Werner Steinmueller

1
European Bank Consolidation

• Bankers Association for Finance and Trade85th
  Annual Conference, Scottsdale/ Arizona
• April 23, 2007

2
Agenda
1
European banking industry some initial remarks
Transaction Banking accelerating market
consolidation
2
Outlook
3
3
Market cap of the largest European banks is
increasing ...
Market capitalisation of the top 20 banks in the
region (in EUR bn)
USA
Europe
Note 2004 figures as of 20 August 2004, 2006
figures as of 21 August 2006 Source Thomson One
Analytics, AfK analysis
4
as performance has improved
USA
Europe
RoE (after tax, )
RoE (after tax, )
3.0 pts.
1.5 pts.
() Average of the 20 largest banks in the region
based on market capitalisation as of 21 August
2006Source Thomson One Analytics, AfK analysis
5
and growth opportunities in and beyond Europe
are targeted
Income generated abroad
71
70
67
(3)
65
65
(2)
62
62
61
58
57
46
46
44
40
38
28
25
21
17
(1)
n.a.
(4)
World w/o Europe 2005
World w/o Europe 2002
Europe w/o domestic market 2005
Europe w/o domestic market 2002
Note Segmental reporting varies between banks
and years with respect to the reporting of gross
and net income and the inclusion of risk
provisioning (1) No geographical segmental
reporting provided in 2005 (2) Pro-forma
consolidation of 100 of HVB income in 2005 (3)
Consumer finance income has been equally spilt
between Spain and rest of Europe (4) Based on CIB
and PCAM Source Company information, AfK
analysis
6
with non-interest business becoming
increasingly important
Non-interest banking income
2002
2005
Note Non-interest bank income computed based
on provision income, trading income and other
income total income before risk provisioning
adjusted by net income from insurance
business Source Company information, AfK analysis
7
Share price performance and excess capital
generation are facilitating both organic and
external growth
Stock market index for European banks
Excess capital of European banks
Estimate (in EUR bn)
Stoxx Banks (1 Jan 2003 100)
Source Datastream as of 13 April 2007, Mercer
Oliver Wyman, AfK analysis
8
and the macro environment is positive
Inflation has remained low
As have interest rates
7
5
6
4
USA
USA
5
3
4
2
Euro
3
Euro
Inflation rate
Interest rates
1
2
0
1
Japan
Japan
-1
0
-1
-2
2000
2001
2002
2003
2004
2005
2006
2000
2001
2002
2003
2004
2005
2006
Whilst bond spreads have narrowed
And equity markets have recovered
120
120
100
100
80
60
A
80
Index (Jan-00 100)
AA
40
20
60
0
AAA
-20
40
2000
2001
2002
2003
2004
2005
2006
2000
2001
2002
2003
2004
2005
2006
DJ EURO STOXX 50
NIKKEI 300
SP 500
Price Indices Source DB Research, Datastream
9
Domestic and cross-border consolidation in Europe
is accelerating
Domestic MA transactionsin the European banking
sector
Cross-border MA transactions within the
European banking sector
Volume (in EUR bn)
Volume (in EUR bn)
() Based on announced transactions with a deal
volume above USD 100m and the acquisition of a
stake of more than 10. Unsuccessful transactions
were disregarded. Europe incl. CEE and Turkey,
excl. Russia Source SDC, AfK analysis
10
resulting in a decreasing number of banks
worldwide
Number of banks (2001-2007)
US
Euro Area
Germany
2003
2001
2006
2007
2005
2004
2002
Source European Central Bank,, FDIC
11
... and has led to consolidation in the US and
Europe ...
Region
Build strong position in home market
Expand into complementary regional markets
Develop international global franchise
US
Banks consolidate home market positions through
intrastate deals (1970s-1980s)
Passage of Riegle-Neal Act triggers interstate
merger activity (1990s)
Large banks with national US platforms expanding
globally
Europe
Some domestic consolidation in all markets
during1990s
Emergence of pan-regional activity (Nordea,
Unicredito, ABN, BBVA)
Banks with strong domestic presence expand
globally (ABN, RBS, HSBC)
12
but there remain barriers to MA, especially
cross-border

• Decentralised regulatory regime adds compliance
  burden to cross-border operators
• Difficult/complex diligence processes -
  especially in unfamiliar countries
• Complexity of integration process - especially IT
• Possible customer and employee attrition issues
• Traditionally, low levels of cross-border cost
  synergies
• Lingering political reluctance to allow national
  champions of banking sector to fall into
  foreign ownership

• The financial services market remains relatively
  fragmented globally
• The share of cross-border deals in Financial
  Services MA has risen from below 20 to around
  30 today. However, this still lags other
  industries where 45 is normal
• Hostile transactions have been rare

13
Agenda
1
European banking industry some initial remarks
Transaction Banking accelerating market
consolidation
2
Outlook
3
14
General drivers for consolidation in European
Transaction Banking
Regulatory Change
Cash Management
Efficiency and Standardization
Technological evolution
Trade Finance
Securities
Client demand for improved, cost-effective
services
15
Regulatory Change Promoting a single market in
Europe for payments and securities
Public Initiatives
Objectives
Industry Impact
Single Euro Payment Area (SEPA)

• Leveled prices for cross-border and domestic
  payments in euroland
• Common core payment instruments, consistent
  standards and harmonized consumer protection
  laws
• Harmonization and consolidation of national ACH
  payment systems

• Massive Investments Required
• Strong client led footprint to simplify business
  model, consolidate and drive economies of scale
• Pre-requisites for success
• Long term view and deep investment pocket
• Scaleable future state business and operating
  model
• Significant opportunity for a multi-market
  service provider to extend the services

• Enable choice for location of clearing
  settlement services
• Reduce costs for users
• Harmonize different market processes in each
  market
• Consolidate clearing settlement infrastructure
  and operating models

Single Internal Market for securities
16
Technological evolution Investments in
infrastructure have overcompensated for the
volume growth (the example of DB)
120
116
100
InfrastructureVolume
80
Economies of Scale
60
Productivity Increase
40
20
0
Cost-Efficiency
-20
-30
Total Cost of Infrastructure
-40
-60
2002 Q1
2003 Q1
2004 Q1
2005 Q1
2006Q1
Note All figures benchmarked against Q1/2002.
The IT-infrastructure volumes are based on
volumes in Voice, Storage, ID Admin, Market data,
Audio-Visual, Remote Access, Change Control,
Network Traffic
17
Client demand for improved, cost-effective
services has increased
Corporate Customers Demand
Demand of FIs / Correspondents Banks

• Banks to support global businesses of clients
• Cost pressure and need for operational
  efficiency
• Improvement of Supply Chain Management
  Techniques (Trade Finance)
• Corporate Clients turn to Open Accounts
• Increased demand for risk-hedging products
• Need cash management provider to support both
  local and cross border requirements

• White Labelling solutions / services
• Stability and security
• Leverage scale and continuous investments of a
  global bank partner in platforms / IT
  infrastructure
• Complement product offering to retain / grow
  wallet share from existing customers' and to
  attract new customers

18
Efficiency and Standardization as a key success
factor
Strategic Options for Transaction Banks in Europe
Deutsche Bank

• Investments in IT platforms to increase
  functionality and scalability (STP)
• Centralize operations to regional hubs to
  generate Economies of Scale and to reduce costs
• Offshore operations to low-cost countries
• Outsource when business has limited volumes and
  margins

• Building-out strong market position in Europe
  by
• Investments in IT Infrastructure (i.e. MTNA,
  European Domestic Custody platform)
• Provision of value-added services (i.e. open
  account, risk mitigation products)
• Participation in industry initiatives

19
Agenda
1
European banking industry some initial remarks
Transaction Banking accelerating market
consolidation
2
Outlook
3
20
Outlook
Multiple forces driving investment needs in
technology and operations support
These high barriers of entry on a global scale
with current external environment will lead to
more industry consolidation
Increasing volumes and extracting scale benefits
is crucial
Successful performance dependant on human capital
and broad base of expertise