Richard K. Davis

1
Richard K. Davis Chairman, President and
CEO October 27, 2009
2
Right Brain
3
The Way Forward?
4
Banking Industry 2006

• Strong
• Healthy
• Vibrant

5
Banking Industry Today

• Strong?
• Healthy?
• Vibrant?

6
You Might be an Banker if ...

• Your 4th grade daughter asks you to cancel your
  appearance at her classs career day
• Youre afraid to go to Washington, D.C.
• Your spouse tells everyone youre a pizza
  delivery driver

7
The Economic Outlook

• GDP
• Unemployment
• Labor compensation
• Housing
• Automotive
• Economic growth
• Consumer spending
• Consumer confidence!?

8
Intersection
U.S. Economy
Banking
9
Intersection
Global Economy
U.S. Economy
Banking
10
Catalyst?
Banking!
11
Liquidity Crisis to Credit Crisis to
Solvency Crisis
12
2008 was different from any crisis in living
memory
change in SP market index (and related proxies
for early years) by year
2007
2005
1994
1993
1992
1987
1984
1978
2009 Q3
1970
2006
1960
2004
1956
1988
1948
1986
1947
1979
1923
1972
1916
1971
1912
1968
1911
2000
1965
1906
1990
1964
1902
1981
1959
1899
1977
1896
1969
1952
1949
1895
1962
2003
1944
1894
1953
1999
1926
1891
1946
1998
1921
1889
1940
1996
1919
1887
1939
1983
1918
1881
1934
1982
1905
1877
1932
1976
1904
1875
2001
1929
1967
1898
1874
1973
1914
1997
1963
1897
1872
1966
1913
Current crisis
1995
1961
1892
1871
1957
1903
1991
1951
1886
1870
1941
1890
1989
1943
1878
1869
1920
1887
1985
1942
1864
1868
1917
1883
1980
1925
1858
1867
1910
1882
1975
1924
1855
1866
1893
1876
1955
1922
1850
1865
1884
1861
1950
1915
1849
1859
1873
1860
1945
1909
1848
1856
1854
2002
1853
1954
1958
1938
1901
1847
1844
1841
1974
1851
1933
1935
1936
1900
1838
1842
1837
1930
1845
1885
1928
1927
1880
1834
1840
1831
1907
1835
1879
1863
1908
1852
1832
1836
1828
1857
2008
1833
1862
1843
1830
1846
1829
1826
1825
1839
1937
1931
1827
60
50
40
30
20
0
-20
-30
-40
-50
-10
10
12
13
The global financial crisis shrunk the world
economy at a similar rate as the start of the
Great Depression
13
SOURCE Eichengreen and ORourke, 2009, Center
for Economic and Policy Research
14
U.S. government and others have taken
unprecedented efforts to support the financial
system
0
Maximum Notional amount
Billions
Program
10,985
Guarantees of risky assets
Bear Stearns
29
892
Citi
301
Bank of America
118
FDIC Guarantee to GE
139
Liquidity support bank run protections
FHA Hope for Home Owners
300
FDIC Liquidity Guarantees
1,400
5,220
Net Portfolio CP Funding
1,800
TAF
900
MMIFF
540
Key questions
TSL
250

• Further intervention?
• Exit strategy?

Primary Credit Discount
93
ABCP Liquidity
62
Primary Dealer and others
47
Bailouts capital infusions
Securities Lending Overnight
10
4,873
Secondary Credit
118
TARP
700
TALF (ex TARP funding)
1000
P-PIP (ex TARP funding)
900
Credit easing by MBS purchase
1250
Agency debt/ treasury securities
500
Fannie/Freddie (ex TARP funding)
400
AIG (ex TARP funding)
123
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15
The global macro outlook remains highly uncertain
Scenario 1 Quick fix Rebound by end of 2009,
sustained in 2010-11
Scenario 2 Battered, but resilient Prolonged
stress through mid-2010, recovery begins 2011
Scenario 4 Double dip Shallow recovery followed
by second downturn
Scenario 3 Stalled globalization Moderate
recession, followed by structurally slower global
growth
2009
10
11
12
2013
15
16
More pain to come 1.5 trillion of an estimated
2.6 trillion in global credit losses on U.S.
assets has been recognized

Scenario 2 Battered, but resilient - Estimated
cumulative U.S. loan losses and mark-downs USD
billions, global losses on U.S.-issued assets
2,640
240
130
200
400

• 60 or 600B borne by banks
• Of this, 70 or 400B borne by 19 SCAP banks

390
380
900
Total
Other business debt
LL Loans
HY Bonds
Other consumer loans
Consumer credit cards
CRE
Residential real estate
Total outstandings
11,140
3,480
840
1,680
680
590
6,410
24,820
Loss as of outstanding
8
11
46
24
29
22
4
11
of losses recognized1
90
40
25
40
60
60
45
60
1 Total write-offs as of July, 2009
16
17
Future outlook for banking is linked to the macro
economy and the regulatory and political
environment
Key drivers of change
Key sources of uncertainty

• What will be the depth and shape of the global
  recession and recovery?
• What is the magnitude of balance sheet write-offs
  yet to come?
• When will the global capital markets and credit
  markets recover?
• To what extent will consumers and corporates
  continue to deleverage?

Macro economy

• How will regulators intervene?
• How will the political environment impact the
  industry?

Re-regulation and political environment
17
18
Beyond the current uncertainty, banking will
re-emerge as an attractive space

ESTIMATES
Profitability will return to 2006 levels by 2013
Bank estimated pre-tax profits (after provision
for losses)

• Still attractive
• Economic recovery
• Normalized loan provisions
• Shrinking of shadow banking
• Widening credit spreads
• More safety/ soundness

48B
45-47B

• New headwinds
• Impact of regulations
• Larger capital requirements
• Countercyclical provisions
• Higher deposit insurance
• Lower EPS due to dilution

(2B)
2012-2013E
2008
2006
ROA
1.4
(0.5)
1.3
(after tax)

• Valuation uncertainty
• Higher PE due to lower risk

ROE
13
(0.5)
11-12
(after tax)
18
19
Industry structure in the next 3 years

• Banks will largely focus on traditional less-risk
  businesses
• Regulators will be more strict
• Failure / consolidation of mid-tier and smaller
  banks
• Deposits/ savings/ investments will grow faster,
  and credit will grow slower (as households save
  and deleverage)
• Smaller, more vanilla securitization market rise
  of on-balance sheet banking
• Rise of boutiques, especially in talent-driven
  businesses (MA advisory, proprietary trading,
  etc.)
• Monolines/ credit unions/ ILCs will remain
• Crisis will accelerate the shift of economic
  growth to developing markets

19
20
Proposed Financial Regulatory Changes

• New Financial Consumer Agency
• Systemic Oversight Council
• Resolution Mechanism for Large Institutions
• Regulatory Consolidation and Restructuring
• Stress Testing Requirements (liquidity /
  capital / economic)
• Living Will

21
Intersection
Global Economy
U.S. Economy
Banking
22
Bankings Role in the Economic Expansion
The Next Phase

• Recovery?
• Expansion?
• Adjustment?

23
The Banking System Purpose
To bear risk and allocate capital But (in
recent years) The outcome was to have created
risk
(risk sharing)
(risk creation)
24
The Banking System Purpose
To bear risk and allocate capital And
(going forward) The outcome is to create growth
(risk sharing)
(create leverage)
25
Intersection
Banking
Leadership
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Now is the Time for Leadership!
27
Management vs Leadership
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Management

• The secret of successful managing is to keep the
  five guys who hate you away from the five guys
  who havent made up their minds yet.
• - Casey Stengel

29
Leadership

• The best leader is the one who has sense enough
  to pick good people to do what he wants done, and
  self-restraint enough to keep from meddling
  with them while they do it.
• - Theodore Roosevelt

30
Balance
Management is efficiency in climbing the ladder
of success leadership determines whether the
ladder is leaning against the right wall. -
Stephen R. Covey
31
Move the Ladder!
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The Way Forward?
33
Richard K. Davis Chairman, President and
CEO October 27, 2009