GLOBAL I RESEARCH CFA Society Maine

The 2015 Outlook for Banks Stocks

March 2, 2015

RBC Capital Markets Corporation Gerard Cassidy (Analyst) (207) 780-1554 [email protected] Steven Duong (Associate) (207) 780-1554 [email protected] John Hearn (Associate) (207) 780-1554 [email protected]

This report is priced as of market close February 26, 2015 EST. All values in U.S. dollars unless otherwise noted. For required Conflicts Disclosures, please see page 21

U.S. Labor Market & Unemployment JOLTS Data / Unemployment Rates

6,000 Quits, Mar-07, 2,985

5,000 JOLTS Data 4,000 • JOLTS data measures job openings and labor Openings, Apr-07, 4,534

3,000 turnover. • Key items to focus on are the number of hires, 2,000 openings, and quits.

Hires, Openings, Separations per Month(000s) 1,000

- 2009 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011 2012 2013 2014

Layoffs & Discharges Quits Other Separations Recessions Hires Openings Source: U.S. Bureau of Labor Statistics Data as of Dec-14 18.0 8.0 16.0 7.0 14.0 6.0 12.0 5.0 10.0 Unemployment Rates 4.0

8.0 3 (%) Spread • The U-3 is the official reported unemployment 3.0 - 6.0 6/U rate, which stood at 5.7% in January. 2.0 - 4.0 U 6 Unemployment Rates (%) 6 Rates Unemployment • The U-6 unemployment rate includes marginally - 2.0 1.0 attached workers and those working part-time for - - 3 3 U and economic reasons. - U Jan-98 Jan-02 Jan-06 Jan-10 Jan-14 Jan-94 Sep-96 Sep-00 Sep-04 Sep-08 Sep-12

• The U-3/U-6 spread measures the level of May-95 May-99 May-03 May-07 May-11

marginally attached workers and those working U-6/U-3 Spread Unemployment Rate (U-3) U-6 Rate

part-time for economic reasons. Source: Bureau of Labor Statistics

Employment Outlook Looks Robust

2 RBC Capital Markets U.S. Economy Private Residential Investment as a Percentage of GDP / U.S. Energy Production

8.0

7.0

6.0 Historical Average: 4.68% Private Residential Investment as % of GDP • Private residential has contributed ~4.70% to (%) 5.0 4Q'14: GDP on average. 3.26%

4.0 • The latest reading came in at 3.26%, still below

1Q'91: the pre-crisis troughs. 1Q'67: 1Q'75: 3.47% 3.0 2Q'70: 3.48% 3.78% 3.87% 3Q'82: 3.22%

2.0 1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

Source: U.S. Bureau of Economic Analysis mmbbl/d 12

11

10

9

8

7 NGLs U.S. Energy Production 6

•U.S. energy production is at the highest levels in 5 Onshore Lower 48 almost 30 years, driven by onshore production. 4

•U.S. oil production five years ago was less than 5 3 million barrels a day versus over 8.5 million a day 2 Offshore today. 1 Alaska 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: U.S. Energy Information Administration Housing Recovery Still Has Legs but Recent Oil Price Decline Could Slow Energy Production

3 RBC Capital Markets Loans and Leases of U.S. Commercial Banks

Trough 3/30/11 8,000 to current: 18.51% 7,000 Peak 10/22/08 to Loans and Leases of U.S. Commercial Banks 6,000 Current 3/24/10: -8.58% $7,999.6Billion •Current loans and leases of commercial banks are at 5,000 FAS 166/167 Peak $8.0 trillion. 4,000 $7,323 Billion •Growth in commercial real estate and consumer ($ Billions) 3,000 Total Loans & Leases loans is expected accelerate in 2015.

2,000 C & I Loans Other Real Estate 1,000 Consume - Home Equity 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

1,800 Source: Federal Reserve board. 14.8% CAGR 5/04 - Shaded areas indicate U.S. recessions. Data as of Feb 11, 2015 1,600 10/08 *Beginning 2/1/12, dataset includes thrifts that have converted to commercial bank charters. We estimate the impact to total loans to be $50.5 Billion. 1,400 1,200 9.3% CAGR 9/97 - 1/01 C&I Loans 1,000 10.5% CAGR 8.3% CAGR 7/80 - ($ Billions) ($ 10/10 - •C&I loans have grown at a 10.5% CAGR since 800 8/90 12/14 bottoming out in October 2010. 600 -7.1% CAGR 1/01 -14.1% CAGR •The high level of growth has been driven in large part 400 - 5/04 10/08 - 10/10 by a rebound in leverage lending. 200 -2.8% CAGR 8/90 - 12/93 - 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Source: Federal Reserve board. Shaded areas indicate U.S. recessions. Data as of Feb 11, 2015 *Beginning 2/1/12, dataset includes thrifts that have converted to commercial bank charters. We estimate the impact to total loans to be $50.5 Billion.

Loans Outstanding at All-Time Record High; Loan Growth Expected to Accelerate in 2015

4 RBC Capital Markets Household Debt

110.0% 2009Q1: 104.1%

100.0%

90.0% Total Household Debt to Personal Income 80.0% •Total household debt stood at 79.1% in the fourth

70.0% quarter, down from 104.1% in 1Q09. 2014Q3: 79.1% •The deleveraging of the consumer balance sheet 60.0% appears to be over.

50.0% 99:Q1 99:Q3 00:Q3 01:Q1 01:Q3 02:Q1 02:Q3 03:Q1 03:Q3 04:Q1 04:Q3 05:Q1 05:Q3 06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 10:Q3 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 00:Q1 08:Q3 09:Q1 09:Q3 10:Q1 Source: FRBNY Consumer Credit Panel/Equifax; U.S. Department of Commerce: Bureau of Economic Analysis. Beginning in 2003Q1, student loans are included in total household loans.

13.5 13.17% Q4-07 13.0

12.09% 12.5 Q2-87

12.0 Household Debt Service as Percentage of DPI (%) 10.39% 11.5 . •Household debt service to disposable personal Q4-93 income currently stands at 9.92% as compared to 11.0 9.92% 13.17% in 4Q07. 10.5 Q3-14 •Lower interest rates have had a positive impact on 10.0 consumer debt service. 9.5 '80 '81 '82 '83 '85 '86 '87 '88 '90 '91 '92 '93 '95 '96 '97 '98 '00 '01 '02 '03 '05 '06 '07 '08 '10 '11 '12 '13 Source: Federal Reserve Board; shaded areas indicate U.S. recession Note: The household debt service burden is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt. Data as of Q3 2014

Household Debt Service and Total Debt Levels Remain Well Below Peak Levels

5 RBC Capital Markets Subprime lending

Subprime lending •New subprime consumer loans increased to $189.3 billion in 2014. •Auto loans represent the largest subprime consumer loan category at $129.5 billion of originations.

Source: Equifax *Excludes home loans and student loans. Data are through November of each year and not adjusted for inflation.

Subprime share of total mortgage originations •.Subprime mortgage lending remains anemic, however. •Subprime mortgage originations have averaged ~$4 billion a year since 2009, down from a peak of $625 billion in 2005.

Source: Inside mortgage finance Total mortgage originations include home-equity lending.

Subprime Lending Driven by Auto Loans

6 RBC Capital Markets Net interest margin/ Fed Balance Sheet

Net Interest Margin 4.50

4.294.27 •Net interest margins (NIMs) have contracted to its 4.25 4.22 lowest level in 30 years due to the prolonged low 4.084.06 4.08 3.94 4.00 3.90 interest rate environment. 3.83 3.81 •NIMs are expected to stabilize in 2015 and increase 3.75 3.60 3.62 3.55 3.52 as short-term interest rates rise in 2015. 3.50 3.39 3.42 3.35

Net Interest Margin (%) Margin Interest Net 3.253.25 3.253.26 3.25 3.21 3.143.133.123.12

3.00 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Annual Quarterly

Source: FDIC. 5.0 Reserve Balance 4.5 Other 4.0 Deposits Other than Reserve Balance 3.5 Total Factors Supplying Reserve Funds Treasury Cash Holdings 3.0 Repo 2.5 • Assets on the Fed’s balance sheet have risen from Currency in Circulation 2.0 Other

1.5 Treasury Currency Outstanding about $900 billion in 2006 to about $4.5 trillion today Funds ($T) 1.0 Gold Stock & SDR •As a percentage of nominal GDP, Fed assets have 0.5 Central Bank Liquidity Swaps Factors Supplying Reserve - Maiden Lane grown from 6% of nominal GDP to about 26% of (0.5) Commercial Paper Funding Facility ABCP/MM Facility Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 (1.0) Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Broker/Dealer Facility nominal GDP. (1.5) TALF (2.0) •The net expansion over this period primarily reflects Direct Bank/AIG Lending (2.5) Term Auction Credit (3.0) the Fed’s large-scale asset purchase programs. Repo

(3.5) Agency & Debt Securities Reserve Reserve Funds ($T)

•We expect it will take up to 10 years to bring the (4.0) MBS Reserves Factors Absorbing Reserves & (4.5) US Treasuries Fed’s balance back to pre-crisis levels. (5.0)

Source: Federal Reserve

NIMs are Expected to Stabilize in 2015 and Increase as Short-term Interest Rates Rise in 2015.

7 RBC Capital Markets Credit Quality Nonperforming Assets and Net Charge-offs/ Loan Loss Reserves

3.5 6.0

3.0 5.0 2.5 Nonperforming Assets and Net Charge-Offs 4.0 2.0 •Nonperforming assets continue to trend lower. 3.0 •Net charge-off rates trend lower as well and are near

NCO (%) 1.5

NPA (%) NPA historical lows. 2.0 1.0 •Stronger for longer over next three years.

0.5 1.0

- -

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 NPAs1996 1997 1998 1999 2000 2001 2002 NCOs2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: FDIC Data as of 4Q14 Shaded areas indicate U.S. recessions Loan Loss Reserves / Total Loans (1948 - 2013)

2010, 3.31% 3.5%

1987, 2.73% 3.0%

Loan Loss Reserves 2.5% •Loan loss reserves peaked to an all-time high in 2010 at 3.31% of total loans and has fallen below the 2.0% historical average to 1.48% of total loans at 4Q14. 1.5% Average LLR/Lns, 1.78%

•Loan loss reserves are expected to continue to trend Loan Loss Loans Reserves/Total 1.0% 3Q14, 1.54% lower into 2016. 2006, 1.15% 0.5% 1977, 0.92%

0.0% 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Source: FDIC Recessions LLR/Lns Average LLR/Lns Credit Recovery Almost Complete and Credit Quality Expected to Remain Strong

8 RBC Capital Markets Credit Quality

14.0

12.0

10.0 Delinquency Rates 8.0 •Delinquency rates continue to trend lower across all

6.0 lending categories. •Residential real estate delinquency rates remain Delinquency % Total Loans % Total Delinquency 4.0 elevated, however, at 6.63% in the 4Q14.

2.0

- 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Res. RE CRE Total RE Consumer loans C&I loans Source: FRB Data as of 4Q14

Percentage of loans in foreclosure by state •The rate of loans in foreclosure in judicial states remains elevated relative to the rate of loans in foreclosure in non-judicial states. •The higher level of loans in foreclosure in judicial states has contributed to the relatively high delinquency rate of residential real estate.

Source: Mortgage Bankers Association of America

Delinquency Rates Expected to Continue Downward Trend

9 RBC Capital Markets Energy Loans Large U.S. Banks •Even under the worst case scenarios, large banks will be able to absorb losses from their energy exposures, in our view. For the largest banks in the U.S., we do not believe sustained low oil prices ($40-$45 a barrel) will have a material negative impact on them.

Energy / Total Loans CRE / Total Loans CRE / Energy Banks with energy BOKF 20.1% 19.2% 95.5% exposure CFR 16.1% 28.0% 174.1% GNBC 14.0% 18.8% 134.5% •We are concerned if oil HBHC 12.0% 22.6% 188.3% prices remain depressed ZION 8.0% 25.2% 314.5% these banks will experience CMA 7.0% 0.0% 0.0% increased credit problems in PB 5.6% 32.8% 585.3% both their energy and real ASB 4.3% 17.2% 400.4% estate portfolios. Source: SNL Financial LC; RBC Capital Markets Energy Exposure Remains Manageable at the Largest U.S. Banks

10 RBC Capital Markets Efficiency Ratio Efficiency Ratio – Top 20 U.S. Commercial Banks Efficiency Ratio (%) Company Ticker 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 Chart 1 U.S. Bancorp USB 49.6 50.6 51.3 53.7 51.9 50.4 51.3 54.6 2 Capital One Financial Corporation COF 51.7 51.6 53.3 56.1 53.4 53.4 52.0 55.6 3 BB&T Corporation BBT 56.0 57.8 60.5 60.1 59.5 61.4 59.9 57.3 4 M&T Bank Corporation MTB 55.7 50.8 55.8 65.1 63.7 59.2 59.5 58.8 5 Wells Fargo & Company WFC 57.4 56.5 59.2 59.2 59.3 58.1 59.1 59.1 6 Fifth Third Bancorp FITB 61.1 63.5 62.3 64.2 62.9 64.1 59.6 61.1 7 SunTrust Banks, Inc. STI 64.2 65.4 70.6 65.8 66.5 63.5 61.4 61.8 8 KeyCorp KEY 67.0 68.5 66.9 69.0 67.2 67.9 68.1 63.8 9 Huntington Bancshares Incorporated HBAN 62.6 64.2 65.8 61.8 62.6 62.3 61.9 64.1 10 Comerica Incorporated CMA 66.7 64.5 65.3 73.3 65.9 64.5 63.4 64.9 11 PNC Financial Services Group, Inc. PNC 58.8 60.2 61.8 61.7 58.5 59.4 59.8 65.0 12 Citizens Financial Group, Inc. CFG 72.0 71.4 69.8 70.0 70.4 73.4 67.9 66.9 13 Northern Trust Corporation NTRS 72.5 70.5 71.8 73.0 72.5 74.1 70.9 68.6 14 State Street Corporation STT 71.4 67.0 67.7 71.1 77.1 67.3 69.3 69.0 15 JPMorgan Chase & Co. JPM 61.4 63.8 103.0 72.0 63.6 62.8 64.8 69.1 16 Bank of New York Mellon Corporation BK 76.4 71.8 72.2 73.9 73.1 73.7 74.4 72.5 17 Zions Bancorporation ZION 71.5 72.1 67.4 74.7 74.7 75.1 79.0 72.8 18 Bank of America Corporation BAC 69.7 66.2 81.1 81.2 85.9 82.8 70.8 73.5 19 Regions Financial Corporation RF 63.7 66.4 66.3 62.8 63.0 63.2 61.6 75.3 20 Citigroup Inc. C 62.1 60.4 66.5 69.1 60.7 61.3 66.5 82.0 Min 49.6 50.6 51.3 53.7 51.9 50.4 51.3 54.6 Max 76.4 72.1 103.0 81.2 85.9 82.8 79.0 82.0 Median 63.1 64.3 66.4 67.4 63.6 63.3 62.6 64.9 Average 63.6 63.2 66.9 66.9 65.6 64.9 64.1 65.8

Source: SNL Financial LC; RBC Capital Markets

Efficiency Ratio •Efficiency ratios for the top 20 banks have hovered ~63-66%. •Improved expense discipline have been offset by weak revenues and higher regulatory/operating expenses. •Growth in revenues in 2015 is expected to help drive the efficiency ratios lower.

Efficiency Ratios are Expected to Fall as Revenue Growth Picks-up

11 RBC Capital Markets Basel III Common Equity Tier 1 (CET1) Ratio and Excess Capital Basel III CET1 Ratio and Excess Capital for Top 15 Banks Based on Latest U.S. GSIB Rules Basel III CET 1 • Recent U.S. GSIB rules are more stringent than GSIB rules proposed by the BCBS. • For some institutions, it effectively nearly doubles their capital surcharge (i.e. “SIFI buffer”) under the BCBS rules.

In $M except percentages Fully Phased-In Basel III at 4Q14 Expected B3 B3 CET1 CET1 Ratio Excess / (Shortfall) Company Ticker B3 RWA B3 CET1 Ratio Run-Rate % Amount JPMorgan Chase & Co. JPM 1,625,000 165,000 10.2% 12.0% (1.8%) (30,000) Bank of America Corporation BAC 1,465,633 141,274 9.6% 9.5% 0.1% 2,039 Citigroup Inc. C 1,299,000 136,541 10.5% 11.5% (1.0%) (12,844) Wells Fargo & Company WFC 1,312,800 137,000 10.4% 9.0% 1.4% 18,848 U.S. Bancorp USB 328,508 29,668 9.0% 8.5% 0.5% 1,745 Bank of New York Mellon Corporation BK 162,030 16,529 10.2% 8.5% 1.7% 2,756 PNC Financial Services Group, Inc. PNC 299,360 29,817 10.0% 8.5% 1.5% 4,371 Capital One Financial Corporation1 COF 237,587 29,534 12.4% 8.5% 3.9% 9,339 State Street Corporation STT 107,829 13,525 12.5% 8.5% 4.0% 4,360 BB&T Corporation BBT 149,316 15,323 10.3% 8.5% 1.8% 2,631 SunTrust Banks, Inc. STI 160,400 15,600 9.7% 8.5% 1.2% 1,966 Fifth Third Bancorp1 FITB 121,068 11,368 9.4% 8.5% 0.9% 1,077 Citizens Financial Group, Inc. CFG 108,846 13,173 12.1% 8.5% 3.6% 3,921 Regions Financial Corporation RF 101,997 11,315 11.1% 8.5% 2.6% 2,645 Northern Trust Corporation1 NTRS 62,897 7,813 12.4% 8.5% 3.9% 2,467

1) On a transitional (not fully phased-in) basis. Source: Company reports; RBC Capital Markets Capital Levels for the Industry are at Levels not Seen Since the 1930s

12 RBC Capital Markets Future Profitability Future Return on Average Assets / Return on Average Common Equity

1.35%

1.30% 0.03% 1.30% 0.04%

1.25% 0.08% Future Return on Average Assets

1.20% •Return on average assets have been impacted 0.04% primarily from new legislation and regulation. 1.15% 0.02% •We do not expect ROAs to return pre-crisis levels. 0.03% 1.10% 0.03%

1.05% 1.02% 0.00%

1.00%

Source: SNL Financial, LC; RBC Capital Markets. 16% 15.54% 0.36% 0.48% 15% 0.94%

14% 0.50% 0.25% 0.38% 13% 0.38% 2.04% Future Return on Average Common Equity 12%

•Return on average common equity have been 11% 10.21% impacted by new regulatory capital requirements. 10%

•We do not expect ROEs to return to pre-crisis levels. 9%

Source: SNL Financial, LC; RBC Capital Markets.

The Pre-Crisis Profitability Levels are Not Expected to Return

13 RBC Capital Markets Future Profitability and Valuations Future Profitability and Valuations •Lower profitability will drive lower valuations. •L-T Valuations Should Benefit from Lower Stock Betas

Average 1997 - 2006 4Q14 2015E - 2016E

Return on Average Assets 1.30% 0.89% 1.00% - 1.10% Return on Average Common Equity 15.54% 8.40% 10.00% - 12.00% Price to Book Value (x) 2.37 1.20 1.25 - 1.50 Price to Tangible Book Value (x) 3.02 1.59 1.50 - 2.00 Price to Forward Earnings (x) 15.5 13.0 10.0 - 11.0 Relative Price to Earnings 76% 78% 60% - 70%

1 Tier 1 Common Capital Ratio 8.29% 11.00% 8.00% - 10.00%

Tier 1 Capital Ratio 9.49% 12.40% 10.00% - 12.00%

Source: SNL Financial LC, Factset. Estimates are RBC Capital Markets estimates. 1) Tier 1 Common Capital Ratio averages not available for 1997 - 2002. Average for period 2003 - 2006 used as approximation. Note: Averages are based on median values of each period, and top 50 banks are the top 50 in assets publicly traded commercial banks for each respective period.

Lower Valuation Levels Are Likely in Near Term; Lower Betas Could Lead to Higher L-T Valuations

14 RBC Capital Markets S&P500 Banks Price/Earnings Performance

July 1987 - September 1987 March 2009 - March 2010 data off chart data off chart S&P Bank Index Absolute P/E – Forward 12-Month 19.0x Earnings 17.0x •S&P 500 banks have approached their historical mean 15.0x price/earnings ratio. +1σ, 14.1 13.0x •Stocks look fairly values on this measure. •On a normalized earnings basis this ratio would be below 11.0x μ, 10.4 long term average, in our opinion. 9.0x

7.0x -1σ, 6.8

5.0x

3.0x 2009 2011 2013 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

100.0%

S&P 500 Bank Index relative to S&P 500 Index 90.0% +2σ, 85.7% •Relative to the S&P 500, S&P banks remain below the 80.0% historical price/book value ratio. +1σ, 74.8% •Price/book value suggest the stocks look undervalued. 70.0% μ, 63.9% 60.0% -1σ, 53.0% 50.0%

40.0% -2σ, 42.1%

30.0% 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Source: SNL Financial, LC; RBC Capital Markets. We View S&P 500 Bank Stocks Valuation as Attractive at Current Levels

15 RBC Capital Markets Future Profitability and Valuations – Top 20 Bank Price to Book and ROACE Relationship Price to Book and ROACE Relationship •Generally, a company’s valuation will be based on its return on common equity and its level of risk. •Companies that can not deliver an ROACE above its cost of capital will need to radically change.

250.0

200.0 NTRS USB y = 12.329x + 7.4653 R² = 0.6473 WFC STT 150.0 MTB HBAN CMA BBT KEY FITB BK PNC JPM 100.0 COF ZION STI

Price/ Book (%) RF BAC C CFG 50.0

0.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

Source: SNL Financial, LC; RBC Capital Markets. ROACE (%) A Consistently Higher ROACE Leads to a Higher Stock Valuation

16 RBC Capital Markets Merger and Acquisition Activity and Pricing

1,400 1,313 600 210% increase from 1,211 1990 to 1994 1,200 524 500 435 442451 475 451 1,000 400 357 800 M&A Activity 334 296 268 283 287 621 267 300 274 569 253 262 •The number of deals generally have increased from 600 251 216 223 486 209 431 of Number Deals 385 176 200 the low in 2009. Seller's Assets ($ Billions) ($ Assets Seller's 169 369 400 318 145 291 289 287 143 237 109 •The majority of the deals are done with targets of 170 183 194 100 200 143 145 165 137 147 117 111 less than $1 billion in assets. 36 46 37 19 - - •Increased deal activity is expected in 2015 as deal 2009 2010 2011 2012 2013 2014 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 prices rise to higher levels.

Seller's Assets in Billions Number of Deals Announced 2015 YTD

Source: SNL Financial LC Data as of February 26, 2015

35.0X In 2008, 4 of the top 5 275 deals were done at less 255 than 35% of book value. 30.0X 235 215 25.0X 195 M&A Pricing 175 (%) •Deal prices troughed in 2011 and have risen since. 20.0X 155 •We do not expect deal pricing to come back to levels 135 witnessed in the 1993-2008 period. 15.0X 115 95 •Higher deal pricing is largely driven by the acquirer’s 10.0X 75 stock valuation. 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD Median P/LTM Earnings (left) Median P/BV (right)

Source: SNL Financial, LC; RBC Capital Markets.

Merger and Acquisition Activity is Expected to Pick-up as Deal Pricing Increases

17 RBC Capital Markets Interest Rate Tightening Periods Federal Funds Intended Rate vs. 10 Year Yield •The Fed Funds rate has been at historical lows, while the 10-year treasury continues to be impacted by macro-geopolitical events. •Historically, the 10-year treasury yield rises or falls before the Fed Funds rate.

10 yr Gov't Bond2 Fed Funds Target1 Lowest Yield at FF Rate @ Time of Date of Duration of Date of Yield FFunds Increase Duration of 1st FF Rate Increase FF Rate FF Rate Lowest Yield (%) (%) bps Δ Increase (%) Increase Increases Oct-93 5.33 5.97 64 4 months 3.00 Feb-94 12 months Dec-98 4.65 5.90 125 6 months 4.75 Jun-99 11 months Jun-03 3.33 4.73 140 12 months 1.00 Jun-04 24 months Jul-12 1.38 NA NA NA 0-0.25 NA NA

10.0 9.0 8.0 7.0 6.0 5.0 (%) 4.0 1.38 3.0 4.65 2.0 5.33 1.0 3.33 - 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Fed Funds Target 10 year

Source: Federal Reserve. 1 Target rate denotes the rate at which Fed concludes period of monetary easing. The Fed stopped lowering rates on September 1992 at 3.00% and maintained this level for 17 months. 2 The lowest yield in the 10 year government bond represents the minimum recorded yield from the time the Fed concluded a period of monetary easing to when rates were eventually raised. When the intended fed funds rate was lowered to 3.00% in September 1992, the 10 year reached its minimum yield of 5.33% in October 1993 and had increased to 5.97% by the time rates were increased 4 months later. The Federal Funds Rate is Likely to Rise in 2015 but Will the 10-Year Treasury Rate Increase

18 RBC Capital Markets

30 day Federal Funds Futures implied rate vs S&P Regional Banking ETF

0.90% 44.00

0.80%

42.00

0.70%

0.60% 40.00

0.50%

38.00

0.40% SPDR S&P Regional Banking ETF 0.30% 36.00 30 day Federal Funds Futures implied rate implied Futures Funds Federal day 30

0.20%

34.00

0.10%

0.00% 32.00 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15

Fed Funds Dec 2015 SPDR S&P Regional Banking ETF

Source: Bloomberg; FactSet

Bank Stock Performance is Correlated with Fed Funds Expectations in Near-term

19 RBC Capital Markets Federal Reserve Actions and Bank Stock Performance Bank Stock Performance •Bank stock performance tends to be the strongest going into the first Fed Funds rate increase. •Following a number of Fed Fund rate increases bank stock performance weakens. Date Increase Decrease Level (%) 2/1/1995 50 ... 6.00 11/15/1994 75 ... 5.50 8/16/1994 50 ... 4.75 5/17/1994 50 ... 4.25 4/18/1994 25 ... 3.75 320.0 3/22/1994 25 ... 3.50 37.0 2/4/1994 25 ... 3.25 35.0 300.0 10 Yr Last Fed Funds Rate Oct-93 Increase 33.0 280.0 First Fed Funds Rate Bottoms at Increase Feb-95 5.33% Feb-94 to 6.00% 31.0 260.0 3.25% BIX BKX 29.0

240.0 27.0 10 Yr 220.0 Nov-94 25.0 Peaks at 8.05% 200.0 23.0 Jul-93 Jul-94 Jul-95 Jan-94 Jan-95 Sep-93 Sep-94 Nov-93 Nov-94 Mar-94 Mar-95 May-93 May-94 May-95

Source: SNL Financial, LC; FactSet; Federal Reserve; RBC Capital Markets BIX BKX

At This Point in the Cycle, the Best Time to Own Bank Stocks is Six Months Prior to First Fed Funds Increase

20 RBC Capital Markets Required Disclosures

Conflicts Disclosures This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses to provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report. Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates. Distribution of Ratings For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above).

Distribution of ratings RBC Capital Markets, Equity Research As of 31-Dec-2014 Investment Banking Serv./Past 12 Mos. Rating Count Percent Count Percent BUY [Top Pick & Outperform] 897 52.92 290 32.33 HOLD [Sector Perform] 686 40.47 137 19.97 SELL [Underperform] 112 6.61 6 5.36

RBC Capital Markets Required Disclosures

Conflicts Policy RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. To access our current policy, clients should refer to https://www.rbccm.com/global/file-414164.pdf or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time.

Dissemination of Research and Short-term Trade Ideas RBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having regard to local time zones in overseas jurisdictions. RBC Capital Markets' equity research is posted to our proprietary website to ensure eligible clients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via email, fax, or other electronic means, or regular mail. Clients may also receive our research via third party vendors. RBC Capital Markets also provides eligible clients with access to SPARC on the Firm’s proprietary INSIGHT website, via email and via third-party vendors. SPARC contains market color and commentary regarding subject companies on which the Firm currently provides equity research coverage. Research Analysts may, from time to time, include short-term trade ideas in research reports and / or in SPARC. A short-term trade idea offers a short-term view on how a security may trade, based on market and trading events, and the resulting trading opportunity that may be available. A short-term trade idea may differ from the price targets and recommendations in our published research reports reflecting the research analyst's views of the longer-term (one year) prospects of the subject company, as a result of the differing time horizons, methodologies and/or other factors. Thus, it is possible that a subject company's common equity that is considered a long-term 'Sector Perform' or even an 'Underperform' might present a short-term buying opportunity as a result of temporary selling pressure in the market; conversely, a subject company's common equity rated a long-term 'Outperform' could be considered susceptible to a short-term downward price correction. Short-term trade ideas are not ratings, nor are they part of any ratings system, and the firm generally does not intend, nor undertakes any obligation, to maintain or update short-term trade ideas. Short-term trade ideas may not be suitable for all investors and have not been tailored to individual investor circumstances and objectives, and investors should make their own independent decisions regarding any securities or strategies discussed herein. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Markets' research.

Analyst Certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s Financial Services LLC (“S&P”) and is licensed for use by RBC. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

RBC Capital Markets Disclaimer

RBC Capital Markets is the business name used by certain branches and subsidiaries of the Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital Markets, LLC, RBC Europe Limited, RBC Capital Markets (Hong Kong) Limited, Royal Bank of Canada, Hong Kong Branch and Royal Bank of Canada, Sydney Branch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC Capital Markets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment banking revenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. RBC Capital Markets may be restricted from publishing research reports, from time to time, due to regulatory restrictions and/ or internal compliance policies. If this is the case, the latest published research reports available to clients may not reflect recent material changes in the applicable industry and/or applicable subject companies. RBC Capital Markets research reports are current only as of the date set forth on the research reports. This report is not, and under no circumstances should be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. To the full extent permitted by law neither RBC Capital Markets nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Capital Markets. Additional information is available on request. To U.S. Residents: This publication has been approved by RBC Capital Markets, LLC (member FINRA, NYSE, SIPC), which is a U.S. registered broker-dealer and which accepts responsibility for this report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in a broker or dealer capacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and place orders with RBC Capital Markets, LLC. To Canadian Residents: This publication has been approved by RBC Dominion Securities Inc.(member IIROC). Any Canadian recipient of this report that is not a Designated Institution in Ontario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC Dominion Securities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada. To U.K. Residents: This publication has been approved by RBC Europe Limited ('RBCEL') which is authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority ('FCA') and the Prudential Regulation Authority, in connection with its distribution in the United Kingdom. This material is not for general distribution in the United Kingdom to retail clients, as defined under the rules of the FCA. However, targeted distribution may be made to selected retail clients of RBC and its affiliates. RBCEL accepts responsibility for this report and its dissemination in the United Kingdom. To Persons Receiving This Advice in Australia: This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No. 246521). This material has been prepared for general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting on this material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisition or possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that product and consider that document before making any decision about whether to acquire the product. This research report is not for retail investors as defined in section 761G of the Corporations Act. To Hong Kong Residents: This publication is distributed in Hong Kong by RBC Capital Markets (Hong Kong) Limited and Royal Bank of Canada, Hong Kong Branch (both entities which are regulated by the Hong Kong Monetary Authority (‘HKMA’) and the Securities and Futures Commission ('SFC')). Financial Services provided to Australia: Financial services may be provided in Australia in accordance with applicable law. Financial services provided by the Royal Bank of Canada, Hong Kong Branch are provided pursuant to the Royal Bank of Canada's Australian Financial Services Licence ('AFSL') (No. 246521). RBC Capital Markets (Hong Kong) Limited is exempt from the requirement to hold an AFSL under the Corporations Act 2001 in respect of the provision of such financial services. RBC Capital Markets (Hong Kong) Limited is regulated by the HKMA and the SFC under the laws of Hong Kong, which differ from Australian laws. To Singapore Residents: This publication is distributed in Singapore by the Royal Bank of Canada, Singapore Branch, a registered entity granted offshore bank licence by the Monetary Authority of Singapore. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. You are advised to seek independent advice from a financial adviser before purchasing any product. If you do not obtain independent advice, you should consider whether the product is suitable for you. Past performance is not indicative of future performance. If you have any questions related to this publication, please contact the Royal Bank of Canada, Singapore Branch. Royal Bank of Canada, Singapore Branch accepts responsibility for this report and its dissemination in Singapore. To Japanese Residents: Unless otherwise exempted by Japanese law, this publication is distributed in Japan by or through RBC Capital Markets (Japan) Ltd., a registered type one financial instruments firm and/or Royal Bank of Canada, Tokyo Branch, a licensed foreign bank. ® Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license. Copyright © RBC Capital Markets, LLC 2015 - Member SIPC Copyright © RBC Dominion Securities Inc. 2015 - Member CIPF Copyright © RBC Europe Limited 2015 Copyright © Royal Bank of Canada 2015 All rights reserved

RBC Capital Markets