Banking conference outlook and price targets – bullish post‑election sentiment, no new misconduct allegations

2016 Future of Financials Conference Management and client bullishness implies further upside Price Objective Change Equity | 17 November 2016 Corrected Unauthorized redistribution of this report is prohibited. This report is intended for [email protected] Conference tone bullish into 2017 We recently hosted over 90 public and private companies and 700 attendees at our Future of Financials conference, where investor attendance was up an impressive 66% YoY. The tone from management and investors was uniformly bullish, with more generalists attending than we have seen in previous years. Revenue & regulatory upside + positioning = raising POs We are raising our price objectives across most of our names. Three primary reasons why we think there is upside remaining after the recent rally: 1) an improved outlook on both activity levels and interest rates, driving revenue upside; 2) potentially lower regulatory burden, particularly as new supervisory leadership can come with the new administration; and 3) relatively lighter positioning in US financials vs. other sectors. Full house at innovation-focused panels New this year, we hosted expert panels on the evolution of clearing, fixed income market structure, equity market structure, and payments, and how innovation in blockchain, big data, and robo advisory can change the game. Strong panel attendance suggested high interest in these themes, and polling feedback suggests shareholders want banks to make investment spend in innovation a priority -- so long as it is self funded with savings found elsewhere. Banks: Most constructive we've heard in years We are raising our POs for our banks by c11% (see Table 1 page 63). When asked if the election results changed 2017 outlooks, all banks were more enthusiastic about growth. Echoing sentiment from our panel on regulation and M&A, banks were upbeat on the CCAR process potentially evolving post-election. Our top picks out of the conference: WFC (sentiment over retail sales practices clouding EPS sensitivity to improving macro), C (solid momentum on revenues and capital return), IBKC (moving closer to strategic targets), and EWBC (sentiment post-election appears constructive on regulatory relief). Brokers, Alternatives, and Asset Managers The sentiment around the capital market sector was mostly favorable post the election outcome, given the potential for de-regulation, pro-growth, rising rates, lower tax rates, and increasing activity levels. For the brokers, given mostly favorable 4Q activity trends (more so for trading vs. banking), 1H17 seasonality with easy comps, and potential for de-regulation and lower taxes – we like the outlook, particularly for GS. For the asset managers, despite the move higher post the election on a potential DOL delay/modification and lower tax rates, most expect the DOL to continue in some form and the core trends remain challenging – we remain cautious. For the alternative managers, while we continue to view the structural growth as attractive and a lower corp tax rate could potentially increase the odds of a transition to a C-corp , given the potential for a higher carry tax, rising rates, and de-regulation of banks potentially moderating some of the newer growth areas, we view the outlook as more balanced. Specialty / Consumer finance Companies were generally bullish on the US consumer heading into 2017. AXP presented a fairly upbeat outlook on billings, loan and revenue growth, while cautioning that Discount rate pressures and FX headwinds could impact near-term results. The private tech based lenders were cautiously optimistic that hiccups from earlier this year were behind the sector, while the private payments companies stressed the importance of partnering with incumbent leaders and the need to maintain safety standards. BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 78 to 81. Analyst Certification on page 75. Price Objective Basis/Risk on page 64. 11687665 Timestamp: 17 November 2016 06:24AM EST United States Banks US Financials MLPF&S Erika Najarian Research Analyst MLPF&S +1 646 855 1584 [email protected] Michael Carrier, CFA Research Analyst MLPF&S +1 646 855 5004 [email protected] Ebrahim H. Poonawala Research Analyst MLPF&S +1 646 743 0490 [email protected] Kenneth Bruce Research Analyst MLPF&S +1 415 676 3545 [email protected] See Team Page for Full List of Contributors Conference tone bullish into 2017 We recently hosted over 90 public and private companies and 700 attendees at our Future of Financials conference, where investor attendance was up an impressive 66% YoY. The tone from management and investors was uniformly bullish, with more generalists attending than we've seen in previous years. When asked how they would describe their portfolio positioning in financial stocks, 60% of the investors polled noted that they are either slightly overweight or very overweight the sector (see Chart 1). Chart 1: How would you describe your portfolio positioning in financial stocks, excluding insurance and REITs? 40% 37% 35% 30% 25% 20% 15% 10% 5% 0% 23% 16% 15% Very overweight Slightly overweight Neutral Slightly underweight 9% Very underweight Source: BofA Merrill Lynch Global Research New this year, we hosted expert panels on the evolution of clearing, fixed income market structure, equity market structure, and payments, and how innovation in blockchain, big data, and robo advisory can change the game. Strong panel attendance suggested high interest in these themes, and polling feedback suggests shareholders want banks to make investment spend in innovation a priority -- so long as its self funded with savings found elsewhere. 68% of those polled across multiple company presentations believed that institutions should invest in innovation projects but be mindful of self-funding (see Chart 2). Chart 2: Chart 2: As a shareholder, what statement most closely aligns with your view on how traditional financial institutions should allocate investment spending on innovation? 80% 70% 60% 50% 40% 30% 20% 10% 0% 26% Investment spending on innovation should be top priority 68% 6% Given the revenue Institutions should focus on environment, institutions should improving the bottom line and invest in innovation projects but delay innovation projects be mindful of self-funding Source: BofA Merrill Lynch Global Research 2 2016 Future of Financials Conference | 17 November 2016 Banks Takeaways With our conference coming a week following a historic US presidential election that helped boost bank stocks by 12%, bank management teams were generally optimistic with regards to the economic outlook heading into 2017. Greater fiscal stimulus that is expected to spur economic growth coupled with potential regulatory relief has helped improve the overall sentiment in the sector. When asked what the biggest impact of the GOP sweep would likely be to bank earnings, 35% noted tax cuts and infrastructure spurring growth as the biggest impact. Chart 3: What do you think is the biggest impact of the GOP sweep to bank earnings? 40% 35% 30% 25% 20% 15% 10% 5% 0% 24% Interest rates rising faster across the curve due to stronger dollar 35% Tax cuts and infrastructure spending spurring growth, therefore better loan demand 31% Lower regulatory burden, driving higher ROEs as excess capital is returned back to shareholders or reinvested for growth 9% No real impact/too early to tell Source: BofA Merrill Lynch Global Research An area that has attracted particular attention among bank investors is around the current landscape of multifamily lending. We polled the audience around their outlook for multifamily lending in 2017 and found that 49% of those polled said there was some concern, but only in certain regions and at certain rental price points. Meanwhile, 29% noted softening fundamentals that should lead to slower financing activity and worsening credit metrics (see Chart 4). Chart 4: How do you view fundamentals for multifamily lending in 2017? 60% 50% 40% 30% 20% 10% 0% 10% Softening fundamentals should lead to slower financing activity next year 2% Softening fundamentals should lead to worsening credit metrics 29% Softening fundamentals should lead to slower financing activity and worsening credit metrics 49% Some concern, but only in certain regions and at certain rental price points 11% No concern Source: BofA Merrill Lynch Global Research 2016 Future of Financials Conference | 17 November 2016 3 Brokers Takeaways In brokers, GS presented, while MS hosted 1-1 meetings with investors. During the conference we polled the audience on several topics including the outlook for capital markets revenues. Investors modestly positive on capital markets over next 1-2 years Given the election outcome, recent rise in rates, potential for higher growth and deregulation, and lower corporate tax rates, we asked investors about their outlook for capital markets over the next 1-2 years. The majority of investors (78%) were positive about the capital markets sector, with 56% who expect modest improvement in regulation, revenue growth of 5-10%, and returns of 10-12% and 22% who think we could see significant improvement in regulation, revenues growth of 10%+, and returns 12%+. Chart 5: Based on the backdrop and the election outcome, what is your outlook for the capital markets over the next 1-2 years 60% 56% 50% 40% 30% 20% 10% 9% 13% 22% 0% Little to no change in regulation, flattish revenues, and stable returns Little to no change in regulation, but improving revenues (5%) and returns (10%+) with GDP growth Modest improvement in regulation, revenues (5-10%), and returns (10-12%) Significant improvement in regulation, revenues (10%+), and returns (12%+) Source: BofA Merrill Lynch Global Research Asset Manager Takeaways In asset management, four of the largest public managers, IVZ, EV, LM, and AB either presented or engaged in fireside chats, while several other firms including AMG, APAM, BLK, CNS, OMAM, and VRTS hosted 1-1 meetings with investors. During the conference we polled the audience on several topics including the outlook for DOL (in the panel section), the outlook for fixed income given the recent rise in rates/expected rate hike and outlook, active vs passive market share, M&A, and pricing/fee structures. Fixed income outlook more muted Given the recent rise in rates, a looming rate hike in December, and the potential for a higher growth/inflation outlook for the economy, we asked investors their outlook on fixed income performance and flows vs equities. The majority of investors believe we will see weaker fixed income performance and flows offset by stronger equity performance and flows (52%). Weaker fixed income/equity performance and flows was the second most popular answer at 24% while flat flows and performance came in third at 16%. Only 8% of the audience think we will see stronger fixed income/equity performance and flows, while nobody thinks fixed income will be stronger and equity will be weaker (both flows and performance). 4 2016 Future of Financials Conference | 17 November 2016 Chart 6: What is your outlook on fixed income performance and flows versus equities? 60% 50% 52% 40% 30% 24% 20% 16% 10% 8% 0% Weaker FI performance & flows / Stronger equity performance & flows Weaker FI and Equity performance & flows Flat FI performance & flows / Flat equity performance & flows Stronger FI and Equity performance & flows 0% Stronger FI performance & flows / Weaker equity performance & flows Source: BofA Merrill Lynch Global Research Active vs passive outlook – passive to continue to gain share Given the ongoing shift to passive investing from active, we polled the audience to see where they think the share split between the two styles eventually settles. Currently the share split is roughly 70% active and 30% passive which was the least popular answer (10%) when asked “do you see improving cyclical demand for active management, despite structural headwinds, and if so where do you think active/passive share settles?” Most investors do see improving cyclical demand for active management and think passive will eventually control 40% of the market (50%) while 40% of respondents do not see improving trends for active and that passive will eventually capture 50% of the market. Chart 7: Do you see improving demand for active & where do you think active/passive share settles? 60% 50% 40% 30% 20% 10% 0% Yes, but structural will persist, with share heading to 60% active / 40% passive No, and structural will persist, with share heading to 50% active / 50% passive Yes, with the share settling near the current 70% active / 30% passive Source: BofA Merrill Lynch Global Research M&A activity likely to rise Given a recent pickup in M&A and pressures within the industry that will likely continue the trend, including rising regulatory costs, some fee pressure, and active outflows, we asked investors their outlook for M&A in the sector. We found that the majority think 2016 Future of Financials Conference | 17 November 2016 5 that the number of deals in the asset management sector will increase modestly in 2017 vs 2016 (56%), 32% see M&A picking up significantly, and 12% see flat activity in 2017. Nobody sees lower M&A activity in 2017 vs 2016. Chart 8: How will 2017 asset management M&A activity (# of deals) be versus 2016? 60% 56% 50% 40% 30% 32% 20% 10% 12% 0% Increase modestly Increase significantly Be stagnant 0% 0% Decrease modestly Decrease significantly Source: BofA Merrill Lynch Global Research Pricing/fee structure in retail seems to have more of a following Given some underperformance of active managers, some scrutiny around fees, as well as fee pressure from passive, we asked investors if they thought a change in active pricing could make sense, i.e. charge a lower base fee with a variable performance fee that would be earned when alpha is generated. We found a majority of respondents thought it would make sense to change the pricing structure and it could make active more competitive vs passive (67%). The rest of respondents felt it didn’t make sense either because it would be too challenging for the active industry or it would not slow the flows into passive. Chart 9: Do you think a change in industry active pricing (lower base + perf fee) could make sense? 80% 70% 67% 60% 50% 40% 30% 25% 20% 10% 8% 0% Yes, it could make the product more competitive vs. passive products No, it would be too challenging for the active industry No, it would not change the flow trend toward passive products Source: BofA Merrill Lynch Global Research 6 2016 Future of Financials Conference | 17 November 2016 Alternative Asset Manager Takeaways Within alternative asset management, four of the public managers, ARES, BX, CG, and KKR presented, while the others did meetings. During the conference we polled the audience on several key topics including the outlook for the equity and real estate markets, potential impacts from the recent election, distribution outlook, and firm structures and business models. Investors were generally bullish on the equity market, potential for fiscal stimulus ahead, and a key focus from investors was on the potential change in taxes following the election, and whether that means reassessing corporate structures for the alts, with a possible change from PTP to C-corp. Investors bullish on the equity markets Our polling results indicate that investors are generally positive on equity market returns over the next year. When asked “What is your expectation for equity market returns over the next year?” the most common response was +0-10% (51%), followed by 10%+ (25%), 0 to -10% (15%), and <-10% (8%). Chart 10: What is your expectation for equity market returns over the next year? 60% 50% 51% 40% 30% 25% 20% 15% 10% 8% 0% 10%+ 0 to +10% 0 to -10% More than a 10% pullback Source: BofA Merrill Lynch Global Research Investors are less positive on the real estate market When asked “Where do you think we are in the overall Real Estate cycle?” most people think that we are in the middle innings with a few pockets of concern (57%), followed closely by later innings with growing areas of concern (42%). Very few people think that we are in the early innings of the real estate cycle (1%). 2016 Future of Financials Conference | 17 November 2016 7 Chart 11: Where do you think we are in the overall Real Estate cycle? 60% 57% 50% 40% 42% 30% 20% 10% 0% 1% Early innings with limited areas of concern Middle innings with a few pockets of concern Late innings with growing areas of concern Source: BofA Merrill Lynch Global Research Investors like the growth, superior performance, & distributions When asked “What is the most attractive aspect of investing in an alternative asset manager?” investors like both attractive growth & superior performance and high dividends/distributions (both at 35%). Investors also like the long term locked up capital (18%), while low valuations and wide moats were less important (both at 6%). Chart 12: What is the most attractive aspect of investing in an alternative asset manager? 40% 35% 35% 35% 30% 25% 20% 18% 15% 10% 5% 6% 6% 0% Attractive organic growth & superior performance High dividends/distributions for shareholders Wide moats for established firms Long term locked up capital Low valuations Source: BofA Merrill Lynch Global Research Despite moderating distributions of late, most expect flat to higher in ‘17 When asked “Where do you think distributions for the industry will be in 2017 vs. 2016?” investors expect roughly flat or up 5-15% (both at 37%), followed by down 5- 15% (21%). Few investors expect distributions to change more than 15% year-overyear. 8 2016 Future of Financials Conference | 17 November 2016 Chart 13: Where do you think distributions for the industry will be in 2017 vs. 2016? 40% 37% 37% 35% 30% 25% 20% 21% 15% 10% 5% 0% 0% Roughly flat Up 5-15% Up 15%+ Down 5-15% Down 15%+ 5% Source: BofA Merrill Lynch Global Research Election results could have far reaching impacts for the sector When asked “What is the most likely impact from the election results on the alternative asset managers?” investors were fairly mixed in their responses, indicating to us that investors expect a number of changes. The most common response was increased tax on carried interest (33%), followed by higher rates impacting financing costs and some returns (27%), then stronger economic growth and healthy returns (20%). Few investors expect a decrease in bank regulation slowing alternative manager growth in new areas (13%) along with too much euphoria leading to a market correction (7%). Chart 14: What is the most likely impact from the election results on the alternative asset managers? 40% 35% 30% 25% 20% 15% 10% 5% 0% 20% 33% Stronger economic Increased tax rate growth and on carried interest healthy returns for the alternative managers 27% Higher rates impacting financing costs and some returns 13% Decreased bank regulation potentially slowing growth in new areas 7% Too much euphoria leading to a market correction and deployment opportunities Source: BofA Merrill Lynch Global Research Specialty / Consumer finance Takeaways Companies were generally bullish on the US consumer heading into 2017. AXP presented a fairly upbeat outlook on billings, loan and revenue growth, while cautioning that Discount rate pressures and FX headwinds could impact near-term results. The 2016 Future of Financials Conference | 17 November 2016 9 private tech based lenders were cautiously optimistic that hiccups from earlier this year were behind the sector, while the private payments companies stressed the importance of partnering with incumbent leaders and the need to maintain safety standards. US Banks Top Takeaways Associated Bancorp (ASB) B-3-7, Underperform • A strong Midwest market should lead to steady growth: ASB’s CEO Phillip Flynn and CFO Chris Niles highlighted the strong fundamentals of the bank’s Midwest footprint with its low unemployment and a strong manufacturing base. While commenting on the potential for relief coming out of DC under the new Trump administration, management noted that shortage of skilled workers was probably the biggest issue impeding businesses in its footprint versus higher taxes or an overly stringent regulatory environment. • CRE represents a growth opportunity: Management was positive on growth prospects within the CRE loan portfolio, which represents 24% of avg loans as of 3Q16. Management is targeting CRE to represent 30-40% of the portfolio in order for consumer, CRE, and commercial to each comprise approximately a third of the loan book. In the near term, executives see opportunities in the CRE space in 2017 as pricing and structure improve benefitting from a pullback by lenders with high CRE concentration. • Energy portfolio should begin to stabilize: While management analyzes the energy book on a credit by credit basis, it noted caution if oil prices fell significantly. However, management noted that the energy book reflects lower energy prices as new energy loans price in lower hydrocarbon pricing vs. the maturing loans. Regarding energy loan growth, management expects muted growth going forward as the benefit from new loans will most likely be offset by continued pay-downs by existing customers. • Dec rate hike to surface in 1Q17 margin: Management expects a Dec rate hike to have little impact on 4Q given that its LIBOR based portfolio would re-price on Jan 1. On the other hand, interest expense is expected to rise as deposits that are linked to benchmark rates re-price higher. Last year, the margin fell 1bp QoQ following the Fed rate hike as deposit costs rose 8bp QoQ. Management noted that 1Q16 saw lower loan renewal rates and compression from cost of funds, but that its cost of funds are in a better position this year, which should help lead to a modest positive impact to the margin in 1Q17 from a Dec rate hike. • Fee businesses could get augmented by additional M&A: Within fees, management views insurance as the best opportunity from non-bank M&A. Recall that ASB completed the acquisition of Ahmann & Martin in 02/15. Management noted that it saw a significant opportunity from providing consulting services around employee benefits to small-to-medium sized businesses. Moreover, any changes to the Affordable Care Act that creates added uncertainty in the market would present an incremental revenue growth opportunity for this business. 10 2016 Future of Financials Conference | 17 November 2016 Chart 15: Would you want to see ASB partner with emerging online lenders to augment organic growth? 70% 60% 50% 40% 30% 20% 10% 0% Yes, partnership with online lenders provides a good source of loan growth No, given the uncertainty around how these loans will perform during a credit downturn Source: BofA Merrill Lynch Global Research BB&T (BBT), B-1-7, Buy • Pent up demand in small and middle market corporates. COO Chris Henson was upbeat with regards to the growth outlook for the US economy post the US elections, particularly from middle market companies that have been extremely cautious around making investments over the last few years. Mr Henson noted that as business confidence rises on back of potentially stronger job growth and lower tax reductions, BBT should see strength across its core banking operations. • Out of M&A in the near term but looking to grow long term. Management reiterated that it is out of the M&A game for now as it looks to execute on delivering its targeted synergies from recent deals. That said, management expects to eventually engage in M&A deals with BBT having the infrastructure for double its size, noting that scale has become important in the current regulatory landscape. When asked where investors would like BBT to focus on doing deals, 59% noted that it would like management to pursue fee related businesses while 23% would like management to prioritize dividend maximization. Chart 16: Do you expect the deal activity in financial services to pick up in 2017? Chart 17: Once M&A is back on the table, where would you like to see BBT focus on doing deals? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 87% Yes 13% No 70% 60% 50% 40% 30% 20% 10% 0% 18% Depository deals 59% Fee-related businesses 23% Would rather they prioritize maximizing the dividend Source: BofA Merrill Lynch Global Research Source: BofA Merrill Lynch Global Research • Well positioned from rising rates. Given the outlook for higher interest rates on both the short and long end of the curve, Mr. Henson noted that while BBT tries to maintain a relatively neutral balance sheet, it would expect to see upside in the margin on back of higher rates. Additionally, higher long rates could also help drive 2016 Future of Financials Conference | 17 November 2016 11 lower pension expense as it reduces the overall discounted pension liability given that BBT remains one of the few large regional banks that still have defined benefit pension plans. • Potential for regulatory relief requires BBT to reevaluate risk/compliance spending. Management noted that 75-80% of its infrastructure budget is based around risk management and regulatory costs. Given the possibility of regulatory relief coming out of the new administration, management noted that it does not want to misallocate its expense spending. As such, management expects to redeploy some of those compliance related costs into revenue and service generation opportunities stemming from any regulatory relief. • Branches still have value, but the structure will likely change. Mr. Henson noted that he still sees value from BBT’s branch network but increasing customer usage across its digital channels and with branch transactions down 4%, he expects continued branch consolidation at a pace of more than 2-2.5% over the next couple years. Moreover, management believes that future branches will be likely be smaller in nature and staffed with fewer people that are cross trained with multiple responsibilities. As an example of this, Mr. Henson noted that BBT has combined its teller and relationship banking role into one branch banker role. Chart 18: What do you think is the biggest catalyst for BBT shares over the next 12-24 months? 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 30% Successful integration of its recent deals and achieving synergy targets 41% Strong top-line organic revenue growth, regardless of macro backdrop 11% Expense rationalization 15% Accretive bank and/or non-bank deals 4% Continued outperformance in dividend growth and dividend yield Source: BofA Merrill Lynch Global Research Bank of Hawaii (BOH), B-3-7, Underperform • Solid loan growth on back of a strong HI economy. Chairman, President and CEO Peter Ho, Vice Chairman and CFO Kent Lucien and Senior Executive VP, Controller and Principal Accounting Officer Dean Shigemura were generally upbeat with regards to the operating outlook as we enter 2017. Management guided to achieving low double digit loan growth on the back of a robust Hawaiian economy. While management expects some moderation in C&I growth following a strong 3Q it sounded upbeat around the lending outlook given fairly healthy tourism activity. Management noted that while a de-emphasis on the Pacific Alliance, a priority for the Obama administration, was not a positive development, it remained fairly confident that strong military spending should continue to serve as a tailwind to the Hawaiian economy. • Credit outlook remains benign. Mr. Ho affirmed the credit environment has been benign and believes BOH’s strong credit will remain intact in the near future. As loan growth improves, Mr. Ho acknowledged provisions should follow a similar trend, but nothing on the horizon suggests credit will worsen anytime soon. Management acknowledged reserve balances are hard to predict, but believes the 12 2016 Future of Financials Conference | 17 November 2016 greatest likelihood is for the loan loss reserve ratio is to stabilize near current levels. • Remains asset sensitive. Management acknowledged positive trends coming out of a future Trump administration, with one being the positive benefit from higher rates. With a December rate hike likely on the horizon, CFO Kent Lucien reminded investors that a 25 bp rate increase would benefit NII marginally ($1.5mn on an annual basis), but as the 10yr continues to rally, spread income will benefit more significantly. A 100 bp increase contributes to a 5.2% increase in NII on an annual basis. • Continued focus on expenses. Management expects expenses to come in at the upper end of their 3% to 3.5% guidance this year, mainly due to performance based expenses such as stock based comp and commissions. A potential source of expense savings should be reduction in the size of its branches, not necessarily overall count. While management has piloted this new branch design it believes that converting the entire branch network will be a multiyear process. • Capital deployment remains a priority. BOH continues to provide great transparency in regards to their capital deployment strategy. Management reiterated their commitment to payout 50% of net income in the form of dividends, with a remaining portion going to buybacks. BOH has completed over $400mn in buybacks over the past five years and noted that they are very comfortable with this strategy, given its proven track record. Chart 19: What do you see as the biggest headwind to BOH’s 2017 EPS growth outlook? 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 20% Normalizing credit provisioning costs? 40% 40% Slowing loan growth following a strong 2016 Pressure on expense growth 0% Pressure on the net interest margin Source: BofA Merrill Lynch Global Research 2016 Future of Financials Conference | 17 November 2016 13 Chart 20: With regard to capital deployment, what would you like management to focus on? 70% 60% 57% 50% 40% 30% 29% 20% 14% 10% 0% Increase dividend payout Increase the pace of share buybacks Continue with current capital management strategy Source: BofA Merrill Lynch Global Research Capital Bank Financial (CBF), C-1-7, Buy • Investor expectations for CBF to achieve its ROA target increased YoY. Of the audience polled, 75% believe CBF to achieve its 1.1% ROA by YE17. This compares to 67% of the audience polled last year. CEO Gene Taylor highlighted both the organic growth opportunities and limited expense growth for the bank to achieve its ROA target. Although the bank is expected to cross $10bn in assets next year, management sounded confident that there would be little incremental expense growth as the bank has already built out leverageable systems. Chart 21: What do you consider as the single most important catalyst for CBF shares in 2017? 60% 50% 40% 30% 20% 10% 0% 50% Achieving its profitability targets 42% A bank acquisition Source: BofA Merrill Lynch Global Research 0% 0% Acceleration in loan growth 8% Increasing Higher capital returninterest rates Chart 22: Do you think CBF will achieve its 1.1% core ROA target by YE17? 80% 70% 60% 50% 40% 30% 20% 10% 0% 75% Yes Source: BofA Merrill Lynch Global Research 25% No • Expectations around COB merger remain intact. CBF reiterated their expectations to fully recognize the 39% of cost savings related to the CommunityOne merger by 2017 year-end. (Systems conversion is slated for mid- 1Q17, with initial savings expected to be realized starting 2Q17). During their presentation, management introduced the source of these savings (new disclosure), with the majority expected to come from executive management compensation (23%) and back-office functions (33%). • Capital deployment remains a key catalyst for the stock. Management agreed with the 80% of the audience polled that believe the pace of M&A activity will pick YoY (slightly better than last year’s forward expectations). While management noted that it remains focused on integrating COB, and acknowledged that it remains 14 2016 Future of Financials Conference | 17 November 2016 active in terms of M&A discussions, CBF continues to evaluate all opportunities that promise the best returns for shareholders. Interestingly, investor sentiment around CBF’s positioning within the M&A market shifted, 75% of respondents believing the pro forma institution is better positioned to act as an acquirer. (Note last year, 55% of respondents believed CBF would be a takeout candidate in the medium term. Chart 23: Do you think the pace of M&A activity will pick-up significantly in 2017 vs. 2016? 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 80% Yes Source: BofA Merrill Lynch Global Research 20% No Chart 24: Does the acquisition of CommunityOne better position CBF as an acquirer or a takeout candidate? 80% 70% 60% 50% 40% 30% 20% 10% 0% 75% Acquirer Source: BofA Merrill Lynch Global Research 25% Takeout candidate • CBF expected to prudently grow in CRE as bank is underpenetrated. CFO Chris Marshall acknowledged that there exist signs of frothiness within the multi-family lending segment. That said, he noted there is still room to grow as peers pull back in response to regulatory oversight (3Q: 161% vs. 300% threshold). That said, management remains selective and has implemented a 25-30% concentration limit (3Q: 22%). Citigroup (C), B-1-7, Buy • Markets revenue up YoY so far, down from robust 3Q. President and CEO of ICG Jamie Forese and CFO John Gerspach noted that at this current point in time, they expect a seasonal sequential decline in Markets revenue in 4Q, but revenues should be up YoY on back of stronger activity levels post the election. Moreover, banking activity is looking consistent with prior quarters. • DTA impact from lower tax rates. Given the possibility of lower tax rates under the new administration, there have been many questions around what a potential tax cut could mean on C’s ability to re-capture some of its DTA. Management noted that the impact will depend on 1) the ultimate tax rate, 2) either a worldwide or territorial regime, and 3) the time it takes to reflect the new changes. A federal tax cut would directly impact the $21B timing related differences component of its DTA balance. Assuming a 20% decline in the federal tax rate, this would imply a $4B charge to the P&L (20% X $21B). That said, C has $7B of timing difference DTA that is not includable in its regulatory capital. As a result, that $4B impact would not have an impact on its CET1. In the event that there is a territorial regime, there is an element in its foreign subs equal to ~30% of the $21B that would lose its value at an accelerated rate. Assuming a 25% tax rate and territorial regime, management noted that there would be roughly $12B worth of DTA that would see some valuation adjustment and drive a $4B of reduction in its regulatory capital. • Aiming to improve market share in Equities. Management noted that C currently ranks around 8-9th in the Equities business and while it is not looking to achieve a top 3 market share, it would like to improve to around 5-6th. Management noted that the revenue gap to reaching that ranking is ~$1B. While not all of that is 2016 Future of Financials Conference | 17 November 2016 15 expected to fall to the bottom line, management noted that achieving this would be accretive to its overall margin. We note that when asked where is C’s biggest opportunity to take global market share within ICG, 47% of those polled said the biggest opportunity lied within the Equities business. Chart 25: Where do you think C’s biggest opportunity is to take global market share within its IGC business? 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: BofA Merrill Lynch Global Research • Lower regulatory constraints versus peers present opportunity. Given C’s strong regulatory position such as its above peer SLR ratio, management noted that it can compete in balance sheet intensive businesses such as Rates while more constrained peers are forced to pull back. In terms of its ability to take market share away from European banks, management noted that European banks are more likely to cede share in Fixed Income and less so within Equity and Banking. • Longer term goal of 14% ROTCE in ICG. Management believes that under a more normalized rate environment and through its work towards improving efficiencies across ICG on back of its infrastructure refinements, ICG should be able to achieve a 14% ROTCE vs ~12% today. Chart 26: Despite material progress, C shares still trade below TBV. What will drive shares to re-rate closer to TBV? 40% 35% 30% 25% 20% 15% 10% 5% 0% 31% Source: BofA Merrill Lynch Global Research 47% 22% Fixed income markets Equity markets Banking (Treasury & Trade Solutions, advisory, ECM, DCM) 34% Continued increase in capital return from the $10.4B expected return under the 2016 CCAR cycle 37% Consistent improvement in revenue momentum 12% Continued core cost control, with further reductions in legal & repositioning charges 10% Accelerated recapture of its deferred tax asset (DTA) 7% Further simplification of its global business model 16 2016 Future of Financials Conference | 17 November 2016 Chart 27: Where do you see Citicorp’s efficiency ratio settling in 2017? 80% 70% 71% 60% 50% 40% 30% 20% 10% 21% 9% 0% Below the 58% reported YTD in ‘16 In-line with the 58% reported YTD in ‘16 Above the 58% reported YTD in ‘16 Source: BofA Merrill Lynch Global Research East West Bancorp (EWBC), B-1-7, Buy • Sentiment post-election appears constructive on regulatory relief. CEO Dominick Ng noted that the industry could be positively impacted should aspects of Dodd-Frank, which have been both challenging and taken up significant internal resources (even for banks below the $50bn SIFI asset threshold), be reformed. Specifically, Mr. Ng believes the pace of expense growth could likely slow. That said, he noted the possibility to shift some of these expense savings to revenue generating areas. • EWBC sees limited impact from anti trade rhetoric during the run-up to the US elections. Although recent political rhetoric on China has had a negative bias, Mr. Ng believes these views are primarily focused on the traditional-manufacturing Chinese industries vs. the country’s current strategic emphasis on tech and consumer/retail. Despite having only a 4% exposure to Greater China (includes Hong Kong), EWBC benefits from its unique positioning, both as industry experts in parallel industries and as a relationship bank. Investor sentiment agreed; with 86% of the audience polled have a bullish view of EWBC’s China exposure. Chart 28: How does China exposure impact your investment thesis on EWBC? 50% 43% 43% 40% 30% 20% 14% 10% 0% Makes me cautious, especially given the anti-trade rhetoric in the run-up to the US elections Makes me bullish, as China provides an attractive growth opportunity 0% Makes me cautious, given a slowing Chinese economy Does not matter much, given EWBC’s earnings are far more levered to the US economy Source: BofA Merrill Lynch Global Research • EWBC reiterated its strategy to sell CRE loans in favor of portfolio diversification. Although Mr. Ng expressed caution on the overall commercial real estate (CRE) market, he noted seeing little tangible signs of concern within EWBC’s footprint. That said, EWBC could continue to look to sell CRE loans in order to keep the loan portfolio balanced and thereby limit the reliance on any one segment. Note: CRE concentration was 261% of risk-based capital as of 3Q vs. 265% in 2Q. 2016 Future of Financials Conference | 17 November 2016 17 • EWBC to maintain capital for organic growth opportunities. As of 3Q, EWBC’s CET1 ratio was 10.9%. While EWBC isn’t opposed to using excess capital for an acquisition (depending on the market landscape), Mr. Ng prefers to use capital to support organic growth opportunities and the dividend (1.75% div yield). With respect to share repurchase, EWBC seemed less enthusiastic to buy back stock at current valuation levels (2.3x TBV). First Hawaiian (FHB), C-2-7, Neutral • Positive outlook around the Hawaiian economy. Chairman and CEO Robert Harrison and CFO/Treasurer Michael Ching were optimistic with regards to the outlook for the Hawaiian economy, particularly around tourism trends. While the recent strength of the dollar could impact the inflow of foreign tourists (with Japan and Canada the key foreign markets for HI) to the island, management noted that the potential for an increases in domestic tourism could help offset the pressure from any slowdown due to a stronger USD. • Positioned well for higher rates. With regards to its outlook on the impact of potentially higher interest rates, management noted that it remains asset sensitive with 60% of its loan portfolio floating rate. On the funding side FHB expects the deposit beta to remain low given the competitive dynamics in the Hawaii landscape. Management anticipates that another 25bp increase in the Fed Funds rate in December could have a similar impact on the NIM (+6bp) as it experienced following the previous rate hike in Dec '15. • Cash deployment to securities completed. Management noted that it has completed the liquidity actions that it planned to take from deploying excess cash into its securities portfolio and the full impact of this should be visible in 4Q results. Note the securities portfolio duration is 3.3yrs at the end of 3Q16. Management noted that it prefers to keep $400-500mn at the Fed in cash liquidity. • Continued focus on maintaining dividend payout. In terms of capital management, management reiterated that it would like to maintain a healthy dividend payout. Given that additional capital return from buybacks are limited due to the Fed’s CCAR process (which FHB is subject to given that it is part of a larger holding company owned by BNP), management intends to increase its capital payout to shareholders (via higher dividend and buybacks) over time. Expenses to stay relatively elevated in near term. During the audience poll, when asked about what management should prioritize in 2017, 38% of the investors polled noted that they would like management to manage core expense growth while 31% would like management to increase the dividend payout to over 50% of earnings. Management noted that the efficiency ratio would likely trend around 50%, modestly higher than the 48.5% it reported in 3Q as it incurs additional public company costs ($14.5 – 17mn of expenses), but over time should move back below in the mid-to-high 40s. 18 2016 Future of Financials Conference | 17 November 2016 Chart 29: What is the single biggest factor that would prevent you from buying or increasing exposure to FHB? 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 40% 27% FHB’s premium valuation Exposure to the auto sector Liquidity overhang tied to a single large shareholder (BNP owns 82% of shares o/s) 33% Source: BofA Merrill Lynch Global Research Chart 30: What would you like management to prioritize in 2017? 40% 35% 30% 25% 20% 15% 10% 5% 0% 38% Managing core expense growth to under 2.5% 31% 25% Increase its dividend Initiate a stock buyback payout to over 50% of program earnings 6% Pursue M&A opportunities Source: BofA Merrill Lynch Global Research Great Western Bancorp (GWB), B-1-7, Buy • GWB sees three potential benefits following the US presidential election results. Chief Financial Officer Peter Chapman sounded optimistic that clarity around the corporate tax policy could act as a much needed impetus to spur lending activity. Secondly, current prospects for Head of Ag under the new administration are viewed as a net positive for the industry. Lastly, while GWB has already begun to see regulatory costs increase now that they’ve exceeded $10bn in assets, management could see a potential for compliance costs to rationalize should the new administration reform the regulatory framework. • Management’s revised growth rate outlook was meant to level set expectations. During its 3Q16 earnings call, management tempered loan growth expectations slightly to “mid-single” digits for FY16 vs. “mid-to-high” single digits. Interestingly, this was the number one reason among investors polled as to why they were hesitant to increase their exposure to GWB. That said, management sounded optimistic about the growth opportunities within its AZ and CO markets. While growth in C&I should see continued momentum, management noted increased competition around pricing as banks tapped out of the CRE markets look to make C&I loans. On CRE, GWB sees itself as a potential beneficiary from pullback by some of its competitors. While management was generally constructive of the 2016 Future of Financials Conference | 17 November 2016 19 CRE market across its footprint it noted some caution around the health of the market in Denver. Chart 31: What is the primary reason keeping you from buying/increasing exposure in GWB? 40% 38% 38% 35% 30% 25% 25% 20% 15% 10% 5% 0% Ag exposure, as the weakness Stock valuation, see better Cautious commentary around in the farm sector increases risk/reward elsewhere loan growth during 3Q16 credit risk earnings Source: BofA Merrill Lynch Global Research • Ag portfolio offers unique opportunity, but management believes fears overstated. As of 3Q16, ag loans represented 25% of the total portfolio (36% in grains, 50% in proteins and 14% in other). Tied for first at 38% as a reason why investors are hesitant to increase exposure to GWB resonates from the bank’s ag exposure. While lower grain prices may constrain cash flow on those loans nearterm, Mr. Chapman noted that this is offset by stronger yields. Management also highlighted the relatively low losses observed historically in this portfolio given the significant experience within GWB's management ranks in lending to this segment, including in the 1980s the last stress period for the farm sector. That said, management remains committed to this business as it is key to GWB’s footprint. • Management reiterated its commitment to actively manage excess capital. Although management is comfortable with its current capital levels (3Q: 9.5% tier 1 leverage), Mr. Chapman noted the bank’s preference is to put its excess capital to work. Management reminded investors of the criteria it looks for in a potential target. While they continue to look for opportunities within their footprint, specifically IA and KS, they remain disciplined. In addition to its recently authorized repurchase program of $100mn, management believes a total payout ratio of 30% is maintainable. IBERIABANK (IBKC), B-1-7, Buy • Focused on moving closer to its strategic targets: President and CEO Daryl Byrd and Senior Vice President John Davis were upbeat around the outlook for economic growth across IBKC's 10 state footprint as the bank looks out into 2017. While management has thus far not provided any specific guidance for 2017, we expect this to be forthcoming in conjunction with the announcement of 4Q16 results in January. Moreover, management sounded cautiously optimistic that pro-growth policies (if implemented) coupled with some relief on the regulatory front under the new Trump administration could lead to a much stronger growth outlook • Energy credit costs should trend lower: Management noted the overall energy portfolio should continue to trend lower but is expected to moderate as run-off in stressed energy loans (and loan payoffs) are partially offset by new energy loans, with management looking to selectively lend again in the sector. Moreover, with energy criticized loans peaking in 1Q16, management expects the criticized loans to trend lower barring any major declines in oil prices. 20 2016 Future of Financials Conference | 17 November 2016 • Ready for M&A: While a depressed valuation (due to the volatility surrounding oil prices) had kept IBKC out of M&A, given the recovery in valuation it noted its desire to pursue potential deals across its footprint. Management also noted that while the recent move in equity markets had pushed up valuations for potential publicly traded sellers, it sees significant opportunity among the privately held banks that may look for a merger partner to gain liquidity and monetize the improving sentiment surrounding bank stocks. From a size standpoint, management did not rule out larger deals. This is not surprising given that IBKC has not shied away from pursuing relatively large sized deals previously. • Rate increase to boost the margin: In terms of its interest rate sensitivity, management noted that it retains an asset sensitive balance sheet, with a potential 25 basis point move in the Fed Funds rate expected to add 5c to quarterly EPS. That said, management recognized that slower mortgage activity due to rising long rates could temper the revenue outlook for its mortgage business. Chart 32: What is the biggest factor that prevents you from owning or adding exposure to IBKC? 60% 50% 50% 40% 30% 20% 20% 30% 10% 0% Energy exposure Potential that the bank will enter into a large M&A deal Valuation, see better risk/reward elsewhere Source: BofA Merrill Lynch Global Research JPMorgan Chase & Co (JPM), B-1-7, Buy • Pent up demand from macro uncertainty offers growth opportunity. Doug Pento, CEO of JPM’s Commercial Bank, sounded optimistic around the opportunity within commercial banking from the pent-up demand in the market that was constrained by the uncertainty surrounding the election. In addition, he highlighted the increased opportunity generated by JPM’s expansion into 44 new markets since 2008, specifically in LA. This coincides with 62% of the audience polled who believe top-line revenue growth is most important for the stock to continue its outperformance. 2016 Future of Financials Conference | 17 November 2016 21 Chart 33: As a current or prospective JPM shareholder, what do you think is most important for the stock to continue its outperformance next year? 70% 60% 50% 40% 30% 20% 10% 0% 62% Top-line revenue growth 0% Continued expense management 14% Positive shift in the interest rate backdrop 10% Accelerating capital return 14% More clarity on regulatory and/or litigation issues facing the industry Source: BofA Merrill Lynch Global Research • JPM cautious on CRE; however, overall credit remains benign. Forty-eight (48%) percent of the audience polled believe concerns around multi-family fundamentals will be concentrated in certain regions. Although credit for the overall bank remains benign, Mr. Petno believes we are in the later stages of the real estate cycle and expressed a cautious tone on the high-end condo/construction market. That said, JPM is primarily exposed to more stable, multi-family credit (i.e. rent-controlled apartments) where the average loan to value is 60%. Chart 34: How do you view fundamentals for multifamily lending in 2017? 60% 50% 40% 30% 20% 10% 0% 6% Softening fundamentals should lead to slower financing activity next year 3% Softening fundamentals should lead to worsening credit metrics 35% Softening fundamentals should lead to slower financing activity and worsening credit metrics 48% Some concern, but only in certain regions and at certain rental price points 6% No concern Source: BofA Merrill Lynch Global Research • With tech/digital intellectual property at fingertips, capabilities within CB are on horizon. Mr. Pento expressed his intention to leverage the technology that the Investment Bank has and the investments that the Consumer Bank has to build the right digital and mobile platforms for the bank’s commercial clients. He noted that they have the largest investment and digital budgets ever this year and expect it to increase next year. New York Community Bancorp (NYCB) C-1-8, Buy • Completion of Astoria acquisition best outcome for both banks: Following the recent announcement of a regulatory delay in getting approval for the Astoria acquisition, NYCB CEO Joe Ficalora and CFO Thomas Cangemi reiterated that closing the Astoria deal represents the best outcome for both banks. Beyond that management was limited in its ability to talk about what particular factors led to the delay and refrained from providing a specific timeline to close the deal assuming that the BoDs at both banks agree to extend the deal deadline beyond 22 2016 Future of Financials Conference | 17 November 2016 YE16. Management was quite clear that the bank was unlikely to cross the $50bn SIFI asset threshold on an organic basis until the SIFI threshold is moved higher, which would take an act of Congress. Chart 35: What is the biggest risk that prevents you from owning/increasing exposure to NYCB? 60% 50% 40% 41% 53% 30% 20% 10% 6% 0% Uncertainty tied with the Astoria acquisition Overhang from a softening in the NYC multifamily space Liability sensitive balance sheet that could see pressure on the margin from rising interest rates Source: BofA Merrill Lynch Global Research • Regulatory relief would be meaningful for NYCB: Given that the prolonged timeline for gaining regulatory approval for the Astoria acquisition can be attributed to the pro-forma entity crossing over the $50bn SIFI asset threshold, management noted the significant relief it would receive from legislative action that would push this threshold higher. This would not only make the regulatory burden following the closing of the Astoria acquisition more manageable, but would also allow NYCB to look at additional M&A opportunities once it integrates Astoria. Moreover, any potential relief on LCR compliance would also be welcomed by management as it would remove a source of significant pressure on its net interest margin. • Higher rates could accelerate refinance activity: While investors tend to view rising rates as a headwind to refinance activity, management noted that it had already seen a pick-up in applications as borrowers look to lock-in rates based on the fear that rates could be significant higher 6-12 months out. As a result, this could provide a near term boost to the margin from higher prepay income. • Steepening yield curve leading to rising lending rates: Management noted that it had recently increased its multifamily coupon by 0.375% to 3.50% on the improved interest rate environment. NYCB was not alone in this rate hike as SBNY commented that it recently moved up lending rates for its 5-year and 7-year fixed multi-family loans. Notably, the increased lending rates are above the current book yield of NYCB's loan book implying the potential to offset some of the potential pressure from higher funding costs following the December rate hike. • NYCB able to withstand downturn in multifamily market: Management was also upbeat on its ability to withstand a downturn in the multifamily market given its history through multiple credit cycles of outperforming on credit metrics. While it is debatable how close we are to the next downturn, we believe that the defensibility of NYCB's balance sheet is a key strength of the bank and should create significant 2016 Future of Financials Conference | 17 November 2016 23 organic and M&A driven growth opportunities during the next downturn. That said, management noted that it was very likely that potential pro-growth measures taken by the incoming Trump administration could push out any downturn, as in the short run the economy would witness stronger growth. Chart 36: How do you view fundamentals for multifamily lending in 2017? 60% 50% 40% 30% 20% 10% 0% 11% Softening fundamentals should lead to slower financing activity next year 0% Softening fundamentals should lead to worsening credit metrics 28% Softening fundamentals should lead to slower financing activing and worsening credit metrics 50% Some concern, but only in certain regions and at certain rental price points 11% No concern Source: BofA Merrill Lynch Global Research Regions Financial (RF), B-2-7, Neutral • Regions harnessing consumer to drive growth: Scott Peters, Senior EVP and Consumer Services Group Head, Logan Pichel, Consumer Lending Group Head, and Darren Smith, Treasurer, noted that Regions is utilizing its retail platform to drive growth. Management highlighted strength in mortgage, card, and online lending as avenues for growth. Importantly, management felt the US election has provided tailwinds for Regions revenue growth prospects heading into 2017. Combined with a better rate back drop, management sounded upbeat on its outlook. Chart 37: What do you think is the biggest impact of the GOP sweep to bank earnings? 40% 30% 20% 10% 20% 36% 32% 12% 0% Interest rates rising faster across the curve due to stronger dollar Tax cuts and infrastructure spending spurring growth, therefore better loan demand Lower regulatory burden, driving higher ROEs as excess capital is returned back to shareholders or reinvested for growth No real impact/too early to tell Source: BofA Merrill Lynch Global Research • Multiple channels to drive loan growth: Management illustrated several avenues for loan growth. Within mortgage, Regions has 450 originators that generate 95% of its $6bn in annual originations. Management is seeking to increase its originations from home loan direct and telephone banking to 15-20% of total originations (currently 5% of originations) given the greater profitability from these channels. Card growth has also been strong with active credit card growth at 12% 24 2016 Future of Financials Conference | 17 November 2016 YoY and card penetration reaching 20%. Importantly, management is utilizing online lenders like GreenSky, a nationwide point-of-sale home improvement business, to drive growth as balances having increased to $660mn (1% of loans) from its 2014 inception. Of note, management expects challenged growth in auto, though its exclusive lending to the prime space limits the credit downside. Chart 38: How do you view the impact of new online lending startups on the banking industry? 60% 50% 40% 30% 54% 38% 20% 10% 8% 0% A revenue growth opportunity as banks partner with these new players Potential disruptors that will likely take market share away from traditional lenders Online lending start ups don’t offer anything proprietary Source: BofA Merrill Lynch Global Research • Possible tailwind from regulation: Management at Regions noted that while it is still uncertain how the regulatory landscape will evolve, a more favorable environment could allow Regions to free up investments tied to regulatory initiatives and risk management. Management would likely direct these funds to product development and customer initiatives. • Asset sensitive, particularly to the long end: Regions’ executives noted its highly asset sensitive balance sheet given the more favorable rate back drop since 3Q. According to management, a 100bp parallel shift in the yield curve produces ~$175mn in incremental spread revenue (11% of ’17e operating income) with twothirds of the impact coming from the middle to long end of the curve. Part of the benefit of a rate rise is derived from lower premium amortization on its investment portfolio from higher rates. Given the steepening of the yield curve, we expect Regions to benefit more than peers. • Branch network continuing to evolve: Management intends to increase the productivity of its branches through several measures. Firstly, it is designing smaller, more visible locations to drive traffic. Management is also implementing the universal banker model, which has already resulted in 500 fewer tellers, in order to increase revenues at branches. Management noted that it expects to consolidate at the higher end of its expected 100-150 branch reductions, having already identified 90 branches for closure. Signature Bank (SBNY), B-1-9, Buy • Focused on $4-6bn asset growth target: President & CEO Joe DePaolo & EVP Eric Howell sounded fairly optimistic about the outlook for balance sheet growth with $4bn in loan growth and $4.6bn in deposit growth YTD as of 9/30 vs. management target for $4-6bn in annual asset growth. Management reiterated that the fundamentals of the multifamily business (which is focused on the low-to-moderate 2016 Future of Financials Conference | 17 November 2016 25 income segment) have not changed despite the headlines surrounding a softening in the multifamily space. • Hiring bankers, even as team hiring on pause: On the hiring front, management noted that although it does not expect to hire teams heading into year-end, it is continuing to hire individual bankers (recently hired 4 to 5 lenders). Hiring will be focused on C&I and specialty finance lenders. Management does not expect to hire additional CRE lenders. • Easing in regulatory environment could provide some relief on expense growth: With regard to the potential for some easing of regulatory burden on the banks (important here as SBNY approaches the $50bn asset threshold) under the incoming Trump administration management noted that it could see some abatement in expense growth associated with compliance costs. However, management is running the business based on the current regulatory framework and will look for more tangible signs before it makes any changes to investment decision, especially as it relates to the compliance infrastructure. • Lending rates reflecting the steepening in the yield curve: SBNY noted that it had raised rates on its 5-year fixed by 0.125% to 3.5%- 3.625% and 7-year fixed up by 0.25% to 4.0%-4.125% following the steepening in the yield curve over the last week. We note that this was echoed by SBNY's NY rival NYCB which also noted increasing rates on lending products in the aftermath of the move higher in interest rates. We believe higher rates associated with new loans and better reinvestment opportunities in the securities portfolio should serve as a tailwind to the margin even as funding costs will likely trend higher, especially as the Fed raises interest rates by 25bp in December. • Regulatory scrutiny on multifamily lending manageable: With regard to the heightened regulatory concerns surrounding CRE multifamily lending (multifamily is 50% of SBNY’s loan book), management noted that it has implemented a new loan system likely coming on line in 3Q17 which should allow the bank to analyze the loan portfolio at a more granular level. Management is also underwriting fewer interest only multifamily loans in response to the regulatory concerns. Although, it noted that it was not losing any significant business due to this as competitors had also pulled back and borrower ability (in most instances) to service a non-interest only loan. 26 2016 Future of Financials Conference | 17 November 2016 Chart 39: How do you view fundamentals for multifamily lending in 2017? 30% 25% 20% 15% 10% 5% 0% 13% Softening fundamentals should lead to slower financing activity next year 7% Softening fundamentals should lead to worsening credit metrics Source: BofA Merrill Lynch Global Research 27% 27% 27% Softening fundamentals should lead to slower financing activing and worsening credit metrics Some concern, but only in certain regions and at certain rental price points No concern • Confident past most of taxi medallion issues: Management expressed confidence that it has taken care of most of the issues on its Chicago taxi medallion loan book and is seeing stabilization of its New York book with New York fleets near 100% utilization. Management also expects the $20mn +/- in quarterly provisioning outlook to absorb the impact from any incremental provisioning associated with the medallion portfolio. Chart 40: How much does SBNY’s taxi medallion exposure impact your decision to invest in the stock? 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 33% Not at all, the portfolio only accounts for 2% of total loans 40% A little bit, I think this portfolio could continue to cause some EPS volatility 27% I am staying away from the name due to this exposure Source: BofA Merrill Lynch Global Research Synovus Financial (SNV), C-2-7, Neutral • SNV hesitant to react too quickly to post-election excitement. Chairman and CEO Kessel Stelling noted that despite the very positive reaction seen in bank stocks from the results of the US elections, it was too soon to say the real impact on growth outlook. That said, he believes that a more encouraging business climate (i.e. increased infrastructure spending) as well as some regulatory relief (i.e. raising the $50bn asset threshold) could be a benefit for SNV and the overall industry. • SNV could see a benefit at both ends of a steepening yield curve. As of 3Q16, 50% of SNV’s total loan portfolio was fixed rate (includes variable rate loans with floors), implying a benefit to spread income from a rise in both the short- and longend of the yield curve. With the futures market now pricing in a 94% probability the Fed raises rates in Dec., CFO Kevin Blair believes the net interest margin could expand by 6bp in from a 25bp rate hike (vs. +9bp last year). That said, the benefit is 2016 Future of Financials Conference | 17 November 2016 27 dependent on what happens with deposit costs. SNV’s current sensitivity analysis assumes a 50-60% deposit beta. • SNV keenly focused on credit. Chief Credit Officer Kevin Howard noted expectations for net charge-offs to naturally tick up as recoveries become less of a benefit and some seasoning in the loan portfolio. Recall during its earnings call, management lowered its FY16 net charge-off range to 10-20bp (3Q: 12bp). Mr. Howard noted that he would not be surprised if NCOs increased to 15-20bp in 2017 (cons: 12bp) and stay near those levels for the near future. • Management reiterated its intent to continue to deploy excess capital. Although SNV will disclose a more detailed capital plan in January, management expects to continue deploying excess capital via buybacks, M&A and/or organic growth. When asked how management should utilize its excess capital, 56% of the audience polled prefers SNV pursue M&A opportunities (vs. 8% last year). In reaction, Mr. Stelling noted continued interest in strategic acquisitions (like Entaire) but hesitant to execute a large, dilutive transaction. While DTA accretion could allow for continued share repurchase, management may choose to be a bit more opportunistic around buybacks given the run up in the stock. Chart 41: What would you like to see management do with its excess capital? 60% 56% 50% 40% 33% 30% 20% 10% 0% 0% Be even more aggressive on buybacks 11% Increase the dividend payout Support faster organic growth Pursue M&A opportunities Source: BofA Merrill Lynch Global Research • Management is positive but cautious on online lending partnerships. Investors were also relatively split in how they view SNV’s partnerships with online lenders SoFi and GreenSky. The majority (57%) remains cautious on how these loans will perform during a credit cycle. Mr. Stelling agreed; however, he believes these partnerships represent the right vehicle to help the bank grow its retail portfolio to 20-25% of loans (in line with its strategy to transition away from CRE) and achieve its 1.0% ROA target (3Q: 0.88%). Although we note that SNV is being deliberate around growing this book and is targeting these loans to grow to approximately 2- 3% of total loans. 28 2016 Future of Financials Conference | 17 November 2016 Chart 42: How do you view SNV’s partnerships with online lenders (SoFi/GreenSky)? 57% 43% 70% 60% 50% 40% 30% 20% 10% 0% Positively. Creates another avenue for loan growth Cautiously. Unsure how these loans will perform during a credit downturn 0% Indifferent. The exposure is relatively small so does not matter either ways Source: BofA Merrill Lynch Global Research Texas Capital Bancshares (TCBI) C-2-9, Neutral • Upbeat on business outlook: TCBI’s President & CEO Keith Cargill, CFO & COO Peter Bartholow, CAO Julie Anderson, and CLO Vince Ackerson were relatively upbeat about TCBI’s business outlook. Management expects its mortgage businesses, particularly MCA to be to be a source of strength even if overall mortgage volumes were to slow down due to the rise in interest rates. Management expects to mitigate the negative impact from lower mortgage activity by picking up greater wallet share of existing clients and given the option to bring back to the balance sheet loan participations. Regarding expenses, despite expectations for an uptick in the efficiency ratio over the next couple of quarters management expects to beat its 2016 efficiency guidance (low-to-mid 50s). Chart 43: What would drive you to buy or increase your positioning in TCBI? 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 0% Stronger loan growth 20% Higher interest rates Source: BofA Merrill Lynch Global Research 47% Better visibility on the outlook for the Texas economy and oil prices 20% A pick-up in bank M&A activity, especially in Texas 13% A pull back in the stock • Credit provisioning likely to trend lower in 2017: During an investor poll, nearly half of investors expect credit provisions to be lower in 2017 vs. 2016, based on expectations for stabilization in oil prices. Management expressed comfort that reserve levels should be adequate even if oil prices were to decline to the mid-tohigh $30s in the near term (vs. spot WTI prices of $45/bbl today). However, management would need to consider increasing its reserve level if oil falls to the high $20s. Conversely, if oil stabilizes in the high $50s-low $60 levels, management could consider reserve releases. Management stressed on looking at the forward curve when assessing the impact from oil prices on credit costs vs. the spot rate. 2016 Future of Financials Conference | 17 November 2016 29 With regard to growth in the energy book management expects balances to stay relatively flattish as new growth is offset by pay downs and deleveraging. Chart 44: Where do you see TCBI’s provisioning in 2017 relative to 2016? 50% 47% 45% 40% 37% 35% 30% 25% 20% 15% 10% 5% 0% Lower, given the stabilization in oil prices which should lead to reserve reversals Source: BofA Merrill Lynch Global Research Flat-to-higher, given credit normalization in the rest of the book • Mortgage growth to continue despite a downshift in activity: Management was optimistic on the outlook for both its mortgage businesses – warehouse lending and MCA businesses Management expects both these portfolios in aggregate to total 28-33% of average total loan portfolio. Management tried to debunk the perception that the MCA business was cannibalizing its warehouse lending business and noted that two business were complimentary in nature. Moreover, while initially the vast majority of the MCA customers were the ones that TCBI had a relationship on the warehouse lending side, it noted that that number had fallen to 50% and is likely to move lower over the coming quarters. TCBI has a dedicated sales force prospecting for the MCA business. 16% Uncertain, as volatility in oil prices could lead to an elevated level of provisioning • Next rate hike to give a bigger boost to EPS: Management noted its high asset sensitivity with most of their loans tied to LIBOR and prime and its expectations for an increase in funding costs to remain relatively tempered. With strong demand deposit growth during the year and a $1bn reduction in loans with floors (from $3.1bn to $2bn), TCBI has become more asset sensitive relative to last year, when a rate hike led to a $4mn increase in spread income. Management expects a Dec rate hike to boost spread income by more than $4mn a quarter. • Remains cautious around CRE lending: Management noted that it intends to grow CRE more slowly as it de-risks the portfolio and until it sees a turn in the cycle. However, management is optimistic on the credit quality of CRE, particularly noting that trends in its Houston real estate portfolio (Houston special mention loans are 1% of Houston CRE) continue to be fairly benign. US Bancorp (USB), B-2-7, Neutral • Strong growth outlook across the business spectrum. CEO Richard Davis provided an upbeat view around the outlook for the economy across the business spectrum ranging from small businesses to large corporates and noted that businesses could drive the economic recovery vs the consumer side. 30 2016 Future of Financials Conference | 17 November 2016 • Continued investments in regulatory costs despite potential regulatory relief. On the topic of regulation, management noted that it is still too early to know what type of regulatory relief banks of USB’s size may receive so management has not slowed down any of its investments in regulatory costs. • Long term 13.5- 16.5% ROE target unchanged. Despite the outlook for higher rates, management noted that it was not going to change the range at this point of time but noted that USB could reach the top end sooner than later if its outlook proves accurate. • Risk management compliance expenses sustaining at this level. Management noted that while compliance related expenses could trend lower following the new administration, it will continue to invest and the impact will likely not be meaningful. • In terms of innovation projects, 86% of those polled noted that it should invest in innovations projects that are self-funded. Davis noted that given the importance of innovation, it would not just self-fund those expenses and would look to spend money for long term benefits. In terms of its P2P initiative with Zelle, Davis was optimistic around its growth. • In terms of potential M&A, management noted that it would look for in market opportunities and double down where it has scale. Chart 45: What do you consider to be the most important catalyst for large-cap banks in 2017? 60% 50% 52% 40% 36% 30% 20% 10% 0% Rising interest rates 8% Revenue growth that’s not interest rate driven 0% Further realignment of cost structures 4% Stronger return of capital to shareholders Less overhang from regulatory and litigation challenges Source: BofA Merrill Lynch Global Research 2016 Future of Financials Conference | 17 November 2016 31 Chart 46: What do you consider to be the most important catalyst for USB in 2017? 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 43% 0% Sustained operating Further acceleration of leverage, regardless of capital return rate backdrop 14% Using excess capital and strong currency to engage in nondepository deals 43% Rising interest rates Source: BofA Merrill Lynch Global Research Wells Fargo & Co (WFC), B-1-7, Buy • WFC sees modestly better benefit from steepening yield curve vs parallel shift. Following the election, the 10yr yield is up 37bp while futures currently imply a 94% probability the Fed raises rates in Dec. As such, Treasurer Neal Blinde noted that WFC could realize a modestly better benefit to spread income from a steepening yield curve vs. the current +$150mn/qtr expectation from a 25bp parallel shift. He outlined how the bank’s actions to manage an interest rate cycle via balance sheet positioning protect on the downside (i.e. post-Brexit) while at the same time allow for an uptick when rates rise. WFC received numerous investor questions on when they would deploy its dry power ($572bn in liquidity), and management noted that the rate backdrop – not question marks on deposit duration – mostly drove deployment decisions. • WFC reiterated its performance targets disclosed at its Investor Day. WFC reiterated its 2-yr performance targets: (1) 1.1-1.4% ROA; (2) 11-14% ROE; (3) 55- 59% efficiency ratio; and (4) 55-75% net capital payout. As of 3Q16, the bank is currently within these ranges on all metrics except for efficiency (3Q: 59.4%). This is consistent with the 61% of the audience polled that expect WFC to perform within the targeted ROE range as headwinds from Retail Banking is offset by an improvement in the macro-economy. That said, 50% of the audience polled believe the issues arising from the retail sales issue will modestly impact earnings (0-5%). Chart 47: Based on your post-election outlook for 2017, how do you think WFC will perform against this 2 year target? Chart 48: What do you think is the earnings impact of the retail sales practices issue? 70% 60% 50% 40% 30% 20% 10% 0% 39% Outperform the range, given likely higher interest rates than expected and less headwind from regulation 61% Perform within the range, as lower contribution from the Community Bank will mitigate a stronger macro backdrop 0% Underperform the range, as consensus in underestimating the earnings impact from the retail sales practices issues. 60% 50% 40% 30% 20% 10% 0% 37% 50% 13% Meaningful, at over 5% of EPS, given lost revenues and higher operating and marketing costs Modest, between 0- 5% of EPS Community Bank earnings will be offset by the rest of the firm, resulting in no impact to EPS power Source: BofA Merrill Lynch Global Research Source: BofA Merrill Lynch Global Research 32 2016 Future of Financials Conference | 17 November 2016 • WFC continues to make progress on regulatory compliance. As of 3Q, WFC’s current total loss absorbing capacity (TLAC) shortfall was 2.1% of risk weighted assets or $29bn ($43bn including its internal buffer), an $8bn QoQ improvement. That said, Mr Blinde assured investors that WFC will continue to focus on deposit growth (66% of total funding) even as its long-term debt needs continue. WFC is compliant with the liquidity coverage ratio (LCR). • Potential changes to annual stress test process viewed as positive. Mr. Blinde noted that potential changes to the annual stress test process, as proposed by Gov. Tarullo in Sept., is a “real” positive, specifically as it reduces any variance between how the stressed risk weighted asset balance is calculated. This is likely positive for the majority of investors polled (31%) who think capital return is the biggest catalyst for the stock and the (70%) who see the dividend payout growing towards the 40-50% range long-term (currently 37%). Chart 49: What do you think is the biggest catalyst for WFC shares over the next 12-24 months? 35% 30% 25% 20% 15% 10% 5% 0% 21% 24% Better clarity Delivering clean around the full and consistent impact of the sales earnings results practices issue close to or better than current consensus 14% Achieving solid revenue growth regardless of the rate environment 10% Renewed focus on expense management to drive the efficiency ratio lower 31% Accelerating capital return, with focus on the dividend Source: BofA Merrill Lynch Global Research Chart 50: As a result, what do you think WFC's long-term dividend payout ratio will be? 40% 35% 30% 25% 20% 15% 10% 5% 0% 16% Near the current level of 37% 35% 35% 14% 40-45% 45-50% >50% Source: BofA Merrill Lynch Global Research • Note: WFC is scheduled to report October customer activity in Retail Banking on Thur, Nov. 17th at 9am ET. Zions Bancorporation (ZION), C-3-7, Underperform • Sentiment post-election appears constructive on growth prospects. Consistent with other bank management teams speaking at this year’s conference, CFO Paul Burdiss noted that small businesses have been reluctant to invest given the 2016 Future of Financials Conference | 17 November 2016 33 uncertain macro backdrop. That said, following the results of the election, and assuming the new administration can create fiscal stimulus, management sounded optimistic around growth prospects in C&I (10% ex-energy YoY), owner-occupied, etc. • Energy portfolio performing in-line with expectations. Management reaffirmed the >8% allowance on its energy portfolio ($2.3mn or 5% of total loans) remains sufficient to cover future losses. However, continued stress in its oilfield services portfolio (26% of portfolio) remains the primary reason behind ZION’s cautious view. This was consistent with the 60% of the audience polled whose ownership in the stock is modestly influenced by this portfolio. That said, until supply/demand fundamentals improve or activity picks up, material reserve release is unlikely. Chart 51: How much does credit quality in ZION’s energy portfolio influence your decision on owning the stock? 70% 60% 60% 50% 40% 30% 27% 20% 13% 10% 0% Still a material factor in my investment decision A modest factor in my investment decision No longer a factor in my investment decision Source: BofA Merrill Lynch Global Research • Steepening yield curve a modest benefit, though short-end matters more. Despite recent actions that have reduced the bank’s asset sensitivity, ZION remains the most asset sensitive among US banks. For a 25bp rise in the short-end, ZION estimates a $30mn incremental benefit to spread income. That said, due to the variable-rate mismatch between assets/liabilities, a steeper yield curve is expected to have a marginal impact. • Potential changes to CCAR viewed as positive for ZION. Mr. Burdiss viewed the potential change to the annual stress test (CCAR), specifically the static RWA balance, as net positive for the bank/industry. That said, overall these changes are immaterial as CCAR remains their capital constraint. Although only 14% of the audience polled think more aggressive capital return is the most important catalyst for the stock (top response: 29% for stronger revenue growth), investor bias leaned higher as it relates to total payout. 34 2016 Future of Financials Conference | 17 November 2016 Chart 52: What do you consider as the single most important catalyst for ZION shares in 2017? 35% 30% 25% 20% 15% 10% 5% 0% 14% 14% Greater comfort around potential energy losses More aggressive capital return to shareholders 29% Stronger revenue growth regardless of what happens to interest rates 21% 21% Continued expense savings to achieve an efficiency ratio in the low 60%s for FY17 Higher interest rates Source: BofA Merrill Lynch Global Research Chart 53: Compared to this year’s CCAR capital ask which implies a total payout of ~60%, what level would you like to see ZION’s 2017 CCAR payout increase to? Chart 54: ZION expects total expenses in 2016 to come in below $1.58bn and then slightly increase in 2017. Would you prefer absolute expenses be flat to down in 2017? 40% 35% 36% 80% 70% 69% 30% 60% 25% 20% 15% 21% 21% 21% 50% 40% 30% 31% 10% 20% 5% 10% 0% Remain at 60% 70% 80% Greater than 80% 0% Yes Indifferent; I’m more focused on the efficiency target Source: BofA Merrill Lynch Global Research Source: BofA Merrill Lynch Global Research Brokers Top 5 Takeaways Goldman Sachs (GS), B-1-7, Buy • GS’ Harvey Schwartz, CFO, and Harit Talwar, Head of Digital Finance presented at our conference. Overall, Harvey and Harit were optimistic about the consumer lending opportunity with Marcus as well as the overall outlook for the firm. • When asked about what would get investors more interested in GS stock, 51% of the investors responding to the poll voted for a stronger revenue backdrop, while 34% voted for normalizing regulations and ability to return more capital. 2016 Future of Financials Conference | 17 November 2016 35 Chart 55: What would get you more interested in investing in GS stock? 60% 50% 51% 40% 34% 30% 20% 10% 10% 5% 0% A stronger revenue backdrop Normalizing regulations and ability to return more capital Investing to drive improving returns Additional expense reductions Source: BofA Merrill Lynch Global Research • Management focused the presentation on Marcus, Goldman’s new consumer lending effort. This venture has significant potential with an unsecured consumer loan target market of $850B and Goldman coming to the market with a unique skillset of technology and risk management, no channel conflicts or bricks and mortar, a strong balance sheet that can provide loans at a meaningful discount to peers, and a long history in the financial markets with a strong brand. When fully ramped up, this unit could produce pre-tax ROA’s of 3-4%, and assuming 9-11% equity commitments, this could translate into a high teens ROE. • Given the positive sector/GS stock reaction post the election, management was asked on what they thought about the future of current regulation and activity levels. While they said it is too early to tell the impact, a lower corporate tax rate would benefit GS some, a pro-growth policy could positively impact confidence/activity levels, and some de-regulation could ease some of the operational challenges, though much of the regulation was well intended and has created a stronger industry. • In terms of the current environment, GS didn’t give an exact update, but said activity has been healthy and around the election activity was similar to around Brexit (slow before and very active post). Most other firms also mentioned positive trends in 4Q, with normal seasonality, but up materially year over year. Asset Managers Top 5 Takeaways Invesco (IVZ), C-1-7, Buy • Presenting from IVZ was Loren Starr, CFO. Overall Loren was optimistic on the outlook for IVZ to generate above average organic growth given its product mix and performance, deliver cost savings, and accelerate buybacks, and does not expect a significant change in the DOL impact from the election. • When asked what would get investors more excited about investing in IVZ stock, the majority of respondents said that a consistent above average organic growth rate would get them most excited (48%), followed by a more favorable market backdrop (38%), less regulation (10%), and more operating leverage (5%), while nobody said longer term FX hedged would get them more interested. 36 2016 Future of Financials Conference | 17 November 2016 Chart 56: What would get you more interested in investing in IVZ stock? 60% 50% 48% 40% 38% 30% 20% 10% 0% Consistent above average organic growth A more favorable market backdrop 10% Less regulation for the industry 5% More operating leverage 0% Longer term FX hedges Source: BofA Merrill Lynch Global Research • IVZ is confident it can achieve its 3-5% organic growth rate driven by three main pillars. The first being the ongoing search for yield driving fixed income flows/allocation which IVZ has benefitted from and should continue to benefit given their strong performance, distribution, and product set. The second being ongoing “barbelling” by clients which drives flows into passive and alternatives, two products IVZ has leadership in. Lastly, IVZ sees opportunity in its institutional channel, particularly in Asia which has had notable momentum. • Given the run up in rates, IVZ touched upon its fixed income exposure and what might be at risk of underperformance/outflows. IVZ mentioned roughly $100B of its AUM or ~13% was in fixed income that didn’t include short duration or floating rate, a number they feel is relatively small compared to some of its peers. Additionally, within that $100B a major portion had been underperforming because of strategic shorter duration, which in a rising rate environment should lead to outperformance and potentially negate some of the flow headwind. • Regarding potential changes from the election, while very early, management thinks that whatever happens to the DOL Fiduciary Rule (delay, modify, etc.), the industry has already been shifting in a fiduciary direction, and they expect that to continue, though the pace could vary depending on the eventual outcome. Additionally, IVZ is relatively well positioned given its diversification among ETF/passive and active strategies, as well as similar regulations in Europe that it has managed through. In terms of a lower corporate tax rate, that would not have much impact to IVZ given its Bermuda domicile. Eaton Vance (EV), B-3-7, Underperform • Presenting from EV was Thomas Faust, CEO, Laurie Hylton, CFO, and Dan Cataldo, Head of IR and Treasurer. Management reported relatively positive F4Q flows, expects organic growth to hold up well given its mix and performance, and does not expect a significant change in the DOL impact from the election, but would expect a significant benefit from a lower US corporate tax rate. • When asked what would get you more interested in EV’s stock, the majority of investors were fairly split between better high fee flows and ETMFs taking off (38%/31% respectively). Investors also thought increased capital return was 2016 Future of Financials Conference | 17 November 2016 37 important (23%) while investors thought more operating leverage was least important for EV (8%). Chart 57: What would get you more interested in investing in EV stock? 40% 38% 35% 30% 31% 25% 23% 20% 15% 10% 8% 5% 0% Stronger high-fee flows and a favorable fee rate ETMFs taking off Increased capital return Positive operating leverage aiding the margin Source: BofA Merrill Lynch Global Research • EV disclosed their F4Q AUM which was $336.4B up modestly from $334.4B at the end of its prior quarter as modest market losses were offset by inflows which were also disclosed by EV. Flows for C3Q (F4Q) were $4.8B/6% aog or $1.7B/3% aog ex exposure management flows, roughly in-line with expectations in a fairly challenging backdrop. EV also commented on their recent acquisition of Calvert Investments (~$12B AUM, see note) and is excited about the opportunity in ESG investing. Calvert is a leader in investing in socially responsible companies, a small but rapidly growing area. • When asked about the outlook on fixed income performance and flows given the recent run up in rates as well as the outlook, EV was fairly positive in their outlook given their positioning and leadership in floating rate which should perform well and attract flows in a rising rate environment. • ETMFs continue to be topical for EV given they are the only player in the nontransparent active ETF business with their NextShares franchise. EV has launched 3 NextShares thus far and Waddell and Reed launched 3 of their own in October, making 6 total NextShares in the market right now, however they are only available through Folio and Interactive Brokers. While we continue to view this as not very significant in the near term and a potential longer term opportunity, with EV signing on UBS and Envestnet for distribution in 2017, we should see a little more traction ahead. • Regarding potential changes from the election, while very early, management thinks that whatever happens to the DOL Fiduciary Rule (delay, modify, etc.), the industry has already been shifting in a fiduciary direction, and they expect that to continue, though the pace could vary depending on the eventual outcome. Additionally, EV has limited exposure to higher distribution share classes (<20% of sales), so they see a more limited impact. In terms of a lower corporate tax rate (15-20%), this would have a meaningful benefit for EV, potentially increasing earnings by 15-20%. 38 2016 Future of Financials Conference | 17 November 2016 Legg Mason (LM), C-1-7, Buy • Presenting from LM was Joe Sullivan, Chairman & CEO, and Alan Magleby, Head of IR. Joe was optimistic on the flow outlook for LM given the repositioning over the past few years, mostly favorable investment performance, and a healthy institutional pipeline, and does not expect a significant change in the DOL impact because of the election or a lower corporate tax rate on their cash tax rate. • When asked what would get you more interested in investing in LM stock, investors overwhelmingly (82%) replied “strong organic growth, particularly in equity/alternatives” while the absence of deal noise (12%) and higher margins/operating leverage (6%) were less interesting for investors. Nobody said that a stronger balance sheet or more affiliate deals would get them more excited about LM’s stock. Chart 58: What would get you more interested in investing in LM stock? 90% 80% 82% 70% 60% 50% 40% 30% 20% 10% 0% Stronger organic growth, notably in equity/alternatives 12% The absence of deal noise 6% Operating leverage and higher margins 0% 0% A stronger balance sheet More affiliate deals Source: BofA Merrill Lynch Global Research • LM was relatively upbeat on the flow outlook, despite some ongoing headwinds for the industry. Management sees the following drivers offsetting some of the industry headwinds to position LM to flow better than the industry: strong investment performance, notable progress with consultants over the last several years, a healthy institutional pipeline ($8B of unfunded wins/$3B uncalled committed capital), highest level of search activity in active equity in several years, large cash balances in Europe (20-50% cash allocation across the continent), increasing demand for real estate / infrastructure / alts (Clarion, RARE, and EnTrustPermal), and a diverse / differentiated product/vehicle set. • Management also mentioned that besides offering well performing products across strategies, it also wants to be able to deliver to clients in different vehicles, including ETFs. The firm has been launching some ETF products and also has an interest in Precidian, which has its non-transparent ETF submission under the review process. • Regarding potential changes from the election, while very early, regarding the DOL fiduciary rule, LM sees it getting delayed and watered down some as the most likely outcome. However, they mentioned the fiduciary rule was just an accelerant for trends that were already occurring (i.e. the shift to fee based accounts and away from brokerages) and whether or not the rule goes through as expected or gets 2016 Future of Financials Conference | 17 November 2016 39 modified will not likely change the outlook. LM feels its strong positioning in global distribution and product sets bodes well to perform in a new fiduciary world. • Additionally, a lower potential U.S. corporate tax rate will not change its cash tax rate which is likely to be 6-7% through 2021 and in the mid-teens through 2025 after that. However, it would impact GAAP EPS and a lower corporate tax rate would lower the value of LM’s DTA. AB (AB), B-1-8, Buy • Presenting from AB was Peter Kraus, Chairman & CEO. Peter expects AB to generate above average organic growth and hopes to accelerate it given its product mix and mostly favorable investment performance. In addition, he sees the potential for new pricing in the industry, and does not expect a significant change in the DOL impact from the election or a lower corporate tax rate on their tax rate. • When asked what would get you more interested in AB’s stock, 55% of investors said they wanted to see consistent positive organic growth, 18% said a better operating margin, another 18% said diversification from fixed income flows (i.e. equity and alternative flows), and only 9% of investors wanted to see a simplified structure and increased float. Chart 59: What would get you more interested in investing in AB stock? 70% 60% 55% 50% 40% 30% 20% 18% 18% 10% 9% 0% Consistent positive organic growth Operating leverage and an improving margin Further diversification from fixed income flows A more simplified structure and increased float Source: BofA Merrill Lynch Global Research • AB has seen and expects to continue to see above average organic growth (ex 3Q which was weighed down by lumpy institutional outflows) given a relatively new and attractive product set, strong investment performance (notable improvement in recent years), better traction with the consultant community, and opportunities to gain in the retail and private wealth channels. • Regarding potential changes post the election, AB had a similar tone to other asset managers on DOL, in the sense that it likely gets delayed/modestly modified, but regardless of what happens, asset managers and distributors need to accept that the industry is living in a new fiduciary world with minimized (potentially no) conflicts of interest which ultimately is a good thing for end clients. A lower potential corporate tax rate would not likely benefit AB given its tax structure/low current tax rate. 40 2016 Future of Financials Conference | 17 November 2016 • Another topic which AB elaborated on was fees/pricing particularly in the US retail market. Peter Kraus commented that there is a very strong philosophical argument for the regulators to approve new fee structures which would allow investors to pay a low beta fee and a higher performance fee for alpha generated (while it exists in Europe, a similar structure is not available in the U.S.). While some in the industry may not be fans to adapt such a structure, given challenging cost structure changes, he thinks the product could be much more competitive relative to passive products. Alternative Asset Manager Top Takeaways Ares Management (ARES), C-2-7, Neutral • Michael Arougheti, Co-founder and President, presented for Ares. Overall, Mr. Arougheti was positive on the firm’s growth prospects, given demand for their products across the platform by institutional investors. In addition, given recent fundraising and fees on the horizon, the outlook for FRE and DE is attractive. • When asked “What would get you more interested in investing in ARES stock?” the most common response was a higher float and reduced tax complexity (64%), followed by more diversification in the business model (21%), and confidence in an attractive credit return outlook (14%). Investors were less concerned over the visibility on the distribution (0%). Chart 60: What would get you more interested in investing in ARES stock? 70% 64% 60% 50% 40% 30% 20% 14% 21% 10% 0% A higher float and reduced tax complexity Confidence in an attractive credit return outlook More diversification in the business model 0% Increased visibility on the distribution Source: BofA Merrill Lynch Global Research • If comprehensive tax reform includes an elimination of carried interest tax, potentially moving to an ordinary income rate, it could have some impact to after tax unitholder returns, but 80-90% of revenue comes from management fees and much of the income already faces a corporate tax rate. It could make it more attractive to shift to a C-corp. A change to the tax deductibility of interest expense could have more far-reaching changes to the business, and to U.S. • Ares will always look to do tuck-in acquisitions, and has been doing almost one a year. The pipeline of M&A opportunities continues to grow for ARES, given demographics of principles with founders aging, and the environment becoming harder to compete for small managers. The Blackstone Group (BX), C-2-8, Neutral • Jonathan Gray, Global Head of Real Estate, presented for Blackstone. Overall, Mr. Gray was positive on the outlook for the U.S., with new pro-growth fiscal policies 2016 Future of Financials Conference | 17 November 2016 41 likely. Mr. Gray also thinks that concerns over the commercial real estate market may be overdone. • When asked “What would get you more interested in investing in BX stock?” the most common response was a market pullback (30%), followed by comfort on the direction of the real estate market (25%), rising returns and visibility on distributions (21%), and a more simplified structure (20%), while fundraising and margin improvement were less important (4%). Chart 61: What would get you more interested in investing in BX stock? 35% 30% 25% 20% 21% 25% 30% 20% 15% 10% 5% 4% 0% Rising markets/returns and visibility on DE and distributions Improving FRE/margins following strong fundraising Comfort on the direction of the real estate market & hedge funds A market pullback for better deployment/returns A more simplified corporate/tax structure Source: BofA Merrill Lynch Global Research • Mr. Gray thinks the economic narrative has changed for the U.S., from low growth and low interest rates to a more pro-growth outlook. There will likely be lower taxes, less regulation, and more fiscal spending. A potential offset is that deficits from government spending and tariffs could create inflation. Even so, management was cautiously optimistic on growth. • For Europe, Brexit was the big news and Mr. Gray expects the next couple of years will be somewhat challenging for the U.K, though the bigger question is core Europe, where rates and inflation are likely to be lower for longer. In Asia, China is decelerating, particularly for manufacturing, infrastructure, and real estate which will likely continue though don’t expect a hard landing in China. A trade war between the U.S. and China could be a risk to the downside for China. In India, BX sees accelerating economic growth and falling inflation and interest rates, along with a lot of demand for office space in India. • Mr. Gray does not believe we are in the early stages of the real estate cycle, but concern over a bubble in commercial real estate in the U.S. is probably overdone for a couple of reasons. 1) Supply and demand are reasonable, given modest growth in supply and an economy that is growing. 2) Debt levels aren’t out of hand like in ‘06/’07. 3) Cap rates are low at around 5%, compared to ‘07 when 10yr treasuries were at the same level. Overall, you aren’t going to see the same returns as in the past, but looking at past periods where rates and growth increased, commercial real estate did fine. • In terms of growth, Mr. Gray is optimistic on the outlook. Half of the areas BX invests in today didn’t exist at the time of the IPO, and that culture of innovation, growth, and investing for attractive returns is alive and well. 42 2016 Future of Financials Conference | 17 November 2016 Carlyle Group (CG), C-2-8, Neutral • Glenn Youngkin, President and Chief Operating Officer, presented for CG. Overall, Mr. Youngkin is positive on the economic/market backdrop and on CG’s ability to generate cash carry relatively consistently over time given the firm’s diversity of funds. • When asked “What would get you more interested in investing in CG stock?” most investors would like to see an increased float and reduced complexity (40%), followed closely by rising fee related earnings (30%). Investors are also interested in seeing increased visibility on the distribution (15%) and increased contribution from RA and GMS segments (15%). Chart 62: What would get you more interested in investing in CG stock? 45% 40% 40% 35% 30% 30% 25% 20% 15% 15% 15% 10% 5% 0% Rising fee related earnings Increased visibility on the distribution Increased contribution from RA and GMS segments Increased float and reduced complexity Source: BofA Merrill Lynch Global Research • If comprehensive tax reform includes an elimination of carried interest tax, potentially moving to an ordinary income rate, it could have some impact to after tax unitholder returns. However, Glenn thinks it is very early to speculate on any changes and expects tax changes to likely be comprehensive. • Glenn sees the potential for a strong push in infrastructure, along with tax change, defense spending, and the border will get a lot of attention along with international trade. Three main conclusions: 1) First time in a long time that there is a universal pro-business outlook across congress and the presidential office; 2) Unclear today what is going to be enacted, there is optimism but uncertainty; and 3) CG is not going to make meaningful changes one way or another based on speculation. CG launched its latest infrastructure fund in September, and the election results are more wind in the sails. • CG has multiple funds, each with its own economic engine. That makes the cash flow profile more stable than other firms. Management believes that a discounted valuation in the stock is driven more by fear of a recession vs. lower FRE. Glenn thinks that outlook has changed with the election. The economy may be going into extra innings now. • The investment environment hasn’t changed materially in last few weeks - it continues to be tough. Global growth will continue to be muted, and despite the 2016 Future of Financials Conference | 17 November 2016 43 move in the ten year treasury rate, interest rates remain low and the combination of those things results in high prices. KKR & Co (KKR), C-1-8, Buy • Bill Janetschek, Chief Financial Officer, presented for KKR. Overall, Mr. Janetschek believes that KKR’s balance sheet gives them the ability to take advantage of market dislocations, sees opportunities to grow in certain areas (e.g. infrastructure and real estate), and noted that they don’t need to grow the headcount to bring on more assets. • When asked “What would get you more interested in investing in KKR stock?” the most common response was a market pullback for better deployment/returns (50%). Respondents also felt that attractive returns and book value growth (33%), and stronger fee related earnings (17%) were also important. Less important for investors was improving energy markets and overall market confidence (0%). Chart 63: What would get you more interested in investing in KKR stock? 60% 50% 50% 40% 33% 30% 20% 17% 10% 0% Stronger fee related earnings Attractive returns and book value growth 0% Improving energy markets and overall market confidence A market pullback for better deployment/returns Source: BofA Merrill Lynch Global Research • Overall, KKR likes the publicly traded partnership structure today. If comprehensive tax reform includes an elimination of carried interest tax, the income would still get passed through in that scenario which avoids a second level of taxation, so it still may not be attractive to change the structure. But, if the corporate rate is also lowered significantly, it could potentially make sense to go to a c-corp. • Bill sees infrastructure as a real growth area for KKR. 7-8 years ago it was difficult to raise an infrastructure fund as the asset class didn’t do very well in the financial crisis; today there is more interest. KKR’s first infrastructure fund was around $1B and the second one was around $3B. Infrastructure needs are tremendous longterm, with $1-2 trillion capital needed for projects over the next decade, and infrastructure spend is one area of consistency across the two major parties. • Management thinks that investors understand the reason for the change in the distribution policy. KKR likes to pay out the stable dividend and redeploy capital into the balance sheet. As part of the year-end process, KKR will likely review the level of the fixed distribution and determine whether it should be changed. KKR would like to have around 40% of the balance sheet invested in private equity over time. • KKR will manage concentration risk, and it is unlikely that the firm will make another investment as big as First Data again. The biggest advantage to having a 44 2016 Future of Financials Conference | 17 November 2016 large balance sheet is the ability to take advantage of market dislocation, along with high margins. • The firm grew at a healthy rate from 2004-2014, and with around 1,200 people now there doesn’t need to be much growth in headcount for the time being, the infrastructure is in place. Marshall Wace AUM has grown significantly since they did the deal, due in part to advantages from combining the two firms. Real estate is an area where KKR is small and could see more growth. Specialty Finance American Express Company (AXP), B-2-7, Neutral • Presenting from American Express Company was Mr. Jeff Campbell, Chief Financial Officer. Overall we thought AXP presented a fairly upbeat outlook on billings, loan and revenue growth. AXP did express caution on near-term Discount rate pressures and FX headwinds. • When asked what would be a key factor to increase / initiate a position in AXP, 53% of the audience said they would like to see better visibility in AXP’s core growth. AXP acknowledged the sale of the Costco portfolio to Citi has added complexity to reporting results and has provided additional disclosures on underlying trends in the quarterly results. AXP also said that accelerating revenue growth is a key area of focus for management. Chart 64: What would be a key factor for you to increase / initiate a position in American Express? 60% 53% 40% 29% 20% 7% 13% 0% Accelerating global growth Renewed visibility in growth in AXP’s core business Solid execution of cost reduction initiatives More aggressive capital management Source: BofA Merrill Lynch Global Research • AXP was a little surprised that more investors did not view its focus on loan growth as an appropriate strategy to increase wallet share amongst the revolving segment. Instead a plurality of investors viewed AXP’s strategy as appropriate in light of the portfolio sale but risky due to the duration of the credit cycle. While investors were concerned about the duration of the credit cycle, AXP emphasized its low loss rates and premium customer base as well as the loss of the Costco portfolio to argue that AXP's credit profile will not materially change from its current strategy to grow revolving balances through revolving credit card customers. Chart 65: How would you describe American Express’ strategy to expand exposure to credit? 60% 40% 20% 0% 8% 8% Timely opportunity to grow earnings while credit costs are low Appropriate strategy to increase wallet share amongst revolving segment 46% Appropriate in light of the Costco portfolio sale but risky due to duration of credit cycle 38% Risky due to extended duration of the credit cycle Source: BofA Merrill Lynch Global Research 2016 Future of Financials Conference | 17 November 2016 45 • On a more cautious note, AXP said that Discount rate pressures are likely to remain elevated near-term as EU merchants renegotiate contracts post-interchange rules and the OptBlue program gains additional scale in the US. Strengthening in the US$ will also lead to FX headwinds that will likely impact NT results, particularly from countries like Mexico where AXP has a large business. Conference Panels Top Takeaways Contact your BofA sales representative for additional information. Blockchain: Potential Transformation of Financial Markets With Blockchain one of the most talked about potential disruption in financial services and 71% polled noting that blockchain is a significant opportunity for financial service firms, we thought it was timely to host a panel on the potential impact of Blockchain on financial markets that included Co-founder & COO of R3 Todd McDonald and CEO of Axoni Greg Schvey. • Blockchain could lead to $60-80bn of annual potential cost savings for financial institutions. While it is still early days to know what the full impact of potential cost savings that blockchain technology could bring to financial institutions, the panelists believe that total savings could reach $60-80bn. • Successful implementation of equity swaps. An area where Blockchain has shown to be successfully implemented is around equity swaps. Axoni had worked with multiple financial institutions to handle data reconciliation around its equity swaps record which drove efficiencies. • Trade finance viewed as most likely for success. When asked which part of the financial industry will be the first to successfully utilize blockchain technology, 38% of those polled cited trade finance/transaction banking as the most likely, with 28% citing capital markets & securities servicing. Chart 66: Which part of the financial industry do you believe will be the first to successfully utilize blockchain technology? 40% 38% 30% 20% 14% 28% 21% 10% 0% Wholesale payments (cross-border F/X, correspondent banking) Trade fianance/transaction banking (receivables finance, commodities trade finance) Capital markets & securities servicing (securities settlement, asset documentation) Retail payments (parallel currency systems, remittances) Source: BofA Merrill Lynch Global Research • Implementation could be earlier than expected. While many investors are skeptical that blockchain will be broadly adopted in the near term, with none of the audience expecting it to be widely adopted within 12-24 months, the panelists were more optimistic and believes that there could be upside surprise in terms of the timing as proof points and implementation could happen more quickly than expected. 46 2016 Future of Financials Conference | 17 November 2016 Chart 67: How knowledgeable are you with blockchain technology? 60% 50% 50% 40% 34% 30% 20% 16% 10% 0% Very knowledgeable Moderately knowledgeable Not at all knowledgeable Source: BofA Merrill Lynch Global Research Chart 68: After this panel, how do you feel about the applicability of blockchain technology in financial services? Chart 69: How long do you think it will take for financial sevices industries to broadly adapt blockchain technology? 80% 70% 60% 50% 40% 30% 20% 10% 0% 71% 14% 14% A significant A modest opportunity opportunity for for financial service financial service firms firms Overhyped technology 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 40% 36% 24% 0% 12-24 months 3-5 years 5+ years 10+ years Source: BofA Merrill Lynch Global Research Source: BofA Merrill Lynch Global Research The Future of Clearing: Understanding the Options • Guest speakers in this panel included Brian Ruane (CEO, Broker Dealer Services, BNY Mellon), Lee Betsill (Chief Risk Officer, CME Group), Michael C. Bodson (President & CEO, DTCC), John Horkan (Head of North America and Global COO, Rates & FX, LCH, LSE Group) and Marcus Denne (Director, Global Clearing, BofA Merrill Lynch). • With the start of the Uncleared Margin Rule (UMR) on September 1st, we asked investors what was the primary challenge related to the new clearing rules. Most investors (95%) thought the rising cost, particularly in the amount of collateral required (50%) and the complexity around infrastructure and different country rules (45%) were the main issues. 2016 Future of Financials Conference | 17 November 2016 47 Chart 70: What is the primary challenge related to the new clearing rules? 60% 50% 40% 50% 45% 30% 20% 10% 0% The rising cost, particularly in the amount of collateral required The complexity around infrastructure and different country rules 2% 2% The lack of dealers offering the capabilities given their challenges None Source: BofA Merrill Lynch Global Research • Panel participants believe that the election/shift in regulatory outlook might lead to a slowdown of products being added to the clearing mandate, with FX being the biggest unknown. • Going forward, firms are tackling U.S. vs Europe collateral harmonization/transfer (DTCC and Euroclear are working on a collateral transfer initiative that is expected to launch in 1Q17), collateral management through firms including BNY Mellon, and Cleared repo could also be on the horizon (CME has filed an application with the SEC but no timeline given). • We asked investors what the biggest potential risks are in the clearing mandate and CCPs, and 33% of voting investors thought collateral concentration issues with cybersecurity (27%) coming in 2nd. Chart 71: What is the biggest potential risk in the clearing mandate and CCPs? 35% 33% 30% 25% 27% 20% 15% 17% 17% 10% 7% 5% 0% Much more collateral will be needed in stress times There will be collateral concentration issues CCP risk models fail Dealer/FCMs fail Cybersecurity Source: BofA Merrill Lynch Global Research 48 2016 Future of Financials Conference | 17 November 2016 Equity Market Structure: Simplifying the Complex • Guest speakers in this panel included Anthony Barchetto (EVP, Head of Corporate Development, BATS Global Markets, Inc.), Jamil Nazarali (Head of Execution Services, Citadel Securities Inc.), Eric Stockland (Chief Strategy Officer, IEX Corp.) and Pankil Patel (Managing Director, Electronic Sales, BofA Merrill Lynch). • Panel members had a spirited debate regarding the current market structure pros and cons, rebates, off-exchange trading, latency, market maker obligations, and the future of regulation post the election. • We asked investors what they thought of the current state of the equity market structure, and 74% thought that the market needs revamping. 32% believe that there was a problem with the depth of liquidity and 23% thought there were misaligned incentives. Chart 72: What is your view of the current state of the equity market structure? 35% 30% 25% 27% 32% 23% 20% 15% 14% 10% 5% 0% The market structure is overall adequate 5% The market structure needs improvement – notably in transparency The market structure needs improvement – notably in liquidity of size The market structure needs improvement – notably in misaligned incentives The market structure needs a full revamp Source: BofA Merrill Lynch Global Research • Given the announcement that SEC Chairwoman White will leave at the end of President Obama’s term, this will likely lead to some regulatory uncertainty and lack of activity given not enough commissioners to make forward progress. In addition, the new Chair will likely be focused on less regulation and one panel member thought Reg NMS could come under review. Life after DOL: Evolving Beyond the Fiduciary Rule • We hosted industry experts for a panel on the Department of Labor’s (DOL) fiduciary rule, which is set to go into effect in April 2017. Panel participants included Michael Hadley (Partner at Davis & Harman LLP), Lisa Bleier (Associate General Counsel at SIFMA), and Kevin Crain (Head of Workplace Financial Solutions at Bank of America Merrill Lynch). • Given potential changes for the brokerage industry, we asked investors “Will the DOL’s fiduciary rule cause meaningful changes to the brokerage industry?”. Most investors believe that the rule will cause a number of significant changes to the brokerage industry (83%), including significant pressure on commission revenues, a shift to advisory and fee based accounts, and assets in motion with some to robo advisor and RIA platforms. 2016 Future of Financials Conference | 17 November 2016 49 Chart 73: Will the DOL’s fiduciary rule cause meaningful changes to the brokerage industry? 90% 83% 80% 70% 60% 50% 40% 30% 20% 10% 0% 3% Yes, significant pressure on commission revenues 7% Yes, a shift to advisory and fee based accounts 0% Yes, assets in motion with some to robo advisor and RIA platforms All of the above 7% No significant impact Source: BofA Merrill Lynch Global Research • We also asked about changes to the asset management industry, positing “Will the DOL’s fiduciary rule cause meaningful changes to the asset management industry?” Investors again expect multiple changes (91%), including an accelerated shift from active to passive, further pricing pressure, and higher cost of distribution and margin pressure. No respondents expect there to be no significant impact to the asset management industry. Chart 74: Will the DOL’s fiduciary rule cause meaningful changes to the asset management industry? 100% 90% 91% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0% Yes, an accelerated shift from active to passive 4% 4% Yes, further Yes, higher cost of pricing pressure distribution and margin pressure All of the above 0% No significant impact Source: BofA Merrill Lynch Global Research • The panel noted that President Elect Trump did not address the Fiduciary Rule during his campaign, so his view on the rule is unknown, but Republicans have largely been against it. There is some precedence on what we could expect President Elect Trump to do with the fiduciary rule. President Bush had implemented an investment advice regulation that President Obama delayed several times until it was finally withdrawn. The view from the panel was that the most likely action over the next several months is that President Elect Trump delays the rule, though to repeal or change it would take work and new regulatory 50 2016 Future of Financials Conference | 17 November 2016 proposals. Mr. Trump and congress could also ultimately defer to the SEC to act on a Fiduciary Rule. • The biggest issue from the brokerage industry is the contract requirement under the BIC. The issue with the contract is increased liability, given the contract makes it easier to litigate. This would likely be the primary area for modifications. Even though many firms have made announcements regarding changes they expect to make, most have not figured out all of the underlying steps yet given that it is so complicated and impacts large parts of the business. • The industry will have to move forward on implementing the rule, given the April 2017 implementation date, but firms may not put as much effort into certain areas that need to be final by January 2018. In addition, prior to Mr. Trump starting, the transition team could make an announcement about the rule. However, even at that stage firms would have to determine whether or not to act on the announcement. • While the most likely scenario is a delay in the rule, with the potential for some modifications to ease some of the burdens, most see the trend towards a fiduciary rule already well in motion for the industry. The Future of Tech-Based Lending • James Paris, Executive Vice President at Avant, Ashish Jain, Senior Vice President at SoFi and John Schleck, Senior Vice President at Bank of America discussed key trends and recent developments in Tech-Based lending. • Audience members and panelists generally agreed that improved customer service, full spectrum lending, and better pricing all are contributing to the growth in techbased lending. SoFi did caution that better pricing is not usually the primary driver as banks can usually offer cheaper pricing. Chart 75: What is the biggest driver of growth in tech-based lending 40% 30% 27% 27% 33% 20% 10% 13% 0% Improved service model Full spectrum lending Better pricing – cheaper All the above Source: BofA Merrill Lynch Global Research • Acquisition models differ by company but being efficient at customer acquisition is key for a successful tech-based lender. SoFi estimated that its customer acquisition cost is 1/5 th that of a bank which enables it to effectively compete and partner with banks. Panelists highlighted the use of data analytics to more efficiently target potential customers via direct mail, digital ads or through affiliate programs. • Audience members were split on the main risks to investing in tech-based companies with limited sustainable competitive advantage, untested credit models and fragile all highlighted as key risks. Somewhat surprising given events earlier this year, regulatory concerns were not high on the list of investor concerns. 2016 Future of Financials Conference | 17 November 2016 51 Chart 76: Biggest risks to investing in a tech-based lending companies 40% 30% 29% 32% 32% 20% 10% 7% 0% No sustainable competitive advantage Untested credit model/risk management Fragile funding model Uncertain regulatory backdrop Source: BofA Merrill Lynch Global Research • Panelists agreed that flexible funding models that utilized both balance sheet lending and distribution of loans were important for a tech based lender. Additionally, panelists said that risk management is top of mind and tech based lenders are increasingly applying refined analytics that rely on credit variables directly from credit bureaus into their lending and portfolio management decisions The Future of Payments: The Need for Speed • Jonathan Lear, President – North America, Earthport and Bruce Parker, Founder of Modopayments spoke on The Future of Payments panel. In a wide ranging discussion, the panelists discussed the B2B opportunity, the importance of partnering with incumbents and the need to maintain Safety standards. • Audience members identified the lack of a clear value proposition for new players relative to incumbents and concerns about Safety and Security as the largest risks to investing in new Fin Tech payments companies. Chart 77: What is the primary risk to investing in new entrants within the payments landscape? 40% 20% 0% 38% Unclear value proposition of new entrants relative to incumbents Source: BofA Merrill Lynch Global Research 23% Rapid innovation that erodes value proposition 38% Concerns around safety & security 0% Intense regulatory friction • Panelists generally thought the best way for a new Fin Tech companies to succeed was by partnering with incumbents. This was consistent with the views of audience members, a majority of whom thought the payments industry would continue to be controlled by incumbent institutions partnering with innovative tech companies. 52 2016 Future of Financials Conference | 17 November 2016 Chart 78: What do you believe will be the structure of the payments industry in 5-7 years? 80% 60% 59% 40% 28% 20% 0% Dominated by large incumbent payment brands Controlled by large incumbent institutions enable by innovative tech companies 10% Controlled by savvy tech companies operating through traditional payments providers 3% Dominated by dynamic eco-system of savvy tech companies Source: BofA Merrill Lynch Global Research • Panelists highlighted that while recent innovations in faster payment transfers have been focused on P2P applications, the B2B opportunity is 7-10x larger. That said, panelists thought, based on experience in the UK, the cost of faster payments would likely have to be borne by the existing payment infrastructure as consumers have not been willing to pay for faster transfers. Additionally, panelists pointed out that in countries where faster payments have been implemented, it has mostly been a mandate by regulations suggesting the government has an important role to play. • Panelists highlighted Security and Compliance as being essential for a new Fin Tech company to be admitted as part of the industry ecosystem. Incumbent payment companies will only partner with a new FinTech company that can meet the safety and regulatory standards that the incumbent is required to meet. Robo Advisors: Shedding Light on the Potential Opportunity • Guest speakers in this panel included Eli Broverman (Co-Founder and President of Betterment), Randy Sternke (Vice President, Business Development at Alkanza), and Vaughn Bowman (Director, Managed Solutions Channel Management at BofAML). Each firm discussed the unique aspects of their individual business models and where they see the robo industry headed in the future. • Broverman brought up several key points on how the independent robo advisor model came about and why it will continue to grow in the future. He believes that the main drivers include a lack of quality advice for investors with few assets, investors’ beliefs that financial institutions are not aligned with their interests or transparent, and the fact that people want financial services to work as well as the other technology in their lives. Broverman believes that the biggest opportunity going forward is in the mass affluent segment and the 401K space. • Alkanza is focused on providing robo capabilities to financial advisory firms through partnerships, rather than directly to consumers, with a focus on the platform as well as portfolio construction. • We surveyed the audience to gauge their views on the potential size of the robo advisor market and the most common answer was that assets will surpass $1T, followed by assets will hit $500B and then level out. 2016 Future of Financials Conference | 17 November 2016 53 Chart 79: How significant do you think robo advisor platforms will become over the next 3-5 years? 60% 50% 51% 40% 35% 30% 20% 14% 10% 0% Assets will surpass $1T Assets will hit $500B then level out Assets will hit $500B then decline Source: BofA Merrill Lynch Global Research • Based on our polling questions, investors believe that the main beneficiaries of the robo advisor trend will be the passive asset managers (40%), followed by the large broker firms adding robo technology (28%) and the online brokers that have scalable robo platforms (21%). They also believe that the main driver of success for robo advisors will be a low and transparent cost structure (44%), followed by an efficient technology and user interface (25%). Chart 80: Which firms will benefit the most from the robo advisor trend? 45% 40% 40% 35% 30% 28% 25% 20% 21% 15% 10% 5% 0% Passive asset managers Large broker firms adopting robo technology Online broker robo platforms that have scale 9% Independent B2C robo advisor firms 2% Robo advisor firms that have a B2B model Source: BofA Merrill Lynch Global Research 54 2016 Future of Financials Conference | 17 November 2016 Chart 81: What do you expect to be the main driver of success for robo advisors? 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 44% A low and transparent cost structure 25% 11% 11% An efficient Advanced portfolio technology and construction that interface platform outperforms Department of Labor fiduciary rule 8% Access to a human in volatile markets Source: BofA Merrill Lynch Global Research • Finally, all of the panel participants believe that the DOL Fiduciary Rule will not be repealed by the new administration, although it may be delayed. In the end, this should benefit robo advisors, as most of the models have low fee structures and limited conflicts of interest. State of the Multifamily Market: Cooling or Collapsing? We hosted a panel to discuss the state and the outlook for the multifamily market following a year which has witnessed increased investor anxiety around multifamily loan growth and heightened scrutiny by banking regulators of multifamily loan portfolios, particularly at banks with a high concentration of multifamily loans. Our panelists included John Jardine, Co-CEO of Ares Commercial Real Estate Corp, David Brickman, Executive Vice President and the Head of Multifamily business at Freddie Mac and Alan Fishman, Chairman of the Board at commercial real estate investment trust Ladder Capital. • Multifamily on solid footing: The panelists view the multifamily market as having a solid foundation with most of the risk lying at the high end, class A properties in particular markets (New York, San Francisco). Even here, the panelists agreed that the issues at the high end segment were more likely to manifest themselves in the form of decelerating growth in rents (and increased incentives by landlords) as opposed to serious credit issues. Investors echoed this sentiment during a live audience poll with 60% of the investors seeing issues in the multifamily market limited to certain regions and at certain rental price points. 2016 Future of Financials Conference | 17 November 2016 55 Chart 82: How do you view fundamentals for multifamily lending in 2017? 70% 60% 50% 40% 30% 20% 10% 0% 10% Softening fundamentals should lead to slower financing activity next year 0% Softening fundamentals should lead to worsening credit metrics 23% Softening fundamentals should lead to slower financing activing and worsening credit metrics 60% Some concern, but only in certain regions and at certain rental price points 7% No concern Source: BofA Merrill Lynch Global Research • Future demand in multifamily promising: Looking forward, the panelists see healthy demand for multifamily housing given a preference among millennials to live in urban areas versus the suburbs. Moreover, the panelists noted that increasing debt burden tied to student loans is likely to make home ownership out of reach for several first time home buyers. Furthermore, it was noted that the US needs 1.5mn new housing units each year and the present level of construction activity was not keeping pace with this when looking at it on a national level. • Foreign capital part of the equation: Some of the panelists are seeing a significant flow of foreign capital into the multifamily market with Mr. Brickman surmising that data around inflow of foreign capital into the commercial real estate market was likely understated given that significant amount of inflows have come indirectly through investment vehicles like private equity. • Risk retention rules modest impact: Our multifamily panelists viewed the risk retention rule for CMBS as having a modest impact given the large role played by the GSEs in lending to the multifamily space. It was also noted that while the rule may dampen private securitization activity, less competition from the CMBS markets would be a positive for balance sheet lenders. • Impact from rising rates may not be all news: While the panel acknowledged that the rise in interest rates will likely push cap rates higher, an increase driven by a more favorable growth outlook may not be as bad. This is because a stronger economy should theoretically lead to a better backdrop for jobs and wage growth, thereby providing landlords some leeway to raise rents. The Future of Big Data in Financials We hosted a panel to discuss how big data is impacting the financial services industry. The panel discussed key big data buzzwords including machine learning, data scientist, structured data and unstructured data. They panel also reviewed how different firms are adapting big data solutions to solve specific company issues. Our panelists included Jessica Donohue, the Chief Innovation Officer for State Street and the head of advisory and information solutions for State Street Global Exchange, Greg Michaelson, head of data science practice at Data Robot, and Sandeep Saini, head 56 2016 Future of Financials Conference | 17 November 2016 of global markets sales, research, and capital markets technology at Bank of America Merrill Lynch. • How big data can influence the future: The panel confirmed the notion that there are many different definitions for big data, but everyone seemed to agree almost all financial firms are seeking effective ways to implement big data techniques to 1) generate alpha, 2) manage risk 3) manage expenses. • Companies polled are a long way from benefitting big data: 96% of the audience polled said their firm is either somewhat effective or not at all effective at using big data. Some of the main challenges the panelists highlighted during our discussion were merging multiple legacy data systems and finding attractive talent with both data science and business experience. Chart 83: How effective is your firm at using big data? 70% 60% 57% 50% 40% 39% 30% 20% 10% 4% 0% Fully integrated with the investment and process and operations Somewhat effective Not at all effective Source: BofA Merrill Lynch Global Research • The panel discussed three roles needed to solve data science problems: 1) someone who has sway to make change and implement solutions 2) business champion, someone to discuss solutions with technical employees and to share knowledge on key issues such as regulation 3) technically savvy employees. • Implementation advice: The panel provided advice for firms that have yet to utilize big data to attempt to solve problems facing their companies. The advice included seeking problems that could be solved using data science and focusing on small wins with the data present. 2016 Future of Financials Conference | 17 November 2016 57 Chart 84: Now that we’ve defined “big data”, how far do you think financial institutions are at embracing the use of big data today? 60% 50% 40% 30% 20% 10% 0% 5% Fully committed to using big data to generate investment alpha / revenue growth 19% 19% Fully committed to using big data to improve cost or process efficiency, risk management, regulatory compliance Fully committed to using big data across the organization 49% Somewhat committed 8% Not at all committed Source: BofA Merrill Lynch Global Research Chart 85: After this conversation, have you changed your mind on how financial institutions are adopting big data in their businesses? 60% 55% 50% 40% 30% 20% 23% 23% 10% 0% Financial institutions are more committed to allocating resources to big data than I thought Financial institutions are less committed to allocating resources to big data than I thought No change Source: BofA Merrill Lynch Global Research The Future of Financials M&A and Regulation We hosted a panel to discuss the state and outlook of M&A and regulation. Given the results of the US election and the potential for easing of regulations, the panel discussed a timely topic on the mind of investors. Our panelists included Rodgin Cohen, Senior Chairman of Sullivan & Cromwell; Richard Kim, partner at Wachtell, Lipton, Rosen & Katz, and Ed Hill, Senior Vice President, Government Affairs, Bank of America Corporation. • Regulation is about tone: Our panelists agreed that the scope and strength of regulation comes from the tone and attitude of regulators rather than from legislation. They noted that an attempt to repeal legislation such as Dodd-Frank would be misplaced as most direction derives from the tops of regulatory bodies. They also felt Senator Hensarling’s Financial Choice Act would not be a better alternative to Dodd-Frank given the 10% leverage ratio is not a Federal Reserve definition of leverage. Utilizing a Fed definition would likely lead to leverage north of 10%. The inclusion of CAMEL ratings with the leverage ratio would also allow regulatory sway over institutions. 58 2016 Future of Financials Conference | 17 November 2016 Chart 86: Following last week’s GOP sweep, do you think regulatory relief is in the cards for the financial services industry? 70% 60% 50% 40% 30% 20% 10% 0% 29% Yes, and this should have a meaningful impact to returns 62% Yes, but change in regulatory burden and subsequent impact to bank returns will be more gradual than what financial stocks are currently pricing in 9% No, I think there will be little change in regulatory burden Source: BofA Merrill Lynch Global Research • CCAR a product of regulatory attitude: The panelists agreed that CCAR in its current form is not a result of legislation as post-recession bank stress tests (SCAP) existed prior to Dodd-Frank. Furthermore, the panelists noted Dodd-Frank’s definition of a stress test is very basic, which has been made more stringent and complex as a result of regulators. Mr Cohen also noted that a lack of transparency of the test was the least defensible part of CCAR. • Biggest obstacle for bank M&A and activist influence is regulation. Despite headlines of increased shareholder activism within the banking industry, the majority of investors polled (61%) believe activist investors have only a moderate impact on corporate strategy (see chart). Specifically, Mr. Cohen explained that two of the three reasons why an activist will typically get involved with a corporate are difficult to achieve on a bank’s board given the level of regulatory oversight on the industry. While selling the bank is the one area where activists have had success, this typically occurs at the community bank level. That said, he believes a change in attitude of regulators could free up M&A activity. Chart 87: What kind of impact does an activist investor have in corporate strategy and ultimate shareholder value? 70% 60% 50% 40% 30% 20% 10% 0% 18% Meaningful impact, as activism behooves complacent Boards to rethink corporate strategy in a way that is most positive to near-term and long-term shareholder value 61% 21% Moderate impact, as activism No meaningful impact, as many can bring issues to the forefront activists have a short-sighted and can invigorate deal view of shareholder value discussions but have modest influence in corporate strategy and ultimate shareholder value Source: BofA Merrill Lynch Global Research 2016 Future of Financials Conference | 17 November 2016 59 • How to do M&A right: When describing acquisitions that most impressed the panelists, a key reason for success was the acquirer keeping the target management in place as well as giving the target management independence. The scope and planning of the integration was also critical for success. Chart 88: Do you think M&A activity in financial services will pick up in 2017? Chart 89: If you voted yes, what statement closely matches your rationale? 70% 60% 50% 40% 30% 20% 10% 0% 26% 57% 17% Yes, meaningfully Yes, modestly No, I don’t think deal activity will increase 60% 50% 40% 30% 20% 10% 0% 48% 47% Lower anticipated regulatory burden, particularly on buyers Modest economic tailwinds and/or subscale businesses will behoove more institutions to sell 5% Shareholder activism should pick up and help drive activity Source: BofA Merrill Lynch Global Research Source: BofA Merrill Lynch Global Research Understanding the Changing Fixed Income Markets We hosted a panel to discuss the evolution of the fixed income market structure given the advent of electronic trading and regulatory construct. Our panelists included Lee Olesky (co-founder and CEO of Tradeweb), Adam Brown (Head of US Rates Electronic Trading at BofAML) and Brian Callahan (Head of US Par Loan Trading and the head of Electronic Initiatives for Global Credit and Special Situations at BofAML). • Electronification of fixed income markets steadily growing; however, lag European market. Electronic trading came to fixed income trading in the late 1990’s as a way of automating transactions (i.e. create a more efficient process between parties). Today in the US, the investment grade market is 16-20% electronic, the high yield market is 8% (has doubled over the last few of years), the treasury market (which has been growing steadily over last 10-15yrs) is 80-90% of the actual trade count is electronic. While the electronification of the derivative market was slower to evolve, recent regulatory reform has accelerated the electronification process (50% today). That said, while the evolution towards electronification in the US continues to grow, the European bond market is actually more advanced with nearly 50% of the bond market automated (vs. 20% for the US). • Regardless of possible regulatory relief, electronification may slow but won’t end entirely. While a partial repeal or lightening of Dodd-Frank would be a net positive for the financial markets, and possibly lower the costs to banks and endusers, Mr. Brown doesn’t see a dramatic effect on the market structure. In other words, regulatory relief may only slow down the electronification progress. • Electronification within the fixed income market is a modest priority among asset managers. Fifty-two percent (52%) of the audience polled believe it to be a modest priority in their own corporate strategy to embrace new technologies/electronification in fixed income. Mr. Brown was not surprised by the results as many of the asset managers have their own constraints from technology funding to regulatory issues to running the day-to-day business. While 60 2016 Future of Financials Conference | 17 November 2016 electronification is something that pays dividends, these benefits occur over time. That said, general sentiment from asset managers is that electronification is something they want as it leads to efficiency. Chart 90: As you think about corporate strategy for asset managers, how open is your firm with embracing new technologies/electronification in the fixed income space? 60% 50% 52% 40% 30% 20% 19% 29% 10% 0% Top priority in corporate strategy Modest priority in corporate strategy Low priority in corporate strategy Source: BofA Merrill Lynch Global Research • ETF market for fixed income securities expected to grow significantly. Unlike in the equities market where ETFs are 7% of the volume traded, fixed income ETFs are still sub-1% (0.8% at YE15). As the market continues to grow, particularly in the asset classes where the underlying bonds aren’t that liquid, Mr. Callahan noted seeing increased liquidity in the ETFs for liquidity reasons. Following in the footsteps of the equities market, Mr. Callahan expects the fixed income ETF market to grow significantly and be very impactful to the overall market structure. • Greater concern around speed at which liquidity can change vs. liquidity in the market. There is a lot of concern around liquidity in fixed income markets. That said, Mr. Brown is more concerned with the speed at which liquidity can change. There has been growing evidence that the market is going to adjust greater and faster than the underlying fundamental reasons for the correction. As such, this is causing participants to revisit how they look at risk management. Now market participants need to take into account not only their behavior, but their reaction to other participants’ behavior (i.e. contagion effect). • Fewer, well-established platforms reduce overall risk within system. Eighty-nine (89%) percent of the audience polled prefer to conduct business with a few, wellestablished platforms to diminish risk within the system. Using the government bond market as an example, Mr. Olesky points out that the growing contribution from PTFs to the overall treasury trade volume has increased the risk outside the primary-dealer system. This is a risk Mr. Olesky believes needs to be addressed and prefers a central clearinghouse for fixed income transactions. 2016 Future of Financials Conference | 17 November 2016 61 Chart 91: As you think about platform management, what is your view on having multiple options of liquidity providers? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 11% Prefer to have a material amount of options 89% Prefer to conduct business with a few, wellestablished platforms Source: BofA Merrill Lynch Global Research 62 2016 Future of Financials Conference | 17 November 2016 Table 1: PO Changes Firm Rating QRQ Current Price Old PO New PO ASB UNDERPERFORM B-3-7 $22.45 $19.00 $20.00 BANC NEUTRAL C-2-7 $14.80 $18.50 $15.50 BBT BUY B-1-7 $42.82 $41.00 $45.00 BKU BUY C-1-7 $34.19 $36.00 $37.00 BOH UNDERPERFORM B-3-7 $85.67 $64.00 $75.00 C BUY B-1-7 54.63 $55.00 $60.00 CBF BUY C-1-7 $35.80 $35.00 $38.00 CBSH NEUTRAL A-2-7 $56.39 $53.00 $60.00 CFG BUY B-1-7 $30.73 $28.00 $33.00 CFR UNDERPERFORM B-3-7 $82.93 $70.00 $74.00 CMA UNDERPERFORM B-3-7 $59.21 $49.00 $55.00 EWBC BUY B-1-7 $45.64 $45.00 $50.00 FBP NEUTRAL C-2-9 $6.29 $6.00 $6.50 FCB BUY C-1-9 $39.75 $44.00 $44.00 FHB NEUTRAL C-2-7 $29.48 $28.00 $31.00 FHN UNDERPERFORM B-3-7 $17.97 $14.50 $16.00 FITB NEUTRAL B-2-7 $24.90 $23.00 $26.00 FSB NEUTRAL C-2-9 $33.80 $40.00 $36.00 GS BUY B-1-7 $206.26 $195.00 $230.00 GWB BUY B-1-7 $38.85 $38.00 $42.00 HBAN BUY C-1-7 $11.93 $12.00 $13.00 HBHC NEUTRAL B-2-7 $39.05 $35.00 $41.00 IBKC BUY B-1-7 $78.05 $74.00 $85.00 JPM BUY B-1-7 77.40 $74.00 $83.00 KEY BUY B-1-7 $16.73 $17.00 $18.00 MS BUY B-1-7 $39.19 $36.00 $43.00 NYCB BUY C-1-8 $15.36 $17.00 $17.00 PB UNDERPERFORM B-3-7 $64.38 $50.00 $58.00 PNC BUY B-1-7 $107.51 $100.00 $110.00 RF NEUTRAL B-2-7 $12.89 $11.00 $13.00 SBNY BUY B-1-9 $147.02 $140.00 $160.00 SIVB BUY B-1-9 $147.35 $140.00 $165.00 SNV NEUTRAL C-2-7 $38.01 $35.00 $40.00 STI BUY B-1-7 $50.79 $48.00 $53.00 TCB UNDERPERFORM B-3-7 $16.23 $13.50 $14.00 TCBI NEUTRAL C-2-9 $70.75 $62.00 $74.00 UMBF BUY B-1-7 $72.04 $65.00 $78.00 USB NEUTRAL B-2-7 $47.87 $45.00 $50.00 WFC BUY B-1-7 51.68 $50.00 $55.00 ZION UNDERPERFORM C-3-7 $37.46 $30.00 $36.00 Source: BofA Merrill Lynch Global Research 2016 Future of Financials Conference | 17 November 2016 63 Price objective basis & risk AllianceBernstein (AB) Our $25 price objective is based on 13x target P/E on our '17E, a discount vs our target for asset managers as a group, based on improving but inconsistent flows and limited active equity exposure as well as the MLP structure which means less liquidity, though a high distribution. Upside/downside risks to our price objective are market appreciation/depreciation, similar to other asset managers, underperformance, and an unpredictable yield since it is based on earnings rather than fixed. Because Alliance is an MLP, total potential return includes a variable distribution based on earnings. Amer Express (AXP) Our $74 price objective reflects a 13x PE multiple to our 2017 EPS estimate. Given the elevated uncertainty, we expect AXP will trade near the low end of its historical valuation range, which averages 12x-16x. This multiple reflects our view of solid loan growth and better billings, offset by increased risks of rising credit and marketing costs. We think the market will view AXP through a more credit card lens in the near-term, which also supports a multiple at the low end of the historical range. Upside risks to our PO are stronger than expected macroeconomic conditions, accelerating consumer and business spending, lack of disruptions in capital markets, or a decreasing regulatory burden. Downside potential could come from weaker than expected macroeconomic conditions and renewed recessionary pressure, softer consumer and business spending, disruptions in capital markets, or an increasing regulatory burden. Ares Management (ARES) Our price objective (PO) for Ares is $18, which implies a target price-to-ENI (P/ENI or P/E) multiple of 11x our 2017 ENI estimate. Our price objective is based on our sum-ofthe-parts (SOTP) analysis. Our SOTP analysis includes the following components: a target multiple on fee related earnings (15x - in line with or a premium to asset manager multiples given healthy growth and sticky assets), book value for the balance sheet investments and accrued carry, and a discounted value on the performance fee upside over a cycle (1.3x MOIC). Based on this method, we value the fee related earnings at $13/unit, the balance sheet (principal investments and accrued carry) at $4/unit, and the discounted value of future carry income and investment income at $1/unit, which equates to a total value of $18. Risks to our PO: a weak macro and capital markets backdrop, potential changes in tax laws related to carried interest and partnerships, legal and political risk, increased regulation, credit market disruptions, poor performance, weak fundraising, expansion risk, key person and talent risk, competition, a unique corporate structure that limits unitholder control, and lock ups. Associated Banc-Corp (ASB) We use an equal weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $20 price objective and assign a 1.4x multiple to 3Q17E TBV and a 14.9x 2017 P/E multiple, in-line with smid-cap peers due to their near median return profile. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 5%. The upside risk to our price objective is a less onerous residential RE cycle. Downside risks are a double dip in housing prices, deteriorating energy portfolio and falling rental income for commercial properties. Banc of California (BANC) To arrive at our $15.50 price objective, we have employed a three-factor valuation methodology that incorporates target P/E, target P/TBV and a DCF model. For our P/E analysis, we use a 14x earnings multiple on BANC's 2017E core earnings below peer 64 2016 Future of Financials Conference | 17 November 2016 multiples due to lagging EPS growth. For our P/TBV valuation, we apply a 1.2x tangible book multiple to BANCs 2Q17E tangible book below peer multiples due to lagging ROTE. For our DCF analysis, we forecast net income growth stabilizes at 3% in the terminal stage. We also assume a beta of 1.1x in the terminal stage. Downside risks to our price objective are slower than expected loan growth, and a reduction in the common dividend. Bank of Hawaii Corp. (BOH) We use an equal weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $75 PO and assign a 2.2x multiple to 2Q17E TBV, representing a premium to peers, which we believe is appropriate given a stronger profitability and capital profile. Our 17x multiple on 2017E EPS is equal to the the peer median given average EPS growth relative to peers. Our DCF assumes a two-stage cost of capital of 9.8% and a terminal growth rate of 3%. Downside risks to our price objective are a longer-than-anticipated low rate environment and a reversal of local economic improvement. Upside risks are a strongerthan-expected economic rebound, better-than-expected capital distribution and a shorter-than-anticipated low rate environment. BankUnited, Inc. (BKU) To arrive at our $37 price objective, we have employed an equal-weighted three factor valuation methodology that incorporates target P/TBV, P/E and DCF. We have applied a target P/TBV value multiple of 1.5x on our 2Q17E TBV and a P/E target multiple of 16x '17 EPS, based on BKU's above average growth relative to peers. Our DCF assumes a two-stage cost of capital of 7.9% and 9.3% and a terminal growth rate of 6%. Downside risks to our price objective are slower CRE loan growth on the back of regulatory oversight, as well as an inability to deploy excess capital, increased competition for Florida M&A and an inability to continue to implement an organic growth strategy in New York City. BB&T Corporation (BBT) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $45 PO and assign a 1.6x multiple to 2017E TBV and 14.5x multiple on 2017E EPS. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%. Our EPS multiple is in-line with BBT's historical avg, which reflects very high-growth years in the 1990s, a pace unlikely to be achieved near term given BBT's size as well as the challenging macro backdrop and industry headwinds. Our DCF assumes a two-stage cost of capital of 9.7% and 10.9% and a terminal growth rate of 4%. Risks to our price objective are macro risks such as a double dip recession, the implementation of a strict liquidity coverage ratio and further regulation on overdraft income that restricts bank profitability. Specific to BBT, risks are enhanced regulatory scrutiny and capital standards as a Domestic SIFI, the announcement of a large, expensive deal, and the risk that the NPBC transaction does not consummate. Capital Bank Financial Corp. (CBF) Our $38 PO is based on an equal-weighted, two-factor valuation methodology that assumes: We assumes a 20.0x P/ 2017e EPS and a target P/TBV of 1.6x to 2017E tangible book given our forecast above peer EPS growth. Downside risks to our PO are an inability to deploy excess capital and create value through acquisitions. 2016 Future of Financials Conference | 17 November 2016 65 Citigroup Inc. (C) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $60 PO, assigning a 0.9x multiple to 2017E TBV and 11x multiple on '17E blended NA and EM earnings. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%. Near term, we view C's current market multiple as overly discounted, but expect money center banks will likely continue to trade at a discount to the regionals. Our 1x TBV multiple represents a 0.3x discount to our median multiple for our universe. Our discount to TBV is a reflection of the earnings drag from Holdings and the fact that money centers will most likely continue to trade at a discount to regional peers. Our 11x 16E multiple is based on a sum of the parts analysis, where we apply a 10.5x multiple, on all operations ex. Lat Am and Asia GCB. We then apply a 11x multiple on Lat Am and Asia GCB to represent the earnings growth for consumer banking in emerging markets. Lastly, we deduct the earnings drag from Holdings. Our DCF analysis assumes a 5% growth rate and two stage cost of equity of 13%. Risks to our PO are macro risks such as a slower than expected rate of fed hikes, and economic downturn and further scrutiny of the financials industry. Specific to C, risks are enhanced regulatory and capital standards as a Global SIFI, slower wind-down on Citi Holdings than expected, and slower-than-expected growth in the emerging markets and potential fines. Citizens Financial Group (CFG) We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $33 price objective and assign a 1.2x multiple to our 2017E TBV in-line with other asset sensitive peers. We place a 15x multiple on our 2017E EPS, also in-line with its asset sensitive peer group. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 5%. Downside risks to our price objective are: 1) a significantly delayed Fed rate hike leading to pressured revenue growth, 2) higher losses associated with CFG's consumer oriented loan portfolio, and 3) a quicker than expected credit normalization. Comerica Incorporated (CMA) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $55 PO, and assign a 1.2x multiple to 2017E TBV (in line with the median energy-exposed peers) and 16x multiple on 2017E EPS due to below peer EPS growth and ROTE. We have weighted the P/E and P/TBV factors equally at 33%, and our DCF analysis by 33%. Our DCF assumes a two-stage cost of capital of 12.3% and 10.5% and a terminal growth rate of 5% and Tier 1 common of 8% at termination. Downside risks to our PO are a more severe than expected impact from lower energy prices, or a slower than expected rate of fed hikes. Upside risks are a better than expected rebound in energy prices and sooner recognition of cost saves. Commerce Bancshares Inc. (CBSH) We use an equal-weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $60 PO and assign a 2.2x multiple to 2Q17E TBV, representing a premium to peers, given higher-quality earnings and capital position. Our assigned 18x multiple on 2017E EPS is at a premium to peers due to higher earnings quality. Our DCF assumes a terminal cost of equity of 9%, and a terminal growth rate of 3%. Downside risks to our price objective are regulatory headwinds, or longer-thananticipated low-rate environment. Upside risks are a stronger-than-expected economic rebound, better-than-expected capital distribution and a potential takeout above our price objective. 66 2016 Future of Financials Conference | 17 November 2016 Cullen/Frost Bankers Inc (CFR) To arrive at our $74 price objective, we employed a three-factor valuation methodology that incorporates target P/E, target P/TBV and a DCF model. For our P/E valuation, we apply a 15x earnings multiple on CFR's 2017E core earnings. For our P/TBV valuation, we apply a 1.7x tangible book multiple to CFR's 2017E tangible book. Both multiples are lower than peers for CFR due to EPS headwinds and rising credit costs from lower energy prices. For our DCF analysis, we use a net income growth of 3.0% and assume a beta of 1.0 in the terminal stage. Upside risks to our PO: a sharp rebound in oil prices, higher than expected interest rates, stronger loan growth, better than expected credit performance of CFR's energy loan portfolio. Downside risks: A worse than expected decline in Texas economic growth that impacts CFR's balance sheet growth, a slower than expected pace or rate hikes and a worse than expected sell off in oil prices. East West Bancorp, Incorporated (EWBC) Our three-pronged valuation methodology (target P/E, target P/TBV, and DCF analysis) drives our price objective of $50. We assumes a 16.0x P/ 2017e EPS and a target P/TBV of 2.0x to 2Q17E tangible book given our forecast above peer EPS growth. Our DCF assumes a two-stage cost of capital of 9.5% and a terminal growth rate of 3% Upside risks to our PO are a quick economic recovery (led by stabilization or appreciation in CA housing values) or a faster than expected recovery in China. Downside risk to our PO is an even deeper economic slowdown driving corporate losses higher than we currently anticipate, faster than expected normalization in credit. Eaton Vance (EV) Our $35 price objective is based on a target P/E of 15x calendar 2016E (14x '17E), at a discount to our asset-manager group target multiple, given recent outflows from high fee products, offset by distinct products in areas such as floating rate and overlay. Downside risks to our price objective are market depreciation and investment underperformance, as for all asset managers, and (should the economy slow) concentration in some credit areas, such as bank loan funds, high yield and longer-duration munis. Upside risks are improving performance, flows, or future traction from EV's ETF licensing initiative. FCB Financial Holdings, Inc (FCB) We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $44 price objective and assign a 1.6x multiple to our 2017E TBV given that we believe the market would pay a 0.3x premium for FCB's 2016 estimated returns in line with the median premium of its peer group (Florida banks, High Growth, Bank Acquisition, and SMIDs). We place a 18x multiple on our 2017E EPS, a premium to its SMIDs peers given our outlook for stronger EPS growth. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 3%. Downside risks to our price objective are a deterioration in credit quality in FCB's unseasoned newly originated loan portfolio, a downturn in the Florida economy, and continued competition for C&I loans. Upside risks are a better than expected improvement in its return profile and a much stronger economic improvement in the Florida economy. Fifth Third Bank (FITB) Our PO of $26 is predicated on target P/E multiple of 15x to reflect higher confidence in FITB achieving most of its profit improvement goals related to Project North Star. This represents a modest premium versus peers. Downside risks to our PO are a prolonged low interest rate environment, expensive M&A and slower than guided loan growth on weaker economic activity. 2016 Future of Financials Conference | 17 November 2016 67 First Bancorp Puerto Rico (FBP) We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $6.50 price objective. We assign a 1.0x multiple to our 2Q17E TBV, below the 1.6X for peers, due to the overhang of PR fiscal issues that may reduce TBV. Our revised implied 2Q17E TBV of 1.0x is consistent with a 5% ROE. We assign a 10x multiple to our 2017E EPS, in line with peers. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 3%. Downside risks to our price objective are a worse-than-expected restructuring of PR government debt, deterioration in the Puerto Rican economy that could hurt the ongoing credit and earnings recovery at FBP, a change in management's strategy to dispose troubled assets, and potential regulatory risk stemming from the ongoing implementation of the Dodd-Frank financial rules. Upside risks to our price objective are a much stronger economic improvement in Puerto Rico and a better-than-expected improvement in asset quality trends at FBP. First Hawaiian Inc. (FHB) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $31 PO and assign a 2.2x multiple to 2017E TBV and 17x multiple on 2017E EPS, representing premium target multiples for the median smid-cap banks under coverage. We have weighted the P/E and P/TBV factors equally. A superior profitability profile suggests an above peer multiple. Our DCF assumes a twostage cost of capital of 8% and a terminal growth rate of 4%. Risks include 1) FHB's reliance on the Hawaiian economy with 80% of the franchise spread across Hawaii, Guam, and Saipan poses downside risk to EPS from a severe economic downturn in this region. 2) While FHB has a history of conservative underwriting its exposure to auto loans could serve as an overhang if investor concerns around the health of the auto sector and consumer increase. 3) Expectations for continued divestiture by French bank BNP (owns 82% of shares o/s) could temper stock performance. First Horizon National Corp. (FHN) We use a three-prong valuation framework (P/E, P/TBV, DCF) to arrive at our $16 price objective and assign a 1.5x multiple to 2Q17E TBV and a 14x multiple to 2017E EPS (inline with median for our mid-to-small cap universe). We believe that this valuation discount is warranted given the below average earnings growth that we forecast for FHN. Our P/TBV and P/E targets reflect our expectation that earnings growth and profitability will remain challenged by a low growth low interest rate environment. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 5%. Downside risks to our price objective are a double dip in home prices and slower residential real estate recovery. Upside risks are FHN being taken out above our price objective and better performance in the economy than we expect. Franklin Financial Network, Inc. (FSB) We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $36 price objective and assign a 1.8x multiple to our 2Q17E TBV, given that we believe the market would pay no premium for FSB's 2016 estimated returns of 14%, below the median of its peer group (High performing, Southeast peers, and SMIDs). We place a 14x multiple on our 2017E EPS, a premium to its peer group given above average expected EPS growth. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 3%. Downside risks to our price objective are: 1) execution risk leading to slower than expected loan growth or lower than expected improvement in the efficiency ratio, 2) 68 2016 Future of Financials Conference | 17 November 2016 downturn in the local real estate markets affecting Franklin's construction loans and increasing credit costs via higher charge-offs and provisions, and 3) inability to effectively fund asset growth driving greater than expected compression in the net interest margin. Goldman Sachs (GS) We value the brokers based on the relationship between ROE (return on equity) and PB (price to book), which has a high historical correlation. Our $230 PO is based on a target PB multiple of 1.2x our forward book value estimate, which is above our 2017E ROE of roughly 10% as we add in higher interest rate expectations and loosening regulations into our multiple. Risks to the downside are a weaker economy/capital markets, increased macro issues, tougher regulation, and litigation, while risks to the upside are a stronger economy, moderating macro risks, market share gains, and less onerous regulatory and legal issues. Great Western Bancorp Inc (GWB) We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $42 price objective and assign a 2.0x multiple to our 2Q17E TBV given that we believe the market would pay premium for GWB's 2016 estimated returns of 15%, in line with the median premium of its peer group (High performing, Midwest peers, and SMIDs). We place a 16x multiple on our 2017E EPS, a premium to its peer group given higher quality earnings. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 3%. Downside risks to our price objective are a prolonged downturn in the farm sector and lower for longer interest rate environment. Upside risks are a better than expected improvement in the farming industry and a much stronger economic improvement in the Midwest economy. Hancock Holding (HBHC) We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $41 price objective. We assign a 1.5x multiple to our 2Q17E TBV, in line with SMID-cap peers based on their in-line return profile, and this translates to $35.75. We place a 14.5x multiple on our 2017E EPS, in line with other peers based on forecasted EPS growth, for $33. Our DCF assumes a two-stage model with terminal growth rate of 3.5% and a cost of capital of 8.5% to derive our $35 PO. Downside risks to our price objective are regulatory issues, slowing growth and if M&A synergies do not materialize. Upside risks are better than expected cost saves, stronger loan growth that would lead to better than forecast spread revenue and lower credit costs. Huntington Bancshares Inc. (HBAN) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our PO of $13 and assign a 1.8x multiple to 2017E TBV and a 14x multiple on 2017E EPS, below historical multiples. This is due to more stringent capital standards and the negative fee income impact of pending regulatory reform. Our DCF analysis uses a cost of equity of 15.7% in the first stage and 11% in the second stage, and a terminal growth rate of 3%. Risks to our price objective are an inability to offset regulatory fee income headwinds and integration risk associated with FMER. Other risks are an inability to return capital to shareholders in a timely fashion or overpaying for an acquisition target. IBERIABANK Corp (IBKC) We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $85 price objective and assign a 1.6x multiple to our 2Q17E TBV, in line with multiples of other 2016 Future of Financials Conference | 17 November 2016 69 high growth peers. We place a 16x multiple on our 2017E EPS in line with SMID peers. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 3%. Downside risks to our price objective are worse than expected decrease in oil prices, regulatory issues, deteriorating credit quality, and if M&A synergies do not materialize. Upside risks are sooner than expected recovery in the oil price, faster than expected rate hikes or better than expected improvement in the US economy. Invesco (IVZ) Our $36 price objective is based on a target P/E multiple of 14x our 2017E, which is above IVZ's historical valuation relative to the group given expectations for superior organic growth. Risks to our price objective are market depreciation and investment underperformance, as for all asset managers, along with volatile flows in IVZ's passive strategies, non-US currency and market risk. JPMorgan Chase & Co. (JPM) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $83 PO, assigning a 1.5x multiple to 2017E TBV and 13x multiple on 2017E EPS. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%. Near term, we view JPM's current market P/E multiple as overly discounted, but expect money center banks will likely continue to trade at a discount to the regionals. Our 11x multiple is a 2x discount to our median multiple as we believe in the near future, money centers will continue to trade at a discount to regional peers. Our DCF assumes a twostage cost of capital of 10% and a terminal growth rate of 4%. Risks to our price objective are macro risks such as a longer than expected low interest rate environment and further regulation and scrutiny of the financials industry. Specific to JPM, risks are enhanced regulatory and capital standards as a Global SIFI, mortgage putback risk, material decline in investment banking/trading profitability, and increased litigation on matters such as private label securitization, foreclosures, etc. Key Corp (KEY) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $18 PO and assign a 1.4x multiple to 2017E TBV and 15x multiple on 2017E EPS, in-line with its peer group due to near median profitability and EPS growth. Our DCF assumes a two stage cost of capital of 13.4% and 10.9% and a terminal growth rate of 5% and Tier 1 common of 8% at termination. Downside risks to our PO are a prolonged low interest rate environment, greater than expected expenses, inability to maximize balance sheet efficiency, and the announcement of expensive deals. KKR & Co. (KKR) Our price objective (PO) for KKR is $17, which results in a target price-to-ENI (P/ENI or P/E) multiple of 10x our 2017 economic net income (ENI) estimate. Our price objective is based on our sum-of-the-parts (SOTP) analysis. Our SOTP analysis is based on the following components: a target multiple on fee related earnings (11x - discount to asset manager multiples given revenue mix), a discount to book value for the balance sheet investments and accrued carry given markets, and a discounted value on the performance fee upside over a cycle. Based on this method, we value the fee related earnings at $6/unit, the balance sheet (principal investments and accrued carry) at $9/unit, and the discounted value of future carry income and investment income at $2/unit, which equates to a total value of $17, in line with our price objective. Risks to our PO: a weak macro and capital markets backdrop, potential changes in tax laws related to carried interest and partnerships, regulatory and political risk, poor 70 2016 Future of Financials Conference | 17 November 2016 performance, weak fundraising, principal investment and balance sheet risk, expansion risk, key person and talent risk, competition, a unique corporate structure that limits shareholder control, and share lock-ups that could weigh on the stock. Legg Mason (LM) Our $36 price objective is based on a target P/E multiple of 12x our calendar '17E, a discount to the group, given financial leverage, muted flows, and deal/integration risk. Downside risks to our price objective: an equity sell-off or weakening flows, which would pressure AUM and revenues. A return to past under-performance at key affiliates is also a risk for Legg, given its fragile recovery and brand issues. Given their affiliate model there are integration risks. Upside risks to our price objective are better than expected equity markets, performance, or flows, or an accretive acquisition. Morgan Stanley (MS) We value the brokers based on the relationship between ROE (return on equity) and PB (price to book), which has a high historical correlation. Our $43 PO is based on a target PB multiple of 1.3x our forward book value estimate, which is above our 2017E ROE of roughly 8% as we add in higher interest rate expectations and loosening regulations into our multiple. Risks are a weak economy, low rates for longer, a significant reduction in capital markets activity, weak returns, another shock to the financial system, ongoing competition and talent risk, tighter regulation, significantly higher capital requirements, and ongoing litigation risks. New York Community Bancorp (NYCB) Our price objective is $17 and we use a three factor valuation model equally weighing valuations using P/E, P/TBV and DCF models. To arrive at our P/E valuation, we assign a 14x multiple to our blended '17e EPS or inline with the median of other CCAR banks with $50-100bn in assets. To arrive at our P/TBV valuation we applied a 2.2x multiple to our 2Q17E TBV, a premium to NY/Thrift and smid cap peers given NYCB's superior return profile. We arrive at our DCF valuation using we assume a 2% terminal growth rate and a WACC of 8%. Upside risks to our price objective are: 1) Change in SIFI threshold could drive a relief rally, 2) Lower for longer rate backdrop, and 3) A period of heightened market volatility. Downside risks to our price objective are: 1) worse than expected impact on ROTE from increased capital standards from obtaining the SIFI designation and 2) higher than expected impact from increasing rates on funding cost. Prosperity Bancshares Inc (PB) We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $58 price objective. We assign a 1.8x multiple to our 2Q17E TBV (40% weight) compared to 1.1x median of TX peers. We believe the 0.7x premium to Texas peers is warranted given PB's above average return on tangible equity (ROTE) profile. We place a 14x multiple on 2017E EPS, in line with historical P/E median (40% weight) net of accretable yield. Our DCF valuation ((20% weight) suggests a fair value of $45. Our DCF assumes a terminal growth rate of 3% and cost of capital of 9.9%. Risks to our price objective are worse than expected drop in the price of oil, better than expected macro environment and increasing rates which offset the effects of lower oil prices, or inability to close an M&A deal due to regulatory or capital constraints. Regions Financial (RF) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $13 price objective and assign a 1.4x multiple to 2017E TBV and 14x multiple on 2017E EPS. Our 2016 Future of Financials Conference | 17 November 2016 71 estimates imply RF would generate ROTEs of 10-11% in 2016-2017E, hence we find RF fairly valued at 1.3x TBV. Our 13x multiple is in-line with large regional peers. Our DCF assumes a two-stage cost of capital of 13.6% and 10.5% and a terminal growth rate of 6.5% and Tier 1 common of 8% at termination. Downside risks to our PO are a slower-than-expected credit recovery, and the Fed on hold for a longer period of time. Signature Bank (SBNY) We use an equal-weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $160 PO and assign a 2.1x multiple to 3Q17E TBV, representing a premium to the group, which we believe is appropriate given a stronger profitability and capital profile, and above-peer-growth prospects. Our 16.1x multiple on 2017E is higher than peers given consistent above peer growth. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 4%. Risks to our price objective are required provisioning at higher-than-forecast levels, further deterioration in rental income for commercial properties, and a longer-thananticipated low-rate environment. SunTrust Banks, Inc. (STI) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $53 PO, assigning a 1.7x multiple to 2017E TBV and 14.5x multiple on 17E EPS. Above peer P/TBV due to their above median profitability, and below peer P/E due to their below median EPS growth. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%. Our DCF assumes a two-stage cost of capital of 12% and a terminal growth rate of 4%. Risks to our price objective are macro risks, such as a slower than expected rate increase. Upside risks are higher-than-expected capital return, a general beta rally for bank stocks, and faster recognition of "normalized" earnings. SVB Financial Group (SIVB) We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $165 price objective and assign a 1.8x multiple to our 2Q17E TBV and apply a 17x P/E to 17E EPS. Our valuation multiples are both in line with high growth peers due to SIVB's high profitability and EPS growth profile. Our DCF assumes a two-stage cost of capital of 9.5% and a terminal growth rate of 6%. Downside risks are a longer than expected low rate environment and a slowdown in the technology sector and related IPO activity. Upside risks are sooner than expected rate hike, or better than expected pickup in the tech sector. Synovus Financial Corp. (SNV) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $40 price objective and assign a 1.7x multiple to our forward 2Q17 TBV, given peers are currently trading higher and a discount is warranted given their lower return profile. We place a 15x multiple on 2017E EPS, in line with the historical median for the stock. Our DCF assumes a two-stage cost of capital of 9%, and a terminal growth rate of 3%. Downside risks to our price objective are potentially slower-than-expected economic growth in their footprint or a potential takeout price that is lower than where the stock is trading today. Upside risks to our price objective are a quicker pick-up in capital return than we are expecting and SNV being acquired above our price objective. TCF Financial Corp. (TCB) 72 2016 Future of Financials Conference | 17 November 2016 We use an equal weighted, three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our PO of $14. We assigned a 1.2x multiple to 2Q17E TBV and a 12x multiple on 2017E EPS, with lower PTBV/PE multiple than peers assigned due to the higher perceived risk of their lending model. Our DCF assumes a two-stage cost of capital of 9.4% and 11.5% and a terminal growth rate of 2%. Upside risk to our price objective is a less onerous residential real estate cycle favorably benefiting credit provision forecasts. Downside risks are a double dip in home prices and a prolonged low rate environment. Texas Capital Bancshares Inc. (TCBI) We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $74 price objective and assign a 1.7x multiple to our 2Q17E TBV, below high growth peers due to possible losses as a result of the downturn in energy prices. We place a 17x multiple on our 2017E EPS, below TCBI's historical pre-crisis P/E multiple based on possible EPS headwinds from their energy exposures. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 4%. Downside risks to our price objective are lower than expected oil prices and a slowdown in economic activity in Texas. Upside risk to our price objective is better than expected ramp up in MCA business, and sooner than expected hike in rates, faster than expected recovery in oil prices. The Blackstone Group (BX) Our price objective (PO) for Blackstone is $29, which results in a target price-to-ENI (P/ENI or P/E) multiple of 12x our 2017 ENI estimate. Our price objective is based on our sum-of-the-parts (SOTP) analysis. Our SOTP analysis is based on the following components: a target multiple on fee related earnings (16x - roughly in line with or a premium to top tier asset manager multiples given healthy growth and sticky assets), book value for the balance sheet investments and accrued carry, and a discounted value on the performance fee upside over a cycle (1.5x MOIC). Based on this method, we value the fee related earnings at $14/unit, the balance sheet (principal investments and accrued carry) at $6/unit, and the discounted value of future carry income and investment income at $9/unit, which equates to a total value of $29, in line with our price objective. Risks to our PO: a weak macro and capital markets backdrop, potential changes in tax laws related to carried interest and partnerships, legal and political risk, increased regulation, poor performance, weak fundraising, expansion risk, key person and talent risk, competition, and a unique corporate structure that limits unitholder control. The Carlyle Group (CG) Our price objective (PO) for Carlyle is $18, which implies a target price-to-ENI (P/ENI or P/E) multiple of 13x our 2017 ENI estimate. Our price objective is based on our sum-ofthe-parts (SOTP) analysis. Our SOTP analysis is based on the following components: a target multiple on fee-related earnings (16x, roughly in line with or a premium to asset manager multiples given growth outlook), book value for the balance sheet investments and accrued carry, and a discounted value on the performance fee upside over a cycle (1.5x MOIC). Based on this method, we value the fee-related earnings at $4 share, the balance sheet at $5 share, and incentive upside at $9 share, which equates to a total value of $18, in line with our price objective. Risks to our PO: a weak macro and capital markets backdrop, potential changes in carried interest and partnership tax laws, regulatory and political risk, poor performance, weak fundraising, expansion risk, key person and talent risk, competition, a unique corporate structure that limits shareholder control, a limited float, and share lock-ups that could weigh on the stock. 2016 Future of Financials Conference | 17 November 2016 73 The PNC Financial Services Group, Inc. (PNC) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $110 PO and assign a 1.4x multiple to 2017E TBV and 14x multiple on 2017E EPS, in line with target multiples for the median large regional banks under coverage. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%. A superior profitability profile suggests an above peer multiple - however, a challenging macro backdrop and specific industry headwinds restrain our P/E target. Our DCF assumes a two-stage cost of capital of 9.6% and 11.2% and a terminal growth rate of 4%. Risks are macro risks such as a lower for longer rate environment, the implementation of a strict liquidity coverage ratio and further regulation on overdraft income that restricts bank profitability. U.S. Bancorp (USB) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $50 PO, assigning an above peer 2.8x multiple to 2017E TBV and near median 14.5x multiple on 2017E EPS due to their above median profitability. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%. Our DCF assumes a twostage cost of capital of 9.5% and 10.9% and a terminal growth rate of 5%. Risks to our price objective are macro risks such as a double dip recession, the implementation of a strict liquidity coverage ratio and further regulation on overdraft income that restricts bank profitability. Specific to USB, risks are enhanced regulatory scrutiny and capital standards as a Domestic SIFI and an announcement of a large expensive deal that could weigh on the stock price. UMB Financial Corporation (UMBF) We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $78 price objective and assign a 1.8x multiple to our 2Q17E TBV, in-line with peers, and we place a 18x multiple on our 2017E EPS, above peers given our above median EPS growth forecast. Our DCF model assumes cost of equity of 8% and a terminal growth rate of 4%. Downside risks to our price objective are continued rising long rates, which could negatively impact the company's sizable securities book and erode tangible book value. In addition, a sudden outflow of deposits could impact EPS and the asset sensitivity of UMBF's balance sheet to higher interest rates. Upside risks to our price objective are a much faster asset mix change into higher yielding loans that significantly increases its net interest margin. Wells Fargo & Company (WFC) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $55 PO, assigning a 1.75x multiple to 2017E TBV and 13x multiple on 2017E EPS. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%. Our 1.6x TBV multiple represents a 0.3x premium to our mega-cap median multiple, but we believe this is justified due to WFC's superior returns on tangible equity (ROTE consistent between 13%-14% throughout our forecast period, versus 12% for peers). Our 12x EPS multiple is in line with our mega-cap median multiple. We believe WFC deserves to trade at a premium due to better earnings growth, but we are assuming WFC trades in line with peers due to a higher percentage of earnings from mortgage banking and accretable yield, as well as potentially greater regulatory scrutiny as the second largest US depository. Our DCF assumes a two-stage cost of capital of 11% and a terminal growth rate of 4%. 74 2016 Future of Financials Conference | 17 November 2016 Downside risks to our price objective are an economic slowdown and the final implementation of a strict liquidity coverage ratio. Specific to WFC, risks are enhanced regulatory scrutiny and capital standards as a Global SIFI, and issues surrounding its cross selling. Zions Bancorp (ZION) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $36 price objective and assign a 1.2x multiple to 2017E TBV. Our 16x P/E multiple, which we apply on 2017E EPS along with debt extinguishment upside, is 1x higher than its historical median due to low interest rates. Our DCF assumes a two-stage cost of capital of 16.1% and 11.6% and a terminal growth rate of 8%. Upside risks to our price objective are more robust economic recovery and less onerous post cycle reserve requirements. Downside risks are a slowdown in housing price appreciation and a prolonged low interest rate environment. Analyst Certification We, Erika Najarian, Ebrahim H. Poonawala, Kenneth Bruce and Michael Carrier, CFA, hereby certify that the views each of us has expressed in this research report accurately reflect each of our respective personal views about the subject securities and issuers. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report. Special Disclosures BofA Merrill Lynch is currently acting as financial advisor to KKR and the Company in connection with its proposed sale of a majority stake in SMCP Group to Shandong Ruyi Group. The signing of an exclusivity agreement between the parties was announced on 31 March 2016. BofA Merrill Lynch is currently acting as financial advisor to Huntington Bancshares Inc in connection with Huntington and FirstMerit Corp's proposed sale of 13 bank branches in Stark and Ashtabula counties to First Commonwealth Bank, a subsidiary of First Commonwealth Financial Corp, which was announced on July 27, 2016. BofA Merrill Lynch is currently acting as financial advisor to Blackstone Group LP in connection with its proposed acquisition of Team Health Holdings Inc, which was announced on October 31, 2016. The proposed transaction is subject to approval by shareholders of Team Health Holdings Inc. This research report is not intended to (1) provide voting advice, (2) serve as an endorsement of the proposed transaction, or (3) result in the procurement, withholding or revocation of a proxy. BofA Merrill Lynch is currently acting as financial adviser to Blackstone Real Estate Partners Europe IV and Blackstone Real Estate Partners VIII (jointly “Blackstone”) through its entity Vega Holdco Sarl in connection with a proposed offer to acquire a controlling stake of D. Carnegie & Co. AB, which was announced on 15 July 2016. The transaction will, if completed eventually result in Blackstone passing the threshold for a mandatory offer obligation. BofA Merrill Lynch is currently acting as financial advisor to Ares Capital Corp. in connection with its proposed acquisition of American Capital, Ltd., which was announced on May 23, 2016. Ares Management L.P. will provide financial support to the transaction. The proposed transaction is subject to approval by shareholders of American Capital ltd. and Ares Capital Corp. This research report is not intended to (1) provide voting advice, (2) serve as an endorsement of the proposed transaction, or (3) result in the procurement, withholding or revocation of a proxy. 2016 Future of Financials Conference | 17 November 2016 75 US - Brokers, Asset Managers, & Exchanges Coverage Cluster Investment rating BUY NEUTRAL UNDERPERFORM RSTR Company BofA Merrill Lynch ticker Bloomberg symbol Analyst Affiliated Mgrs. AMG AMG US Michael Carrier, CFA AllianceBernstein AB AB US Michael Carrier, CFA BlackRock, Inc. BLK BLK US Michael Carrier, CFA Charles Schwab Corp. SCHW SCHW US Michael Carrier, CFA CME Group CME CME US Michael Carrier, CFA Cohen & Steers CNS CNS US Michael Carrier, CFA Goldman Sachs GS GS US Michael Carrier, CFA Houlihan Lokey HLI HLI US Michael Carrier, CFA IntercontinentalExchange ICE ICE US Michael Carrier, CFA Invesco IVZ IVZ US Michael Carrier, CFA KKR & Co. KKR KKR US Michael Carrier, CFA Legg Mason LM LM US Michael Carrier, CFA Morgan Stanley MS MS US Michael Carrier, CFA Oaktree Capital Group OAK OAK US Michael Carrier, CFA Old Mutual Asset Management OMAM OMAM US Michael Carrier, CFA TD Ameritrade AMTD AMTD US Michael Carrier, CFA Apollo Global Management APO APO US Michael Carrier, CFA Ares Management ARES ARES US Michael Carrier, CFA E*TRADE Financial ETFC ETFC US Michael Carrier, CFA Franklin Resources BEN BEN US Michael Carrier, CFA Janus Capital JNS JNS US Michael Carrier, CFA Nasdaq Inc NDAQ NDAQ US Michael Carrier, CFA Och-Ziff OZM OZM US Michael Carrier, CFA T. Rowe Price TROW TROW US Michael Carrier, CFA The Blackstone Group BX BX US Michael Carrier, CFA The Carlyle Group CG CG US Michael Carrier, CFA WisdomTree WETF WETF US Michael Carrier, CFA Artisan Partners APAM APAM US Michael Carrier, CFA CBOE Holdings CBOE CBOE US Michael Carrier, CFA Eaton Vance EV EV US Michael Carrier, CFA Federated Inv. FII FII US Michael Carrier, CFA Virtus Investment Partners VRTS VRTS US Michael Carrier, CFA Waddell & Reed WDR WDR US Michael Carrier, CFA Bats Global Markets, Inc. BATS BATS US Michael Carrier, CFA 76 2016 Future of Financials Conference | 17 November 2016 US - Specialty Financial Services Coverage Cluster Investment rating BUY NEUTRAL UNDERPERFORM RSTR RVW Company BofA Merrill Lynch ticker Bloomberg symbol Analyst Apollo Commercial Real Estate Finance ARI ARI US Kenneth Bruce Ares Commercial Real Estate Corp. ACRE ACRE US Kenneth Bruce Blackstone Mortgage Trust Inc BXMT BXMT US Kenneth Bruce Compass Diversified Holdings CODI CODI US Derek Hewett Ladder Capital Corp. LADR LADR US Kenneth Bruce MGIC Investment Corp. MTG MTG US Mihir Bhatia New Residential Investment NRZ NRZ US Kenneth Bruce Radian Group Inc RDN RDN US Mihir Bhatia Starwood Property Trust, Inc. STWD STWD US Kenneth Bruce TCP Capital Corp. TCPC TCPC US Derek Hewett TPG Specialty Lending, Inc. TSLX TSLX US Derek Hewett AGNC Investment Corp AGNC AGNC US Kenneth Bruce Ally Financial Inc. ALLY ALLY US Kenneth Bruce Amer Express AXP AXP US Kenneth Bruce Annaly Capital NLY NLY US Kenneth Bruce CIT Group Inc. CIT CIT US Derek Hewett Discover Financial Services DFS DFS US Kenneth Bruce Golub Capital BDC, Inc. GBDC GBDC US Derek Hewett MasterCard Inc MA MA US Kenneth Bruce PayPal PYPL PYPL US Kenneth Bruce PennyMac Financial Services, Inc. PFSI PFSI US Kenneth Bruce Synchrony Financial SYF SYF US Kenneth Bruce Visa Inc. V V US Kenneth Bruce Apollo Investment Corporation AINV AINV US Derek Hewett Capital One COF COF US Kenneth Bruce Credit Acceptance Corp. CACC CACC US Kenneth Bruce Essent Group ESNT ESNT US Mihir Bhatia Goldman Sachs BDC, Inc. GSBD GSBD US Derek Hewett OneMain Holdings, Inc. OMF OMF US Kenneth Bruce PennyMac Mortgage Investment Trust PMT PMT US Kenneth Bruce Santander Consumer USA Inc. SC SC US Kenneth Bruce American Capital, Ltd. ACAS ACAS US Derek Hewett Ares Capital Corporation ARCC ARCC US Derek Hewett AG Mortgage Investment Trust, Inc. MITT MITT US Kenneth Bruce ARMOUR Residential REIT, Inc ARR ARR US Kenneth Bruce CYS Investments, Inc CYS CYS US Kenneth Bruce Ellington Financial LLC EFC EFC US Kenneth Bruce Hannon Armstrong HASI HASI US Kenneth Bruce Invesco Mortgage Capital, Inc. IVR IVR US Kenneth Bruce Two Harbors Investment Corp. TWO TWO US Kenneth Bruce Western Asset Mortgage Corp WMC WMC US Kenneth Bruce 2016 Future of Financials Conference | 17 November 2016 77 US - Banks Coverage Cluster Investment rating BUY NEUTRAL UNDERPERFORM RSTR Company BofA Merrill Lynch ticker Bloomberg symbol Analyst BankUnited, Inc. BKU BKU US Ebrahim H. Poonawala BB&T Corporation BBT BBT US Erika Najarian Capital Bank Financial Corp. CBF CBF US Erika Najarian Citigroup Inc. C C US Erika Najarian Citizens Financial Group CFG CFG US Erika Najarian East West Bancorp, Incorporated EWBC EWBC US Ebrahim H. Poonawala FCB Financial Holdings, Inc FCB FCB US Ebrahim H. Poonawala Great Western Bancorp Inc GWB GWB US Ebrahim H. Poonawala Huntington Bancshares Inc. HBAN HBAN US Erika Najarian IBERIABANK Corp IBKC IBKC US Ebrahim H. Poonawala JPMorgan Chase & Co. JPM JPM US Erika Najarian Key Corp KEY KEY US Erika Najarian New York Community Bancorp NYCB NYCB US Ebrahim H. Poonawala Signature Bank SBNY SBNY US Ebrahim H. Poonawala SunTrust Banks, Inc. STI STI US Erika Najarian SVB Financial Group SIVB SIVB US Ebrahim H. Poonawala The PNC Financial Services Group, Inc. PNC PNC US Erika Najarian UMB Financial Corporation UMBF UMBF US Ebrahim H. Poonawala Wells Fargo & Company WFC WFC US Erika Najarian Banc of California BANC BANC US Ebrahim H. Poonawala Commerce Bancshares Inc. CBSH CBSH US Ebrahim H. Poonawala Fifth Third Bank FITB FITB US Erika Najarian First Bancorp Puerto Rico FBP FBP US Ebrahim H. Poonawala First Hawaiian Inc. FHB FHB US Ebrahim H. Poonawala Franklin Financial Network, Inc. FSB FSB US Ebrahim H. Poonawala Hancock Holding HBHC HBHC US Ebrahim H. Poonawala M&T Bank MTB MTB US Erika Najarian Regions Financial RF RF US Erika Najarian Synovus Financial Corp. SNV SNV US Ebrahim H. Poonawala Texas Capital Bancshares Inc. TCBI TCBI US Ebrahim H. Poonawala U.S. Bancorp USB USB US Erika Najarian Associated Banc-Corp ASB ASB US Ebrahim H. Poonawala Bank of Hawaii Corp. BOH BOH US Ebrahim H. Poonawala Comerica Incorporated CMA CMA US Erika Najarian Cullen/Frost Bankers Inc CFR CFR US Ebrahim H. Poonawala First Horizon National Corp. FHN FHN US Ebrahim H. Poonawala Prosperity Bancshares Inc PB PB US Ebrahim H. Poonawala TCF Financial Corp. TCB TCB US Ebrahim H. Poonawala Zions Bancorp ZION ZION US Erika Najarian First Republic Bank FRC FRC US Erika Najarian Disclosures Important Disclosures Equity Investment Rating Distribution: Banks Group (as of 30 Sep 2016) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 81 43.55% Buy 74 91.36% Hold 45 24.19% Hold 41 91.11% Sell 60 32.26% Sell 56 93.33% 78 2016 Future of Financials Conference | 17 November 2016 Equity Investment Rating Distribution: Financial Services Group (as of 30 Sep 2016) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 113 46.89% Buy 89 78.76% Hold 66 27.39% Hold 55 83.33% Sell 62 25.73% Sell 40 64.52% Equity Investment Rating Distribution: Global Group (as of 30 Sep 2016) Coverage Universe Count Percent Inv. Banking Relationships* Count Percent Buy 1553 49.44% Buy 1130 72.76% Hold 730 23.24% Hold 538 73.70% Sell 858 27.32% Sell 514 59.91% * Issuers that were investment banking clients of BofA Merrill Lynch or one of its affiliates within the past 12 months. For purposes of this Investment Rating Distribution, the coverage universe includes only stocks. A stock rated Neutral is included as a Hold, and a stock rated Underperform is included as a Sell. FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii) attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation). Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster* Buy ≥ 10% ≤ 70% Neutral ≥ 0% ≤ 30% Underperform N/A ≥ 20% * Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9 - pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock’s coverage cluster is included in the most recent BofA Merrill Lynch report referencing the stock. Price charts for the securities referenced in this research report are available at http://pricecharts.baml.com, or call 1-800-MERRILL to have them mailed. MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: AllianceBernstein, Amer Express, Ares Management, Assoc Banc-Corp, Banc of California, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Capital Bank Fin., Carlyle, Citigroup, Citizens Financial G, Comerica, Commerce Bancs, Cullen/Frost Bankers, East-West, Eaton Vance, FCB Financial Holdin, Fifth Third, First Bancorp PR, First Hawaiian Inc., First Horizon, Franklin Financial N, Goldman Sachs, Great Western Bancor, Hancock, Huntington Banc, IBERIABANK, Invesco, JP Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, New York Community B, PNC, Prosperity Bancshare, Regions Bank, Signature Bank, SunTrust Banks, SVB Financial, Synovus, TCF, Texas Capital, U.S. Bancorp, UMB Financial Corp, Wells Fargo, Zions. MLPF&S or an affiliate was a manager of a public offering of securities of this issuer within the last 12 months: Ares Management, Assoc Banc-Corp, Banc of California, BB&T, Citigroup, First Hawaiian Inc., Franklin Financial N, Goldman Sachs, Huntington Banc, IBERIABANK, KKR, Legg Mason, Regions Bank, SunTrust Banks, Wells Fargo. The issuer is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: AllianceBernstein, Amer Express, Ares Management, Assoc Banc- Corp, Banc of California, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Capital Bank Fin., Carlyle, Citigroup, Citizens Financial G, Comerica, East-West, Eaton Vance, FCB Financial Holdin, Fifth Third, First Bancorp PR, First Hawaiian Inc., First Horizon, Franklin Financial N, Goldman Sachs, Great Western Bancor, Hancock, Huntington Banc, IBERIABANK, Invesco, JP Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, New York Community B, PNC, Prosperity Bancshare, Regions Bank, Signature Bank, SunTrust Banks, SVB Financial, Synovus, TCF, Texas Capital, U.S. Bancorp, UMB Financial Corp, Wells Fargo, Zions. MLPF&S or an affiliate has received compensation from the issuer for non-investment banking services or products within the past 12 months: AllianceBernstein, Amer Express, Ares Management, Assoc Banc-Corp, Banc of California, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Capital Bank Fin., Carlyle, Citigroup, Citizens Financial G, Comerica, Commerce Bancs, Cullen/Frost Bankers, East-West, Eaton Vance, Fifth Third, First Bancorp PR, First Hawaiian Inc., First Horizon, Goldman Sachs, Hancock, Huntington Banc, IBERIABANK, Invesco, JP Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, New York Community B, PNC, Regions Bank, Signature Bank, SunTrust Banks, SVB Financial, Synovus, TCF, Texas Capital, U.S. Bancorp, UMB Financial Corp, Wells Fargo, Zions. The issuer is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: AllianceBernstein, Amer Express, Ares Management, Assoc Banc- Corp, Banc of California, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Capital Bank Fin., Carlyle, Citigroup, Citizens Financial G, Comerica, Commerce Bancs, Cullen/Frost Bankers, East- West, Eaton Vance, Fifth Third, First Hawaiian Inc., First Horizon, Goldman Sachs, Hancock, Huntington Banc, Invesco, JP Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, New York Community B, PNC, Regions Bank, Signature Bank, SunTrust Banks, SVB Financial, Synovus, TCF, Texas Capital, U.S. Bancorp, UMB Financial Corp, Wells Fargo, Zions. MLPF&S or an affiliate has received compensation for investment banking services from this issuer within the past 12 months: AllianceBernstein, Amer Express, Ares Management, Assoc Banc- Corp, Banc of California, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Carlyle, Citigroup, Citizens Financial G, Comerica, Eaton Vance, Fifth Third, First Bancorp PR, First Hawaiian Inc., Franklin Financial N, Goldman Sachs, Great Western Bancor, Hancock, Huntington Banc, IBERIABANK, Invesco, JP Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, New York Community B, PNC, Regions Bank, Signature Bank, SunTrust Banks, Synovus, TCF, UMB Financial Corp, Wells Fargo, Zions. MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuer or an affiliate of the issuer within the next three months: AllianceBernstein, Amer Express, Ares Management, Banc of California, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Capital Bank Fin., Carlyle, Citigroup, Citizens Financial G, East- West, Eaton Vance, FCB Financial Holdin, Fifth Third, First Hawaiian Inc., First Horizon, Goldman Sachs, Great Western Bancor, Huntington Banc, IBERIABANK, Invesco, JP Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, New York Community B, PNC, Prosperity Bancshare, Regions Bank, SunTrust Banks, SVB Financial, Synovus, Texas Capital, U.S. Bancorp, UMB Financial Corp, Wells Fargo, Zions. MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this issuer. If this report was issued on or after the 9th day of the month, it reflects the ownership position on the last day of the previous month. Reports issued before the 9th day of a month reflect the ownership position at the end of the second month preceding the date of the report: AllianceBernstein, BB&T, Blackstone Group, Carlyle, Citigroup, Citizens Financial G, Cullen/Frost Bankers, Eaton Vance, Fifth Third, Goldman Sachs, Great Western Bancor, Huntington Banc, Invesco, JP Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, PNC, Regions Bank, SunTrust Banks, SVB Financial, TCF, U.S. Bancorp, Wells Fargo. MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the issuer on a principal basis: AllianceBernstein, Amer Express, Ares Management, Assoc Banc- Corp, Banc of California, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Capital Bank Fin., Carlyle, Citigroup, Citizens Financial G, Comerica, Commerce Bancs, Cullen/Frost Bankers, East- West, Eaton Vance, FCB Financial Holdin, Fifth Third, First Bancorp PR, First Hawaiian Inc., First Horizon, Franklin Financial N, Goldman Sachs, Great Western Bancor, Hancock, Huntington Banc, IBERIABANK, Invesco, JP Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, New York Community B, PNC, Prosperity Bancshare, Regions Bank, Signature Bank, SunTrust Banks, SVB Financial, Synovus, TCF, Texas Capital, U.S. Bancorp, UMB Financial Corp, Wells Fargo, Zions. The issuer is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: AllianceBernstein, Amer Express, Ares Management, Assoc Banc-Corp, Bank Hawaii Corp, BankUnited, BB&T, Blackstone Group, Capital Bank Fin., Carlyle, Citigroup, Citizens Financial G, Comerica, Commerce Bancs, Cullen/Frost Bankers, East-West, Eaton Vance, Fifth Third, First Bancorp PR, First Hawaiian Inc., First Horizon, Goldman Sachs, Great Western Bancor, Hancock, Huntington Banc, IBERIABANK, Invesco, JP Morgan Chase, KeyCorp, KKR, Legg Mason, Morgan Stanley, New York Community B, PNC, Regions Bank, Signature Bank, SunTrust Banks, SVB Financial, Synovus, TCF, Texas Capital, U.S. Bancorp, 2016 Future of Financials Conference | 17 November 2016 79 UMB Financial Corp, Wells Fargo, Zions. 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Sales persons and financial advisors affiliated with MLPF&S or any of its affiliates may not solicit purchases of securities or financial instruments that are Restricted or Under Review and may only solicit securities under Extended Review in accordance with firm policies. Neither BofA Merrill Lynch nor any officer or employee of BofA Merrill Lynch accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. 2016 Future of Financials Conference | 17 November 2016 81 Research Analysts US Banks Erika Najarian Research Analyst MLPF&S +1 646 855 1584 [email protected] Ebrahim H. Poonawala Research Analyst MLPF&S +1 646 743 0490 [email protected] Michael Liu Research Analyst MLPF&S +1 646 855 3874 [email protected] Brandon Berman Research Analyst MLPF&S +1 646 855 3933 [email protected] Andrew Schukman Research Analyst MLPF&S +1 646 855 3622 [email protected] Christopher Nardone Research Analyst MLPF&S +1 646 743 2016 [email protected] Brokers, Alternatives, Asset Managers, and Trust Banks Michael Carrier, CFA Research Analyst MLPF&S +1 646 855 5004 [email protected] Sameer Murukutla, CFA Research Analyst MLPF&S +1 646 855 2960 [email protected] Jeffrey Ambrosi Research Analyst MLPF&S +1 646 855 5034 [email protected] Michael Needham, CFA Research Analyst MLPF&S +1 646 743 0179 [email protected] Shaun Calnan, CFA Research Analyst MLPF&S +1 646 855 1362 [email protected] Specialty Financial Services Kenneth Bruce Research Analyst MLPF&S +1 415 676 3545 [email protected] Mihir Bhatia Research Analyst MLPF&S +1 415 676 3575 [email protected] 82 2016 Future of Financials Conference | 17 November 2016