us banks - european exposure fitch

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www.fitchratings.com November 16, 2011

Banks

U.S.A.

U.S. Banks – European ExposureDirect Exposures to GIIPS Manageable, Contagion Risk Chief ConcernSpecial 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, Fitch’s 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.

Risks Increasing: The risks of a negative shock are rising and could alter Fitch’s stable rating

outlook for U.S. banks. Fitch’s 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).

Related Research

Fitch Comments on Euro Area Summit, Oct. 28, 2011

U.S. Money Funds and EuropeanBanks: French Exposure Down,Oct. 20, 2011

French Banks: Under Market Fire,Sept. 29, 2011

The Euro Area Financial Crisis – HowDoes it End?, Sept. 20, 2011

European Banks and Market Turmoil,Sept. 20, 2011

AnalystsJoseph Scott+1 212 908-0624 [email protected]

Christopher D. Wolfe+1 212 [email protected]

Thomas Abruzzo+1 212 [email protected]

http://www.fitchratings.com/creditdesk/press_releases/detail.cfm?pr_id=732123


http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=653901
















U.S. Banks – European Exposure 2

November 16, 2011

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Public Disclosure Not Complete

Disclosure is generally limited to aggregate claims outstanding to a country greater than or

equal to 0.75% of a bank’s 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.

Money Market Fund Exposure Considerable

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 theseMMFs, 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.)

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

Selected Outstandings(US$bn)

French Banks UK Banks

2Q11 2010 2009 2Q11 2010 2009

BAC 8.9 13.0 N.A. 3.8 5.5 8.5

C 15.7 11.2 11.4 18.3 9.5 6.5

JPM 22.8 16.0 16.2 9.4 9.3 12.8

GS 38.5 29.4 8.8 5.4 5.6 3.3

MS 28.1 39.0 9.7 14.0 7.6 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.

0

0

0

0

0

0

0

0

0

0

BAC C JPM GS MS

Source: Company reports.

(%)

apital Market Revenues/Total Revenuess of Sept. 30, 2011)




November 16, 2011

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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.

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

Exposures to Stressed European Markets($bn, As of Sept. 30, 2011)

BAC C JPM WFC GS MS

Net Exposures 13.0 16.3 15.1 3.1 2.5 3.4

Sovereign 0.4 1.9 N.A. 0.0 N.A. N.A.

Hedges 1.7 9.4 5.2 0.0 1.7 3.6

Gross Exposures 14.6 25.7 20.3 3.1 4.2 7.0

Net/Total Assets (%) 0.6 0.8 0.7 0.2 0.3 0.5

Net/T1C (%) 11.0 14.2 12.6 3.4 4.5 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.




November 16, 2011

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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.)

Fitch’s 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 facescontinued pressure on real estate and persistently high unemployment, combined with fiscal

pressures at the government level.




November 16, 2011

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