Bank Productivity What’s Happened Since 1998?

1. Bank ProductivityWhat’s Happened Since 1998? 11.17.03

2. Background • A 1998 paper entitled “Bank Productivity: Promises Unrealized” examined the drivers of bank efficiency • Surprisingly, efficiency gains over the previous four years were driven primarily by income growth • Costs had actually increased as banks expanded branch networks and new distribution channels • Tonight we will determine whether the last four years has shown a change in performance 1 Published in Creating Value in Financial Services (2000 – NYU Stern School of Business)

3. Productivity programs of the 90s • Process redesign • Overhead value analysis • Centralization • Mergers & acquisitions • Strategic sourcing

4. Bank mergers have slowed considerably US Bank Mergers Source: SNL Database

5. Bank Concentration Source: SNL Database

6. $48B 6.4% CAGR $38B 27.8% CAGR $14B Average Bank Assets (top 120 banks) 1998 2002 1994 Source: SNL Database

7. 13,723 9,144 7,887 1987 1997 2002 Source: FDIC Statistical Abstract of the U.S. Change in Number of US Banks

8. 66,185 1.87% CAGR 60,320 5.78% CAGR 45,537 2002 1987 1997 Source: FDIC Statistical Abstracts U.S. Bank Branch Growth

9. 65.6% 61.4% 57.8% Cost to Income Ratio 1998 2002 1994 Source: SNL Database

10. 64.3% 59.7% 58.0% Normalized Cost to Income 1998 2002 1994 Source: SNL Database

11. C/I Improvement CAGR 33% 26% 23% 18% Source: SNL Database

12. Bank Asset CAGR Map 12% Stalled & 12% Under-performers 53% Out-performers & 24% Latecomers 19% Stalled & 19% Under-performers 17% Out-performers & 45% Latecomers 14% 48% 8% 30% 22% Stalled & 0% Under-performers 11% Out-performers & 67% Latecomers 19% Stalled & 42% Under-performers 31% Out-performers & 8% Latecomers Source: SNL Database

13. What’s driving C/I? 5.3% 5.2% 5.1% 3.4% 3.1% 3.1% 1994 1998 2002 1994 1998 2002 Costs/Assets Income/Assets Source: Creating Value in Financial Services, Nov 1999 (Normalised Revenue & Costs)

14. Another “gross” industry measure indicates only marginal improvement Average Annual Increase in Labor Productivity, 1994-1998 and 1998-2002 25.3% 24.1% 19.3% 12.8% 10.4% 6.8% -1.1% 1.4% 3.1% 0.5% 1.8% 1.0% -0.5% 0.6% Radio & TV Banks Department Stores Grocery Stores Non-store retailers Computer & Peripherals Electronics & Appliance Stores Source: Bureau of Labor Statistics

15. What happened between 1998-2002? • Recession – cost cutting (layoffs, projects deferred, reduced IT spend) • Declining interest rates yielding improving margins • Improved fee income from record-breaking refinancing • Continued mergers/scale • Channel migration

16. What will happen in the future?

17. Case Study – Abbey Bank (UK) • Position -- Abbey is the sixth largest bank in the UK ($200+ billion in assets) -- second largest provider of mortgages and savings in the UK • Staff -- Abbey National employs 28,300 FTEs • Customer Focus – principally consumers and small businesses • Service Channels – all of the typical channels (750 Branches, 12 telephone centers, internet, 3,000 ATMs, etc) and several retail partners such as Safeway, Costa Coffee and Homebase

18. 54% 46% 54% 47% 41% 56% Abbey National HSBC Lloyds Barclays Royal Bank of Scotland Bank of Scotland (Halifax) Cost to Income Ratio (2002) Source: 2002 Company Annual Reports

19. Project approach Timeline and Tasks Timeline and Tasks 2 weeks 2 weeks 2 weeks 2 weeks 2 weeks 2 weeks 2 weeks 2 weeks 3. Data Gathering / 3. Data Gathering / 1. Initial Overview 1. Initial Overview 2. Data Gathering / 2. Data Gathering / 4. Analysis and 4. Analysis and 3. Data Gathering / 3. Data Gathering / 1. Initial Overview 1. Initial Overview 2. Data Gathering / 2. Data Gathering / 4. Analysis and 4. Analysis and Analysis: Phase II Analysis: Phase II and Data Requests and Data Requests Analysis: Phase I Analysis: Phase I Recommendations Recommendations Analysis: Phase II Analysis: Phase II and Data Requests and Data Requests Analysis: Phase I Analysis: Phase I Recommendations Recommendations • • Conduct deep Conduct deep - - dive dive • • Compile results Compile results • • Develop Operational Develop Operational • • Conduct Conduct operational operational and follow and follow - - up data up data Baseline Baseline site site tours tours • • Conduct joint Conduct joint clarification clarification meetings to review meetings to review • • Conduct in Conduct in - - depth depth • • Develop high Develop high - - level level interviews interviews results results interviews with interviews with operational map operational map • • Compile data in Compile data in appropriate parties appropriate parties • • Develop Develop Operations Operations • • Meet key contacts Meet key contacts operational operational flows flows Strategy Strategy and Plan and Plan • • Review data received Review data received • • Review existing Review existing • • Meet with businesses Meet with businesses for clarification for clarification documentation documentation to understand to understand • • Develop initial Develop initial operational operational • • Submit Submit initial data initial data performance flash performance flash requirements requirements requests requests report report Deliver preliminary Deliver preliminary • • Finalized Operational Finalized Operational Operational Baseline Operational Baseline Baseline Baseline • • Operational Strategy Operational Strategy

20. Strategic cost positioning Acceptable investment Current Organization Over time Operating costs Income Target Target Target Non-strategic/ dormant/closed products Core products New strategic products