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Industry View

February 4, 2015

Swiss BanksSwiss BanksUBS to deliver on Dividend; Credit Suisselikely to miss

Capital return beats and misses, we think, will drive much of relativebank performance in 2015 (our “the good, the bad and thechallenged” thesis). We continue to think UBS can hit and beatexpectations, and CS likely miss. We update PTs and EPS for Sfrmove.

The need for CS to increase its equity leverage ratio by ~30% (2.3% to3.0%+) to hit our base case of new equity leverage ratio within arevised 'going concern' leverage ratio remains a constraint on divis &capital plan, we think. We expect to get more clarity on new Swiss standardsfor equity and “going concern” leverage ratio in Q1. Whilst CS targets a 3%equity leverage ratio by end 2015e, our base case is that this is more likely in2016e, and the recent Swiss franc move also may make the target morechallenging. Given all the uncertainties of running a capital markets businessand litigation uncertainty, we continue to think CS could clear the air byscripping or cutting the 2014 divi and accelerating meeting the new realities.Our recent meeting with CS's CFO underscored that the bank is keen to showconsistent improvement in the leverage ratio. After 3 quarters of noimprovement, it seems plausible it will rise somewhat in Q4 - in part throughthe sale of a flagship high value Zurich property to Swatch before Christmasand some deleveraging. But we also see another Sfr1bn+ litigation around USmortgage issues as likely.

With this note we update our EPS, PT (to SFr 25) and capital ratios forthe Swiss franc move to 11.7% CET1 and 3.1% equity leverage ratio in16e. We have assumed a degree of additional cost cutting, as we saw at Baer,to offset NIM headwinds and Swiss franc appreciation. The key catalyst for are-rating would be if CS not only announced extra cost cutting but rebalancedthe group to lower capital allocated to the investment bank over time. Thestock trades at 0.8x TNAV for MSe ~12% ROTE in 16e.

At UBS, on the other hand, we see a meaningful chance of a higherdividend for 2014e, notwithstanding the headwinds from unresolvedlitigation, Swiss franc move and low yields. A large uncertainty for UBSremains litigation, but we see progress being made as FX is being addressed atlevels below consensus' fears. Our thesis has been “that bid/ask on FX & otherlitigation would narrow substantially in Q4 2014 and so open the door togreater clarity on divis and capital planning into 2015.” We have SFr0.75bnand SFr1bn in our litigation costs for Q42014e and 2015e respectively. UBSreserved SFr1.7bn in the i-bank for Q3, we deduce from disclosure for FX,although clearly we need to wait until it's finalised. We continue to think divisare key to unlocking value and that UBS could have one of the highestdividend yields in the banks sector in 2015/16 as it works through its issues. In

Morgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research. As a result,investors should be aware that the firm may have a conflictof interest that could affect the objectivity of MorganStanley Research. Investors should consider MorganStanley Research as only a single factor in making theirinvestment decision.For analyst certification and other important disclosures,For analyst certification and other important disclosures,refer to the Disclosure Section, located at the end of thisrefer to the Disclosure Section, located at the end of thisreport.report.+ = An alysts emp loyed by n on -U .S. a ff ilia tes are n o t reg istered w ith F INRA, mayn o t be associated person s o f th e member an d may n o t be su b ject to NASD/NYSErestriction s on commu n ication s w ith a su b ject compan y, pu b lic appearan ces an dtrad in g secu rities h eld by a research an alyst accou n t.

| February 4, 2015Swiss Banks

MORGAN STANLEY RESEARCH

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mailto:[email protected]

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part this is driven by a booster as capital tied up in non-core is freed-up (of~SFr4.6bn), FINMA add-on reversal (currently implied~SFr2.5bn) alongsideDTA recognition. We've argued capital will be supported by FINMA add-onbeing reversed as litigation is settled. Our recent meeting with the CFO alsogave us confidence on more cost cutting from rethinking the operating modellikely, although this may only offset recent Swiss franc moves in the near term.

We also update our UBS estimates (please see exhibits in the nextsection) . The stock trades on ~1.3x our TNAV for a ~14% ROTE in 16e. Wecontinue to rate UBS Overweight with a new PT of SFr20, with the biggest riskbeing litigation.



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What has changedWhat has changed

Exhibit 1:Exhibit 1: UBS : changes to EPS / PT / CapitalRatios

Source: Morgan Stanley Research estimates

Exhibit 2:Exhibit 2: Credit Suisse : changes to EPS / PT /Capital Ratios

Source: Morgan Stanley Research estimates



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Valuation: what's in the price?Valuation: what's in the price?

Exhibit 3:Exhibit 3: Valuation comparison

Sou rce: Th omson Reu ters (p ricin g data), Morgan Stan ley Research , e = Morgan Stan ley Research estimates

Exhibit 4:Exhibit 4: P/TNAV 14e vs ROTE 16e

Sou rce: Morgan Stan ley Research estimates



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UBS : Capital RatiosUBS : Capital Ratios

We have written extensively about the capital debate, so below we simply update our expectations for hittingleverage ratio and core tier 1 to guide the discussion. UBS has flagged that it can move to a 50%+ divi payoutwhen core Tier 1 is above 13% and stressed ratio above 10% – with core Tier 1 at 13.7% end 3Q14, clearly UBSis ahead of this. We still think near a 100% payout ratio in 2015 and 2016 is plausible given the booster effectsof the unwind of the non-core unit, reduction in FINMA add-on and DTAs.

Exhibit 5:Exhibit 5: Basel III Capital Assumptions

Sou rce : Compan y data , Morgan Stan ley research , e = Morgan Stan ley Research estimates



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FinancialsFinancials

Exhibit 6:Exhibit 6: UBS P&L Forecasts

Sou rce : Compan y data , Morgan Stan ley Research (e = estimates)



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Price Target SFr 20 We derive our PT from a blend of adjusted Gordon growth modeland group P/E. We assign a 20% weighting to our bull case, 20%to our bear and 60% to our base case. We add SFr1 to account fora forecast special dividend in 2015-16.

Bull SFr 242.0x bull TNAV 15e

Stronger recovery. Our bull case rests on more resilient earnings ini-bank and WM. 17% sustainable RoTE as UBS hits restructuringtargets, 10.3% COE, 4% long-term growth. Theoretical P/TBVmultiple of 2.1x

Base SFr 191.6x base TNAV 15e

Slow growth in private bank margins, lower i-bank revenues. PBinflows of 4.7% in 2014e and margins of 84bps in 2015e. Reportedi-bank revenues at ~SFr7.8bn in 2015e, down ~4% on 2014e.Core group expenses falling ~3% in 2015e vs. 2014e. 15.5%sustainable ROTE, 10.5% CoE, 3.3% long-term growth. TheoreticalP/TBV multiple of 1.7x.

Investment ThesisInvestment Thesis

We see successful restructuring at UBS, as greaterearnings from A&WM and non-core wind-downcan drive higher ROTE (>15%), leading to a re-rating and potential for higher capital returns.

UBS offers leverage to potentially stronger marketsthrough faster deleveraging, improved capitalmarkets revenues, and higher private bankingactivity. Further, strong capital leaves it withsufficient buffer to meet stricter regulation andlitigation, and potential for greater capital return.

Our RWA expectations on deleveraging forecasttop quartile B3 CT1 of 14.1% by end of 2014,reducing the risk of negative outcomes.

Wealth management has demonstrated decentflows, but faces headwinds from risk aversion andlow interest rates. We see upside risk to ournumbers if markets improve, given our subduedforecast outlook.

Key Value DriversKey Value Drivers

UBS faces lower funding and capital risks thanEuropean peers, given its strong sovereign andfunding profile.

On ~1.7x 2015e TNAV, valuation looksundemanding for potential >15% ROTE andpayout of ~50% or more including special.

Potential CatalystsPotential Catalysts

Further clarity on litigation settlements/ provisionsin the next six months.

Risks to Achieving Price TargetRisks to Achieving Price Target

Risks from deleveraging the balance sheet andpotential marks taken.

Deterioration in asset credit quality outside thelegacy assets.

Bear SFr 151.3x bear TNAV 15e

Wealth Management business deteriorates, weaker recovery.Weaker NNM flows in 2014e and market performance. In the i-bank, revenues remain weak with only a limited recovery. 14.5%sustainable ROTE, 10.5% CoE, 2% long-term growth. TheoreticalP/TBV multiple of 1.5x.

Risk RewardRisk Reward

UBS: Over time ROE should get stronger via restructuring and litigation and non-UBS: Over time ROE should get stronger via restructuring and litigation and non-core risks reducingcore risks reducing

Sou rce: Th omson Reu ters (h isto rica l sh are p rice data), Morgan Stan ley Research estimates



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UBS: Valuation Methodology and RisksUBS: Valuation Methodology and Risks

We lower our price target to SFr 20. Our dividendforecast is for ~SFr 0.70 in 2014 including specialdistribution of SFr 0.25. Clearly litigation is a materialswing factor for 2014 and future dividends. We modelSFr 1.0 in 2015e, with the latter implying an attractive~6% yield.

To reach our valuation, we first use a P/BV multiplebased on an adjusted Gordon growth model (this is ourprimary method, and looks to the longer-term earningspower of the franchise). The key input is a tangible bookvalue per share in 2016 (65% of valuation) discountedto 2015. Second, we perform a sanity check with a one-year forward P/E based on peers’ and historical tradingranges (35% of valuation). To reach our price target, weapply weightings to our bull, bear and base case valuesthat reflect our view on the probability of risks to theup- or downside; we assign a 20% weighting to the bull,60% to the base and 20% to the bear case. On top ofthis, we add SFr 1.0 to account for a special dividend in2015-16.

Our base case sustainable ROE is 15.5%. Our base caselong-term growth rate is 3.3% and our cost of equity is10.5%. In our bear case, our cost of equity is 10.5%, ourlong-term growth rate is 2% and sustainable ROE is14.5%. Our bull case assumptions are cost of equity of 10.3%, long-term growth rate of 4% and sustainable ROEof 17%. Our bull case reflects UBS hitting a higher sustainable ROE as restructuring is successful and “reveals”more of the A&WM returns.

The key upside risks to our price target include a sharp and continued bounce in i-banking revenues across theindustry and far stronger private banking profits. The main downside risks we see are higher book value erosionfrom risky assets and material client money outflows, as well as greater ongoing marks from de-leveraging, aninability to improve the profitability of the i-bank, and higher litigation charges.

Exhibit 7:Exhibit 7: UBS Price Target methodology

Sou rce: Morgan Stan ley Research estimates



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Credit Suisse : Capital RatiosCredit Suisse : Capital Ratios

We have written extensively about the capital debate, so below we simply update our expectations for hittingleverage ratio and core tier 1 to guide the discussion.

Exhibit 8:Exhibit 8: Basel III Capital assumptions

Sou rce : Compan y data , Morgan Stan ley research , e = Morgan Stan ley Research estimates



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FinancialsFinancials

Exhibit 9:Exhibit 9: Credit Suisse P&L Forecasts

Sou rce : Compan y data , Morgan Stan ley Research (e = estimates)



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Price Target SFr 25 We apply a 70% weight to our base case, 15% to our bull case and15% to our bear case to reflect our view of the skew of risks.

Bull SFr 341.5x bull TNAV 2015e

Stronger returns from revenue recovery and greater cost-savingdelivery. Wealth Management sees continued strength in net newmoney at 4-5% in 2015-16e, with good market performance levelsand margins of ~100-101bp. Asset Management sees a goodmarket performance. Cost of equity is 11% with a long-termgrowth rate of 3.0%, a sustainable ROTE of 15% and a theoreticalP/TBV of 1.5x.

Base SFr 251.1x base TNAV 2015e

Weaker equity trading revenues in the i-bank and subduedimprovement in WM but offset by cost saves. WealthManagement sees net new money growth at 3-3.5% in 2014-16e,with margins at ~98-100bp. IB sees reported revenues in 2015e -9% YoY. To reach our valuation we use a P/BV multiple based onan adjusted Gordon growth model (which is our primary method,and looks at longer-term earnings power of the franchise). Cost ofequity is 11.3% with a long-term growth rate of 2.8%, asustainable ROTE of 12.5% and a theoretical P/TBV of 1.1x.

Investment ThesisInvestment Thesis

We believe CS has several levers to improvereturns via private banking strength and i-bankinggearing, as well as an aggressive cost-saving plan.

CS has de-levered decisively improving its groupleverage ratio to 3.8% and we expect it to improvefurther, potentially able to meet higher minimumrequirements if need be or issue further cocos.

The performance of the private bank remains animportant source of earnings strength. However,CS continues to underperform UBS on gatheringnew money while WM margins are subdued dueto high levels of cash. An increase in risk appetitecould leverage returns.

Key Value DriversKey Value Drivers

We see strength in the investment bank throughunderwriting, advisory and equities, but questionsremain in FICC, especially post Basel 3 and givenlower for longer rates, migration of OTC, etc. Also,we think the operational leverage of the mid-sizedFICC franchise is a challenge, we feel.

Valuation on ~1.1x TNAV 2015e is undemandingfor ~14% ROTE, but we prefer UBS instead onstronger capital and focus on A&WM

Potential CatalystsPotential Catalysts

Closing mortgage litigation with DoJ in the next sixmonths.

Risks to Achieving Price TargetRisks to Achieving Price Target

Weaker markets and risk aversion could lead tolower i-banking revenues, depressed grossmargins in WM and lower AUM, as reflected in ourbear case earnings and multiple.

Bear SFr 180.9x bear TNAV 2015e

Recovery does not last and IB revenues are weaker. WealthManagement sees flattish flows in 2014-16e, margins at ~95bpwith limited performance and a higher comp ratio. AssetManagement sees a fall in margins and weaker net new moneywith weaker i-bank revenues. Cost of equity is 11.5% with a long-term growth rate of 1%, a sustainable ROTE of 11.5% and atheoretical P/TBV of 1.0x.

Credit Suisse: WM, operational leverage & non-core key to upsideCredit Suisse: WM, operational leverage & non-core key to upside

Sou rce: Th omson Reu ters (h isto rica l sh are p rice data), Morgan Stan ley Research estimates



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Credit Suisse: Valuation Methodology and RisksCredit Suisse: Valuation Methodology and Risks

We lower our price target to SFr25. We value CS on2015e TNAV and use a sustainable ROTE of 12.5% inour base case. Our bull case assumes greater ROTEfrom hitting CS’s ROE target of 15% and strongermarket recovery, while our bear case assumes lowerreturns if revenues deteriorate. Our base case fair valueis SFr 25, our bull case is SFr 34 and bear case SFr 18.Our valuation is driven mostly by 2015e TNAV, which isSFr 22.3. Our base case sustainable ROTE is 12.5%, CoE11.3%, and long-term growth of 2.8%.

To reach our valuation, we first use a P/BV multiplebased on an adjusted Gordon growth model (which isour primary method (70% weighting, and looks to thelonger-term earnings power of the franchise). Second,we check with a one-year forward P/E (30% weighting)based on peers and historical trading ranges. To reachour price target, we apply weightings to the resultingbull (15%), base (70%), and bear values (15%) to reflectour view on the relative probability of risks.

Key risks to our price target: We see upside anddownside risks from credit markets, equity marketlevels and volumes, FX, the macro and regulatoryenvironment, as well as execution risk and riskmanagement.

The authors of this material are not acting in thecapacity of attorneys, nor do they hold themselves outas such. This material is not intended as either a legal opinion or legal advice. The information provided hereindoes not provide all possible outcomes or the probabilities of any outcomes. The result of any legal dispute orcontroversy is dependent on a variety of factors, including but not limited to, the parties' historical relationship,laws pertaining to the case, relative litigation talent, trial location, jury composition, and judge composition.Investors should contact their legal advisor about any issue of law relating to the subject matter of this material.

Exhibit 10:Exhibit 10: CSG price target methodology

Sou rce: Compan y data , Morgan Stan ley Research e = Morgan Stan ley

Research estimates



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not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decisionto buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.Global Stock Ratings Distribution(as of January 31, 2015)For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside ourratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover.Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (seedefinitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspondEqual-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC)STOCK RATING CATEGORY COUNT % OF TOTAL COUNT % OF TOTAL

IBC% OF RATING

CATEGORYOverweight/Buy 1173 35% 320 41% 27%Equal-weight/Hold 1446 43% 361 46% 25%Not-Rated/Hold 107 3% 14 2% 13%Underweight/Sell 603 18% 92 12% 15%TOTAL 3,329 787

Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley receivedinvestment banking compensation in the last 12 months.Analyst Stock RatingsOverweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on arisk-adjusted basis, over the next 12-18 months.Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverageuniverse, on a risk-adjusted basis, over the next 12-18 months.Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst'sindustry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, ona risk-adjusted basis, over the next 12-18 months.Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.Analyst Industry ViewsAttractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevantbroad market benchmark, as indicated below.In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broadmarket benchmark, as indicated below.Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broadmarket benchmark, as indicated below.Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe -MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.Stock Price, Price Target and Rating History (See Rating Definitions)



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relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P. Morgan StanleyResearch or portions of it may not be reprinted, sold or redistributed without the written consent of Morgan Stanley.Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley.

INDUSTRY COVERAGE: Banks

COMPANY (TICKER) RATING (AS OF) PRICE* (02/03/2015)

Alvaro SerranoBanco Popular (ES) (POP.MC) U (01/12/2015) €3.88Banco Sabadell (SABE.MC) E (01/12/2015) €2.29Bankia SA (BKIA.MC) O (02/05/2014) €1.22Bankinter (BKT.MC) U (09/26/2014) €6.28BBVA (BBVA.MC) O (11/24/2014) €7.93CaixaBank SA (CABK.MC) E (07/02/2013) €3.90Danske Bank (DANSKE.CO) E (08/19/2011) DKr 174.70DNB (DNB.OL) O (01/16/2013) NKr 116.80Nordea (NDA.ST) E (03/28/2011) SKr 109.90Santander (SAN.MC) E (11/13/2013) €6.21SEB (SEBa.ST) O (07/23/2014) SKr 101.20Svenska Handelsbanken (SHBa.ST) E (07/23/2014) SKr 396.10Swedbank (SWEDa.ST) E (07/23/2014) SKr 201.30

Bruce HamiltonBNP Paribas (BNPP.PA) E (04/28/2014) €48.41Credit Agricole S.A. (CAGR.PA) E (03/11/2013) €11.00KBC Group NV (KBC.BR) E (08/14/2014) €47.90Natixis (CNAT.PA) O (10/09/2014) €5.85Societe Generale (SOGN.PA) E (12/07/2014) €37.66

Chris Manners, ACABank of Ireland (BKIR.I) E (09/18/2014) €0.28Barclays Bank (BARC.L) O (02/03/2015) 248.45pHSBC (HSBA.L) U (04/25/2014) 617.50pLloyds Banking Group (LLOY.L) O (08/08/2013) 74.97pRoyal Bank of Scotland (RBS.L) E (05/14/2012) 375.60pStandard Chartered Bank (STAN.L) U (02/28/2014) 915.00p

Fiona SimpsonTSB Banking Group plc (TSB.L) E (10/09/2014) 268.60p

Francesca TondiBanca Monte dei Paschi di Siena S.p.A. (BMPS.MI) U (07/14/2014) €0.42Banca Popolare di Milano S.c.a.r.l. (PMII.MI) O (07/14/2014) €0.75Banco Popolare (BAPO.MI) E (07/14/2014) €12.05Commerzbank AG (CBKG.DE) O (03/21/2014) €11.16Erste Bank (ERST.VI) O (07/25/2014) €20.31ING (ING.AS) O (08/22/2013) €11.53Intesa SanPaolo S.p.A. (ISP.MI) O (01/22/2014) €2.64Mediobanca Banca Di Credito Finanziario (MDBI.MI) U (07/14/2014) €7.85Raiffeisen Bank International (RBIV.VI) E (08/29/2012) €11.01UniCredit S.p.A. (CRDI.MI) O (01/22/2013) €5.58Unione di Banche Italiane SCPA (UBI.MI) E (01/22/2014) €6.50

Huw Van SteenisCredit Suisse Group (CSGN.VX) E (11/04/2013) SFr 20.06Deutsche Bank (DBKGn.DE) E (10/11/2010) €27.22Julius Baer (BAER.VX) E (02/17/2014) SFr 41.36UBS AG (UBSN.S) O (01/18/2012) SFr 15.75

Stock Ratings are subject to change. Please see latest research for each company.* Historical prices are not split adjusted.

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