Banks

U.S.A.

U.S. Banks European Exposure

Direct Exposures to GIIPS Manageable, Contagion Risk Chief Concern
Special Report
Contagion Effects Potentially Large: U.S. banks could be greatly affected if contagion continues to spread beyond the stressed European markets (Greece, Ireland, Italy, Portugal, and Spain). Exposures to large European countries and banks are sizable. The ongoing economic and market effects are additional concerns. The crisis has been negatively affecting European credit profiles and has resulted in numerous rating actions recently. (See The Euro Area Financial Crisis How does It End?, dated Sept. 20, 2011, for additional details). Net Exposures Manageable: Large U.S. banks have been reducing direct exposure to stressed markets for well over a year. Overall, net exposure appears manageable but not without financial costs. Aggregate net exposure to these markets totaled approximately $50bn at 3Q11 for the six largest U.S. banks. Exposure averaged 0.5% of total assets and less than 9% of Tier 1 common capital (T1C). (See table on page 3). Exposure to Italy and Spain: Exposure to stressed markets is believed to be generally concentrated in larger markets, notably Italy and Spain. Although Fitch Ratings views the direct exposures to Spain and Italy as manageable, the broader ramifications of distress in these markets will have meaningful consequences beyond direct exposure if not contained. Rating Implications: Fitch believes that, unless the eurozone debt crisis is resolved in a timely and orderly manner, the broad outlook for U.S. banks will darken. Currently, Fitchs rating outlook for the U.S. banking industry is stable, reflecting improved fundamentals at most banks, coupled with generally lower ratings versus pre-crisis levels.
Euro Area

Related Research
Fitch Comments on Summit, Oct. 28, 2011

U.S. Money Funds and European Banks: French Exposure Down, Oct. 20, 2011 French Banks: Under Market Fire, Sept. 29, 2011 The Euro Area Financial Crisis How Does it End?, Sept. 20, 2011 European Banks and Market Turmoil, Sept. 20, 2011

Risks Increasing: The risks of a negative shock are rising and could alter Fitchs stable rating outlook for U.S. banks. Fitchs base case rating assumption underpinning bank ratings is that eurozone sovereign debt concerns will be dealt with in an orderly fashion, i.e. there will not be a disorderly debt restructuring or forced exit of any country from the euro.

Large U.S. Banks Active in Major European Markets

Exposures to Major Markets: Gross exposures to large European countries and major banks are greater than exposures to the stressed markets. For instance, cross-border outstandings to France totaled $188bn for the top five U.S. banks (based on 2Q11 FFIEC and 10Q data). Of this total, $114bn was to French banks (25% of T1C). Aggregate outstandings to the UK were $225bn, of which $51bn (11% of T1C) was to UK banks. Exposures Overstate Direct Risks?: A large portion of this exposure is likely secured (such as repo-related exposures), subject to margin/collateral agreements and/or hedged. Nevertheless, the exposure data show the susceptibility of banks to contagion risk and the interconnectivity of large global banks. Hedge Viability a Question: While U.S. banks have hedged part of their European exposures through the credit default swap (CDS) market, this tactic could prove problematic if voluntary debt forgiveness becomes more prevalent and CDS contracts are not triggered. Any cross-country hedges or proxy hedges (such as an index) could pose mismatch risk/poor hedge performance. The extent of hedges to large European markets is not fully disclosed, but the top five U.S. banks had $22bn in hedges associated with the stressed markets (see page 3 for details).

Analysts
Joseph Scott +1 212 908-0624 joseph.scott@fitchratings.com Christopher D. Wolfe +1 212 908-0771 christopher.wolfe@fitchratings.com Thomas Abruzzo +1 212 908-0793 thomas.abruzzo@fitchratings.com

www.fitchratings.com

November 16, 2011

Banks
Public Disclosure Not Complete
Disclosure is generally limited to aggregate claims outstanding to a country greater than or equal to 0.75% of a banks assets. Consequently, it is not possible to gather complete exposures for all countries. Total country exposures include deposits, central bank balances, securities, loans, participations, acceptances, fair value of derivatives, and reverse repos, among other items, but details of many categories are not disclosed. The long lag time before FFIEC quarterly country exposure data become available also hampers analysis.

Selected Outstandings
(US$bn) French Banks 2Q11 BAC C JPM GS MS 8.9 15.7 22.8 38.5 28.1 2010 13.0 11.2 16.0 29.4 39.0 2009 N.A. 11.4 16.2 8.8 9.7 2Q11 3.8 18.3 9.4 5.4 14.0 UK Banks 2010 5.5 9.5 9.3 5.6 7.6 2009 8.5 6.5 12.8 3.3 13.2

BAC Bank of America Corp. C Citigroup Inc. JPM JP Morgan Chase & Co. GS Goldman Sachs Group Inc. MS Morgan Stanley. N.A. Not available. Sources: 10Q and FFIEC reports.

Money Market Fund Exposure Considerable

Capital Market Revenues/Total Revenues
(As of Sept. 30, 2011)
(%) 90 80 70 60 50 40 30 20 10 0 BAC C JPM GS MS

Beyond direct exposure, money market funds (MMFs) affiliated with major U.S. banks have additional exposure. While not contractually required, banks oftentimes offer support to affiliated MMFs in the event of need for business/reputation reasons. Looking at the 10 largest U.S. prime MMFs, three are affiliated with U.S. banks. Within these MMFs, European bank exposure totaled $89bn (39% of aggregate T1Cs) as of Sept. 30, 2011, down from $110bn in August and $116bn from July. This exposure is concentrated at systemically important European banks in large countries. Major portions included French banks ($13bn), German banks ($15bn), and U.K. banks ($20bn). Exposure to French banks was reduced from $28bn in August and $35bn from July. (See U.S. Money Funds and European Banks: French Exposure Down, dated Oct. 20, 2011, for additional details). A coordinated initiative of the U.S. Federal Reserve bank with other central banks, including the ECB, Bank of England, and Swiss National Bank, recently introduced U.S.-dollar liquidity measures to calm market nervousness over continued reductions in U.S. MMF funding. This initiative enables European banks access to dollar repo operations as needed. (See European Banks and Market Turmoil, dated Sept. 20, 2011, for more details.)

Source: Company reports.

Impact on Capital Market Activities

Any prolonged turmoil could negatively affect capital market-related revenues well into the future, not to mention the possible effects on loan portfolios and other revenue opportunities. The top U.S. banks are generally very active in capital markets globally, including in trading, underwriting, and advisory services. For the seasonally weak 3Q11, capital market results were further affected by the market downturns both in Europe and the U.S., as well as other financial

U.S. Banks European Exposure November 16, 2011

Banks
centers. Tough market conditions not only curtailed deal flow and customer trading activity, but also resulted in significant mark-downs of inventories.

European Revenues Key Part of Mix

Revenues generated from European capital markets activities generally hover around one-third of total capital markets revenue for those banks that disclose a regional breakdown of revenues. Capital market businesses have been the focus of European activities in recent years. In commercial and consumer banking, revenues from Europe are generally much smaller. U.S. banks that traditionally had a larger presence in Europe have scaled down commercial and consumer banking activities in recent years.

Direct Exposure to Stressed Markets Manageable

Sovereign Exposure a Small Subset
Direct sovereign exposure represented a small fraction of total net exposure for those disclosing this information. Not all large U.S. banks disclosed the sovereign component as detailed above. Exposures to corporations and financial institutions are generally more sizable. A large part of the corporate exposure is to the operations of multinational corporations in those markets.

Exposures to Stressed European Markets

($bn, As of Sept. 30, 2011) BAC Net Exposures Sovereign Hedges Gross Exposures Net/Total Assets (%) Net/T1C (%) 13.0 0.4 1.7 14.6 0.6 11.0 C 16.3 1.9 9.4 25.7 0.8 14.2 JPM 15.1 N.A. 5.2 20.3 0.7 12.6 WFC 3.1 0.0 0.0 3.1 0.2 3.4 GS 2.5 N.A. 1.7 4.2 0.3 4.5 MS 3.4 N.A. 3.6 7.0 0.5 7.4

BAC Bank of America Corp. C Citigroup Inc. JPM JP Morgan Chase & Co. WFC Wells Fargo & Co. GS Goldman Sachs Group Inc. MS Morgan Stanley. N.A. Not available. Source: Company reports.

Gross Exposure More Pronounced

Banks have increased the level of disclosure on gross exposures recently. Gross exposure averaged 0.8% of assets and 13% of T1C. Hedges are believed to be primarily with other financial institutions outside the stressed markets and subject to margin/collateral agreements. However, there is still concern over hedge viability, particularly if hedge providers have additional exposures to these same markets. Any voluntary debt forgiveness would add to hedge uncertainty as detailed earlier. Fitch still believes gross direct exposure is ultimately manageable.

Rating Implications
Fitch believes that, unless the eurozone debt crisis is resolved in a timely and orderly manner, the broad outlook for U.S. banks could be negatively affected. Although Fitch believes that
U.S. Banks European Exposure November 16, 2011 3

Banks
framework commitments agreed at the Euro Area Summit in late October represent a positive step toward supporting financial stability, effectiveness will depend on greater clarity on details, as well as full and timely implementation. (See Fitch Comments on Euro Area Summit, dated Oct. 28, 2011, for additional details.) Fitchs rating outlook for the U.S. banking industry currently remains at stable, reflecting the generally improved capital and liquidity position of most U.S. banks, coupled with the fact that ratings for U.S. banks still remain generally lower than pre-crisis levels. Nonetheless, the risks of a negative shock are rising and could alter this view, even for banks with little or no exposure to Europe. While it would appear that the eurozone debt crisis is largely a big bank issue, Fitch is of the view that the consequences could affect global economic growth and further weigh down the U.S. economy. Ratings of U.S. banks could be pressured if difficulties in Europe, combined with domestic economic challenges, result in significant incremental revenue pressure, combined with a reversal of positive asset quality trends. U.S. banks have been reporting improving asset quality in 2010 and to date in 2011. This positive trend could change course if contagion effects translate into a slowdown in general economic activity. The U.S. economy already faces continued pressure on real estate and persistently high unemployment, combined with fiscal pressures at the government level.

U.S. Banks European Exposure November 16, 2011

Banks

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. Copyright 2011 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings, Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitchs factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitchs ratings should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this report is provided as is without any representation or warranty of any kind. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion is based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of Great Britain, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

U.S. Banks European Exposure November 16, 2011