Webinar: Covid-19 Impact on Consumer Credit

WEBINAR: COVID-19 IMPACT ON CONSUMER CREDIT

April 29th, 2020

Please note that this session was held at a particular point in time (Wednesday April 29,2020, 4pm-5pm EDT), and in light of the rapidly evolving COVID-19 situation, it is possible these discussions are no longer accurate after that date. CONFIDENTIALITY Our clients’ industries are extremely competitive, and the maintenance of confidentiality with respect to our clients’ plans and data is critical. Oliver Wyman rigorously applies internal confidentiality practices to protect the confidentiality of all client information. Similarly, our industry is very competitive. We view our approaches and insights as proprietary and therefore look to our clients to protect our interests in our proposals, presentations, methodologies and analytical techniques. Under no circumstances should this material be shared with any third party without the prior written consent of Oliver Wyman. © Oliver Wyman OUR HOSTS

Deepak Kollali Mike Duane Partner, Co-Head of Risk & Public Partner, Risk & Public Policy Policy

Adam Schneider Partner, Retail & Business Banking and Digital

OUR PANELISTS Kevin Moss Ash Gupta Oliver Wyman Senior Advisor, Oliver Wyman Senior Advisor, Formerly Chief Risk Officer for Formerly Chief Risk Officer for Wells Fargo Consumer Lending American Express and SoFi

Brian Gunn Manish Gupta Oliver Wyman Senior Advisor, Founder and CEO of Corridor Formerly Chief Risk Officer for Platforms Santander US and Ally Financial

01 Opening Remarks

02 Consumer Credit Results and Outlook

03 Roundtable Discussion with Oliver Wyman Senior Advisors

04 Additional Q&A and Closing Remarks

Deepak Kollali Partner, Co-Head of Risk & Public Policy 3 Post Webinar Distribution 1 Economic Outlook 02 CONSUMER CREDIT 2 Effects on Consumer Lending RESULTS AND OUTLOOK

Mike Duane Partner, Risk & Public Policy ECONOMIC INDICATORS HAVE TURNED SHARPLY NEGATIVE AS A RESULT OF THE COVID-19 CRISIS, WITH SIGNIFICANT UNCERTAINTY AND UNPRECEDENTED REACTIONS

1 Scale and sharpness of the pandemic1 2 Uncertainty in speed/strength of recovery2

Median Q2 Unemployment Rate forecasts moved from

26.5M unemployment claims in the last 5 weeks 12.5% to 15.7% between end of March and mid-April

10% decline in Consumer Confidence Index since Potential for high variation in timing and March intensity as states reopen

3 Unprecedented government support3 4 Not yet reflected in credit outcomes4

Net Charge-off rate (Net Charge-offs / Average Loans) - NCOs 5 28x increase in mortgage forbearance since early March Annualized % of average loans for reporting banks 0.42% 0.45%

150%+ increase in avg. unemployment insurance payment

Q4 2019 Q1 2020 1. Source: FRED; Conference Board. 2. Source: Bank of America (Apr 2), UBS (Apr 2), Goldman Sachs (Mar 31), Morgan Stanley (Apr 3). TD Securities (Mar 25), Deutsche (Apr 13), JP Morgan (Apr 17). 3. Source: CARES Act; Fannie Mae and Freddie Mac; Mortgage Bankers Association. 4. Source: SNL; Capital IQ; Banks’ earnings reports; Oliver Wyman analysis. 5. Top 10 largest US Banks. Excludes Goldman Sachs and Morgan Stanley due to limited disclosure © Oliver Wyman 7 LOSS PROVISIONS INCREASED BY MORE THAN 4X FROM Q4 2019 TO Q1 2020, AND ADDITIONAL ACTIONS LIKELY AS WE LEARN MORE ABOUT THE CRISIS

Provisions for credit losses (excluding day 1 CECL Allowance coverage ratio vs. 9Q DFAST credit loan impact) losses in Severely Adverse scenario In $BN for reporting banks1 27.1 Provisions for the 10 largest US banks increased more than 4x in Q1 2020… … with reserves already accounting for 35-60% of 9Q DFAST stress credit losses 61%

51% 20.7 25% 45% 41% 18% 41% 4% 12% 35% 15% 8%

6.1 5.8 6.1 5.3 36% 37% 0.4 0.4 0.1 32% 33% 26% 27% 5.7 5.5 5.4 6.0 6.4

-0.3 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 JPM BAC Citi WFC USB PNC Q1 20 Allowance Coverage Rate (total) Reserve build Net Charge-offs Q1 20 Allowance Coverage Rate (incremental)

Source: SNL, Capital IQ, Banks’ earnings reports, Oliver Wyman analysis Q4 19 Allowance Coverage Rate 1. Top 10 largest US Banks. Excludes Morgan Stanley due to limited disclosure: Credit provision is embedded in non-interest expense © Oliver Wyman 8 Last updated: 4/28/2020 UNEMPLOYMENT IS FORECAST TO SPIKE QUICKLY AND DRAMATICALLY, RETURNING TO PRE-COVID LEVELS BY LATE-2021

U.S. Unemployment Forecasts compared to the 2008-09 Financial Crisis Q1 2020 – Q4 2021

20% = Range of COVID Crisis 19% forecast estimates 18% 17% 16% 15% 14% 13% 12% Peak unemployment during 11% financial crisis1 10% Financial Crisis2 9%

Unemployment rate 8% 7% 6% 5% 2020 Covid Crisis consensus3 4% 3% (2008 Q1) (2008 Q2) (2008 Q3) (2008 Q4) (2009 Q1) (2009 Q2) (2009 Q3) (2009 Q4) Financial Crisis quarter (1Q 20) (2Q 20) (3Q 20) (4Q 20) (1Q 21) (2Q 21) (3Q 21) (4Q 21) 2020 COVID Crisis projection

1. Source: U.S. Bureau of Labor Statistics 2. Source: “Unemployment Rate” – Federal Reserve Bank of St Louis 3. Consensus as the average of Goldman Sachs (Mar 31), JP Morgan (Apr 17), Morgan Stanley (Apr 3), Deutsche (Apr 13), UBS (Apr 15), TD (Mar 25), Bank of America (Apr 2) forecasts; consensus for 2020 Q4 – 2021 Q4 a combination of JPM, Goldman, TD, and some Deutsche

Projected days until active cases show a consistent Modelling the next 12-18 months (14-day) downward trajectory – as of 4/17/2020 What-ifs needed to simulate possible sources of uncertainty CURRENT LOCKDOWN TWO SHORT LOCKDOWNS ENDS IN EARLY 06/20 DURING NEXT WINTER Key variables

COVID seasonality

Herd immunity or mutation

Healthcare capacity

Lockdown effectiveness NO LOCKDOWN REQUIRED IN SUMMER MONTHS

Key points • Uncertainty: Government and individual choices that will drive the course of the pandemic and economic recovery are still very much up-in-the-air, and may vary across the US • Tactical response: Banks are preparing for the first wave of the pandemic now, but need to be agile as the crisis evolves (e.g., be ready for extended lockdown, slow recovery, etc.) • Future response: Banks must be both reactive and proactive in crisis response; risk mitigation actions taken now, can have significant impact on bank’s futures for years to come

Ash Gupta Oliver Wyman Senior Advisor, Formerly Chief Risk Officer for 03 American Express Brian Gunn Oliver Wyman Senior Advisor, ROUNDTABLE Formerly Chief Risk Officer for Moderated by Santander US and Ally Financial

Adam Schneider Kevin Moss Oliver Wyman Senior Advisor, Partner, Retail & Business Formerly Chief Risk Officer for Banking and Digital Wells Fargo Consumer Lending and SoFi Deepak Kollali Partner, Co-Head of Risk Manish Gupta & Public Policy Founder and CEO of Corridor Platforms

04 CLOSING REMARKS

Mike Duane Partner, Risk & Public Policy SESSION WRAP-UP: HOW DOES A BANK ORGANIZE AN EFFECTIVE COVID RESPONSE?

Central purpose and principles 1 Setup COVID control tower to dynamically respond to ever-changing epidemiological, economic, and policy environment 2 Define crisis response objectives, considering the bank’s financial capacity and risk appetite, and external requirements

Customer offering and credit strategy design 3 Define key customer segments and archetypes based on key crisis drivers and expected impact on customer well-being 4 Determine treatment waterfall and ‘offramps’ to provide solutions to customers at different level of distress 5 Design customer journey for each segment with initial outreach, information gathering, and follow up 6 Re-examine BAU credit risk management to identify models/processes/strategies requiring adaptation to the new environment

Operational delivery Acquisitions & underwriting Customer management Workout Approval Pricing Modifications Line management Collections Collateral management Line assignment Application fraud Cross-sell Retention 7 Optimize process and controls, including processes and procedures key compensating measures 8 Modify underlying systems, technologies, and tools to support updated processes 9 Build execution capacity to deliver effective customer assistance across both internal and third party resources 10 Design and implement reporting, monitoring, and data collection to support control tower and decision making

• Next webinar on COVID and FS Impacts on May 6 at 4pm. Mike Duane [email protected]

Deepak Kollali [email protected]

Adam Schneider [email protected]

Oliver Wyman and our parent company Marsh & McLennan (MMC) have been monitoring the latest events and are putting forth our perspectives to support our clients and the industries they serve around the world. Our dedicated COVID-19 digital destination will be updated daily as the situation evolves Visit our dedicated COVID-19 website: https://www.oliverwyman.com/coronavirus

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