The Dbriefs Real Estate series presents:

The Great European Shake Out

Guy Langford, Principal, Deloitte & Touche LLP Thomas Kaylor, Principal, Deloitte Financial Advisory Services LLP Vivian Pereira, Partner, Deloitte U.K. Robert Young, Partner, Deloitte U.K.

May 3, 2012

Agenda
Financial sector deleveraging in Europe How are banks responding on the asset side Bank deleveraging-Structuring U.S. background and market data

Debt portfolios and due diligence

Question and answer

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Financial sector deleveraging in Europe

Poll question # 1
What do you see as the single most pressing challenge facing European banks today?

Improvement in shareholder value and Return on Equity (ROE) Increased capital adequacy requirements Liquidity and funding pressure Reduction in risk weighted assets (RWA) Balance sheet reduction Not sure

Copyright 2012 Deloitte Development LLC. All rights reserved.

Financial sector deleveraging in Europe

Moving through the cycle, dealing with fallout from the crisis
Non-core and non-performing assets ('bn)

From U.S. sub-prime to global financial crisis Euro zone sovereign crisis coupled with financial crisis 2.2trn in non-core and nonperforming European banking assets Governments and regulators seeking solutions

940

1,241

Non-core

Non-performing

Note: Figures as at 31 December 2011 Source: IMF, EIU & Deloitte Analysis; Prepared by: Deloitte UK

Copyright 2012 Deloitte Development LLC. All rights reserved.

Non-core and non-performing assets across Europe

Banks in the UK, Germany and Italy account for the majority of total noncore and non-performing assets in Europe but clearly a pan-Europe issue
Non-core and non-performing assets
2011 Country ('bn)
UK Germany Italy Ireland France Belgium Spain Netherlands Central & Eastern Europe Austria Greece Portugal Denmark Cyprus Sw eden Luxembourg Malta Finland

Non-core assets by country ('bn)

2010 Total
529 465 281 210 164 163 156 53 46 43 25 21 9 7 5 3 1 1 2,181
361 209 400 132

NC
400 349 102 132 71 152 2 5 28 1,241

NPL
129 116 179 78 93 11 154 48 46 15 25 21 9 7 5 3 1 1 940

152 349 UK Germany Belgium Ireland Others

Note: Figures as at 31 December 2011 Source: IMF, EIU & Deloitte Analysis; Prepared by: Deloitte UK

Non-performing assets by country ('bn)

179

No tes: (1 NC = No n-co re; NP L = No n-perfo rming lo ans; (2) Central & Eastern Euro pe includes ) B ulgaria, Czech Republic, Esto nia, Hungary, Latvia, Lithuania, P o land, Ro mania, Slo vakia and Slo venia. So urce: IM F, EIU & Delo itte A nalysis; P repared by: Delo itte UK

154

116 Italy Spain UK

129

Germany

Others

Note: Figures as at 31 December 2011 Source: IMF, EIU & Deloitte Analysis; Prepared by: Deloitte UK

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Measures to strengthen bank capitalization

European Banking Authority (EBA) pronouncements on capitalization Aimed at addressing increased systemic risk posed by the sovereign debt crisis in the Euro area Requirement for a 9% core tier 1 capital ratio taking into account the summer 2011 macro stress tests plus the a capital buffer against sovereign debt exposures to reflect market prices 70 European banks included in the sample An estimated 115bn in new capital is required to be raised Banks submitted capital plans to their national banking supervisor in January 2012 and are required to achieve the capitalization target by June 2012 Bank actions to achieve the capital levels include capital raising, capital restructuring, withholding dividends/bonuses and deleveraging The EBA warns against excessive deleveraging

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Challenges facing European banks today

Regulatory reform & balance sheet optimization
Increased capital adequacy requirements The need to reduce capital consumption and specifically RWAs Responding to a range of stakeholder commitments to reduce balance sheet Improvement in shareholder value and ROE Liquidity and funding pressure due to the reduction in inter-bank funding

Deleveraging and asset divestment have a role to play in responding to each of the above challenges

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How are banks responding on the asset side

Poll question # 2
What is the single most common response by European banks to the recapitalization and deleveraging issue?

Capital raising via rights issues, private raises, etc. Conversion of lower quality capital and debt instruments to CT1 eligible capital Establishment of a non-core asset strategy Separation of core from non-core assets Design of a structured wind down plan Not sure

Copyright 2012 Deloitte Development LLC. All rights reserved.

How are banks responding on the asset side?

Effective use of a range of asset reduction approaches
Deleveraging approaches by selected European banks ('bn) Establishment of non-core 450 400 strategies 350 Separation of non-core from core 300 250 Design and implementation of 200 structured wind down programs 150 100 Selective divestments that are not 50 capital destructive

Lending

Legacy assets

CIB / markets

CEE

Greece / Ireland

Source: Morgan Stanley; Prepared by: Deloitte UK

Copyright 2012 Deloitte Development LLC. All rights reserved.

Selected divestments of US assets by European banks

Divestments of non-core US assets picked up in 2011 with further opportunities expected as banks further reduce balance sheet and exit noncore assets and markets
Deal
April 2012: Eurohypo sells US CRE loan portfolio February 2012: BNP sells North America energy loan portfolio November 2011: Bank of Ireland sells project finance and energy loans in North America and Europe October 2011: Santander sells a 25% stake in its U.S. auto loans unit August 2011: HSBC sells US credit card business August 2011: Anglo sells US CRE loan portfolio August 2011: Bank of Ireland sells US CRE loan portfolio May 2011: Allied Irish sells US CRE loan portfolio
Source: Press articles and other public information Prepared By: Deloitte UK

Seller
Eurohypo AG BNP Paribas Bank of Ireland

Buyer
Wells Fargo & Blackstone Wells Fargo Sumitomo Mitsui Banking Corp Confidential

Reported Deal size

$0.6bn $9.5bn $0.8bn

Santander

$1.2bn

HSBC Anglo Irish Bank Bank of Ireland Allied Irish Bank

Capital One Financial Corp Lone Star, J P Morgan & Wells Fargo Wells Fargo Blackstone & Wells Fargo

$32.7bn $9.5bn $1.4bn $1.0bn

Copyright 2012 Deloitte Development LLC. All rights reserved.

Bank deleveragingStructuring

Poll question # 3
What type of transaction activity do you expect to see more of in the next 12 months?

Private asset sales Public asset sales Structured transactions Capital raising All of the above Not sure

Copyright 2012 Deloitte Development LLC. All rights reserved.

Bank deleveraging Structuring

Structured transactions occur where a clean sale has not been possible Key driver is capital Implement a risk sharing arrangement enable banks to reduce capital usage A staging post for an eventual disposal in the meantime, assets managed by a private-equity fund to enhance recoveries Used to manage new risks e.g. redenomination risk

Copyright 2012 Deloitte Development LLC. All rights reserved.

U.S. background and market data

Poll question # 4
Of the following five (5) ways that the Eurozone debt crisis could affect the U.S. which one is the largest concern for your organization? U.S. banks are 'tethered' to those in Europe A potential threat to U.S. exports U.S. companies' investments in Europe at stake The potential impact on individual investors A dramatic effect on the 2012 election Not sure or Not Applicable

Copyright 2012 Deloitte Development LLC. All rights reserved.

United States debt background

Moving through the cycle, dealing with fallout from the financial crisis

In U.S., not much happening in election year but look for lots of proposed budget and regulatory changes in 2013 Bank stress test results will require increased Tier 1 capital which will result in additional asset sales Repayment of TARP funds needs to continue for 2nd tier banks Large banks need to add performing real estate and C & I loans to their balance sheets quickly Potential external shocks to system include a blow-up in Europe and other geopolitical issues
Activity in U.S. marketplace
Wells Fargo has acquired loans from
Anglo Irish Allied Irish Bank of Ireland

JP Morgan Chase has acquired loans from Anglo Irish US Bank, GE Capital, CIT, and others are actively seeking loans. Active purchasers of distressed debt: Blackstone, Lone Star, Starwood Looming maturities
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Copyright 2012 Deloitte Development LLC. All rights reserved.

U.S. CRE debt maturities due to peak in FY13

At least $1.4 trillion of CRE debt will mature between FY12 and FY15. Trepp LLC estimates that nearly 63.0 percent of these loans are underwater, which raises concerns on the timing of a CRE recovery.
CRE Debt Maturities by Lender Type
$ Billion 400.0 $1.4 Trillion

350.0
$72.4 $74.3 $72.3 $23.4 $24.5 $23.6 $53.3 $62.4 $66.6 $22.9 $24.1 $101.1 $112.2 $65.5 $59.0 $51.8 $22.9

300.0

250.0

200.0

150.0
$213.1
$209.8 $182.3 $150.0 $112.3

$133.0

$44.2 $20.0 $34.9 $40.4 $17.3 $25.3 $15.8 $20.2 $44.0

100.0

50.0

$25.7
$85.1 $66.3

$32.2

0.0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Banks
Prepared by: Deloitte LLP Source: Trepp LLC, 4Q11 Update

CMBS

Life Cos

Other

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U.S. distress slows amid stabilizing property fundamentals

Net inflows to distressed properties declined 33.2 percent YoY to $12.8 billion in 4Q11, due to stabilizing commercial property fundamentals and relatively favorable refinancing conditions.
$ Billion

Total Outstanding Distress

350.0 300.0 250.0

As of December FY11, outstanding distressed assets in the U.S., including loans and REO, decreased 2.9 percent YoY to $171.9 billion. Total distress was $350.8 billion.

200.0
150.0 100.0 50.0 0.0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 REO 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11

Troubled

Restructured

Resolved
By property type, Office accounts for the highest distress ($41.0 billion).

Distress by Region
6.6% 13.1% 28.3%

Western U.S. continues to lead the volume of distress assets, with Las Vegas recording the highest distress.

Distress by Property Type

7.3% 25.3%

West Southeast 16.6%

Office Apartment Hotel Development & Other Retail Industrial 12.5%

Southwest
14.0% Northeast Midwest 17.6% 20.7% 22.1%

16.0%

Mid-Atlantic

Prepared by: Deloitte LLP Source: Real Capital Analytics (RCA), January 2012
Copyright 2012 Deloitte Development LLC. All rights reserved.

Debt portfolios and due diligence

Poll question # 5
Where do you believe may hold the best risk-return opportunity with either performing or non-performing loan portfolios from lending institutions? U.S. banking institutions with European assets U.S. banking institutions with domestic assets European banking institutions with European assets European banking institutions with domestic assets Not sure

Copyright 2012 Deloitte Development LLC. All rights reserved.

Debt portfolios: Sellers, buyers and type

Non-core and underperforming debt portfolios
Sellers
Bank & non-bank financial institutions Savings institutions Insurance companies Governments and regulators

Debt Portfolios
Corporate loans Commercial property debt Residential mortgages Unsecured consumer debt Asset finance loans

Buyers
Strategic buyers (i.e. banks, pension funds, life companies) Financial buyers (i.e. Private Equity/Hedge Funds) Real estate funds Debt purchasers

Copyright 2012 Deloitte Development LLC. All rights reserved.

Loan portfolio considerations

Non-core and underperforming debt portfolios
Sellers and Buyers of Debt Portfolios
Data Analytics & Due Diligence Investment Decision Closing & Post Deal

Data Analysis/Stratifications & Portfolio Level Reports

Data Aggregation and Cash Flow Modeling

Confirmatory Due Diligence

Assessment of Information Content & Quality

Historical Portfolio Performance Analysis

Investment Committee Presentation

Review of Credit Origination and Underwriting Quality

Key Asset Summary Reports

Loan Transfer Coordination and Take-on Setup

Property Diligence, Strategy and Valuation

Portfolio Management & Exit Strategies

Loan Workouts and Restructuring

Monetizing U.S. and European Assets.

Copyright 2012 Deloitte Development LLC. All rights reserved.

Question and answer

Join us May 8 at 2 PM ET as our Banking & Securities series presents:

Securitization: A Regulatory Update for Financial Institutions

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Contact information
Thomas Kaylor Principal Deloitte Financial Advisory Services LLP + 1 415 783 4242 tkaylor@deloitte.com
illiken@deloitte.com

Vivian Pereira Partner Deloitte U.K. +44 20 7007 0558 viviapereira@deloitte.co.uk Robert Young Partner Deloitte U.K. +44 20 7007 2571 robyoung@deloitte.co.uk

Guy Langford Principal Deloitte & Touche LLP + 1 212 436 3020 glangford@deloitte.com

Copyright 2012 Deloitte Development LLC. All rights reserved.

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

Copyright 2012 Deloitte Development LLC. All rights reserved.

About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2012 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited