December 9, 2010

Europe: Banks

Still not a level playing field; regulatory differences drive relative returns

A wide gap in average risk weights … European IBs’ competitive position improves European investment banks (IBs) report similar The end game of the current regulatory set-up is risk-based leverage (CT1) to those in the US, but an improved competitive position for non-Swiss ACTION substantially higher “simple” leverage (TATE). European IBs (e.g. , BNP Paribas), RATING AND 12-MONTH PRICE TARGET CHANGES This is a function of differences in average risk in our view. Comparatively higher leverage should Share Price Target Rating Price Old New Old New weights, which in 3Q2010 stood at 27% for allow for a pricing advantage and consequently an Credit Suisse SFr 38.2 57.0 49.0 Buy Neutral European IBs versus 54% in the US, on our increase in their global market share. UBS SFr 15.5 20.9 20.1 Neutral Neutral Deutsche bank € 38.2 49.0 51.0 Neutral Neutral estimates. This disparity can be explained by £p 263.0 339.0 339.0 Neutral Neutral For Credit Suisse/UBS, we expect steady-state multiple factors, with genuine business mix BNP € 49.3 78.0 78.0 Buy* Buy* returns to de-rate, as Swiss regulation drives a Societe Generale € 38.9 58.0 58.0 Buy Buy differentiation being important. Pure * denotes Conviction List membership sharp increase in capital per unit of assets; CoCos methodological differences are also meaningful, can be a partial mitigant. All in, we struggle to see COVERAGE VIEW: NEUTRAL in particular for market RWA. Swiss banks exceeding mid-teen ROTE under the RELATED RESEARCH: new regulatory regime (exceeded 30% pre-crisis). … set to continue under Basel III October 18, 2010: Capital is back in the spotlight, but one We find that the historically high return differential size does not fit all Under Basel III, the gap in average risk weights between Swiss IBs and Deutsche Bank closes does not close, on our estimates, allowing the October 12, 2010: Swiss endorse CoCos – laying out when targeted capital structure is applied. scenarios for European TBTF capital surcharge leverage disparity to continue. Swiss IBs are an exception, as (substantially) higher minimum September 21, 2010: Capital post Basel III: 7% Core Tier 1 CS down to Neutral; BNP remains CL Buy not the magic number; select banks in capital surplus capital ratios (as per new Swiss regulation) We downgrade Credit Suisse from Buy to Neutral compensate for lower risk weights, thus closing following a revision of our valuation model and their TATE gap with US peers. steady-state returns under the new regulatory In our view, global comparability of risk-based proposal; our preferred European bank with leverage cannot be achieved without ensuring a exposure to capital markets is BNP Paribas, which consistent and transparent approach to RWAs. is on our Conviction Buy List. Jernej Omahen The Goldman Sachs Group, Inc. does and seeks to do business with +44(20)7774-6324 [email protected] Goldman Sachs International companies covered in its research reports. As a result, investors should Richard Ramsden be aware that the firm may have a conflict of interest that could affect (212) 357-9981 [email protected] Goldman Sachs & Co. the objectivity of this report. Investors should consider this report as Pawel Dziedzic only a single factor in making their investment decision. For Reg AC +44(20)7774-1279 [email protected] Goldman Sachs International certification, see the end of the text. Other important disclosures follow Aaron Ibbotson, CFA the Reg AC certification, or go to www.gs.com/research/hedge.html. +44(20)7774-6661 [email protected] Goldman Sachs International Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research December 9, 2010 Europe: Banks

Table of Contents

Overview: Still unlevel playing field under B3; regulatory arbitrage drives relative returns 3 RWA increase under Basel III substantial, mitigation is not execution risk free 5 A wide gap in European and US risk weights continues under Basel III 7 Swiss banks’ returns to de-rate, in absolute and relative terms, in our view 17 Estimates changes and valuation 21 Credit Suisse (CSGN.VX): Absolute upside attractive, relative in line; down to Neutral 22 Appendix I: Peer group, methodology and trying to bridge the gap in US GAAP and IFRS 24 Appendix II: Swiss bank returns to de-rate, in absolute and relative terms, in our view 25

Prices in the body of this report are based on the close of December 7, 2010.

We would like to thank Eugene Zagorovskis for his contribution to this report.

Goldman Sachs Global Investment Research 2 December 9, 2010 Europe: Banks

Overview: Still unlevel playing field under B3; regulatory arbitrage drives relative returns

We lay out the global peer group and accounting approach/adjustments we use as a basis for comparisons in Appendix I.

RWA increases under Basel III substantial, mitigation is not execution risk free IBs have communicated sharp increases in RWA due to the Basel III effects; we believe company guidance is reasonably precise, providing gross increases in RWA as well as mitigation targets. Cumulatively, mitigation targets are large; in total, the four European IBs are looking to reduce RWA by €238 bn or 33% of communicated gross increase. For most banks, planned disposals account for a meaningful proportion of mitigation and are therefore subject to execution risk, in our view. Successful execution adds c.100 bp to CT1 ratios.

More broadly, we believe the new treatment of select assets will result in banks no longer being willing to hold them – the regulatory changes, therefore, are likely to push these assets into the non-bank sector – one such asset class could be low-rated securitizations, which all banks have earmarked as part of their mitigation programmes.

A wide gap in European and US risk weights to remain under Basel III The old debate of different leverage levels between European and US IBs has recently been revived, as part of changes relating to Basel III. In essence, this debate boils down to European IBs reporting similar CT1 ratios (i.e. risk-based leverage) to those in the US, but substantially higher non-risk based leverage. In our view, this is primarily a function of average risk-weight differentials, which in 3Q2010 stood at 27% for IBs in Europe and 54% for those in the US. Under Basel III, we estimate new risk weights to increase towards 39% for European IBs and 71% for the US. We therefore do not expect the application of Basel III to meaningfully close the gap – we estimate the gap will narrow marginally, from 99% to 79%.

We see the following main reasons for the discrepancy in risk weightings: genuine business mix differences, differences in total asset reporting under US GAAP and IFRS, which we adjust for; differentials in off-balance sheet asset amounts and varied approaches to RWA calculation. Due to limited disclosure, we are unable to quantify the contribution of each of these factors.

We show in Exhibit 10 how a mechanical application of various US IB risk weights to European IB assets would impact CT1 ratios, but caution that this is only a theoretical exercise, based on several significant assumptions. We do not change our estimates for European banks risk weights (and RWA) on the back of this analysis. However, we believe that with risk weightings failing to adequately capture actual levels of risk during the recent crisis, market focus and debate on this topic are likely to increase.

We believe it is imperative that the global standardization of capital adequacy does not end at setting broadly similar methodology for the calculation of CT1 capital, but also ensures consistent calculation of the denominator, i.e. RWA.

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Swiss bank returns to de-rate, in absolute and relative terms, in our view We expect the Swiss banks to face severe pressure on their returns as the amount of capital per unit of assets rises sharply, in line with the spirit of new regulation. We believe CoCos are crucial in Swiss banks’ attempts to mitigate some of the return compression. This said, even if we assume full CoCo issuance (for both the mandatory buffer as well as the SIFI surcharge) returns would decline by 7%-14% (so ROTE in the c.16%-17% range) compared to “normalized” 2012E levels, all else equal. The magnitude of a de-rating increases to 16%-24% (so ROTE in the 14-15% range) if we assume the 3% mandatory buffer is met through tangible equity build-up. In either case, we struggle to see Swiss banks exceeding a mid-teen ROTE under the new regulatory regime. Historically, the ROTE of Swiss IBs exceeded 30%, in good years.

In contrast to the Swiss banks, Deutsche Bank has a similar starting point of leverage, but without the same de-leveraging pressures, in our view. As a consequence, we see a compression in the historically high ROTE differential between the Swiss banks on one side and DBK on the other – the Swiss banks’ ROTE was 1.9x higher than that of DBK in the 2004-06 period, while we expect it to decline towards 1.4x in 2012. Assuming full implementation of the new Swiss capital regime, this differential could fall further, towards 1.1x-1.2x.

Goldman Sachs Global Investment Research 4 December 9, 2010 Europe: Banks

RWA increase under Basel III substantial, mitigation is not execution risk free

We lay out the global peer group and accounting adjustments for the approach we use as a basis for comparisons in Appendix I. IBs have communicated sharp increases in RWA due to the Basel III effects; we believe company guidance is reasonably precise, providing gross increases in RWA as well as mitigation targets. Cumulatively, mitigation targets are large; in total, the four European IBs are looking to reduce RWA by €238 bn or 33% of communicated gross increase. For most banks, planned disposals account for a meaningful proportion of mitigation and are therefore subject to execution risk, in our view. Successful execution adds c100 bp to the CT1 ratios. More broadly, the new treatment of select assets will result in banks no longer being willing to hold them – the regulatory changes, therefore, are likely to push these assets into the non-bank sector – one such asset class could be low rated securitizations, which all banks have earmarked as part of their mitigation programmes.

Exhibit 1 summarises the Basel III impact on European and US IB RWA.

Exhibit 1: RWA in Europe driven 64% higher by regulatory change; mitigation plans of €238 bn RWA equivalent are large and ambitious, in our view Risk weighted assets, bn

CS UBS DBK (incl DPB) BARC Total European IB BAC C JPM MS Total US IB ccy chg % ccy chg % ccy chg % ccy chg % € chg % RWA chg % RWA chg % RWA chg % RWA chg % US$ chg % 3Q10 228 - 208 - 345 - 405 - 1,141 - 1,477 - 1,003 - 1,169 - 325 - 3,975 - (+) Gross increase 175 77% 192 92% 278 81% 150 37% 726 64% 600 41% 779 78% 400 34% 240 74% 2,019 51% Gross RWA, B3 403 - 400 - 623 - 555 - 1,867 - 2,077 - 1,782 - 1,569 - 565 - 5,993 - (-) Management action -60 -26% -60 -29% -90 -26% -50 -12% -238 -21% -230 -16% -322 -32% -180 -15% -100 -31% -832 -21% % of gross increase -34% - -31% - -32% - -33% - -33% - -38% - -41% - -45% - -42% - -41% - (=) Net increase 115 51% 132 63% 188 55% 100 25% 489 43% 370 25% 456 45% 220 19% 140 43% 1,186 30% Net RWA, B3 (proforma) 343 - 340 - 533 - 505 - 1,630 - 1,847 - 1,460 - 1,389 - 465 - 5,161 -

Note: For C, net increase as per company guidance, gross increase as per GS estimate. For UBS, management action guidance is for “up to SFr100 bn”, we incorporate SFr60 bn.

Source: Company data, Goldman Sachs Research estimates.

On aggregate, we expect European IBs to show a gross increase in RWA of €726 bn (64% increase), of which the new treatment of securitizations amounts to €231 bn. Cumulative mitigation plans amount to €238 bn, resulting in a net increase of €489 bn. We therefore expect Basel changes to lift the aggregate RWA by 43% from current levels. These are big numbers and as such we believe the aggressive timing of mitigation strategies could well end up easing, and more closely reflecting the maturity profile of assets held.

Stock specific, the range of our expectations of gross RWA increases is wide, with UBS (+92%) the highest and Barclays (BARC) (+37%) the lowest. The banks than get to a lower net increase through mitigation – European IBs are targeting a roughly similar magnitude of mitigation actions (around 30%), except for UBS, which is targeting mitigation at 50%. We believe UBS’s target is ambitious; our estimates allow for SFr60 bn of mitigation effects, compared to UBS’s SFr100 bn target.

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In the US, our range of gross RWA increases for the aggregate of IBs is even larger, at 34%-78% (or US$2 tn in aggregate) but the average of 51% is below that in Europe (64%). We estimate mitigation actions in the 38%-45% range (over US$800 bn in aggregate), resulting in net increases of around 30% (Europe 43%).

We also find that new treatment of securitizations account for a third of aggregate RWA increases; for BARC, the securitization impact alone is half of the total. We believe that true sales of these assets come with a high execution risk – that said, we find that a reduction in line with the maturity profile (we estimate at 5-10 years) of the assets is execution risk free.

Exhibit 2: Securitizations account for a large proportion of RWA inflation; disposals are not execution risk free Securitization exposures, bn

Securitisations rated

Source: Company data, Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 6 December 9, 2010 Europe: Banks

A wide gap in European and US risk weights continues under Basel III

The old debate of different leverage levels between European and US IBs has recently been revived, as part of changes relating to Basel III. In essence, this debate boils down to European IBs reporting similar CT1 ratios (i.e. risk-based leverage) to those in the US, but substantially higher non-risk based leverage. This is a function of average risk weight differentials, which in 3Q2010 stood at 27% for IBs in Europe and 54% for those in the US. Under Basel III, we estimate the new risk weights to increase towards 39% for European IBs and 71% for the US. A somewhat narrower, but still a substantial 79% gap in average risk weights remains, on our estimates, allowing for a disparity between risk based and non-risk based leverage to continue. This said, Swiss regulation is driving for higher CT1 ratios, which we believe will close the leverage gap to the US banks. For the time being, however, we have not observed similar moves by the local regulators of other European IBs.

We see the following main reasons for the discrepancy in risk weightings: genuine business mix differences, differences in total asset reporting under US GAAP and IFRS, which we attempt to adjust for (all of our Exhibits use adjusted IFRS total assets); differentials in off-balance sheet asset amounts and varied approaches to RWA calculation. Due to limited disclosure, we are unable to quantify the contribution of each of these factors.

We also show how a mechanical application of various US IBs risk weights to European IBs assets would impact CT1 ratios, but caution that this is only a theoretical exercise, based on several significant assumptions (Exhibit 10). We do not change our estimates for European banks’ risk weights (and RWA) on the back of this analysis. However, we believe that with risk weightings failing to adequately capture actual levels of risk during the recent crisis, market focus and debate on this topic are likely to increase.

We believe it is important that the global standardization of capital adequacy does not end at setting a uniform methodology for the calculation of CT1 capital, but also ensures consistent calculation of the denominator, i.e. RWA.

Theoretical and historical backdrop – risk weights failed during the last crisis As the recent crisis has shown, in our view, assigning the appropriate risk weights (rw) is all important. A lower risk weight should mark a lower probability of default (pd) as well as a loss given default (lgd); the two then form a basis for any RWA calculation. We believe it became obvious during the crisis that RWAs failed to gauge actual riskiness of bank assets – banks with an overall low risk weight frequently suffered losses that were disproportionally higher, compared to those that had higher risk weights.

In Europe, we believe the best examples of “low risk” banks that required urgent assistance include: HRE (and within it, Depfa), , RBS, UBS and . This took place as some of the lowest risk weighted assets (i.e. widely perceived to be the “safest”) incurred some of the largest losses; 0% rw structured products are an obvious example.

Exhibit 4 shows the theoretical relationship between risk-based and non-risk based leverage, as a function of risk weights (CT1 = TE/TA * 1/rw). In simple terms, it demonstrates that a low risk weight, when misjudged, can give rise to substantial capital misallocation.

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Exhibit 3: Some of the lowest rw banks produced some of the largest losses Exhibit 4: Theoretical relationship between CT1 and rw, when TETA static PBT (2008-09) as % of total CT1 (2007) versus RWAs as % of total assets (2007) for Theoretical example, assuming the same asset is assigned a range of risk weights, major European banks with TA of €100, TE of €10 and hence static leverage ratio of 10x

100% 60% Low Risk Weights High Risk Weights 80% High Profitability High Profitability

(2007) 50%

BARC.L 60% BBVA.MC STAN.L SAN.MC

40% 40% BNPP.PA ISP.MI derivatives 20% SOGN.PA CRDI.MI ex CAGR.PA HSBA.L 30% 0% DBKGn.DE assets

‐20% DEXI.BR Tier 1 (%)Core total CSGN.VX RBS.L 20% %

as ‐40% CBKG.DE CNAT.PA 09) ‐ ‐60% 10% (2008 ‐80% Low Risk Weights High Risk Weights 0% PBT Low Profitability UBSN.VX LLOY.L Low Profitability ‐100% 80% 70% 60% 50% 40% 30% 20% 0% 10% 20% 30% 40% 50% 60% 70% 80% RWA as % of total assets ex derivatives (2007) Risk Weighting

Source: Company data, Goldman Sachs Research estimates. Source: Company data, Goldman Sachs Research estimates.

Europe versus US: Similar risk-based leverage (CT1 ratio) but twice the (simple) leverage When compared to US peers, European IBs report substantially higher leverage ratios (TATE). In contrast, the CT1 ratios are similar. In our view, this is primarily due to the substantial difference in average risk weights (Exhibit 5).

One of the frequent explanations is that this difference is primarily driven by US IBs reporting RWAs under Basel 1, while European IBs do so under Basel 2. Both are likely to move to Basel III – and current company guidance on Basel III RWA suggests that the differential in rw will remain broadly unchanged.

We calculate the average rw for European IBs will increase from 27% under Basel 2 to 39% under Basel III; and in the US from 54% currently to 71%. This would lead to the difference in rw decreasing marginally, from 99% to 79%.

As is always the case, an average hides disparity within the group. In the case of European IBs, the key capitalization metrics of TATE, rw and CT1 are particularly diverse, which an observation of the aggregate diminishes. We therefore also make the following points:

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 On the issue of non-risk based leverage ratio (TATE), the disparity among European IBs is high. CS and DBK report TATE in the 39-43x range, while UBS and BARC report TATE significantly lower, at 25-26x. The low end of the range is broadly comparable with the highest TATE in the US, that of Morgan Stanley at 23x.

 On the issue of average risk weight, the disparity among the European IBs is limited to the difference between BARC on one side (with 37%) and all of the others, which report a rw in a tight range of 21%-25%.

 Finally, on the issue of CT1 ratio, the European IBs report an average of 10.2%, yet UBS has by far the highest CT1 with 14.2%.

Exhibit 5: Europe vs. US, before and after Basel III: wide disparity in leverage but similar CT1 ratio, due to a wide spread in rw Simple and risk-adjusted leverage ratio, risk weightings (3Q2010)

Basel I / II Basel III Change in risk weighting (net) Leverage RWA / Assets RWA / Assets Core Tier 1 RWA / Assets ppt % (TA / TE) (net) (gross) CS 43x 10.3% 21% 32% 38% 11ppt 51% UBS 25x 14.2% 22% 36% 42% 14ppt 63% DBK (incl DPB) 39x 8.5% 25% 39% 45% 14ppt 55% BARC 26x 10.0% 37% 47% 51% 10ppt 28% Average Europe 32x 10.2% 27% 39% 45% 12ppt 44% BAC 17x 8.4% 63% 79% 89% 16ppt 25% C 15x 10.3% 51% 74% 90% 23ppt 45% JPM 18x 9.5% 55% 65% 73% 10ppt 19% MS 23x 10.7% 39% 55% 67% 17ppt 43% Average US 17x 9.4% 54% 71% 82% 16ppt 30% US / Europe -45% -8% 99% 79% 81% 34% -33% US - Europe -14x -0.8ppt 27ppt 31ppt 37ppt 4ppt -14ppt

Note 1: Total assets for US banks and CS as per company accounts under US GAAP. For DBK, UBS and BARC US GAAP proxy assets calculated as IFRS total assets less derivative balances. Note 2: CT1 for European banks is calculated as Tier 1 capital less hybrids. We treat CS’s “Claudius” instrument as hybrid, while CS has regulatory approval to include it in its CT1 capital. For US banks CT1 calculated as Tier 1 common ratio. Note 3: BARC figures are as of 1H2010, due to semi-annual reporting.

Source: Company data, Goldman Sachs Research estimates.

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Exhibit 6: Higher leverage translates into similar CT1, through lower risk weights; UBS an exception with its 14.2% CT1 Reported TATE and CT1 ratio and current risk weighting (3Q2010)

US v Europe: similar CT1, different leverage 20% Reported TATE and CT1 ratio, 3Q10

16% UBS 1 12% MS

Tier C CS BARC JPM BAC DBK

Core 8% ±1.1% range

4%

15x - 43x range 0% 0x 10x 20x 30x 40x 50x TATE

CT1 ratios based on a wide spread of risk‐weights...... which allow for a wide disparity in leverage 20% 50x Reported CT1 ratio (3Q10), current risk weighting Reported TETA ratio (3Q10), current risk weighting 18% CS 40x 16% DBK 14% UBS 1 12% MS 30x

Tier C BARC CS

10% range BARC UBS JPM TATE MS DBK BAC 20x Core 8% JPM BAC 6% ±1.1% C 4% 10x 2% 21-63% range 0% 0x 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Risk weighting Risk weighting

Source: Company data, Goldman Sachs Research estimates.

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Examining key reasons behind different risk weights A wide difference exists in risk weights between IBs in Europe and the US. These institutions are frequently similar in their activity mix (especially on the global investment banking side) and balance sheet size and are considered peers by the market; we believe the key reasons for the differences in risk weights can be grouped into the following main categories:

1. Business mix: Genuine and substantial differences exist We view differences in business mix and/or balance sheet composition as a genuine differentiator of risk at the individual bank level. In our view, the mix of activities on the investment banking side is broadly similar, but more genuine differences materialize on the lending/credit side, in our view.

For example, US banks run with higher proportions of unsecured lending, while the proportion of lower-risk mortgages tends to be higher in Europe. Differences in risk weights are therefore to be expected and acknowledged here. Current disclosure does not allow for a more detailed benchmarking of the credit portfolios; additionally our insight at the way the credit risk weights are set for specific parts of the credit exposures is also limited. We believe most investors accept that credit books tend to be of different risk profiles between regions – but the difference cannot be quantified with public disclosure, in our view.

A partial attempt at adjusting for the differences in business mix is to strip out the low-risk loans – residential mortgages – completely from the average rw calculation. For CS/UBS, stripping out mortgages from total assets and RWA (by assuming a 10% rw) results in average Basel III rw increasing to 34% for CS (from 32%, up 2 ppt) and to 39% for UBS (from 36%, so up 3 ppt). Low rw of residential mortgages – a frequently quoted reason for the lower rw – cannot therefore explain the substantial difference, in our view.

2. Accounting differences between US GAAP and IFRS All of the exhibits use adjusted IFRS assets, as a proxy for US GAAP assets, as we discuss below.

US banks and CS file their accounts under US GAAP, while DBK, UBS and BARC do so under IFRS. Total assets (the denominator in our RWA/A ratio) are higher under IFRS as netting of certain balances is not allowed. The largest area of difference is the treatment of derivatives (replacement values), for which US GAAP uses net and IFRS gross balances. We adjust for this by calculating US GAAP proxy assets for these banks as IFRS total assets less derivative balances (positive replacement values). As laid-out in Appendix I, total asset figures for IFRS banks are presented on this basis in all Exhibits.

Our adjustment here is far from perfect and the analysis should be taken in this context. Still, we believe that the largest differentiatior between total assets under US GAAP and IFRS is largely captured.

3. Off-balance sheet assets US IBs hold comparatively more off-balance sheet assets than European IBs; these assets generate RWA that can distort the RWA/A ratio by inflating the numerator. We have attempted to adjust for this element, but we caution that the disclosure of these items is incomplete and comparability limited. We therefore see the use of these figures as a broad guide, rather than an exact estimate.

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We adjust RWA/A ratio by adding off-balance sheet assets to the denominator of RWA/A ratio to arrive at an “on and off-balance sheet asset risk weighting”. For the US banks, we calculate the average at 47%, compared to Europe at 34%. The differential would narrow from the initial 79% to 36%.

Exhibit 7: Risk weighting differential remains, even if the definition is expanded to account for off balance sheet assets RWA/A ratio including and excluding off balance sheet assets, Basel III, 3Q2010

Risk weights Simple On + Off balance sheet RWA / Assets + off balance RWA / Assets sheet assets CS 32% 26% UBS 36% 33% DBK (incl DPB) 39% 35% BARC 47% 39% Average Europe 39% 34% BAC 79% 48% C 74% 48% JPM 65% 45% MS 55% 47% Average US 71% 47% US / Europe 79% 36% US - Europe 31ppt 13ppt

Note 1: Off-balance sheet assets mainly consist of unused commitments. Note 2: BARC figures as of end 1H2010, due to semi-annual reporting.

Source: Goldman Sachs Research estimates.

4. Regulatory approach to RWA calculation, especially for mRWA Currently, market RWA represent between 8%-16% of total RWA for European banks, compared to some 6%-37% for the US banks. They are secondary in size to other types of RWA. While mRWA increases under Basel III, the approach used to calculate the amounts will remain important in determining capital allocation, in our view.

Methodological differences in current mRWA calculations screen as a potentially important driver of the differences in risk weights. Here, we refer to the application of various regulatory approved models, which can calculate a wide range of mRWA outcomes even when the underlying risk is similar.

There are two main ways to calculate mRWA – standardized and advanced models. The standardized model generally results in higher capital allocation and therefore a more punitive capital treatment. This is mainly due to the limited hedging benefit, which,

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under the standardized approach is determined using formulae-based (or, “haircut-based”) rules. In contrast, an advanced model will simulate the impact across the entire portfolio, giving a fuller benefit of hedging/diversification. The difference in capital consumption under the standard and advanced approaches tends to be particularly notable with derivatives businesses.

Ultimately, we believe the question is the amount of capital backing a unit of risk – one way to approximate this is through a mRWA/VaR ratio (Exhibit 9). We approximate the average mRWA/VAR for the US banks of 627, compared to Europe at 376. We note, however, that averages for both the US and Europe are diverse, with outliers for both (for example, C in the US and BARC in Europe).

In our analysis, we use market RWA as reported in the quarterly financial statements for European IBs and as per Y9-C disclosure for the US IBs. For the purpose of this exercise we assume they are broadly comparable.

Our analysis runs as follows:

 Determining the extent of advanced model usage for the calculation of mRWA: Usage of advanced models can give rise to a lower mRWA calculation, for a similar portfolio of assets. We show that the US banks make substantially higher usage of the standard model, while the European banks calculate substantially all of their mRWA through advanced models. This can give rise to different levels of mRWA calculation, in our view.

We make the following steps:  Standardised VaR (1): We translate reported avg VaR into one-day, 99% VaR for all banks; we call this “standardized VaR”  VaR-related mRWA (2): We estimate mRWA driven by the standardized VaR; we call this “VaR-related mRWA”  Extent of advanced model usage for mRWA (3): We put VaR-related mRWA in the context of total mRWA; we believe this is a good indication of the extent of advanced model use in calculating mRWA  Reported usage of advanced models (4): The source here is Pillar 3 disclosure, which is only provided by the European IBs and shows that essentially all market RWA for CS, UBS and DBK are calculated using advanced models. BARC is the exception with 34% of its mRWA derived through advanced models. The reported usage of the advanced model is higher than what our “back test” would suggest for three reasons: we assume a scaling factor of 3x, at the lower end of the 3-4x range, add-ons are not captured in our calculation, as they are not VaR driven, and VaR used to calculate mRWA might differ from reported quarter average VaR.

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Exhibit 8: Extensive advanced model usage in mRWA calculation for the European investment banks, compared to US peers VaR-related mRWA, 2Q2010 (3Q2010 for CS, UBS and DBK)

VaR related mRWA VaR related mRWA

VaR (1-day, % of mRWA via 100% ccy % mRWA 99%) advanced approach

(1) (2) (3) (4) 80% CS 118 13,993 71% 95% UBS 83 9,893 47% 100% 60% DBK (ex DPB) 87 10,281 49% 100% BARC 81 9,558 15% 34% 40% Europe avg 331 39,220 32% -

BAC 189 22,413 15% - 20% C 188 22,294 35% -

JPM 127 15,091 14% - 0% MS 197 23,307 20% - JPM BARC BAC MS C UBS DBK (ex CS DPB) US avg 701 83,105 19% - VaR related mRWA (% of total) mRWA via advanced approach (% of total)

Source: Goldman Sachs Research estimates.

 Comparing capitalization of mRWA between the US and European banks:

Our analysis continues along the following steps:

 mRWA/VaR ratio (5) represents mRWA per unit of risk; the average in Europe is 376, compared to 627 in the US (Exhibit 9).  CT1 allocated per unit of risk (6) – we simply take the mRWA/VaR ratio and multiply it by the current CT1 ratio, to derive the amount of CT1 capital backing each unit of risk. We show the result of this exercise in Exhibit 9.

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Exhibit 9: US banks seemingly back market assets with a higher amount of capital per unit of risk mRWA and CT1 per unit of risk as measured with 99%, one-day VaR

mRWA / VaR CT1 / VaR 1,000 900 (5) (6) 800 CS 167 17 700 UBS 253 36 600 DBK (ex DPB) 243 21 500 BARC 776 78 400 Europe avg 376 39 300 BAC 769 65 C33835200 JPM 874 83 100 MS 605 65 0 CS DBK (ex DPB) UBS C MS BAC BARC JPM US avg 627 60

Source: Company data, Goldman Sachs Research estimates.

Conclusion In our view, the actual contribution of each category to the difference in rw is impossible to quantify from the outside, due to limited disclosure. However, we believe that with risk weightings failing to adequately capture actual levels of risk during the recent crisis, market focus and debate on this topic are likely to increase.

Mechanically applying US risk weights to European assets reduces CT1 We mechanically apply US risk weights to European bank assets (Exhibit 10) to derive a theoretical CT1 ratio. We do not claim that investors should look at capitalization of European banks on this basis. Rather, we use this as a way to mechanically translate and observe differences in non-risk based leverage to the CT1 ratio (i.e. risk based) level. As discussed, there are a multitude of reasons why rw in Europe and the US are different.

We show the outcome of this theoretical exercise below, as follows:  “Simple” risk weighting: mechanically applying the lowest and average US risk weight to European IBs’ assets  “On- and off-balance sheet” risk weighting: mechanically applying the average US total risk weight (where the denominator includes both total assets and off-balance sheet assets) to European IBs’ assets.

Goldman Sachs Global Investment Research 15 December 9, 2010 Europe: Banks

Exhibit 10: European ratios notably reduced if US risk weights are mechanically applied CT1 ratios for European banks applying various US risk weights

CT1 ratio assuming various risk weights CT1 (2012E) Simple On + Off balance sheet US Low (55%) US Avg (71%) US Avg (47%) CS 10.8% 6.3% 4.9% 6.1% UBS 14.0% 9.2% 7.2% 10.1% DBK (proforma DPB) 8.4% 5.9% 4.6% 6.4% BARC 10.0% 8.8% 6.9% 8.3% Average 10.2% 7.4% 5.8% 7.5%

Note: Calculations based on: (1) 2012E CT1 capital, which does not incorporate Basel III deductions/adjustments as the gradual phase in starts in 2014, so after the end of our forecast period; (2) 2012E RWA estimates, which include our estimates of the Basel 2.5 and Basel III impact.

Source: Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 16 December 9, 2010 Europe: Banks

Swiss banks’ returns to de-rate, in absolute and relative terms, in our view

We expect the Swiss banks to face severe pressures on their returns as the amount of capital per unit of assets rises sharply, in line with the spirit of new regulation. We believe CoCos are crucial in Swiss banks’ attempts to mitigate some of the return compression. This said, even if we assume full CoCo issuance (for both the mandatory buffer as well as the SIFI surcharge) we find that returns could decline by 7%-14% (so ROTE in the 16%-17% range) compared to “normalized” 2012E levels, all else equal. The magnitude of a de-rating increases to 16%-24% (so ROTE in the 14%-15% range) if we assume the 3% mandatory buffer is met through tangible equity build-up. In either case, we struggle to see Swiss banks exceeding a mid-teen ROTE under the new regulatory regime. Historically, the ROTE of Swiss IBs exceeded 30%, in good years. In contrast to the Swiss banks is Deutsche Bank, which has a similar starting point of leverage, but without the same potential de-leveraging pressures. As a consequence, we see a compression in the historically high ROTE differential between the Swiss banks on one side and DBK on the other – the Swiss banks’ ROTE was 1.9x higher than that of DBK in the 2004-06 period, while we see it declining towards 1.4x in 2012. Assuming full implementation of the new Swiss capital regime this differential could fall further, towards 1.1x-1.2x.

Steady-state capitalization scenarios: For these calculations we apply fully phased Basel III impact, for both the CT1 capital as well as RWA. We do this in order to reflect the new steady-state profitability as well as capital structure. For the capital structure we assume full compliance with the new Swiss regulation. This said, it is important to acknowledge the lengthy phase-in (or transition) period; for example, most of the hybrid instruments will be grandfathered and therefore will count towards CT1 for a lengthy period of time.This will give banks additional time to adjust their business mix and hence profitability.

For the Swiss banks, our analysis proceeds as follows:

 New regulations call for capitalization of 19%. We expect the actual figure to end up around 20%, thus allowing for a marginal voluntary buffer. This increase in capitalization can be achieved either by building up tangible equity – or – through a combination of tangible equity build up and CoCo issuance.

The three basic scenarios to achieving the new minimum capitalization therefore are:  “11% + 9%”: holding common equity of 11%, but issuing high-trigger CoCos for the mandatory buffer of 3% as well as low trigger CoCos for the SIFI surcharge of 6%.  “14% + 6%”: holding common equity of 14%, but issuing CoCos for the SIFI surcharge of 6%; for both CS and UBS, we see this level of capitalization as the most likely outcome, and refer to it as “target” capitalization.  “20%”: build-up of tangible equity to 20%, without any CoCo issuance, only a theoretical scenario, in our view.

Goldman Sachs Global Investment Research 17 December 9, 2010 Europe: Banks

For Deutsche Bank, we introduce two scenarios:

 “8% + 3%”: holding common equity of 8% (a buffer of 100 bp over the Basel III minimum), but issuing a type of hybrid (possibly CoCos) for an additional 3% buffer. We note that DBK currently only has to comply with the Basel III standards, as the German regulator has not issued any additional demands to date. For DBK, we see this level of capitalization as the most likely outcome, and refer to it as “target” capitalization.  “11%”: build-up of tangible equity to 11%, without any hybrid/CoCo issuance.

Swiss returns to come under pressure, absolute and relative to DBK, as per our analysis: Our analysis suggests that CS and UBS’ returns will continue to de-rate, while DBK’s returns will remain broadly stable.

The reasons for the de-rating of Swiss IBs’ returns are:

 To meet new regulatory standards, both banks will need to hold more capital – this applies to tangible equity and other components of regulatory capital. An increase in tangible equity reduces returns through an increase in base; an increase in other forms of capital (mostly in the form of CoCos) through a reduction in profits.  Swiss IB returns de-rate least if CS/UBS make full use of CoCos (Scenario: “11% + 9%”). Assuming that both the mandatory 3% buffer and SIFI surcharge of 6% are met through CoCo issuance, we estimate steady-state ROTEs of 17.4% for CS and 15.9% for UBS. This represents a de-rating of 14% for CS compared to our 2012N but only 7% for UBS. UBS ROTE compression is smaller as we forecast the bank will reach a higher tangible equity level relative to CS by 2012E; in other words, the capitalization starting point for the two banks is different.

 Swiss ROTE de-rates further, if we assume the 3% mandatory buffer composed of tangible equity (Scenario: “14% + 6%”), rather than CoCo issuance. The steady-state ROTE would fall to 15.3% for CS (a de-rating of 24% vs 2012E) and to 14.3% for UBS (a de-rating of 16% vs 2012N).

 Finally, assuming that both the 3% mandatory buffer as well as the SIFI charge are met through common equity implies a much larger de-rating magnitude. We do not see this as realistic.

For DBK, returns are broadly stable if we assume the “8% + 3%” scenario, while they de-rate 15% if we assume build-up of core capital towards the 11% mark.

We lay out the calculations in detail in Appendix II.

Goldman Sachs Global Investment Research 18 December 9, 2010 Europe: Banks

Exhibit 11: Swiss banks will see significant ROTE compression following B3… Exhibit 12: …DBK much less so ROTE, %. We view “14% + 6%” the most likely capitalization outcome and refer to ROTE, %. We view “8% + 3%” as the most likely capitalization outcome and refer it as “target” capitalization. to it as “target” capitalization

25% 25%

20% 20% 20% 17% 17% 16% 15% 14% 15% 15% 14% 14% 13% 12% 12%

10% 10%

5% 5%

0% 0% GS(2012E)* 11% + 9% 14% + 6% 20% GS(2012E)* 8% + 3% 11%

CS UBS DBK

* Normalized TE * Normalized TE

Source: Goldman Sachs Research estimates. Source: Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 19 December 9, 2010 Europe: Banks

Exhibit 13: Increased capital requirements likely to reduce ROTE differential Exhibit 14: Swiss regulation will drive down leverage and relative returns, between CS/UBS and DBK] versus European peer group. ROTE Reported TETA ratio (3Q10) and, BIII risk weighting; target capitalization “14%+6%” for CS/UBS and “8%+3%” for DBK.

40% 50x CS DBK 40x 30%

30x DBKtarget UBS 20% BARC

TATE MS CStarget 20x UBStarget JPM BAC 10% C 10x 15x-23x range 32-79% range

0% 2004-06 avg 2012 (normalised) [2] [3] 0x 0% 20% 40% 60% 80% 100% CS UBS DBK Risk weighting [2] “14%+6%” scenario for CS and UBS and “8%+3% for DBK; [3] “20%” scenario for CS and UBS and “11% for DBK

Source: Goldman Sachs Research estimates. Source: Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 20 December 9, 2010 Europe: Banks

Estimates changes and valuation

Exhibit 15: Estimate and price target changes, methodology and risks

Old New Change GS EPSTarget GS EPSTarget GS EPS Target TP period Rating TP period Rating 2010E 2011E 2012EPrice 2010E 2011E 2012EPrice 2010E 2011E 2012E Price DBK € 5.56 5.54 5.79 49.00 12 months Neutral 5.43 5.52 5.77 51.00 12 months Neutral -2% 0% 0% 4% CS SFr 4.29 5.72 6.15 57.00 12 months Buy 4.30 5.51 6.15 49.00 12 months Neutral 0% -4% 0% -14% UBS SFr 1.80 1.85 2.15 20.90 12 months Neutral 1.79 1.80 2.13 20.10 12 months Neutral -1% -2% -1% -4%

TP methodology Risks DBKROTE / COE Better / worse than expected capital markets performance, German macroeconomic data, impact of regulatory changes (Basel 2.5 and Basel 3) CSROTE / COE Better / worse than expected capital markets performance, NNM flows, impact of regulatory changes (Basel 2.5 and Basel 3) UBSROTE / COE Better / worse than expected capital markets performance, NNM flows, impact of regulatory changes (Basel 2.5 and Basel 3)

TP changes DBK Increased due to forecasting period roll forward CS Target P/TB multiple reduced due to expected reduction in long-term sustainable ROTE (see "Swiss bank returns to de-rate" section of the report) UBS Target P/TB multiple reduced due to expected reduction in long-term sustainable ROTE (see "Swiss bank returns to de-rate" section of the report)

Source: Goldman Sachs Research estimates.

Exhibit 16: Credit Suisse trades at 12% premium to UBS P/TB multiples

2.75 50%

2.50 25% 2.25

2.00 0% 1.75

1.50 -25% 1.25

1.00 -50% Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

CS UBS CS / UBS

Source: Company data, Datastream, Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 21 December 9, 2010 Europe: Banks

Credit Suisse (CSGN.VX): Absolute upside attractive, relative in line; down to Neutral

What happened We have examined the Swiss regulatory proposal and in particular its impact on the long-term return prospects of Swiss banks. As a consequence, we have revised our valuation model, and our new 12-month price target of SFr49 implies upside of – a still healthy - 28%. In a European banks context, CS’s upside of 28% now compares to 30% for the sector average; on this basis, we downgrade Credit Suisse to Neutral from Buy.

Since being added to the Buy List on October 3, 2008, Credit Suisse is down 33.5% versus the 35.3% average decline of the European banks in our coverage and the 13.0% increase of the FTSE World Europe (-12.7% in SFr). Over the last 12-months, Credit Suisse is down 27.5% versus the 18.6% average decline of the European banks and the FTSE World Europe’s 2.7% rise (-4.8% in SFr).

Key data Current Price (SFr) 38.19 Current view 12 month price target (SFr) 49.00 Upside/(downside) (%) 28 We believe that the new regulatory set-up is likely to put severe pressure on Swiss banks’ returns, when fully Market cap (SFr mn) 44,743.4 Tier 1 ratio (%) 16.3 phased. This is a consequence of a sharp increase in capital per unit of assets, which we estimate will push CS’s current leverage lower. 12/09 12/10E 12/11E 12/12E GS EPS (SFr) New5.964.305.516.15To achieve our target capitalization structure – which we see as a combination of 14% CT1 and a 6% low trigger EPS (SFr) Old 5.964.295.726.15 DPS (SFr) New 2.001.001.001.00CoCo issuance – we believe Credit Suisse would need to accelerate its equity build up. In our view, this is likely DPS (SFr) Old 2.002.002.002.00 GS P/E (X) 6.4 8.9 6.9 6.2 to include a downward adjustment in the cash component of the dividend (we have reduced 2010E-2011E DPS Dividend yield (%) 5.2 2.6 2.6 2.6 from SFr2.0 to SFr1.0). As equity builds up, steady-state returns are likely to compress substantially when GS ROE (%) 21.914.918.217.6 P/BV (X) 1.6 1.3 1.1 1.0 compared to those from the pre-crisis periods. We show that for both CS and UBS, steady state returns on proposed Swiss capital regulation are unlikely to exceed mid-teens, on our estimates.

We have incorporated our lowered expectations of steady-state returns into our valuation and have reduced the Price performance chart 60 410 target P/TB multiple as a consequence. This drives down our 12 month ROTE/COE-model price target, from SFr57 previously to SFr49 currently, leaving it with potential upside of 28%, compared to the European banks’ 55 390 sector average of 30%. While the potential upside remains healthy in absolute terms, we believe the relative 50 370 upside now warrants a Neutral rating. 45 350

40 330

35 310 Dec-09 Mar-10 Jun-10 Sep-10

Credit Suisse (L) FTSE World Europe (GBP) (R)

Share price performance (%) 3 month 6 month 12 month Absolute (15.8) (11.7) (27.5) Rel. to FTSE World Europe (GBP) (21.3) (23.6) (29.4)

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 12/07/2010 close.

Source: Company data, Goldman Sachs Research estimates, FactSet.

Goldman Sachs Global Investment Research 22 December 9, 2010 Europe: Banks

Exhibit 17: Performance of Credit Suisse versus peer group Priced as of the close on December 7, 2010

Price Price as of Dec Price performance 3 month price 6 month price 12 month price Company Ticker Primary analyst currency 7, 2010 since Oct 3, 2008 performance performance performance Europe Banks Peer Group

Credit Suisse CSGN.VX Jernej Omahen SFr 38.19 -33.5% -15.8% -11.7% -27.5% Agricultural Bank of Greece AGBr.AT Heiner Luz € 0.79 -62.4% -26.2% -18.6% -57.5% ALBK.I Pawel Dziedzic € 0.45 -94.0% -41.1% -53.3% -70.5% ACBr.AT Heiner Luz € 4.70 -66.0% -13.4% 9.0% -46.0% Banca Monte dei Paschi di Siena BMPS.MI Domenico Vinci € 0.86 -52.2% -11.8% 3.5% -33.7% PMII.MI Domenico Vinci € 2.65 -54.9% -23.9% -17.9% -49.9% PAS.MC Pawel Dziedzic € 3.85 -38.6% -2.4% 2.3% -20.7% BAPO.MI Domenico Vinci € 3.28 -68.3% -28.6% -20.7% -42.2% Banco Popular Espanol POP.MC Pawel Dziedzic € 4.16 -51.5% -13.5% 8.6% -27.1% SABE.MC Jernej Omahen € 3.18 -42.7% -18.0% -0.1% -23.5% Banesto BTO.MC Pawel Dziedzic € 6.37 -37.5% -10.3% 7.0% -27.0% BOCr.AT Heiner Luz € 2.98 -27.9% -12.9% 28.5% -18.5% BKIR.I Pawel Dziedzic € 0.42 -86.5% -42.1% -45.1% -59.4% Bank of Piraeus BOPr.AT Heiner Luz € 3.23 -77.0% -23.6% -14.1% -67.0% BKT.MC Pawel Dziedzic € 4.20 -50.8% -20.6% -1.6% -40.7% Barclays plc BARC.L Aaron Ibbotson, CFA p 262.60 -28.6% -16.4% -8.1% -11.6% BBVA BBVA.MC Jernej Omahen € 7.76 -34.3% -17.3% 7.1% -37.9% BNP Paribas BNPP.PA Jean-Francois Neuez € 49.28 -28.9% -6.5% 15.4% -11.1% Commerzbank AG CBKG.DE Domenico Vinci € 5.75 -59.5% -9.4% 4.9% -7.3% Credit Agricole SA CAGR.PA Jean-Francois Neuez € 10.04 -34.8% -5.6% 22.3% -26.4% EMBI.MI Domenico Vinci € 4.48 -28.5% -6.2% 3.9% -16.2% PCVI.MI Domenico Vinci € 3.15 -47.0% -13.9% -16.7% -43.5% DANSKE.CO Aaron Ibbotson, CFA Dkr 147.90 11.2% 8.6% 16.5% 27.5% Deutsche Bank DBKGn.DE Jernej Omahen € 38.19 -21.0% -15.1% -9.8% -15.1% DPBGn.DE Jernej Omahen € 20.16 -38.0% -18.4% -15.1% -18.5% Dexia DEXI.BR Jean-Francois Neuez € 2.94 -64.0% -9.4% -2.3% -38.5% DnB NOR DNBNOR.OL Aaron Ibbotson, CFA Nkr 78.45 69.5% 5.6% 22.6% 20.7% EFG Eurobank EFGr.AT Heiner Luz € 4.40 -64.5% -17.8% 21.2% -50.0% EFG International EFGN.S Jean-Francois Neuez SFr 12.50 -62.1% 11.6% -16.9% -21.1% Erste Bank ERST.VI Frederik Thomasen € 32.69 -15.1% 12.1% 30.2% 13.2% Grupo Santander SAN.MC Jernej Omahen € 8.10 -25.7% -16.0% 8.5% -32.0% HBNK.CY Heiner Luz € 0.90 -50.8% -12.6% -6.3% -23.7% HSBC HSBA.L Frederik Thomasen p 665.50 -17.7% 0.5% 5.7% -6.6% ISP.MI Domenico Vinci € 2.11 -45.8% -10.3% 6.4% -30.6% Julius Baer Group BAER.VX Jean-Francois Neuez SFr 43.10 NA 13.4% 32.4% 29.9% KBC KBC.BR Frederik Thomasen € 28.80 -54.5% -14.1% -1.6% -10.9% Plc LLOY.L Aaron Ibbotson, CFA p 66.70 -53.7% -8.0% 23.6% 24.2% Marfin Popular Bank CPBC.CY Heiner Luz € 1.19 -61.2% -16.4% -0.7% -42.4% NBGr.AT Heiner Luz € 7.01 -69.2% -20.7% -10.8% -59.2% CNAT.PA Jean-Francois Neuez € 3.68 37.2% -19.4% 5.9% 3.3% NDA.ST Aaron Ibbotson, CFA Skr 71.65 4.3% 5.6% 12.8% -4.1% Raiffeisen Bank International RBIV.VI Frederik Thomasen € 39.62 -25.0% 18.0% 29.7% -10.0% Royal RBS.L Aaron Ibbotson, CFA p 41.06 -77.9% -11.0% -4.7% 24.4% Sarasin BSAN.S Jean-Francois Neuez SFr 39.45 -1.4% 4.4% -5.4% 5.2% SEB SEBa.ST Aaron Ibbotson, CFA Skr 53.35 -14.4% 11.4% 36.0% 8.2% Societe Generale SOGN.PA Jean-Francois Neuez € 38.90 -40.2% -8.7% 25.5% -20.3% STAN.L Frederik Thomasen p 1842.00 56.2% 3.1% 18.7% 28.1% Svenska SHBa.ST Aaron Ibbotson, CFA Skr 214.00 30.5% 4.1% 14.7% 1.3% SWEDa.ST Aaron Ibbotson, CFA Skr 94.75 10.7% 10.7% 41.8% 25.1% TT Hellenic Postbank S.A. GPSr.AT Heiner Luz € 3.19 -48.2% -31.1% 27.6% -29.3% UBI Banca UBI.MI Domenico Vinci € 6.79 -55.7% -5.3% 1.3% -31.7% UBS UBSN.VX Jernej Omahen SFr 15.52 -35.3% -12.9% 5.4% -4.1% CRDI.MI Domenico Vinci € 1.66 -33.5% -13.7% 5.8% -26.4% Vontobel VONN.S Jean-Francois Neuez SFr 33.40 -6.3% 11.1% 13.8% 14.2%

FTSE World Europe (GBP) 375.88 13.0% 7.0% 15.6% 2.7% Index performance in stock price currency 5.8 -12.7% 7.4% 6.7% -4.8% Note: Prices as of most recent available close, which could vary from the price date indicated above This table shows movement in absolute share price and not total shareholder return. Results presented should not and cannot be viewed as an indicator of future performance.

Source: Factset, Quantum database.

Goldman Sachs Global Investment Research 23 December 9, 2010 Europe: Banks

Appendix I: Peer group, methodology and trying to bridge the gap in US GAAP and IFRS

Global investment banking peer group Throughout this report we use the term European investment banks (“European IBs”) to describe a group of the following banks: Credit Suisse (CS), UBS, Deutsche Bank (DBK) and Barclays (BARC). Similarly, we use US investment banks (“US IBs”) to describe the following group: (BAC), Citigroup (C), JPMorgan (JPM) and Morgan Stanley (MS). In our view, the market views these two groups of banks as “peers”.

Total assets – using US GAAP where available and US GAAP proxy where not Importantly, we note that the accounting standards used by IBs are not uniform. US banks and CS file their accounts under US GAAP, while DBK, UBS and BARC do so under IFRS. Total assets are higher under IFRS as netting of certain balances is not allowed. By far the largest area of difference is the treatment of derivatives (replacement values), where US GAAP uses net and IFRS gross balances.

There are a number of ways to adjust the total assets difference under US GAAP and IFRS, and all are approximate. In this note, we adjust by calculating US GAAP proxy assets for banks that file accounts under IFRS as total IFRS assets less total derivative balances (positive replacement values). Total asset figures for IFRS banks are presented on this basis in all Exhibits and in all of our calculations.

DBK discloses their own “target definition” leverage ratio, which is based on US GAAP proxy assets and equity. Here, DBK adjusts its IFRS total assets (€1,958 bn) for €914 bn, which consists of netting of derivatives (€760 bn, 83% of the total adjustment), additional pending settlements (€144 bn, 16%) and additional reverse repo netting (€10 bn, 1%). We are not able to replicate the additional pending settlements and reverse repo netting for the three IFRS reporting banks in Europe, so rather than follow DBK’s approach we deduct the gross derivatives balance for all; in the case of DBK our adjusted assets are within 10% of that of DBK.

UBS discloses “FINMA assets”, which are used to calculate FINMA leverage ratios. These are calculated as follows: total assets - derivatives (nettable under Swiss GAAP) - loans to Swiss clients (ex interbank) - cash – other, with all balances quarter average. Total assets adjusted in this manner are SFr792 bn. However, adding back loans to Swiss clients and cash, total assets would rise to SFr991 bn. Under our approach (IFRS assets less derivatives) we get to SFr923 bn.

Tangible equity We calculate tangible equity as per US GAAP and IFRS reporting of stated equity respectively, adjusted for total intangible assets.

Goldman Sachs Global Investment Research 24 December 9, 2010 Europe: Banks

Exhibit 18: Our path of adjustments to broadly comparable assets and leverage ratios Leverage ratio calculation, 3Q2010

Tangible Total Assets Tangible Assets Leverage ratios equity Reporting Reporting US GAAP (or US GAAP (or US GAAP (or IFRS Adjustment Intagibles CCY IFRS GAAP CCY proxy) proxy) proxy) Europe CS US SFr ‐‐1,067 9 1,058 25 ‐ 43x UBS IFRS SFr 1,461 517 943 10 933 37 39x 25x DBK (incl DPB) IFRS € 2,189 820 1,369 14 1,356 35 63x 39x BARC IFRS £ 1,587 505 1,082 9 1,073 41 39x 26x US BAC US US$ ‐‐2,340 83 2,257 130 ‐ 17x CUSUS$‐‐1,983 31 1,953 132 ‐ 15x JPM US US$ ‐‐2,142 52 2,090 114 ‐ 18x MS US US$ 841 12 830 36 23x ‐‐ ‐

Source: Company data, Goldman Sachs Research estimates.

Appendix II: Swiss bank returns to de-rate, in absolute and relative terms, in our view

Our analysis of the steady-state returns, under new regulatory regime is laid out in Exhibit 19. The analysis follows the following key steps:

1. TE normalization. Normalized 2012 tangible equity is assumed to be equal to 2012E Equity Tier 1 estimate. This adjustment eliminates such temporary distortions to TE as gains on own debt and cash flow hedges.

2. Progression toward target capital structure. We than assume that banks will pay no dividends and do not grow RWA until target capital structure is reached, through compounding of normalized profits. When targeted equity Tier 1 is reached, we assume banks move to retire existing hybrids via repurchase at par. Furthermore, we assume that CoCos are issued to achieve targeted Tier 1 ratio (total capital ratio of 20%).

3. Target capital structure. We consider the following three target capital structure scenario for CS and UBS – these are in line with the current Swiss regulatory proposal (for more on this topic see our note: October 12, 2010: Swiss endorse CoCos – laying out scenarios for European TBTF capital surcharge).

[1] 11% equity Tier 1 + 3% CoCo (high trigger) + 6% CoCo (low trigger)

[2] 14% equity Tier 1 + 6% CoCo (low trigger)

[3] 20% equity Tier 1

Goldman Sachs Global Investment Research 25 December 9, 2010 Europe: Banks

For DBK, we assume the following two scenarios, which are based around the current Basel III proposal:

[1] 8% equity Tier 1 + 3% CoCo (low trigger)

[2] 11% equity Tier 1

4. Steady-state net income. We estimate steady-state net income by taking GS 2012 net income estimates, adding cost of hybrids (that will be repurchased), subtracting cost of high and low trigger CoCo and adding yield on additional equity accumulated (at a rate for a senior ).

We assume the following rates for key instruments:

 CoCo (high trigger): 7.50% after tax, 10% before tax;

 CoCo (low trigger): 6.75% after tax, 9% before tax;

 Tier 1 hybrids: 5.25% after tax, 7% before tax;

 Senior unsecured debt: 2.25% after tax, 3% before tax.

5. Steady-state ROTE. We divide steady-state net income by TE achieved at the time when target capital structure is reached.

Using UBS as an example, the analysis would work as follows (again, Exhibit 19 lays this out for all three banks under review), if we assume a capitalization scenario of “14% equity Tier 1 + 6% CoCo”, which is our target scenario:

1. TE normalization. We forecast UBS tangible equity at SFR53.5 bn in 2012E. We normalize TE by adjusting for own share deduction (SFr2.3 bn), cash flow hedges impact (SFr2.2 bn), gain on own debt (SFr0.8 bn) and other temporary effects (SFr0.1bn) to arrive to normalized TE of SFr48.1 bn.

2-3. Target capital structure. We assume that UBS pays no dividend until target equity Tier 1 ratio of 14% is reached in 2013. Than, we assume, that UBS redeems SFr5.2 bn of hybrids and issues SFr20.6 bn of CoCo (low trigger) to bring total Tier 1 ratio inline with the 20% capital target.

4. Steady-state net income = SFr7.8 bn = 2012 net income of SFr8.2 bn + saved expense on repurchased hybrids of SFr0.3 bn – total cost of CoCo of SFr1.4 bn + yield on equity build up of SFr0.7 bn.

5. Steady-state ROTE of 14.3% is derived from steady state net income of SFr7.8 bn and steady-state TE of SFr54.3bn

Goldman Sachs Global Investment Research 26 December 9, 2010 Europe: Banks

Exhibit 19: New regulation pressures IBs’ returns, more so for the Swiss IBs than for DBK, on our analysis Normalized ROTE assuming different capital structures, %

CS UBS DBK [1] [2] [3] [1] [2] [3] [1] [2] GS(2012E)* 11% + 9% 14% + 6% 20% GS(2012E)* 11% + 9% 14% + 6% 20% GS(2012E)* 8% + 3% 11% Normalised capital structure (year) 2012N 2014 2015 2018 2012N 2013 2014 2017 2012N 2013 2016 Capital structure (% of RWA) Equity Tier 1 (B3) 10.8% 11.0% 14.0% 20.0% 12.0% 11.0% 14.0% 20.0% 8.1% 8.0% 11.0% CoCo (H) 0.0% 3.0% 0.0% 0.0% 0.0% 3.0% 0.0% 0.0% 0.0% 0.0% 0.0% CoCo (L) 0.0% 6.0% 6.0% 0.0% 0.0% 6.0% 6.0% 0.0% 0.0% 3.0% 0.0% Hybrids 4.2% 0.0% 0.0% 0.0% 1.5% 0.0% 0.0% 0.0% 2.3% 0.0% 0.0% Tier 1 (B3) 15.0% 20.0% 20.0% 20.0% 13.5% 20.0% 20.0% 20.0% 10.5% 11.0% 11.0% Capital structure RWA (B3) 343 343 343 343 343 343 343 343 532 532 532 Equity Tier 1 (B3) 37 38 48 69 41 38 48 69 43 43 59 CoCo (H) 0 10 00010 00000 CoCo (L) 0 21 21 0021 21 0016 0 Hybrids 14 0005 00012 00 Tier 1 (B3) 51 69 69 69 47 69 69 69 56 59 59 Net income Net income + cost of hybrids 8.2 8.2 8.2 8.2 8.5 8.5 8.5 8.5 6.9 6.9 6.9 (-) Cost of CoCo (H) 0.0 -0.8 0.0 0.0 0.0 -0.8 0.00.00.00.00.0 (-) Cost of CoCo (L) 0.0 -1.4 -1.4 0.0 0.0 -1.4 -1.4 0.0 0.0 -1.1 0.0 (-) Cost of hybrids -0.8 0.0 0.0 0.0 -0.3 0.0 0.0 0.0 -0.7 0.0 0.0 (+) Interest on bonds repurchased 0.0 0.5 0.5 0.5 0.0 0.7 0.7 0.7 0.0 0.2 0.2 Net income (shareholders) 7.5 6.6 7.3 8.7 8.2 7.0 7.8 9.1 6.2 6.0 7.1 Ratio ROTE (normalised) 20.2% 17.4% 15.3% 12.7% 17.1% 15.9% 14.3% 12.2% 13.9% 13.7% 11.8% v 2012E - -14% -24% -37% - -7% -16% -28% - -2% -15% TA / TE 29x 28x 22x 16x 20x 21x 17x 13x 31x 32x 23x TA / (TE + CoCo) 16x 16x 16x 13x 13x 13x 23x 23x * Normalised tangible equity = CT1 (Basel 3) + permanent deductions (DTA, pension assets, shortfall of a stock of provisions over expected loss)

Source: Company data, Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 27 December 9, 2010 Europe: Banks

Reg AC

We, Jernej Omahen and Richard Ramsden, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Investment Profile

The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.

Quantum

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Disclosures

Coverage group(s) of stocks by primary analyst(s)

Jernej Omahen: Europe-Pan-Euro Banks. Richard Ramsden: America-Large Banks. America-Large Banks: Bank of America Corporation, Citigroup Inc., J.P. Morgan Chase & Co., Morgan Stanley & Co., PNC , U.S. Bancorp, & Company. Europe-Pan-Euro Banks: Agricultural Bank of Greece, Allied Irish Bank, Alpha Bank, Banca Monte dei Paschi di Siena, Banca Popolare di Milano, Banco Pastor, Banco Popolare, Banco Popular Espanol, Banco Sabadell, Banesto, Bank of Cyprus, Bank of Ireland, Bank of Piraeus, Bankinter, Barclays plc, BBVA, BNP Paribas, Commerzbank AG, Credit Agricole SA, Credit Suisse, Credito Emiliano, Credito Valtellinese, Danske Bank, Deutsche Bank, Deutsche Postbank, Dexia, DnB NOR, EFG Eurobank, EFG International, Erste Bank, Grupo Santander, Hellenic Bank, HSBC, Intesa Sanpaolo, Julius Baer Group, KBC, Lloyds Banking Group Plc, Marfin Popular Bank, National Bank of Greece, Natixis, Nordea, Raiffeisen Bank International, , Sarasin, SEB, Societe Generale, Standard Chartered, Svenska Handelsbanken, Swedbank, TT Hellenic Postbank S.A., UBI Banca, UBS, UniCredit, Vontobel.

Company-specific regulatory disclosures

The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs beneficially owned 5% or more of common equity (excluding positions managed by affiliates and business units not required to be aggregated under US securities law) as of the second most recent month end: Credit Suisse (SFr38.85) and UBS (SFr15.77) Goldman Sachs has received compensation for investment banking services in the past 12 months: BNP Paribas (€50.61), Credit Suisse (SFr38.85) and Deutsche Bank (€38.56) Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and UBS (SFr15.77) Goldman Sachs has received compensation for non-investment banking services during the past 12 months: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and UBS (SFr15.77)

Goldman Sachs Global Investment Research 28 December 9, 2010 Europe: Banks

Goldman Sachs had an investment banking services client relationship during the past 12 months with: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and UBS (SFr15.77) Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and UBS (SFr15.77) Goldman Sachs had a non-securities services client relationship during the past 12 months with: BNP Paribas (€50.61), Credit Suisse (SFr38.85), Deutsche Bank (€38.56) and UBS (SFr15.77) Goldman Sachs has managed or co-managed a public or Rule 144A offering in the past 12 months: BNP Paribas (€50.61) Goldman Sachs holds a position greater than U.S. $15 million (or equivalent) in the debt or debt instruments of: BNP Paribas (€50.61)

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe

Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 30% 54% 16% 50% 43% 37% As of October 1, 2010, Goldman Sachs Global Investment Research had investment ratings on 2,845 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

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Price target and rating history chart(s)

Credit Suisse (CSGN.VX) Stock Price Currency : Sw iss Franc Deutsche Bank (DBKGn.DE) Stock Price Currenc y : Euro Goldman Sachs rating and stock price target history Goldman Sachs rating and stock price target history 100 450 100 500 57.21 59 90 58 66.61 53.84 46.54 450 44.9 70 45 68 71 400 80 60.22 34.67 47.45 59.31 80 60 67 61 400 53 68 56.57 57.49 64 92.53 48.36 48.36 70 350 60 350 90.24 35.59 60 43 300 86.3 80.95 50 300 40 250 82.3 75.74 40 74.82 200 68.52 50.5 62 250 20 60.22 72.09 30 69.89 60 53 150 62.96 20 Nov 20 Apr 25 Oct 3 200 0 100 S N B N N DJ F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S N DJ F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S 2007 2008 2009 2010 2007 2008 2009 2010 Index Price Index Price Stock Price Stock Price Stock Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 9/30/2010. Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 9/30/2010. Oct 1, 2007 N Rating Covered by Jernej Omahen, Rating Covered by Jernej Omahen, Price target as of Apr 9, 2009 Price target as of Apr 9, 2009 Price target at removal Not covered by current analyst Price target at removal Not covered by current analyst FTSE World Europe FTSE World Europe (GBP) (EUR)

The price tar gets show n should be considered in the context of all prior published Goldman Sachs research, w hich ma y or The price tar gets show n should be considered in the context of all prior published Goldman Sachs research, w hich ma y or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets. may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.

UBS (UBSN.V X) Stock Price Currency : Sw iss Franc Goldman Sachs rating and stock price target history 80 450 56.83 32.82 19.5 70 18 19.6 46.87 400 60 37.35 20 17.2 22.8 50 22.1 350 34 12.5 40 25 69.99 30 300 66.88 19.4 20 66.08 35.57 250 10 56.72 31.45 31

0 Dec 19 200 N N DJ F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S 2007 2008 2009 2010 Index Price Stock Price Stock Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 9/30/2010. Oct 1, 2007 B Rating Covered by Jernej Omahen, Price target as of Apr 9, 2009 Price target at removal Not covered by current analyst FTSE World Europe (GBP)

The price tar gets show n should be considered in the context of all prior published Goldman Sachs research, w hich ma y or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.

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See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes a market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities. The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts. Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at http://www.gs.com/research/hedge.html.

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Goldman Sachs Global Investment Research 30 December 9, 2010 Europe: Banks

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Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return. Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

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