120.0 04 June 2014 European Banks - Reutersblogs.reuters.com/data-dive/files/2014/06/cs-report-euro-banks.pdf · European Banks . THEME. cost) The Ideas Engine series showcases Credit

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

Client-Driven Solutions, Insights, and Access

Equity Research Europe

Multinational Banks

04 June 2014

European Banks THEME

The Ideas Engine

series showcases

Credit Suisse’s unique

insights and investment

ideas.

Litigation—more risk, less return

This report updates our market-leading analysis on litigation costs for

European Banks, Litigation - delaying capital return (19 Feb 2013).

Sector conclusions – 1. Costs have risen sharply, with $66bn of losses

to come, taking the total bill to $104bn (i.e. c.50% of the subprime crisis

cost) vs. our previous estimate of $58bn, 2. Capital needs are increasing

with operational RWAs growing, potentially to 17% of total RWAs (vs 11% in

2013), 3. Tail risks have gone up, increasing uncertainty, with deferred

prosecution agreements (DPAs) potentially a thing of the past.

Why it matters – Legacy litigation risk has become a primary factor in

share-price performance. Our analysis indicates that since October 2013,

European banking stocks with legacy litigation risks have underperformed by

c25% vs those without. We expect this relative divergence to widen further.

Stock calls in order of impact – 1. Baer (OP): excess capital could be

significantly impacted, although we still see value from recent acquisitions.

2. UBS (N): capital return expectations still look too high. 3. RBS (UP):

litigation could further delay return to full private ownership. 4. Barclays (N):

weakest capital position, weighing on the strategic plan. 5. DB (OP): capital

raise should put the group in a stronger position than peers to absorb losses.

6. HSBC (UP): compounding issues create significant tail risks, especially

with regard to US tax issues. 7. Lloyds (N): litigation risk seems to have

declined, with costs largely reserved. 8. BNP (N): await a better entry point;

in France, we prefer Natixis (OP), then CASA (OP), then SocGen (OP).

Figure 1: Banking stocks with legacy litigation risk have started to

materially underperform those without

Note: We have included UK Banks, IBs, Wealth Managers and French Banks in the

'legacy' risks category, and Spanish, Italian and Nordic Banks in the 'non- legacy'

category. Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research

Figure 2: Potential litigation costs continue to rise ($bn)

Source: Company data, Credit Suisse estimates; previous est as of19 Feb 2013

Amit Goel, CFA (Research Analyst) 44 20 7883 7516

[email protected]

David Da Wei Wong (Research Analyst) 44 20 7883 7515

[email protected]

Carla Antunes-Silva (Research Analyst) 44 20 7883 0500 [email protected]

European Banks Team

Specialist Sales: Nick Gough 44 20 7888 0125 [email protected]

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-U.S ANALYSTS. US Disclosure: Credit Suisse 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.

80

90

100

110

120

130

140

May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14

SX7P Legacy Non-legacy

18.9

37.2

15.4

27.524.1

38.8

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Previous estimate Updated estimate

Settled items Applicable provisions Uncovered loss

CSe future litigation loss


58.4

103.5

IDEAS ENGINE SERIES

https://plus.credit-suisse.com/r/aaa828

IDEAS ENGINE 2

European Banks

Financials

Figure 3: European Banks: Summary Valuation

Source: Company data, Credit Suisse Estimates, Thomson Reuters, prices from close 28 May 2014.

Figure 4: European Banks: Summary Valuation (Contd...)

Source: Company data, Credit Suisse Estimates, Thomson Reuters

Price Tgt Price Rec.

Acc.

Cur Adj. EPS PE adj.

2014E 2015E 2016E 2014E 2015E 2016E

Austria

ERSTE € 25.2 € 30.0 OP Euro 1.41 2.61 3.40 17.8x 9.7x 7.4x

RBI € 24.4 € 26.9 NT Euro 1.57 2.85 3.80 15.5x 8.6x 6.4x

France

BNPP € 53.1 € 59.0 NT Euro 5.17 6.36 7.81 10.3x 8.3x 6.8x

CAGR € 12.0 € 13.2 OP Euro 1.22 1.51 1.67 9.8x 7.9x 7.2x

NATIXIS € 5.0 € 5.7 OP Euro 0.42 0.47 0.52 11.8x 10.6x 9.6x

PROR € 17.9 € 19.5 NT Euro -0.09 1.36 2.14 N/A 13.2x 8.3x

SOGN € 43.0 € 48.5 OP Euro 5.16 5.99 6.26 8.3x 7.2x 6.9x

Germany

CBK € 12.0 € 12.5 NT Euro 1.04 1.71 1.96 11.5x 7.0x 6.1x

DE € 30.3 € 40.0 OP Euro 5.19 5.54 5.80 5.8x 5.5x 5.2x

Ireland

BKIR € 0.3 € 0.3 NT Euro 0.01 0.02 0.03 51.3x 15.9x 9.7x

Italy

ISP € 2.4 € 2.9 OP Euro 0.07 0.17 0.23 36.5x 14.7x 10.4x

BMPS € 23.8 € 21.0 NT Euro -0.05 0.57 1.51 N/A 41.5x 15.8x

UBI € 6.6 € 7.7 OP Euro 0.19 0.51 0.71 34.8x 13.0x 9.3x

UCG € 6.4 € 6.6 NT Euro 0.36 0.51 0.69 17.5x 12.4x 9.2x

Scandinavia

DANSKE DKK 153.9 DKK 172.0 OP Dkr 12.50 14.89 16.95 12.3x 10.3x 9.1x

DNB NOK 112.6 NOK 94.0 UP Nkr 11.68 11.37 11.56 9.6x 9.9x 9.7x

NORD € 10.8 € 11.2 NT Euro 0.84 0.96 1.01 13.0x 11.3x 10.7x

SEB SEK 89.0 SEK 105.0 OP Skr 7.55 8.38 8.60 11.8x 10.6x 10.3x

SHB SEK 337.0 SEK 289.0 UP Skr 22.17 24.28 25.78 15.2x 13.9x 13.1x

SWED SEK 175.4 SEK 157.0 UP Skr 13.72 14.62 15.61 12.8x 12.0x 11.2x

Spain

SAB € 2.4 € 2.4 NT Euro 0.08 0.13 0.21 29.0x 18.2x 11.5x

POP € 5.2 € 4.8 NT Euro 0.00 0.25 0.44 N/A 20.8x 11.7x

SAN € 7.5 € 6.8 NT Euro 0.48 0.57 0.63 15.6x 13.3x 11.9x

BKIA € 1.5 € 1.3 NT Euro 0.08 0.09 0.12 19.3x 16.0x 12.4x

BBVA € 9.4 € 9.0 NT Euro 0.47 0.68 0.86 20.0x 13.8x 10.9x

CABK € 4.5 € 5.4 OP Euro 0.13 0.29 0.42 33.9x 15.5x 10.6x

Switzerland

UBS CHF 18.3 CHF 16.5 NT CHF 1.27 1.53 1.81 14.4x 11.9x 10.1x

BAER CHF 40.6 CHF 48.0 OP CHF 2.73 3.19 3.63 14.9x 12.7x 11.2x

UK

BARC p 245.4 p 275.0 NT GBP (p) 22.01 24.23 27.22 11.1x 10.1x 9.0x

HSBC p 629.2 p 550.0 UP USD (c) 87.81 94.85 101.81 12.0x 11.1x 10.3x

LLOY p 77.9 p 68.0 NT GBP (p) 6.70 6.98 7.46 11.6x 11.2x 10.5x

RBS p 343.1 p 280.0 UP GBP (p) 13.76 17.31 25.74 24.9x 19.8x 13.3x

STAN p 1348.0 p 1200.0 UP USD (c) 195.61 209.62 218.17 11.5x 10.7x 10.3x

P/Tangible BV CS Adj RoTE Stated RoE

2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E

Austria

ERSTE 3.7x 3.4x 3.1x 1.1x 1.0x 0.9x 6.6% 11.2% 13.2% 5.2% 9.0% 10.8%

RBI 3.2x 3.0x 2.7x 0.8x 0.7x 0.7x 4.6% 7.5% 10.0% 5.5% 6.8% 9.0%

France

BNPP 5.0x 4.4x 3.6x 0.9x 0.9x 0.8x 9.3% 10.8% 12.3% 7.0% 8.7% 10.5%

CAGR 5.0x 4.4x 4.0x 1.0x 0.9x 0.9x 10.9% 12.4% 12.6% 7.1% 8.6% 9.0%

NATIXIS 6.4x 5.8x 5.2x 1.2x 1.1x 1.1x 9.9% 10.7% 11.4% 8.8% 9.4% 9.6%

PROR 10.0x 6.1x 4.5x 1.4x 1.3x 1.2x -0.7% 10.3% 14.9% -0.6% 7.8% 11.6%

SOGN 3.7x 3.4x 3.2x 0.8x 0.8x 0.7x 10.3% 11.1% 10.8% 9.1% 9.8% 9.6%

Germany

CBK 5.5x 4.2x 3.7x 0.6x 0.5x 0.5x 5.0% 7.9% 8.2% 3.6% 6.5% 7.6%

DE 5.2x 3.7x 3.1x 0.7x 0.7x 0.6x 12.7% 12.6% 12.1% 5.3% 7.8% 9.1%

Ireland

BKIR 7.0x 6.3x 5.5x 1.5x 1.3x 1.2x 2.9% 8.9% 12.9% 2.1% 8.4% 12.3%

Italy

ISP 4.9x 4.6x 4.2x 1.1x 1.0x 1.0x 3.0% 7.2% 9.7% 2.8% 5.5% 7.6%

BMPS N/A 4.0x 3.6x 0.7x 0.7x 0.7x -3.7% 1.8% 4.6% -3.5% 1.3% 4.0%

UBI 4.2x 3.9x 3.4x 0.8x 0.7x 0.7x 2.3% 5.8% 7.7% 1.2% 3.8% 5.4%

UCG 4.1x 3.8x 3.4x 0.9x 0.8x 0.8x 5.0% 6.8% 8.6% 4.1% 5.8% 6.9%

Scandinavia

DANSKE 7.9x 6.9x 6.3x 1.2x 1.1x 1.0x 9.8% 10.8% 11.4% 8.6% 9.4% 10.0%

DNB 6.6x 6.8x 6.7x 1.2x 1.1x 1.0x 13.2% 11.5% 10.8% 12.6% 11.0% 10.4%

NORD 8.6x 7.6x 7.2x 1.6x 1.5x 1.4x 12.6% 13.6% 13.5% 12.3% 12.2% 12.2%

SEB 9.0x 8.2x 8.0x 1.6x 1.5x 1.4x 14.5% 14.9% 14.4% 13.0% 13.5% 13.1%

SHB 10.8x 9.9x 9.3x 2.0x 1.8x 1.7x 13.4% 13.7% 13.6% 13.0% 12.9% 12.8%

SWED 9.8x 9.0x 8.4x 2.0x 1.9x 1.8x 15.8% 16.2% 16.6% 13.8% 14.3% 14.7%

Spain

SAB 4.4x 6.0x 5.3x 1.1x 1.1x 1.0x 3.9% 6.0% 9.2% 3.9% 5.2% 7.9%

POP 6.0x 5.8x 5.3x 1.1x 1.0x 1.0x -0.1% 5.0% 8.5% 1.6% 4.1% 7.0%

SAN 4.0x 4.2x 4.1x 1.9x 1.8x 1.7x 12.0% 14.1% 14.9% 7.4% 9.0% 10.0%

BKIA 8.2x 7.6x 6.9x 1.4x 1.3x 1.2x 7.4% 8.2% 10.1% 9.5% 8.2% 10.1%

BBVA 5.4x 5.1x 4.7x 1.6x 1.5x 1.4x 7.9% 11.0% 12.9% 6.4% 9.0% 10.7%

CABK 7.2x 6.7x 6.3x 1.2x 1.2x 1.1x 3.5% 7.6% 10.6% 3.1% 6.5% 9.1%

Switzerland

UBS 16.6x 11.6x 8.8x 1.6x 1.5x 1.4x 10.9% 12.9% 14.4% 6.2% 8.6% 11.4%

BAER 12.3x 10.5x 9.3x 3.0x 2.6x 2.2x 20.6% 22.2% 21.6% 12.0% 13.3% 13.8%

UK

BARC 4.3x 4.1x 3.8x 0.9x 0.8x 0.8x 7.8% 8.3% 9.0% 4.5% 6.5% 7.5%

HSBC 7.9x 7.2x 6.6x 1.3x 1.2x 1.2x 11.2% 11.5% 11.7% 8.2% 8.3% 8.8%

LLOY 6.0x 5.6x 5.4x 1.5x 1.4x 1.3x 13.1% 12.7% 12.8% 8.1% 9.4% 9.8%

RBS 7.1x 7.7x 6.4x 0.9x 0.9x 0.9x 3.3% 4.1% 6.0% 0.1% -6.2% 2.4%

STAN 6.2x 5.9x 5.7x 1.3x 1.3x 1.2x 11.9% 12.0% 11.8% 10.1% 10.3% 10.3%

Price to Pre-

provision profit

IDEAS ENGINE 3

European Banks

Key charts

Figure 5: Potential litigation costs continue to rise ($bn)

Source: Company data, Credit Suisse estimates; previous estimate as of 19th Feb 2013

Figure 6: However, the relative size differs by bank

Local currency millions LHS, % RHS

Note this is relative to our 2014 estimates, where for some banks we already factor in litigation costs in our

estimates, reducing the potential impact presented. Source: Company data, Credit Suisse estimates

Figure 7: We estimate $66bn of future litigation costs

Source: Credit Suisse estimates

Figure 8: CSe YE14E CET1 ratio impact from litigation costs and higher op risk

Source: Company data, Credit Suisse estimates

18.9

37.2

15.4

27.524.1

38.8

0.0

20.0

40.0

60.0

80.0

100.0

120.0





58.4

103.5

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

HSBC LBG RBS BARC DBK UBS BAER BNP SG CASA

Settled items Est future losses YE14 uncovered litigation loss as % of TNAV

LIBOR Manipulation4.5

Other Market Manipulation

15.2

Mis-sold products13.9

US embargoes7.2

Tax evasion2.5

US mortgage-related12.2

Mis-rep of Financial Statements

4.0

Company specific6.8

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

HSBC LBG RBS BARC DBK UBS BAER BNP SG CASA Total

YE14E adj CET1 capital ratio Uncovered loss Higher operational risk

IDEAS ENGINE 4

European Banks

Investment case

Whilst European banks made settlements of c$19bn in 2013, based on our estimates the

costs to the industry have continued to increase rapidly, with cases of market manipulation in particular growing as an area of focus, and regulators taking a tougher line. In particular,

we also see the 'tail risks' increasing, with an apparent bias towards prosecution, and

deferred prosecution agreements largely becoming a thing of the past.

$104bn cost of litigation now our base case

When we conducted our analysis in February 2013 we estimated $58bn of total costs

relative to c.$201bn of subprime crisis losses – this has now increased to over 50% of the costs of the subprime crisis. Even with banks adding to provisions and making further

progress in several areas, we think there are still $39bn of unprovisioned litigation costs to

come relative to $37bn taken so far. This translates to c5% of YE13 TNAV. We see this

as an ongoing drag on TNAV growth and capital return.

Figure 9: European banks: litigation cost progression since our first report ($bn)

Source: Credit Suisse estimates; previous estimate as of 19th Feb 2013

In particular we have seen increased settlement costs with regulators, and we see much

higher costs still to come from litigation related to activities that we group as 'market manipulation' litigation which started with LIBOR but may extend to many product classes.

Our future 'market manipulation' cost estimate has increased from $4bn to $19bn despite

$2.4bn of settlements in 2013.

The one area of improvement has been the unprovisioned cost estimates related to 'mis-

selling' allegations which primarily relate to payment protection insurance (PPI) and interest rate hedging products (IRHP) in the UK. In this area, whilst there is still significant cost to

be taken, based on our estimates it is largely provided for.

Figure 10: We previously estimated

c$39bn of future litigation costs for

European banks…

Figure 11: … our updated analysis now

puts it at $66bn despite $19bn of

settlements since

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

The figure overleaf shows the costs from litigation relative to the subprime crisis costs by

company. As we highlighted earlier, based on our updated analysis we now expect the

total costs from litigation to be c.50% of the costs from the subprime crisis, compared to

our previous estimate of c.30%.

18.9

37.2

15.4

27.524.1

38.8

0.0

20.0

40.0

60.0

80.0

100.0

120.0





58.4

103.5

LIBOR Manipulation

3.1


0.4

Mis-sold products

14.5

US embargoes2.1

Tax evasion0.5


Mis-rep of Financial

Statements2.5

Company specific

5.3

LIBOR Manipulation

4.5


15.2

Mis-sold products

13.9US embargoes7.2

Tax evasion2.5


Mis-rep of Financial

Statements4.0

Company specific

6.8

A note about litigation cost estimates and tax assumptions

The cost numbers we present above are before tax. Nevertheless, when we compare

the potential losses with TNAV and capital, we do so on a post-tax basis, assuming a tax

benefit of 15%. We also assume 80% of the stock of reserves are for the issues we

highlight. Also note for Deutsche Bank the results are presented pro-forma for the €8bn

of capital being raised currently.

Furthermore, we note that in estimating potential costs, we are not assuming any

wrongdoing by any of the banks in any of the cases.

IDEAS ENGINE 5

European Banks

Figure 12: European banks: Credit market losses compared to potential litigation

cost estimates

$millions LHS, % RHS


Further, legacy risks have started to have a much more significant impact on share price

performance as illustrated in the charts below.

Figure 13: Banks with legacy litigation risk have started to materially underperform

those without

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

Previously, there has been less impact from litigation risks, as illustrated below.

Figure 14: Legacy issues had less impact in the past

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

In these charts, we have included UK Banks, IBs, Wealth Managers and French Banks

within the category with 'legacy' risks, and we have included Spanish Banks, Italian Banks

and Nordic Banks within the category of 'non-legacy' litigation risks as below.

Figure 15: Legacy litigation risk stock categorisation for charts above

Legacy Non Legacy BNPP HSBC ISP BBVA

CAGR LLOY BMPS DANSKE

NATIXIS RBS UBI DNB

SOGN STAN UCG NORD

BAER CABK SEB

DB SAB SHB

UBS POP SWED

BARC SAN

Source: Credit Suisse Research estimates

We note that it is difficult to isolate the specific performance related to this factor, with

other issues such as regulation also very important, but we think this methodology provides

an interesting perspective. Also we note that the 'non-legacy' stocks may still have some

litigation risks, but we think these are on a smaller scale to those categorised as with 'legacy' risk.

0%

20%

40%

60%

80%

100%

120%

140%

160%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000


Credit Market losses Cumulated litigation losses Total Cumulated losses as % of 2015E TNAV

80

90

100

110

120

130

140

May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14


80

100

120

140

160

180

200

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14


IDEAS ENGINE 6

European Banks

Stock conclusions

As the chart below illustrates, the banks are not all equally affected (Figure 16). Our

analysis suggests that banks which have already been significantly impacted by litigation

will continue to be so. Below we go through our thoughts on each of the stocks in order of

impact as a percentage of TNAV.

Figure 16: European banks: the potential litigation impact differs by bank

in local ccy mn, unless otherwise stated

Source: Company data, Credit Suisse estimates. Note this is relative to our 2014 estimates, where for some

banks we already factor in litigation costs in our estimates, reducing the potential impact presented.

Julius Baer (Outperform, TP 48) – Core business resilient but surplus reduced, 11%

2014E TNAV

Gurjit Kambo 44 20 7888 0263 [email protected]

David Wong 44 20 7883 7515 [email protected]

We now estimate a potential CHF750m fine from the DoJ, compared to company

consensus of c.CHF400m, given that we see greater risk as the DoJ appears to be

toughening its stance. Nevertheless, whilst a charge of this magnitude would reduce the capacity for capital return or to make further acquisitions, we think this possibility is largely

reflected in market expectations.

If the cost were to increase to significantly more than CHF1bn then there would be more

risk to the capital base in our opinion, but at this stage we think this is unlikely as the group

has limited exposure to the US, potentially reducing the pressure the US authorities can

exert.

With the shares trading at 12.6x 2015E earnings, we remain confident in the resilience of

the core business and in realising the potential of the IWM integration. As such, we would

view a settlement of this legacy issue at a cost in line with our estimates as a positive.

For more details on Julius Baer, please refer to 'BAER.VX: Julius Baer - Focus on

extracting deal benefits' 4th Feb 2014.

UBS (Neutral, TP CHF16.5) – Forex probes a significant risk, 8% 2014E TNAV

Amit Goel 44 207 883 7516 [email protected]


Based on our estimates, we continue to see the group as the most exposed to litigation

costs as a proportion of TNAV and capital, with the group's derisking actually making the

capital base more sensitive. As we suggested last year when we downgraded to Neutral,

FINMA have applied an RWA add-on for litigation risk, which has delayed the RoE target

and capital return already. Please refer to 'UBS - Delaying capital return' 18 Nov 2013.

We see further significant costs from civil LIBOR and FX, and on our estimates the bank is

still one of the most exposed, with uncovered post-tax litigation losses of cCHF3.6bn at

YE14E (after CHF1.2bn of costs assumed within 2014E), or c8% of YE14E TNAV. We

note that it is unclear whether UBS will receive leniency on penalties for some of these

issues with some regulators, similar to what happened with the EU Cartel fines for LIBOR

by revealing the existence of the cartel. Note in the case of LIBOR, UBS avoided a penalty of €2.5bn from the EU Commission.

The shares are trading at 1.5x 2015E TNAV for an underlying 14% RoTE in 2016E, so

they look fully valued, and our analysis suggests that there could be further disappointment

for the market with regards to capital return.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000


Settled litigation +customer redress paid

Estimated future litigation losses YE14 uncovered litigation loss as % of TNAV

mailto:[email protected]

https://plus.credit-suisse.com/r/HHDCAM

https://plus.credit-suisse.com/r/HHDCAM

https://plus.credit-suisse.com/r/aaCZSd

IDEAS ENGINE 7

European Banks

RBS (Underperform, TP 280p) – Hardest hit of the UK banks and most vulnerable, 8%

2014E TNAV

Carla Antunes da Silva 44 20 7883 0500 [email protected] Mohamed Souidi 44 20 7883 9362 [email protected]

Whilst in Q1 management were able to improve the capital base with the absence of

'exceptional' items including litigation costs, based on our estimates even with PPI and

IRHP costs more limited we see $4bn of uncovered litigation costs which has a 120bps

negative capital impact before any operational RWA change.

For the group as a whole we see these costs being another factor putting pressure on the

strategic plan presented with full-year results, even if we see the plan ultimately putting the

group back on a more sustainable path.

From a valuation perspective, at 0.9x 2016E TNAV for a 2016E steady state RoTE of

c.8.0%, we remain Underperform and see execution risks and these litigation costs as not

discounted. Further, on dividends, even though we do not factor in a dividend until 2016E, this likely further delays the process.

For more details, please refer to 'RBS.L: Royal Bank of Scotland - Looking at 'steady

state' earnings - Remain UP' 18 Mar 2014.

Barclays (Neutral, TP 275p) – The weakest capitalised bank leaves little room for

execution risk, 7% 2014E TNAV


The outstanding litigation issues remain substantial, with c£7.3bn of potential uncovered losses, making the task of preserving the Group's capital during the ongoing strategic

restructuring more challenging. Based on our estimates, the group will have the weakest

capital ratio at 9.7% proforma in 2016E.

On the strategic plan, we see the revised capital allocation as a positive step, providing a

more balanced structure for the future. Nevertheless, given management have chosen not

to raise additional equity to accelerate a deleveraging, we see these costs having a meaningful impact on the pace of restructuring. We also think that they make the group

more dependent on hitting the targets presented for the core business, which on our

estimates also include stronger revenue assumptions in the core IB.

With the shares trading at 0.8x 2015E TNAV for an 8-9% RoTE, we remain Neutral, but

see execution risks to the strategic plan. Please refer to 'BARC.L: Barclays - Revising

estimates post strategy update - Remain Neutral' 12 May 2014, for more details.

Deutsche Bank (Outperform, TP €40) – Capital raise provides a cushion, 5% 2014E

TNAV



One of the questions following the group's announcement of an €8bn capital increase has

been how much of this capital would be consumed by higher litigation costs. Based on our

estimates, this is c.€3.3bn, which is c.41% of the total being raised.

Even though this is a significant amount, it still leaves the group in a position to absorb other costs and puts the group in a much stronger position relative to peers. We estimate

it has a CET1 ratio of 11.8% at YE2015 after reflecting litigation costs and operational

RWA increase after the capital raise, which is the second highest of the peer group. As

such, we view the capital raise as a positive event.

With the shares trading at 0.7x 2015E TNAV proforma for the capital raise, with a 10.9%

proforma RoTE, we remain Outperform and see many of the market concerns discounted.

HSBC (Underperform, TP 550p) – Tail risks increasing, 5% 2014E TNAV



Whilst litigation costs are large in an absolute sense, compared to TNAV the potential

costs are smaller than for some peers. Nevertheless, given the US authorities appear to be taking a tougher stance against the banks, we think the risks for the group are

increasing.

We note that last year it took the group some time to achieve judicial sign-off of their

deferred prosecution agreement with the DoJ, as there may have been questions over

whether the settlement was too lenient (e.g., the Guardian, 23 May 2013, 'HSBC faces

court threat as deal on money laundering charges stalls'). We also note that it is a condition of that deferred prosecution agreement that HSBC is not prosecuted for any

crime under US federal law, and lastly we note that the group could be prosecuted for the

US tax-related matters. As such we see a potential risk that the group might face legal

proceedings for both the tax issues and the Mexican AML issues (with the DPA voided),

with the DoJ possibly looking to seek substantially higher penalties. It is difficult to reflect

this in estimates, but we have assumed the settlement for US embargo matters is doubled as a result, i.e. another $1.9bn of potential costs.

There are also specific issues for the group such as the Jaffe litigation and issues in Brazil.

We estimate a total YE14E post-tax uncovered cost of $6.8bn, or 4.5% of 2014E TNAV.

This is a further headwind, with the group facing higher capital requirements with the UK's

'super equivalent' stance on regulation, that will likely reduce the scope for additional



https://plus.credit-suisse.com/r/HRQsD1

https://plus.credit-suisse.com/r/HRQsD1



https://plus.credit-suisse.com/r/HRQGoD

https://plus.credit-suisse.com/r/HRQGoD

IDEAS ENGINE 8

European Banks

capital return and could impact the group's competitive position globally. With the shares

trading at 1.2x 2015E TNAV for an 11% RoTE, we remain Underperform.

Lloyds Banking Group (Neutral, TP 68p) – Litigation risks appear to have decreased,

2% 2014E TNAV


With the main area of litigation cost being PPI claims over the last few years, based on our estimates Lloyds is one of the few banks where our estimates for uncovered litigation

costs have declined. Based on our numbers, both PPI claims and IRHP costs are largely

provisioned, although there are still significant claims to be paid. We forecast the total cost

from 'mis-selling' for the group will be £10.5bn, and this has been a major factor delaying

the group's capacity to return capital to investors.

We still see some risk from potential market manipulation and from mis-representation litigation, but our uncovered cost estimate is now c.2% of TNAV. With the shares trading

at 1.3x 2015E TNAV for a 13% RoTE, we remain Neutral but see this headwind as largely

out of the way, and Lloyds remains our preferred pick within the UK.

BNP (N, TP €59): we await a better entry point; in France, we prefer Natixis (OP, TP

€5.7), then CASA (OP, TP €13.2), then SocGen (OP, TP €48.5), 1% 2014E TNAV for

the French banks

Maxence le Gouvello 44 20 7888 0308 [email protected]

For the French banks, costs appear manageable whilst high in absolute terms. Following May market corrections, the sector remains attractive. Our order of preference is CA SA,

Natixis and SG: they all offer some good earnings growth, good cash flow generation and

capital redistribution and attractive valuations. We expect to see a gradual normalisation of

earnings with first a cost of risk normalisation, second the benefits of all cost-cutting

programmes announced in 2012/13 and finally a pick-up of the group top lines.

We have a Neutral on BNP Paribas as we do not expect any positive catalysts before 2015; although a US litigation settlement if reached might create a good entry point for

long-term investors. For more details on French banks, please refer to BNPP.PA: BNP

Paribas - It will take time - Downgrading from OP to N (2nd May 2014), CAGR.PA:

Credit Agricole SA - The benefits of the de-gearing plan (11th April 2014) and CNAT.PA: Natixis - Sound results and opening the debate on a potential super

dividend for 2014 (7th May 2014).

More specifically on the recent press commentary regarding BNP (WSJ, 30th May 2014)

we make the following points:

* The speculated scale of a US sanctions settlement for BNPP continues to escalate, with

the WSJ reporting that the Justice Department is looking for a fine of more than $10bn.

* However, we note that the article goes on to suggest that the actual fine could be 'far

less than $10bn', and that BNPP is looking to pay less than $8bn, although this is

materially higher than previous press reports of $5bn (which were themselves higher than previous reports of $2-3bn).

* If a settlement were to come in at c.$10bn, then this would have a material impact on

group capital - we estimate between 70-110bp off CT1, depending on the tax treatment,

taking the ratio down to 9.5-9.9%, and hence dividend expectations.

* There is also a potential threat to BNPP's US$ funding, which it has reorganised into its

Bank West operation. In addition, the recently-articulated IB growth strategy included market share gains in US (as well as Asia), which could come into question.

* Ongoing newsflow about the cost of a US settlement will likely continue to weigh on the

shares, and, despite underperformance, we would expect investors to wait on the sidelines

until there is clarity on this announcement. It may be that this ultimately creates a buying

opportunity in BNPP (the stock is trading on 0.8x P/TNAV 16E for a 12.3% RoTE), but

we think it is too soon and continue to prefer the other three French banks.

Within the scenario analysis presented in this report, we have estimated a cost of $3.5bn

for the group.




https://plus.credit-suisse.com/r/HSs5jp

https://plus.credit-suisse.com/r/HSs5jp

https://plus.credit-suisse.com/r/HSs8IZ

https://plus.credit-suisse.com/r/HSs8IZ

https://plus.credit-suisse.com/r/HSsSRN

https://plus.credit-suisse.com/r/HSsSRN

IDEAS ENGINE 9

European Banks

Main areas of potential litigation costs

1. Market manipulation litigation ($19bn)

Regulatory fines relating to LIBOR manipulation were the starting point, but since then the

areas of focus have broadened and there is a lot of focus on foreign exchange benchmark

setting in particular.

On LIBOR we estimate another $1.5bn of regulatory fines, and $3bn of civil litigation costs,

resulting in a further $4.5bn on top of the $4.6bn already paid to regulators.

FX is the next biggest area of focus, and it is very difficult to reliably estimate what the costs

will be, with very little guidance given. Nevertheless, we have estimated $11.6bn of cost

based on spot FX revenue estimates and the LIBOR process. We have assumed the civil

costs for FX are similar to those for LIBOR, although the spread is different for the banks.

We have estimated potential litigation costs for other benchmark manipulation, including

ISDAfix which is used in swaps markets, commodities (e.g. gold and silver) and CDS. In

total we estimate $3.1bn of cost at this stage.

High frequency trading is the latest area to come under the spotlight, and here we have

estimated costs as a proportion of equity revenues. Overall we have estimated a cost of

$500m, which is still relatively small in the context of the other areas of focus.

2. US mortgage-related issues ($12bn)

Most of the banks in this report have settled with the FHFA (except HSBC and RBS) but are

still to settle with other regulatory agencies. Note that for JP Morgan the FHFA costs were

less than 50% of the regulatory cost before borrower relief, civil claims and repurchase

losses to GSEs.

We now estimate $12bn of future losses related to these matters, which is still a small

increase compared to our previous estimate of $11bn, although we expect there will be

greater reserves set aside by banks.

3. Mis-selling litigation ($14bn)

This has been one of the major negative drivers for the UK domestic banks in particular, with

PPI and IRHP being significant negative drivers since 2009. Whilst there is still a large

volume of claims to be settled, based on our estimates these are largely covered by reserves.

For PPI claims, we are modelling a fade over the coming periods based on the trends we

have seen over the last two years. We derive a future cost of $8.4bn which compares to

$7.4bn of provisions available for redress at YE13. In total we estimate PPI will cost

Barclays, Lloyds, HSBC and RBS alone up to $31bn. This compares with the then-FSA's

August 2010 estimate of £1.9bn to £4.5bn over the next 5 years.

For IRHP we are coming towards the end of the FCA's review process, with the main areas

of uncertainty consequential loss claims and litigation from clients who choose not to opt in to

the FCA's scheme. Nevertheless, we think these additional costs will be limited, given the

terms on offer from opting in to the FCA scheme. The total cost we estimate at $5bn.

4. Tax evasion litigation ($2.5bn)

HSBC and Julius Baer appear the most exposed in our coverage, with both 'category 1'

banks in the US process. There could also be a risk for UBS if US prosecutors were to find

a way to reopen the charge filed in 2009, although this risk appears to be very low and we

do not assume any additional cost in this regard.

There are also potentially costs still to be incurred for tax evasion litigation relating to other

countries, although on our estimates these costs are relatively small. Where we could see

more impact from this is in the net new money growth rates for wealth management

businesses, although this is already widely anticipated (e.g. UBS have guided to lower net

new money growth for the next few years, as a result of outflows in their European

business).

5. US embargo issues ($7bn)

BNP and HSBC are the main drivers of this future cost estimate, with some recent press

articles (e.g. WSJ, 30 May 2014) suggesting that the cost for BNP alone could be as high

as $10bn. We have estimated a $3.5bn cost for BNP in this analysis.

Whilst HSBC has already settled for $1.9bn with a deferred prosecution agreement (DPA),

we have assumed that this cost increases as we think that there is a possibility that the tax

evasion matters for the group result in the terms of the AML DPA being breached.

6. Mis-representation litigation ($4bn)

This relates to investors claiming disclosures were incomplete in capital issuance, significant

transactions and with regards to 'toxic asset' exposure. Our cost estimates have increased

primarily relating to additional litigation costs for RBS.

7. Company-specific issues ($7bn)

There continues to be a large number of specific cases for each bank where the potential

cost is significant on a group basis. This cost has also increased since we last published as

more cases have come to light, or have developed further.

IDEAS ENGINE 10

European Banks

Operational RWA increases

Since we published on this topic last year, we have seen a significant amount of change,

with the most notable item from our perspective being the RWA add-on applied to UBS by FINMA for litigation-related costs. We have also seen several US banks report increases

to operational RWAs relating to litigation settlements.

Figure 17: Operational risk add-on guidance from European and US IBs

UBS 3Q13 results - 50% "temporary" add-on in operational RWAs (by CHF28bn)

4Q13 results - new "supplemental analysis" which reduced the increase to

CHF22.5bn

JPM 4Q13 results - 50bps decrease to CET1 ratio after including US mortgage

settlement into risk model; c$80bn increase in RWAs

Citi

4Q13 results- c$40bn increase in RWAs after considering higher level of litigation-

related activity in the industry

1Q14 results- $56bn increase in operational RWAs related to approved exit from

parallel reporting (under final Basel 3 rules).

MS 4Q13 results - 50bps decrease to CET1 ratio after including litigation provision;

c$20bn increase in RWAs

Source: Company data

Based on our analysis, we could see more banks impacted by RWA add-ons, as regulators look to 'up front' litigation costs in capital ratios, and whilst it may appear to be double-

counting to some degree, as we suggested last year, these 'add-ons' may not automatically

reduce as settlements are reached.

In this report we have estimated the potential impact if banks are required to hold an

equivalent amount of capital to the uncovered litigation losses via higher operational RWAs.

Note whilst this may appear to be equivalent to reserving for these amounts, forward operational RWAs may be 'backward looking' to some extent, and we note that some banks

already have RWA add-ons now offsetting some of the impact.

Based on our estimates, operational RWAs could represent 17% of RWAs in 2015E,

compared to 11% in 2013 for the banks in this report, with UBS and Julius Baer the

highest at 39% and 36% respectively, followed by RBS at 22%, Barclays at 21% and

Deutsche Bank at 20%.

IDEAS ENGINE 11

European Banks

Updated cost analysis

In this section, we review our updated cost estimates, relative to the stock of provisions at

the banks, and we also highlight the potential impact on capital ratios including the impact from operational RWAs. The following table summarises our estimates of cost for the main

areas of litigation that we have identified.

Figure 18: European banks: Updated litigation cost estimates by category in local millions, unless otherwise stated


Total

($mn)

Settled litigation 4,958 7,179 2,978 3,796 3,156 3,096 0 13 966 0 37,207

Estimated future costs 11,907 3,908 7,610 6,433 5,865 6,698 750 3,087 1,771 1,122 66,336

o.w. LIBOR 664 112 356 348 590 752 0 0 387 217 4,513

o.w. FX 1,251 0 1,111 1,369 1,702 2,449 0 470 314 0 11,560

o.w. Other manipulation 50 0 333 584 694 780 145 3,607

o.w. US mortgage 1,582 0 2,890 956 1,931 1,458 0 0 0 0 12,249

o.w. Mis-sold products 1,841 3,271 1,957 2,091 0 0 0 0 0 0 13,917

o.w. Tax evasion 1,056 243 750 216 2,482

o.w. US embargoes 1,910 0 0 0 307 0 0 2,536 507 507 7,234

o.w. Mis-representation 293 525 788 155 228 512 54 136 92 4,000

o.w. Company specific 3,260 0 175 929 413 504 0 26 282 91 6,773

Stock of reserves 4,214 3,815 4,397 3,013 2,451 1,622 35 2,718 700 1,210 34,387

Applicable reserves (80%

of stock) 3,371 3,052 3,518 2,410 1,961 1,298 28 2,174 560 968 27,510

Estimated Uncovered

Future Losses 8,536 856 4,092 4,023 3,904 5,400 722 912 1,211 154 38,826

Total litigation losses 16,865 11,087 10,588 10,230 9,021 9,794 750 3,100 2,737 1,122 103,543


The following table shows the estimates we presented last year when we first presented this

analysis.

Figure 19: European banks: Previous estimates of litigation costs from 19 Feb. 2013 in local millions, unless otherwise stated HSBC LBG RBS BARC DBK UBS BAER BNP SG CASA Total

($mn)

Settled Litigation 3,765 3,700 1,473 2,184 277 2,308 0 14 432 0 18,887

Estimated Future Costs 5,881 3,491 3,947 4,239 4,298 4,783 98 821 1,421 846 39,513

o.w. Market Manipulation 590 124 39 295 444 140 0 442 442 221 3,533

o.w. Mis-sold Products 2,606 2,998 1,743 2,020 490 518 0 0 0 0 14,547

o.w. US Mortgage 1,062 0 1,522 1,047 1,604 3,265 0 0 146 0 10,985

o.w. Tax Evasion Matters 0 0 0 0 0 372 93 0 0 0 500

o.w. US embargo matters 0 0 134 318 197 0 318 318 318 2,121

o.w. Mis-representation 197 370 510 90 168 281 NA 32 84 62 2,500

o.w. Company Specific 1,425 0 0 788 1,275 9 5 28 431 244 5,327

Stock of Reserves 3,034 2,069 734 2,432 1,800 1,432 25 389 674 1,193 18,318

Applicable reserves (80%

of stock) 2,427 1,655 587 1,946 1,440 1,146 20 311 539 954 15,449

Estimated Uncovered

Future Losses 3,453 1,836 3,360 2,294 2,858 3,637 78 510 882 0 24,063

Total Litigation Loss 9,646 7,191 5,420 6,424 4,575 7,091 98 834 1,853 846 58,400


As can be seen from the tables above, our cost estimates for market manipulation litigation

(LIBOR, FX and Other) have increased significantly, along with US embargo-related costs.

Other areas have seen smaller increases in absolute cost, with mis-selling actually seeing a

decline in aggregate. Whilst the stock of reserves has also increased significantly, they have

been unable to keep up with the growth in future costs, leading to a larger estimate for

uncovered losses.

IDEAS ENGINE 12

European Banks

Figure 20: European banks: litigation cost progression since our first report

in $bn


The following chart shows how the costs compare to the losses from the subprime crisis. In total the banks in this report incurred equity losses of c.$201bn from the subprime crisis, so

now the litigation costs appear to be c. 50% of this. For more details on our estimates for

the cost of the subprime crisis, please refer to ‘European Banks: The Lost Decade’ 15

September 2011.

Figure 21: European banks: Credit market losses compared to litigation costs

in $mn, unless otherwise stated


Please note the following points:

We assume that 80% of existing reserves can be used to cover the litigation costs that we

have identified and estimated, with the balance required for smaller on-going costs such as

employment-related litigation and other legal matters.

We note that we are only looking at issues that are known at present—there are likely to be

issues in the future that we are not aware of at this stage, but we have not tried to take these

into account.

Estimates on litigation reserves are based on the latest stated figures for these items and are

adjusted for settlements reported since the announcements.

We have adjusted some costs to reflect an 'expected value' rather than the best or worst

outcomes.

When reviewing potential impact on capital and equity we have assumed that banks will be

able to get a 15% tax offset against costs. We have applied this uniformly, although we note

that in reality there will be some items where the tax offset would be significantly smaller and

others where it could be larger.

For our 2014E, 2015E and 2016E impact analysis we adjust for the litigation costs that are

already in our earnings estimates. Currently this affects the results for HSBC, Deutsche

Bank, UBS and Julius Baer, reducing the incremental impact.

18.9

37.2

15.4

27.524.1

38.8

0.0

20.0

40.0

60.0

80.0

100.0

120.0





58.4

103.5

0%

20%

40%

60%

80%

100%

120%

140%

160%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000


Credit Market losses Cumulated litigation losses Total Cumulated losses as % of 2015E TNAV

IDEAS ENGINE 13

European Banks

Potential capital and earnings impact

The following tables show the potential impact on our TNAV, CET1 and leverage ratio

estimates from these costs. As we highlighted previously, this is after giving a 15% tax benefit.

Figure 22: European Banks: Potential impact on TNAV and earnings estimates from

litigation losses in %, unless otherwise stated HSBC LBG RBS BARC DBK UBS BAER BNP SG CASA Total

YE13 uncovered loss

as % of TNAV 5.0 2.1 8.5 7.5 6.8 11.0 21.1 1.2 2.7 0.5 5.1

YE14 uncovered loss

as % of TNAV 4.5 1.9 8.3 7.3 4.5 8.2 10.6 1.1 2.5 0.4 4.4

YE15 uncovered loss

as % of TNAV 4.1 1.8 8.1 7.0 3.0 6.3 9.2 1.0 2.3 0.4 3.8

YE16 uncovered loss

as % of TNAV 3.8 1.7 7.9 6.7 2.6 4.9 7.8 0.9 2.2 0.4 3.5

YE14 uncovered loss

as % of market cap 3.4 1.4 9.2 8.6 7.4 5.2 3.5 1.2 3.1 0.5 4.1

YE14 uncovered loss

as % of underlying profit 43.6 15.2 224.1 94.9 62.0 96.2 101.0 12.0 25.3 4.3 45.4

YE15 uncovered loss


YE16 uncovered loss



As can be seen from the table above, UBS and Baer are most impacted initially, although

we already factor in additional litigation provisions for both, reducing the impact over time.

RBS and Barclays are also significantly impacted based on this analysis.

In terms of the capital and leverage impact:

We reduce the capital base by the uncovered litigation loss. We do not assume any additional

impact from items such as the impact on regulatory capital allowances.

We factor in our additional operational RWA estimates, although this does not affect leverage

ratios. This calculation is given in more detail in the next section on Operational Risk.

Figure 23: European Banks - CSe CET1 ratio impact analysis from litigation risk

in %, unless otherwise stated HSBC LBG RBS BARC DBK UBS BAER BNP SG CASA Total

YE14E CET1 capital

ratio 11.3% 11.3% 9.6% 9.9% 11.8% 14.0% 14.0% 11.0% 10.2% 9.8% 10.8%

Uncovered loss -0.5% -0.3% -0.9% -0.8% -0.6% -1.6% -1.8% -0.1% -0.3% 0.0% -0.5%

Higher operational risk -0.7% -0.7% -0.8% -0.8% -1.1% -0.9% -2.4% -0.5% -0.4% -0.3% -0.7%

YE14E adj CET1

capital ratio 10.1% 10.4% 8.0% 8.3% 10.2% 11.5% 9.8% 10.3% 9.5% 9.5% 9.6%

YE15E CET1 capital

ratio 11.9% 12.4% 11.6% 10.6% 13.2% 15.4% 15.4% 11.5% 10.7% 11.0% 11.8%

Uncovered loss -0.5% -0.3% -1.1% -0.8% -0.4% -1.3% -1.7% -0.1% -0.3% 0.0% -0.5%


YE15E adj CET1

capital ratio 10.7% 11.4% 9.5% 8.9% 11.8% 13.4% 10.8% 10.8% 10.0% 10.6% 10.6%

YE16E CET1 capital

ratio 12.4% 13.3% 12.9% 11.5% 14.5% 17.4% 17.3% 12.1% 11.0% 12.2% 12.6%

Uncovered loss -0.5% -0.3% -1.2% -0.9% -0.4% -1.2% -1.6% -0.1% -0.2% 0.0% -0.5%


YE16E adj CET1

capital ratio 11.2% 12.3% 10.7% 9.7% 13.2% 15.7% 12.3% 11.3% 10.2% 11.7% 11.4%


From the table above we see that Barclays and RBS appear most stretched on capital

factoring in these effects, with Deutsche Bank benefiting from the capital being raised. For

UBS the ratios remain at the top end of the peer group, although on this basis they would only achieve the 13% CET1 target in 2015E, and on a 'stressed' capital basis it would take

significantly longer to achieve the 10% target the group has set.

IDEAS ENGINE 14

European Banks

Figure 24: European Banks - CSe leverage ratio impact analysis from uncovered

losses

HSBC LBG RBS BARC DBK UBS BAER SG Total

YE13 leverage ratio 4.5% 3.3% 3.0% 2.9% 2.6% 2.9% 3.5% 3.2% 3.5%

YE14E leverage ratio 4.6% 4.0% 3.5% 3.3% 3.3% 3.4% 3.4% 3.6% 3.9%



Adjusting for uncovered

litigation loss

YE13 leverage ratio 4.5% 3.3% 3.0% 2.9% 2.4% 2.9% 3.5% 3.2% 3.3%

YE14E T1 leverage ratio 4.5% 4.0% 3.5% 3.3% 3.2% 3.4% 3.4% 3.6% 3.7%



In bps

YE13 lev ratio reduction 24 09 32 25 21 45 87 08 23

YE14E lev ratio reduction 22 09 34 27 16 37 42 08 22




Based on our leverage analysis both RBS and Barclays appear the weakest placed,

potentially putting additional focus on the execution of their strategic plans.

Operational risk capital

Since we published last year on the topic we have seen a number of changes from

regulators, and operational RWAs are where we have seen the largest component of RWA inflation. This RWA inflation has offset some of the benefits from broader deleveraging and,

for US banks, advanced model adoption.

Figure 25: European Banks: Operational RWAs as % of Total RWAs (2010-2013)


The most notable change came with the UBS 3Q 2013 results, when the Swiss regulator

FINMA applied a 50% increase in operational RWAs. This was broadly in line with our

expectations, although the timing came as a surprise to some investors. Since then, there

have been operational RWA increases by both European and US banks, and FINMA have

refined the approach applied to UBS.

0%

5%

10%

15%

20%

25%

30%

35%

40%

UB

S

DB

K

BA

RC

SA

N

SO

GN

UC

G

CB

K

HS

BC

RB

S

ST

AN

LLO

Y

BB

VA

BN

P

ISP

CA

SA

2010 2011 2012 2013

IDEAS ENGINE 15

European Banks

Figure 26: Op Risk add-on guidance from European and US IBs

UBS 3Q13 results - 50% "temporary" add-on in operational RWAs (by CHF28bn)

4Q13 results - new "supplemental analysis" which reduced the increase to CHF22.5bn

JPM 4Q13 results - 50bps decrease to CET1 ratio after including US mortgage settlement into

risk model; c$80bn increase in RWAs

Citi

4Q13 results- c$40bn increase in RWAs after considering higher level of litigation-related

activity in the industry

1Q14 results- $56bn increase in operational RWAs related to approved exit from parallel

reporting (under final Basel 3 rules).

MS 4Q13 results - 50bps decrease to CET1 ratio after including litigation provision; c$20bn

increase in RWAs


Operational risk can be calculated using either a relatively simple, prescriptive method (the

Basic Indicator Approach and the Standardised Approach), or a more sophisticated method using internal models (Advanced Measurement Approach, "AMA"). The banks here use the

AMA for a large part of their RWAs; although HSBC and Lloyds currently still use the

standardised approach (Figure 27). Note HSBC are in the process of developing and

implementing an AMA framework. As such, the development of litigation-related operational

RWAs depends in large part on how model assumptions and parameters change.

Figure 27: European Banks: YE13 operational RWAs by calculation method


For example, JPMorgan commented at their 3Q13 results that, in cases where the models

incorporate historical loss experience, any increase in operational RWAs arising from a large litigation settlement might be slow to reverse, but also they were discussing with the

regulator on how to make the risk-modelling more flexible.

Capital ratio impact analysis from increased operational risk

Our impact analysis estimates how much operational RWAs could increase from potential

higher litigation costs (Figure 28 below).

We estimate a "base" level of operational risk, which incorporates non-litigation related risks.

This uses the Basic Indicator Approach, which sets the capital required at 15% of average

revenues over a rolling historical period (we use 3 years).

We add on an additional litigation-related RWA charge of 12.5x our estimated uncovered

litigation loss.

The difference between the sum of the two with the actual YE13 operational RWAs the banks

reported gives the additional RWA estimates.

Figure 28: European Banks: CSe additional operational RWAs from litigation

in $ millions, unless otherwise stated


Total

($m)

YE 13 op

risk RWAs 119,206 26,594 41,800 54,311 50,891 77,941 3,687 50,364 40,993 23,795 643,567

CSe standardised op risk charge

2013 123,894 36,061 43,273 53,838 61,800 52,126 3,553 74,916 44,798 32,028 701,585

2014E 116,959 34,392 37,133 52,470 61,073 50,807 4,047 72,466 44,407 30,783 671,930

2015E 118,769 34,693 32,287 50,601 60,254 52,796 4,703 73,974 46,508 31,825 671,451

2016E 120,477 35,353 29,127 49,505 60,634 54,532 5,222 78,221 49,680 33,790 683,264

CSe total op risk (standardised + uncovered litigation loss)

2013 214,587 45,154 86,753 96,582 103,280 109,506 11,223 84,610 57,665 33,667 1,114,112

2014E 202,339 43,485 80,613 95,214 89,803 95,437 7,998 82,160 57,274 32,422 1,042,835

2015E 201,493 43,787 75,767 93,345 80,484 88,394 8,654 83,668 59,376 33,464 1,017,707

2016E 201,874 44,446 72,607 92,249 77,676 84,818 9,173 87,915 62,548 35,429 1,017,756

CSe additional op risk RWA

2013 95,381 18,560 44,953 42,271 52,389 31,565 7,536 34,246 16,673 9,872 470,545

2014E 83,133 16,891 38,813 40,903 38,912 17,496 4,311 31,796 16,282 8,627 399,268

2015E 82,287 17,193 33,967 39,034 29,593 10,453 4,967 33,304 18,384 9,669 374,140

2016E 82,668 17,852 30,807 37,938 26,785 6,877 5,486 37,551 21,556 11,634 374,190


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

HSBC LBG BARC DBK UBS BNP SG CASA

Basic indicator Standardised AMA

IDEAS ENGINE 16

European Banks

As can be seen, we could see a further $374bn of operational RWAs, which equates to

17% of total RWAs in 2015E. For UBS and Julius Baer this would be approaching 40% of total capital demand.

The following table shows how the proportion of capital allocated to operational RWAs would

change between 2013 and 2015E.

Figure 29: European Banks: Change in capital allocated to operational RWAs due to

litigation in local billions, unless otherwise stated

HSBC LBG RBS BARC DBK UBS BAER BNP SG CASA Total

($bn)

Operational RWAs

(2013) 119 27 42 54 51 78 4 50 41 24 644

Total RWA (2013) 1,215 271 429 436 350 225 16 627 380 300 5,649

Operational

RWA % 10% 10% 10% 12% 15% 35% 23% 8% 11% 8% 11%

Total RWA

(2015E) 1,264 266 307 409 366 214 19 640 399 300 5,502

RWAs after litigation related add-on

Operational RWAs

(2015E) 201 44 76 93 80 88 9 84 59 33 1,018

Total RWA

(2015E) 1,346 283 340 448 396 224 24 673 417 310 5,876

Operational

RWA % 15% 15% 22% 21% 20% 39% 36% 12% 14% 11% 17%


The main litigation areas in detail

As we explained on page 9, the discussion is split into the categories below:

1. Market manipulation litigation ($19bn, 29% of total cost)

2. US mortgage-related issues ($12bn, 18% of total cost)

3. Mis-selling litigation ($14bn, 21% of total cost)

4. Tax evasion litigation ($2.5bn, 4% of total cost)

5. US embargo issues ($7bn, 11% of total cost)

6. Mis-representation litigation ($4bn, 6% of total cost)

7. Company-specific issues ($7bn, 10% of total cost)

Figure 30: We estimate $66bn of future litigation costs


LIBOR Manipulation4.5


15.2

Mis-sold products13.9

US embargoes7.2

Tax evasion2.5


Mis-rep of Financial Statements

4.0

Company specific6.8

IDEAS ENGINE 17

European Banks

1. Market manipulation litigation ($19bn, 29% of total)

When we looked at this topic last year, LIBOR-related issues were the main focus, with

some banks having settled with some of the regulators and civil costs to come. Since then, however, there have been several new investigations into a number of different areas of

potential market manipulation.

FX-related issues seem to be generating most of the headlines at present, but we are also

seeing a growing number of potential issues with other market activities. We calculate that

European banks could face another $19bn of costs/fines/penalties, and this is the area

seeing the largest increase in potential cost.

Figure 31: European Banks - CSe future losses from market manipulation litigation


HSBC LBG RBS BARC DBK UBS BNP SCG CASA TOTAL

LIBOR regulatory $368 $37 $25 $444 $349 $299 $1,522

LIBOR class-action $296 $185 $550 $550 $370 $855 $0 $185 $2,991

FX regulatory fines $1,099 $1,528 $1,801 $1,891 $2,020 $558 $342 $9,239

FX class action $153 $305 $458 $458 $763 $92 $92 $2,320

Other mkt

benchmark

manipulation $50 $550 $800 $300 $700 $2,400

High Freq Trading $163 $157 $187 $507

Total $1,966 $185 $2,971 $3,797 $3,621 $4,525 $649 $968 $299 $18,980


In particular we highlight the following before reviewing each area in more detail:

LIBOR was the focus of 2012-13, but the issue is not yet fully closed: (i) several banks have

not settled with the regulators and (ii) there are private class-action lawsuits underway. We

estimate $1.4bn of further regulatory costs and $3bn of civil costs for the European banks.

The main new development this year has been a wide-ranging investigation into the setting of

FX benchmarks, involving the FCA in the UK, the CFTC and DoJ in the US, and several other

national regulators. Whilst there is little information at this stage, we estimate this could cost

$11.6bn including civil claims, which compares to a total cost from LIBOR of c.$10bn.

There are several other areas that the regulators are looking into which could become more

significant going forward. In particular, we highlight the setting of interest-rate swap

benchmarks (i.e. ISDAfix), CDS benchmarks and commodity prices. At this stage we have

estimated a potential cost of $2.4bn for these issues in total.

Banks' operation of "dark pools" and their relationship with high-frequency trading firms has

also been discussed, and there are preliminary investigations underway (FT, 16 April 2014).

We have put an estimated cost on this, although it is small in the context of the other issues.

a. LIBOR – $5.5bn paid, c$4.4bn still to come

Even though it has been almost two years since Barclays announced their settlement with

regulators, not all banks have put this issue behind them, and the industry is still working through private-sector lawsuits.

We estimate a further c$1.4bn of regulatory fines for European banks…

Figure 32 below summarises the fines paid by European banks to national regulators, and our estimates of further potential penalties.

Figure 32: European banks - LIBOR regulatory settlements in $ millions, unless otherwise stated

EU antitrust

regulator CFTC US DoJ FCA FINMA Other

Settled

total

CSe

further

settlement Total

UBS (*) Received full immunity 700 500 259 64 - 1,524 0 1,524

RBS 359 325 150 137 37 - 971 37 1,008

Barclays (**) Received full immunity 200 160 96 25 - 456 25 481

Deutsche Bank 1,001 203 145 77 19 - 1,001 444 1,445

HSBC 276 41 30 16 5 368 368

CASA 207 28 20 11 3 299 299

SocGen 615 172 123 39 15 615 349 965

BNP - 0 0 0

Settled total 1,975 1,700 1,135 663 64 0 5,537

CSe further

settlement 483 459 328 149 104 0 1,522

Total 2,458 2,159 1,463 811 169 0 7,059

Source: Company data, Credit Suisse estimates. Shaded cells represent our estimates for future settlements.

(*)The EC reported that UBS avoided a €2.5bn fine by revealing the existence of the cartel. (ii) Similarly, Barclays

avoided a €690m fine.

For banks which had been fined by the EC, we derived estimates for other regulatory fines by

pro-rating with UBS's known fines.

We have assumed a $200m EC settlement for HSBC and a €150m EC settlement for Credit

Agricole, both of which have yet to resolve their EC investigations.

…and c$3bn in class-action settlements

There have also been a number of private-sector class-action lawsuits. Figure 33 below is a

summary of some of the larger ones, highlighting which banks have been named in each

and when each lawsuit was filed.

IDEAS ENGINE 18

European Banks

Figure 33: LIBOR class-action lawsuits - summary of banks named Plaintiff FDIC Fannie Mae Freddie Mac UC Regents US

homeowners

City of

Baltimore

Date filed 14 Mar 2014 31 Oct 2013 14 Mar 2013 25 Jun 2013 04 Oct 2012 12 Aug 2011

BAC X X X X X X

Barclays X X X X X X

BNP

Citigroup X X X X X X

CS X X X X X

Deutsche Bank X X X

HSBC X X X X

JPM X X X X X

Lloyds X X X X

RBC X X X X

RBS X X X X X

Soc Gen X

UBS X X X X X

Source: US DoJ

Estimating the civil litigation costs

Many of these lawsuits do not specify the size of damages sought. The actual calculations

can be quite complex, even for the investors themselves. To prove that manipulation

occurred requires accurate and comprehensive records of their interest rate product

transactions which the investors may not have.

To derive our estimates we have used the following pieces of information:

On 14 March 2014, the US FDIC sued 17 banks on behalf of 38 failed banks alleging

manipulation of LIBOR rates that caused them substantial losses. Some media (e.g. the FT)

reported damages sought of around $1bn (although we did not find this disclosed on the

filing).

Fannie Mae, which sued in October 2013, estimated it suffered damages of $800m, and is

seeking additional punitive damages.

The WSJ reported on 19 December 2012 that an internal report by the FHFA estimated that

Fannie Mae and Freddie Mac's combined LIBOR-related losses could be more than $3bn.

Freddie Mac has also sued but not disclosed its estimated damages.

Using this as a starting point, we estimate a potential total cost of c$3.0bn for European

banks arising from LIBOR class-action lawsuits (Figure 34 below).

We assume $1.5bn from the FDIC, and $1.2bn each from Fannie Mae and Freddie Mac, i.e.

the potential damages quoted in the press with some additional punitive damages;

For the remaining cases, we assume a total of $1bn.

In allocating the potential costs among the banks, we used as a guide previous regulatory

fines, press reports and material in the case filings.

Figure 34: Estimate of potential LIBOR class-action costs in $ millions, unless otherwise stated LIBOR class action FDIC Fannie Mae Freddie Mac Others Total ($m)

BAC 75 120 60 50 305

Barclays 150 180 120 100 550

BNP 0 0 0 50 0

Citigroup 120 120 96 80 416

CS 0 0 0 0 0

Deutsche Bank 150 0 120 100 370

HSBC 120 0 96 80 296

JPM 120 120 96 80 416

Lloyds 75 0 60 50 185

RBC 75 0 60 50 185

RBS 150 180 120 100 550

Soc Gen 75 0 60 50 185

UBS 225 300 180 150 855

Others 165 180 132 60 587

Total 1,500 1,200 1,200 1,000 4,900

European banks total 945 660 756 680 2,991


Many of these cases come from the US, and several suits invoke violations of the US Sherman Act, Clayton Act and/or Donnelly Act (the box below has further detail) which

could lead to much higher costs (double or treble damages). We do not explicitly factor this

into our estimates, but it is a factor to bear in mind.

Sherman Antitrust Act

This is part of United States Federal law (Link): Section 1: Fine not exceeding $100,000,000 if a corporation, or, if any other person,

$1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments.

The maximum fine may be increased to twice the amount the conspirators gained from the

illegal acts or twice the money lost by the victims of the crime, if either of those amounts is

over $100 million.

Clayton Act

This is also part of US Federal law (Link): Treble damages under Section 4 and injunctive relief under Section 16

There are no criminal penalties.

Donnelly Act

This is part of the State of New York's anti-trust laws (Link): The Act permits the Attorney General to bring an action for civil fines up to $1,000,000 for

corporations and $100,000 for individuals.

Private parties may also bring lawsuits to enjoin these practices and obtain treble damages.

Violation of the Donnelly Act is also a felony, punishable by a criminal fine of up to $1m for

corporations and up to $100,000 and 4 years' imprisonment for individuals.

http://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws

http://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws

http://www.ag.ny.gov/antitrust/antitrust-enforcement#law

IDEAS ENGINE 19

European Banks

b. FX – Potentially bigger than LIBOR at $11.6bn

Over the past year the FX investigations have become a key investor focus, with several

headlines from regulators but at this stage no actual settlements. As such it is even harder to estimate accurately the potential costs from this issue, but the table below shows our

base case cost assumptions.

Figure 35: Estimate of potential costs from FX-related litigation

in $ millions, unless otherwise stated BARC DBK UBS RBS HSBC BNP SCG Total

($m)

Annual spot FX revs (local) 295 365 480 251 282 108 66

Annual spot FX revs ($m) 462 485 518 392 282 143 88 2,369

European fine ($m) 693 727 777 588 423 214 131 3,554

UK fine ($m) 462 485 518 392 282 143 88 2,369

US fines ($m) 554 582 622 470 338 172 105 2,843

Other fines ($m) 92 97 104 78 56 29 18 474

Total fines ($m) 1,801 1,891 2,538 1,528 1,099 558 342 9,239

Private lawsuits 458 458 763 305 153 92 92 2,320

Total fines + lawsuits 2,259 2,349 2,783 1,834 1,251 649 433 11,560


Please note the following points in deriving these estimates, and below we highlight some of

the additional analysis that has shaped our thinking on this matter:

We have estimated the spot FX revenues for each bank (since it is the spot desk which is

involved in setting the FX benchmark).

Based on the EC guidelines, we suppose a fine of 20% of annual spot FX revenues, multiplied

by 7.5 years, assuming this was the time-frame over which the manipulation occurred.

We assume the fines from US regulatory bodies are smaller than the EU fines, and the FCA

cost is smaller still.

Given how early we are into the investigations, we have even less detail about the potential

damages sought from FX-related class-action lawsuits. It appears that proof of alleged

manipulation is easier in some ways, and more difficult in others, than LIBOR. Our base

estimate of $2.4bn is slightly smaller than our estimate for LIBOR civil litigation ($3bn).

Below we go through the factors behind our assumptions in more detail.

Understanding the issue

The issues relate primarily to a series of FX benchmarks known as the WM/Reuters rates,

where some traders are alleged to have bought or sold ahead of client orders, and to have

shared information at such time.

The WM/Reuters rates are published hourly for 160 currencies and every 30 minutes for 21 of

them. For the 21 major currencies, the major fixing is seen as the one at 4pm London time,

and there is a 60-second window around this time where bid and offer rates from the order-

matching systems and actual trades executed are captured, and the median bid and offer rates

form the benchmark rate.

Regulatory investigations

Several authorities including the DoJ, FCA, BoE, FINMA and FSB have opened probes. The

investigations are still at an early stage, although several regulators have made comments including the following:

On 20 May 2014, the German regulator BaFin said it had found concrete evidence that

"multiple currencies" had been subject to attempted manipulations, although it added they were

not the larger currencies such as the euro and dollar.

On 31 March 2014, the Swiss competition commission WEKO said it was investigating several

banks including UBS, Julius Baer, JPMorgan, Citi, Barclays and RBS for allegedly colluding to

manipulate exchange rates.

The UK FCA's chief executive Martin Wheatley said in February 2014, "The allegations are

every bit as bad as they have been with LIBOR"; although it was unlikely the FCA investigation

would reach a conclusion in 2014.

Suspension and dismissal of traders

According to press reports (FT, Nov 2013), various banks have now banned traders from

using multi-dealer electronic chat rooms, and have suspended or dismissed several traders,

including some team leaders. The regulatory environment appears to have made banks more

conservative and inclined to take pre-emptive action ahead of actual findings.

IDEAS ENGINE 20

European Banks

Class-action lawsuits

Several class-action lawsuits have also been filed against both European and US banks as

illustrated below.

Figure 36: FX litigation - Class action lawsuits Date Plaintiffs Defendants

10-Feb-11 Arkansas pension fund State Street Corp

7-Mar-11 Southeastern Pennsylvania Transportation Authority BNY

13-Dec-11 Louisiana Municipal Police Employees' Retirement System BNY, C, GS, Merrill Lynch, MS, UBS

1-Nov-13 Haverhill Retirement System BARC, C, CS, DB, JPM, RBS, UBS

8-Nov-13 Simmtech Co. Ltd BARC, C, CS, DB, JPM, RBS, UBS

23-Dec-13 Oklahoma Firefighters Pension and Retirement System

BARC, BNP, C, CS, DB, GS, HSBC,

JPM, MS, RBS, UBS

26-Dec-13

Employees' Retirement System of the Government of the

Virgin Islands

BARC, C, CS,DB, GS, HSBC, JPM, RBS,

UBS

17-Jan-14

United Food and Commercial Workers Union and

Participating Food Industry Employers Tri-State Pension

Fund

BARC, BNP, C, CS, DB, GS, HSBC,

JPM, Lloyds, MS, RBS, UBS

24-Jan-14 State - Boston Retirement System BARC, C, DB, HSBC, JPM, RBS, UBS

11-Feb-14 Philadelphia Board of Pensions BARC, C, DB, HSBC, JPM, RBS, UBS

Source: Company data, Credit Suisse research

The legal nature of the issue

The investigations are being carried out by national anti-trust authorities, and were fines to

be levied, it is worth noting the different guidelines in various jurisdictions:

The UK FCA regulation guidelines are for up to 20% of revenue derived from breach of

regulation, with adjustments for aggravating/mitigating factors. The details can be found in the

FCA's Decision Procedure and Penalties Manual (DEPP), Chapter 6

(http://fshandbook.info/FS/html/FCA/DEPP/6).

The European Commission guidelines are for penalties capped at 10% of total annual

revenues. Within this limit, up to 30% of the company's annual sales to which the infringement

relates, multiplied by the number of years of participation in the infringement. There is a floor

given by an "entry fee" of 15-25% of relevant sales. The details can be found under the "EC

guidelines on the method of setting fines"

(http://ec.europa.eu/competition/cartels/overview/factsheet_fines_en.pdf).

In the US, the regulators are the DoJ and CFTC and the law is the Securities Exchange Act.

c. Other benchmark manipulation and HFT issues

Whilst in some respects LIBOR has been the original market manipulation issue, and FX

seems to be the current theme, there are also several other areas that could become more

important as time progresses.

In Figure 37 below we summarise the main areas of potential benchmark manipulation

litigation and our estimated costs for each.

Figure 37: European Banks - CSe future litigation costs from other potential

benchmark manipulation investigations in $ millions, unless otherwise stated

BARC DBK UBS RBS HSBC BNP SCG Total ($m)

ISDAfix 500 500 500 500 2,000

Commodities 200 200 100 200 700

CDS benchmarks 100 100 100 50 50 400

Total 800 800 700 550 50 0 200 3,100


For ISDAfix, we estimate potential costs roughly on the order of LIBOR, given that swap rates

are an important benchmark, especially for longer-dated instruments.

We estimate smaller amounts for commodities as that is a smaller market; UBS might have a

smaller potential cost because it is not on the gold-fixing panel unlike the other 3 banks

(Barclays, Deutsche Bank and SocGen), although it is conducting its own investigation and

cooperating with regulators.

For CDS benchmarks, there is very little information at present, and we have made fairly

conservative estimates at this point.

Below we review each of these issues in more detail and also present our analysis of

potential HFT-related costs.

ISDAfix – $2bn cost assumed

The ISDAfix is a benchmark rate for swaps. Previously the rate was published in 6

currencies but the rates for HKD and JPY were suspended on 29 Apr 13 and 27 Jan 14

respectively. Of the rates published, USD rate is the most important.

The USD rate was compiled by the interdealer-broker ICAP based on submissions from 16

banks while the other rates were compiled by Thomson Reuters. However, in January, ISDA

with a view to overhaul the way rates are fixed gave the responsibility of collecting non-USD

ISDAfix rates to Thomson Reuters, thus removing the role of ICAP. Further, ISDA has also

recently invited offers for the role of independent benchmark administrator making it

necessary for Thomson Reuters to win the tender for it to continue as calculation agent.

It has been alleged that banks along with brokers manipulated the benchmark rates (WSJ,

Jan 2014, Telegraph Aug 2013). A financial institution submitting the ISDAfix rate could in

IDEAS ENGINE 21

European Banks

theory manipulate it as ISDAfix rates are used by banks to value their own portfolios.

Additionally, banks allegedly manipulated the rates to reap profits on separate derivatives trades at the expense of companies and pension funds. The CFTC and FCA are

investigating the banks and ICAP. Additionally, the banks also face the risk of possible

private lawsuits from money managers and pension funds.

Antitrust CDS matters - $0.4bn cost assumed

The European Commission opened two antitrust investigations into the CDS information market in April 2011, alleging anti-competitive activity by a number of market participants

between 2006 and 2009.

The Commission is investigating if the banks along with other players like Markit and ISDA

delayed or prevented exchanges from entering the credit derivatives business, thereby

stifling competition in the internal market, breaching EU antitrust rules. Statements of

objection were sent to ISDA, Markit and 13 IBs including Bank of America, Barclays, BNP, Citigroup, DB, GS, HSBC, JPM, MS, RBS and UBS during July 2013.

Commodities Price Fixing - $0.7bn cost assumed

The main banks involved are the five participants in the London Bullion Market Association

(LBMA) who fix the gold price on the London Bullion Market – Bank of Nova Scotia,

Barclays, Deutsche Bank, HSBC and Societe Generale.

Currently the CFTC, BaFin and the FCA are among the regulators that have initiated probes.

BaFin initiated investigations against Deutsche Bank towards the end of 2013 requesting

documents and interviewing employees. Earlier in 2014, the bank decided to withdraw its participation in the gold and silver benchmark setting process as it scaled back its

commodity business. Several class-action lawsuits have also been filed by individuals and

hedge funds.

Barclays was fined £26m by the FCA on 23 May 2014 for alleged gold fixing by one of its

traders (there was a 30% discount for early settlement disclosed) and we note there are

several other regulatory investigations ongoing.

High frequency trading

This has attracted attention more recently, with the New York Attorney General requesting

information from several banks. A class-action lawsuit has also been filed by the City of

Providence, Rhode Island, naming several banks, including Barclays, Deutsche Bank and

UBS.

The issue at hand is whether the banks knowingly diverted their client orders to "dark pools",

which were subject to front-running and other forms of manipulation by HFT firms, and hence failed to obtain the best bid and ask prices for their clients.

We estimate the potential costs as 10% of estimated cash equities revenues derived from

dark pools and electronic trading, as in Figure 38 below.

Figure 38: European Banks: CSe litigation cost from HFT litigation in $ millions, unless otherwise stated Barclays Deutsche Bank UBS

2009-13 Equities revenues 11,548 13,018 20,247

% in cash 30% 30% 30%

Cash equities 3,464 3,905 6,074

% in dark pools and electronic 30% 30% 30%

Dark Pool and electronic 1,039 1,172 1,822

Penalties as a % of revenues 10% 10% 10%

Penalties (local m) 104 117 182

Penalties ($) 163 157 187


IDEAS ENGINE 22

European Banks

2. US mortgage issues ($12bn, 18% of total)

Whilst we are now several years on from the crisis and both European and US banks have

settled some of the costs, such as some of the FHFA costs, there are still several issues

outstanding based on our estimates. We have made potential litigation cost estimates by

plaintiff for the European banks, and summarise them in the table below.

Figure 39: US mortgage-related matters - CSe potential future litigation costs in $ millions, unless otherwise stated

HSBC RBS BARC DBK UBS SG Total

FHFA $620 $3,200

Settled for

$280m

Settled for

$1.9bn

Settled for

$885m

Settled for

$122m $3,820

Other govt agencies (*) $352 $898 $622 $872 $892 $0 $3,637

Private sector $610 $670 $956 $1,792 $764 - $4,792

Total $1,582 $4,768 $1,578 $2,664 $1,656 $0 $12,249

Source: Company data, Credit Suisse estimates. (*) FDIC, NCUA, DoJ, State AG's

Claims from government regulators and bodies

Several regulators are involved here; the FHFA settlements have been the most visible, but

interestingly they may only be part of the civil penalties. There are also potential

litigation/settlement costs with the Department of Justice (DoJ), the National Credit Union

Administration (NCUA) and the FDIC in particular.

Figure 40 below summarises the settlements reached and key outstanding cases for the

major European and US banks. Overall, we estimate potential further settlements of $7.5bn

for the European IBs, on top of the $3.4bn already settled for, with RBS being the most

exposed, mainly from its outstanding FHFA litigation.

Figure 40: European IBs - US RMBS-related claims from govt regulators and bodies


FHFA NCUA FDIC DOJ State AG Settled CSe not settled Total

N (*) S(*) N S N S N S N S

BARC 2,700 280 555 125 0 73,000 324 173 280 622 902

DB 14,300 1,925 U (**) 145 U 300 84,000 373 199 2,070 872 2,942

HSBC 6,200 620 U 5.3 U 100 37,000 164 88 5 972 977

RBS 32,000 3,200 629 141 U 300 67,000 298 159 0 4,098 4,098

SOGN 1,300 122 0 0 0 122 0 122

UBS 6,300 885 1,100 247 U 100 80,000 356 190 885 892 1,777

Settled total 24,600 3,212 150 0 0 0 3,362 3,362

CSe not settled 3,820 514 800 1,516 808 0 7,457 7,457

Total 7,032 814 800 1,516 808 3,362 7,457 10,819

JPM 33,800 4,000 6,300 1,417 U 515.4 450,000 2,000 1,066 8,998 8,998

Source: Company data, US agencies, Credit Suisse estimates. (*) N: Notional amount of RMBS involved.

S: Potential settlement amount/estimate. (**) U: undisclosed

We highlight that the claims are not all of an identical nature, and vary from bank to bank:

The FHFA, FDIC and NCUA seek compensation on behalf of the purchasers of RMBS

securities (Fannie Mae, Freddie Mac, failed banks, credit unions, etc).

The DoJ and State AGs (Attorneys General) are not representing specific parties but are

seeking to prosecute alleged violations.

Fannie Mae and Freddie Mac have separate litigation (mortgage repurchase) claims from those

of the FHFA, which are covered in the next section.

IDEAS ENGINE 23

European Banks

We have estimated the potential costs for the European banks based on estimates of the

RMBS notionals in question, using previous settlements as a guide. As such we note that there could be specific circumstances which make the actual amounts larger or smaller –

e.g. not all RMBS securities would have suffered the same losses.

FHFA: Among the European banks, only HSBC and RBS have yet to settle. We have

estimated a settlement amount of 10% of the notional RMBS referred to in the FHFA

complaints, which is broadly in-line with previous settlements. We note that HSBC highlight in

their disclosures that the cost for them could be up to $1.6bn.

NCUA: For Barclays, UBS and RBS, we have pro-rated the JPM settlement based on the

notional RMBS referred to in the NUCA's complaints.

FDIC: The exact notionals are not disclosed here, with the complaints naming banks jointly.

There are several cases here, not all of the same magnitude, with the one involving Guaranty

Assurance the largest. Therefore we have assigned a possible loss based on our estimates of

each bank's degree of involvement.

DoJ: We have pro-rated the JPM settlement based on the total amount of private-label RMBS

the banks issued before the crisis.

State AGs: We assume this to be 50% of the DoJ amount, based on the JPM settlement.

Claims from the private sector

There are again several different types of parties involved here, from government-sponsored

entities such as Fannie Mae and Freddie Mac, to institutional investors such as pension

funds, and other banks. The cases generally involve alleged breaches of representations and

warranties which the banks made regarding the sale of both RMBS and mortgage loans,

and they have been required to repurchase the loans and/or indemnify investors for losses

suffered on these securities.

Overall, we estimate potential further charges of $4.8bn for the European banks in

mortgage re-purchase losses, as presented in Figure 42 below.

Figure 42: European IBs: CSe potential future costs from private sector RMBS

in $ millions, unless otherwise stated HSBC RBS BARC DBK UBS Total

Total RMBS & loans sold pre-crisis ($bn) 61 67 95.6 155 100.5 479.1

RMBS and loan notional released from claims ($bn) 30.5 33.5 47.8 65.4 62.3 239.5

RMBS and loan notional outstanding ($bn) 30.5 33.5 47.8 89.6 38.2 239.6

Repurchase settlement as % of notional 2% 2% 2% 2% 2% 2%

Repurchase loss ($m) 610 670 956 1,792 764 4,792


The JP Morgan example

Whilst there are a number of areas of litigation relating to the US mortgage market, JP

Morgan provides an interesting example of the potential costs involved for banks. The

chart below highlights the costs that JP Morgan has incurred.

Please also refer to our US colleagues' report, "JPM Settles with DOJ, Nearly

$10BN of Reserves Left; Maintain Outperform" 19 Nov 2013, for more details of

the JP Morgan settlement.

The following table shows the main elements of the settlements so far.

Figure 41: JPMorgan's mortgage litigation settlements so far

Plaintiff Settlement amount ($m)

FHFA 4,000

DoJ 2,000

NCUA 1,417

State Attorneys General 1,066

o.w. California 299

o.w. Delaware 20

o.w. Illinois 100

o.w. Commonwealth of Massachusetts 34

o.w. New York 613

FDIC 515

Subtotal 8,998

Borrower Relief 4000

Subtotal 12,998

Fannie and Freddie whole loan repurchase claims 1,100

Institutional investors 4,500

Total 18,598

Source: Company data, US DoJ

We can identify several categories here:

Government regulators and bodies, of which:

(1) The FHFA, acting as a conservator for Fannie Mae and Freddie Mac which

purchased large amounts of RMBS;

(2) The FDIC, acting as a conservator for failed banks;

(3) The NCUA, acting as a conservator for failed credit unions;

(4) Claims from the US DoJ and State Attorneys General;

Claims from private investors, including class action and individual purchaser litigation.

Borrower relief programs, which impact impairment charges.

We also note that JP Morgan highlight the remaining civil mortgage-related risks include

actions by monoline insurers, mortgage claims relating to disputed insurance on FHA

loans and some additional actions.

https://plus.credit-suisse.com/r/Ah8BB7

https://plus.credit-suisse.com/r/Ah8BB7

IDEAS ENGINE 24

European Banks

Our estimates are based on several previous settlements by US banks, which have typically

been about 2% of RMBS notional as illustrated in Figure 43 below. In these particular cases they have involved the law firm Gibbs and Bruns which has represented the claimants. In our

model, we have estimated how much outstanding RMBS notional each European bank has,

and assumed a settlement amount of 2% of this.

Figure 43: US banks - RMBS settlements with private investors as disclosed

in $ millions, unless otherwise stated Notional RMBS Settlement amount Settlement as % of notional

JPM 290,000 4,500 1.6%

BAC 424,000 8,500 2.0%

C 59,400 1,125 1.9%

Source: Gibbs and Bruns LLP

Note the notional RMBS amounts in the table above are much larger than the repurchase

claims which the banks disclose; this is because the settlements also release the banks from

all repurchase and servicing claims both asserted and which could have been asserted. US RMBS litigation: further details

Department of Justice (DoJ)

The DOJ has made civil claims under the Financial Institutions Reform, Recovery and

Enforcement Act (FIRREA), in addition to criminal investigations. This mechanism has a

broad scope of application and the standard of proof is lower than in a criminal prosecution.

National Credit Union Administration (NCUA)

The NCUA is the federal agency that regulates, charters and supervises federal credit

unions, and operates and manages the National Credit Union Share Insurance Fund

(NCUSIF). A credit union is a cooperative financial institution owned by the individual members. During the crisis, several large credit unions experienced significant losses on

RMBS securities that they had invested in, and this led to several insolvencies. The NCUA

is now looking to recoup some of the losses.

Federal Deposit Insurance Corporation (FDIC)

The FDIC as receiver for failed financial institutions may sue to maximise recoveries. As of

October 30, 2013, the FDIC has filed 18 lawsuits seeking damages for violations of federal

and state securities laws. Borrower Relief Programs

So far we have seen JP Morgan set aside $4bn to provide relief to homeowners, and in

2012 there was a 'national mortgage settlement' with 5 mortgage servicers. Note these

costs for the banks will generally be reported through the impairment line over time, rather

than in the cost base.

Government Sponsored Entities (GSEs)

These include Fannie Mae and Freddie Mac. When banks sold loan portfolios to the GSEs,

the transactions included an obligation for the seller to repurchase them in case of breach of

warranties made. Subsequently, some of the banks have entered settlements resolving such repurchase claims. The total outstanding repurchase claim by GSEs has reduced

substantially in comparison to year-ago levels (Figure 44).

Figure 44: GSEs Mortgage Repurchase request activity 2012-2013

in USD millions, unless otherwise stated Fannie Mae Freddie Mac

2012 2013 2012 2013

Beginning balance 10,400 16,013 2,716 3,028

Issuances 23,764 18,478 9,246 10,797

Successfully resolved -17,082 -32,231 -3,487 -5,638

Cancellations and other -1,069 -761 -5,447 -5,996

Ending balance 16,013 1,499 3,028 2,191

Source: Fannie Mae, Freddie Mac

So far, only the US banks have made settlements with respect to repurchase claims. We

view mortgage repurchase liability outstandings for each bank as providing some colour on

potential damages from the above lawsuits.

Figure 45: Settlements with GSEs by banks, resolving mortgage repurchase

obligations

in USD millions, unless otherwise stated

Fannie Mae Freddie Mac Total

BAC 11,600 1,350 12,950

JPM 670 480 1,150

C 968 395 1,363

WFC 591 869 1,460


IDEAS ENGINE 25

European Banks

3. Mis-sold product litigation ($14bn, 21% of total)

This is largely concerned with PPI and interest-rate hedging products (IRHP) sold in the UK.

For these two costs, the UK banks give disclosure on provisioning, and our analysis

suggests that the worst is potentially over, and while we expect substantial further costs, we

think these are largely covered by the existing provisions.

For PPI, we estimate an additional £450m of payments above existing provisions for

Barclays, HSBC, Lloyds and RBS; while for IRHP, we are not expecting significant additional costs over existing provisions.

Payment Protection Insurance (PPI)

Monthly payment data from the UK FCA have been broadly trending downwards, and we

expect this to tail off in the next few years. Assuming the linear decline presented in Figure

46 below, we estimate a total industry payout of £5.5bn from YE13; and assuming 90%

applies to Barclays, HSBC, Lloyds and RBS, this implies £5.0bn for the 4 banks.

Nevertheless, the banks have already taken significant provisions against this, and our

estimates do not imply significant additional charges (Figure 47 below). We have allocated

the additional charge estimates by bank, based on their existing stock of provisions.

Figure 46: UK PPI monthly payments - historical and CSe trend

in £ millions, unless otherwise stated

Source: UK FCA, Credit Suisse estimates

Figure 47: UK banks - CSe potential additional PPI costs

in £ millions, unless otherwise stated

£m Barclays HSBC Lloyds RBS Total

YE13 provisions 971 587 2,807 926 5,291

Provisions available for claims 825 499 2,386 787 4,497

Additional claims 83 50 239 79 450

Additional provisions (*) 97 59 281 93 529

Source: Credit Suisse estimates. (*) Assuming 85% of provisions taken used for claims payment, and the remaining

15% used for administrative expense.

In total we estimate the cost of PPI to the industry will be £19.2bn, which has been a

significant impediment to capital and equity build. The following charts further illustrate the

trends that the banks have been seeing.

Figure 48: Number of PPI complaints and

Average redress per complaint

(1H11-2H13)

Figure 49: Cumulative PPI pay-outs

(in £ millions)

Source: FCA Source: FCA

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15

CSe trend from Feb 14CSe trend from Feb 140

500

1,000

1,500

2,000

2,500

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1H11 2H11 1H12 2H12 1H13 2H13

Number of Complaints (lhs) Average redress per complaint (£-rhs)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

No

v-1

1

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

No

v-1

2

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

No

v-1

3

IDEAS ENGINE 26

European Banks

Interest Rate Hedging Products (IRHP)

At this point we are not expecting additional charges, on top of existing provisions for this

category of mis-selling litigation, as data from the UK FCA indicates to us that the banks' customer and redress determination process is approaching an end. The FCA has a review

process which is nearing completion, as illustrated below.

Figure 50: Redress determinations as % of customers who have opted in to the

review

Source: FCA

The IRHP review process in more detail

In early 2013, an arrangement was reached between the banks and the FCA regarding the

procedure to be followed in conducting the review of mis-sold interest rate hedging

products. The full review started in May 2013. There are essentially three stages before the customers’ claims are settled.

Sophistication assessment: Customers are classified into ‘Sophisticated’ and ‘Non-

sophisticated’ with the former being excluded from the scope of review, based on their ability

to understand the risk inherent in the hedges. In January 2014, this first stage of the process

was fully completed. Among the customers classified as ‘Non-sophisticated’, some of them

are automatically included in the review while others classified as ‘Category B’ are invited to

opt-in. The overall customer opt-in rate was 85% as of April 2014.

Compliance assessment: The sales are reviewed for compliance with regulatory

requirements. Those found to be non-compliant proceed to the redress phase. The overall rate

of non-compliant sales as of April 2014 was 93%. Of the total customers who have opted in,

the compliance assessment has been completed for 94% of them as of April 2013.

Redress determination and final settlement: The redress amount is determined

based on what is fair and reasonable in the circumstances. The redress offer can include:

(i) Basic redress: The difference between actual payments made on the IRHP and those that

the customer would have made if the breaches of relevant regulatory requirements had

not occurred;

(ii) Interest: the opportunity cost of being deprived of money (8%);

(iii) Consequential losses such as loss of profits, bank charges, certain legal expenses etc.

The FCA has reported that “around 13,000 customers (80%) have already received a redress

determination” (note this includes compliant and non-compliant sales as well where no redress

was due).

One caveat: We acknowledge that the banks may not have made provisions for

consequential losses that may arise out of IRHP claims as they are difficult to estimate. However, we expect customers to avoid claiming such losses, because these claims take

longer to review and also the onus is on them to prove that the ‘legal tests’ are met. Further,

when calculating interest on redress, customers will be typically offered 8% simple interest

on top of redress payments, which is not offered on consequential loss.

Figure 51: % of sales at each stage of

review, April 2014 Figure 52: Completion rate of reviews for

opt-in customers, April 2014

Source: FCA Source: FCA

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14

Barclays HSBC Lloyds RBS

Barclays HSBC Lloyds RBS

Actual

Projected

0%

20%

40%

60%

80%

100%

RBS HSBC BARC LLOYDS Otherbanks

Total

Redress: Sales at redress offer and acceptance stage

Redress: Sales at redress determination stage

Compliance assessment

Customer opt in

Sophistication assessment

99% 96%

78%75%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

HSBC LLOY BARC RBS

IDEAS ENGINE 27

European Banks

4. Tax evasion litigation ($2.5bn, 4% of total)

These issues have become more prominent, with the US regulators appearing to take a

tougher stance. This introduces further uncertainties, even for banks which have previously

settled on related matters. To recall, several banks which previously settled with the US

authorities on a variety of issues had Deferred Prosecution Agreements (DPAs), which

cleared them of charges provided they met certain conditions over a certain period.

Nevertheless, recent comments by US authorities suggest a growing inclination towards seeking guilty pleas from banks. Beyond the immediate concerns about the implications of a

guilty plea, we also see implications for banks with existing DPAs from previous settlements.

Note that there are also costs for other regions outside of the US. The table below shows

our cost estimates.

Figure 53: European Banks – CSe potential costs from tax evasion litigation and US

embargo matters in local millions, unless otherwise stated Other shared issues

HSBC DBK UBS BAER BNP SCG CASA Total

($m)

US Embargo related matters $3,820 $424 - - $3,500 $700 $700 $5,324

Advising on tax evasion $704 - € 200 $852 € 216 $852


The main issue has centred on US investigations into allegations of Swiss banks helping

their US clients evade taxes. In August 2013, the US DoJ and the Swiss government

signed an agreement for a tax declaration programme, with a YE13 deadline. The banks are

divided into several categories:

Category 1: banks already under criminal investigation; this includes Julius Baer and HSBC

Private Bank;

Category 2: banks which know or suspect they have committed offences in the US, and are

seeking non-prosecution agreements;

Category 3: banks with US customers but which believe that they and their clients have

complied fully;

Category 4: banks with very limited exposure to foreign clients.

For the banks we cover, HSBC and Baer have been under investigation by the US

authorities since 2011. Hence, they have to continue with their separate programme with

the US DoJ, and not under the terms of the August 2013 agreement.

UBS settled with the US DoJ for $780m in 2009, which included an 18-month DPA which

expired with UBS deemed to have satisfied the terms. It has an outstanding case with the

German authorities, although this appears smaller in cost based on our estimates.

Of the open investigations, we estimate the following:

HSBC: US authorities are investigating HSBC Private Bank Suisse SA and other HSBC

companies, including one in India. We have estimated the total litigation cost to be three times

the provision made within the private bank (GPB) in 2013 ($352m). There is an extra

complication, in that should HSBC plead guilty in this case, it could violate the terms of a

previous DPA over Mexican money-laundering allegations. We discuss this in the next section.

UBS: Press reports (Bloomberg, Reuters, Feb 2014) have suggested UBS is prepared to pay

€200m to German authorities resolving the investigations on possible assisted tax evasion. We

have assumed a €200m cost for the group.

Julius Baer: Company consensus has been for a cost of CHF400m. We now assume a

potential cost of CHF750m, reflecting the increasing regulatory demands.

IDEAS ENGINE 28

European Banks

5. US embargo matters ($7bn, 11% of total)

Several banks remain under probes by US regulators (the main one is the Office of Foreign

Assets Control, OFAC) regarding alleged failures to comply with anti-money laundering laws

(AML) and violating sanctions imposed on certain countries such as Iran. There have been

several settlements in recent years (Figure 54), although it appears that the US authorities

are looking for larger penalties now than in the past.

Figure 54: AML and US embargo-related settlements in $ millions, unless otherwise stated Settlement Amount Year of settlement

HSBC 1,910 2012

ING 619 2012

Standard Chartered 667 2012

RBS/ABN Amro 500/100 2010/2013

Barclays 298 2010

Lloyds 567 2009

Source: Company data, US DoJ

BNP: The group made a $1.1bn provision in 2013, but since then recent press reports (eg

WSJ, 30 May 2014) have suggested that the US authorities are seeking over $10bn along

with the bank pleading guilty to criminal charges. We have an estimated $3.5bn cost at this

stage. The group has commented that the cost could be significantly higher than the

provision.

DB: The bank has received requests for information from various regulatory agencies in

connection with the processing of payment orders denominated in US dollars involving

countries that are subject to US embargo laws. Separately, the bank is also being probed by

Dubai Financial Services Authority regarding possible violations of anti-money laundering and

due-diligence procedure. Nevertheless, as we have not seen any further material development

since we last published our litigation analysis in February 2013, our estimate for the potential

litigation cost from US embargo-related matters remains the same for DB at $424m.

CAGR / SOGN: In the absence of any further information, we have assumed potential

litigation costs of €525m for each bank, representing 20% of the total cost we have assumed

for BNP (SocGen has said that its involvement in such activities was much less than other

banks).

HSBC: We estimate $1.9bn of additional costs arising from a potential breach of the existing

DPA. As part of its settlement with the US authorities over money-laundering charges, HSBC

entered into a 5-year DPA on 1 July 2013. If HSBC fulfills the terms of the DPA, the DoJ

charges against those entities will be dismissed at the end of the 5-year period. However, the

DoJ may prosecute HSBC Holdings or HSBC Bank USA if either breaches the terms of the

DPA. One condition is that HSBC not break any federal law, but there is a risk that this might

be deemed to have been breached as a result of the Swiss tax evasion investigations.

6. Mis-representation of financial statements litigation

($4bn, 6% of total)

This litigation item stems from allegations of false or misleading information in banks'

financial statements. We keep the method used in our 2013 report. First, we think the following three areas most expose a bank to such allegations.

'Toxic asset' exposures, potentially including RMBS, CMBS, Monoline exposures, Leveraged

Finance exposures, CDOs, CLOs and comparable structured derivatives;

M&A undertaken; we analyse the amount since 2008; and

Amount of equity raised since 2007.

RBS in particular has faced allegations over its £12bn rights issue in 2008, shortly after

which the shares declined significantly in value, resulting in government intervention. Several

shareholders have joined together initiating a group action against the bank alleging that

there were untrue and misleading statements in the prospectus issued for the rights issue.

Recent press reports (eg The Times, May 2014) have suggested that the legal claims made

so far could be close to £7bn.

Figure 55 on the next page summarises our estimates for the sector. We assume a total

cost for each item, and assign this to each bank pro-rata.

For credit market exposure-related litigation we have assumed a potential litigation cost of

$1.0bn;

For legal issues regarding misrepresentations made with respect to entities which have been

acquired, we estimate a potential $500m sector litigation cost.

For the sector, we estimate a potential total litigation cost related to capital raisings of

$2.5bn.

IDEAS ENGINE 29

European Banks

Figure 55: European banks: CSe estimated potential litigation costs due to alleged

mis-representations in financial statements in $ millions, unless otherwise stated HSBC LBG RBS BARC DBK UBS BNP* SG* CASA* Total

2008 Toxic asset

exposure 119,535 107,705 235,516 59,075 145,564 104,124 19,733 54,833 48,337 894,423

% of total toxic

assets 13% 12% 26% 7% 16% 12% 2% 6% 5% 100%

Toxic assets

litigation losses $134 $120 $263 $66 $163 $116 $22 $61 $54 $1,000

M&A related

exposure NA

€

850,000

€

666,817 NA NA NA NA NA NA

€

1,516,817

% of total M&A

exposure NA 56% 44% NA NA NA NA NA NA 100%

M&A litigation

losses NA $280 $220 NA NA NA NA NA NA $500

Capital raised

since FY 2007 € 12,994 € 38,027 € 66,742

€

15,533 € 12,400 € 37,998 € 4,300

€

10,300 € 5,900 € 204,194

% of total capital

raised 6% 19% 33% 8% 6% 19% 2% 5% 3% 100%

Capital raising

litigation losses $159 $466 $817 $190 $152 $465 $53 $126 $72 $2,500

Total litigation

losses $293 $866 $1,300 $256 $315 $582 $75 $187 $126 $4,000

Source: Company data, Credit Suisse estimates. (*) Given limited disclosure in 2007 we have used 2008 figures

7. Company-specific cases ($7bn, 10% of total)

Barclays

Devonshire Trust: Barclays has appealed a court ruling from September 2011 approving that

the early termination of a swap deal by Devonshire Trust was correct. If the appeal is

unsuccessful, Barclays has indicated a potential loss of $500m. Barclays has not given further

details; we have assumed a 30% probability of a successful appeal by Barclays, giving an

estimated value for potential litigation losses of $350m from this item.

Lehman Brothers: Barclays has reported pending litigation relating to the Lehman Brothers

takeover approved by the courts in September 2008. The pending legal risks relate to assets

which have not been received yet by Barclays that had been included in the group accounts.

Barclays has indicated a $6bn loss in the worst case, or a $1.6bn recovery in the best case.

We have assumed a 25% chance of the worst or best case happening, and a 50% chance of

no gain/loss either way.

BDC Finance LLC: In 2008, BDC Finance LLC filed a complaint alleging that Barclays

defaulted on a total return swap and failed to transfer $40m of collateral demanded by BDC.

BDC sought damages totaling $297m plus attorneys' fees, expenses, and prejudgment

interest. In October 2013, the Appellate Division of the NY Supreme Court found Barclays

liable for breach of contract and hence reversed an earlier court ruling, granting BDC’s motion

for a pretrial ruling. However, the appellate division has not ruled on the amount of damages

yet.

Agreements with Qatar Holding LLC: In September 2013, the FCA issued a warning

notice to Barclays alleging that the while Barclays disclosed the existence of advisory service

agreements with Qatar Holding LLC in 2008, it did not disclose enough details including the

payment of £322m that was payable over a period of 5 years under the agreement.

Subsequently, the regulator issued a fine of £50m. Barclays is currently contesting the

findings.

Deutsche Bank

Hydro dispute: Deutsche Bank is involved in legal proceedings with two Italian companies,

BEG SpA and Hydro Srl over an Albanian hydropower project, the dispute centering around its

obligation to fund construction of the project in full. Two separate arbitrations ("Rome 1" and

"Rome 2") awarded a total of €426m in damages against Deutsche Bank, which commenced

a new arbitration before the ICC tribunal in Paris seeking recovery of the sums. We assume a

50% recovery and hence an overall loss of €213m.

CO2 emission case: In December 2012, Deutsche Bank's offices in Germany were

searched for evidence on tax evasion allegations related to trading of CO2 emission

certificates. This investigation began in the spring of 2010 and the false VAT reclaim, based

on CO2 derivative trading activities, was voluntarily adjusted for the unjustified claims. Although

Deutsche Bank took a P&L charge of €310m in Q3 2011 in relation to the unjustified VAT

reclaim, we assume additional fines raised by regulators as a result of the ongoing

investigation. We estimate this at €200m.

IDEAS ENGINE 30

European Banks

UBS

Puerto Rico: UBS faces claims from several investors and regulatory inquiries following the

price decline of Puerto Rico municipal bonds. UBS has reported that in aggregate damages

claimed by clients in Puerto Rico who own those securities exceeds $300m. Separately, the

Employee Retirement System of the Commonwealth of Puerto Rico filed a derivative action

against over 40 defendants including UBS seeking damages of over $800m. Assuming only a

portion of the claimed damage is settled, we estimate $200m of legal damages

Banco UBS Pactual tax indemnity: UBS has estimated BRL 2.5bn ($1.1bn) of contractual

indemnification claims from BTG investments following the sale of UBS Pactual SA to the

company in 2009. Assuming 30% of total claims materialise, we estimate a litigation cost of

$339mn.

RBS

Madoff: In December 2010, Irving Picard, Madoff trustee, filed a claw-back claim against

RBS, seeking to recover $238m. In October 2011, a further claim, for $21.8m, was filed in

October 2011.

Technology incident: RBS has agreed to reimburse customers who suffered due to a

technology incident that happened in June 2012, which delayed the processing of certain

customer accounts and payments. In this regard, RBS has made a provision of £175m in

2012 which we treat as a reasonable estimate of litigation loss.

HSBC

Jaffe securities class-action: In 2002, a class-action lawsuit was filed against Household

International, a unit of HSBC, alleging that the company and certain former officers gave false

and misleading statements about its consumer lending operations. In October 2013, the

District court issued a partial final judgment of $2.46bn against the HSBC unit. HSBC has

said it believes it has a strong case and has made an appeal. The group says that in the case

of rejection by the Appeal Court, the final loss could range from relatively insignificant to "up to

or exceeding US$3.5bn". We assume $2.46bn, the amount of the partial final judgement.

HSBC Bank Brasil S.A.: HSBC Brazil is one among several banks in Brazil facing lawsuits by

savings account holders filed during the late 1980s and early 1990s. Plaintiffs allege they

suffered losses as the savings account balances were adjusted by a different price index than

originally agreed upon. The Supreme Court is reviewing the constitutionality of the changes

resulting from the economic plans that were implemented during that period. Its final judgment

will set the precedent for the cases pending against the banks in the lower court. HSBC has

reported a range of potential losses, from insignificant to up to $600m. We assume a potential

litigation cost of $300m.

Brazil labour claims: HSBC made a $500m provision to deal with labour and overtime

litigation claims brought by past employees against the banks' operations in Brazil, and we

treat this as a reasonable estimate of the litigation loss.

BNP

Algerian trade finance: Legal action has been filed by Algerian regulators against BNP and

other Algerian or international banks for administrative errors in processing international trade

finance applications. Upheld claims against BNP total €52m. We assume a potential litigation

loss of €26m relating to this action.

SocGen

Algerian trade finance: Legal action has been filed by Algerian regulators against Societe

Generale regarding the processing of trade finance applications in Algeria. Incorporating

pending legal claims of €98m and a settlement ratio of 50% (with an equal probability of

success absent other information), we estimate potential legal costs of €49m on this action.

Goldas: Since 2003, the bank has had gold consignment contracts with the Turkish Goldas

Group. In 2008, Goldas failed to deliver gold worth €466m. In order to protect its interest,

Societe General brought civil claims against Goldas to recover the financial loss. Assuming a

recovery of 50% of the loss by seizing the remaining assets of Goldas, we estimate the bank

faces potential losses of €233m.

Credit Agricole

IFI Dapta Mallinjoud Group: The liquidator of the IFI Dapta Mallinjoud Group filed claims

against entities of CA SA alleging violations in arranging and financing the takeover of the

Pinault Group's furniture business by IFI Group. The first court ruling required the entities of

CASA to pay €8m in total but the liquidator is appealing against the decision. Absent of a

ruling on the latest appeal, we incorporate the most recent court ruling and hence a potential

litigation loss of €8m. The case has been adjourned until 17 June 2014 for closure and 9

September 2014 for hearings.

CIE Case: In March 2008, France's Competition Council accused LCL and Credit Agricole,

among other banks, of colluding to implement and apply interchange fees for cashing

cheques, since the passage of the Cheque Image Exchange system (between 2002 and

2007) and thus, causing damage to the economy. Subsequently, LCL and Credit Agricole

were sentenced to pay €20.7m and €82.1n for the Cheque Image Exchange fee (CEIC) and

€0.2m and €0.8m for the cancellation of wrongly cleared transactions. However, in February

2012, the court overruled the decision and the French Competition Authority has now filed an

appeal against the court’s decision. Assuming the regulator is successful in its appeal, we

estimate a potential cost of €82.9m for Credit Agricole.

IDEAS ENGINE 31

European Banks

Appendix 1—Summary of outstanding litigation

matters

In this section, we provide an overview of existing litigation that will likely constrain

profitability levels of the European banks with investment bank activities over the coming years. This report focuses only on litigation issues of which banks, regulators, clients or

investors have been made aware. Hence we only consider litigation matters if:

Litigation risks were outlined by banks in their financial reports or separate press releases;

Regulators/ authority bodies started or finished investigations related to a specific litigation

issue;

If banks were named as defendants in lawsuits regarding certain legal issues.

Three main areas of pending litigations shared by all European IBs are: Investigations over alleged benchmark setting and market manipulation;

Mortgage-related claims stemming from various business activities concerning US mortgage

loans; and

Alleged failures in various manners to comply with legal frameworks mostly related to sale of

financial products or other financial services provided.

On top of these shared litigation risks, European IBs face individual legal risks which are

covered in this report on a stock-by-stock basis.

Rules changing

Legal claims from customers brought against banks are also rising due to a more customer-

friendly regulatory and legal framework. Definitions of “unsophisticated customers” are

broadening and therefore requirements to advise clients and for related documentation are

constantly increasing for banks. Furthermore, the interpretation of existing laws is changing

as courts are tending to apply a more client-friendly approach, resulting in rising legal claims

and an increased need for banks to review their legal compliance. EU regulations such as MiFID, UCITS and PRIPS are designed to broaden and protect customer rights and

therefore raise the legal hurdle for banks in order to sell products or provide financial

services to their clients.

The legal process

In order to categorise existing litigation risks, we outline the different groups of potential

opponents in a legal dispute:

Regulators or other authority bodies could take legal action against banks in various ways.

Recipients of financial products or services could file a lawsuit against banks.

Third parties could have been negatively impacted by illegal actions undertaken by banks and

therefore raise legal claims against financial institutions.

Different legal opponents can ask for the permission to sue a bank as a group and file class-

action suits against them.

We also have to differentiate between the different forms of litigation risk representing a

potential future liability for a bank. Actions undertaken by regulatory or authority bodies could

potentially lead to:

Fines for the banks combined with regulatory requirements to avoid similar incidents in the

future; or

Punitive damages designed to deter culprits and competitors from repetition due to their much

higher scale. Fines charged might also include compensation for any affected victims.

Claims brought against banks by other groups of interest could include: Compensation payments for losses inherited;

Repurchase demands for mis-sold or mis-represented securities;

Other agreements to compensate for any monetary losses or other disadvantages incurred.

Lastly, to make assumptions on potential losses stemming from pending litigations, we need

to consider all circumstances. Understanding the reasoning, the targets and the leverage of

legal opponents is key in order to estimate potential outcomes of such disputes. Due to

globally stretched fiscal budgets and unprecedented financial aid provided by governments during the financial crisis, national regulators/authorities have been raising penalty charges

for financial institutions if they fail to comply with the legal framework. Moreover, regulators

could withdraw a banking licence if banks are not willing to pay charges or to redress

customers. This relative weakness for financial institutions compared with the authorities is

elevated if foreign regulators are targeting their cross-border subsidiaries. In contrast, banks

might have certain incentives to quickly settle individual legal disputes with clients/investors to avoid large class-action suits which could represent a material risk for banks and usually

lead to much longer trials and therefore drive litigation-related costs even higher.

The table below summarises ongoing litigation risks shared between European banks

covered by this report and categorises them by litigation issue, legal opponents and potential

future obligations arising from the litigation proceedings.

IDEAS ENGINE 32

European Banks

Figure 56: European banks: shared litigation issues

Litigation

issues

General description

of allegations Legal opponents

Potential

future

obligations

Affected

European

IBs

LIBOR/TIBOR/

EURIBOR

manipulation

- falsely submitted rates to

the rate-setting panels in

order to manipulate them

- SEC, DoJ, CFTC,

FCA, FINMA, FDIC,

GSEs, EU antitrust

regulator

- fine charged by

regulators BARC,

HSBC, RBS,

LBG, DBK,

UBS, BNP,

SG, CASA

- investors of

securities pegged to

one of these interest

rates

- compensation

payment for

incurred losses

FX

manipulation

- manipulating FX

benchmark in London by

colluding with the

counterparts

SEC, DoJ, CFTC,

FCA, BoE, FINMA,

FSB, BaFin, WEKO

and EU antitrust

regulator

- fine charged by

regulators

BARC, BNP,

DBK, HSBC,

RBS, UBS - class action lawsuits

by individual investors,

pension funds, asset

managers and other

institutional investors

- compensation

payments

Other market

manipulation

- Banks manipulating

ISDAfix, CDS market,

Commodity prices and

HFT

CFTC, BaFin, FCA,

US state Attorney

Generals and

European Commission

- fine charged by

regulators

BARC, BNP,

DBK, HSBC,

RBS, UBS,

SG

Mis-sold

products, like:

Interest Rate

Hedging

Products

PPI

Life insurance

Card Protection

plan policies

- misleading information in

security registration

documents

- insufficiently advising on

product-related risks

- mis-pricing and illegal

selling practices

- any purchaser/

holder of

concerned products

- compensation

payment/ redress

and/or

- claim to

repurchase

securities

BARC,

HSBC, RBS,

LBG

- national regulators - potential fine for

mis-selling

Know Your

Customer

Principle

- engaged in business with

Madoff entities despite

knowing/should have

known about fraudulent

scheme

- individual investors

- liquidators

- fund of funds

- fund trustees

- compensation

payments

- clawback claims

by liquidators

BARC,

HSBC, RBS,

DBK, UBS,

BNP, BAER

US Anti Money

Laundering

matters

+

US embargo-

related matters

- failure to comply with US

AML laws

- processing $ transactions

via US banks for parties

from countries subject to

US embargo

- US authorities - penalty charge

by US regulators

HSBC, RBS,

DBK, UBS,

BNP, SG,

CASA

Advising on

tax evasion

- Banks

advising/supporting clients

in order to avoid taxation

- different national

authorities

- fines charged

by different

authorities

BARC,

HSBC, UBS,

BAER, SG,

CASA

Mortgage-

related matters

- fraudulent business

practices regarding

mortgage- related

business units

- US regulators

- potential fine for

illegal business

methods

- obligation to

adjust business

practices

BARC,

HSBC, RBS,

DBK, UBS,

SG

- breaches of

representations and

warranties related to the

sale/ underwriting/

securitisation/ sponsoring

of mortgage loans or

RMBS

- FHFA (GSEs)/ FHA

- compensation

payment and/or

- claim to

repurchase RMBS

BARC,

HSBC, RBS,

DBK, UBS,

SG

HSBC

- breaches of

representations and

warranties related to the

sale/ underwriting/

securitisation/ sponsoring

of mortgage loans or

RMBS

- investigation of

residential mortgage

foreclosure practices

- RMBS insurer

- compensation

payment

- loss sharing

agreement

- Trustees of private

label RMBS

- payment to the

covered pool

- claim to

repurchase RMBS

- purchasers of RMBS

or

mortgage loans

- compensation

payment

- claim to

repurchase loans/

RMBS

- national regulators

(FED+OOC)

- tenants

- fine which might

include

compensation

payments for

affected

homeowners

Alleged mis-

representations

- mis-representing values

of assets/liabilities in

financial statements

- mis-leading information

- individual investors

- investigations by

national regulators

- compensation

payments for

losses incurred

due to incorrect

financial

reportings

BARC,

HSBC, RBS,

LBG, DBK,

UBS, BNP,

SG, CASA

Source: Company data, Credit Suisse research

IDEAS ENGINE 33

European Banks

Appendix 2—Description of each issue

LIBOR

LIBOR stands for London Interbank Offered Rate and is produced for 10 currencies with 15

maturities quoted every business day, generating 150 rates per day. Banks covered by this

report, as members of rate-setting panels relating to certain currencies, have been

investigated by US, British, European and other national regulators for allegedly manipulating

the rate setting by submitting wrong or colluded rates. Every contributor bank regarding a

certain currency is asked to submit a rate based on the bank’s perception of the lowest

interest rate for which the bank currently could obtain funding in reasonable market size for the concerned maturity. In this respect, two different motivations for rate manipulation have

to be considered.

Starting in 2005, traders from several banks allegedly tried to influence the rate setting

procedure by submitting colluded rates to influence specific interest rates by a few basis

points – although usually not more than 1 basis point. Derivatives traders from the banks

asked their internal bankers responsible for the rates submission to submit rates which would benefit their derivatives positions or current trading positions of clients. Therefore,

strategy rates were influenced in both directions, driven by collusion between the panel

members.

In contrast with the first motivation to manipulate rates, some banks also allegedly submitted

lower rates than justified to manage their reputation. By submitting lower interbank rates,

banks were trying to improve perceptions of other banks and clients with regards to their refinancing abilities. This strategy is called “low balling” as senior managers were requiring

internal rate submitters to submit lower rates to prove their unchanged access to the

interbank market.

FX

The issue revolves around the manipulation of the WM/Reuters exchange rates that are widely used by various parties, including equity and bond index compilers, corporates, and

customers executing contracts (such as financial derivatives settlement) in different

currencies. WM/Reuters publishes closing and intraday spot rates for 160 currencies on an

hourly basis (of these, there are 21 trade currencies for which half-hourly rates are

published). These rates are the median of the trades executed during a 1-minute window –

30 seconds before to 30 seconds after the fix. The rates fixed at 4pm UK time are called the Closing Spot rates.

It is alleged that a handful of traders were able to make a sizeable impact on the currency

market as they were front-running client orders and executing the trades before and during

the 60-second windows when the benchmark rates are set such that it was beneficial to

them. This was possible as they were able to collude with their counterparts by conferring in

electronic chatrooms. Subsequently, the transcripts of these electronic chatrooms have

become the centre of the investigation into the manipulation of the FX market.

Regulators across the globe, including the DoJ, FCA, BoE, FINMA and FSB are probing

several banks, including European banks such as BARC, DB, RBS, UBS, HSBC and BNP.

Various banks have suspended or dismissed traders following internal investigations and are

also cooperating with requests for information from the regulators. Other than the regulatory

probes, banks also face the risk of litigation loss emanating from the class-action lawsuits.

It is expected that the damage caused by FX manipulation could be much higher than that in the case of LIBOR manipulation. Unlike LIBOR, FX manipulation amounts to distortion of a

product that is actively traded in a liquid market and hence, it appears relatively easier to

establish that banks’ behaviour was anti-competitive. Also, FX rates are more widely used

and hence, any kind of manipulation could potentially attract lawsuits from a wide class of

investors and corporations. There are no settlements at this stage and it will take some time

before we get any further colour on the magnitude of potential damages that may be caused to the banks from this issue.

Other market manipulation

Other than LIBOR and FX manipulation, banks are being probed for other market

manipulation allegations including ISDAfix, CDS benchmarks, commodities pricing and high-

frequency trading.

Know Your Customer

The Know Your Customer (KYC) principle is a key element of today’s banking business. Financial institutions are required to undertake due diligence to ascertain relevant information

about their clients in order to do business with them. Many banks had business relations with

entities of the fraudulent Ponzi scheme built up by Bernard Madoff. Liquidators and funds

are suing these banks for inadequate due diligence undertaken by the banks to discover the

fraudulent nature of these entities. Additionally, banks are facing claw-back claims from

liquidators as they took out cash from funds as the system was collapsing.

With respect to the KYC principles, fines were and will be charged by the US for bypassing

existing US embargoes depending on the magnitude and duration of such business

practices followed by the banks. In this respect, we would assume all banks subject to such

an investigation to voluntarily cooperate with US authorities; otherwise US banking licences

would be at stake. Similarly, any alleged failures to comply with Anti Money Laundering laws

(AML) will be investigated by regulators and likely result in the banks being charged with a fine proportionate to the seriousness of the offence.

Banks have been constantly monitored for potential illegal activities relating to supporting

customers on tax evasion. If investigations uncover that banks consciously supported or

advised clients on how to avoid taxation, they will face penalty charges and are likely to

IDEAS ENGINE 34

European Banks

become subject to a deferred prosecution agreement. Additionally, banks have been

required to hand over data of customers suspected of tax evasion to revenue offices of different countries.

Mis-selling

Losses stemming from the mis-selling of products are linked to the losses the recipient of a

certain product or service incurred. Such losses would in theory relate to three different

types of mis-selling practices: most often, banks are sued for mis-representations within

sales or registration prospectuses of securities offered. Such mis-representations could be false or misleading statements and/or omissions of required content. Despite providing a

comprehensive and compliant prospectus, banks may also be named as defendants in court

cases alleging they failed to sufficiently advise clients on underlying product risks.

Customers therefore are claiming back losses incurred if banks failed to fulfil their duties as

financial advisors. Finally, banks became targets of investigations by local regulators

regarding illegal selling practices including wrong incentives for selling mis-priced products. The list below provides a short description of the legal issues surrounding the different mis-

sold products referred to in this report.

Interest Rate Hedging Products: Suitors claim redress for losses incurred from insufficient

advice on the purchase of interest rate derivatives. Such derivatives were sold as a protection

against rising interest rates to customers. As rates started to decline, customers were facing

losses on these positions but are claiming back losses as they allege banks failed to advise

them on the risks related to falling rates.

Auction Rate Securities: The SEC started investigations on ARS sold mainly to corporate

investors between 2003 and 2004. As interest rates for such securities were regularly reset

via Dutch auctions, purchasers were facing liquidity and credit risks if the auction failed. The

SEC later concluded that the sales prospectuses of such securities often failed to describe

these risks properly to potential buyers. Consequently, purchasers of ARS are demanding that

banks repurchase the securities at par value or compensate them for losses incurred.

American Depository Shares: Buyers of ADRs between 2006 and 2008 are claiming

losses incurred due to allegedly misleading statements and/or omissions in the registration

documents of the ADRs. Claimants argue that facts were consciously concealed to support the

placement process.

Payment Protection Insurance (PPI): Payment protection insurance is designed to cover

loan and debt repayments in the event a borrower is unable to meet his or her obligations.

They were often sold with a loan. Investigations by the FSA and OFT found that often these

contracts were mis-sold as the consumer either did not realise that he or she had taken out a

policy or that the policy was not properly described. Purchasers of PPI are claiming

compensation payments for the mis-selling or for the reason that insurance claims were put on

hold during judicial review.

Lender-placed insurance: Typically, US mortgage contracts include the obligation for the

borrower to ensure hazard insurance for the real estate for the time period of the insurance

contract. If the borrower fails to provide insurance cover for the whole contract period, the

mortgage lender will take out an insurance policy on the building in the name of the borrower.

The lender will pay the insurance premium upfront but charge the borrower for it. This selling

practice has been investigated by US regulators, as lender-placed insurance contracts were

often much more expensive than the prior contracts and most often in favour of the lender.

Additionally, mortgage lenders received financial incentives for taking out more expensive

insurance contracts.

German life insurance: German courts ruled that insurance companies have to compensate

claimants for the difference between the promised returns for life insurance contracts and the

truly achieved yields on these policies. Sellers of life insurance contracts therefore have to

compensate clients for the high promises made on future returns on their purchased life

insurance product.

Interest rate variation clauses on mortgage contracts: UK financial regulators concluded

that banks did not sufficiently explain specific risks to the mortgage borrower relating to an

interest rate variation clause. Provided with such a variation clause, borrowers are facing rising

interest obligations under certain circumstances which should have been previously explained.

If banks failed to provide sufficient advice to the customer on this particular risk, they have to

compensate clients for the disadvantages relating to the particular variation clause included in

their mortgage contracts.

UK Private Motor Insurance: The UK Competition Commission is investigating the price

setting for the private motor segment. Steady increases in premiums and, lately, the rise in

costs for repair and hire vehicles indicate that competition may be restricted or distorted.

However, any financial impact on the financial service industry is hard to quantify.

US mortgage-related issues

Litigation risks related to Residential Mortgages and Residential Mortgage Backed Securities

(RMBS) vary by the type of business and the role a bank had within the securitisation

process or related businesses. Figure 57 shows the entities currently involved in mortgage-

related litigation issues and the link between those entities.

Figure 57: Legal parties involved in Mortgage related litigation issues

Source: Credit Suisse research

IDEAS ENGINE 35

European Banks

Involved legal entities can be defined as follows:

Mortgage Borrower: Customer who takes out a mortgage loan and is contractually obliged to

make interest and redemption payments.

Mortgage Originator: Entity that is granting the loan to the borrower. The role of a mortgage

originator can be fulfilled by mortgage brokers, banks, thrifts or mortgage bankers.

RMBS Sponsors: Entity that organises a RMBS securitisation by purchasing and providing

mortgage loan portfolios. Sponsors therefore either directly purchase mortgage loans from

originators or from other sponsors.

RMBS Issuer/Depositor: The RMBS issuer is the originator of the RMBS by bundling and

securitising the loan portfolio. This pool of mortgage loans will be deposited in the

securitisation trust (SPV) by the RMBS depositor.

RMBS Underwriter: The underwriter prepares offering materials and offers the RMBS to

investors.

RMBS Investor: Purchaser or holder of issued RMBS securities.

RMBS Trustee: This is the fiduciary representing the rights of investors. Its obligations are to

disperse payments to investors, to oversee security of the RMBS trust and to collect data from

the mortgage servicer and issuer.

Mortgage Servicer: Mortgage servicer is working on behalf of the RMBS trustee on a fee

basis. The mortgage servicer has to keep the mortgage loans current. This includes the

monthly collection of payments, forwarding of interest and principal payments to the SPV and

also covering obligations related to taxation and insurance of the real estate.

RMBS Insurer: The RMBS Insurer guarantees an issuance and its cash flows. It has to fulfil

claims of purchasers of RMBS that it insured in the event of a default on the RMBS. Insurance

on a RMBS issuance on behalf of the RMBS issuer is paid as an upfront premium to the

insurer.

Government Sponsored Enterprise (GSEs): GSEs (formerly Fannie Mae and Freddie Mac)

are financial service corporations created by the US Congress to enhance availability of home

loans. GSEs are active as buyers of conforming mortgage loans (prime and subprime) and

were also purchasers of RMBS via the secondary market.

Special Purpose Vehicle (SPV): The SPV is a legal entity solely created to facilitate a

RMBS securitisation. It is an independent entity and its assets and liabilities are fully separated

from the parent company.

Independent of the roles different banks fulfilled, US regulators are investigating all

mortgage-related business units domiciled in the US for fraudulent business practices. Investigated banks are required to implement appropriate and compliant business practices

with all stages of the securitisation process under investigation.

Considering the different business roles a bank could have played, European IBs could

potentially face two main risks: (i) breaches of representations and warranties, and (ii)

residential mortgage foreclosure practices.

Mortgage servicers or trustees of private label RMBS are facing investigations regarding their mortgage foreclosure practices. Allegations have been raised that companies used

illegal means to force people out of their homes. Banks have been accused of providing

inaccurate foreclosure documents, failing to get a proper signature or notarisation on these

documents or failure in the foreclosure process and communication regarding the borrower. Banks have been charged fines by US regulators which also included amounts which will be

distributed to home-owners who were forced to leave their houses.

Parties in the chain of the RMBS securitisation process – originators, sponsors, issuers,

underwriters, depositors – are engaged in lawsuits against third parties or against each

other. The process of RMBS securitisation consists of a chain of transfers of mortgage loan

portfolios or RMBS securities. Most of those transfers involve representations and warranties made by the transferor to the next transferee within the securitisation process.

Representation and warranties concern the quality of the mortgage loans specifically and in

general their origination, servicing, securitisation or underwriting practices (depending on the

role of the individual bank within the process). A breach of such a representation and

warranty which does materially and adversely affect the value of the RMBS or loan portfolio

would require the transferor to cure the breach or to repurchase the affected mortgage loans or RMBS. Claimants in related lawsuits could further be government sponsored entities

(GSEs), RMBS insurers, RMBS Trustees or RMBS purchasers which could also claim

breach of certain representations and warranties along the RMBS securitisation process.

Misrepresentation of financial statements

Regulators worldwide are investigating the accounting principles applied during the financial crisis to value toxic credit market exposure. Such investigations concentrate on the valuation

methodology of asset-backed securities, CDOs, CLOs, mono-line exposures and other

related exposures. In addition, shareholders are suing banks to compensate for losses

incurred during the financial crisis which they argue related to the misrepresentation of

financial statements. According to claimants of similar class action suits, stock declines were

driven by misleading statements on asset values or risk controlling practices. Banks that raised capital during the financial crisis are facing relatively higher litigation risk in this

respect as claimants are arguing that they were consciously misled to ensure the success of

the capital placement at that time. Banks which have undertaken acquisitions during the

financial crisis might face higher legal claims from plaintiffs. Prosecutors allege that banks

failed to do comprehensive due diligence on such transactions to protect shareholder funds.

IDEAS ENGINE 36

European Banks

Appendix 3—Lessons drawn from the tobacco industry

Three litigation risk categories – manipulation of interbank offered rates (LIBOR, TIBOR,

EURIBOR), mortgage-related litigation and the misrepresentation of financial statements – involve class-action suits filed by affected claimants.

Class actions represent lawsuits brought by one or more plaintiffs on behalf of a larger group

sharing a similar legal claim against the same defendant. Class actions could be brought in

federal courts if claims are based on federal law or when cumulated claims exceed $5m.

Nationwide actions are only possible if a commonality of issues across state borders is

given.

The filing of class actions requires at least one named plaintiff on behalf of a proposed class

which consists of a group of individuals or other entities sharing a common claim against the

named defendant. After a claim is filed, claimants file a motion for class certification. This

often requires a determination of the size of the proposed class and whether this class

meets requirements relating to the commonality and validity of its claim against the

defendant.

If class action status is approved to plaintiffs, it is often required that a description of the

class action is sent to class members enabling parties to join the class or to opt out and to

proceed on their own. This procedure creates the risk for the defendant that many affected

parties join the class action and that claims posed against them rise rapidly. Therefore,

defendants often claim the dismissal of the class action due to the absence of a

commonality of claims made by plaintiffs.

Class actions due to potentially much higher claims attached and specific features in the

conduct of such cases require a different strategy from involved parties. In order to analyse

potential strategies and outcomes for the banking industry, it may be useful to look at the

class-action proceedings in the US tobacco industry and what lessons can be learned from

these events.

Lessons from US tobacco class actions

Since the 1950s, the US tobacco industry was sued for causing harm to health by individual plaintiffs. Until the mid-1990s, only one court case had been decided against a tobacco

company. Court rulings were essentially based on two rationales: (i) claimants failed to prove

that harm was caused by the consumption of cigarettes, and (ii) proving a wrongdoing by the

cigarette industry regarding the omission of warnings on the health risks related to the

tobacco consumption as no evidence had been detected so far.

In 1994, the first class action was filed by a group of 56 law firms which pooled their resources alleging American Tobacco Company failed to warn on the addictive properties of

cigarettes. This nationwide class action was ruled too unwieldy, reflecting difficulties to prove

a true commonality of represented claims.

Later in 1994, the state of Mississippi filed a lawsuit against the industry to recover its rising

medical costs relating to the treatment of smoking-related illnesses. This case represented two main issues for the tobacco industry. First, the claim was based on the assumption that

tobacco companies were reliable for smoking-related medical costs even if smokers knew

about potential negative implications on their wellbeing from smoking. And the claim was

also raised after a new law was established allowing states to sue manufacturers of allegedly

harmful products relying on statistical data rather than proving causation and damage. As a

result, most other states filed similar claims to recover medical costs.

Facing an unprecedented legal risk, the tobacco industry sought to reach an industry

settlement with the state and in addition trying to limit its future legal liabilities from other

class-action suits. As the granting of other legal immunities requires an approval by

Congress, state attorneys were not able to settle with the tobacco industry under the

proposed conditions. Due to the involvement, several new settlement proposals were

presented, leading to the final multi-state settlement agreement in 1998 which included $206bn of volume-adjusted payments due over 25 years and a restriction on future

advertising strategies.

However, this settlement still allowed customers or other affected parties to claim back

smoking-related injury costs although linked to tougher requirements relating to the proof of

damage and causation. Several settlements have been reached since then, with tobacco

firms paying several million dollars to groups of smokers. In 2000, a jury awarded 500,000 smokers $145bn in damages. However, all recent decisions remain subject to appeal.

We think the following lessons may be drawn from the above legal proceedings concerning

the US tobacco industry:

Class actions require the claimants to comprehensively prove incurred damages and their

causation by the named defendant;

Claimants need perseverance to pursue their claims owing to the following facts:

1. High chances for a rejection/ dismissal on the first instance requiring parties to specify

amounts claimed and sufficiently prove validity and commonality of claims;

2. Nationwide class actions are often referred to state courts which have favoured

defendants in the past.

Claims pursued by states or governmental bodies show a higher success rate for the claimant,

and settlements often cover a higher share of original claims.

Although class actions undertaken by the government might be a door opener for individual

claimants, it might limit future claims and tends to complicate the argumentation of future

plaintiffs.

Industry settlements are possible involving several parties as defendants, and each company’s

contribution to the final settlement could be determined by its market share or similar

measures.

IDEAS ENGINE 37

European Banks

Potential implications for current banking litigation risks

To incorporate these potential implications, our litigation loss estimates relating to class

action claims for the three risk categories - manipulation of interbank offered rates (LIBOR, TIBOR, EURIBOR), mortgage-related litigation and the misrepresentation of financial

statements – are based on the following:

Are government bodies or similar authorities involved in class actions pursued against banks?

What is the status quo of legal proceedings between banks and these national authority

bodies?

How difficult will it be for plaintiffs to specify losses incurred and prove their causation by

alleged banks?

How homogenous or dissimilar are claims made by complaints?

IDEAS ENGINE 38

European Banks

Companies Mentioned (Price as of 29-May-2014)

BBVA (BBVA.MC, €9.35) BNP Paribas (BNPP.PA, €52.65) Banco Popular (POP.MC, €5.13) Banco Sabadell (SABE.MC, €2.38) Bank of America Corp. (BAC.N, $15.15) Bank of Ireland (BKIR.I, €0.28) Bankia (BKIA.MC, €1.47) Barclays (BARC.L, 246.05p) CaixaBank (CABK.MC, €4.42) Citigroup Inc. (C.N, $47.28) Commerzbank (CBKG.F, €11.75) Credit Agricole SA (CAGR.PA, €11.89) DNB (DNB.OL, Nkr112.6) Danske Bank (DANSKE.CO, Dkr153.9) Deutsche Bank (DBKGn.F, €30.07) Erste Bank (ERST.VI, €25.2) Goldman Sachs Group, Inc. (GS.N, $160.74) HSBC Holdings (HSBA.L, 627.9p) Intesa Sanpaolo (ISP.MI, €2.44) JPMorgan Chase & Co. (JPM.N, $55.72) Julius Baer (BAER.VX, SFr40.55) Lloyds Banking Group (LLOY.L, 77.41p) Monte dei Paschi di Siena (BMPS.MI, €23.2) Morgan Stanley (MS.N, $31.13) Natixis (CNAT.PA, €4.99) Nordea Bank (NDA1V.HE, €10.84) Paris Orleans (PROR.PA, €17.85) Raiffeisen Bank International (RBIV.VI, €24.44) Royal Bank of Scotland (RBS.L, 346.3p) SEB (SEBa.ST, Skr89.0) Santander (SAN.MC, €7.48) Societe Generale (SOGN.PA, €43.2) Standard Chartered Plc (STAN.L, 1346.5p) Svenska Handelsbanken (SHBa.ST, Skr337.0) Swedbank (SWEDa.ST, Skr175.4) UBI Banca (UBI.MI, €6.6) UBS (UBSN.VX, SFr18.25) Unicredit (CRDI.MI, €6.32)

Disclosure Appendix

Important Global Disclosures

The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities 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 in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

IDEAS ENGINE 39

European Banks

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector , with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country o r regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10 -15% level in the Outperform and Underperform stock rating definitions, respec tively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 44% (54% banking clients)

Neutral/Hold* 40% (49% banking clients)

Underperform/Sell* 13% (46% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy o r sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

See the Companies Mentioned section for full company names

The subject company (BNPP.PA, BARC.L, BAC.N, C.N, CAGR.PA, DBKGn.F, GS.N, HSBA.L, JPM.N, BAER.VX, LLOY.L, RBS.L, SOGN.PA, UBSN.VX, STAN.L, CNAT.PA, MS.N, ERST.VI, RBIV.VI, CBKG.F, BBVA.MC, BKIA.MC, BKIR.I, BMPS.MI, SAN.MC, CABK.MC, CRDI.MI, DANSKE.CO, DNB.OL, ISP.MI, NDA1V.HE, POP.MC, SABE.MC, SEBa.ST, SHBa.ST, SWEDa.ST) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (BNPP.PA, BARC.L, BAC.N, C.N, CAGR.PA, DBKGn.F, GS.N, HSBA.L, JPM.N, LLOY.L, RBS.L, SOGN.PA, CNAT.PA, MS.N, RBIV.VI, CBKG.F, BBVA.MC, BKIA.MC, BKIR.I, SAN.MC, CABK.MC, CRDI.MI, DANSKE.CO, DNB.OL, ISP.MI, NDA1V.HE, POP.MC, SHBa.ST, SWEDa.ST) within the past 12 months.

Credit Suisse provided non-investment banking services to the subject company (BNPP.PA, BARC.L, BAC.N, C.N, CAGR.PA, DBKGn.F, GS.N, HSBA.L, JPM.N, BAER.VX, LLOY.L, RBS.L, SOGN.PA, UBSN.VX, STAN.L, CNAT.PA, MS.N, ERST.VI, CBKG.F, BBVA.MC, BKIA.MC, BKIR.I, BMPS.MI, SAN.MC, CABK.MC, CRDI.MI, DANSKE.CO, DNB.OL, ISP.MI, NDA1V.HE, POP.MC, SABE.MC, SEBa.ST, SHBa.ST, SWEDa.ST) within the past 12 months

IDEAS ENGINE 40

European Banks

Credit Suisse has managed or co-managed a public offering of securities for the subject company (BNPP.PA, BARC.L, C.N, CAGR.PA, DBKGn.F, GS.N, HSBA.L, JPM.N, RBS.L, SOGN.PA, CNAT.PA, MS.N, CBKG.F, BBVA.MC, BKIR.I, SAN.MC, CRDI.MI, DANSKE.CO, ISP.MI, NDA1V.HE, POP.MC, SHBa.ST, SWEDa.ST) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (BNPP.PA, BARC.L, BAC.N, C.N, CAGR.PA, DBKGn.F, GS.N, HSBA.L, JPM.N, LLOY.L, RBS.L, SOGN.PA, CNAT.PA, MS.N, RBIV.VI, CBKG.F, BBVA.MC, BKIA.MC, BKIR.I, SAN.MC, CABK.MC, CRDI.MI, DANSKE.CO, DNB.OL, ISP.MI, NDA1V.HE, POP.MC, SHBa.ST, SWEDa.ST) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (BNPP.PA, BARC.L, BAC.N, C.N, CAGR.PA, DBKGn.F, GS.N, HSBA.L, JPM.N, LLOY.L, RBS.L, SOGN.PA, STAN.L, CNAT.PA, MS.N, ERST.VI, RBIV.VI, PROR.PA, CBKG.F, BBVA.MC, BKIA.MC, BKIR.I, SAN.MC, CABK.MC, CRDI.MI, DANSKE.CO, DNB.OL, ISP.MI, NDA1V.HE, POP.MC, SHBa.ST, SWEDa.ST) within the next 3 months.

Credit Suisse has received compensation for products and services other than investment banking services from the subject company (BNPP.PA, BARC.L, BAC.N, C.N, CAGR.PA, DBKGn.F, GS.N, HSBA.L, JPM.N, BAER.VX, LLOY.L, RBS.L, SOGN.PA, UBSN.VX, STAN.L, CNAT.PA, MS.N, ERST.VI, CBKG.F, BBVA.MC, BKIA.MC, BKIR.I, BMPS.MI, SAN.MC, CABK.MC, CRDI.MI, DANSKE.CO, DNB.OL, ISP.MI, NDA1V.HE, POP.MC, SABE.MC, SEBa.ST, SHBa.ST, SWEDa.ST) within the past 12 months

As of the date of this report, Credit Suisse makes a market in the following subject companies (BAC.N, C.N, GS.N, JPM.N, MS.N).

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (BARC.L, DBKGn.F, HSBA.L, BAER.VX, UBSN.VX, STAN.L, UBI.MI).

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (BNPP.PA, BARC.L, BAC.N, C.N, CAGR.PA, DBKGn.F, GS.N, HSBA.L, JPM.N, BAER.VX, LLOY.L, RBS.L, SOGN.PA, UBSN.VX, STAN.L, CNAT.PA, MS.N, ERST.VI, RBIV.VI, PROR.PA, CBKG.F, BBVA.MC, BKIA.MC, BKIR.I, BMPS.MI, SAN.MC, CABK.MC, CRDI.MI, DANSKE.CO, DNB.OL, ISP.MI, NDA1V.HE, POP.MC, SABE.MC, SEBa.ST, SHBa.ST, SWEDa.ST, UBI.MI) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (BARC.L, HSBA.L).

The following disclosed European company/ies have estimates that comply with IFRS: (BNPP.PA, BARC.L, CAGR.PA, DBKGn.F, HSBA.L, LLOY.L, RBS.L, SOGN.PA, UBSN.VX, STAN.L, CNAT.PA, ERST.VI, CBKG.F, BBVA.MC, BKIR.I, BMPS.MI, SAN.MC, CRDI.MI, DANSKE.CO, DNB.OL, ISP.MI, POP.MC, SABE.MC, SEBa.ST, SHBa.ST, SWEDa.ST).

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (BNPP.PA, BARC.L, BAC.N, C.N, CAGR.PA, DBKGn.F, GS.N, HSBA.L, JPM.N, LLOY.L, RBS.L, SOGN.PA, STAN.L, CNAT.PA, MS.N, ERST.VI, RBIV.VI, CBKG.F, BBVA.MC, BKIA.MC, BKIR.I, BMPS.MI, SAN.MC, CABK.MC, CRDI.MI, DANSKE.CO, DNB.OL, ISP.MI, NDA1V.HE, POP.MC, SABE.MC, SHBa.ST, SWEDa.ST) within the past 3 years.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

CS may have issued a Trade Alert regarding this security. Trade Alerts are short term trading opportunities identified by an analyst on the basis of market events and catalysts, while stock ratings reflect an analyst's investment recommendations based on expected total return over a 12-month period relative to the relevant coverage universe. Because Trade Alerts and stock ratings reflect different assumptions and analytical methods, Trade Alerts may differ directionally from the analyst's stock rating.

The author(s) of this report maintains a CS Model Portfolio that he/she regularly adjusts. The security or securities discussed in this report may be a component of the CS Model Portfolio and subject to such adjustments (which, given the composition of the CS Model Portfolio as a whole, may differ from the recommendation in this report, as well as opportunities or strategies identified in Trading Alerts concerning the same security). The CS Model Portfolio and important disclosures about it are available at www.credit-suisse.com/ti.

IDEAS ENGINE 41

European Banks

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse Securities (Europe) Limited Amit Goel, CFA ; Carla Antunes-Silva ; David Da Wei Wong ; Gurjit Kambo, CFA ; Maxence Le Gouvello ; Mohamed Souidi

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

IDEAS ENGINE 42

European Banks

References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to 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 such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, having registered address at 990 Abdulrahim Place, 27 Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited (CIN no. U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Copyright © 2014 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

XX6230EU.docx

https://www.credit-suisse.com/who_we_are/en/

Documents

120.0 04 June 2014 European Banks - Reutersblogs.reuters.com/data-dive/files/2014/06/cs-report-euro-banks.pdf · European Banks . THEME. cost) The Ideas Engine series showcases Credit