Note: All New Materials Since Last Update Are Highlighted

December 20, 2005 Research Associate: Bipin Jain, ICWAI Editor: Ryan Fuhrmann, CFA

Research Digest Sr. Editor: Ian Madsen, CFA [email protected] 800-767-3771 x417

www.zackspro.com 155 North Wacker Drive Chicago, IL 60606 MBNA Corp (KRB - NYSE) $27.52

Note: All new materials since last update are highlighted.

Reason for Report: Non Earnings update Previous Edition: November 3, 2005

Overview

MBNA Corporation (KRB or the Company), based in Wilmington, Delaware, is the parent company of MBNA America Bank, a national bank. MBNA America has two wholly-owned, non-U.S. bank subsidiaries: MBNA Europe Bank Limited (MBNA Europe) and MBNA Canada Bank (MBNA Canada). MBNA is the largest independent credit card issuer in the world with $123 billion in managed loans as of September 30, 2005, and has endorsement relationships with more than 5,000 organizations. MBNA is an international financial services company that provides lending, deposit, and credit insurance products and services to its customers. Through MBNA America, the corporation issues endorsed credit cards, marketed primarily to members of associations and customers of financial institutions and other organizations. In addition to its credit card lending, MBNA makes other consumer loans as well as commercial loans primarily to small businesses. MBNA conducts its business in the United Kingdom, Ireland, and Spain through MBNA Europe, and in Canada through MBNA Canada. Its employs over 28,000 people worldwide. Its website is www.mbna.com .

Investors in MTG should make an investment decision based on their assessment of the following issues:

Key Positive Arguments Key Negative Arguments  The driving force behind MBNA is its “affinity” or  Higher attrition of credit card customers has led to endorsement marketing model. a decline in managed loans.  Pursuing diversification strategies including its  Higher repayment volumes in higher rate accounts recent agreement to purchase Nexstar, a home act as a double-edged sword – leads to lower equity lender. balances and lower yields on those balances.  Signed a long-term agreement with the  KRB faces intensive competition and funding cost American Bar Association (ABA). The disadvantages. agreement is a good fit to MBNA’s strategy of  Management has reduced their EPS growth marketing cards to professionals, such as objective, which has damaged MBNA’s credibility. attorneys.  Interest Only (I/O) strip write-downs pose  Expanded its relationship with American incremental risks to the Company’s balance sheet. Express and entered into an agreement to  Approach to pricing may have a material negative market the Amex cards to U.K. cardholders. impact on profitability.  MBNA’s partnership with American Express is a  Earnings sensitive to rising short-term interest key step in diversification, away from rates. MasterCard and Visa branding.  Continues to lag peers in loan growth.  Successfully used acquisitions to strengthen its financial and competitive positions.  Pending acquisition by Bank of America.

NOTE: The Company’s fiscal year ends December 31st; all fiscal references coincide with the calendar year end.

The third quarter of 2005 reflected that the environment is still extraordinarily competitive and pricing drives the outcome in receivables. Low rates and little asset repricing enabled the Company to grow receivables and slow prepayments. However, these strategies hurt the overall performance as the net interest margin experienced compression of 5%, mitigated to some degree by higher fee income.

Revenue

Figures in $M 2004A 1Q05A 2Q05A 3Q05A 4Q05E 2005E 2006E 2007E Net Interest Income $10,421 $2,510 $2,502 $2,433 $2,466 $9,920 $10,199 $10,787 Other Income $4,650 $944 $1,152 $1,301 $1,332 $4,747 $5,167 $5,990 Net Revenue $15,071 $3,454 $3,654 $3,734 $3,798 $14,660 $15,289 $16,776 Digest High $15,071 $3,454 $3,654 $3,734 $3,857 $14,803 $15,764 $16,776 Digest Low $15,071 $3,454 $3,654 $3,734 $3,755 $14,596 $14,882 $16,776 YoY Growth 3.6% -7.2% -1.3% -1.9% -1.2% -2.7% 4.3% 9.7% Sequential Growth -10.1% 5.8% 2.2% 1.7%

The 3Q05 revenue figure was $3,734 million, a decline of 1.9% YOY although an increase from 2Q05. Non-interest income was up 12.9% on a sequential basis in spite of a revaluation of the interest-only strip receivable that actually impacted that line negatively by $129 million. KRB attributed the jump to a surge in cash advance fees and higher interchange income.

Net Interest Income – 3Q05 net interest income figure was $2,433 million, down 5.4% YOY and 2.8% sequentially. The decline with respect to 2Q05 was due to net interest margin compression (7.37%; down 37 bps), which was mildly offset by managed loan growth of $5.1 billion to $122.5 billion. The growth in managed loans occurred due to increased cash advances, retail loan growth, and stable payment rates. Cash advance volumes were $23.1 billion, up $3 billion from 2Q05 and contributed in part to the margin compression, as the majority of these loans were likely teaser and 0% rate products. KRB tends to have relatively fixed rate assets and floating rate funding sources. Though these position it to benefit from falling interest rates, it poses potential risk should interest rates rise. The Company can reprice its credit card loans with 45 days notice, and has repriced roughly one-third of its portfolio to variable rate cards in recent months in order to protect NIM and drive long-term growth. Management stated the net interest margin is expected to contract over the balance of 2005 due to the increased use of teaser rate products in the U.S. One analyst (Raymond James) anticipates non-interest income will face some downward pressure as cash advance fees return to more historic levels.

Other Income – 3Q05 other income was $1,301 million, an increase of 5.4% YOY and 12.9% sequentially. Non-interest income improved sequentially reflecting the increase in sales volume to $38.1 billion (up 3.3%). This increase is due in large part to higher interchange revenue, which is being driven by increased interchange fees and continued high prices at the pump. The net impact of the change in the I/O strip receivables decreased securitization income by $129 million, as compared to a $106 million decrease in 2Q05. Management indicated that the U.K. interchange reform issue is meant for consideration in the future. It believes that in the long run, interchange fees in the U.K. could fall to as low as 30 bps. Meanwhile, the U.S. interchange is expected to continue to be strong as spend volumes improve and KRB shuffles cardholders on to higher return cards such as AXP and Visa Signature. Management expects the proportion of revenue from interchange to continue growing in the forthcoming quarters. One analyst (AG Edwards) believes that KRB’s continued efforts to defend its market share proved fruitful for the second quarter in a row.

Zacks Investment Research Page 2 www.zackspro.com Please see the separately saved spreadsheet for more details.

Margins

2004A 1Q05A 2Q05A 3Q05A 4Q05E 2005E 2006E 2007E Pretax Margin 27.4% 23.2% 27.7% 29.7% 28.8% 27.5% 27.8% 26.8% Net Operating Margin 17.7% 14.8% 17.6% 18.9% 18.4% 17.5% 17.8% 17.2%

The pretax margin was 29.7% in 3Q05 compared to 30.2% in 3Q04, but improved by 200 bps from 2Q05. The upside from 2Q05 was due to the better than expected non-interest expenses, primarily reflecting the restructuring efforts the Company began in 1Q05. The 3Q05 provision was $1,264 million compared to $1,307 million in 3Q04. The primary driver behind the reduced provision expense is the better than expected loan loss performance, as the bankruptcy filings did not materialize during 3Q05. As it turns out, the spike in September and October filings will hit in 4Q05 instead because MBNA charges off bankruptcy-related balances in the second month following the filing notice.

The net operating margin was 18.9% in 3Q05 flat with 19.0% in 3Q04. This was due to the in line tax rate both in 3Q05 and 3Q04.

Please see the separately saved spreadsheet for more details

Reserve Position

The Company released $26.6 million in reserves in 3Q05 bringing the total allowance for loan losses to $972 million vs. $998 million at the end of 2Q05 and $1,142 million a year ago. As a result the coverage ratio (provision/charge-offs) came in at 0.98. One analyst (Keefe Bruyette) expects the Company to increase reserves going forward to reflect exposure in the hurricane affected areas, and the impact from elevated bankruptcy filings in September.

Credit Quality and Financial Metrics

KRB reported managed loans of $122.5 billion, a 4.3% increase from 2Q05. Loan growth was suppressed by $125 million during the quarter due to FX translation adjustments. Receivables growth was driven by aggressive pricing and increased use of teaser rates, as well as by strong volumes. Sales volume was up 7.9% from the prior year, while cash advance volume was up by 31% resulting in a 15.6% total increase. One analyst (Friedman, Billings) believes receivables growth will be slow in 2006, given the lack of diversification and slow growth of receivables being experienced by the general credit card sector. In 3Q05, the net interest margin (NIM) was 7.37%, down from 7.74% in 2Q05. The compression occurred as the LIBOR increased by 52 bps in the quarter, resulting in a higher cost of funds. One analyst (Raymond James) expects NIM will continue to decline as a result of the Company’s aggressive teaser rate campaign as well as a higher cost of funds in light of impending interest rate hikes.

Managed loans increased $1.24 billion month-over-month to $123.8 billion in October, 2005. The month included an estimated $125 million in forex benefits from the stronger UK£, offset slightly by a weaker CAD. MBNA continues to see strong growth since aggressively returning to 0% teasers on balance transfers in the past six months according to analysts. Average managed loans were $123.3 billion, up from $122.7 billion in September. One analyst (Fulcrum) believes it is hard to extrapolate industry assumptions from KRB’s growth as the Company has suffered from unique circumstances over the past

Zacks Investment Research Page 3 www.zackspro.com year and may now be leveraging newfound balance sheet flexibility provided by acquirer Bank of America.

Credit quality was strong as net charge-offs were down slightly at 4.29%, an improvement of 31 bps sequentially. The delinquency rate was stable at 3.99%, up a basis point from 2Q05 but still 18 basis points below 1Q05 level. The credit metrics were better than anticipated mostly due to lower impact of bankruptcy-reform legislation. Additionally, the fact that credit losses also improved on a dollar basis provides support to the improvement in credit performance (as stronger than anticipated receivables growth could have contributed to a lower credit loss rate). Given the large amount of bankruptcy filings, analysts anticipate 4Q05 net charge-off rate to increase materially. The managed loan loss provision was $1.3 billion and $0.01per share lower than net charge-offs. One analyst (Sandler O’ Neill) expects net charge-offs to increase in 4Q05, due to the recent change in bankruptcy laws, and estimates that MBNA attributes 30% - 40% of its net charge-offs to bankruptcies.

Net credit losses increased 35 bps to 4.28% from September levels. The Company did see an increased level of bankruptcy in August related to new legislation, but excluding this unusual event, credit quality remained flat with prior periods. On a dollar basis, net credit losses increased $37.8 million to $440 million in October. The October spike in bankruptcy filings did not materially impact October losses due to the timing of recognition. Delinquencies of 30+ days declined 4 bps to 3.95% from September levels, signaling that future credit weakness may be related to one time bankruptcies. On a dollar basis, delinquencies were flat from September at $4.89 billion versus $4.87 billion a year ago.

In a recently released 10Q the Company indicated that the impact from the substantial spike in October bankruptcies is expected to be reflected in December credit losses since KRB typically recognizes losses on bankrupt accounts "within" 60 days of receiving the petition.

KRB booked a net loss of $129 million due to the revaluation of the interest-only (I/O) portion of securitization. This was due to the lower gain on sale of newly securitized loans and lower presumed excess cash flows on those receivables. The Company anticipates that yields on its loan receivables will show some relative weakness in upcoming periods as it has re-instated its teaser rate program in order to compete more effectively for new loans. Payment volumes from U.S. cardholders were higher than expected, particularly due to higher interest rates. In order to accommodate these changes, the Company is now using lower excess spreads and higher payments in their valuation assumptions.

Earnings per Share

EPS 2004A 1Q05A 2Q05A 3Q05A 4Q05E 2005E 2006E 2007E Zacks Consensus $2.05 $0.40 $0.51 $0.56 $0.55 $1.98 $2.19 Digest High $2.05 $0.40 $0.51 $0.56 $0.60 $2.09 $2.28 $2.45 Digest Low $2.05 $0.40 $0.51 $0.56 $0.49 $1.90 $2.05 $2.43 Digest Avg. $2.05 $0.40 $0.51 $0.56 $0.55↓ $2.01↓ $2.18 $2.44 Digest YoY growth 14.5% 0.0% 0.0% 0.0% -6.7% -2.1% 8.8% 11.7%

Operating EPS for 3Q05 was $0.56, in line with the earlier year period, and better than the Street consensus estimate of $0.53. The upside from consensus was primarily due to $26.6 million reserve release, solid managed loan growth, and strong fee income. Net interest margin declined due to higher funding cost, while net charge-offs improved and delinquencies were flat. Fee income growth was a healthy 18% yoy though changes in the interest only (I/O) strip on lower NIM assumptions reduced the reported increase to 5% yoy (the 3Q05 I/O reduction lowered EPS by roughly $0.07/share). Reported GAAP EPS was $0.56. KRB reversed $17.9 million of the restructuring charge incurred in 1Q05.

Zacks Investment Research Page 4 www.zackspro.com Highlights from the above chart are as follows:  2005 forecasts (Total 17) range from $1.95-$2.09; the average is $2.02.  2006 forecasts (Total 17) range from $2.05-$2.28; the average is $2.18.  2007 forecasts (Total 2) range from $2.43-$2.45; the average is $2.44.

One analyst (AG Edwards) increased the 2005 EPS estimate to account for the positive variance in 3Q05. Another analyst (Fulcrum) increased the EPS estimates for both 2005 and 2006 to account for the BankofAmerica merger. Another analyst (Friedman, Billings) raised the EPS estimate for 2005 to reflect greater receivable growth & improved credit. But one analyst (Raymond James) decreased the EPS estimates for both 2005 and 2006 due to non-sustainable non-interest income.

Please see the separately saved spreadsheet for more details.

Target Price/Valuation

Of the 19 analysts, 6 rate the shares Positive, and 13 rate the shares Neutral. The average Zacks Digest price target is $26.56 (↑ from previous report; 3.6% downside from current price). The price target ranges from $23 (16.4% downside from current price) to $29 (5.4% upside from current price).

The analyst (Prudential) with the highest target price rates the stock Overweight and uses the EVA method to value the shares. The analyst (Keefe Bruyette) with the lowest target price rates the stock Market Perform. One analyst (Wachovia) increased the price target range from ($24-$26) to ($25-$27) to reflect higher EPS estimate for 2006.

Rating Distribution Positive 32% Neutral 68% Negative 0% Avg. Target Price $26.56↑ Digest High $29.00 Digest Low $23.00 No. of Analysts with Target Price/Total 13/19 Previous Target Price $26.46 Change ($0.10)

Metrics detailing current management effectiveness are as follows:

Metric (TTM) Value Industry S&P 500 Return on Assets (ROA) 3.46% 1.56% 7.82% Return on Investments (ROI) 8.52% 8.92% 11.79% Return on Equity (ROE) 16.54% 15.18% 19.81%

Return on assets, return on investment and return on equity are lower than the average of 7.82%, 11.79%, and 19.81%, respectively for the S&P 500.

Risks to the target price include reduced demand for credit card loans, rising interest rates that may raise funding costs and pressure interest margins, further I/O strip write-downs impacting investor perception, and intense competition.

Please see the separately saved spreadsheet for more details.

Zacks Investment Research Page 5 www.zackspro.com Upcoming Event

January 19, 2005 – KRB expected to announce 4Q05 results.

Long-Term Growth

The long-term growth rates for KRB fall within the range of 4% (Raymond James) and 13% (Piper Jaffray). The Digest long-term growth rate is 9.1%.

MBNA now offers customers access to the three largest card platforms. The Company can expand the breadth of its target customers through its relationship with American Express and also reduce its cost base. The intense competition in the credit card industry in the prime segments of the market in particular may adversely impact results in the long run. Affinity marketing is MBNA’s core strategy with an emphasis on marketing to people with a strong common interest and offering superior customer service.

The Company faces a trade off in terms of receivables growth and margin in the cards business given the trend of rising interest rates. However, the Company has pursued acquisitions in areas outside card issuance and ventured into home equity products, which promise earnings growth in the long run. One analyst (MorganStanley) continues to believe that MBNA will need to price aggressively in order to stem receivables attrition and return to a modest growth rate of 3-5%.

Capital Structure/Solvency/Cash Flow/Governance/Other

End of distribution of WachoviaCorporation-branded credit cards by KRB: On November 3, 2005 MBNA and WachoviaCorporation announced the end of an existing agreement under which MBNA issues WachoviaCorporation-branded credit cards, effective October 2006. MBNA will retain and service the existing credit card loans and will begin issuing replacement credit cards. MBNA may also market other credit card products and services to select customers. The decision to end the agreement comes in the wake of the announced merger between MBNA and BankofAmerica.

Dividend: On October 19, 2005 KRB's Board of Directors declared a quarterly cash dividend of $0.14 per common share, payable December 23, 2005 to stockholders of record as of December 2, 2005.

Acquisition by BankofAmerica: KRB redeemed all outstanding shares of both its 7-1/2% Cumulative Preferred Stock, Series A, and its Adjustable Rate Cumulative Preferred Stock, Series B, effective as of November 3, 2005. The Series A preferred stock was redeemed at a price of $25.09896 per share, which includes the face amount of $25.00 per share plus $0.09896 of current period dividends that are accrued through the Redemption Date. The Series B preferred stock was redeemed at a price of $25.0726 per share, which includes the face amount of $25.00 per share plus $0.0726 of current period dividends that are accrued through the Redemption Date.

On June 30, 2005 MBNA announced that it has entered into a definitive agreement to be acquired by BankofAmerica in a cash and stock deal. The new entity joins the third and fourth-largest U.S. credit card issuers. The combined Company would have had $143 billion in receivables. In addition to making

Zacks Investment Research Page 6 www.zackspro.com BankofAmerica the No.1 U.S. issuer, the Company will also get a strong foothold in Canada, the UK, Spain, and Ireland.

MBNA shareholders will receive the $27.50 in total consideration per equivalent of 0.5009 shares of BankofAmerica for each KRB share plus $4.125 per share in cash, which equates to MBNA share or $35 billion, which is at 22% premium to managed receivables. The deal is expected to close in early January 2006. BankofAmerica expects to achieve overall expense synergies of $850 million after-tax, and anticipates a restructuring charge of $1.25 billion after-tax. Expense synergies of 50% are expected to occur in 2006 and to be fully realized by 2007. Six thousand jobs are expected to be eliminated on top of MBNA’s recent reduction of over 1,000 management positions. MBNA CEO Bruce Hammonds will become CEO of BankofAmerica Card Services. The deal includes an expected increase of $320 million in intangible amortization expense. However, due to the BankofAmerica credit ratings, funding benefits should approximate $100 million. Revenue loss is projected at 7% over the next three years due to customer attrition. The management teams of BankofAmerica and MBNA suggest that the deal will be 1% dilutive to 2006 earnings, assuming the consensus EPS of $2.20 for MBNA.

Product synergies will create cross selling opportunities by linking MBNA’s Affinity program with bank products that will provide areas of growth as more than 5,000 organizations are associated with MBNA. Additionally, on-site credit card applications will eliminate some of the costly direct mail solicitations. BankofAmerica’s joint venture with CCB in China will provide added opportunity to leverage MBNA’s strengths such as marketing expertise, affinity relationships, and superior loan underwriting.

The attractiveness of the deal was also driven by the customer and cultural focus of both companies. Managed net credit losses have declined at MBNA as underwriting standards have become more stringent over the last year and customers have re-liquefied their personal balance sheets using home equity products. The MBNA customer base through its Affinity program brings in customers that are 150- 200 bps lower in credit losses than the industry, carry 48% higher balances, and spend 25% more on their cards annually than the industry average.

There is some speculation as to whether the BankofAmerica-MBNA transaction will be approved by the Fed in light of recently released statistics indicating that the combined entity, holding over $600 billion in deposits, would top the legally defined maximum merger-induced national deposit market share of 10%. The FDIC calculated combined Bank of America-MBNA national market share of 10.22%.

However, BankofAmerica officials have assured investors that the merger will not be blocked based on the market share capitalization. Indeed, the Fed has a track record of approving deals despite expected violation of this provision, as they did in BankofAmerica’s prior acquisition of Fleet. It’s also possible that BankofAmerica or MBNA will allow some of their deposits to run off the books over the next two months to bring their combined balances below the legal cap.

Individual Analyst Opinions

POSITIVE RATINGS

Bear Stearns – Outperform ($27 – price target) – (10/19/05): The analyst believes KRB has successfully adjusted its pricing and marketing to generate profitable growth which should make MBNA more valuable to BankofAmerica.

Deutsche Bank – Buy ($25) – (11/03/05): The analyst does not see any significant obstacle to Bank of America's offer and notes KRB is in play and is monitoring the risk of a break in the current merger agreement.

Zacks Investment Research Page 7 www.zackspro.com Goldman – Outperform – (10/19/05): The analyst views KRB's strong 3Q05 loan growth as consistent with its more aggressive posture on cash advances and teaser rate pricing. The Company continues to look attractive to the analyst although now as a discounted vehicle for owning BankofAmerica.

MorganStanley – Overweight ($27.50) – (10/19/05): The analyst believes KRB continues to make progress at slowing receivables attrition even though credit and margins remains a concern. The analyst opines that the BankofAmerica acquisition should generate meaningful synergies.

Prudential – Overweight ($29) – (10/28/05): The analyst initiated coverage of MBNA with an Overweight rating as the Company should move in lock step with Bank of America.

NEUTRAL RATINGS

AG Edwards – Hold – (10/19/05): The analyst expects KRB’s pending acquisition by BankofAmerica to be completed in January 2006, and hence their rating mirrors that of BankofAmerica.

Fulcrum – Neutral ($27.50) – (11/16/05): The analyst reiterates their Neutral rating, as upside to BankofAmerica’s $27.50 takeover price remains limited. The analyst opines that the price BankofAmerica is paying for KRB remains fair.

Raymond James – Market Perform – (11/15/05): The analyst doubts the sustainability of non-interest income despite higher loans balances, and feels management is trying to hold down customer interest rates until its acquisition by BankofAmerica. The analyst maintains the Market Perform rating as they believe that an investment in MBNA is essentially an investment in BankofAmerica’s shares.

Stifel Nicolous – Hold – (12/01/05): The analyst initiated coverage with a Hold rating and believes that although management was successful in building a dominant credit card franchise, the Company struggled in 2005 with slowing growth rates and the lack of a diversified lending platform, which precipitated Bank of America's buyout offer.

Friedman, Billings – Market Perform ($27) – (11/15/05): The analyst believes that the pending merger will provide support to the share price. The analyst believes KRB is making tremendous strides to grow receivables, but expects future performance to suffer from continued margin compression, as low introductory rates appear to be the primary drivers of the growth.

J.P. Morgan – Neutral – (10/19/05): The analyst views that KRB is trading in line with other monolines companies, but feels that acquisition by BankofAmerica will drive the share prices in the future.

Keefe Bruyette – Market Perform ($23) – (11/15/05): The analyst remains cautious on the competitive implications for teaser pricing on balance transfers due to the Company’s growth turnaround and subsequent margin compression. The analyst notes that October’s managed data should not impact the Company’s planned sale to Bank of America.

Piper Jaffray – Market Perform ($26) – (10/19/05): The analyst believes that rising interest rates may put additional pressure on the NIM in 4Q05 as only about 50% of MBNA's loans are at floating rate, and the Company continues to offer more aggressively-priced products.

Wachovia – Market Perform ($25 - $27) – (10/19/05): The analyst believes slower-than-anticipated loan growth may limit profitability, but KRB continues to exhibit improving credit quality.

Copy Editor: Uttara Ganguly

Zacks Investment Research Page 8 www.zackspro.com