Richard K. DavisChairman, President and CEOOctober 27, 2009

Richard K. DavisChairman, President and CEOOctober 27, 2009

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Right Brain

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The Way Forward?The Way Forward?

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Banking Industry 2006

Strong

Healthy

Vibrant

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Banking Industry Today

Strong?

Healthy?

Vibrant?

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You Might be an Banker if ...

Your 4th grade daughter asks you to cancel your appearance at her class’s career day

You’re afraid to go to Washington, D.C.

Your spouse tells everyone you’re a pizza delivery driver

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The Economic Outlook

GDP

Unemployment

Labor compensation

Housing

Automotive

Economic growth

Consumer spending

Consumer confidence!?

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Intersection:

BankingBanking U.S. U.S. EconomyEconomy

U.S. U.S. EconomyEconomy

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Intersection:

U.S. U.S. EconomyEconomy

U.S. U.S. EconomyEconomyBankingBanking

Global Global EconomyEconomy

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Catalyst?Catalyst?

Banking!Banking!

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Liquidity Crisis …to Credit Crisis …to Solvency Crisis

Liquidity Crisis …to Credit Crisis …to Solvency Crisis

% change in S&P market index (and related proxies for early years) by year

18621879188519331954

18431863192819351958

183019081927193619381945195019551975198019851989199119951997

18461852188019001901190919151922192419251942194319511961196319671976198219831996199819992003

182918321834183818471848184918501855185818641878188618921897189819041905191819191921192619441949195219591964196519681971197219791986198820042006

182618361840184218441856

1866186718681869187018711872187418751877188118871889189118941895189618991902190619111912191619231947194819561960197019781984198719921993199420052007

18591865

18251828183118371841185418731884189319101917192019411957196619732001

183918571907193019742002

193719312008

182718331835184518511853

187618821883188718901903191319141929193219341939194019461953196219691977198119902000

18601861

60504030200-20-30-40-50 -10 10

2008 was different from any crisis in living memory

Current crisis

2009 Q3

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SOURCE: Eichengreen and O’Rourke, 2009, Center for Economic and Policy Research

The global financial crisis shrunk the world economy at a similar rate as the start of the Great Depression

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Bailouts – capital infusions

Liquidity support – bank run protections

Guarantees of risky assets

10,985

4,873

5,220

892

$ Billions

Bear Stearns

Citi

Bank of America

FDIC Guarantee to GE

FHA Hope for Home Owners

FDIC Liquidity Guarantees

Net Portfolio CP Funding

TAF

MMIFF

TSL

Primary Credit Discount

ABCP Liquidity

Primary Dealer and others

Securities Lending Overnight

Secondary Credit

TARP

Fannie/Freddie (ex TARP funding)

AIG (ex TARP funding)

29

301

118

139

300

1,400

1,800

900

540

250

93

62

47

10

118

700

400

123

Program

Maximum Notional amount

P-PIP (ex TARP funding) 900

Credit easing by MBS purchase 1250

Agency debt/ treasury securities 500

TALF (ex TARP funding) 1000

– Further intervention?

– Exit strategy?

U.S. government and others have taken unprecedented efforts to support the financial system

Key questions

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Scenario 4: Double dip

Shallow recovery followed by second

downturn

Scenario 3: Stalled globalizationModerate recession, followed by structurally slower global growth

Scenario 1: Quick fixRebound by end of 2009, sustained in

2010-11

The global macro outlook remains highly uncertain

2009 ‘10 ‘11 ‘12 2013 2009 ‘10 ‘11 ‘12 2013

Scenario 2: Battered, but resilientProlonged stress through mid-2010, recovery begins 2011

Base case

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1,575

1,065

Total

~2,640

Other business debt

240

LL Loans

130

HY Bonds

200

Other consumer loans

400

Consumer credit cards

390

CRE

380

Residential real estate

900

More pain to come – $1.5 trillion of an estimated $2.6 trillion in global credit losses on U.S. assets has been recognized

Losses writtenoff through July 2009

Scenario 2: ‘Battered, but resilient’ - Estimated cumulative U.S. loan losses and mark-downs USD billions, global losses on U.S.-issued assets

Estimated cumulativeLosses

Total outstandings

% of losses recognized1

Loss as % of outstanding

~90%

8%

11,140

~40%

11%

3,480

~25%

46%

840

~40%

24%

1,680

~60%

29%

680

~60%

22%

590

~45%

~4%

6,410

~60%

11%

24,820

1 Total write-offs as of July, 2009

▪ ~60% or $600B borne by banks

▪ Of this, ~70% or $400B borne by 19 SCAP banks

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Future outlook for banking is linked to the macro economy and the regulatory and political environment

Key sources of uncertaintyKey drivers of change

▪ What will be the depth and shape of the global recession and recovery?

▪ What is the magnitude of balance sheet write-offs yet to come?

▪ When will the global capital markets and credit markets recover?

▪ To what extent will consumers and corporates continue to deleverage?

Macro economy

▪ How will regulators intervene?

▪ How will the political environment impact the industry?Re-regulation and political environment

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Banking – next 3-5 years

▪ Still attractive

– Economic recovery

– Normalized loan provisions

– Shrinking of shadow banking

– Widening credit spreads

– More safety/ soundness

Profitability will return to 2006 levels by 2013

Bank estimated pre-tax profits (after provision for losses)

2012-2013E

$45-47B

2008

($2B)

2006

$48B

ESTIMATES

ROA 1.4% (0.5%) ~1.3%

ROE 13% (0.5%) 11-12%

Beyond the current uncertainty, banking will re-emerge as an attractive space

+

▪ New headwinds

– Impact of regulations

– Larger capital requirements

– Countercyclical provisions

– Higher deposit insurance

– Lower EPS due to dilution

(after tax)

(after tax)

?

–

▪ Valuation uncertainty

– Higher PE due to lower risk

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Industry structure in the next 3 years

▪ Banks will largely focus on traditional less-risk businesses

▪ Regulators will be more strict

▪ Failure / consolidation of mid-tier and smaller banks

▪ Deposits/ savings/ investments will grow faster, and credit will grow slower (as households save and deleverage)

▪ Smaller, more vanilla securitization market; rise of on-balance sheet banking

▪ Rise of boutiques, especially in talent-driven businesses (M&A advisory, proprietary trading, etc.)

▪ Monolines/ credit unions/ ILCs will remain

▪ Crisis will accelerate the shift of economic growth to developing markets

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Proposed Financial Regulatory Changes

New Financial Consumer Agency

Systemic Oversight Council

Resolution Mechanism for Large Institutions

Regulatory Consolidation and Restructuring

Stress Testing Requirements (liquidity / capital / economic)

“Living Will”

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Intersection:

U.S. U.S. EconomyEconomy

U.S. U.S. EconomyEconomyBankingBanking

Global Global EconomyEconomy

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Recovery?

Expansion?

Adjustment?

The Next Phase:The Next Phase:

Banking’s Role in the Economic Expansion

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The BankingBanking System Purpose

To bear risk and allocate capital

But: (in recent years)

The outcome was to have created risk

(risk sharing)

(risk creation)

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The BankingBanking System Purpose

To bear risk and allocate capital

And: (going forward)

The outcome is to create growth

(risk sharing)

(create leverage)

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Intersection:

BankingBanking LeadershipLeadershipLeadershipLeadership

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Management

“The secret of successful managing is to keep the five guys who hate you away from the five guys who haven’t made up their minds yet.”

- Casey Stengel

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Leadership“The best leader is the one who has sense enough to pick good people to do what he wants done, and self-restraint enough to keep from meddling with them while they do it.”

- Theodore Roosevelt

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Balance

“Management is efficiency in climbing the ladder of success; leadership determines whether the ladder is leaning against the right wall.”

- Stephen R. Covey

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The Way Forward?The Way Forward?

Richard K. DavisChairman, President and CEOOctober 27, 2009

Richard K. DavisChairman, President and CEOOctober 27, 2009