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November 2, 2015
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Presentation: Which role have banks to play in Europe? Research Deutsche Bank Jan Schildbach 2 November 2015 Research Deutsche Bank Which role have banks to play in Europe? Stockholm, 2 November 2015 Jan Schildbach Research Deutsche Bank Jan Schildbach 2 November 2015 Agenda 2 1 Outlook for business segments State of play in European banking 2 Research Deutsche Bank Jan Schildbach 2 November 2015 European banks are 4-5 years behind their US peers in the cycle 3 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 Q1 15 US banksLarge European banks Total revenues Sources: FDIC, company reports, Deutsche Bank Research Q1 2006 = 100, up to Q2 15 -80 -60 -40 -20 0 20 40 60 Q1 06 Q1 07 Q1 08 Q1 09 Q1 10 Q1 11 Q1 12 Q1 13 Q1 14 Q1 15 US banksLarge European banks Net income Sources: FDIC, ECB, company reports, Deutsche Bank Research USD / EUR bn, up to Q2 15 Research Deutsche Bank Jan Schildbach 2 November 2015 ... as loan books have shrunk and asset quality remained weak until recently 4 -9 -6 -3 0 3 6 9 12 0809101112131415 USEuro area Lending to the private sector % yoy, up to Sep 15 Sources: ECB, FDIC, Deutsche Bank Research 0 10 20 30 40 50 60 70 80 06070809101112131415 US banksLarge European banks Loan loss provisions USD / EUR bn, up to Q2 15 Sources: FDIC, company reports, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 2 November 2015 ... and low interest rates hurt margins 5 0 1 2 3 4 5 6 7 19990103050709111315 USEurolandUK % Main official interest rates Sources: Federal Reserve, ECB, BoE 105 110 115 120 125 130 135 140 H1 10 H2H1 11 H2H1 12 H2H1 13 H2H1 14 H2H1 15 EUR bn, top 20 European banks Sources: Company reports, Deutsche Bank Research Net interest income Research Deutsche Bank Jan Schildbach 2 November 2015 Leverage down, capital up – but process has slowed 6 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 Dec 14 Jun 15 Total assets / equity capital Euro-area banks' leverage ratio Sources: ECB, Deutsche Bank Research 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 14 Q2 15 % 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 Research Deutsche Bank Jan Schildbach 2 November 2015 Despite improving earnings – consumed by increased risk-taking 7 -50 0 50 100 150 200 250 200708091011121314 Net incomeNet income, continuing operations Net income of EU-27 banks EUR bn Sources: ECB, Deutsche Bank Research -8 -6 -4 -2 0 2 4 6 20091011*121314* % yoy, top 20 institutions * significant increase in RWA due to introduction of Basel 2.5 and Basel III, resp. European banks: Change in risk-weighted assets Sources: Company reports, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 2 November 2015 Corporate borrowing has partly shifted to capital markets – but will it continue? 8 -9 -6 -3 0 3 6 9 12 15 18 03040506070809101112131415 HouseholdsNon-fin. corporations % yoy Sources: ECB, Deutsche Bank Research Loans to the private sector in the euro area -600 -400 -200 0 200 400 600 09101112131415 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 and in the euro area in Dec 12 following the introduction of ESA 2010. Non-financial firms in the EMU: Cumulative change in outstanding funding instruments EUR bn, January 2009 = 0 Research Deutsche Bank Jan Schildbach 2 November 2015 ... while securitisation levels remain depressed 9 0 100 200 300 400 500 600 700 800 900 200607080910111213149M15 PlacedRetained EUR bn Sources: AFME, Deutsche Bank Research European securitisation issuance by retention 0 50 100 150 200 250 20070809101112131415 447 Source: AFME European securitisation issuance EUR bn Research Deutsche Bank Jan Schildbach 2 November 2015 But a stronger traditional funding base creates new challenges in the current rate environment 10 0 10 20 30 40 50 60 DEFRITESEMU 199920062014 Sources: ECB, Deutsche Bank Research Customer deposits in % of total assets 40 60 80 100 120 140 160 180 DEFRITESEMU 199920062014 Loan-deposit ratio with non-banks % Sources: ECB, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 2 November 2015 Cross-border banking on the retreat, too 11 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 Jun 14 Jun 15 DEFRUKESSE March 2008 = 100 Sources: BIS, Deutsche Bank Research Foreign claims of European banks by reporting country 0 5 10 15 20 25 30 979899000102030405060708091011121314 EU banksBanks from third countries % of total assets Market share of foreign-owned banks in the EU-28 Sources: ECB, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 2 November 2015 Banking Union as a potential remedy 12 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)  − started Nov. 2014 − ECB now in charge for 123 significant banks (82% of EA banking assets); for others joined responsibility with national authorities − Comprehensive assessment (supervisory risk assessment, AQR, stress test) as precondition and “health check” contributed to building trust Single Resolution Mechanism (SRM)  − basis: common rules for resolution, crisis prevention; bail-in as basic principle instead of bail-out > 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 (Jan 2016 – end-2023), gradual mutualization of compartments Research Deutsche Bank Jan Schildbach 2 November 2015 Rank GFCI 2015 GFCI 2007 London 1 1 New York 2 2 Hong Kong 3 3 Singapore 4 4 Tokyo 5 9 Seoul 6 43 Zurich 7 5 Toronto 8 12 San Francisco 9 13 Washington D.C. 10 20 Chicago 11 8 Boston 12 14 Geneva 13 10 Frankfurt 14 6 Sydney 15 7 Dubai 16 25 Montreal 17 21 Vancouver 18 27 Luxembourg 19 26 Osaka 20 - Shanghai 21 24 Doha 22 - Shenzhen 23 - Busan 24 - Tel Aviv 25 - Taipei 26 - Melbourne 27 18 Abu Dhabi 28 - Beijing 29 36 Vienna 30 35 Nonetheless, Europe’s influence in global finance is declining; EM financial centres gain in importance 13 Sources: Z/Yen, CityUK 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 199920042007200920132015 USAEurope JapanOther developed countries Emerging markets European banks losing ground Market cap of the world's 25 largest banks by region As of mid-June each year Sources: Bloomberg, The Banker, Thomson, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 2 November 2015 Swedish banks are highly profitable and efficient – not least due to growing business volumes 14 Source: Deutsche Bank Research Source: Deutsche Bank Research Research Deutsche Bank Jan Schildbach 2 November 2015 ... but strong reliance on market funding and relatively high absolute leverage 15 Source: Deutsche Bank Research Source: Deutsche Bank Research Research Deutsche Bank Jan Schildbach 2 November 2015 Agenda 2 1 Outlook for business segments State of play in European banking 16 Research Deutsche Bank Jan Schildbach 2 November 2015 —Global investments in FinTech startups quadrupled in 2014 —USD 12 bn, up from USD 1.8 bn in 2010 —US dwarfs rest of the world with investments of almost USD 10 bn in 2014 —Despite an uptick in recent years, Europe lagging behind —In 2014: —USD 623 m investment in UK and Ireland —USD 345 m in Nordic region —USD 85 m in Germany Retail banking (I): FinTech challenge 17 0 2 4 6 8 10 US UK & Ireland Nordic Region Netherlands Germany USD bn in 2014 Sources: Accenture, Deutsche Bank Research Investment in FinTechs by region Sources: Accenture, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 2 November 2015 18 Retail banking (II): FinTechs versus “Fins”? How much finance, how much regulation? —FinTech business volume very small compared to incumbent providers (even in payment services) – so far —Will FinTechs be able to scale up their business? —Attractiveness to mass market (retail and business clients)? —Processing capabilities —Customer service —Regulation: how much regulatory arbitrage? —Up to date, many FinTechs are not supervised like established financial service providers —Can FinTechs sustain their business models if regulators impose existing financial regulations on them (“same risk- same regulation”)? —Competition on —Expertise in financial risk management —Funding cost: funding loans by deposits only allowed with banking licence Research Deutsche Bank Jan Schildbach 2 November 2015 —Overarching objective of CMU: boost growth and innovation and lift employment by —enhancing the free flow of capital across borders —developing a more diversified financial system —reduce high dependence on bank funding: bank loans to firms 37% of GDP in Europe vs 14% in the US —CMU complements the Banking Union with a larger coverage: all 28 EU countries and not only the euro area —Action plan released in September —Legislative proposals on securitisation and Solvency II —Public consultation on venture capital and covered bonds —Cumulative impact of financial legislation Corporate banking (I): Increasing role of capital market funding  Capital Markets Union 19 Research Deutsche Bank Jan Schildbach 2 November 2015 —Stock issuance in 2014 —EUR 69 bn in the US (150% market-cap to GDP) —EUR 63 bn in the EU (65% market-cap to GDP) —Solid liquidity and market access, yet —fragmentation along national lines —decline in cross-border investments within Europe —CMU may help to harmonise 1.rules that govern exchanges 2.company, securities and insolvency laws and taxation Corporate banking (II): Stock market financing is a cornerstone of corporate funding in Europe 20 0 40 80 120 160 02 04 06 08 10 12 14 US France Germany Italy Netherlands Spain Ireland Other euro area Non-financial firms’ stock issuance trends in the US & euro area EUR bn Sources: FED, ECB, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 2 November 2015 —Between 2012 and 2014, —bank loan outflows of EUR 300 bn in the EMU —compensated by inflows of EUR 269 bn from bond issuance —Investor base creates a bottleneck for further growth —CMU is a good opportunity to 1.allow for a more active involvement of pension funds in bond markets 2.reduce the mechanistic reliance on ratings 3.iron out duplications and overlaps in disclosure regimes Corporate banking (III): Corporate bond markets take on a bigger role versus bank lending 21 -200 0 200 400 600 0 40 80 120 160 06 07 08 09 10 11 12 13 14 Bond issuance Bank loan Sources: ECB, Deutsche Bank Research Euro area: Non-financial firms' funding shifts from loans to bonds EUR bn, Net bond issuance (left), Bank loan flows (right) Research Deutsche Bank Jan Schildbach 2 November 2015 —Market size —USD 1.9 tr in Europe —USD 10 tr in the US —Robust securitisation market in Europe. Default rates (2014) in the US —8x and 3x larger than in Europe for RMBSs and CDOs, respectively —MBS and SME-ABS are vital for lending to regain traction —CMU can boost the securitisation market to the extent that it introduces a preferential regulatory treatment —“simple, transparent and comparable securitisations” Corporate banking (IV): Properly regulated securitisation is a valuable contribution to European financial markets 22 0 4000 8000 12000 16000 02 04 06 08 10 12 14 MBS (US) CDO (US) ABS (US) MBS (Europe) CDO (Europe) ABS (Europe) Decline of the securitisation market Outstanding amounts in USD bn Sources: SIFMA, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 2 November 2015 Investment banking (I): M&A prospects benign & upside potential in Europe 23 0 2 4 6 8 10 12 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15YTD Millionen DCMECMM&A Source: Dealogic USD tr Global corporate finance deal volumes -by type 0 2 4 6 8 10 12 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15YTD AmericasEMEAAPAC Global corporate finance deal volumes -by region USD tr Sources: Dealogic, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 2 November 2015 Investment banking (II): But regulation drives structural imbalance in some market segments Corporate bond volume has doubled in the US, but banks’ bond holdings have fallen to a fraction of pre-crisis levels 24 Research Deutsche Bank Jan Schildbach 2 November 2015 Complexity due to new consultations and revisions by the BCBS: − some elements of Basel III will become mandatory over the next few years − Scope of “Basel IV” rather vague Discussion of upcoming regulatory initiatives: − Revisions to the standardised approach for credit risk • reducing reliance on external credit ratings • new capital floor based on the revised approach to mitigate model risks − Fundamental Review of the Trading Book •revised standardised approach to be given greater weight / potential floor •gap between standard and internal approaches to be reduced − Potential increase in Leverage Ratio requirements up to 5% − Introduction of TLAC as an additional minimum capital requirement  addressing the too-big-too-fail problem − Interest rate risk in the banking book (IRRBB) • potential increase in capital requirements (e.g. for fixed-rate mortgages) Investment banking (III): With more to come – “Basel IV” is just around the corner 25 Research Deutsche Bank Jan Schildbach 2 November 2015 Investment banking (IV): Smaller (and Nordic) banks better prepared for (even) tougher capital rules Basel III Monitoring Sources: BCBS, Bundesbank 26 %, as of 31 Dec 2014 Ø G1 EU Ø G1 Basel G-SIBs Ø G2 EU Ø G2 Basel CET1 ratio 11.4 11.1 10.8 12.4 12.3 Leverage ratio 4.2 5.0 4.9 5.0 5.3 LCR 124 125 127 150 144 NSFR 102 111 112 109 114 Additional capital needed EUR 48.8 bn EUR 35.4 bn EUR 15.5 bn Research Deutsche Bank Jan Schildbach 2 November 2015 Asset management: A structural growth business – in Europe, and even more so elsewhere 27 7.5 7.6 7.4 8.5 9.3 10.2 11.3 11.7 9.1 10.7 11.6 11.4 12.7 14.9 16.2 19.9 4.8 5.1 5.9 6.6 7.2 7.6 8.4 9.5 7.4 9.7 10.8 10.7 12.0 14.2 15.8 21.2 8.4 8.4 8.4 8.6 8.9 9.4 10.1 10.7 8.3 9.5 10.2 10.1 10.9 12.4 13.0 16.5 26 26 27 29 31 34 37 41 33 39 43 42 46 53 56 70 0 10 20 30 40 50 60 70 80 200020022004200620082010201220142017F North America 5.7%Asia-Pacific 8.9%Europe 3.2% Latin America 6.5%Middle East 6.1%Africa 6.2% Average change 2000-14 in % p.a.: Global HNWI wealth distribution by region USD tr Sources: Capgemini, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 2 November 2015 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 2 November 2015 © Copyright 2015. 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