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October 22, 2014
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Presentation: Banking & regulatory trends in Europe Research Deutsche Bank Jan Schildbach 21 October 2014 Research Deutsche Bank Banking & regulatory trends in Europe Stockholm, 21 October 2014 Jan Schildbach Research Deutsche Bank Jan Schildbach 21 October 2014 Agenda 3 2 1 Regulatory trends & their impact Swedish banks Big picture: EU bank performance 2 4 Outlook: Banking Union Research Deutsche Bank Jan Schildbach 21 October 2014 European banks are struggling – US peers enjoying record profitability 3 -80 -60 -40 -20 0 20 40 60 80 Q1 06 Q1 07 Q1 08 Q1 09 Q1 10 Q1 11 Q1 12 Q1 13 Q1 14 US banks Large European banks All EU banks (quarterly share of annual data) Net income USD / EUR bn, up to Q2 14 Sources: FDIC, ECB, company reports, Deutsche Bank Research 70 80 90 100 110 120 130 Q1 06 Q1 07 Q1 08 Q1 09 Q1 10 Q1 11 Q1 12 Q1 13 Q1 14 US banksLarge European banks Q1 2006 = 100, up to Q2 14 Total revenues Sources: FDIC, company reports, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 21 October 2014 Weak asset quality and shrinking loan books in Europe 4 0 10 20 30 40 50 60 70 80 060708091011121314 US banksLarge European banks Loan loss provisions USD / EUR bn, up to Q2 14 Sources: FDIC, company reports, Deutsche Bank Research -9 -6 -3 0 3 6 9 12 08091011121314 USEuro area Lending to the private sector % yoy, up to Aug 14 Sources: ECB, FDIC, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 21 October 2014 ... as well as margin pressure due to low interest rates 5 0 1 2 3 4 5 6 7 199901030507091113 USEurolandUK % Main official interest rates Sources: Federal Reserve, ECB, BoE 105 110 115 120 125 130 135 140 H1 10H2H1 11H2H1 12H2H1 13H2H1 14 EUR bn, top 20 European banks Sources: Company reports, Deutsche Bank Research Net interest income Research Deutsche Bank Jan Schildbach 21 October 2014 Agenda 3 2 1 Regulatory trends & their impact Swedish banks Big picture: EU bank performance 6 4 Outlook: Banking Union Research Deutsche Bank Jan Schildbach 21 October 2014 7 Re-regulation is comprehensive – and potentially overwhelming Regulatory initiatives Non-conducive initiatives Limit potential spillover effects of affected institutes  Improved transparency, especially in terms of market infrastructure  Levy cum funds  Bankruptcy regimes  Recovery and resolutions regimes (e.g. living will concept)  Reform of deposit guarantee schemes  Limitation re the size of banks  Cap regarding maximum leverage ratio  ‘Re-nationalisation’ of international banks´ subsidiaries  Compensation restrictions  Tighter regulation of hedge funds  Restriction of prop trading  FTT  “Structural” bank reforms to split up universal banks Reduce the likelihood of shocks  Higher capital requirements in terms of quantity and quality  Increased minimum liquidity standards  Improved transparency  Contingent capital  Countercyclical capital buffers  Macro prudential oversight addressing system wide risk across banks  Multitude of initiatives leads to complexity and uncertainty about interaction  Lack of international coordination creates competitive distortions, lack of effectiveness and regulatory arbitrage  Large cumulative effects increase danger of recessionary effect  Increasing divergence between policy agendas adds to the risk of market (re)fragmentation  Aggressive timetable  Bias against large banks Objections Research Deutsche Bank Jan Schildbach 21 October 2014 Leverage down, capital up 8 4 5 6 7 8 9 10 11 12 13 08 Q2 09 09 Q2 10 10 Q2 11 11 Q2 12 12 Q2 13 13 Q2 14 % Core Tier 1/Common Equity Tier 1 ratio* of Europe's 20 largest banks * Basel II; Basel 2.5 applied from Q4 11 on, Basel III from Q1 14 on Sources: Company reports, Deutsche Bank Research 10 11 12 13 14 15 16 17 18 19 20 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Total assets / equity capital Euro-area banks' leverage ratio Sources: ECB, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 21 October 2014 Driven by de-risking and shrinking, not retained earnings 9 -50 0 50 100 150 200 250 2007080910111213 Net income of EU-27 banks Sources: ECB, Deutsche Bank Research EUR bn -8 -7 -6 -5 -4 -3 -2 -1 0 1 20091011*1213 % yoy EU banks: Change in risk- weighted assets * significant increase in RWA due to introduction of Basel 2.5 Sources: ECB, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 21 October 2014 Corporate borrowing is partly shifting to capital markets 10 -9 -6 -3 0 3 6 9 12 15 18 030405060708091011121314 HouseholdsNon-financial corporations % yoy Sources: ECB, Deutsche Bank Research Loans to the private sector in the euro area -600 -400 -200 0 200 400 600 091011121314 Loans*Bonds** Sources: ECB, Deutsche Bank Research * Including loans transferred to national bad bank in Spain in Dec 12. ** Adjusted for reclassification of issuers in Germany in Jan 11. Non-financial firms in the EMU: Cumulative change in outstanding funding instruments EUR bn, January 2009 = 0 Research Deutsche Bank Jan Schildbach 21 October 2014 ... as banks are also unable to securitise loans 11 0 50 100 150 200 250 200708091011121314 447 Source: AFME European securitisation issuance EUR bn 0 100 200 300 400 500 600 700 800 900 200607080910111213H1 14 ann. PlacedRetained EUR bn Sources: AFME, Deutsche Bank Research European securitisation issuance by retention Research Deutsche Bank Jan Schildbach 21 October 2014 Cross-border banking on the retreat, too 12 0 5 10 15 20 25 30 9798990001020304050607080910111213 EU banksBanks from third countries % of total assets Market share of foreign-owned banks in the EU-27 Sources: ECB, Deutsche Bank Research 40 50 60 70 80 90 100 110 120 130 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 DEFRUKESSE March 2008 = 100 Sources: BIS, Deutsche Bank Research Foreign claims of European banks by reporting country Research Deutsche Bank Jan Schildbach 21 October 2014 Funding: Stronger focus on deposits 13 0 10 20 30 40 50 60 DEFRITESEMU 199920062013 Sources: ECB, Deutsche Bank Research Customer deposits in % of total assets 40 60 80 100 120 140 160 180 DEFRITESEMU 199920062013 Loan-deposit ratio with non-banks % Sources: ECB, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 21 October 2014 Rank GFCI 2014 GFCI 2007 New York 1 2 London 2 1 Hong Kong 3 3 Singapore 4 4 Zurich 5 5 Tokyo 6 9 Seoul 7 43 Boston 8 14 Geneva 9 10 San Francisco 10 13 Frankfurt 11 6 Luxembourg 12 26 Washington D.C 13 20 Toronto 14 12 Chicago 15 8 Montreal 16 21 Vancouver 17 27 Shenzhen 18 - Vienna 19 35 Shanghai 20 24 Tel Aviv 21 - Calgary 22 - Sydney 23 7 Monaco 24 - Buenos Aires 25 - Qatar 26 - Busan 27 - Munich 28 - Dubai 29 25 Stockholm 30 29 Overall, Europe’s influence in global finance is declining; EM financial centres gain in importance 14 Sources: Z/Yen, CityUK 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 19992004200720092014 USEurope JapanOther developed countries Emerging markets European banks losing ground As of mid-June each year, 2014: Oct 6 Sources: Bloomberg, The Banker, Thomson, DB Research Market cap of the world's 25 largest banks by region Research Deutsche Bank Jan Schildbach 21 October 2014 Agenda 3 2 1 Regulatory trends & their impact Swedish banks Big picture: EU bank performance 15 4 Outlook: Banking Union Research Deutsche Bank Jan Schildbach 21 October 2014 Swedish banks are highly profitable and efficient 16 Research Deutsche Bank Jan Schildbach 21 October 2014 ... with growing business volumes – a rare exception 17 Research Deutsche Bank Jan Schildbach 21 October 2014 ... but strong reliance on market funding and relatively high absolute leverage 18 Research Deutsche Bank Jan Schildbach 21 October 2014 Agenda 3 2 1 Regulatory trends & their impact Swedish banks Big picture: EU bank performance 19 4 Outlook: Banking Union Research Deutsche Bank Jan Schildbach 21 October 2014 20 Banking Union: The ESFS Comprehensive approach, but multiple players European System of Financial Supervision (ESFS) ESRB (Frankfurt/M) European Supervisory Authorities (ESAs) EBA (London ) ESMA (Paris) EIOPA (Frankfurt/M) Joint Committee of the ESAs (incl. Sub-Committee on Financial Conglomerates ) Board of Appeal (6 members, 2 each nominated by each ESA Mgt. Board) ECB (Fft/M. ) National competent authorities SSM Research Deutsche Bank Jan Schildbach 21 October 2014 Interdependence of financial and budget (in)stability 21 Financial instability Budget instability • support for financial firms • lower tax revenues • higher expenditure • potential default of sovereign debtors • concerns on inflation Research Deutsche Bank Jan Schildbach 21 October 2014 Breaking the bank-sovereign nexus 22 Financial instability Budget instability How? Financial sector rescue must not fall on national budget! How? Funding and assets should be diversified! Research Deutsche Bank Jan Schildbach 21 October 2014 BU elements are interdependent: Common supervision needs complementary resolution arrangements 23 Research Deutsche Bank Jan Schildbach 21 October 2014 BU framework established, implementation under way 24 Motivation: − Breaking the link between financial and fiscal instability − Securing the single financial market; avoiding (re-)fragmentation Necessary elements Status quo Single Rule Book  - incl.CRD IV /CRR, deposit insurance and resolution - some progress, not perfect. Single Supervisory Mechanism (SSM)  − To start November 2014 − for 120 significant credit institutions (85% of assets) the ECB will be in charge directly; for others joined responsibility with national authorities − Precondition: comprehensive assessment (supervisory risk assessment, AQR, stress test) currently under way with results expected end of Oct. 2014 Single Resolution Mechanism (SRM)  − basis: common rules for resolution, crisis prevention; bail-in as basic principle instead of bail-out > agreement reached and new rules being implemented − Single resolution mechanism: agreement to set up a joint mechanism to decide about resolution incl. financing Single Resolution Fund (SRF)  − so far only national funds in some member states − SRF: Common resolution fund financed by banks; 55bn € target level to be reached over 8 years, gradual mutualization of compartments Current critical issues: − Communication of AQR results: ensure dialogue with ECB, appropriate validation, transparent & robust process − Detailed rules for calculation of fund contributions Research Deutsche Bank Jan Schildbach 21 October 2014 Contact Jan Schildbach Deutsche Bank Research Banking, Financial Markets, Regulation Taunusanlage 12 D-60325 Frankfurt/Main Phone: +49 69 910-31717 E-mail: jan.schildbach@db.com Internet: www.dbresearch.com Research Deutsche Bank Jan Schildbach 21 October 2014 © Copyright 2014. 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