ab Global Equity Research

Europe Including UK UBS Investment Research , Ex-S&L Eurobanks Funding Monitor Sector Comment

Q1 11 – back to full speed, for some 7 April 2011 „ Robust long-term debt issuance in Q1 www..com/investmentresearch Total issuance of banks’ term debt reached €315bn in Q1 11, a meaningful step up on the €244bn issued in the last quarter of 2010. At the same time only €225bn of debt has matured in Q1 11. We see UK, French and Nordic banking systems as most active in addressing their refinancing requirements. Alastair Ryan Analyst „ Interbank funding market – rates already priced in [email protected] A higher interest rate environment in Europe is already priced in. 3M EURIBOR +44 20 7568 3238 reached 124 bps on 31 March, compared with 100bps at the start of the quarter. We Anton Kryachok see Intesa, and as net beneficiaries of rising Euro rates. Associate Analyst [email protected] „ ECB support – still significant +44-20-7568 3580 We believe that, fundamentally, the funding challenges of some European banking John-Paul Crutchley systems are still not fixed. As of February 2011, the European has Analyst lent more than €487bn to banks across the continent. Irish and Greek banks are the [email protected] biggest borrowers in absolute terms. And, in the absence of any comprehensive +44-20-7568 5037 funding solution, we expect them to be most vulnerable to any tightening of Philipp Zieschang liquidity by the ECB. Analyst [email protected] „ UK most advanced in the UBS liquidity test +41-44-239 7414 In a simplified liquidity test we see UK banks as the most advanced in covering their short-term funding requirements. However, in the event of renewed difficult funding markets, Portuguese and Greek banks will struggle most without central bank support, in our view.

Chart 1: Debt issuance as % of debt maturity – two-speed structure

400% 335% 350% 300% 232% 250% 221% 200% 150% 116% 116% 100% 50% 0% France Sw eden United Kingdom* Italy Spain*

Source: Dealogic, UBS estimates Note *: We adjust the UK and Spanish debt issuance for Santander UK. It is deducted from Spanish total debt issuance and added to the UK.

This report has been prepared by UBS Limited ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 17. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Eurobanks Funding Monitor 7 April 2011

Executive summary Given the inherently leveraged nature of the banking industry, ability to issue long-term debt at a sustainable price is paramount for any financial institution, in our view. Therefore we prefer banks which have stable and sustainable sources of external funding (the Nordic names), a well calibrated and deposit- rich balance sheet structure (HSBC, Standard Chartered) or which are quickly addressing their refinancing needs (Lloyds, RBS, the French names). We think that the funding problems of the European banks are still not fully fixed. We therefore reiterate our cautious stance on some peripheral names, particularly on the Spanish and Portuguese domestic players. In a rising interest rate environment, which Europe is quickly becoming, we recommend banks with significant interest rate sensitivity, such as Intesa. Term debt issuance European banks demonstrated robust debt issuance in Q1 11. The total issuance UK, French and Nordic banking of term debt has reached €315bn, versus €244bn issued in the last quarter of systems are most active in addressing 2010. At the same time, only €225bn of the bank debt has matured in Q1 11. In their refinancing requirements absolute terms, the British and French banking systems were most active in issuing debt in Q1. Banks in these countries issued more than €50bn in the first quarter. French banks, including unlisted peers, have issued more than treble their refinancing needs, while UK banks issuance more than double the maturities. On a relative scale, Swedish and Norwegian monetary financial institutions have also demonstrated robust debt issuance. We note that, according to Dealogic, apart from Germany and Belgium, all major banking systems were issuing more debt than the current refinancing need in Q1.

Figures in Charts 1 and 2 are based on the nationality of operations of the parent bank. Although, we recognise the limitation of this approach, we believe that this is an optimal way to measure refinancing efforts of diverse European banking groups, with some adjustments indicated in the footnotes.

Chart 2: Debt issuance and maturity by banking systems in Q1 11 (€m)

70,000 58,815 54,156 60,000 50,000 35,232 34,361 32,472 32,373 40,000 26,484 30,000 13,645 20,000 8,826 6,261 10,000 0 United France Spain* Netherlands Italy Germany Sw eden Sw itzerland Norw ay Belgium Kingdom*

Issued Matured

Source: Dealogic, UBS estimates Note *: We adjust the UK and Spanish debt issuance for Santander UK. It is deducted from Spanish total debt issuance and added to the UK.

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Eurobanks Funding Monitor 7 April 2011

Having issued more than £50bn of term debt in 2010, Lloyds has continued to top debt issuance tables in Q1 11 with more than €18bn of new term debt issued, while only €9.9bn of Lloyds’ long-term debt has matured in Q1, according to Dealogic. Santander and BBVA have both been active on funding markets. This quarter they have issued more than €28bn in total, which accounts for 70% of total debt issued by the whole Spanish banking system (including Santander UK). This reflects, in our view, the fact that only the biggest and internationally diversified Spanish banks are able to access the funding market freely, albeit at a higher cost. We think that funding conditions for smaller Spanish MFIs remain quite challenging.

Table 1: Top 10 listed issuers of bank debt in Europe, Q1 11 Lloyds continues to top debt issuance tables in Europe Pos. Issuer Parent Deal Value in euros (Proceeds) (m)

1 Lloyds Banking Group plc 18,236

16,339 2 SA (o/w 5,333- Santander UK)

3 BBVA 11,855

4 SpA 11,596

5 Credit Agricole SA 11,244

6 BNP Paribas SA 10,781

7 Nordea Bank AB 10,104

8 RBS Group plc 9,472

9 ING Groep NV 8,415

10 plc 8,223

Source: Dealogic

We tend to treat data from Tables 1 and 2, as a good indicator of the banks’ refinancing efforts, rather than precise and final figures of debt issuance and maturity of all European banks. The table below gives a breakdown of debt issued YTD by type of instrument used, as well as total refinancing need for 2011, which we estimate as total long-term debt maturing this year, based on Dealogic figures. We also include loan-to-deposit ratio as of 2010 for the banks we cover. The L/D ratio serves as a good estimate of the structural dependence of a bank on the wholesale funding markets, in our view.

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Eurobanks Funding Monitor 7 April 2011

Table 2: Debt profile of European banks (UBS coverage universe)

(€ m) Issued in 2011 YTD

2011- Issued in ABS and Corporate Covered Medium - 2010 L/D Issuer Parent Total YTD Refinancing 2010 MBS bond bond term note ratio needs

Allied Irish Banks plc 5,484 4,131 n/a

Alpha Bank AE 878 5,793 129%

Banca Monte dei Paschi di Siena SpA - 6,450 2,245 70 2,315 5,989 99% MPS

Banca Popolare di Milano Scarl 1,495 398 333 75 806 2,200 149%

Banco Bilbao Vizcaya Argentaria SA - 15,839 4,088 7,615 153 11,855 12,182 123% BBVA

Banco BPI SA 2,385 582 133%

Banco Comercial Portugues SA - 1,831 3,882 181% Millennium BCP

Banco de Sabadell SA 2,277 1,198 1,198 2,975 n/a

Banco Popolare Scarl 5,662 998 2,191 357 3,546 1,749 249%

Banco Popular Espanol SA 3,751 1,190 1,190 4,616 222%

Banco Santander SA 45,445 2,883 6,294 6,714 448 16,339 26,015 123%

Bank of Ireland (Governor & Co of) 5,128 2,737 142%

Bankinter SA 3,642 874 874 1,050 227%

Barclays plc 23,322 1,297 5,353 995 578 8,223 19,212 129%

BNP Paribas SA 21,252 8,327 1,856 598 10,781 16,830 118%

Commerzbank AG 12,307 1,732 2,140 82 3,954 25,148 125%

Credit Agricole SA 21,085 5,635 4,363 1,246 11,244 9,824 76%

Credit Suisse Group 34,356 1,858 3,543 5,401 12,740 76%

Danske Bank A/S 6,195 1,292 1,292 7,645 215%

Deutsche Bank AG 10,421 3,352 1,984 175 5,511 16,519 n/a

Dexia SA 35,485 3,880 464 4,344 32,898 277%

DnB NOR ASA 11,859 2,157 4,035 120 6,313 8,670 182%

EFG SA 1,522 4,508 127%

Erste Group Bank AG 2,177 20 1,113 10 1,143 3,098 113%

Espirito Santo Financial Group SA 1,325 3,725 n/a

HSBC Holdings plc 23,462 7,252 322 7,574 30,603 78%

ING Groep NV 16,340 4,552 3,428 435 8,415 11,246 120%

Intesa Sanpaolo SpA 13,298 6,829 3,987 779 11,596 27,653 165%

KBC Group NV 3,382 1,746 171 1,917 4,861 78%

Lloyds Banking Group plc 36,187 2,391 10,358 4,975 512 18,236 40,161 148%

Mediobanca - Banca di Credito Finanziario 2,832 3,973 n/a SpA

Nordea Bank AB 16,248 6,772 2,555 778 10,104 4,327 178%

Piraeus Bank SA 900 1,150 125%

Raiffeisen Zentralbank Oesterreich AG - 1,657 2,381 265 2,646 6,575 129% RZB

Royal Bank of Scotland Group plc 33,601 151 4,528 2,989 1,804 9,472 25,170 123%

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Eurobanks Funding Monitor 7 April 2011

(€ m) Issued in 2011 YTD

2011- Issued in ABS and Corporate Covered Medium - 2010 L/D Issuer Parent Total YTD Refinancing 2010 MBS bond bond term note ratio needs

Skandinaviska Enskilda Banken AB - SEB 3,454 499 2,572 66 3,137 6,323 174%

Societe Generale 15,124 4,121 998 475 5,594 8,279 119%

Standard Chartered plc 5,184 609 6 615 1,947 79%

Svenska AB 7,728 1,721 179 149 2,049 5,079 271%

Swedbank AB 9,536 4,354 603 4,957 11,011 222%

UniCredit SpA 9,994 2,500 3,860 231 6,591 19,281 95%

Unione di Banche Italiane Scpa - UBI 3,196 699 1,742 2,441 3,973 174% Banca

Total 483,696 8,581 96,465 75,656 10,973 191,675 446,330

Source: Dealogic, UBS estimates Structure of bonds issued Regulatory and legal changes are combining to effectively subordinate Covered bonds offer protection from unsecured bank funding and make default more likely. ‘Bail in’ proposals in the participation in ‘bail ins’ for investors EU would formalise write-down risk. This leaves secured funding, including covered bonds and mortgage-backed securities, relatively more attractive, although the failure of the sponsor bank would still likely prove disruptive.

These changes, coupled with the shift in investor sentiment, have significantly reshaped the structure of the banks’ funding mix. Issuances of ABS and MBS instruments have declined significantly, since the pre-crisis era, while issuance of covered and corporate bonds grew.

The limited availability of securitisation restricts banks’ ability to significantly grow lending without inflating RwA growth, in our view.

Chart 3: Profile of debt issued by European banks (UBS Chart 4: Profile of debt issued by European banks (UBS coverage), Q1 11 coverage), Q1 07

6% 4% 13%

13% 43% 39% 51%

31% ABS and MBS Corporate Bond ABS and MBS Corporate Bond Covered Bond Medium - Term Note Covered Bond Medium - Term Note

Source: Dealogic Source: Dealogic

We see covered bonds becoming a preferred instrument for those banks which either have strong historical footprint in the market (the Nordic banks) or those issuing covered bonds to fight increasing cost of funding form other sources (the Spanish banks). According to Dealogic, BBVA and Santander alone accounted

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Eurobanks Funding Monitor 7 April 2011 for around €14.3bn of covered bonds issuance in Q1 2011. This is roughly an equivalent of 19% of total covered bonds issued by European banks in UBS coverage universe. Covered bonds are lower-cost funding tools, but impose their own challenges. Certain regulators, including the FSA, place limits on covered bond dependence as a result. For example, the necessary over-collateralisation leaves the balance sheet increasingly hypothecated. There is also only a finite pool of assets eligible for inclusion in a covered bond pool.

At an extreme (and this is not currently the case for Santander and BBVA, in our Pressure to create assets eligible for view), falling house prices and a maturing of existing loans can drive a need to covered bonds can depress new originate new loans to support a maxed-out cover pool. We believe there is some business margins in some markets, in evidence of this in the Spanish mortgage market, as discussed in “Into the rate our view hike cycle, unreconstructed” – 7 March 2011. This pressure can result in depressed new business margins as banks compete in the new business market to support the funding structure of the existing balance sheet. Short-term liquidity position From a slightly different angle, we try to look at the liquidity need of European banks under more stressed scenario. We estimate net short-term financing position in 2011 as total debt issued in 2011 YTD plus net interbank position and cash on balance sheet minus debt maturing in 2011. In our view, this analysis could prove illustrative of funding and liquidity needs of European banks. We think that these calculations can serve as a rough sensitivity test to potential short-term cost shocks on the funding market among European banks.

In a simplified liquidity test we see UK banks as being most advanced in UK banks are most advanced in covering their short-term funding requirements (Chart 3). Out of the top five covering their financing needs for 2011 banks with greatest liquidity resource, four were UK names. In the unlikely event of further deterioration in funding markets, we think Portuguese and Greek banks will struggle most without central bank support.

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Eurobanks Funding Monitor 7 April 2011

Table 3: Short-term financing position of European banks (UBS coverage universe)

+ Cash on Issued in 2011 + Net Interbank - Term debt maturing = Net liquidity Issuer Parent (€ m) balance sheet YTD position 2010 in 2011 position 2011 2010

Alpha Bank AE -10,805 2,219 5,793 -14,379

Banca Monte dei Paschi di Siena SpA - MPS 2,315 -17,020 724 5,989 -19,970

Banca Popolare di Milano Scarl 806 -1,693 209 2,200 -2,878

BBVA 11,855 -44,544 19,981 12,182 -24,890

Banco BPI SA -4,533 1,328 582 -3,786

Banco Comercial Portugues SA - Millennium BCP -16,474 1,484 3,882 -18,872

Banco de Sabadell SA 1,198 -7,589 1,254 2,975 -8,113

Banco Popolare Scarl 3,546 -1,889 465 1,749 374

Banco Popular Espanol SA 1,190 -12,278 683 4,616 -15,021

Banco Santander SA 16,339 -38,113 77,785 26,015 29,997

Bank of Ireland (Governor & Co of) -28,612 914 2,737 -30,435

Bankinter SA 874 -4,163 196 1,050 -4,143

Barclays plc 8,223 -46,814 113,941 19,212 56,137

BNP Paribas SA 10,781 -93,779 33,568 16,830 -99,828

Commerzbank AG 3,954 -27,010 8,053 25,148 -40,151

Danske Bank A/S 1,292 -12,062 4,751 7,645 -13,665

Dexia SA 4,344 -45,111 3,266 32,898 -70,399

DnB NOR ASA 6,313 -26,949 2,077 8,670 -27,229

EFG Eurobank Ergasias SA 4,015 3,606 4,508 3,113

Erste Group Bank AG 1,143 -7,658 5,839 3,098 -3,775

Espirito Santo Financial Group SA -13,999 1,984 3,725 -15,739

HSBC Holdings plc 7,574 72,817 42,774 30,603 92,562

ING Bank NV 8,415 -21,024 13,072 11,246 -10,783

Intesa Sanpaolo SpA 11,596 -2,067 4,749 27,653 -13,375

KBC Group NV 1,917 -14,858 15,292 4,861 -2,510

Lloyds Banking Group plc 18,236 -23,448 44,483 40,161 -889

Nordea Bank AB 10,104 -24,948 10,023 4,327 -9,148

Piraeus Bank SA -16,840 2,787 1,150 -15,203

Royal Bank of Scotland Group plc 9,472 -9,370 66,539 25,170 41,471

Skandinaviska Enskilda Banken AB - SEB 3,137 -7,093 5,154 6,323 -5,125

Societe Generale 5,594 -7,043 11,303 8,279 1,575

Standard Chartered plc 615 10,789 24,393 1,947 33,850

Svenska Handelsbanken AB 2,049 -7,038 11,905 5,079 1,837

Swedbank AB 4,957 3,288 1,897 11,011 -869

UniCredit SpA 6,591 -28,082 7,225 19,281 -33,547

Unione di Banche Italiane Scpa - UBI Banca 2,441 -3,698 586 3,973 -4,644

Source: Dealogic

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Eurobanks Funding Monitor 7 April 2011

Chart 5: Net liquidity position as % of total assets

Standard Chartered plc 8.8% HSBC Holdings plc 5.1% EFG Eurobank Ergasias SA 3.6% Barclays plc 3.2% Banco Santander SA 2.5% Roy al Bank of Scotland Group plc 2.4% Sv enska Handelsbanken AB 0.8% Banco Popolare Scarl 0.3% Societe Generale 0.1% Lloy ds Banking Group plc -0.1% Sw edbank AB -0.5% KBC Group NV -0.8% ING Bank NV -1.2% Nordea Bank AB -1.6% Erste Group Bank AG -1.8% Intesa Sanpaolo SpA -2.0% Skandinav iska Enskilda Banken AB - SEB -2.1% Danske Bank A/S -3.2% UniCredit SpA -3.5% Unione di Banche Italiane Scpa - UBI Banca -3.5% BBVA -4.5% BNP Paribas SA -5.0% Commerzbank AG -5.3% Banca Popolare di Milano Scarl -5.5% Bankinter SA -7.7% Banca Monte dei Paschi di Siena SpA - MPS -8.2% Banco BPI SA -8.3% Banco de Sabadell SA -8.4% DnB NOR ASA -11.4% Banco Popular Espanol SA -11.5% Dex ia SA -12.4% Bank of Ireland (Gov ernor & Co of) -17.9% Espirito Santo Financial Group SA -17.9% Banco Comercial Portugues SA - Millennium BCP -18.9% Alpha Bank AE -21.2% Piraeus Bank SA -26.4%

-30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0%

Source: Dealogic, UBS estimates

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Eurobanks Funding Monitor 7 April 2011 Interbank market A higher interest rate environment in Europe is quickly becoming a reality, Interbank markets are in effect already rather than a distant prospect. Interbank markets are in effect already pricing in pricing in next ECB interest rate hike next ECB interest rate hike. 3M EURIBOR reached 124 bps on 31st March, compared with 100bps at the start of the quarter. 3m USD LIBOR remained largely flat in the first quarter. The TED spread, a broad indicator of perceived credit riskiness of banks, widened 3bps in the same quarter. A tightening of the EURIOBOR – EONIA spread by more than 19bps in Q1 11 points to an easing of the funding pressure in the euro interbank markets since the start of the year. On contrary, the US 3m LIBOR – OIS spread widened by 5bps in Q1 11, suggesting that liquidity in USD interbank market remains somewhat restrictive.

Chart 6: 3m USD LIBOR (pct) Chart 7: 3m USD LIBOR (pct)

7.0 0.320 6.0 0.315 5.0 4.0 0.310 3.0 2.0 0.305 1.0 0.0 0.300 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 01-Jan-11 12-Jan-11 23-Jan-11 03-Feb-11 14-Feb-11 25-Feb-11 08-Mar-11 19-Mar-11 30-Mar-11

Source: Bloomberg Source: Bloomberg

Chart 8: 3m EURIBOR (pct) Chart 9: 3m EURIBOR (pct)

6.0 1.29 5.0 1.24 1.19 4.0 1.14 3.0 1.09 2.0 1.04 0.99 1.0 0.94 0.0 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 01-Jan-11 12-Jan-11 23-Jan-11 03-Feb-11 14-Feb-11 25-Feb-11 08-Mar-11 19-Mar-11 30-Mar-11

Source: Bloomberg Source: Bloomberg

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Eurobanks Funding Monitor 7 April 2011

Chart 10: 3m TED Spread (bps) Chart 11: 3m TED Spread (bps)

500 50 450 45 400 40 350 35 300 30 250 25 200 20 150 15 100 10 50 5 0 0 Jul-10 Oct-10 Jan-10 Apr-10 Jun-10 Jan-11 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Feb-10 Mar-10 Aug-10 Sep-10 Dec-10 Feb-11 Mar-11 Nov-10 May-10

Source: Bloomberg Source: Bloomberg

Chart 12: 3m EURIOBR – EONIA (bps) Chart 13: 3m EURIOBR – EONIA (bps)

250 50

200 40

150 30

100 20

50 10

0 0 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

Source: Bloomberg Source: Bloomberg

Chart 14: US 3m LIBOR - OIS (bps) Chart 15: US 3m LIBOR - OIS (bps)

400 40 350 35 300 30 250 25 200 20 150 15 100 10 50 5 0 0 Jul-07 Jul-08 Jul-09 Jul-10 Jul-10 Jan-11 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-10 Mar-11 Mar-10 Sep-10 Nov-10 May-10

Source: Bloomberg Source: Bloomberg

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Eurobanks Funding Monitor 7 April 2011 ECB Borrowing Chart 16: Borrowing from ECB, gross (€ m) The ECB has lent more than €487.6bn to the banks across the continent, as of 160,000 February 2011. Irish (€117bn) and Greek 140,000 120,000 (€98bn Dec 10) banks are the biggest 100,000 borrowers in absolute terms. 80,000 60,000 40,000 20,000 0

0 0 1 t-09 09 09 -10 -10 1 -10 -10 -1 t-10 10 -10 -1 c pr y- g c c O ec- A a Jul ep O ov- e eb Sep-09 Nov- D Jan-10Feb Mar-10 M Jun-10 Au S N D Jan-11F

Spain Greece Portugal Ireland

Source: Central Banks

Chart 17: ECB Marginal lending facility (€ m)

18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

Source: ECB

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Eurobanks Funding Monitor 7 April 2011 Funding signposts Sovereign CDS Table 4: Sovereign CDS as of 31 March 2011

Amounts % change

Sovereign CDS (10-yr Sr, bps) Current -1w -1m -1q -1yr YtD -1w -1m -1q -1yr

Germany 62.3 60.8 68.3 71.4 37.6 -12.8% 2.4% -8.8% -12.8% 65.6%

Italy 160.2 160.6 186.5 244.1 118.2 -34.4% -0.3% -14.1% -34.4% 35.5%

Spain 240.6 219.1 256.0 342.8 121.4 -29.8% 9.8% -6.0% -29.8% 98.2%

Portugal 513.5 484.8 431.7 453.5 144.4 13.2% 5.9% 18.9% 13.2% 255.7%

Ireland 517.5 510.5 513.4 549.7 146.8 -5.9% 1.4% 0.8% -5.9% 252.5%

Greece 895.3 910.4 803.4 1,008.0 329.2 -11.2% -1.7% 11.4% -11.2% 171.9%

Source: Bloomberg

CDS on Italian (-34%) and Spanish (-30%) bonds have tightened significantly since the start of the year. Prices of CDS on Ireland (-6%) and Greece (-11.2%) have also decreased, but to a smaller degree. Although CDS spreads of peripheral European government bonds remain elevated on a longer-term perspective. However, by the end of the quarter sovereign fears had returned to investors’ minds. Last week, the cost of insurance against default of Spanish government bonds has risen by 10% and that of Portugal by 6%.

Chart 18: Sovereign CDS Sovereign crisis is still on investors’ radars. This could create pressure on 1,200 peripheral European banks share price 1,000 performance, in our view 800 600 400 200 0 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Nov-07 Nov-08 Nov-09 Nov-10 May-08 May-09 May-10

Italy Greece Spain German Portugal Ireland

Source: Bloomberg

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Eurobanks Funding Monitor 7 April 2011

Bank CDS Table 5: CDS on 5-year Senior Unsecured Bonds

31/03/2011 24/03/2011 31/12/2010 31/03/2010 w/w q/q y/y

ALLIED IRISH 1,191 1,435 1,435 197 -17% -17% 506%

ALPHA BANK 935 935 998 423 0% -6% 121%

BCP FINANCE 699 683 841 n/a 2% -17% n/a

BBV ARGENTARIA 214 209 261 109 2% -18% 96%

INTESA SANPAOLO 162 164 154 69 -1% 5% 134%

BANCO COMR PORTUGUES 675 670 841 171 1% -20% 294%

BARCLAYS BANK PLC 124 117 121 87 5% 2% 43%

BANCO ESPIRITO SANTO 607 602 850 182 1% -29% 233%

BANK OF IRELAND 1,060 1,107 1,023 192 -4% 4% 452%

BANKINTER 338 381 400 185 -11% -15% 83%

BNP PARIBAS 96 95 110 70 1% -12% 38%

BANCA MDP DI SIENA SPA 229 237 261 84 -3% -12% 174%

CREDIT AGRICOLE SA 130 132 163 85 -1% -20% 54%

COMMERZBANK 147 141 139 79 4% 5% 86%

CREDIT SUISSE 90 87 102 76 4% -12% 19%

DEUTSCHE BANK 97 94 105 85 3% -7% 14%

DANSKE BANK 118 119 120 75 -1% -2% 56%

DNB NOR 74 74 75 71 0% 0% 4%

ERSTE GROUP 134 135 164 134 0% -18% 0%

HSBC 83 81 82 66 3% 1% 27%

ING 107 106 144 79 1% -25% 35%

KBC 208 208 198 104 0% 5% 100%

LLOYDS TSB 190 186 198 138 2% -4% 38%

MEDIOBANCA 148 151 169 79 -2% -12% 88%

NATIONAL BANK OF GREECE 927 926 978 405 0% -5% 129%

NORDEA BANK 77 77 82 73 1% -7% 5%

BCO PASTOR 494 496 550 287 0% -10% 72%

BANCO POP ESPANOL 347 367 432 178 -5% -20% 96%

RBS 196 192 212 154 2% -8% 27%

RAIFFEISEN 152 153 186 152 -1% -18% 0%

BANCO DE SABADELL 312 330 413 184 -5% -24% 69%

BANCO SANTANDER 205 201 253 111 2% -19% 85%

SEB 83 82 86 103 0% -4% -20%

SOCIETE GENERALE 128 130 155 82 -1% -17% 55%

HANDELSBANKEN 59 59 56 63 0% 6% -7%

STD CHARTERED 93 96 92 73 -3% 1% 28%

SWEDBANK 89 89 91 106 0% -3% -16%

UNIONE DI BANCHE 193 193 212 86 0% -9% 124%

UNICREDIT BANK 94 94 109 n/a 0% -14% n/a

Source: Thomson Reuters Datastream

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Eurobanks Funding Monitor 7 April 2011

Chart 19: CDS on 5-year Senior Unsecured Bonds Funding markets are starting to significantly differentiate between 350 perceived riskiness of banks from 300 different European countries 250 200 150 100 50 0 Jul-08 Jul-09 Jul-10 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Jan-08 Jan-09 Jan-10 Jan-11

BBVA HSBC Santander Handelsbanken

Source: Bloomberg

Chart 20: Greatest changes in CDS q/q (%)

10% 5% 6% 4% 5% 5% 5% 0% -5% -10% -15% -20% -25% -20% -20% -30% -25% -24% -29% -35% Ban. Espirito ING Sabadell Credit Agr. Banco Pop. Bank of Ireland KBC Intesa Commerzbank SHB Santo Esp.

Source: Bloomberg

iTraxx Table 6: iTraxx indexes

Amounts % change

ITRAXX Indices (10-yr Sr, bps) Current -1w -1m -1q -1yr YtD -1w -1m -1q -1yr iTraxx Europe Xover 10yr 435.7 430.3 422.2 455.5 440.9 -4.3% 1.3% -3.1% 4.5% -1.2% iTraxx Europe 10yr 125.2 123.9 120.8 120.2 93.6 4.1% 1.0% -3.5% -3.9% 33.7% iTraxx Europe Financials 160.7 160.0 169.7 182.5 101.1 -12.0% 0.4% 5.6% 13.6% 58.9% iTraxx Europe High-Vol 167.1 166.1 160.9 172.1 137.6 -2.9% 0.6% -3.7% 3.0% 21.4%

Source: Bloomberg

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Chart 21: ITRAXX Europe Indices Chart 22: ITRAXX Europe

300 200 250 180 160 200 140 150 120 100 100 50 80 60 0 40 20

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 0

Europe 10y r Europe Fin Sr 10y r Europe Non-Fin 10y r Jul-09 Jul-10 Jan-09 Jan-10 Jan-11 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Nov-09 Nov-10 May-09 May-10

Source: Bloomberg Source: Bloomberg

Chart 23: ITRAXX Europe Xover Chart 24: ITRAXX Europe Financials

1,000 250 900 800 200 700 600 150 500 400 100 300 200 50 100 0 0 Jul-09 Jul-09 Jul-10 Jul-10 Jan-09 Jan-09 Jan-10 Jan-10 Jan-11 Jan-11 Mar-09 Sep-09 Mar-09 Sep-09 Mar-10 Sep-10 Mar-10 Sep-10 Mar-11 Mar-11 Nov-09 Nov-09 Nov-10 Nov-10 May-09 May-09 May-10 May-10

Source: Bloomberg Source: Bloomberg

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Glossary

Q Libor: Libor stands for London Inter Bank Offered Rate. It is calculated for ten currencies with 15 maturities quoted for each, ranging from overnight to 12 months. Libor is a benchmark rate giving an indication of the average rate a prime bank can obtain unsecured term funding in the London market for a given currency. Libor (bbalibor) is a trademark of the British Bankers Association (BBA).

Q Euribor: Euribor is the benchmark rate of the euro money market. It is sponsored by the European Banking federation. A representative sample of prime banks provides daily quotes – for 13 maturities from 1 week to 1 year – at which interbank term deposits denominated in euros are being offered within the eurozone between prime banks.

Q EONIA: The Euro Overnight Index Average (EONIA) reflects the effective overnight lending rate. It is computed as weighted average of all overnight unsecured lending transactions in the interbank market, initiated within the euro area by contributing banks. EONIA is calculated daily by the (ECB).

Q 3m Euribor-EONIA: The 3m Euribor-EONIA spread measures the difference between the Euro Overnight Index Average rate and the Euribor rate. It is the key gauge of liquidity in money markets (denominated in euros). Spread widening points to increased funding pressure, while spread tightening is indicative of an easing of funding pressure.

Q OIS: An Overnight Indexed Swap (OIS) is a fixed/floating interest rate swap with the floating leg computed using a published overnight rate index, in the case of the USD, the Fed Funds Effective Rate. The OIS rate is typically considered less risky than the corresponding interbank rate (Libor). There is very little default risk in the OIS market because there is no exchange of principal; funds are exchanged only at the maturity of the contract, when one party pays the net interest obligation to the other.

Q US 3m Libor-OIS: The US 3m Libor-OIS spread measures the difference between the Overnight Indexed Swap rate and the Libor rate. It is the key gauge of liquidity in money markets (denominated in USD). Spread widening points to increased funding pressure, while spread tightening is indicative of an easing of funding pressure. It can be viewed as a complement to the US 3m TED spread, confirming the perception of credit risk by measuring the availability of funds in the market.

Q US 3m TED: The US 3m TED spread is the difference between the three month T-bill interest rate and three-month Libor. The TED spread is an indicator of perceived credit risk in the general economy. This is because T- bills are considered risk-free while Libor reflects the credit risk of lending to commercial banks. An increase of the TED spread is a sign that lenders believe the risk of default on interbank loans is increasing. When fears of default risk subside and risk appetite increases, the TED spread decreases.

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Q Swap spread: The swap spread is defined as the spread paid by the fixed- rate payer of an interest rate swap over the rate of the on-the-run treasury with the same maturity as the swap. It is used to represent the risk associated with the investment. Swap spreads are based on Libor rates, the creditworthiness of the swap's parties, and other economic factors that could influence the terms of the investment's interest rates.

Q iTraxx Europe Financials: The Markit iTraxx Europe Financials (CDS) Index is a sub-index of the Markit iTraxx Europe CDS Index.

Q Statement of Risk

Banks are exposed to a range of risks, including exchange rates and interest rates, and

Q Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

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Required Disclosures

This report has been prepared by UBS Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission.

UBS Investment Research: Global Equity Rating Allocations

UBS 12-Month Rating Rating Category Coverage1 IB Services2 Buy Buy 52% 41% Neutral Hold/Neutral 40% 37% Sell Sell 8% 20% UBS Short-Term Rating Rating Category Coverage3 IB Services4 Buy Buy less than 1% 30% Sell Sell less than 1% 17% 1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months.

Source: UBS. Rating allocations are as of 31 March 2011. UBS Investment Research: Global Equity Rating Definitions

UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition Buy: Stock price expected to rise within three months from the time the rating was assigned Buy because of a specific catalyst or event. Sell: Stock price expected to fall within three months from the time the rating was assigned Sell because of a specific catalyst or event.

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KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months.

EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.

Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Limited: Alastair Ryan; Anton Kryachok; John-Paul Crutchley. UBS AG: Philipp Zieschang.

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Company Disclosures

Company Name Reuters 12-mo rating Short-term rating Price Price date Allied Irish Bank2, 4, 16b ALBK.I Suspended N/A €0.33 05 Apr 2011 Alpha Bank5, 16b ACBr.AT Buy N/A €4.35 05 Apr 2011 Banca Pop Milano2, 4, 5 PMII.MI Buy N/A €2.68 05 Apr 2011 Banco de Sabadell2, 4, 5, 16b SABE.MC Sell N/A €3.08 05 Apr 2011 Banco Popolare2, 4, 5, 13, 16b BAPO.MI Neutral N/A €2.12 05 Apr 2011 Banco Popular2, 4, 5 POP.MC Sell N/A €4.18 05 Apr 2011 Bank of Ireland2, 4, 5, 14, 16b, 22 BKIR.I Neutral N/A €0.32 05 Apr 2011 Bankinter16b BKT.MC Neutral N/A €4.94 05 Apr 2011 Barclays2, 4, 5, 6, 16b, 18a BARC.L Neutral N/A 287p 05 Apr 2011 BBVA2, 4, 5, 13, 15, 16b BBVA.MC Sell N/A €8.53 05 Apr 2011 BCP4, 5 BCP.LS Neutral N/A €0.57 05 Apr 2011 BNP Paribas2, 4, 5, 16b, 22 BNPP.PA Neutral N/A €52.47 05 Apr 2011 BPI5 BBPI.LS Neutral N/A €1.21 05 Apr 2011 Commerzbank1, 2, 4, 5, 13, 14, 16b CBKG.DE Neutral N/A €5.60 05 Apr 2011 Crédit Agricole2, 4, 5, 16b CAGR.PA Neutral N/A €11.59 05 Apr 2011 Credit Suisse Group5, 13, 15, 16b CSGN.VX Neutral N/A CHF39.31 05 Apr 2011 Danske Bank2, 4, 5, 16b DANSKE.CO Neutral N/A DKr120.00 05 Apr 2011 Deutsche Bank2, 4, 5, 6, 13, 15, 16b, 18b DBKGn.DE Buy N/A €41.90 05 Apr 2011 Dexia4, 5, 6, 22 DEXI.BR Neutral N/A €2.76 05 Apr 2011 DnB NOR4, 5, 16b DNBNOR.OL Buy N/A NKr85.80 05 Apr 2011 EFG Eurobank Ergasias2, 4, 5 EFGr.AT Neutral N/A €4.06 05 Apr 2011 Erste Bank5, 16b ERST.VI Neutral N/A €35.53 05 Apr 2011 Espirito Santo Financial Group14 ESF.LS Neutral N/A €14.15 05 Apr 2011 Handelsbanken4, 16b SHBa.ST Buy N/A SKr207.80 05 Apr 2011 HSBC2, 4, 5, 6, 16a, 16b HSBA.L Neutral N/A 647p 05 Apr 2011 ING2, 4, 5, 6, 16b, 22 ING.AS Buy N/A €9.00 05 Apr 2011 Intesa SanPaolo2, 4, 5, 6, 16b ISP.MI Buy N/A €2.13 05 Apr 2011 KBC Groep4, 5 KBC.BR Neutral N/A €27.35 05 Apr 2011 Lloyds Banking Group1, 2, 4, 5, 6, 12, 14, 16b, 22 LLOY.L Buy N/A 60p 05 Apr 2011

Mediobanca5 MDBI.MI Buy N/A €7.33 05 Apr 2011 MPS2, 4, 5 BMPS.MI Neutral N/A €0.88 05 Apr 2011 Nordea2, 4, 5, 6, 16b NDA.ST Neutral N/A SKr70.10 05 Apr 2011 Piraeus Bank4 BOPr.AT Sell N/A €1.28 05 Apr 2011 Raiffeisen Bank Intl4, 5 RBIV.VI Neutral N/A €39.17 05 Apr 2011 RBS Group2, 3a, 3b, 3c, 4, 5, 6, 8, 14, 16b, 20, 22 RBS.L Buy (CBE) N/A 42p 05 Apr 2011

Santander5, 16b SAN.MC Sell N/A €8.23 05 Apr 2011 SEB Group2, 4, 5 SEBa.ST Buy N/A SKr57.40 05 Apr 2011 Société Générale2, 4, 5, 16b SOGN.PA Buy N/A €45.32 05 Apr 2011 Standard Chartered2, 4, 14 STAN.L Neutral N/A 1,671p 05 Apr 2011 Swedbank2, 4, 16b SWEDa.ST Neutral N/A SKr109.90 05 Apr 2011 UniCredit2, 4, 5, 22 CRDI.MI Neutral N/A €1.73 05 Apr 2011 Unione di Banche Italiane2, 4, 5 UBI.MI Neutral N/A €5.94 05 Apr 2011 Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date

1. UBS Limited is acting as manager/co-manager, underwriter, placement or sales agent in regard to an offering of securities of this company/entity or one of its affiliates. 2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months. 3a. UBS Limited is acting as adviser to Royal Bank of Scotland Group on the proposed sale of a portfolio of project finance assets to Bank of Tokyo-Mitsubishi UFJ.

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3b. UBS Limited is acting as advisor to Royal Bank of Scotland Group on the sale of part of its UK banking business comprising certain branches, SME customers and supporting infrastructure 3c. UBS Securities LLC is acting as advisor to Royal Bank of Scotland on its announced agreement to sell its Argentina wholesale banking operation to Banco Comafi SA. 4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 5. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 6. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided. 8. The equity analyst covering this company, a member of his or her team, or one of their household members has a long common stock position in this company. 12. Directors or employees of UBS AG, its affiliates or subsidiaries are directors of this company. 13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end). 14. UBS Limited acts as broker to this company. 15. UBS AG, its affiliates or subsidiaries has issued a warrant the value of which is based on one or more of the financial instruments of this company. 16a. UBS Securities (Hong Kong) Limited is a market maker in the HK-listed securities of this company. 16b. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 18a. A U.S. based global equity strategist, a member of his team, or one of their household members has a long common stock position in Barclays PLC. 18b. UBS AG, its affiliates or subsidiaries beneficially owned 5.26% of this company`s voting rights as of last month`s end. 20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds the MRA by 10% (compared with 6% under the normal rating system). 22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end).

Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.

For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Publishing Administration.

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This report has been prepared by UBS Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. In certain countries, UBS AG is referred to as UBS SA.

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