which Road to take?" Deutsche Bank AG/London Page 3 9 June 2017 Focus Europe progress or where consensus between member states could be build relatively easily. This includes, for example, the translation of the Fiscal Compact into European law, as already envisaged in 2012 when it was signed as part of an intergovernmental treaty to enforce stricter discipline and address shortcomings in the Stability and Growth Pact. The Commission also calls for a rapid agreement on the third pillar of the Banking Union, the European Deposit Insurance Scheme (EDIS) by 2019 4 . However, the sequencing and timing of EDIS implementation remains critically discussed, such as by the Association of German Banks which highlights the necessity of harmonization of national insurance schemes as a prerequisite and emphasizes the risk of setting wrong incentives through joint liability  5 . Setting up a fiscal backstop to the Single Resolution Fund is a second step towards full Banking Union demanded by the Commission. 2020-2025: aiming high – far reaching and significant changes to the euro area framework The Commission saves its more radical proposals, some of which would require changes to the European treaties, for after the 2019 European parliamentary elections. At the heart of the Commission’s vision lies the creation of a euro area Treasury , an idea that has been discussed for some time already and emphasized in the 2015 Five Presidents Report as a way to allow taking collective decisions on fiscal policy. The creation of a euro area Treasury is closely linked to the Commission’s proposal to strengthen the Eurogroup by turning it into a Council with a permanent Eurogroup Chair . This function could also be merged with the Member of the Commission responsible for the EMU, effectively creating an EU Finance Minister who would both head the Eurogroup and be in charge of the Treasury. As more national competences are transferred to the European level, oversight powers should be given to the European Parliament (possibly only a euro area chamber, even though not explicitly outlined in the paper) in order to warrant democratic accountability. The Treasury could serve as an “umbrella” to coordinate a range of fiscal functions. Proposals include the management of a “ macroeconomic stabilization function ” to mitigate the impact of asymmetrical external shocks on euro area members. Relatedly, a euro area budget that goes beyond crisis mitigation is discussed to support “broader objectives” including convergence among member countries. Macroeconomic stabilization function or a euro area budget With the fiscal rules and the macroeconomic scoreboard the EU has implemented a sort of preventive mechanism that should help to synchronise growth cycles in the EU, support the effectiveness of monetary policy and foster stability for the currency union. But reactive mechanism for fiscal stabilisation of countries in recession can be found only on national level. The call for a “common stabilization function” reflects the perception that EU members might be asymmetrically hit by external shocks and that fiscal policies should be adjusted accordingly. Two main proposals under discussion are the creation of a European Investment 4 The three pillars of the European Banking Union are the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM), and the European Deposit Insurance Scheme (EDIS). 5 Deutscher Bankenverband (2017): “Dossier Europäische Bankenunion”. Page 4 Deutsche Bank AG/London 9 June 2017 Focus Europe Protection Scheme and/ or a European Unemployment Reinsurance Scheme. The Investment Protection Scheme is meant to mitigate the shortfall of public investment in an economic downturn and prevent an amplification of the crisis. A European Unemployment Reinsurance Scheme can be seen as a complementary instrument to protect national social safety nets during downturns and warrant their function as automatic stabilizers. Access to both funds would be conditional on compliance with EU fiscal rules and other criteria and permanent transfers should be avoided. Commission proposals for financing such instruments reach from using existing tools such as the ESM (requiring some legal changes), the EU budget or the creation of a new rule-based instrument for national contributions (e.g. GDP-weighed). In that context, the Commission paper also mentions the idea of a euro area budget that goes beyond mitigating the impact of asymmetric shocks as a potential long-term goal but falls short on any more detailed discussion  6 . According to the Commission, the Treasury could also integrate the European Stability Mechanism (ESM), once it is translated into EU law and building on it, a European Monetary Fund that could provide liquidity assistance to euro area members as well as serve as a “last resort backstop” to the Banking Union. Finally, the paper sees the Treasury coordinate the issuance of a European “safe asset”, a particularly controversial idea among many member countries. The idea of European “safe assets” has caught the attention of financial markets Figure 4: Euro area sovereign borrowing costs 0 200 400 600 800 1000 1200 1400 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 ES FR IE IT NL PT 10Y sovereign bond yields spreads over German Bunds, bps Source: ECB, Deutsche Bank The recent years have seen a number of proposals for euro area debt instruments often labeled as Eurobonds but in fact with different design. The latest idea is that of a “safe asset”, thought as a euro area equivalent to US Treasuries and serving as a European benchmark instrument. According to the Commission, it could help banks to diversify their assets and cut their exposure to their national sovereign’s debt, thus reduce the correlation risks between national banking systems and sovereigns. Many euro area members, including Germany, have expressed strong opposition to the prospect of “debt mutualisation” (i.e. the common issuance of euro area sovereign bonds and therefore joint liability). The EC paper therefore emphasizes an assumedly less controversial variant, called sovereign bond- backed securities (SBBS) . These instruments are currently discussed by the European System Risk Board (ESRB)  7   as a candidate for a euro area wide safe asset that should avoid the issue of joint liability. In a nutshell, the SBBS envisioned by the ESRB would work as follows: a commercial or public entity purchases a portfolio of euro area sovereign bonds, which is diversified according to some clear rules (e.g. GDP-weighed). To finance this purchase it would issue two financial instruments: a senior tranche - European Safe Bonds (ESBies) and a junior tranche - European Junior Bonds (EJBies). The tranching protects the ESB as it would only defaults if the junior tranche has been “wiped out” already. The most obvious advantage of the SBBS is to avoid the hot issue of joint liability. However, from a practical point of view, many open questions remain. First of all, it can be asked whether the proposed vehicle would really fulfill 6 For a deeper discussion of these elements see Deutsche Bank Research EU Monitor „ Do all roads lead to fiscal union? “(2013). 7 European Systemic Risk Board (2016): “ESBies: Safety in the tranches”. Deutsche Bank AG/London Page 5 9 June 2017 Focus Europe the requirements of a safe asset. According to Standard & Poor’s, the tentative answer is “no”  8 . Earlier this year, the rating agency issued a statement regarding the ESRB proposals. Rather than assigning an equivalent security the desired AAA-rating it would actually put it far below in the “lower half of the investment- grade” range, based on lacking diversification and strong correlation of default risk of underlying sovereign bonds. But if a respective instrument would not benefit from preferable creditworthiness, the next question would be if there is really sufficient demand – given that market participants already now can diversify their portfolios accordingly. This applies particularly for the higher risk junior tranche of the vehicle, for which a functioning market is crucial to fulfill the role of a safety vehicle for the senior tranche. On top of that, an issuing entity would be needed – either private or public. At least for the variant of a public entity, it can be assumed that resistance amongst member countries concerned about the issue of “debt mutualisation” remains unchanged. However, given that European institutions like the ESRB or the ECB have looked deeper into this indicates that this proposal will remain on the agenda for the future. A fresh reform momentum – but will it last? The election of pro-European Emmanuel Macron in highly contested French presidential elections and upcoming German parliamentary elections in September are embraced as a “unique window of opportunity” to strengthen the framework of the EMU 9  . The public demonstration of unity between new French President Emmanuel Macron and German Chancellor Angela Merkel in their willingness to reform the EMU - if necessary even through changes of EU treaties - underlines the current sentiment among European leaders that this opportunity should not be squandered. The increased public support for the euro (apart from Italy) could also help to foster more initiatives, with the Eurobarometer reaching a record high of 72% for the single currency in 2017 (see first figure of the article). The Commission’s reflection paper now provides a structured guideline on how this fresh reform momentum can be used for constructive discussion between member countries on how to proceed. In its most radical reform proposals, the European Commission’s paper tries to address the underlying shortcomings of EMU that Jens Weidmann, President of the Bundesbank and François Villeroy de Galhau, Governor of Banque de France, called the “asymmetry between national sovereignty and common solidarity” 10 . To remove this imbalance and source of instability, member countries are presented with two options: to move further towards “fully-fledged” EMU, requiring further transfer of national sovereignty to and strengthened democratic accountability on the European level; and a “decentralized approach” relying on strengthened fiscal rules. Many of the discussions among EU leaders about the future of EMU go along these lines. The Commission clearly favors the first option – in fact the second one is not even mentioned - as already implied in the title of its working paper. However, the political feasibility of most of the required reforms towards Fiscal Union remains a big question mark. Even among France and Germany, the EU’s two largest economies and frequently depicted as engine of EU integration, opinions tend to differ when it comes to 8 Standard & Poor’s (2017): „How S&P Global Ratings Would Assess European “Safe” Bonds (ESBies)” 9 François Villeroy de Galhau, Governor of Banque de France (2017), quoted in European Commission (2017): “About the Brussels Economic Forum 2017”. 10 Deutsche Bundesbank (2017): “Europe at the crossroads”. Page 6 Deutsche Bank AG/London 9 June 2017 Focus Europe details on what and how it should be done. French President Macron promotes the idea of a European Finance Minister, Treasury and euro area budget, calls for the creation of a euro area parliament (an idea not explicitly mentioned in the Commission paper), and favors macroeconomic stabilization funds. German Minister of Finance Wolfgang Schäuble (CDU), however, has voiced skepticism regarding the feasibility of such proposals as they would require changes to the European treaties – to be signed by all 28 European member states – which he considers unrealistic at the current moment (FAZ, 09.05.2017). He instead favors further integration through agreements between member countries rather than treaty changes, such as the creation of a European Monetary Fund based on the ESM. But controversies regarding an EMU reform agenda are not only found between member states. Ahead of September parliamentary elections, the German government coalition hardly speaks with one voice. Minister of Foreign Affairs Sigmar Gabriel (SPD) endorsed the Commission’s paper and together with Martin Schulz, SPD chancellor candidate supports the call of French president Macron for a European budget (Die Zeit, 10.05.2017, Der Spiegel, 15.05.2017 and 03.06.2017). But even the idea of further euro area integration as such is not seen by all EU members in the same light. With the United Kingdom leaving, the balance between euro and non-euro countries within the EU will shift substantially. It leaves 19 countries that adopted the single currency compared to eight countries outside the euro area. Post-Brexit, the euro area’s share of total EU GDP will increase from currently 72% to 86% (based on 2016 Eurostat numbers). The percentage of European citizens living in the currency union will increase from 67% to 76%. Critics of stronger euro area integration warn that non-euro members (the Nordic EU countries Denmark and Sweden as well as six out of eleven Central and Eastern European countries that joined the EU in 2004 and later) might increasingly feel being marginalized and could block any attempts to change EU treaties (Deutschlandfunk, 25.05.2017). While this could in principle be circumvented by the creation of new institutions (along the lines of the ESM as a body of international law), this would not only reduce further transparency and democratic control in the euro area but would also come at the price of further fragmentation within the EU. Bridging the differences regarding positions and approaches to EMU deepening will be challenging. The discussion of the Commission’s paper which should start at the EU December summit, i.e. after the German (and possibly Italian) elections thus promises to become very lively even though many member states agree that 2018/ 2019 should be used to push on with policy changes in the EU. Deutsche Bank AG/London Page 7 9 June 2017 Focus Europe Appendix 1 Important Disclosures *Other information available upon request *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg, and other vendors. Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr . Aside from within this report, important conflict disclosures can also be found at https://gm/db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Mark Wall, Barbara Boettcher Page 8 Deutsche Bank AG/London 9 June 2017 Focus Europe Additional Information The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness. Hyperlinks to third- party websites in this report are provided for reader convenience only. Deutsche Bank neither endorses the content nor is responsible for the accuracy or security controls of these websites. If you use the services of Deutsche Bank in connection with a purchase or sale of a security that is discussed in this report, or is included or discussed in another communication (oral or written) from a Deutsche Bank analyst, Deutsche Bank may act as principal for its own account or as agent for another person. Deutsche Bank may consider this report in deciding to trade as principal. It may also engage in transactions, for its own account or with customers, in a manner inconsistent with the views taken in this research report. Others within Deutsche Bank, including strategists, sales staff and other analysts, may take views that are inconsistent with those taken in this research report. Deutsche Bank issues a variety of research products, including fundamental analysis, equity-linked analysis, quantitative analysis and trade ideas. Recommendations contained in one type of communication may differ from recommendations contained in others, whether as a result of differing time horizons, methodologies or otherwise. Deutsche Bank and/or its affiliates may also be holding debt or equity securities of the issuers it writes on. Analysts are paid in part based on the profitability of Deutsche Bank AG and its affiliates, which includes investment banking, trading and principal trading revenues. Opinions, estimates and projections constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank provides liquidity for buyers and sellers of securities issued by the companies it covers. Deutsche Bank research analysts sometimes have shorter-term trade ideas that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. Trade ideas for equities can be found at the SOLAR link at http://gm.db.com . A SOLAR idea represents a high conviction belief by an analyst that a stock will outperform or underperform the market and/or sector delineated over a time frame of no less than two weeks. In addition to SOLAR ideas, the analysts named in this report may from time to time discuss with our clients, Deutsche Bank salespersons and Deutsche Bank traders, trading strategies or ideas that reference catalysts or events that may have a near-term or medium-term impact on the market price of the securities discussed in this report, which impact may be directionally counter to the analysts' current 12-month view of total return or investment return as described herein. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof if any opinion, forecast or estimate contained herein changes or subsequently becomes inaccurate. Coverage and the frequency of changes in market conditions and in both general and company specific economic prospects make it difficult to update research at defined intervals. Updates are at the sole discretion of the coverage analyst concerned or of the Research Department Management and as such the majority of reports are published at irregular intervals. This report is provided for informational purposes only and does not take into account the particular investment objectives, financial situations, or needs of individual clients. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst’s judgment. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Prices and availability of financial instruments are subject to change without notice and investment transactions can lead to losses as a result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results. Unless otherwise indicated, prices are current as of the end of the previous trading session, and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank, subject companies, and in some cases, other parties. The Deutsche Bank Research Department is independent of other business areas divisions of the Bank. Details regarding our organizational arrangements and information barriers we have to prevent and avoid conflicts of interest with respect to our research is available on our website under Disclaimer found on the Legal tab. ? ? Deutsche Bank AG/London Page 9 9 June 2017 Focus Europe Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor who is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements. ? ? Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products for use by investors is dependent on the investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities, and as such, investors should take expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this publication. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than the amount of funds initially deposited. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized Options”, at http:// www.optionsclearing.com/about/publications/character-risks.jsp . If you are unable to access the website please contact your Deutsche Bank representative for a copy of this important document. ? Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs, whose values are affected by the currency of an underlying security, effectively assume currency risk. ? Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. Aside from within this report, important conflict disclosures can also be found at https:// gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. ? ? United States : Approved and/or distributed by Deutsche Bank Securities Incorporated, a member of FINRA, NFA and SIPC. Analysts located outside of the United States are employed by non-US affiliates that are not subject to FINRA regulations. Germany : Approved and/or distributed by Deutsche Bank AG, a joint stock corporation with limited liability incorporated in the Federal Republic of Germany with its principal office in Frankfurt am Main. Deutsche Bank AG is authorized under German Banking Law and is subject to supervision by the European Central Bank and by BaFin, Germany’s Federal Financial Supervisory Authority. United Kingdom : Approved and/or distributed by Deutsche Bank AG acting through its London Branch at Winchester House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank AG in the United Kingdom is authorised by the Prudential Regulation Authority and is subject to limited regulation by the Prudential Regulation Authority and Financial Conduct Authority. Details about the extent of our authorisation and regulation are available on request. ? ? Hong Kong : Distributed by Deutsche Bank AG, Hong Kong Branch or Deutsche Securities Asia Limited. ? ? Page 10 Deutsche Bank AG/London 9 June 2017 Focus Europe India : Prepared by Deutsche Equities India Pvt Ltd, which is registered by the Securities and Exchange Board of India (SEBI) as a stock broker. Research Analyst SEBI Registration Number is INH000001741. DEIPL may have received administrative warnings from the SEBI for breaches of Indian regulations. Japan : Approved and/or distributed by Deutsche Securities Inc.(DSI). Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association and The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. We may also charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the name of the entity. Reports on Japanese listed companies not written by analysts of DSI are written by Deutsche Bank Group's analysts with the coverage companies specified by DSI. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Target prices set by Deutsche Bank's equity analysts are based on a 12-month forecast period. Korea : Distributed by Deutsche Securities Korea Co. South Africa : Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). ? ? Singapore : by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch (One Raffles Quay #18-00 South Tower Singapore 048583, +65 6423 8001), which may be contacted in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), they accept legal responsibility to such person for its contents. Taiwan : Information on securities/investments that trade in Taiwan is for your reference only. Readers should independently evaluate investment risks and are solely responsible for their investment decisions. Deutsche Bank research may not be distributed to the Taiwan public media or quoted or used by the Taiwan public media without written consent. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation to trade in such securities/instruments. Deutsche Securities Asia Limited, Taipei Branch may not execute transactions for clients in these securities/instruments. ? ? Qatar : Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. Russia : This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation. ? Kingdom of Saudi Arabia : Deutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia. ? ? Deutsche Bank AG/London Page 11 9 June 2017 Focus Europe United Arab Emirates : Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority. Australia : Retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Please refer to Australian specific research disclosures and related information at https://australia.db.com/australia/content/ research-information.html ? ? Australia and New Zealand : This research is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. ? Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published without Deutsche Bank's prior written consent. Copyright © 2017 Deutsche Bank AG Page 12 Deutsche Bank AG/London David Folkerts-Landau Group Chief Economist and Global Head of Research Raj Hindocha Global Chief Operating Officer Research Michael Spencer Head of APAC Research Global Head of Economics Steve Pollard Head of Americas Research Global Head of Equity Research Anthony Klarman Global Head of Debt Research Paul Reynolds Head of EMEA Equity Research Dave Clark Head of APAC Equity Research Pam Finelli Global Head of Equity Derivatives Research Andreas Neubauer Head of Research - Germany Stuart Kirk Head of Thematic Research International locations Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) 2 8258 1234 Deutsche Bank AG Große Gallusstraße 10-14 60272 Frankfurt am Main Germany Tel: (49) 69 910 00 Deutsche Bank AG Filiale Hongkong International Commerce Centre, 1 Austin Road West,Kowloon, Hong Kong Tel: (852) 2203 8888 Deutsche Securities Inc. 2-11-1 Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo 100-6171 Japan Tel: (81) 3 5156 6770 Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom Tel: (44) 20 7545 8000 Deutsche Bank Securities Inc. 60 Wall Street New York, NY 10005 United States of America Tel: (1) 212 250 2500