Us banks regulation

Richard Ramsden Goldman Sachs & Co.

212-357-9981

[email protected] Phillips Goldman Sachs & Co.

202-637-3746

[email protected] Foran Goldman Sachs & Co.

212-855-9908

[email protected] Harris Goldman Sachs & Co.

212-855-7512

[email protected]

US Banks: Regulation

The Goldman Sachs Group, Inc.

May 2010

Large Cap: AttractiveRegionals: NeutralTrust Banks: NeutralConsumer Finance: Neutral

The Goldman Sachs Group, Inc. 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.

For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html.

Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Goldman Sachs Global Investment Research 2

Regulation

1. Stepping back – what’s really on the table–

First tenant: limitations of scope, which would restrict the activities of banks (ie

the Volcker rule, the Blanche Lincoln proposal)

–

Second tenant: alterations to existing practices and market structures (ie

the derivatives proposals, the consumer protection agency)

2. An off-setting force – credit and liquidity–

Must be weighed against credit availability and liquidity in secondary markets–

This may moderate some of the worst case scenarios (eg

momentum seems to be building to remove an outright prohibition on swaps dealing by banks )

Where we would position–

We believe big banks have lagged enough to justify the legislative risk–

Continue to favor JPM and BAC–

Exchanges (CME, ICE, NDAQ and NYX) should benefit from the move to central clearing

Overview of regulatory reform


The Senate’s proposal on one page

Derivatives Reform•

Bank Prohibition: No institution that receives federal support may be a (1) swap dealer or (2) “major swap participant”.

•

Clearing and Execution: Central clearing of standardized contracts and execution on exchange or alternative execution facility.

•

Capital and Margin: Prudential requirements for large market participants; higher capital for non-standardized contracts. Initial and variation margin required for all non-cleared contracts.

•

End-user exemption: Smaller users that hedge “commercial risk”

–

not financial risk—exempt from clearing, execution, and margin reqs.

•

Reporting: Real-time price reporting for centrally cleared contracts (even if end user is exempt); aggregated delayed reporting for non-

cleared swaps. Block trades subject to delayed reporting.

•

Position Limits: CFTC may impose position limits.

•

Coverage: Covers commodity, rates, securities, and FX swaps.

Consumer Financial Protection•

Bureau of Consumer Financial Protection: Housed within Federal Reserve, but director appointed by President, and Fed is

prohibited from intervening in Consumer Bureau actions.

•

Scope: Takes primary jurisdiction over consumer financial products for institutions with $10bn+ in total assets, and non-banks that deal in mortgages or are a large participant in other consumer markets. Does not regulate activities regulated by the SEC/CFTC.

•

No State Preemption: Federal rules would set floor for regulation, but state laws could supersede federal if stronger.

Systemic Risk Regulation•

Scope: Banks with $50bn+ assets; systemic important non-banks.

•

Prudential Requirements: Capital, leverage, liquidity requirements.

•

“Hotel California” Provision: BHCs

$50bn+ assets that took TARP capital deemed systemically important if it drops BHC status.

•

Volcker Rule: BHCs

may not engage in proprietary trading, may not sponsor or invest in hedge or private equity funds; systemically

important non-banks may still operate in these areas, but with increased prudential requirements.

•

Concentration limits: No financial company may exceed 10% of national financial liabilities through M&A.

Resolution Authority•

Process: Modeled on FDIC resolution process; FDIC may take control of institution, sell assets or transfer to bridge firm.

•

Creditor Protections: (1) panel of 3 bankruptcy judges must agree with Treasury that company is in “default or danger of default.”

(2) Creditors receive at least what they would in Chap. 7 bankruptcy.

•

Emergency Lending: Federal Reserve lending under Sec. 13 (3) limited to broadly available programs; FDIC may guarantee

bank/BHC obligations, but requires 2/3 support of council + Fed.

Bank Tax•

$50bn Fund: Financed through assessments on BHCs

$50bn+ in assets, and systemic non-bank firms. Raised over 5-10 yr period. Add’l

industry assessments if fund incurs losses.

•

Other tax proposals not included: President Obama’s “Financial Crisis Responsibility Fee”

(15bps non-deposit liability tax); Boxer-

Webb 50% bonus tax.


Summary of key proposals and potential impact to financial sub sectors

Area of reform What seems likely Points of greatest debate from hereBig

BanksRegional

BanksCredit Cards

Smid Brokers

Mkt Structure

Asset Mgrs

Derivatives Greater use of central clearing1. Section 106 - can banks own swaps dealers2. Margin requirements3. Central clearing vs. exchange trading

─ +

Volcker rule Less proprietary trading1. Sponsorship of hedge funds and private equity --i.e. can banks put HF and PE into asset mgmt divisions

─ +

Consumer Protection New Consumer Financial Protection Agency (CFPA)

1. Rule making authority: CFPA vs. Fed

2. National pre-emption vs. state by state lending laws

─ ─ ─

Bank tax & size limitations Some form of tax to fund any losses from TARP

1. Pre-funded money for any future crisis

2. Legislative restrictions on size of banks─

Resolution Authority Ability to wind down systemically important firms

1. Impact on credit markets including potential ratings agency actions ─

OVERALL RISK -->MOST

NEGATIVE RISK

Potential Sector Risk

LESS AT RISKPOTENTIAL

MODEST POSITIVES

Source: Goldman Sachs Research estimates.


The reform debate from here

Passes Financial Services Committee (Nov. 2009)

Banking Committee Markup (March 2010)

Ag. Committee Markup (April 2010)

Passes House Floor 223-202 (Dec. 2009)

Senate Floor (April/May 2010)

House-Senate Conference Committee

(May/June 2010)

Option 2: House Passage of Senate Bill

House Passage of Senate Bill (May/June 2010)

Option 1: Conference Committee

House Passage of Conf. Report (June 2010)

Senate Passage of Conf. Report (June 2010)

House Senate

Derivatives and prop trading


RAFSA has two important proposals that impact market structure companies


The Volcker Rule (Section 619 or Title VII)

Would prohibit certain types of high risk activity

Proposal could reduce overall trading activity, potentially lower market liquidity, and impact fees generated by exchanges in the transaction parts of their business

Creating a safer derivatives market: there are three tenets to this proposal:

Central clearing of OTC derivatives: all OTC products would be required to be centrally cleared with requisite initial margin requirements for all products

Exchange trading as a price transparency mechanism would be required

•

Can be exchange traded or traded on an alternative swap execution facility (ASEF)

Allow for some customized bilateral contracts. Exceptions are fairly well defined:

•

One counterparty is not a swap/security dealer or MSP (major swap participant), the product does not meet the eligibility requirements of a clearing house

•

Margin may be waived in certain circumstances if one party is not a swap/security dealer or MSP, is using the swap to hedge under GAAP, and is not predominantly engaged in financial activities


Market Structure & Exchange stocks appear well positioned to benefit


Difficult to see how exchange and clearing stocks are not incremental beneficiaries

CME: currently trades and clears 99% of U.S. futures products on interest rates

NDAQ: acquired the International Derivatives Clearing Group (IDCG) in 2009, which is the only market participant to have announced it has an interest rate swap clearing platform ready for clients to test

Dealers/Brokers have less directional authority to drive clearing strategy than they have had in the past few years

ICE Trust is the dominant provider of clearing services in CDS clearing in the U.S.

Dealers were able to secure 49% of net profits from ICE Trust to support that platform

NYSE – sold 49% stake in its U.S. options business to attract flow

Beyond clearing, there could be positive impacts on transactions and associated exchange traded product

Clearing tends to have a higher profit stickiness given underlying liquidity pool

Other market structure names may benefit: GFIG, BGCP, MKTX, NITE


Sizing the OTC markets: $604 tn notional and multiple the size of exchange markets


$0

$100

$200

$300

$400

$500

$600

$700

$800

1H98

2H98

1H99

2H99

1H00

2H00

1H01

2H01

1H02

2H02

1H03

2H03

1H04

2H04

1H05

2H05

1H06

2H06

1H07

2H07

1H08

2H08

1H09

Interest rate contracts Unallocated Credit default swaps

Foreign exchange contracts Commodity contracts Equity-linked contracts

72 80 81

OTC

not

iona

l am

ount

out

stan

ding

($, t

rillio

ns)

88 94 95 99 111 127 141169 197

220257 281 297

370414

516

596

684

592

604

Interest rate and F/X OTC markets are multiple of exchange peers437.2

6.6

48.867.1

5.8 0.3-

50

100

150

200

250

300

350

400

450

500

Interest Rate Equity Index F/X

6.5x

1.2x157x

11.9x

21.2x

0.6x4.5x 1.2x 2.8x 1.1x 1.0x

93.0x

45.0x

92.0x

0

10

20

30

40

50

60

70

80

90

100

Total FXForward

FX Swaps FXOptions

Total FRAs IRS IROptions

F/XFutures

RateFutures

EquityFutures

F/X OTC Interest Rate OTC Exchange Traded

•

OTC markets have grown at a 24% CAGR since 1998

•

Interest Rate swaps have grown the fastest at 26% and represent 72% of total

•

CDS swaps are now $25 tn

•

But exchange traded products turn over much more rapidly


CDS markets: $25 tn gross notional, but netting reduces risk roughly 90%


•

The CDS markets remain quite robust, with over $25 tn in gross exposure

•

With compression and tear-ups, the amount of net exposure is $2.4 tn

•

77% of CDS is dealer to dealer and is likely to move into the ICE Trust Clearing House

•

The average length of time to termination is 2.7 years

Dealer to Dealer

77%

Dealer to Client23%

$0

$5

$10

$15

$20

$25

$30

Gross Net

Index Single Name

$25.0 tn

$2.4 tn

90% Compression from Gross to Net

CDS exposure

$0

$2

$4

$6

$8

$10

$12

$14

$1620

10

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

0%

20%

40%

60%

80%

100%

120%Cumulative Single Name Notional Outstanding ($ tn) Cumulative Notional % Outstanding

Average Years to Sw ap Termination: 2.7 years


We estimate $75 bn in CDS initial margin requirements for U.S. companies


•

We estimate 40% of outstanding CDS contracts are in the U.S.

•

Initial margin requirements are likely to be 5%-10% of net notional

•

We estimate dealers will need to contribute close to $20 bn, and clients $55 bn when all contracts are loaded into ICE Trust

•

Today, there is $635 bn in net notional CDS in ICE Trust U.S. ($367 bn) and EU ($268 bn)

•

There is likely an additional $45 bn in initial margin required among U.S. firms

Dealer to Dealer Dealer to Client Client to Client TotalSingle Name 12,167 2,735 24 14,927Index 4,455 2,929 3 7,386Tranched 2,568 130 0 2,698Gross Exposure Outstanding 19,190 5,794 27 25,011

% of TotalSingle Name 49% 11% 0% 60%Index 18% 12% 0% 30%Tranched 10% 1% 0% 11%% of Total 77% 23% 0% 100%

Compression estimateSingle Name 95% 75% 75% 91%Index 95% 75% 75% 87%Tranched 95% 75% 75% 94%Estimated Compression 95% 75% 75% 90%

Net ExposureSingle Name 602 670 6 1,279Index 221 718 1 939Tranched 127 32 0 159Net Exposure Outstanding 950 1,420 7 2,377

U.S. estimated Exposure 40% 40% 40% 40%Net U.S. exposure (estimate) 380 568 3 951

Initial Margin required for U.S. firms (% of net, est) 5% 10% 10% 8%Initial Margin required for U.S. firms ($ bn, est) $19 $56 $0 $75

CDS Market Summary ($ in bn)

•

ICE has indicated it expects $80-$100 mn in CDS clearing revenue in 2010, we estimate it will at least double over the next 1-2 years

•

This revenue is split with participating dealers


Interest Rate Swaps: the upcoming $437 tn opportunity


•

35% of global interest rate swap products are U.S. based

•

More than three-quarters are interest rate swaps, plain vanilla and somewhat easy to standardize

•

Roughly 60% of product is dealer-to-dealer, with the remaining 40% up for client central clearing and thus impacted by U.S. regulatory changes

Interest Rate Swap Clearing Opportunity

Options9%

Eligible to clear by cpty and type

27%

Basis and X-currency

6%

Exotics10% Currently cleared

25%

Customer trades - focus on customer

clearing12%

FRAs 30 yr + eligibility via product set expansion

3%

Eligible w / smaller dealers - focus on

increased Sw apclear 8%

Backloading program to address

More bespoke structures w hose eligibility w ill require further product expansion

Interest Rate Swaps by Derivative Type: Total: $437 tn

Options11%

Interest rate sw aps78%

Forw ard rate agreements

11%

Interest Rate Swaps by Currency: Total $437 tn

Swedish krona1%

Sterling7%

CAD1%

Swiss franc1%

Other4%

Euro38%

US dollar35%

Yen13%


Client Clearing U.S. denominated swaps is the targeted Interest Rate product


•

The interest rate swap market is the focus of the next leg of clearing. It represents 72% of the global OTC market

Total Global Interest Rate Swap Market: $437 tn

Dealer to Client (25%): $109 tn

USD Swaps: (35%): $39 tn

•

Dealer to Dealer transactions (52%) are cleared at LCH SwapClear

•

The clearing opportunity lies in plain vanilla client transactions

•

The initial opportunity to clear will be in USD denominated swaps

•

However, their could emerge global solutions following a successful U.S. Launch


Could be up to $570 bn in IRS initial margin requirements needed for USD swaps


•

We estimate USD swaps account for 35% of total global swaps.

•

Initial margin requirements are likely to be 1%-5% of notional based on duration

•

We estimate clients may need to post up to $570 bn in initial margin on swap positions for USD swaps

•

The size of the client swap market may decline meaningfully with higher costs/margin

•

Today, there is a de minimis amount of margin collected on client swaps outside hedge fund clients

•

NDAQ and CME have announced they would offer an interest rate swap product for clients; LCH SwapClear has also launched a client product

•

NDAQ’s IDCG indicated it would charge $1/$100K of notional value cleared per contract

•

Average duration is 5-7 years for most plain vanilla swaps

DurationLess than 1

YearBetween 1-5

Years Over 5 Years Total

Total Interest Rate OTC Global Market ($ bn) 159,143 128,301 149,754 437,198 % of total 36% 29% 34% 100%

U.S. denominated swaps, % of total 35%U.S. denominated swaps, in $ bn 56,118 45,242 52,807 154,167 % of original interest rate swap notional value 35% 35% 35% 35%

Transaction TypeDealer-to-Dealer 60%Dealer-to-Client 25%Non-Clearable (bespoke, option, basis) 15%

Dealer-to-Client summary of notional exposure ($ bn) 14,029 11,311 13,202 38,542 % of original interest rate swap notional value 9% 9% 9% 9%

Estimated Compression (netting, tear-ups) 25%Net Exposure 10,522 8,483 9,901 28,906 % of original interest rate swap notional value 7% 7% 7% 7%

Initial Margin required for U.S. denominated Swaps (est) 1.0% 2.0% 3.0% 2.0%Initial Margin required for U.S. firms ($ bn, est) $105 $170 $297 $572

Interest Rate Margin Estimates for U.S. Clients ($ bn)


How we think about the interest rate swap clearing opportunity: up to $400 mn annually

•

The only part of the market up for competition is the dealer-to-client IRS market, about 25% of the total IRS market, or about $39 tn in notional

•

There is limited netting given client positions are bespoke

•

Potential revenue opportunity from clearing of $100-$400 mn over time, though this could take 4-7 years to achieve

Notes

Total Global Interest Rate Swap Notional Outstanding $437,198,000,000,000 $437 tn

U.S. Percentage of total 35%U.S. Dollar denominated IRS $154,167,000,000,000

Swap participant break-downDealer to Dealer - plain vanilla 60% $92,500,200,000,000 Already within LCH SwapClear Clearing mechanismDealer to Client - plain vanilla 25% $38,541,750,000,000 Target market opportunityOther (bespoke, option, basis, etc) 15% $23,125,050,000,000 Will require initial margin, not likely to be cleared

Dealer to Client Notional $38,541,750,000,000 This is the sector CME, NDAQ are pursuing

Number of 'one $ mn units' 38,541,750 Assumes full backloading, probably takes 4-7 years to reach this level

Potential Clearing Revenues Cost per million Potential revenue$2 $77,083,500$5 $192,708,750

$10 $385,417,500 This is IDCG's target pricing

SummaryInterest Rate Swap Clearing opportunity

Source: Goldman Sachs Research

Consumer protection


The CFPA is arguably the biggest concern but most has been accomplished via overdraft protection (Reg E) and credit card legislation (CARD Act)

Source: Company reports, Goldman Sachs Research

CARD Act ImpactReg E Impact

$BN Guidance Pre-tax Impact

2009 DSC %

PNC $115MM after-tax impact in 2010 (half year impact) 0.35 1.0 37%

USB $200MM-$300MM impact in 2010 0.25 1.0 26%

BAC about $2.0BN / quarter run rate vs $2.57BN currently 2.00 11.0 18%

KEY $50MM on an annualized basis 0.05 0.3 15%

STI reduction of 10-20% during the 2H of the year 0.13 0.8 15%

JPM $500MM +/- annualized after-tax impact 0.77 5.6 14%

WFC $500MM after-tax annualized impact 0.77 5.7 13%

FITB $20MM / quarter by 4Q09 0.08 0.6 13%

BBT $70-$80MM pre-tax annual impact 0.08 0.7 11%

FNFG $5-6MM on annualized basis 0.01 0.05 10%

RF $70MM pre-tax annual net impact 0.07 1.2 6%

16%Average

Reg E Impact

$BN Guidance EPS Impact

Norm EPS %

COF Margin to decline to 15% from 17% currently $0.93 $5.00 19%

DFS Margin to decline by 25-50 bps from 2009YE $0.30 $2.00 15%

AXP Margin to decline to 9% from 10% currently $0.34 $3.15 11%

BAC $900MM after-tax annual impact $0.09 $2.40 4%

JPM $500-$750MM net income reduction $0.15 $6.50 2%

C $400-600MM pre-tax annual net impact $0.01 $0.45 2%

PNC $40MM after-tax annual impact $0.08 $6.50 1%

USB $100MM pre-tax impact in 2010 $0.03 $2.85 1%

WFC $235MM after-tax gross impact $0.05 $4.35 1%

6%

*: EPS impact for COF, DFS, AXP are based on GS estimates.

CARD Act Impact

Average

Resolution Authority


Capital levels are back to pre-crisis levels


50% of banks have >8% Tier 1 commonCapital ratios back to pre-crisis levels

~5.8%

~8.3%

~11.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

1Q91

2Q92

3Q93

4Q94

1Q96

2Q97

3Q98

4Q99

1Q01

2Q02

3Q03

4Q04

1Q06

2Q07

3Q08

4Q09

US

Ban

ks C

apita

l Rat

ios

TCE / TATier 1 CommonTier 1 Ratio

Tier 1 CommonSTT 15.9%NTRS 12.8%BK 11.6%COF 10.7%FHN 9.9%CMA 9.6%CYN 9.4%C 9.1%JPM 9.1%BBT 8.7%WAL 8.2%MS 8.2%

STI 7.7%BAC 7.6%PNC 7.6%KEY 7.5%MI 7.5%FNFG 7.5%RF 7.1%USB 7.1%WFC 7.1%ZION 7.0%FITB 7.0%HBAN 6.5%Simple Avg 8.8%Weighted Avg 8.3%

6.0%

8.0%

100% above 6%

50% above 8%


We are about ¾ of the way through losses and capital markets remain accommodative


Capital markets remain open$1.8 tn through $2.1-2.6 tn of losses

$ trillions

Out-standing Losses

Cumulative Loss Rate Losses

Cumulative Loss Rate

Subprime 0.9 0.3 32% 0.3 38%

Option ARM 0.5 0.1 27% 0.2 33%

Home Equity 1.1 0.1 13% 0.2 16%

Other (FHA, GNMA) 0.9 0.1 11% 0.1 14%

Alt-A 2.2 0.2 11% 0.3 14%

Prime 5.7 0.3 5% 0.4 6%

Resi Mortgage 11.3 1.2 11% 1.5 13%

Commercial Real Estate 3.3 0.3 8% 0.3 10%

Cards 1.0 0.2 20% 0.2 23%

Auto 1.1 0.1 9% 0.2 14%

Commercial 6.8 0.4 5% 0.5 7%

Total 23.5 2.1 9% 2.6 11%

Losses Recognized as of 1Q10 $1.8TN

Low High

34%Average Deal Performance -49% 5%-8% 62% 29%

26

4552

140

64

9

0

20

40

60

80

100

120

140

160

2H07 1H08 2H08 1H09 2H09 1H10 TD

US

Ban

ks C

omm

on a

nd C

onve

rts

Issu

ance

($bn

)

Bank tax and size caps


Size caps would be a big deal but we’re not sure there is support to enact them

Source: Company data, SNL, Goldman Sachs Research estimates.

Liabilities would increase through a boom, then need to fall in a bust2% GDP cap implies $2.7TN of shrinkage

$BN Assets Liabilities Deposits Non-Deposits 2% of GDP Implied

DeclineImplied

shrinkage

BAC 2330 2,103 976 1,127 285 842 36%

JPM 2130 1,971 925 1,046 285 761 36%

C 2000 1,848 828 1,021 285 735 37%

MS 820 765 64 701 285 416 51%

WFC 1220 1,105 805 301 285 15 1%

Total 8500 7794 3598 4,196 1,426 2,770 33%

150

170

190

210

230

250

270

290

310

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2% o

f Nom

inal

GD

P ($

bn)

Credit availability and liquidity


Less interest rate hedging = more volatile mortgage rates relative to 10yr UST

Source: Federal Reserves, Freddie Mac, Goldman Sachs Research estimates.

134bps

170bps

224bps

116bps

0bps

50bps

100bps

150bps

200bps

250bps

300bps

350bps

400bps

450bps

500bps

Jan-

72Ja

n-73

Jan-

74Ja

n-75

Jan-

76Ja

n-77

Jan-

78Ja

n-79

Jan-

80Ja

n-81

Jan-

82Ja

n-83

Jan-

84Ja

n-85

Jan-

86Ja

n-87

Jan-

88Ja

n-89

Jan-

90Ja

n-91

Jan-

92Ja

n-93

Jan-

94Ja

n-95

Jan-

96Ja

n-97

Jan-

98Ja

n-99

Jan-

00Ja

n-01

Jan-

02Ja

n-03

Jan-

04Ja

n-05

Jan-

06Ja

n-07

Jan-

08Ja

n-09

Jan-

10

Conforming Mortgage spread to 10yr Treasury

Average

+1SD

-1SD

1970 - 1989 701990 - Now 32

Standard Deviation

Less hedging = more volatility


As private sector credit shrinks, loans are shifted to the government balance sheet

Source: Industry sources, Goldman Sachs Research.

Transfer of credit to government balance sheet most pronounced in resi mortgages

-500

-400

-300

-200

-100

0

100

200

300

400

500

Gov't incl GSEs Bank Loans Non-banks + securitization

US

Res

i Rea

l Est

ate

Cre

dit -

YoY

Cha

nge,

$bn

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

1Q09

2Q09

3Q09

Mor

tgag

e or

igin

atio

n sh

are

- Fan

nie,

Fre

ddie

, FH

A

Note: Loan shrinkage data cited here differs from similar data points cited on p14 and p24 as this data point is sourced from Federal Reserve-

Flow of Funds data while p12 and p28 data points are derived from the Federal Reserve-

H-8 data

% of US Credit Market

YoY % Change

YoY $bn Change

Non-banks + securitization 40% -12% -607

Bank loans 31% -7% -552

Government incl GSEs 29% +8% +495

Total 100% -3% -664

Non-banks and securitization account for biggest piece of credit outstanding and credit shrinkage

Private credit is being transferred to Government balance sheet

Banks – possible risks to normalized EPS


Significant range of EPS outcomes depending on legislation

Source: FactSet, Goldman Sachs Research estimates.

Estimate risk vs valuation gap to historyEPS risk: from small plus to -20%

Exchanges

Asset Managers

Small Brokers

Regionals

Credit CardsLarge Banks

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

-25% -20% -15% -10% -5% 0% 5% 10%

Potential Earnings Estimate Upside/Downside from Reg Reform

Cur

rent

Mul

tiple

vs.

LT

Ave

rage

Negative, but seems factored into valuation

A positive that may not be fully factored in

Potential Earning Impact

% Factored in to Estimates

Potential Earnings Estimate

Upside/Downside

Exchanges 7% 0% 7%

Asset Managers 5% 0% 5%

Small Brokers 3% 0% 3%

Regionals -6% 70% -2%

Credit Cards -17% 80% -3%

Large Banks -26% 20% -20%


Market appears to be discounting some element of reg reform

Source: FactSet, Goldman Sachs Research estimates.

77%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

01/0

1/10

01/0

8/10

01/1

5/10

01/2

2/10

01/2

9/10

02/0

5/10

02/1

2/10

02/1

9/10

02/2

6/10

03/0

5/10

03/1

2/10

03/1

9/10

03/2

6/10

04/0

2/10

04/0

9/10

04/1

6/10

04/2

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*: defined as underperformance of big banks relative regionals, credit cards and small brokers divided by the incremental earnings from regulatory reforms to big banks relative to the other sectors

We estimate the market discounts about an 80% chance of worst case scenario


Assessing impact of legislation by item


Hit to Industry Normalized EPS

Accounted for by Street? Large Banks * Regionals All

CARD Act 2% Mostly Total risk 25.7% 5.5% 17.6%

Overdraft Fees 3% Mostly Already modeled ** 5.3% 3.7% 5.2%

TARP Tax 4% No Incremental risk to normalzed EPS 20.4% 1.8% 12.4%

Prop Restriction 3% No*: BAC, C, JPM and MS.

Liability Caps 2% No **: assuming CARD Act and Reg E are mostly modeled in.

Derivatives Legislation 4% No

Total 18% Partly

Large Banks * 26% PartlyRegionals 5% Mostly

Everything proposed so far could haircut normalized EPS about 18%


Our estimates of regulatory impact to normalized earnings by bank

Regulatory actions could negatively impact normalized earnings

Source: Industry sources, Goldman Sachs Research.

$bn BAC C JPM MS WFC PNC USB BK NTRS STT AXP COF DFS BBT CYN CMA FITB FHN FNFG HCBK HBAN KEY MI PBCT RF STI WAL ZION Wtd Avg

Regulatory Impact (pre-tax)OD / NSF Fees (1) 2.0 0.1 0.8 0.0 0.8 0.4 0.3 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.0 0.0 0.1 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.1 0.1 0.0 0.0CARD Act (2) 1.4 0.5 0.9 -- 0.4 0.1 0.1 -- -- -- 0.6 0.7 0.3 -- -- -- -- -- -- -- -- -- -- -- -- -- -- --Financial Crisis Responsibility Fee (3) 1.4 1.9 1.6 0.8 0.6 0.1 0.1 0.2 0.1 0.2 0.1 0.1 0.0 0.1 -- 0.0 0.0 -- -- 0.0 0.0 0.0 0.0 -- 0.1 0.1 -- 0.0Restrictions on "Liabilities" (4) 1.8 1.5 1.6 -- -- -- -- 0.2 0.1 0.1 -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --Restrictions on "Prop" (5) 0.5 1.3 1.0 0.6 0.0 -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --Derivatives Legislation (6) 2.2 2.1 2.5 1.5 -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --Total Regulatory Impact 9.3 7.5 8.4 2.9 1.7 0.5 0.5 0.4 0.1 0.3 0.7 0.8 0.3 0.1 0.0 0.1 0.1 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.1 0.2 0.0 0.0

After-tax Impact 6.0 4.9 5.5 1.9 1.1 0.3 0.3 0.3 0.1 0.2 0.5 0.5 0.2 0.1 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0S/O (bn) 9.9 29.9 4.0 1.4 5.2 0.5 1.9 1.2 0.2 0.5 1.2 0.5 0.5 0.7 0.1 0.2 0.8 0.2 0.2 0.5 0.7 0.9 0.5 0.4 1.2 0.5 0.1 0.16"Gross" EPS hit $0.61 $0.16 $1.38 $1.34 $0.21 $0.62 $0.17 $0.21 $0.38 $0.38 $0.41 $1.14 $0.32 $0.13 $0.13 $0.24 $0.09 $0.09 $0.02 $0.04 $0.05 $0.05 $0.05 $0.00 $0.07 $0.24 $0.01 $0.20% of Normalized EPS 25% 33% 21% 30% 5% 10% 6% 8% 11% 12% 11% 23% 16% 4% 3% 5% 6% 7% 1% 3% 9% 5% 8% 0% 9% 7% 3% 9% 18%

Impact by Regulatory ActionOD / NSF Fees (1) 5% 1% 2% 0% 2% 7% 3% 1% 0% 0% 0% 2% 0% 2% 3% 4% 4% 7% 1% 0% 7% 4% 5% 0% 5% 5% 3% 8% 3%CARD Act (2) 4% 2% 2% 0% 1% 1% 1% 0% 0% 0% 9% 19% 15% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 2%Financial Crisis Responsibility Fee (3) 4% 8% 4% 8% 2% 2% 2% 4% 6% 7% 2% 2% 1% 2% 0% 2% 2% 0% 0% 3% 1% 2% 3% 0% 4% 2% 0% 1% 4%Restrictions on "Liabilities" (4) 5% 7% 4% 0% 0% 0% 0% 3% 5% 5% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 3%Restrictions on "Prop" (5) 1% 6% 3% 6% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 2%Derivatives Legislation (6) 6% 9% 6% 15% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 4%Total 25% 33% 21% 30% 5% 10% 6% 8% 11% 12% 11% 23% 16% 4% 3% 5% 6% 7% 1% 3% 9% 5% 8% 0% 9% 7% 3% 9% 18%

(1): estimated using 15% of annual deposit servicing charges (5% for trust banks), similar to banks that provide guidance.(2): estimated where not provided.(3): estimated using 15bps of Total Assets - Tier 1 Capital - FDIC-assessed deposits - UST Repos. Assuming USB reports make up 80% of total repo outstanding.(4) assuming 10% decline in b/s size for big 3 banks. Also assuming 10% for trust banks as they reduce the repo books.(5): using disclosed % of revenue by bank where applicable.(6): for JPM using guidance of $2.0-$3.0bn pre-tax; others estimated as % of gross derivatives.

Large Banks RegionalsTrust Banks Cards


Break-up values for BAC and JPM are higher than the current stock prices

Source: Company data, Goldman Sachs Research estimates.

BANK OF AMERICA JP MORGAN

3Q09 Commercial Bank

Global Card Services

Investment Bank Total 3Q09 Commercial

BankGlobal Card

ServicesInvestment

Bank AM & Trust Total

Net interest income 5.2 2.7 3.8 11.8 Net interest income 7.2 2.3 2.3 1.1 12.8Noninterest income 7.7 1.3 7.8 14.6 Noninterest income 4.9 1.1 5.4 2.8 14.3Total revenue 12.9 4.0 11.7 26.4 Total revenue 12.1 3.5 7.7 3.9 27.1

Provision expense 7.0 3.7 1.1 11.7 Provision expense 4.4 3.3 0.4 0.1 8.1Noninterest expense 8.0 2.0 6.4 16.3 Noninterest expense 5.2 1.3 4.3 2.6 13.5

Pre-tax income -2.1 -1.6 4.3 -1.6 Pre-tax income 2.5 -1.1 3.0 1.2 5.5Taxes -0.8 -0.6 1.6 -0.6 Taxes 1.1 -0.4 0.9 0.4 2.0Tax rate 40% 36% 36% 39% Tax rate 43% 37% 31% 37% 36%Net income -1.3 -1.0 2.7 -1.0 Net income 1.4 -0.7 2.1 0.7 3.5

Total assets 1,237 224 885 2,345 Total assets 1,161 192 679 93 2,125Total loans 702 208 99 1,009 Total loans 450 169 66 52 738

Adjustment AdjustmentRevenue run rate 12.9 4.0 11.7 28.6 Revenue run rate 11.3 3.5 7.7 3.9 26.3Normalized provision rate 0.50% 3.00% 0.10% 0.98% Normalized provision rate 0.50% 3.00% 0.10% 0.00% 1.00%Normalized provision ($) 3.5 6.2 0.1 9.8 Normalized provision ($) 2.3 5.1 0.1 0.0 7.4Normal efficiency 50% 40% 70% 57% Normal efficiency 50% 40% 70% 70% 14.8Assumed efficiency * 55% 44% 77% 62% Assumed efficiency * 55% 44% 77% 77% 63%

Annual Pre-tax 19.6 2.8 10.7 33.1 Annual Pre-tax 18.1 2.7 7.0 3.6 31.3Tax rate 35% 35% 35% 35% Tax rate 35% 35% 35% 35% 35%Preferred dividend 2.6 0.0 0.0 2.6 Preferred dividend 0.0 0.0 0.0 0.0 0.0Net income 10.2 1.8 6.9 18.9 Net income 11.8 1.7 4.5 2.3 20.4ROA 0.8% 0.8% 0.8% 0.8% ROA 1.0% 0.9% 0.7% 2.5% 1.0%

Multiple 10.0x 10.0x 10.0x 10.0x Multiple 10.0x 10.0x 10.0x 15.0x 10.6xValue 102 18 69 189 Value 118 17 45 35 215Value per share $11.8 $2.1 $8.0 $21.8 Value per share $29.8 $4.4 $11.6 $8.8 $54.6

*: assuming expenses are 10% higher due to the cost of running businesses separately.

Note: Note:Commercial Bank includes Deposits, Home Loans & Insurance and Global Commercial Banking. Commercial Bank includes Retail Financial Services and Commercial Banking.Investment Bank includes Global Corporate & IB, Global Markets and GWIM. AM & Trust includes Asset Management and Treasury & Securities Services.Corporate segment is allocated to each segment. Excluding $2.2bn of MER CVA. Corporate segment is allocated to each segment.


Analyst certification

We, Richard Ramsden, Brian Foran and Daniel Harris, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

DisclosuresMay 6, 2010


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