Equity Raising in the Banking Environment

Presented to: International Financing Review

12 November, 2010

Contact person: CRAIG COBEN +44 207 995 3700

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Notice to RecipientConfidential

Food & BeverageComputers

Insurance

Transportation

Construction

Telecom

Mining

Real Estate

Utility & Energy

Others

Banks42%

21%

7%

6%

5%

4%

4%3%

3%3% 3%

1

EMEA Equity Issuance in Banking Sector by Route to Market(2)

EMEA Equity Issuance by Sector(1)

IPO

AGT

Convertible Bond

Add-Ons Rights Issue62%12%

13%

9%4%

2007-2010YTD

____________________(1) Source: Dealogic; Cumulative issuance 2007– 2010YTD; Others include all the remaining sectors (2) Source: Dealogic; Cumulative issuance from 2007 – 2010 YTD; banking sector (excludes insurances)

Banks Have Dominated New Equity Issuance for Three Years and are Expected to Continue to do so

2007-2010YTD

Banks accounted for approximately 42% of the total EMEA equity issuance since 2007

The rights issue has been the most common way for European banks to raise equity

Value: $437bnValue: $1,251bn

BBVA

Standard Chartered

Deutsche Bank

NBGBank of Ireland

BRE SpareBank

Bank MilleniumUnicredit

ING

DnB Nor

Lloyds

Alpha Bank

Societe Generale

PKO

BNP Paribas

Swedbank

NBG

Pohjola Bank

BES

SEB

HSBC

Nordea

15

20

25

30

35

40

45

50

Nov-08 Mar-09 Jun-09 Sep-09 Jan-10 Apr-10 Aug-10 Nov-1015

25

35

45

55

65

75

85

2

Recent Rights Issues in the Banking Sector(1)

Tighter Discount to TERP in Recent Rights Issues (Excluding Peripheral Countries) for Capital Strengthening and Growth

____________________(1) Source: BofAML Research; most relevant transactions; size of bubbles proportioned to deal size (2) Peripheral countries: Portugal, Ireland, Greece and Spain

Discount to TERP(%)

Announcement Date

2010 (Excl. Peripheral Countries(2)): 29.3%

2010 (All Countries): 31.9%

2009 (All Countries): 37.0%

TERP Average VSTOXX Index(%)

Trend Line VSTOXX Index

3

Key Elements For a Successful Rights Issue

3-5 days for pre-sounding?

Ability to take up pro-rata or more

Core Shareholder Backing

Fix any problem decisively Appropriate discount to TERP -

function of market and transaction risk

Pin Down Right Size and Price

Normal to contractually prohibit underwriters and sub-underwriters from any shorting or single-stock hedging

Control Hedging/Shorting

Disclosure of short positions?

Essential to be ‘in the flow’ for bookrunners

Trading

M&A vs. “capital-strengthening”

Balance sheet resilient to macroeconomic deterioration

Capital strength to seize new business opportunities

Use of Proceeds

Secure fully underwritten deal pre-launch

Sub-underwrite sensibly to high quality institutions

Underwriting and Sub-underwriting

1 2 3

4 5 6

4

Basel III is a Direct Response to Perceived Shortcomings in Bank Regulation

Inadequate Capitalisation Absolute level of capital inadequate

Two new capital buffers: Conservation buffer and Countercyclical buffer

Increased Leverage and Insolvency

Difference between adequate capitalisation and maximum leverage

Unweighted leverage ratio

Insufficient Capital Charges Towards

“Riskier Assets”

Capturing off-balance sheet, derivative and generally “riskier” position

New and substantial capital charges for non-cleared derivative

Hybrid vs. Equity Capital

Loss-absorption features of certain hybrid securities accounted for as Tier 1 capital proved inadequate

Significant revisions to the types of instrument qualified as capital

Funding Mismatch in maturities of assets and liabilities Net stable funding ratio

Liquidity Short-term liquidity issues unanticipated and not monitored

Liquidity coverage ratio

Basel III has imposed higher and more stringent requirements on capital and liquidity

Problem Basel III Suggested Solution

5

Higher Capital Levels but Gradual Phase-In

Capital Level

Illustrative Timing Update – Key Events

31 Dec ‘12: CRD4 (Capital Requirements

Directive 4) implementation begins

1 Jan ‘15: LCR (Liquidity Coverage Ratio) in force

31 Dec ‘12: Basel III implementation begins (except leverage and liquidity)

By 31 Dec ‘10: Final package published

…. 2012 2018

1 Jan ‘18: NSFR / Leverage Ratio in force

2015

Dec ‘10: CRD2 (Capital Requirements

Directive 2) in force

2013-2017: Test period for NSFR (Net Stable Funding Ratio) and Leverage Ratio

Key steps leading up to the full implementation of Basel III in 2018

4.5%

4.5%

4.5%

4.5%

4.5%

4.5%

4.5%

4.5%4.

5%

4.0%

3.5%

2.0%

2.0%

7.0%

7.0%

7.0%

7.0%

7.0%

6.4%

5.8%

5.1%

8.5%

8.5%

8.5%

8.5%

8.5%

7.9%

7.3%

6.6%

6.0%

5.5%

4.5%

4.0%

4.0%

10.5

%

10.5

%

10.5

%

10.5

%

10.5

%

9.9%

9.3%

8.6%

8.0%

8.0%

8.0%

8.0%

8.0%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023+

Cap

ital

Tier 2Tier 1Capital ConservationCT1

Development of regulatory capital buffer levels overtime

Swiss banks plan to raise c. $74bn in Coco’s by 2019 implementation

6

National Regulators Will Apply Their Own Flavour: Swiss Have Introduced Higher Capital Requirements And…

… Additional Buffers for Systemically Important Financial Institutions (“SIFI”)

Contingent Capital?

Common Equity

Tier 2

Hybrid Tier 1

2.5%

4.5%

1.5%

2.0%

Capital Conservation

Buffer

Minimum

SIFI

4.5%

5.5%

3%

6% Contingent Capital (5%)

Common Equity

Contingent Capital (7%)

International Standard Basel III Swiss Proposal

Swiss have proposed additional requirements and incentives to diversify risk for Systemically Important Financial Institutions – Basel Committee and national regulators are expected to do the same

7.3%

9.5%8.4%

6.9%

4.5% 4.7%

8.2%7.5% 7.7% 7.4%

6.3% 6.2%5.6% 5.8% 6.3% 5.8% 5.9%

5.0%

12.7%12.3% 12.1%

10.9% 10.5% 10.0% 10.0% 9.9%9.1% 9.0% 8.6% 8.5% 8.4% 8.4% 8.2% 8.1% 7.7%

7.0%

0%

4%

8%

12%

16%

Basel II - Core T1 Benchmarking(1)

Key Ratios Focused on for EU Banks Capital?(3)

7

European Banks Have Responded to Investor Demands with a Substantial Increase in CT1 Ratios Across the Sector

Common Equity Target for Commercial Banks?(4)

____________________(1) Source: Company filings; BofAML analysis; numbers incorporate BofAML adjustment(2) Pro forma for the €10.2bn rights issue in September 2010 (3) Following release of CEBS stress tests results (4) BofAML CEO Banking & Insurance Conference, 28-30 September 2010

9%12%

79%

CommonEquity Tier 1

Leverage Tier 1

14%

35%

46%

5%

10% or above 9.0% - 9.99% 8.0% - 8.99% 7.0% - 7.99%

2007 2008 2009 H1 2010

Total average 6.6% 7.1% 8.9% 9.5%

Basel III enforces greater equivalence between equity and CT1 with various adjustments proposed including treatment of deferred tax assets, minority interests and unconsolidated holdings

(2)

H1 20102007

8

Investment Potential in “Gone Concern” Capital Investors Run Own Stress Tests

30%

70%

0%

20%

40%

60%

80%

Positive NegativeBanks “Stressed” Enough?

75%

25%

0%

20%

40%

60%

80%

Yes No

Overall View on Stress Test

Mandate does not allow – but otherwise “Yes”

35%

9%

0%

20%

40%

60%

80%

56%

44%

Yes No

Would you invest in “Gone concern” Tier 1?

Mandate does not allow – but otherwise “Yes”

30%

10%

0%

20%

40%

60%

80%

60%

40%

Yes No

Would you invest in “Gone concern” Tier 2?

Investors Cautious on “Gone Concern” Contingent Capital But Remain Interested

Investors conducted their own tests based on more rigorous “sovereign shock” scenario. Fitch expects to rate new-generation bank hybrids (including contingent capital convertible securities), potentially presaging wider acceptance of these instruments

9

The Market Will Enforce its Own Regime On Banks to Address Any Regulatory Gap

Investors likely to praise banks able to meet key challenges in the new opportunistic growth arena

Capital Increased capital requirements, both in terms of quality and

quantity of capital

Increased emphasis on leverage ratios

Resilient enough capital base to seize strategic opportunities Funding & Liquidity Bank access to funding without central bank

support More “discriminatory” approach Need to term out funding (maturity matching) Retaining enough liquid assets on BS to cover

shortfalls

Growth Adequate core capital to pursue growth

opportunities in the face of Subdued macro growth outlook Macro-deleveraging Lower interest rates

Profitability Attractiveness of individual business activities Benefits to stable profitability from diversified business profile Importance of economies of scale Lower risk tolerance

10

The Toolkit Available to Banks to Raise New Capital

Contingent Capital Liability Management

Equity / Equity-Linked Divestments Subsidiaries IPO / Spin-off

$2.8bn Rights Issue

$14bn Rights Issue

$2.7bn convertible in Banco Santander Brazil

Banco Santander Brasil S.A.

€3.1bn sale of Bank Zachodni / other polish assets

Considering sale of Pioneer as part of non-core assets divestments

$1.7bn sale of Sempra commodities European business

Ongoing - NBG to IPO or sell stake in Finansbank towards its €2.3bn capital increase

$8.0bn IPO of Santander Brazil

£9.1bnExchange Offer and Issuance

of ECNs

€1.3bnExchange Offer Issuer

C$179m Exchange Offer €750m Tender Offer onoutstanding 5% Upper Tier 2

Ongoing – KBC’s intention to float CSOB