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October 31, 2007 Banking - Large Cap Banks Consumer Contagion Coming; Downgrading to Cautious View What's Changed Industry View: Banking - Large Cap Banks Attractive to Cautious We are downgrading large cap banks to Cautious from Attractive. We believe there will be contagion from subprime housing to prime housing to auto to card loans. We are raising our consumer credit losses which lower our median 2008 EPS estimate by 5%. We are lowering our price targets based on rising probability of our bear case and greatly diminishing probability of our bull case. We see further downside risk to EPS if a consumer credit recession spills into corporates. What's New: We expect the reduced supply of credit to drive the contagion. We believe the liquidity squeeze that started in July will drive up losses in consumer loan portfolios over the next 4 quarters beyond our prior forecasts. Our downgrade reflects our view that the coming consumer credit recession we see will trump capital market healing, which had been the basis of our Attractive call. The three primary drivers are tightening standards, significantly higher subprime delinquencies, and lower home prices. Implications: We rate Overweight banks with less credit exposure: BK, STT, NTRS, PNC. We remain Overweight JPM given its stronger capital levels relative to peers and lower CDO exposure. We rate Underweight banks with significant Midwest exposure, greater subprime exposure, and less capital: NCC, FITB, KEY, and C. We are downgrading BAC, WFC, and C; we are upgrading NTRS, STT, and STI. We have made these changes in our financial services team model portfolio. We are also making a number of price target and estimate changes (see Exhibit 1). Changes to Ratings and Price Targets Rating Old Rating new PT Old PT New Downgrading BAC OW EW $61 $44 C OW UW $57 $36 WFC OW EW $42 $30 Upgrading NTRS EW OW $68 $80 STI UW EW $81 $68 STT EW OW $81 $85 Unchanged BBT EW EW $47 $39 BK OW OW $50 $52 FITB UW UW $39 $25 JPM OW OW $59 $50 KEY UW UW $30 $25 NCC UW UW $32 $16 PNC OW OW $79 $76 USB EW EW $38 $31 WB EW EW $62 $42 Source: Morgan Stanley Research OW=Overweight EW=Equal-weight UW=Underweight Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. Customers of Morgan Stanley in the U.S. can receive independent, third-party research on companies covered in Morgan Stanley Research, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 1-800-624-2063 to request a copy of this research. For analyst certification and other important disclosures, refer to the Disclosure Section. Morgan Stanley & Co. Incorporated Betsy L. Graseck, CFA [email protected] +1 (1)212 761 8473 Cheryl Wright, CFA [email protected] +1 (1)212 761 3324 Justin Kwong, CFA [email protected] +1 (1)212 761 6983 Gary (Guo) Lu, CFA [email protected] MORGAN STANLEY RESEARCH NORTH AMERICA Industry View Cautious

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Page 1: #0 Wall Street

October 31, 2007

Banking - Large Cap Banks Consumer Contagion Coming; Downgrading to Cautious View

What's Changed Industry View: Banking -

Large Cap Banks Attractive to Cautious

We are downgrading large cap banks to Cautious from Attractive. We believe there will be contagion from subprime housing to prime housing to auto to card loans. We are raising our consumer credit losses which lower our median 2008 EPS estimate by 5%. We are lowering our price targets based on rising probability of our bear case and greatly diminishing probability of our bull case. We see further downside risk to EPS if a consumer credit recession spills into corporates.

What's New: We expect the reduced supply of credit to drive the contagion. We believe the liquidity squeeze that started in July will drive up losses in consumer loan portfolios over the next 4 quarters beyond our prior forecasts. Our downgrade reflects our view that the coming consumer credit recession we see will trump capital market healing, which had been the basis of our Attractive call. The three primary drivers are tightening standards, significantly higher subprime delinquencies, and lower home prices.

Implications: We rate Overweight banks with less credit exposure: BK, STT, NTRS, PNC. We remain Overweight JPM given its stronger capital levels relative to peers and lower CDO exposure. We rate Underweight banks with significant Midwest exposure, greater subprime exposure, and less capital: NCC, FITB, KEY, and C. We are downgrading BAC, WFC, and C; we are upgrading NTRS, STT, and STI. We have made these changes in our financial services team model portfolio. We are also making a number of price target and estimate changes (see Exhibit 1).

Changes to Ratings and Price Targets

Rating Old Rating new PT Old PT NewDowngradingBAC OW EW $61 $44C OW UW $57 $36WFC OW EW $42 $30UpgradingNTRS EW OW $68 $80STI UW EW $81 $68STT EW OW $81 $85UnchangedBBT EW EW $47 $39BK OW OW $50 $52FITB UW UW $39 $25JPM OW OW $59 $50KEY UW UW $30 $25NCC UW UW $32 $16PNC OW OW $79 $76USB EW EW $38 $31WB EW EW $62 $42

Source: Morgan Stanley Research

OW=Overweight EW=Equal-weight UW=Underweight

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. Customers of Morgan Stanley in the U.S. can receive independent, third-party research on companies covered in Morgan Stanley Research, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 1-800-624-2063 to request a copy of this research. For analyst certification and other important disclosures, refer to the Disclosure Section.

Morgan Stanley & Co. Incorporated Betsy L. Graseck, CFA

[email protected] +1 (1)212 761 8473

Cheryl Wright, CFA [email protected] +1 (1)212 761 3324

Justin Kwong, CFA [email protected] +1 (1)212 761 6983

Gary (Guo) Lu, CFA [email protected]

M O R G A N S T A N L E Y R E S E A R C H N O R T H A M E R I C A

Industry View Cautious

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Investment Case Summary and Investment Conclusion We are downgrading large cap banks to Cautious from Attractive. We now expect a consumer credit recession in 2008 with losses above peak-of-cycle in mortgage and at peak-of-cycle in cards, auto and other consumer.

Our conclusion is based on four key inputs.

• First, we did work on bank capital allocation in 3Q07 which suggests that banks are reducing their capital allocated to consumers, adding to the capital market squeeze that started in July.

• Second, we dug into the subprime reset question and now anticipate that subprime delinquencies are likely to rise sharply as $77B of subprime resets are due in 4Q07, $70B above expected subprime loan supply.

• Third, home prices are expected to decline 6.5% in July 2008 y/y, suggesting that in 2008 the median household will look like the Florida consumer. This has negative implications for consumer credit quality as Florida contributes 25% of the country’s most severely delinquent MSAs.

• Fourth, conversations with our CDO strategist, Vishwanath Tirupattur and our Chief Economist, Dick Berner, who share our concerns that subprime delinquencies could rise and that a consumer credit recession is probable.

Our Attractive view recommendation had been based on an expectation that the credit crunch would heal and not tip us into a recession. The crunch is healing for corporates, with A1P1 CP spreads down and LBO deals getting out the door, but not for consumers.

Looking through 3Q07 results, banks have become more restrictive in non-mortgage lending with loan growth slowing and non-performing loans rising. Looking ahead, we have rising first time mortgage resets with a decrease in lending supply. We conclude that times will get tougher for consumers in 2008 and that credit losses will spike to above peak-of-cycle for mortgage and peak-of-cycle for other consumer loans.

We raised our mortgage credit losses on average, to 2x prior cycle peaks. We raised our home equity credit losses, on average, to 100 bp. We raised our non-mortgage consumer credit losses to peak of cycle, which means to levels consistent

with past recessions. 3Q07 data are beginning to show some stress in auto, but not in card or other consumer. However, we expect significant deterioration as tighter credit standards, imposed by banks and capital markets, squeeze consumers and as unemployment rises and housing values fall.

Looking forward, EPS estimates are more at risk of falling than rising. More delinquencies, higher bank consumer credit losses. More rating agency downgrades, more negative bond mark-to-markets, more pressure on SIVs, and more pressure on riskier money market funds. Then there is the possibility that deteriorating consumer spills into segments of corporate. All together, this spells downward pressure for bank earnings.

The offsets are Fed rate cuts, which should drive up net interest margins, and tighter expense management. However, credit is likely to deteriorate more rapidly over the next 3 quarters than NIM or layoffs will improve. It takes 2 quarters for Fed rate cuts and layoffs to improve net interest income and expenses. In the meantime, credit losses are likely to go up.

The other risk to our Cautious call is strategic risk. Banks are trading below our residual income’s fair value, which anticipates a normalized environment. We believe, however, that strategic risk is a 3Q08 risk at the earliest. We believe that buyers would want to be see a stabilization in delinquency trends before engaging in dialogues with interested sellers. We expect credit challenges will rise between now and then.

With the probability of the bear case increasing and the bull case decreasing, we are basing our 12-month price targets on multiples, not our typical residual income. Residual income valuation looks through the cycle to normalized returns. We expect that the market will not value longer-term excess profitability until deteriorating consumer trends stabilize, unlikely until 3Q08. Expect PE contraction as EPS declines.

How to position in the stocks? Overweight banks with less credit exposure: BK, STT, NTRS, PNC. Also, Overweight JPM given its stronger capital levels relative to peers and lower CDO exposure.

Underweight banks with significant Midwest exposure, greater subprime exposure and less capital: NCC, FITB, KEY, and C.

Downgrading: Upgrading: OW to EW: BAC, WFC EW to OW: STT, NTRS OW to UW: C UW to EW: STI

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

We are downgrading Citi to Underweight from Overweight based on concerns we have about its CDO portfolio, subprime consumer exposure, SIV exposure, and thin capital levels. Citigroup is the 2nd largest CDO arranger, arranging $25 billion YTD 2007, just after Merrill's $31 billion. We are baking in an additional $1.1 billion in CDO writedowns in 4Q07 based on our expectation that S&P’s CDO ratings changes announced on October 19 were not reflected in C’s CDO mark in 3Q07, and another $1.0 billion in 1Q08 based on our outlook for deteriorating subprime consumer delinquency. On subprime, Citi has the largest subprime exposure in our group at 13% of loans and 5% of earning assets. We have a sharper increase in consumer losses at CIti based on this heavier subprime composition. On SIVs, Citi is a manager of roughly $80 billion in SIVs. While they do not have liquidity backstops to their SIVs, they will lend at arms-length, exposing Citi to potential losses. Given that there is no disclosure on these loans, it is hard to estimate the magnitude of these potential losses, but we do bake in deteriorating corporate credit in the investment bank. Lastly, Citi's capital levels are among the thinnest in the group at 7.4% tier 1 and 3.0% tangible equity/tangible assets, leaving it more vulnerable to shocks and less able to take advantage of market opportunities.

We are downgrading BAC to Equal-weight from Overweight. Our BAC downgrade is based on deteriorating consumer credit, which BAC is primarily exposed to in its credit card portfolio. Additionally, we are estimating a 13% decline in investment banking revenues in 2008 y/y to reflect a restructuring of that business towards client business. We believe that there is more downside as Brian Moynihan, the new CEO of the GCIB, will be deciding which businesses he plans to retain by the early December budget season. We are less concerned about BAC’s mortgage book as it has insurance with street counterparties, largely in the form of swaps, which cover losses from 11-99 bp.

We are downgrading WFC to Equal-weight from Overweight. With the majority of its earnings sourced from consumers, we believe that it will be hard for WFC to retain its premium multiple to the large cap bank group until delinquency rates stabilize. Strong capital levels, high net interest margins, and low and stable subprime losses keep us from going underweight.

We are upgrading NTRS and STT to Overweight from Equal-weight. NTRS and STT have much less consumer credit risk than the average large cap bank. We are most overweight in BK, as we expect that it will benefit from merger related expense saves and revenue synergies. Our lightest position is in STT as we believe that STT has the most

exposure to more rating agency CDO and subprime mortgage bond downgrades.

We are upgrading STI to Equal-weight from Underweight. While STI earnings remain under pressure from its alt-a and home equity portfolio, we expect that the coming balance sheet restructuring will be a positive for the shares. STI announced that it plans on reducing its KO holdings, however, it is uncertain how much they will sell. These gains can be used to absorb credit losses, increase net interest income through redeployment into higher yielding assets, or increasing ROE through a more efficient balance sheet. This catalyst should come before December year-end, and, as a result, we are stepping to the sidelines on the name.

We are changing our bank weightings in our financial institutions group model portfolio to reflect our recommended weightings shown in Exhibit 2. We are establishing a net short position of 2% in the portfolio.

Exhibit 1 Summary of EPS and Price Target Changes

08 EPS 08 EPS Chg Price Tgt Price Tgt 12 mo. AbsOld New (%) Old New Return P/E P/B

BAC EW $5.23 $4.83 -8% $61 $44 -8% 9.1x 1.4xC UW $4.70 $4.14 -12% $57 $36 -15% 8.7x 1.4xJPM OW $4.95 $4.71 -5% $59 $50 7% 10.6x 1.4xWB EW $5.28 $4.80 -9% $62 $42 -9% 8.8x 1.1xWFC EW $3.06 $2.75 -10% $42 $30 -12% 10.9x 2.1xUSB EW $2.70 $2.67 -1% $38 $31 -5% 11.6x 2.6xSTI EW $6.39 $5.84 -9% $81 $68 -7% 11.6x 1.4xNCC UW $2.40 $1.92 -20% $32 $16 -35% 8.3x 0.7xPNC OW $6.09 $6.00 -1% $79 $76 6% 12.7x 1.7xFITB UW $2.83 $2.73 -4% $39 $25 -18% 9.2x 1.4xBBT EW $3.60 $3.46 -4% $47 $39 7% 11.3x 1.7xKEY UW $2.89 $2.68 -7% $30 $25 -12% 9.3x 1.2x

BK OW $3.05 $3.03 -1% $50 $52 8% 17.2x 2.1xNTRS OW $3.94 $3.97 1% $68 $80 8% 20.1x 4.0xSTT OW $4.92 $4.84 -2% $81 $85 8% 17.5x 2.8x Source: Morgan Stanley Research

Exhibit 2 Recommended Weights in Large Cap Banks

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

BKNTRS

STTJP

MPNC

BACBBT

STIUSB

WBW

FC CFITB

KEYNCC

Source: Morgan Stanley Research

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Why Do We Think Consumer Credit Gets Worse? Reduced Credit Supply Forcing Contagion

• Subprime stress getting worse as capital market liquidity for subprime loans evaporating at same time as resets ramp. Result likely to meaningfully drive up delinquencies in 4Q07 through 3Q08.

• Banks beginning to restrict liquidity to consumers, slowing growth and restricting consumer ability to cure.

• Unemployment expected to rise to 5.6%, trajectory is higher if recession probability increases from our economist’s odds of a one-in-three chance of a recession.

• Median home prices expected to decline 6.5% in 2008 and a total of 12% by 2010. Fully 37% of the population is living in regions expected to suffer at least 6% decline in home value in 2008, similar to what Tampa experienced this year. Given ramping delinquencies there, this suggests an acceleration in credit losses.

Exhibit 3 Subprime Resets Up, Subprime Originations Down Expect Delinquencies to Spike and Remain high through 2008 as more Subprime Loans Face Resets with no Lenders to go to.

-75

-50

-25

0

25

50

75

100

1Q07

2Q07

3Q07

e

4Q07

e

1Q08

e

2Q08

e

3Q08

e

4Q08

e

1Q09

e

2Q09

e

3Q09

e

4Q09

e

$ B

illio

ns

Subprime Resets Subprime Originations Capacity to Absorb Resets

Little subprime originations mean resets likely to hit a wall

Source: Morgan Stanley Research, B&C Mortgage Lending, Inside Mortgage Finance> 3Q07e Subprime originations = 2Q07 volumes * % decline in CFC monthly volumes 4Q07e - 4Q09e Subprime originations = September CFC monthly volumes quarterized e = Morgan Stanley Research estimates

Exhibit 4 With Liquidity Evaporating, Delinquencies Should Rise Slope of expected delinquency curve more likely to steepen as borrowers lack options to cure

8%12%

16%

22%

-80

-60

-40

-20

0

20

40

60

1Q07 2Q07 3Q07e 4Q07e

$ B

illio

ns

Market Capacity to Absorb Resets 2006 Subprime Vintage Del Rates

Source: Morgan Stanley Research

Exhibit 5 Monthly Resets Show Problem Peaks in Sept 2007, but Remains High for 12 Months through Sept 2008

-40

-30

-20

-10

0

10

20

30

40

Jan-0

7

Feb-07

Mar-07

Apr-07

May-07

Jun-0

7Ju

l-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-0

8

Feb-08

Mar-08

Apr-08

May-08

Jun-0

8Ju

l-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Subprime Orig Subprime Resets Capacity to Absorb Resets

$ Billions

Source: Company data, Morgan Stanley Research

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Exhibit 6 ABX AAA Has Not Fully Priced in Deteriorating Aug Delinquencies… and September Should Be Worse

ABX AAA

79.00

81.00

83.00

85.00

87.00

89.00

91.00

93.00

95.00

97.00

99.00

101.00

1/19/2006 5/19/2006 9/19/2006 1/19/2007 5/19/2007 9/19/2007

ABX 06-1 ABX 06-2 ABX 07-1 ABX 07-2

10/25/07:August remittance data shows delinquencies spike

Source: Company data, Morgan Stanley Research

We are just now getting in the August delinquency data for subprime loans. The spike in delinquencies is surprising ABS experts, driving down ABX valuations. Some people wonder how cumulative losses could increase beyond current 20% expectations. Unfortunately, it’s not so hard. A 70% probability of default multiplied by a 50% loss given default yields a 35% realized loss. We don’t think a 70% probability of default is unreasonable in an environment with few refinancing options, falling home prices and an increase in interest payments. Based on public foreclosures, opening bids are oftentimes starting at 1/3 of the appraised value (http://www.ushomeauction.com). At a minimum, we expect significant deterioration in subprime cumulative losses from their current 20% expectations.

September should be worse with much lower levels of subprime originations to absorb the resets. Countrywide, the largest subprime originator, reduced its subprime originations by 80% from $1.3 billion in August to $255 million in September. In speaking with our CDO strategist, Vishwanath Tirupattur, we wouldn’t be surprised to see rating agencies continue to downgrade more mortgage bond and CDO ratings as delinquencies accelerate.

The second reason to expect weaker consumer credit is tighter standards by banks. Banks provide 30% of financing to consumers, followed by capital markets, which is already squeezing the consumer.

Banks appear to have tightened standards during 3Q07. In card, loan growth slowed at C, BAC and JPM from average of 3.8% y/y in 2Q07 to 3.1% y/y in 3Q07, and below industry

Exhibit 7 Subprime Delinquency Curves by Vintage 2006 and 2007 Deterioration Likely to Accelerate

Subprime Delinquencies

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

2000 2001 2002 20032004 2005 2006 2007

Source: Moody’s Exhibit 8 Banks Fund 30% of Consumer Liabilities: Access to these funds is getting tighter too

Consumer credit by provider: 07/2007

2% 4% 4%

10%

22%

28% 30%

-

100

200

300

400

500

600

700

800

Commercialbanks

Securitizedassets

Financecompanies

Creditunions

Savingsinstitutions

Fed gov &Sallie Mae

Nonfinancialbusiness

In $

bill

ion

Liquidity drying up fastest here

Source: Federal Reserve

growth of 5%. Citi indicated that it was taking a tougher line with consumers, adding to reserves if card holders drew down more of their lines or accessed cash advances. In auto, loan growth slowed from an average of 37% y/y to 28% y/y at C, JPM, BBT, FITB, PNC, and WB. The average is skewed upwards by banks who couldn’t execute on securitizations. The backup of assets on the balance sheet is likely to slow consumer asset growth further in 4Q07.

We expect the next fed senior lending officer survey to indicate that banks are tightening further standards in consumer loans. Higher nonperforming loan ratios in the quarter suggest that banks are already doing this. Median consumer nonperforming loans grew 27% q/q in 3Q07 vs. 2% q/q in 2Q07. In auto it was 19% in 3Q07 vs. 11% in 2Q, in card we saw 2% in 3Q07 vs. -6% in 2Q07. Nonperforming loan portfolios are growing the fastest in portfolios with heavy subprime, like Citi’s auto book where most of the book is

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

subprime and 90 day+ delinquency loan ratio increased by one-third to 1.26% in 3Q07 q/q, up from 0.94% in 2Q07.

Exhibit 9 Rising Unemployment Should Drive Up Card Losses With risk of higher NCOs if recession risk rises from our economist’s 1 in 3 chance of a recession

-

2.0

4.0

6.0

8.0

10.0

1Q85 4Q86 3Q88 2Q90 1Q92 4Q93 3Q95 2Q97 1Q99 4Q00 3Q02 2Q04 1Q06 4Q07E

In p

erce

ntag

e

Unemployment rate

Credit card NCO ratio

ForecastPrevious cycle peak

Unemployment rate: 7.6% 3Q92Credit card NCO: 7.67% 1Q02

2Q07Unemployment rate: 4.5%Credit card NCO: 3.81%

4Q08EUnemployment rate:5.4%

Credit card NCO: 6%

Source: Bureau of Labor Statistics, Morgan Stanley Research Exhibit 10 Negative Macro Trends Pointing to an Accelerating Residential Mortgage NCO Ratio

(7.00)

(5.00)

(3.00)

(1.00)

1.00

3.00

5.00

7.00

9.00

11.00

1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07E 2009E

Mac

ro in

dica

tors

Y/Y

cha

nge

%

(0.50)

(0.30)

(0.10)

0.10

0.30

0.50

Res

iden

tial m

ortg

age

NC

O ra

tio

HPI, left axis

Wage growth, left axis

Job growth, left axis

Resi mortgage NCO ratio, right axisForecast

Source: Company data, Radalogic, Bureau of Labor Statistics, Morgan Stanley Research

Lastly, home prices are expected to decline a total of 12.5% over the next three years. We are measuring this via the RPX composite price index which has just started trading on September 17, 2007. Already, 37% of the population live in a region where home prices are expected to be down 6.6% in the coming year. That means that 37% of the population will be experiencing home value declines similar to what Florida experienced this past year. It’s not a pretty picture, as our retail analysts would tell you. For example, in 3Q07, Nordstrom reported a 100bp increase in its delinquency rates from 4.5% to 5.5% and Nordstrom ranks among the highest in the retail

group’s exposure to weak housing markets with a greater store skew in Florida and California. Auto sales at Autozone have also been weak in Florida and California for about 3 quarters.

Exhibit 11 Expect Home Price Deterioration to Get Worse Before It Gets Better

Expected housing price Y/Y change

3.1%

-1%

-6.6%

-3.4%

-1.6%

3.9%

-8%

-4%

0%

4%

8%

2007E 2008E 2009E 2010E 2011E 2012E

Housing market deteriorates Housing market recovers

Source: Radarlogic RPX composite forward price ending 10/30/2007

Looking like Florida is negative from a credit perspective too as one-quarter of the nation’s most stressed MSAs are in Florida. This suggests significantly more deterioration is likely in bank mortgage books as housing prices decline from -1% to -6.6% over the next year.

Exhibit 12 Seriously Delinquent MSAs Florida Contributes 7 of the Top 24 SD MSAs, Indicating more pressure on credit losses coming as the median home price falls in 2008 as much as Florida did in 2007

MSA 2006 (SD%) National Index1 PANAMA CITY, FL 1.27 2442 MIAMI, FL 1.25 2403 FORT MYERS-CAPE CORAL, FL 1.23 2374 VINELAND-MILLVILLE-BRIDGETON, NJ 1.22 2355 ELKHART-GOSHEN, IN 1.17 2256 YUBA CITY, CA 1.16 2238 FORT PIERCE-PORT ST. LUCIE, FL 1.12 2157 CLARKSVILLE-HOPKINSVILLE, TN-KY 1.12 2159 FLINT, MI 1.07 206

10 LEWISTON-AUBURN, ME 1.04 20011 ENID, OK 1.04 20014 NAPLES, FL 0.99 19013 MANSFIELD, OH 0.99 19012 FORT LAUDERDALE, FL 0.99 19015 STOCKTON-LODI, CA 0.98 18816 LAS VEGAS, NV-AZ 0.97 18717 DETROIT, MI 0.95 18318 INDIANAPOLIS, IN 0.93 17919 PUEBLO, CO 0.92 17720 LAKELAND-WINTER HAVEN, FL 0.92 17723 TERRE HAUTE, IN 0.91 17522 JACKSON, MS 0.91 17521 JACKSON, MI 0.91 17525 SOUTH BEND, IN 0.9 17324 SHREVEPORT-BOSSIER CITY, LA 0.9 173

NATIONAL 0.52 100 Source: Company data, Morgan Stanley Research

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Exhibit 13 July 07/July 06 HPI Decline by MSA

8%

6%5%

4%4%

3%2%

-1%-0.7%

-1%

-1.4%

-2%-2%-3%

-3%-3%

-3%-3%

-5%-5%

-6%

-7%

-8%-10%

-12%

-14%

-4.1%

-6.6%

-7.8%

-16.8%

-25% -20% -15% -10% -5% 0% 5% 10%

SeattleCharlotteNew YorkMilwaukeePhiladelphiaAtlantaSan JoseJacksonvilleSan FranciscoCompositeClevelandDenverColumbusChicagoBostonPhoenixMinneapolisLos AngelesDetroitSaint LouisMiamiTampaLas VegasD.C.San DiegoSacramento

1 yr forward expectation implied by RPX 10/30/07 price *

Y/Y change: RPX 28-day price ending 08/28/07

Cumulative % of total US popluation

* Forward expectations only available to New York, Composite, Los Angeles, and Miami, which are currently actively traded

1%2%3%4%5%7%8%9%

14%15%16%17%21%21%22%23%37%24%25%25%27%29%29%36%36%37%

Source: Radarlogic RPX 28-day price ending 08/28/2007, Forward looking expectations from October 30, 2007. Morgan Stanley Research

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

We use the RPX data to describe change in home values by MSA. The data show that in July 2007, the median home price declined 1% y/y. However, the expected price decline for the composite over the next year is 6.5%. For more information on the RPX, which just recently started trading and represents a more recent and more transparent data set than other residential mortgage indices, please see our colleagues’ note Property Derivatives Insights – RPX Derivatives: New Housing Tool, October 5, 2007.

What About the Fed? Lower fed funds should help drive fatter NIM over time. Typically, it takes about 2 quarters for the benefit of a rate cut to be fully reflected in NIM (takes time for banks to lower deposit rates). So, the September 19 Fed rate cut typically should begin to improve margins in 4Q07 and be pretty much fully baked in 1Q08. However, in this cycle, fed fund cuts are not as beneficial as previous cycles. This is because market borrowing costs are running at a higher spread over LIBOR than they were pre-liquidity crunch.

Exhibit 14 ABCP Spread Over 1 Month LIBOR: Liquidity Crunch Still Exists: Fed has to Cut More to Drive Improvements in Bank NIM

9 bps

61 bps

-8 bps

-20

-10

0

10

20

30

40

50

60

70

In b

asis

poi

nts

Spread between ABCP and 1m LIBOR1H07 average: -4 bps

10/26/07

8/01/07

Peak: 8/28/07

Source: Bloomgberg

This means that the Fed has to lower rates more to drive the same impact in the bank net interest margin that a rate cut would have created pre-liquidity crunch. We are in the camp that the Fed will cut more and sooner.

Investors, however, will still have to wait 2-6 quarters for banks to benefit from this rate decline. In the meantime, credit costs are rising faster than we had previously thought. And,

mortgage backed bond valuations and CDOs remain at risk with subprime delinquencies rising. We would be selling into any bank stock strength induced by Fed rate cuts.

Exhibit 15 Historical Bank Stock Performance Post Rate Cuts

12 14

81

2

(20)

10

0 17

(40)

(20)

-

20

40

60

80

100

Rate cut date

Rel

ativ

e re

turn

% v

s. S

&P

07/06/1995 09/29/1998 01/03/2001

3 mo post rate cut

1 yr post rate cut

3 yr post rate cut

Source: Factset, Company data, Morgan Stanley Research

Details on Changes in Credit Outlook

We are now expecting to go into a consumer credit recession in 2008. We have moved up our NCO forecasts for year-end 2008 to roughly 2x above prior peak for mortgage loans, to 100bp home equity, and peak of cycle for auto and card. We looked at each bank’s experience in setting our forecasts and adjusted for business mix shift (WB largely out of subprime) as well as some structural hedges that are in place (BAC owns the first 10bp of first lien mortgage risk, 11–99 is swapped away with counterparties). The following charts give a sense of how much NCOs could rise as the cycle deteriorates.

Exhibit 16 Home Equity: Looking for 100 bps of NCOs by 4Q08

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

1Q91

4Q91

3Q92

2Q93

1Q94

4Q94

3Q95

2Q96

1Q97

4Q97

3Q98

2Q99

1Q00

4Q00

3Q01

2Q02

1Q03

4Q03

3Q04

2Q05

1Q06

4Q06

NCO ratio Delinquencies/Total loan

4Q93:Delinq. 0.25%NCOs: 0.48%

4Q01:Delinq. 0.13%NCOs: 0.39%

4Q03:Delinq. 0.07%NCOs: 0.26%

2Q07:Delinq. 0.09%NCOs: 0.29%

Source: FDIC, Morgan Stanley Research

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9

M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Exhibit 17 Residential Mortgage: Expect 50 bp of NCOs by 4Q08

0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5

0.5

1988

1991

1Q94

4Q94

3Q95

2Q96

1Q97

4Q97

3Q98

2Q99

1Q00

4Q00

3Q01

2Q02

1Q03

4Q03

3Q04

2Q05

1Q06

4Q06

NC

O ra

tio in

%

-

1.00

2.00

3.00

4.00

5.00

6.00

Del

inqe

ncy

ratio

in %

1992 peak:Delinq.: 4.89%NCOs: 0.24%

Delinq. ratio, right axis

NCO Ratio, left axis

3Q01 peak:Delinq.: 5.50%NCOs: 0.45%

4Q03 peak:Delinq.: 4.49%NCOs: 0.35%

2Q07A:Delinq.: 5.12%NCOs: 0.18%

Source: Federal Reserve, Mortgage Bankers Association, Morgan Stanley Research Exhibit 18 Credit Card: Expect 6.5% Peak-of-Cycle in 2009

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

1Q85

4Q85

3Q86

2Q87

1Q88

4Q88

3Q89

2Q90

1Q91

4Q91

3Q92

2Q93

1Q94

4Q94

3Q95

2Q96

1Q97

4Q97

3Q98

2Q99

1Q00

4Q00

3Q01

2Q02

1Q03

4Q03

3Q04

2Q05

1Q06

4Q06

In %

NCOs Delinquencies/Total loan

Early 90's peak:Delinq.: 5.41% 3Q91NCOs: 4.92% 1Q92

Late 90's peak:Delinq.: 4.90% 4Q97NCOs: 5.60% 4Q97

Early 00's peak:Delinq.: 5.09% 3Q01NCOs: 7.67% 1Q02

2Q07A:Delinq.: 4.04%NCOs: 3.81%

Source: Federal Reserve, Morgan Stanley Research Exhibit 19 Other Consumer Loan (incl. Auto): Expect Peak-of-Cycle by 4Q08

0.30

0.50

0.70

0.90

1.10

1.30

1.50

1.70

1Q85

4Q85

3Q86

2Q87

1Q88

4Q88

3Q89

2Q90

1Q91

4Q91

3Q92

2Q93

1Q94

4Q94

3Q95

2Q96

1Q97

4Q97

3Q98

2Q99

1Q00

4Q00

3Q01

2Q02

1Q03

4Q03

3Q04

2Q05

1Q06

4Q06

3Q07

NC

O ra

tio in

%

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Del

inqu

ency

ratio

in %

Delinq. ratio, right axis

NCO Ratio, left axis

90's peak:Delinq.: 3.52% 1Q91NCOs: 1.14% 4Q91

4Q02 NCOs peak:Delinq.: 2.90%NCOs: 1.60%

2Q07A:Delinq.: 2.29% NCOs: 1.37%

Source: Federal Reserve, Morgan Stanley Research

Exhibit 20 Residential Construction: Expect Peak of Cycle in 2009

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

1Q91

4Q91

3Q92

2Q93

1Q94

4Q94

3Q95

2Q96

1Q97

4Q97

3Q98

2Q99

1Q00

4Q00

3Q01

2Q02

1Q03

4Q03

3Q04

2Q05

1Q06

4Q06

NCO ratio Delinquencies/Total loan

4Q92:Delinq. 1.17%NCOs: 4.52%

2Q07:Delinq. 0.14%NCOs: 0.18%

Source: FDIC, Morgan Stanley Research Exhibit 21 Commercial & Industrial: Expect Cycle Avg in 2009

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1Q91

4Q91

3Q92

2Q93

1Q94

4Q94

3Q95

2Q96

1Q97

4Q97

3Q98

2Q99

1Q00

4Q00

3Q01

2Q02

1Q03

4Q03

3Q04

2Q05

1Q06

4Q06

NC

O ra

tio

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%

Del

inqu

ency

ratio

NCO ratio Delinquencies/Total loan

4Q91:Delinq. 0.32%NCOs: 2.38%

2Q07:Delinq. 0.11%NCOs: 0.39%

4Q01:Delinq. 0.15%NCOs: 2.27%

Source: FDIC, Morgan Stanley Research Exhibit 22 Commercial Real Estate: Expect Cycle Avg in 2009

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

1Q91

4Q91

3Q92

2Q93

1Q94

4Q94

3Q95

2Q96

1Q97

4Q97

3Q98

2Q99

1Q00

4Q00

3Q01

2Q02

1Q03

4Q03

3Q04

2Q05

1Q06

4Q06

NCO ratio Delinquencies/Total loan

4Q91: 3Q92:Delinq. 0.54% 0.53% NCOs: 2.00% 1.84%

2Q07:Delinq. 0.09%NCOs: 0.19%

Source: FDIC, Morgan Stanley Research

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Exhibit 23 Net Charge-Offs deterioration: 3Q07 vs. 3Q06 Sharp Jump in Credit Losses, Particularly Consumer, on a Y/Y Basis

4 1

(63)

(6)

10

48

15

3

45

6772

24

(15)

(31)

(10)

29

94

43

30 27

(80)

(60)

(40)

(20)

-

20

40

60

80

Credit card Home equity Auto Otherconsumer

Resimortgage

CRE C&I

Cha

nges

in b

asis

poi

nts

High

Median

Low

Source: Company data, Morgan Stanley Research Exhibit 24 Net Charge-Offs deterioration 3Q07 vs. 2Q07 Sequential Deterioration Sharpest in Consumer, Where Credit Squeeze is Tighter

(30)

13

(27)

0

23

36

60

32

42

21

(5)(1)

(24)

(2)3

1 0 2

3025

86

(40)

(20)

-

20

40

60

80

100

Credit card Home equity Auto Otherconsumer

Resimortgage

CRE C&I

Cha

nges

in b

asis

poi

nts

High

Median

Low

Source: Company data, Morgan Stanley Research Exhibit 25 Expect Credit Costs to Rise Significantly: EPS Could Go Lower on Higher Reserve Builds

NCO ratio Reserve/Loan ratio3Q07 4Q08E bps change 3Q07 4Q08E bps change

C 1.21% 2.31% 110 1.70% 2.07% 37 JPM 1.39% 2.29% 90 1.64% 1.54% (10) BAC 0.80% 1.26% 46 1.27% 1.38% 11 BBT 0.40% 0.63% 23 1.06% 1.10% 4 FITB 0.60% 0.80% 20 1.08% 1.08% (1) KEY 0.35% 0.77% 43 1.38% 1.45% 7 NCC 0.52% 1.08% 56 1.23% 1.25% 2 PNC 0.30% 0.48% 18 1.10% 1.11% 0 STI 0.34% 0.69% 34 0.98% 0.98% 0 USB 0.55% 0.91% 36 1.52% 1.51% (1) WB 0.19% 0.55% 36 0.83% 0.84% 1 WFC 1.01% 1.48% 48 1.05% 1.08% 2

Median 0.54% 0.86% 32 1.16% 1.18% 1 Source: Company data, Morgan Stanley Research

Risk and Valuation

We use a variety of valuation methodologies to determine our price targets, residual income, PE/PB multiples, and sum-of-the-parts. Typically, our price targets are equal to our residual income valuation targets. For the time being, we have switched our valuation methodology to multiples. The simple reason is that residual income is based on the value of excess long-term returns over cost of capital. We expect that the next 3–4 quarters will be very difficult with deteriorating consumer losses. We expect that the market will not value longer-term excess profitability until deteriorating trends stabilize, likely in 3Q08. We’ll revert back to residual income-driven price targets when can expect to see some stabilization in consumer delinquencies and home price changes. Unless our banks give us more information on the tail risk in their consumer loan portfolios (CTLV, MSA, Vintage, FICO, etc.), we will wait until consumer trends stabilize before reverting back to our residual income valuation methodology.

Exhibit 26 Trailing PE: Top 40 Banks Deteriorating Earnings Trends Could Drive PEs Lower Until Consumer Delinquencies Stabilize

Trailing P/E

5.0 x

10.0 x

15.0 x

20.0 x

25.0 x

Mar-85 Sep-87 Mar-90 Sep-92 Mar-95 Sep-97 Mar-00 Sep-02 Mar-05 Sep-07

Top 40 Banks

Since 2000: Trough Multiple of 11.5 x April 2000

10/25/07: Multiple of 12.3x

Trough Multiple of 6.3x October 1990

Source: Company data, Morgan Stanley Research

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Exhibit 27 PB: Top 40 Banks Deteriorating Earnings Trends Could Drive PBs Lower Until Consumer Delinquencies Stabilize

Trailing P/B

0.0 x

1.0 x

2.0 x

3.0 x

4.0 x

Mar-85 Sep-87 Mar-90 Sep-92 Mar-95 Sep-97 Mar-00 Sep-02 Mar-05 Sep-07

Top 40 Banks

Trough Multiple of 0.8x October 1990

10/25/07: Current Multiple of 1.6x at 2000 - present trough level

April 2000:Multiple of 2.0x

Source: Company data, Morgan Stanley Research Exhibit 28 Price/(TB+Reserves): Top 40 vs. Covered Banks

Price / (Tangible Book + Reserves)

0.0 x

0.5 x

1.0 x

1.5 x

2.0 x

2.5 x

3.0 x

3.5 x

4.0 x

4.5 x

5.0 x

Jun-9

0

Mar-91

Dec-91

Sep-92

Jun-9

3

Mar-94

Dec-94

Sep-95

Jun-9

6

Mar-97

Dec-97

Sep-98

Jun-9

9

Mar-00

Dec-00

Sep-01

Jun-0

2

Mar-03

Dec-03

Sep-04

Jun-0

5

Mar-06

Dec-06

Sep-07

Top 40 Banks LC Coverage Median

October 25, 2007:Top 40 Banks: 2.2xLC Coverage: 2.7x

Cycle Lows:Top 40 Banks: 0.7x (Jan '91)LC Coverage: 1.1x (Aug '90)

Cycle Highs:Top 40 Banks: 3.4x (Apr '98)LC Coverage: 4.3x (Jul '98)

Source: Company data, Morgan Stanley Research Exhibit 29 3Q07 Price/(TB+Reserves) For Covered Banks

3Q07 Price / (Tangible Book + Reserves)

3.1 x2.6 x 2.7 x

2.0 x 2.0 x1.5 x 1.4 x

3.6 x

2.4 x

4.4 x

2.5 x2.9 x

4.0 x

7.8 x

4.3 x

0.0 x

1.0 x

2.0 x

3.0 x

4.0 x

5.0 x

6.0 x

7.0 x

8.0 x

BAC BBT C FITB JPM KEY NCC PNC STI USB WB WFC NTRS BK STT

Source: Company data, Morgan Stanley Research

Exhibit 30 3Q07 Subprime as % of Earning Assets

9%

5% 5%4%

2% 2% 2%1%

0%0%1%2%3%4%5%6%7%8%9%

WFC NCC C BAC USB BBT JPM FITB WB

Note: WB data from 2Q07 Source: Company data, Morgan Stanley Research Exhibit 31 3Q07 Subprime as % of Total Loans

13%

10%

6%5%

5%3% 3%

1% 0%0%

2%

4%

6%

8%

10%

12%

14%

C WFC BAC NCC JPM BBT USB FITB WB

Note: WB data from 2Q07 Source: Company data, Morgan Stanley Research

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Exhibit 32 CDO Structured Products League Table as of October 25, 2007, YTD Issuance

Pos. Bookrunner Parents Deal Value $ (Proceeds) (m) No. %share

1 Merrill Lynch 30,918.46 287 17.582 Citi 25,357.83 164 14.413 UBS 20,989.00 187 11.934 Wachovia 12,480.27 139 7.095 ABN AMRO 10,848.77 15 6.176 Goldman Sachs 9,074.79 138 5.167 Banc of America 8,593.62 92 4.888 Deutsche Bank 7,738.11 106 4.409 RBS 7,105.21 112 4.0410 Lehman Brothers 6,569.98 73 3.7311 Morgan Stanley 5,323.02 162 3.0312 Bear Stearns 4,368.38 87 2.4813 Credit Suisse 4,256.50 41 2.4214 JP Morgan 4,204.96 62 2.3915 Fortis 2,971.82 29 1.6916 Calyon 2,558.65 6 1.4517 Dresdner Kleinwort 2,000.00 9 1.1418 KBC 1,927.81 28 1.1019 Barclays Capital 1,450.00 15 0.8220 Natixis 1,249.22 14 0.7121 Mizuho 1,200.00 13 0.6822 First Tennessee Bank 920.20 8 0.5223 SG Corporate & Investment Banking 898.10 19 0.5124 RBC Capital Markets 750.00 8 0.4325 Cohen & Co 715.46 20 0.4126 BNP Paribas 535.31 7 0.3027 Fidelity Capital Markets Co 250.00 7 0.1428 Korea Investment & Securities 206.57 4 0.1229 CIBC World Markets 159.70 5 0.0930 KeyBanc Capital Markets 125.00 13 0.0731 Shinhan Securities Co Ltd 111.23 3 0.0632 Woori Finance Holdings Co Ltd 54.65 2 0.0333 Pali Capital 7.80 1 0.00

Subtotal 175,920.43 1,699 100.00Total 175,920.43 1,699 100.00

* Structured Products CDO Issuance: Includes ABS, MBS, CDO2

Source: Dealogic, Morgan Stanley Research

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Exhibit 33 Changes of Banks’ Tier 1 Ratio If ABCP on Balance Sheet C has one of the lowest Tier 1 Ratios in the Group as of 2Q07 and Under Stressed Scenarios

Current 2Q07 Tier 1 Ratio

Scenario 1: "At-Risk"

Scenario 2: Unlikely

Scenario 2b: 100% Provision

on Mtg ABCPScenario 3: Draconian

% of Non-Credit Card

Commmitments that can be Absorbed for

Tier 1 = 6%JPM 8.38% 7.91% 7.36% 6.85% 6.45% 88%C 7.91% 7.58% 7.12% 6.67% 5.96% 74%BAC 8.52% 8.20% 7.79% 7.42% 6.58% 102%STT 11.49% 11.02% 8.01% 5.94% 6.68% 134%BK 8.46% 8.43% 8.13% 7.87% 6.09% 84%NTRS 10.05% 10.05% 10.05% 10.05% 7.38% 155%WB 7.47% 7.37% 7.04% 6.71% 5.77% 50%PNC 8.26% 8.21% 7.80% 7.42% 6.29% 89%STI 7.49% 7.46% 7.13% 6.81% 5.68% 47%BBT 9.42% 9.42% 9.42% 9.42% 8.06% 214%WFC 8.57% 8.57% 8.57% 8.57% 7.29% 144%FITB 8.09% 8.06% 7.82% 7.61% 6.67% 102%USB 8.50% 8.49% 8.44% 8.39% 6.83% 119%MI 7.88% 7.87% 7.80% 7.72% 6.23% 93%NCC 6.56% 6.55% 6.54% 6.52% 5.55% 28%KEY 8.14% 8.04% 7.98% 7.94% 6.46% 111%RF 7.83% 7.83% 7.81% 7.79% 6.35% 90%ZION 7.85% 7.84% 6.97% 6.24% 5.64% 56%Median 8.20% 8.05% 7.80% 7.51% 6.40% 92%

*BK Tier 1 Ratio proforma to include Mellon FinancialScenario 1 : Mortgage ABCP and LBO Commitments coming on balance sheet. 1% loss on mtg ABCP + 7% loss on LBO commitmentsScenario 2 : Scenario 1 + all non-mortgage ABCP and risk weights move from 0% - 20% to 20% - 100%Scenario 2b: Scenario 2 + incremental 99% loss on mortgage ABCP, for 100% loss stress testScenario 3 : Scenario 2 + All other unfunded commercial commitments

Source: Regulatory filings, Company data, Morgan Stanley Research

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Exhibit 34 Comps Table

(Dollars in millions)Price 52-Week: Common Dividend: Price Performance:

Price as of Bull Bear Price Shares Market Annl. Per 2007E 2008E Tang. Economic 2007E 2008E 2006 2007E 2008E ROE ROTE ROEECompany Ana Ticker Rating Target 10/30/2007 Price Price Target High Low (Mil.) Cap. Share Yield YTD LTM EPS1,2 EPS1,2 BVPS1,3 BVPS1,3 Equity PS 4 P/E P/E EPS g EPS g EPS g P/B P/TB P/EE4

Large Cap. Banks:Bank of America BAC EW $44 $47.99 $57 $31 -8% 55.08$ 46.45$ 4,437 212,932$ $2.56 5.3% -11% -11% $4.29 $4.83 30.45$ 13.08$ 45.43$ 11.2x 9.9x 13% -8% 13% 1.58x 3.67x 1.06x 11% 24% 8%BB&T BBT EW $39 $36.35 $52 $32 7% 44.74 35.19 549 19,968 1.84 5.1% -18% -16% 3.26 3.46 22.58 12.34 34.09 11.2x 10.5x 3% 4% 6% 1.61x 2.95x 1.07x 14% 26% 10%Citigroup, Inc. C UW $36 $42.11 $66 $28 -15% 57.00 40.44 4,981 209,754 2.16 5.1% -25% -16% 3.50 4.14 25.54 12.77 46.52 12.0x 10.2x 12% -17% 18% 1.65x 3.30x 0.91x 6% 35% 4%Fifth Third FITB UW $25 $30.66 $47 $21 -18% 43.32 28.58 533 16,330 1.68 5.5% -26% -23% 2.73 2.73 17.53 13.15 36.77 11.2x 11.2x -15% 16% 0% 1.75x 2.33x 0.83x 16% 22% 9%J.P. Morgan JPM OW $50 $46.56 $66 $30 7% 53.25 42.16 3,359 156,386 1.52 3.3% -5% -2% 4.45 4.71 35.72 20.32 48.29 10.5x 9.9x 34% 18% 6% 1.30x 2.29x 0.96x 11% 20% 9%KeyCorp KEY UW $25 $28.34 $41 $16 -12% 39.90 27.76 389 11,016 1.46 5.2% -26% -24% 2.69 2.68 20.12 16.76 32.41 10.5x 10.6x 9% -10% 0% 1.41x 1.69x 0.87x 11% 13% 7%National City NCC UW $16 $24.43 $32 $13 -35% 38.94 22.11 633 15,472 1.64 6.7% -34% -34% 1.69 1.92 22.06 12.58 42.15 14.4x 12.7x -4% -43% 14% 1.11x 1.94x 0.58x 3% 8% 2%PNC PNC OW $76 $71.52 $91 $47 6% 76.41 64.00 333 23,816 2.52 3.5% -4% 4% 5.17 6.00 43.66 16.83 55.78 13.8x 11.9x 11% 2% 16% 1.64x 4.25x 1.28x 12% 33% 11%SunTrust STI EW $68 $72.80 $89 $44 -7% 94.18 69.39 348 25,340 2.92 4.0% -14% -8% 5.56 5.84 50.01 26.34 78.98 13.1x 12.5x 4% -4% 5% 1.46x 2.76x 0.92x 9% 17% 7%U.S. Bancorp USB EW $31 $32.70 $41 $24 -5% 36.85 29.09 1,725 56,408 1.60 4.9% -10% -4% 2.58 2.67 12.04 5.80 31.89 12.7x 12.2x 8% -1% 3% 2.72x 5.63x 1.03x 22% 50% 9%Wachovia WB EW $42 $45.97 $67 $32 -9% 58.80 44.22 1,901 87,389 2.56 5.6% -20% -17% 4.37 4.80 36.93 15.77 56.56 10.5x 9.6x 13% -7% 10% 1.24x 2.91x 0.81x 10% 26% 7%Wells Fargo WFC EW $30 $34.00 $44 $24 -12% 37.99 32.66 3,325 113,058 1.24 3.6% -5% -6% 2.65 $2.75 14.19 10.46 22.10 12.8x 12.4x 11% 6% 4% 2.40x 3.25x 1.54x 19% 26% 12%

Median -8% 958,531 5.1% -14% -13% 11.2x 10.6x 9% -1% 6% 1.58x 2.94x 0.96x 11% 26% 9%

Northern Trust NTRS OW $80 $74.20 $98 $59 8% 75.00 56.00 220 16,320 1.00 1.3% 21% 26% 3.58 3.97 18.03 15.72 37.00 20.7x 18.7x 13% 18% 11% 4.11x 4.72x 2.01x 19% 21% 19%Bank of New York BK OW $52 $47.98 $60 $37 8% 48.69 35.51 1,128 54,107 0.96 2.0% 13% 32% 3.58 3.97 25.11 5.32 12.66 13.4x 12.1x 12% 59% 11% 1.91x 9.02x 3.79x 10% 45% 10%State Street STT OW $85 $78.60 $104 $49 8% 79.25 59.13 373 29,333 0.88 1.1% 16% 24% 4.26 4.84 30.14 17.82 55.68 18.5x 16.2x 20% 25% 14% 2.61x 4.41x 1.41x 16% 16% 16%

Median 8% 99,760 1.3% 16% 26% 18.5x 16.2x 13% 25% 11% 2.61x 4.72x 2.01x 16% 21% 16%

Current to

Sources: (1) Morgan Stanley Research. (2) First Call consensus estimates as of Oct. 30, 2007, (3) FactSet as of Oct. 30, 2007 (4) Economic equity = stated book value + phantom goodwill associated with pooling transactions.

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Exhibit 35 Summary of Changes to Our 2008 EPS Estimates

Prior EPS Estimate

Impact of Higher Mtg NCOs

Impact of Higher Other Consumer NCOs

Impact of Higher Other NCOs

Impact of Reserve Build Impact of NII Other

Current EPS Estimate

% Change in EPS

BAC $5.23 ($0.06) ($0.11) ($0.04) ($0.02) ($0.05) ($0.12) $4.83 -8%C $4.70 ($0.02) ($0.26) ($0.02) ($0.18) $0.10 ($0.18) $4.14 -12%JPM $4.95 ($0.04) ($0.06) ($0.01) ($0.02) $0.02 ($0.12) $4.71 -5%WB $5.28 $0.00 ($0.14) ($0.11) ($0.01) $0.04 ($0.26) $4.80 -9%WFC $3.06 $0.00 ($0.20) ($0.04) ($0.01) ($0.10) $0.05 $2.75 -10%USB $2.70 $0.00 ($0.03) ($0.03) $0.00 $0.00 $0.01 $2.67 -1%STI $6.39 ($0.04) ($0.18) ($0.15) ($0.04) $0.07 ($0.21) $5.84 -9%NCC $2.40 ($0.07) ($0.20) ($0.08) ($0.06) ($0.22) $0.16 $1.92 -20%PNC $6.09 $0.01 ($0.02) ($0.08) ($0.00) $0.01 ($0.01) $6.00 -1%FITB $2.83 ($0.01) ($0.01) ($0.01) ($0.07) $0.10 ($0.11) $2.73 -4%BBT $3.60 $0.01 ($0.01) ($0.04) $0.01 ($0.09) ($0.02) $3.46 -4%KEY $2.89 $0.00 ($0.04) ($0.06) $0.02 ($0.09) ($0.04) $2.68 -7%BK $3.05 NM NM NM ($0.00) $0.01 ($0.03) $3.03 -1%NTRS $3.94 NM NM NM ($0.03) $0.04 $0.02 $3.97 1%STT $4.92 NM NM NM ($0.00) ($0.02) ($0.06) $4.84 -2%

2008 EPS

Source: Company data, Morgan Stanley Research

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: Bank of New York (BK, Overweight, PT $52)

Risk-Reward View

30

35

40

45

50

55

60

$65

30

35

40

45

50

55

60

$65

$60 (+25%)

$52 (+8%)

$37 (-23%)

$47.98

Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08

Price Target Historical Stock Performance Current Stock Price

Source: Morgan Stanley Research, Factset

Price Target $52 PE 17.2x

Our base and bull case valuations are based on residual income. Bear valuation based on trough P/E levels.

Bull Case $60

P/E 17.9x Stronger Economy. AUM / AUC growth more robust than our base case. Valuation based on bull case residual income.

Base Case $52

P/E 17.2x Consumer credit recession. Base Case intrinsic valuation based on residual income. Processors are better positioned than Large Cap banks due to limited credit exposure. We expect higher earnings growth for the Processors compared with Large Cap banks based on higher revenue growth from increased international business and cross-sell of value-add services.

Bear Case $37

P/E 14.4x Full blown recession. Spillover of consumer recession into corporate drives lower AUM / AUC volumes. Valuation derived from trough PE in 2000.

Investment Thesis

• Our base case12-month intrinsic value for BK implies 8% upside to our price target. We expect BK to outperform the large cap banks group based on limited credit exposure and strong AUC/AUM growth driving fees.

• BK is our top pick, with higher probability for upward earnings revisions as merger related expense saves and revenue synergies come through. Our base case assumes $700 million in cost saves from the merger and $325 million revenue synergies (mid-point of guidance).

• Our base case assumes a combined pre-tax margin of 36.7% by 2011. Pre-tax margin in the bull case is 37.5% and 34.8% in the bear case.

Key Value Drivers

• MEL Pre-Tax Margin Improvement: In both Asset Management, through more efficient distribution and branding as well as increased growth in higher margin products, and Asset Servicing, through improved revenue growth from more effective cross-sell of value-add services, more streamlined back office costs and increased European business.

• Cost Saves and Revenue Synergies Associated with the Merger: In addition to the announced cost saves, management announced expected revenue synergies of $250M - $400M on the 3Q07 earnings call.

Potential Catalysts

• Rising 2008 EPS as BK identifies incremental revenue synergies, executes its efficiency program and as the Street creates segment model.

• Results of Spring 2008 Business Line Goals

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: J.P. Morgan Chase (JPM, Overweight, PT $50)

Risk-Reward View

25

30

35

40

45

50

55

60

65

$70

25

30

35

40

45

50

55

60

65

$70$66 (+42%)

$50 (+7%)

$30 (-36%)

$46.56

Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08

Price Target Historical Stock Performance Current Stock Price

Source: Morgan Stanley Research, Factset

Price Target $50 PE 10.6x

Our price target assumes a higher probability of a bear scenario than a bull scenario and deteriorating ROAs over the next 12-24 months.

Bull Case $66

P/E 12.6x Little Subprime Contagion. Credit deteriorates more modestly than our base case. This scenario does not seem likely to us in the next 12 months.Valuation based on bull case residual income which looks through to normalizing margins in the outer years.

Base Case $58

P/E 12.4x Consumer credit recession. Base Case intrinsic valuation based on residual income, which assumes a return to a more normalized ROA and ROE. However, we anticipate that the next 3-4 quarters will prove difficult as the consumer credit recession takes hold with EPS more likely to deterioratethan improve.

Bear Case $30

P/E 8.3x Full blown recession. Unemployment to 6%, Fed cuts funds rate to 3.25%. Market does not look through to normalizing margins, nor does it discount strategic options. Valuation derived from 12 month average of 1990 trough P/E.

Investment Thesis

• Our base case12-month intrinsic value for JPM implies 7% upside to our price target.

• We remain Overweight JPM given its stronger capital levels relative to peers and lower CDO exposure.

• Subprime as % of earning assets among lowest in group and below BAC and Citi. Opportunistically increasing subprime home equity beginning in 3Q07 to benefit from attractive risk-adjusted margins.

Key Value Drivers • Investment Bank -Tighter credit spreads in

lower leverage, higher quality assets should drive capital markets healing and better trading and net interest income.

• Card Services – We expect increasing NIM to partially offset increased losses. Non-comp expenses decline as JPM reduces their marketing spend.

• Retail –Improving efficiency ratio post Bank of New York conversion completion in 1Q07.

Potential Catalysts

• Tightening spreads in fixed income mkts a positive

• -Expect some additional CDO write-downs in 4Q07 & 1Q08, although small given its #14 ranking

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: Northern Trust Corp. (NTRS, Overweight, PT $80)

Risk-Reward View

40

50

60

70

80

90

100

$110

40

50

60

70

80

90

100

$110

$98 (+32%)

$80 (+8%)

$59 (-20%)

$74.20

Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08

Price Target Historical Stock Performance Current Stock Price Source: Morgan Stanley Research, Factset

Price Target $80 Our base and bull valuations are based on residual income. Bear valuation based on trough P/E levels.

Bull Case $98

P/E 22.5x Stronger Economy. AUM / AUC growth more robust than our base case. Valuation based on bull case residual income.

Base Case $80

P/E 20.1x Consumer credit recession. Base Case intrinsic valuation based on residual income. Processors are better positioned than Large Cap banks due to limited credit exposure. We expect higher earnings growth for the Processors compared with Large Cap banks based on higher revenue growth from increased international business and cross-sell of value-add services.

Bear Case $59

P/E 16.9x Full blown recession. Spillover of consumer recession into corporate drives lower AUM / AUC volumes. Valuation derived from trough PE multiple in early 2003.

Investment Thesis

• Our base case12-month intrinsic value for NTRS implies 8% upside to our price target. We expect NTRS to outperform the large cap banks group based on limited credit exposure and strong AUC/AUM growth driving fees.

• Our bull case assumes a stronger economy, and stronger AUC / AUM volumes. Operating leverage increases slightly over the base case, with an expense ratio of 59% in 2011. Higher share repurchases lead to a TE/TA ratio of 5.7% vs.6.0% in the base case.

• Our bear case incorporates a spillover from consumer recession into a full blown recession. Our bear case expense ratio worsens to 62% in 2011. Share repurchases in the 2011 bear case remain at the base case level and TE/TA increases to 6.4%.

Key Value Drivers

• AUC/AUM Growth – We anticipate strong AUC / AUM growth to continue. We forecast 9.8% y/y growth for AUC and 10.0% y/y growth for AUM.

• Improving Operating Leverage – Continued

strong expense management in 3Q07 leads us to boost our estimates for operating leverage. We expect positive operating leverage of 82bps in 2008.

Potential Catalysts

• New leadership in the Asset Management sector could provide an opportunity for improvement and increase AUM growth.

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: PNC Financial (PNC, Overweight, PT $76)

Risk-Reward View

40

50

60

70

80

90

$100

40

50

60

70

80

90

$100

$91 (+27%)

$76 (+6%)

$47 (-34%)

$71.52

Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08

Price Target Historical Stock Performance Current Stock Price

Source: Morgan Stanley Research, Factset

Price Target $76

P/E 12.7x

Our price target assumes a higher probability of a bear scenario than a bull scenario and deteriorating ROAs over the next 12-24 months.

Bull Case $91

P/E 15.0x Little Subprime Contagion. Credit deteriorates more modestly than our base case. This scenario does not seem likely to us in the next 12 months. Valuation based on bull case residual income which looks through to normalizing margins in the outer years.

Base Case $81

P/E 13.5x Consumer credit recession. Base Case intrinsic valuation based on residual income, which assumes a return to a more normalized ROA and ROE. However, we anticipate that the next 3-4 quarters will prove difficult as the consumer credit recession takes hold with EPS more likely to deteriorate than improve.

Bear Case $47

P/E 8.0x Full blown recession. Unemployment to 6%, Fed cuts funds rate to 3.25%. Market does not look through to normalizing margins, nor does it discount strategic options. Valuation derived from 12 month average of 1990 trough P/E.

Investment Thesis

• We are overweight PNC, as the bank’s diversified business lines (fee income was 56% of total revenues in 3Q07) limit its exposure to the credit contagion. Our base case price target of $76 implies a 10% total return to shareholders.

Key Value Drivers

• Fee income – We look for fee income, to be the major driver of positive operating leverage in 2008. We view the bank’s diversified revenue stream to be a positive given the current environment, as PNC’s earnings are less susceptible to the impact of credit deterioration than peers. We have fee income growth of 12% in our base case, as we expect strong results to continue in its asset management and fund servicing businesses, as well as its stake in BLK.

• Expense Management - We expect the

expense saves associated with the MRBK acquisition to partially reduce the downside risks of lower margins and higher provisions. Our base case assumes a pre-tax cost save run rate of $135mil in 2008 and beyond.

Potential Catalysts

• Realization of MRBK cost saves in 2008

• Higher credit losses than anticipated in PNC’s home equity portfolio, which is 100% self originated, 39% first lien, and roughly 95% to deposit customers.

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: State Street Corporation (STT, Overweight, PT $85)

Risk-Reward View

40

50

60

70

80

90

100

$110

40

50

60

70

80

90

100

$110$104 (+32%)

$85 (+8%)

$49 (-38%)

$78.60

Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08

Price Target Historical Stock Performance Current Stock Price

Source: Morgan Stanley Research, Factset

Price Target $85 Our base and bull valuation are based on residual income. Bear valuation based on trough P/E levels.

Bull Case $104

P/E 18.8x Stronger Economy. AUM / AUC growth more robust than our base case. Valuation based on bull case residual income.

Base Case $85

P/E 17.5x Consumer credit recession. Base Case intrinsic valuation based on residual income. Processors are better positioned than Large Cap banks due to limited credit exposure. We expect higher earnings growth for the Processors compared with Large Cap banks based on higher revenue growth from increased international business and cross-sell of value-add services.

Bear Case $49

P/E 12.2x Full blown recession. Spillover of consumer recession into corporate drives lower AUM / AUC volumes. Valuation derived from trough PE multiple in early 2003.

Investment Thesis

• Our base case12-month intrinsic value for STT implies 8% upside to our price target. We expect STT to outperform the large cap banks group based on limited credit exposure and strong AUC/AUM growth driving fees.

• Of the processors, we prefer BK and NTRS, given STT’s higher exposure to rating agency CDO and subprime mortgage bond downgrades.

• Our bull case assumes a stronger economy, and stronger AUC / AUM volumes. We assume a slight improvement in operating leverage over the base case, with an expense ratio of 63.0% in 2011. 2007 – 2012 Earning Asset CAGR of 8.4% in the bull case, vs. 6.4% in the base case.

• Our bear case incorporates a spillover from consumer recession into a full blown recession. Our bear case expense ratio increases to 65.8%. 2007 – 2012 Earning Asset CAGR of 4.4% in the bear case is 2% below the base case.

Key Value Drivers

• AUM and AUC Growth – We anticipate strong AUM and AUC growth to continue. We forecast 7% y/y growth for AUC and 10% for AUM in 2008.

• Increasing NIM – We expect increased NIM to

be driven by higher non-US volumes and rates, runoff from lower yielding assets in the securities portfolio, the impact of a weaker US dollar and the impact of Fed rate cuts.

Potential Catalysts

• Market valuations (up a plus). • Cessation of Euro/Pound rate hikes a negative

on relative funding benefit. • Progression of IFIN cost saves.

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: Bank of America (BAC, Equal-weight, PT $44)

Risk-Reward View

25

30

35

40

45

50

55

$60

25

30

35

40

45

50

55

$60$57 (+19%)

$44 (-8%)

$31 (-35%)

$47.99

Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08

Price Target Historical Stock Performance Current Stock Price

Source: Morgan Stanley Research, Factset

Price Target $44 PE 9.1x

Our price target assumes a higher probability of a bear scenario than a bull scenario and deteriorating ROAs over the next 12-24 months.

Bull Case $57

P/E 12.1x Little Subprime Contagion. Credit deteriorates more modestly than our base case. This scenario does not seem likely to us in the next 12 months.Valuation based on bull case residual income which looks through to normalizing margins in the outer years.

Base Case $56

P/E 11.7x Consumer credit recession. Base Case intrinsic valuation based on residual income, which assumes a return to a more normalized ROA and ROE. However, we anticipate that the next 3-4 quarters will prove difficult as the consumer credit recession takes hold with EPS more likely to deterioratethan improve.

Bear Case $31

P/E 7.0x Full blown recession. Unemployment to 6%, Fed cuts funds rate to 3.25%. Market does not look through to normalizing margins, nor does it discount strategic options. Valuation derived from 12 month average of 1990 trough P/E.

Investment Thesis

• Our base case12-month intrinsic value for BAC implies 8% downside.

• We are moving to Equal-weight on BAC. BAC has strong capital levels and lower CDO exposure relative to Citi. Subprime as % of earning assets falls in middle-third of coverage group, and above JPM.

• Recent shake-up in the investment bank suggests moving to a lower margin, client-only model, with a significant pullback in capital allocation to the IB.

Key Value Drivers

• GCSB – Target of 6% - 9% earnings growth outlined at BAC Investor Conference, driven by efficiency (lower origination costs), scale and brand.

• GCIB – Treasury Services driving approx 1/3 of the $10 billion in expected revenue increase in GCIB over next 5 years. $750M - $1B to be invested in Treasury Services from 2006 – 2011 to build out global electronic distribution platform. - Consolidation of Commercial Banking and Treasury Services sales forces should drive better efficiency. Expect Commercial Bank to be the distribution arm and Treasury to be the product arm.

Potential Catalysts

• Successful integration of the US Trust and LaSalle acquisitions.

• Expect further CDO write-downs in 4Q07 and 1Q08.

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: BB&T Corporation (BBT, Equal-Weight, PT $39)

Risk-Reward View

25

30

35

40

45

50

55

$60

25

30

35

40

45

50

55

$60

$52 (+43%)

$39 (+7%)

$32 (-12%)

$36.35

Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08

Price Target Historical Stock Performance Current Stock Price

Source: Morgan Stanley Research, Factset

Price Target $39

P/E 11.3x

Our price target assumes a higher probability of a bear scenario than a bull scenario and deteriorating ROAs over the next 12-24 months.

Bull Case $52

P/E 14.4x Little Subprime Contagion. Credit deteriorates more modestly than our base case. This scenario does not seem likely to us in the next 12 months. Valuation based on bull case residual income which looks through to normalizing margins in the outer years.

Base Case $45

P/E 13.0x Consumer credit recession. Base Case intrinsic valuation based on residual income, which assumes a return to a more normalized ROA and ROE. However, we anticipate that the next 3-4 quarters will prove difficult as the consumer credit recession takes hold with EPS more likely to deteriorate than improve.

Bear Case $32

P/E 10.4x Full blown recession. Unemployment to 6%, Fed cuts funds rate to 3.25%. Market does not look through to normalizing margins, nor does it discount strategic options. Valuation derived from 12 month average of 1990 trough P/E.

Investment Thesis

• We are equal-weight BBT. Despite our expectations for increasing credit losses in its residential construction loan portfolio, we believe the bank will benefit from a strong capital base, an above average benefit from declining interest rates, and little exposure to other high-risk assets (minimal subprime loans, no leveraged loans). Our price target of $39 implies an 12% total return. Our bull case assumes a valuation of $52, while our bear case assumes a valuation of $32.

Key Value Drivers

• Net Interest Margin – We expect Fed rate cuts and normalization of the yield curve to result in the stabilization of BBT’s NIM. Our base case assumes that NIM is flat y/y at 3.51% in 2008. Our bull case assumes faster economic growth drives the Fed to raise rates to rein in inflation. Our bear case assumes slower growth in the economy, with additional Fed rate cuts resulting in an improved NIM in 2008.

• Credit Quality – We forecast BBT’s NCO ratio

to come in at 0.55% in our base case scenario. We assume a deterioration in credit quality across all asset classes for the bank, though at a lower rate than peers due to its limited exposure to subprime asset classes. The primarily risk in BBT’s portfolio is its residential construction portfolio, estimated to be roughly 5% of total earning assets.

Potential Catalysts

• Continued Fed rate cuts, driving up NIM • Better credit performance than peers • Share buybacks

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: SunTrust (STI, Equal-weight, PT $68)

Risk-Reward View

40

50

60

70

80

90

$100

40

50

60

70

80

90

$100

$86 (+18%)

$68 (-7%)

$44 (-40%)

$72.80

Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08

Price Target Historical Stock Performance Current Stock Price

Source: Morgan Stanley Research, Factset

Price Target $68

P/E 11.6x

Our price target assumes a higher probability of a bear scenario than a bull scenario and deteriorating ROAs over the next 12-24 months.

Bull Case $86

P/E 14.4x Little Subprime Contagion. Credit deteriorates more modestly than our base case. This scenario does not seem likely to us in the next 12 months. Valuation based on bull case residual income which looks through to normalizing margins in the outer years.

Base Case $76

P/E 13.1x Consumer credit recession. Base Case intrinsic valuation based on residual income, which assumes a return to a more normalized ROA and ROE. However, we anticipate that the next 3-4 quarters will prove difficult as the consumer credit recession takes hold with EPS more likely to deteriorate than improve.

Bear Case $44

P/E 7.9x Full blown recession. Unemployment to 6%, Fed cuts funds rate to 3.25%. Market does not look through to normalizing margins, nor does it discount strategic options. Valuation derived from 12 month average of 1990 trough P/E.

Investment Thesis

• We are upgrading STI from Underweight to Equal-weight. Despite our expectations for accelerated credit deterioration in STI’s loan portfolio, we look for the bank to reduce its KO holdings. The proceeds from such a sale can potentially be redeployed to increase NII growth, or absorb credit losses. This catalyst is expected to come before December year-end, and, as a result, we are stepping to the sidelines on the name.

• Our price target of $68 assumes a total return of -3%; our bull case assumes a valuation of $86, while our bear case assumes $44.

Key Value Drivers

• Credit Quality – We expect the credit quality of STI’s loan portfolio to be the key driver of stock performance, as we believe investors are closely monitoring signs of deterioration in the bank’s sizable residential construction and Alt-A portfolios. Our base case assumes that the NCO ratio deteriorates from 0.32% in 2007 to 0.60% in 2008

• Expense Management - The other key value driver for STI is its execution of the announced E2 expense management program. Expected to generate a run rate of $530 mil in cost savings by 2009, which is our base case estimate.

Potential Catalysts

• Sale of the KO position • Home Price Index data (Southeast region)

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: U.S. Bancorp (USB, Equal-weight, PT $31)

Risk-Reward View: Skewed to the Upside with Median Potential Return

20

25

30

35

40

$45

20

25

30

35

40

$45$44 (+35%)

$31 (-5%)

$24 (-27%)

$32.70

Oct 05 Feb 06 Jun 06 Oct 06 Feb 07 Jun 07 Oct 07 Feb 08 Jun 08 Oct 08Oct 05 Feb 06 Jun 06 Oct 06 Feb 07 Jun 07 Oct 07 Feb 08 Jun 08 Oct 08

Price Target Historical Stock Performance Current Stock Price

Source: Morgan Stanley Research, Factset

Price Target $31

P/E 11.6x

Our price target assumes a higher probability of a bear scenario than a bull scenario and deteriorating ROAs over the next 12-24 months.

Bull Case $44

P/E 15.4x Little Subprime Contagion. Credit deteriorates more modestly than our base case. This scenario does not seem likely to us in the next 12 months. Valuation based on bull case residual income which looks through to normalizing margins in the outer years.

Base Case $39

P/E 14.8x Consumer credit recession. Base Case intrinsic valuation based on residual income, which assumes a return to a more normalized ROA and ROE. However, we anticipate that the next 3-4 quarters will prove difficult as the consumer credit recession takes hold with EPS more likely to deteriorate than improve.

Bear Case $24

P/E 9.3x Full blown recession. Unemployment to 6%, Fed cuts funds rate to 3.25%. Market does not look through to normalizing margins, nor does it discount strategic options. Valuation derived from 12 month average of 1990 trough P/E.

Investment Thesis

• We are equal-weight USB. We expect the bank’s top-line growth to only slowly improve, as tangible benefits from its investments take time to materialize. Payments and wealth management fee income growth should help alleviate some of the credit pressures in 2008.

• Our price target for USB implies a 0% total return;

driven by USB’s 4.9% dividend yield, which is among the highest in our large cap bank coverage universe.

Key Value Drivers

• Balance Sheet Growth – We expect sluggish balance sheet growth to continue into 2008, absent acquisitions. We assume average loan growth of 4% in our base case, with core deposit growth coming in at 1%. Though USB is in the process of implementing initiatives to accelerate its top line growth (such as the Powerbank program), 2008 is expected to be a “transitional year”, as it will take some time for tangible results to materialize.

• Fee Income Growth – We look for fee income growth to partially offset the deterioration in USB’s loan portfolio. The two largest components as of 3Q07 were payments revenue, which contributed 41% of total fee income in the quarter, and Trust and Wealth management, which contributed 18%. Our base case assumes 20% and 9% y/y growth in 2008 for payments and wealth management, respectively.

Potential Catalysts

• Performance of USB’s investments will be under scrutiny throughout 2008, as investors look for tangible benefits to offset the higher expected expense ratio

• Acquisitions can increase earnings estimates from 2008 on, particularly payments or corporate trust acquisitions. This is Richard Davis’ first acquisitions as CEO, we would expect small deals with little dilution.

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M O R G A N S T A N L E Y R E S E A R C H

October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: Wachovia Corp. (WB, Equal-weight, PT $42)

Risk-Reward View

30

40

50

60

70

30

40

50

60

70$67 (+46%)

$42 (-9%)

$32 (-30%)

$45.97

Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08

Price Target Historical Stock Performance Current Stock Price

Source: Morgan Stanley Research, Factset

Price Target $42

P/E 8.8x

Our price target assumes a higher probability of a bear scenario than a bull scenario and deteriorating ROAs over the next 12-24 months.

Bull Case $67

P/E 13.3x Little Subprime Contagion. Credit deteriorates more modestly than our base case. This scenario does not seem likely to us in the next 12 months. Valuation based on bull case residual income which looks through to normalizing margins in the outer years.

Base Case $59

P/E 12.4x Consumer credit recession. Base Case intrinsic valuation based on residual income, which assumes a return to a more normalized ROA and ROE. However, we anticipate that the next 3-4 quarters will prove difficult as the consumer credit recession takes hold with EPS more likely to deteriorate than improve.

Bear Case $32

P/E 7.8x Full blown recession. Unemployment to 6%, Fed cuts funds rate to 3.25%. Market does not look through to normalizing margins, nor does it discount strategic options. Valuation derived from 12 month average of 1990 trough P/E.

Investment Thesis

• We are equal-weight WB, as we expect additional mark to market losses in its CDO warehouse over the next two quarters, and accelerating credit deterioration in its GDW portfolio throughout 2008. Our price target of $42 implies a -4% total return, in-line with the large cap bank median of -4% (excluding processor banks).

Key Value Drivers

• Credit Quality – We expect NCO deterioration in our base case to increase from 18bps in 2007 to 45bps in 2008. We forecast a 30bps NCO ratio specifically for the GDW loan portfolio, as the credit crunch and softening CA real estate market take its toll (GDW loans estimated at roughly 27% of total WB loans).

• Fee Income Growth – We look for total fee

income growth of 25% y/y in 2008, with the high growth rate driven in part by the low base seen in 2007 due to the mark to market charges. The growth rate also includes the impact of the AGE acquisition, with the level of incremental revenue depending on the regretted broker attrition rate, which we assume to be 8% in the base case.

Potential Catalysts

• Rate resets in the GDW and legacy WB portfolio

• Quarterly HPI data – home price depreciation in the CA markets may negatively impact the performance of the GDW loan portfolio

• AGE integration/ regretted broker exits • Efficiency improvements

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October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: Wells Fargo & Co. (WFC, Equal-weight, PT $30)

Risk-Reward View

15

20

25

30

35

40

45

$50

15

20

25

30

35

40

45

$50

$43 (+26%)

$30 (-12%)

$24 (-29%)

$34.00

Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08

Price Target Historical Stock Performance Current Stock Price

Source: Morgan Stanley Research, Factset

Price Target $30

P/E 10.9x

Our price targets assume a higher probability of a bear scenario than a bull scenario and deteriorating ROAs over the next 12-24 months.

Bull Case $43

P/E 14.9x Little Subprime Contagion. Credit deteriorates more modestly than our base case. This scenario does not seem likely to us in the next 12 months. Valuation based on bull case residual income which looks through to normalizing margins in the outer years.

Base Case $37

P/E 13.3x Consumer credit recession. Base Case intrinsic valuation based on residual income, which assumes a return to a more normalized ROA and ROE. However, we anticipate that the next 3-4 quarters will prove difficult as the consumer credit recession takes hold with EPS more likely to deteriorate than improve.

Bear Case $24

P/E 9.4x Full blown recession. Unemployment to 6%, Fed cuts funds rate to 3.25%. Market does not look through to normalizing margins, nor does it discount strategic options. Valuation derived from 12 month average of 1990 trough P/E.

Investment Thesis

• We are downgrading WFC from Overweight to Equal-weight, as we expect consumer credit will deteriorate more dramatically. We look for WFC’s subprime, home equity, and auto portfolios to experience accelerating losses through 2008. Expect WFC to leverage its excess capital base to partially offset the consumer credit recession and housing downturn.

• We now expect a 12-month total return of -8% for WFC, below the LC bank peer group of -4%.

Key Value Drivers

• Credit Quality – The major driver of WFC’s stock performance, in our opinion, will be the credit performance of its loan book. The expected decline in home prices is likely to drive up first and second lien losses. We look for weakness in the consumer to continue to spill over into the card and auto lending portfolios, and to a lesser extent, corporate lending. Our base case assumes that the NCO ratio deteriorates from 0.97% in 2007 to 1.34% in 2008.

• Earning Asset Growth –The bank’s ability to generate top line growth will also be a key driver for the stock, given the competitive pricing and declining credit environment. Our base case assumes total earning asset growth of 11% y/y for 2008. We believe loan growth will decelerate as WFC tightens standards, and given the bank’s exit from certain types of higher risk loans (i.e., wholesale and correspondent subprime mortgages).

Potential Catalysts

• ARM rate resets from 4Q07 – 3Q08 Home Price Index data

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October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: Citigroup, Inc. (C, Underweight, PT $36)

Risk-Reward View

20

25

30

35

40

45

50

55

60

65

$70

20

25

30

35

40

45

50

55

60

65

$70

$65 (+54%)

$42.11 $36 (-15%)

$28 (-34%)

Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08

Historical Stock Performance Current Stock Price Price Target Source: Morgan Stanley Research, Factset

Price Target $36 PE 8.7x

Our price target assumes a higher probability of a bear scenario than a bull scenario and deteriorating ROAs over the next 12-24 months.

Bull Case $65

P/E 14.0x Little Subprime Contagion. Credit deteriorates more modestly than our base case. This scenario does not seem likely to us in the next 12 months.Valuation based on bull case residual income which looks through to normalizing margins in the outer years.

Base Case $56

P/E 13.4x Consumer credit recession. Base Case intrinsic valuation based on residual income, which assumes a return to a more normalized ROA and ROE. However, we anticipate that the next 3-4 quarters will prove difficult as the consumer credit recession takes hold with EPS more likely to deterioratethan improve.

Bear Case $28

P/E 8.3x Full blown recession. Unemployment to 6%, Fed cuts funds rate to 3.25%. Market does not look through to normalizing margins, nor does it discount strategic options. Valuation derived from 12 month average of 1990 trough P/E.

Investment Thesis

• Our base case12-month intrinsic value for Citi implies 15% downside to our price target.

• Moving to Underweight as our base case assumes a consumer recession in 2008 and Citi’s subprime exposure is one of the highest in the coverage group.

• Additionally, Citi is 2nd on the league tables in CDO issuance at $25 billion, and we expect further write-downs in 4Q07 & 1Q08.

• Finally, Citi has thinner capital ratios than peers JPM and BAC.

• Bull case assumes limited spillover from subprime into other asset classes, and business units hitting on all cylinders, particularly in the international (faster growth) segments. Strong asset growth with 7.2% CAGR from 2007 - 2011.

• Bear case assumes deteriorating global environment. Asset growth CAGR 1.7% from 2007 - 2011.

Key Value Drivers

• Deteriorating consumer credit and CDO outlook. • Higher international revenue mix.

• Improving efficiencies from firm-wide cost

reduction initiative.

Potential Catalysts

• Consistent positive operating leverage, s/ start 2008 driven by the efficiency program.

• Near term, additional CDO write-downs and consumer deterioration will be a drag on the stock.

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October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: Fifth Third Bancorp (FITB, Underweight, PT $25)

Risk-Reward View

10

15

20

25

30

35

40

45

$50

10

15

20

25

30

35

40

45

$50$48 (+57%)

$25 (-18%)

$21 (-32%)

$30.66

Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08

Price Target Historical Stock Performance Current Stock Price

Source: Morgan Stanley Research, Factset

Price Target $25

P/E 9.2x

Our price target assumes a higher probability of a bear scenario than a bull scenario and deteriorating ROAs over the next 12-24 months.

Bull Case $48

P/E 16.6x Little Subprime Contagion. Credit deteriorates more modestly than our base case. This scenario does not seem likely to us in the next 12 months. Valuation based on bull case residual income which looks through to normalizing margins in the outer years.

Base Case $40

P/E 14.6x Consumer credit recession. Base Case intrinsic valuation based on residual income, which assumes a return to a more normalized ROA and ROE. However, we anticipate that the next 3-4 quarters will prove difficult as the consumer credit recession takes hold with EPS more likely to deteriorate than improve.

Bear Case $21

P/E 9.0x Full blown recession. Unemployment to 6%, Fed cuts funds rate to 3.25%. Market does not look through to normalizing margins, nor does it discount strategic options. Valuation derived from 12 month average of 1990 trough P/E.

Investment Thesis

• We are underweight FITB, given our expectations for higher credit deterioration and slower balance sheet growth in its Midwest footprint. Our price target of $25 implies a -13% total return, with negative absolute returns partially offset by its dividend yield of 5.5%.

Key Value Drivers

• Balance Sheet Growth – Our base case scenario assumes average earning asset growth of 13% y/y in 2008, driven in part by the acquisitions of Crown and FCTR (expected to close in 4Q07 and 1Q08 respectively). We believe the downside risk is greater given the slow growth Midwest market, intense pricing competition, and slowing mortgage growth.

• Data Processing Fees – We expect data

processing fee income to post a base case y/y growth of 13% in 2008. FITB has been able to grow the business at an average rate of 16% over the last three years, and we do not see significant downside risk in this business going forward.

• Credit Quality – Deterioration in credit was

evident in 3Q07, as the NPL ratio increased 30% q/q to 92bps. We anticipate a greater downside potential for credit losses, given the high level of stress currently experienced by consumers in the Midwest. Our base case scenario assumes that FITB’s NCO ratio deteriorates from 54bps in 2007 to 74bps in 2008.

Potential Catalysts

• Midwest deterioration • Integration of First Charter acquisition

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October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: KeyCorp (KEY, Underweight, PT $25)

Risk Reward View

10

15

20

25

30

35

40

$45

10

15

20

25

30

35

40

$45

$41 (+45%)

$25 (-12%)

$16 (-44%)

$28.34

Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08

Price Target Historical Stock Performance Current Stock Price Source: Morgan Stanley Research, Factset

Price Target $25 Our base and bull valuations are based on residual income. Bear valuation

based on trough P/E levels.

Bull Case $41

P/E 13.7x Little Subprime Contagion. Credit deteriorates more modestly than our base case. This scenario does not seem likely to us in the next 12 months.Valuation based on bull case residual income which looks through to normalizing margins in the outer years.

Base Case $25

P/E 9.3x Consumer credit recession. Base Case intrinsic valuation based on residual income, which assumes a return to a more normalized ROA and ROE. However, we anticipate that the next 3-4 quarters will prove difficult as the consumer credit recession takes hold with EPS more likely to deterioratethan improve.

Bear Case $16

P/E 7.4x Full blown recession. Unemployment to 6%, Fed cuts funds rate to 3.25%. Market does not look through to normalizing margins, nor does it discount strategic options. Valuation derived from 12 month average of 1990 trough P/E.

Investment Thesis

• Our base case12-month intrinsic value for KEY implies 12% downside to our price target.

• Our bull case assumes benign credit continues. Credit costs stabilize at current levels, net interest margin expands, and the market values KEY at a previous cycle peak trailing twelve month P/E multiple.

• Our bear case incorporates a deteriorating economy. Both commercial and consumer credit costs reach previous cycle peak levels, driving both earnings and P/E multiple contraction.

Key Value Drivers

• Deposit competition: drives extent of margin benefit achievable following Fed rate cuts;

• Slope of yield curve: helps drive net interest margin – higher and steeper preferred to lower and steeper, all else equal;

• Demand for residential property: drives credit quality of residential construction borrowers as well as loss exposure to 1st and 2nd lien mortgage.

Potential Catalysts

• Downward revisions in Street EPS forecasts;

• Deteriorating credit quality in residential construction and rising mortgage delinquencies.

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October 31, 2007 Banking - Large Cap Banks

Risk-Reward Snapshot: National City Corp. (NCC, Underweight, PT $16)

Risk-Reward View

10

15

20

25

30

35

$40

10

15

20

25

30

35

$40

$32 (+31%)

$16 (-35%)$13 (-47%)

$24.43

Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08Oct 05 Feb 06 Jun 06 Sep 06 Jan 07 May 07 Aug 07 Dec 07 Apr 08 Jul 08

Price Target Historical Stock Performance Current Stock Price

Source: Morgan Stanley Research, Factset

Price Target $16

P/E 8.3x

Our price target assumes a higher probability of a bear scenario than a bull scenario and deteriorating ROAs over the next 12-24 months.

Bull Case $32

P/E 16.5x Little Subprime Contagion. Credit deteriorates more modestly than our base case. This scenario does not seem likely to us in the next 12 months. Valuation based on bull case residual income which looks through to normalizing margins in the outer years.

Base Case $26

P/E 13.6x Consumer credit recession. Base Case intrinsic valuation based on residual income, which assumes a return to a more normalized ROA and ROE. However, we anticipate that the next 3-4 quarters will prove difficult as the consumer credit recession takes hold with EPS more likely to deteriorate than improve.

Bear Case $13

P/E 7.8x Full blown recession. Unemployment to 6%, Fed cuts funds rate to 3.25%. Market does not look through to normalizing margins, nor does it discount strategic options. Valuation derived from 12 month average of 1990 trough P/E.

Investment Thesis

• We are underweight NCC, as we expect credit deterioration to accelerate significantly in its subprime, home equity, and residential construction portfolios. We also expect lower liquidity in the market to reduce NCC’s ability to sell originated assets. We expect cessation of share buybacks, one of the stock’s positives in 1H07. Our price target for NCC implies a -28% total return, below the large cap bank peer group median of -4%.

Key Value Drivers

• Credit Quality - We see a greater potential for NCOs to trend above our forecast, given the credit performance of NCC’s subprime mortgage and home equity portfolios. We forecast the NCO ratio to come in at 0.53% for full year 2007, and 0.91% for 2008.

• NII Growth – We look for NII growth to be

challenged in 2008, driven by 1) its slow growth Midwest footprint, and 2) compressing NIM due to the continued migration of customers to higher cost deposit accounts. We forecast 7% NII growth for 2008 in our base case, with earning assets up 10% y/y and NIM compressing 10bps to 3.42%.

Potential Catalysts

• Subprime resets from 4Q07 - 3Q08 may result in significantly higher NCOs than previously anticipated in NCC’s remaining First Franklin portfolio.

• Quarterly HPI data/ home price depreciation in NCC’s Midwest footprint

Integration of MAFB in 4Q07 and 2008

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October 31, 2007 Banking - Large Cap Banks

Risks to Our Price Targets

Bank of America

For BAC shares specifically, other downside risks to our thesis and target price include lower than expected growth in credit card account acquisitions and higher than expected investment spend in its key businesses of retail banking and credit cards. Upside risks include less card deterioration, stronger share gains in mortgage banking and a higher level of cost saves in the card group than we are currently anticipating.

Bank of New York

Risks to our price target include weaker than expected capital markets, faster growth in non-interest expenses or a sharp, unanticipated spike in interest rates. Upside risks to our target price include stronger than forecast growth in equity market volumes and values and higher operating leverage. Downside risks include lower than anticipated client retention and a reduced win rate in asset servicing as clients may not want to deal with a company in the midst of a merger.

BB&T

For BBT shares specifically, an additional risk includes slower than expected expense reductions and higher loss content in the specialized lending portfolio. Risks to the upside include faster deposit and loan growth than we are anticipating, possible given BBT’s faster growth Southeast footprint.

Citigroup

For C shares specifically downside risks include higher losses in Japan subprime consumer business, flatter curve with more modest NIM expansion, spread widening in emerging markets. Upside risks include less card losses than we are anticipating, faster international growth, and strategic actions. Fifth Third

For FITB shares specifically, downside risks include slower than expected top line growth associated with its current branch build out strategy and higher costs to de novo. Upside risks include faster hikes in NIM and tighter expense management.

JP Morgan

For JPM shares specifically, upside risks include faster expense reductions and lower card deterioration. Downside risks include larger reserve hikes and larger subprime exposure than we are currently anticipating. KeyCorp

For KEY, upside risks include faster NIM expansion due to wider loan spreads, lower credit costs, better CRE performance and stronger retail execution. Downside risks include deteriorating Midwest footprint and residential construction. National City

For NCC specifically, upside risks include faster efficiency improvement from the Best-in Class initiative than we currently have baked in over the next 2 years, less deterioration in credit quality, and strategic action. Downside risks include a slowdown in loan growth, lower deposit service charge growth, more NIM compression given the difficult interest rate environment, and a dividend cut.

Northern Trust For NTRS specifically, downside risks include weaker than expected equity markets and greater than expected exposure to the yield curve. Upside risks include increased cross-sell traction with the Barings FSG relationship, deeper cross-sell in the faster growing European markets and better than expected operating leverage.

PNC

Risks to our outlook include slower than expected economic growth, with consequent softer commercial credit expansion, higher NCOs than forecasted and lower equity markets that could drive down BlackRock, PFPC, and PNC Advisors’ revenue growth as well as integration risks associated with the MRBK acquisition. Upside risks include continuation of the current strong credit cycle, increased valuation for PFPC, and higher share buybacks than we are forecasting.

State Street

Downside risks include incremental losses in their conduits which STT may elect to absorb, lower net interest income growth, a slower or more expensive adoption of the outsourcing model, and greater-than-expected pricing

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October 31, 2007 Banking - Large Cap Banks

pressure in the core custody business. Upside risks include stronger non-US performance, which STT benefits from relative to peers..

SunTrust Banks

Downside risks include higher Alt-A and residential construction losses, slower expense improvements from E2 and slower top line growth from current organic investments. Upside surprises to our forecast include an acceleration in low-cost deposit growth beyond our expectations, KO sale and reinvestment and strategic options.

US Bancorp

For USB shares specifically, risks include a deceleration in commercial loan growth and severe competition in the payments business. On the upside, faster operating leverage in fee sensitive businesses could drive earnings growth rate above our current forecast.

Wachovia

For WB, downside risks include higher losses in mortgage, execution risks in the AGE integration and the GDW integration. Upside risks include faster growth in new, high growth regions of Texas and California. Wells Fargo

Downside risks include higher reserve requirements, lower mortgage originations and higher home equity losses given WFC’s sizeable consumer lending portfolio. Upside risks include increased share buybacks given excess capital, fatter NIM given large core deposit balances, and improved efficiencies.

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October 31, 2007 Banking - Large Cap Banks

Disclosure Section

The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley Dean Witter C.T.V.M. S.A. and their affiliates (collectively, "Morgan Stanley").

Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Betsy Graseck. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.

Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies.

Important US Regulatory Disclosures on Subject Companies As of September 28, 2007, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Bank of America, Bank of NY, Citigroup Inc., Fifth Third Bancorp, J.P.Morgan Chase & Co., Northern Trust Corp., PNC Financial Services, U.S. Bancorp, Wachovia Corporation, Wells Fargo & Co.. As of October 4, 2007, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in Morgan Stanley Research (including where guarantor of the securities): Bank of America, Bank of NY, BB&T Corporation, Citigroup Inc., J.P.Morgan Chase & Co., KeyCorp, National City, State Street Corporation, SunTrust, U.S. Bancorp, Wachovia Corporation, Wells Fargo & Co.. Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of Bank of NY, Citigroup Inc., Fifth Third Bancorp, State Street Corporation, SunTrust, Wachovia Corporation, Wells Fargo & Co.. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Bank of America, Bank of NY, BB&T Corporation, Citigroup Inc., Fifth Third Bancorp, J.P.Morgan Chase & Co., KeyCorp, Marshall & Ilsley Corp., National City, Northern Trust Corp., PNC Financial Services, State Street Corporation, SunTrust, U.S. Bancorp, Wachovia Corporation, Wells Fargo & Co.. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Bank of America, Bank of NY, BB&T Corporation, Citigroup Inc., Fifth Third Bancorp, J.P.Morgan Chase & Co., KeyCorp, Marshall & Ilsley Corp., National City, Northern Trust Corp., PNC Financial Services, State Street Corporation, SunTrust, U.S. Bancorp, Wachovia Corporation, Wells Fargo & Co.. Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from Bank of America, Bank of NY, BB&T Corporation, Citigroup Inc., Fifth Third Bancorp, J.P.Morgan Chase & Co., KeyCorp, Marshall & Ilsley Corp., National City, Northern Trust Corp., PNC Financial Services, State Street Corporation, SunTrust, U.S. Bancorp, Wachovia Corporation, Wells Fargo & Co.. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Bank of America, Bank of NY, BB&T Corporation, Citigroup Inc., Fifth Third Bancorp, J.P.Morgan Chase & Co., KeyCorp, Marshall & Ilsley Corp., National City, Northern Trust Corp., PNC Financial Services, State Street Corporation, SunTrust, U.S. Bancorp, Wachovia Corporation, Wells Fargo & Co.. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Bank of America, Bank of NY, BB&T Corporation, Citigroup Inc., Fifth Third Bancorp, J.P.Morgan Chase & Co., KeyCorp, Marshall & Ilsley Corp., National City, Northern Trust Corp., PNC Financial Services, State Street Corporation, SunTrust, U.S. Bancorp, Wachovia Corporation, Wells Fargo & Co.. The research analysts, strategists, or research associates principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley & Co. Incorporated makes a market in the securities of Fifth Third Bancorp, Northern Trust Corp.. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.

STOCK RATINGS Different securities firms use a variety of rating terms as well as different rating systems to describe their recommendations. For example, Morgan Stanley uses a relative rating system including terms such as Overweight, Equal-weight or Underweight (see definitions below). A rating system using terms such as buy, hold and sell is not equivalent to our rating system. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.

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Global Stock Ratings Distribution (as of September 30, 2007) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Underweight to hold and sell recommendations, respectively.

Coverage Universe Investment Banking Clients (IBC)

Stock Rating Category Count % of Total Count% of Total

IBC% of Rating

Category

Overweight/Buy 966 42% 330 44% 34%Equal-weight/Hold 1017 44% 326 44% 32%Underweight/Sell 317 14% 88 12% 28%Total 2,300 744 Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.

Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst's view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.

Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. Stock price charts and rating histories for companies discussed in Morgan Stanley Research are available at www.morganstanley.com/companycharts or from your local investment representative. You may also request this information by writing to Morgan Stanley at 1585 Broadway, (Attention: Equity Research Management), New York, NY, 10036 USA.

Other Important Disclosures For a discussion, if applicable, of the valuation methods used to determine the price targets included in Morgan Stanley Research, and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks. Research is available through your sales representative or on Client Link at www.morganstanley.com and other electronic systems.

Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities/instruments discussed in Morgan Stanley Research may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The

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appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them.

Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities or derivatives of securities of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities or derivatives of securities of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons

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With the exception of information regarding Morgan Stanley, research prepared by Morgan Stanley Research personnel are based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.

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© 2007 Morgan Stanley

M O R G A N S T A N L E Y R E S E A R C H

Industry Coverage:Banking - Large Cap Banks

Company (Ticker) Rating (as of) Price (10/30/2007)

Betsy L. Graseck, CFA BB&T Corporation (BBT.N) E (10/05/2007) $36.35Bank of America (BAC.N) E (10/31/2007) $47.99Bank of NY (BK.N) O (04/13/2006) $47.98Citigroup Inc. (C.N) U (10/31/2007) $42.11Fifth Third Bancorp (FITB.O) U (07/14/2005) $30.66J.P.Morgan Chase & Co. (JPM.N) O (12/11/2006) $46.56KeyCorp (KEY.N) U (10/15/2007) $28.34Marshall & Ilsley Corp. (MI.N) NA (09/25/2007) $42.03National City (NCC.N) U (03/05/2007) $24.43Northern Trust Corp. (NTRS.O) O (10/31/2007) $74.20PNC Financial Services (PNC.N) O (10/31/2005) $71.52State Street Corporation (STT.N) O (10/31/2007) $78.60SunTrust (STI.N) E (10/31/2007) $72.80U.S. Bancorp (USB.N) E (12/02/2002) $32.70Wachovia Corporation (WB.N) E (03/02/2006) $45.97Wells Fargo & Co. (WFC.N) E (10/31/2007) $34.00

Stock Ratings are subject to change. Please see latest research for each company.

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