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Thoughts on the global banking sector

Thoughts on the global banking sector. Simon Pryke, Investment Leader - Global Research 26 February 2008. Idea generation - Themes efficiently focus our research. DVD: Also update; - XYZ inst slide library - PIM slide library. Themes are our interpretation of key forces that drive change

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Thoughts on the global banking sector

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  1. Thoughts on the global banking sector Simon Pryke, Investment Leader - Global Research 26 February 2008

  2. Idea generation - Themes efficiently focus our research DVD: Also update; - XYZ inst slide library- PIM slide library • Themes are our interpretation of key forces that drive change • Themes provide a stimulus for debate at the widest level • Themes continually evolve prompting a stream of new ideas Themes make us better stock pickers

  3. Real house price changes last ten years Real house prices changes over the last ten year (2006-1996) Source: Bank of England, Morgan Stanley Research

  4. Betting the bank on house prices... and losing U.S. home prices quarterly annualised appreciation change Source: Haver Analytics, Banc of America Securities LLC - estimates, S&P Case Shiller Index

  5. The lending machine has broken Securitisation volumes falling off a cliff… 60 CDO Issuance ($bn per month, 3 month average) 50 40 $billions 30 20 10 0 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Source: abalert.com, Newton as at Jan 08

  6. ‘A sound banker, alas is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no-one can really blame him’ History repeating itself John Maynard Keynes, 1931

  7. Banks need more capital Source: Citi Investment Research analysis

  8. What happens next? • The end of cheap credit: capital constrained banks will raise lendingrates; the liquidity bubble of the past decade will unwind with a negative impact on asset prices • Regulatory reform in the U.S. and European bank sectors: regulators have been badly caught out. Banks will need more capital and more liquidity. This will mean dividend cuts, rights issues and lower intrinsic profitability • A rise in the level of non-performing loans across all lending categories: the focus of our ‘Debt and Credit’ theme. Bad debts have only just begun to deteriorate

  9. Important information • Newton Investment Management Limited • Past performance is not a guide to future returns. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested. The value of overseas securities will be influenced by fluctuations in exchange rates. If part of the portfolio is invested in sub-investment grade bonds, which typically have a low credit rating and carry a high degree of default risk, then please be aware that this can affect the capital value of your investment. If the portfolio has exposure to hedge funds, gold, private equity and property via publicly quoted transferable securities, then there are additional risks associated with these sectors. The information contained within this document should not be construed as a recommendation to buy or sell a security. It should not be assumed that a security has been - or will be - profitable. There is no assurance that a security will remain in the portfolio. • This presentation is for professional investors only. The opinions expressed in this presentation are those of Newton Investment Management and should not be construed as investment advice. In addition the information contained in this presentation should not be construed as a recommendation to buy or sell a security. • Newton Investment Management Limited Mellon Fund Managers Limited • The Bank of New York Mellon Centre The Bank of New York Mellon Centre • 160 Queen Victoria Street 160 Queen Victoria Street • London EC4V 4LA London EC4V 4LA • Registered in England No. 1371973 Registered in England No. 1998251 • Tel: 020 7163 9000 • www.newton.co.uk • Registered office: As above • Authorised and regulated by the Financial Services AuthorityThe Bank of New York Mellon CorporationSM

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