is the-investment-banking-business-model-broken

June 21, 2012June 21, 2012

U.S. Capital Markets

Is the Investment Banking Business Model Broken?

Brad Hintz • Senior Analyst • +1-212-756-4590 • [email protected] Montgomery, CFA • Analyst • +1-212-969-6714 • [email protected]

Gabriel Farajollah • Research Associate • +1-212-756-4167 • [email protected]

See Disclosure Appendix of this report for important Disclosures and Analyst CertificationsSee Disclosure Appendix of this report for important Disclosures and Analyst Certifications

U.S. Capital Markets: Brokerage Coverage

Target 6/18/2012 EPS P/ERating Price Price 2011 2012E 2013E 2011 2012E 2013E BV/Share P/BV TBV/Share P/TBV

MS O 24 00 $13 82 $1 26 $1 44 $2 36 11 0x 9 6x 5 9x 30 74 0 45x 25 25 0 55xMS O 24.00 $13.82 $1.26 $1.44 $2.36 11.0x 9.6x 5.9x 30.74 0.45x 25.25 0.55xGS O 170.00 $93.63 $4.56 $13.29 $14.63 20.5x 7.0x 6.4x 138.44 0.68x 127.59 0.73xAMTD M 20.00 $17.11 $1.11 $1.14 $1.34 15.4x 15.0x 12.8xLPLA M 40.00 $33.66 $1.95 $2.23 $2.70 17.3x 15.1x 12.5xSCHW M 15.00 $12.58 $0.70 $0.66 $0.92 18.0x 19.1x 13.7x

$ $ $ $S&P 500 $1,344.78 $96.04 $103.98 $117.03 14.0x 12.9x 11.5x

U.S. Capital Markets22

Note: AMTD 2011 EPS represents actual resultsSources: Bloomberg, Bernstein Estimates

U.S. Capital Markets: Futures Exchange Coverage

MarketTarget 6/18/2012 EPS* P/E Cap

Rating Price Price 2011 2012E 2013E 2011 2012 2013 Abs. Rel. Dividends Yield ($Bn)CME O 420.00 $282.21 $17.04 $17.40 $20.20 16.6x 16.2x 14.0x 2.7% -3.1% $5.60 2.0% 18.6

TTM Perf

ICE O 155.00 $136.24 $5.64 $7.95 $8.90 24.2x 17.1x 15.3x 15.4% 9.6% $0.00 0.0% 9.9


Sources: Bloomberg, Corporate Reports, Bernstein Analysis

Institutional Concerns

Th i l k b k i bl ! Th i b i d l i b kThe capital markets banks are uninvestable! Their business model is broken. The stocks are trading as ‘honorary EU banks.’

What portion of their problems is cyclical and what portion is secular?What portion of their problems is cyclical and what portion is secular?

Will any firms profit from the industry changes?

What must buy-side trading desks do to adjust to the future?


U.S. Brokerage – Industry Outlook

$180,000.0

US Securities Industry - Domestic Net Revenues

$120,000.0

$140,000.0

$160,000.0

$60 000 0

$80,000.0

$100,000.0

,

$20,000.0

$40,000.0

$60,000.07.6% Revenue CAGROver 30 Years

$0.0

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011


Source: SIFMA Database, Bernstein analysis

Capital Under Basel I

16.6%18%

13.0%%

13.6% 13.8%14%

16%

9.9%9.5%

10.0%

11.8% 12.1%12.4%

11.3%

12.3%

10%

12%

6%

8%

6%BAC WFC JPM C GS MS

Tier 1 Common Ratio Tier 1 Ratio


Sources: Company disclosures, Bernstein analysis

Capital Markets Pre-Tax Margins

75%

35%

45%

55%

65%

-5%

5%

15%

25%

-5%


Sources: Dealogic, Bernstein Analysis

The Lessons from the Crisis

All major financial institutions are bound together through trading, settlement and derivatives relationships. Thus, a credit event at one firm is passed through to all the other firms like a line of dominos.e o e s e a e o do os

Wholesale funding at a bank can unwind very quickly. Commercial paper, uncommitted bank lines, demand notes, tri-party repo, securities lending, bond borrows and prime brokerage customer cash can and likely will be withdrawn during "black swan" tail events.

Elegant hedges and sophisticated risk management metrics can fail whenElegant hedges and sophisticated risk management metrics can fail when markets become illiquid or when market sectors become near-perfectly correlated.

Regulatory rules do not always work as designed. Regulators do not have unlimited authority to save financial institutions. There is little appetite in financial and political centers around the world to save the banks a second time.


Fixed Income Sales and Trading


Fixed Income Net Revenues

$80,000

$100,000Mexico

WorldComEnron

Crash '87

lions

$20 000

$40,000

$60,000

$, m

ill

‐$20,000

$0

$20,000

Russia Credit

‐$60,000

‐$40,000

0:Q1

1:Q1

2:Q1

3:Q1

4:Q1

5:Q1

6:Q1

7:Q1

8:Q1

9:Q1

0:Q1

1:Q1

2:Q1

3:Q1

4:Q1

5:Q1

6:Q1

7:Q1

8:Q1

9:Q1

0:Q1

1:Q1

2:Q1

3:Q1

4:Q1

5:Q1

6:Q1

7:Q1

8:Q1

:Q1

0:Q1

Russia Credit Crisis

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09:

10


Sources: SIFMA Database, Company Disclosure and Bernstein Analysis

FICC – Facing a Change in the Business Model

10.0%$4,500,000

Revenue Return on FICC Trading Assets FICC Trading Assets

6.0%

8.0%

$3,500,000

$4,000,000

$ , ,

2.0%

4.0%

$2,000,000

$2,500,000

$3,000,000

‐2.0%

0.0%

$500 000

$1,000,000

$1,500,000

‐4.0%

80:Q1

82:Q2

84:Q3

86:Q4

89:Q1

91:Q2

93:Q3

95:Q4

98:Q1

00:Q2

02:Q3

04:Q4

07:Q1

09:Q2

$0

$500,000

80:Q1

82:Q4

85:Q3

88:Q2

91:Q1

93:Q4

96:Q3

99:Q2

02:Q1

04:Q4

07:Q3

10:Q2


8 8 8 8 8 9 9 9 9 0 0 0 0 0

Source: SIFMA Database and Sanford Bernstein Analysis

OTC Derivatives

Derivatives make up approximately 15% of fixed income net revenues and generate 20%T il d

OTC Derivatives Market

fixed income net revenues and generate 20% of institutional equity net revenues.

Expect 70% of derivatives notional amounts to trade in new venue; this portion of theGeneric Swaps;

Tailored swaps

20 to 30% of Notional

trade in new venue; this portion of the derivatives market generates 50% of total earnings. Positive for ICE, CME, LCH.

Hi hl t il d b k d i ti ill i

Generic Swaps;70 to 80%NotionalCentrally Traded

and Settled

Highly tailored bespoke derivatives will remain bilateral, albeit with higher capital charges –and these generate 50% of current earnings.Trading

Opportunities;Volumes Increase,

Derivatives pricing will fall and margins will contract in a ‘new’ electronic market; PTM falls from ≈35% to ≈23% for originators.

FuturesMarket

Cash Equity& Fixed Income

Markets

Lower Margins


Source: Bernstein Analysis

Fixed Income Challenges

“…The E.F. Hutton check kiting scheme, First Boston’s bridge loans, Drexel Burnham Lambert's bankruptcy, Salomon Brothers' treasury trading scandal, the Mexican crisis, the Baring Brothers’ failure, the Asian emerging market crisis, the Russian credit default, LTCM, Lehman Brothers' 1998 funding run, the Internet bubble, Enron and WorldCom, REFCO, Bear Stearns and Merrill Lynch and the Lehman bankruptcy in 2008, the MS and GS funding runs and the MF Global

Proprietary trading prohibited; market making revenues reduced by 20%

failure. This doesn’t look like a Aa rated industry.”

Fixed income derivative central trading and settlement

Leverage downLeverage down

Risk constrained

Carry costs rise due to liquidity/funding changes

Lower credit ratings


Source: Bernstein Analysis

Institutional Equity


Institutional Equities Net Revenues

$30 000 0

$35,000.0

$20 000 0

$25,000.0

$30,000.0

Total Rev.

ons

$10 000 0

$15,000.0

$20,000.0

$ M

illio

$0 0

$5,000.0

$10,000.0

CommissionRev.

$0.0

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011


Source: SIFMA and Sanford Bernstein Analysis

Institutional Equities

Institutional Equity Execution Rate (Cents Per Share) 2001 - 2011

5.00

3.50

4.00

4.50“Best Execution”

DMA and Algo TradingExpand

2 00

2.50

3.00

1.00

1.50

2.00

0.00

0.50

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Source: MSIED, Bernstein Analysis

Prime Brokerage Net Revenues

Prime Brokerage Net Revenues $MM

$14,000

$8,000

$10,000

$12,000

$2,000

$4,000

$6,000

P i t 2008 MS GS d JPM d i t d b i ith 60% k t h

$0

,

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Prior to 2008, MS, GS and JPM dominated business with 60% market share. After Lehman, hedge funds have diversified prime brokers; DB, CS and BAC.

Margins have declined due to loss of free collateral and weaker sec lending


Margins have declined due to loss of free collateral and weaker sec. lending.

Source: Global Custodian and Bernstein Analysis

Institutional Equity

Proprietary trading banned; statistical arbitrage, risk arbitrage

Prime brokerage – changed business model means lower returns g g

Equity derivatives move to central trading and clearing

Reliance on allocated ECM revenues to beat cost of equity


Investment Banking


Investment Banking Margins Are Driven By Business Mix

Mergers and Acquisitions (35 to 65 bp) High Margin

IPO (400 to 700 bp)O ( 00 to 00 bp)

Convertible Underwriting (≈300 bp)

Secondary Equity Underwriting (150-200 bp)

High Yield Underwriting (≈300 bp but Underwriters’ Liab.)

Investment Grade Debt Underwriting (35 to 45bp)

Fairness Opinions Fairness Opinions

Bankruptcy Advisory Low Margin


g

Source: Bernstein Analysis.

IPO Volumes

Global IPO Volume

$350IPO Volume = F(Corporate Earnings, Treasury Bond Rates, Internet & Sarbox

2

$250

$300

ion

s)

Dummy Variables) R2 = 85%

$150

$200

me

($ b

ill

$50

$100

Vo

lum

$0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012


Sources: DRI, Bernstein Analysis, Dealogic

Note: 2012 figure as of April 4, 2012

IPO League Table

2011Rank Bank Net Rev. ($M) # Deals % Share

1 Morgan Stanley 413 85 7.2%g y2 Goldman Sachs 344 58 6.0%3 JPMorgan 301 69 5.3%4 Deutsche Bank 296 68 5.2%5 Credit Suisse 272 60 4 8%5 Credit Suisse 272 60 4.8%6 Citi 246 65 4.3%7 Bank of America Merrill Lynch 223 46 3.9%8 Ping An Securities Co Ltd 201 36 3.5%9 Barclays 173 47 3.0%

10 Guosen Securities Co Ltd 165 32 2.9%Subtotal 2,632 285 45.9%Total 5,730 1,306 100.0%, ,


Source: Dealogic and Bernstein estimates and analysis

Mergers & Acquisitions

Global Announced M&A Volume

$4,000

$5,000

$2,000

$3,000

um

e ($

Bn

)

$0

$1,000

M&

A V

ol

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *2012


Sources: DRI, Bernstein Analysis

Note: 2012 figure is annualized

Mergers and Acquisition Advisory Outlook

10%

12%

Emerging Markets M&A Volume Growth – 5-Yr CAGRHistorical and Projected U.S. M&A Volumes

2,000

M)

4%

6%

8%

10%

Year

CA

GR

1,000

1,500

Volum

e ($MM

-2%

0%

2%

&A

Vol

ume

-5 Y

(500)

‐

500

U.S. M

&A V

-8%

-6%

-4%M(500)

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

E20

16E

Actual Regression

Base Optimistic

Pessimistic


Source: Federal Reserve Bank of St. Louis, Global Insight, Bernstein estimates and analysis

Global M&A League Table

2011Rank Bank Volume ($M) # Deals % Share

1 Goldman Sachs 671,106 379 24.0%, %2 JPMorgan 516,062 329 18.5%3 Morgan Stanley 441,933 312 15.8%4 Credit Suisse 405,549 287 14.5%5 Bank of America Merrill Lynch 401,189 297 14.4%6 Barclays 363,662 179 13.0%7 Citi 341,370 231 12.2%8 Deutsche Bank 293,276 254 10.5%9 UBS 292,800 242 10.5%

10 Lazard 276,628 220 9.9%Subtotal 1 681 987 1 820 60 3%Subtotal 1,681,987 1,820 60.3%Total 2,791,551 44,829 100.0%



Global Debt Underwriting League Table

2011Rank Bank Net Rev. ($M) # Deals % Share

1 JPMorgan 1,145 1,809 6.9%2 Bank of America Merrill Lynch 1,074 1,953 6.5%3 Deutsche Bank 999 1,891 6.0%4 Citi 919 1,643 5.5%5 C dit S i 798 1 506 4 8%5 Credit Suisse 798 1,506 4.8%6 Barclays 777 1,503 4.7%7 Morgan Stanley 701 1,673 4.2%8 Goldman Sachs 691 1 033 4 2%8 Goldman Sachs 691 1,033 4.2%9 UBS 516 2,126 3.1%

10 RBS 482 1,132 2.9%Subtotal 8 102 9 094 48 7%Subtotal 8,102 9,094 48.7%Total 16,630 24,073 100.0%



Retail Brokerage


Overview of the US Retail Brokerage Channels

Wirehouse. Large national branch networks. Emphasis on fee-based pricing of managed accounts. Payout 30% - 50%. Oligopoly. Wirehouses control 50,200 FAs with $4.5 Tn. in assets.

Independent B/D. Sales effort focuses on packaged products, mutual funds and annuities. Advisors are considered contractors (not employees) and FA’s assume all costs of business and most risks. Payout is 70%-100%. There are 113,000 y ,independent FAs with assets of $2.0 Tn.

Registered Investment Advisors. Small, fee-based firms targeting the (>$1 MM) ffl t k t O ti fid i i Th 34 000 RIA ith t t l t faffluent market. Operating as fiduciaries. There are 34,000 RIAs with total assets of

$2.0 Tn.

Regional Brokers Regional brokers with retail segments and private wealthRegional Brokers. Regional brokers with retail segments and private wealth segment of large I-banks. Payout 40%-60%. FAs total 37,000 and assets are $1.8 Tn.


Sources: SNL, Cerulli, Company Reports, Bernstein Analysis

Retail Brokerage

For retail, revenues are a function of client assets.

Cross selling reduces client turnover– transaction accounts, 401K services, t iddl k t l dimortgages, middle market lending.

High operating leverage – full service retail is 26% fixed cost versus institutional 19% fixed costs Discount fixed cost is >35%institutional 19% fixed costs. Discount fixed cost is >35%.

Power of the Channel – “They want the load, the 12b1 and one-half the management fee for three years.”

AMTD Charges 25 bpsSCHW Charges 40 bpsBAC Charges 50 bpsBAC Charges 50 bps


Source; Sanford Bernstein Analysis

Full Service Economics – Client Assets and FA Headcount

Client Assets Assets Per FA MarketBrokers

Client Assets ($Mln)

Assets Per FA ($Mln) Production

Market Share

Morgan Stanley Smith Barney 17,193 1,744,000$ 101$ 787,000$ 25.3%Merrill Lynch 17,512 1,841,106$ 105$ 905,000$ 26.7%Wells Fargo Financial Advisors 15,134 1,200,000$ 79$ 610,000$ E 17.4%UBS 7,015 807,000$ 115$ 842,000$ 11.7%Edward Jones 11,670 543,400$ 47$ 297,977$ 7.9%Raymond James 1 311 85 100$ 65$ 546 000$ 1 2%Raymond James 1,311 85,100$ 65$ 546,000$ 1.2%

0.15$


Sources: SNL, Company Reports, Bernstein Analysis

The Full Service Model – Scale Driven


Sources: Company disclosures, Bernstein analysis

Retail Trading Volumes – Volumes Remains Constrained

8.0

9.0

10.0

5.0

6.0

7.0

2 0

3.0

4.0

5.0

9.4% GrowthTrading Volumes have grown at a 6.4% CAGR since Q2 2007

0.0

1.0

2.0


Sources: SIFMA, SCHW, Bernstein Analysis

Retail – The Last Sector to Recover

Cyclical decline in trading volume and adverse asset management mix shift $25,000

$30,000

es

Fee based accounts average ≈30% of client assets $15,000

$20,000

kerage

Reven

ue

Retail trading volumes are correlated with movements in equity market indices lagged five to eight months $5,000

$10,000

Retail Brok

Retail investment flows are correlated with U.S. Unemployment. Retail revenues correlated with non farm payroll

$080 100 120 140 160

Employment ‐ Non‐Farm Payrol (MM)

correlated with non-farm payroll


Challenges


Regulatory Changes Impact Business Model

Basel III -- Minimum capital ratio for common equity increases to 4.5%. New capital conservation buffer will be required; 2.5% of common equity; 3% tier 1 leverage limit effective 2018; SIFI buffer of 2% to 3%

Volcker -- Proprietary trading is banned; trading in US government securities is exempt; total investment in all hedge funds and private equity funds must not exceed 3% of tier 1 capital

Derivatives -- All OTC derivatives selected by the CFTC / SEC must be centrally cleared; all transactions involving OTC derivatives that are subject to clearing requirements must be traded on an execution facility

2011 2012 2013 2014 2015 2016 2017 2018 2019Leverage ratio Monitor Monitor Monitor Monitor Effective Effective Effective Effective EffectiveMin. Common Equity Ratio 3.50% 4.00% 4.50% 4.50% 4.50% 4.50% 4.50%Capital Conservation 0.63% 1.25% 1.88% 2.50%

Min. Common Equity plus Capital Conservation 3.50% 4.00% 4.50% 5.13% 5.75% 6.38% 7.00%Minimum total Capital plus Conservation 8.00% 8.00% 8.00% 8.63% 9.13% 9.88% 10.50%Liquidity coverage ratio Monitor Monitor Monitor Monitor Effective Effective Effective Monitor Monitor


Source: Davis Polk and Bernstein review

Liquidity coverage ratio Monitor Monitor Monitor Monitor Effective Effective Effective Monitor Monitor Stable Funding Monitor Monitor Monitor Monitor Monitor Monitor Monitor Monitor

Trading ROE

30.0%

40.0%

10.0%

20.0%

10 0%

0.0%

10.0%

Credit

‐20.0%

‐10.0%

5:Q1

5:Q4

6:Q3

7:Q2

8:Q1

8:Q4

9:Q3

0:Q2

1:Q1

1:Q4

2:Q3

3:Q2

4:Q1

4:Q4

5:Q3

6:Q2

7:Q1

7:Q4

8:Q3

9:Q2

0:Q1

0:Q4

1:Q3

Credit Crisis

2007-09

95 95 96 97 98 98 99 00 01 01 02 03 04 04 05 06 07 07 08 09 10 10 11

FICC Equities


Source: Company Disclosure, SIA Database, Bernstein Analysis

Leverage Decline Reduces Trading ROE

Higher RWA capital charges

Indexed Capital Markets Leverage 1990=1.02.5

Higher RWA capital charges, lower leverage limits, and more matched funding will negatively impact the ability to achieve returns over cost of capital

2.0

p

1.0

1.5

0.5

0.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Source: Company Disclosure, SIA Database, Bernstein Analysis

Pro Forma Trading Returns Do Not Exceed Cost of Capital

ROE versus Return and Leverage

1.0% 2.0% 3.0% 4.0% 5.0%RRONA

30 5.6% 11.2% 16.8% 22.3% 27.9%25 4.7% 9.3% 14.0% 18.6% 23.3%20 3.7% 7.4% 11.2% 14.9% 18.6%er

age

(x)

15 2.8% 5.6% 8.4% 11.2% 14.0%10 1.9% 3.7% 5.6% 7.4% 9.3%

Leve


Source: Bernstein SIFMA and Company disclosure

Expense Reduction

Only alternatives Wall Street will have are to cut compensation, reengineer the business, limit capital in trading books and push for higher commissions in equities and wider bid offer spreads in fixed income

Compensation - Bernstein expects the average compensation of an MD in sales and trading to drop by 20% and the percent of MDs in a trading operation to decline from g p y p g p<15% of staff to ≈10%; SVP compensation will decline by 15%; this will reduce the compensation ratio to ≈40%

Trading will implement a major re-engineering of its business model Bernstein expectsTrading will implement a major re engineering of its business model. Bernstein expects improved collateral management systems and straight through trading technology to reduce middle office costs and drive down operation costs by ≈3 to 5%. Automation of trading activities will facilitate direct client execution. Matching engines will increasingly be tested in FICC.be tested in FICC.


Source: Sanford Bernstein

Post Reengineering Trading Returns Still Do Not Beat Cost of Equity

Expense reductions are not enough. Technology is not enough. Balance sheet changes and related business repricing are required.

At 40% Compensation to Net Revenue

0% 2 0% 3 0% 0% 0%RRONA

1.0% 2.0% 3.0% 4.0% 5.0%30 6.3% 12.6% 18.9% 25.2% 31.5%25 5.3% 10.5% 15.8% 21.0% 26.3%20 4 2% 8 4% 12 6% 16 8% 21 0%e

ragee

20 4.2% 8.4% 12.6% 16.8% 21.0%15 3.2% 6.3% 9.5% 12.6% 15.8%10 2.1% 4.2% 6.3% 8.4% 10.5%

Leve


Source: Bernstein SIFMA and Company disclosure

Balance Sheet Reduction of 15% to 20% Needed

Expect a substantial change in balance allocations. New capital allocation models will be established. Low return businesses will find position taking authority limited and allocated inventories constrainedallocated inventories constrained.

Linkages between businesses will be identified to ensure that balance sheet is used to maximize profitable customer execution. Repo books and margin lending will be tightly limited Inventory turnover discipline will be enforced and aged inventory will be tightlylimited. Inventory turnover discipline will be enforced and aged inventory will be tightly monitored.

Expect fixed income balance sheet/capital use to decline by 20% and equities to decline b 10% Thi id bid ff d hi h it i i d lby >10%. This means wider bid offer spreads, higher equity commissions and less liquidity. This opens up opportunities for new competitors.


Thinking About the Future

E t d d ROE f b l h t i t i b i B k ith l ditExpect reduced ROEs from balance sheet intensive businesses. Banks with larger credit businesses and those with relatively larger FICC franchises will be impacted more seriously than those with larger FX and equity franchises.

At low leverage, trading revenues will grow only with the global capital markets (7%-9% CAGR according to McKinsey Global Research Institute). The Street will free capital from trading as low return inventory positions are reduced. Revenue growth rate of the capital markets banks falls, EVA falls, cost of equity falls -- but ROE remains above cost of equity.

Cyclical or Secular? Volcker

Basel Changes Dodd Frank

Investment BankingECM CyclicalDCM Secular Credit Spreads Credit SpreadsM&AM&A Cyclical

Instutional EquitiesEquity Execution Secular Reduction RiseEquity Derivatives Secular CCP

FICCFixed Income Market Making Secular Reduction RiseFixed Income Derivatives Secular CCP

Retail Brokerage Cyclical


Asset Management Cyclical

Regulation Drives Changes in Business Mix

ROE Versus Capital Intensity

35%

40%

45%The Null Set Low Capital Intensity

High ROE

15%

20%

25%

30%

RO

E

0%

5%

10%

%

20% 30% 40% 50% 60% 70% 80%

High Capital IntensityLow ROE

Badly Managed

20% 30% 40% 50% 60% 70% 80%

Capital Intensity


Source; Companies Disclosures, FactSet and Bernstein Analysis

Di l A diDisclosure Appendix

SRO REQUIRED DISCLOSURES

References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and Sanford C. Bernstein (business registration number 53193989L), a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, collectively.

Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in or contributions to generating investment banking revenuesanalysts are compensated based on performance in, or contributions to, generating investment banking revenues.

Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise specified. We have three categories of ratings:

Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.

Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year aheadMarket-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.

Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.

Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.

As of 06/13/2012, Bernstein's ratings were distributed as follows: Outperform - 41.3% (1.5% banking clients) ; Market-Perform - 49.8% (0.4% banking clients); Underperform - 8.9% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve (12) months.

Brad Hintz, as a former Managing Director at Morgan Stanley Group (MS), owns an equity position in MS that is held in a Morgan Stanley Group ESOP Trust at Mellon Bank as convertible preferred stock. These MS ESOP securities were awarded to him as compensation and are fully vested. Mr. Hintz is also an investor in Morgan Stanley Capital Partners III, LP — a merchant banking fund where Morgan Stanley maintains an equity interest as a limited partner. Mr. Hintz participates in the Morgan Stanley Pre Tax Investment Plan, which is a deferred compensation plan structured as a note to Mr. Hintz from Morgan Stanley with the return on the note tied to one of many alternative asset classes. In addition, as a result of the complete spin-off of Discover from Morgan Stanley on June 30, 2007, Mr. Hintz received a long position in Discover stock as a beneficiary of the Morgan Stanley ESOP. These shares of Discover will ultimately be distributed to Mr. Hintz by the ESOP trustee.

Mr. Hintz maintains a long position in Chicago Mercantile Exchange Holdings Inc. (CME).

Bernstein currently makes a market in the following companies SCHW / Charles Schwab Corp, AMTD / TD Ameritrade Holding Corp, LPLA / LPL Investment Holdings.

The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment banking-securities related services and received compensation for such services GS / Goldman Sachs, MS / Morgan Stanley, SCHW / Charles Schwab Corp, AMTD / TD Ameritrade Holding Corp.

An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companies GS / Goldman Sachs, MS / Morgan Stanley, SCHW / Charles Schwab Corp, AMTD / TD Ameritrade Holding Corp.

In the past twelve (12) months, Bernstein or an affiliate managed or co-managed a public offering of securities of LPLA / LPL Investment Holdings.


In the past twelve (12) months, Bernstein or an affiliate received compensation for investment banking services from LPLA / LPL Investment Holdings.

In the next three (3) months, Bernstein or an affiliate expects to receive or intends to seek compensation for investment banking services from LPLA / LPL Investment Holdings.

This research publication covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com, you can also write to either: Sanford C. Bernstein & Co. LLC,

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12-Month Rating History as of 06/18/2012

Ticker Rating Changes AMTD M (IC) 08/12/09 CME O (RC) 01/10/11CME O (RC) 01/10/11 GS O (RC) 06/04/09 ICE O (IC) 06/19/07 LPLA M (IC) 12/28/10 MS O (RC) 08/09/07 SCHW M (RC) 02/02/09 Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated Rating Actions: IC ‐ Initiated Coverage, DC ‐ Dropped Coverage, RC ‐ Rating Change

OTHER DISCLOSURES

A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and when coverage of securities commences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its coverage policies. Although the definition and application of these methods are based on generally accepted industry practices and models, please note that there is a range of reasonable variations within these models. The application of models typically depends on forecasts of a g y p y p , p g pp yp y prange of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and risk factors that are subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts carrying out this valuation.

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This publication has been published and distributed in accordance with Bernstein's policy for management of conflicts of interest in investment research, a copy of which is available from Sanford C. Bernstein & Co., LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105, Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, , , p , , , , , p , y ,London W1J 8SB, United Kingdom, or Sanford C. Bernstein (Hong Kong) Limited, Director of Compliance, Suites 3206-11, 32/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong, or Sanford C. Bernstein (business registration number 53193989L) , a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, Director of Compliance, 30 Cecil Street, #28-01 Prudential Tower, Singapore 049712. Additional disclosures and information regarding Bernstein's business are available on our website www.bernsteinresearch.com.

CERTIFICATIONS

I/(we), Brad Hintz, Luke Montgomery, CFA, Senior Analyst(s)/Analyst(s), certify that all of the views expressed in this publication accurately reflect my/(our) personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was is or will be directly or indirectly related to the specific recommendations or views in this publication


the subject securities or issuers and that no part of my/(our) compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views in this publication.

Copyright 2012, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and AllianceBernstein (Singapore) Ltd., subsidiaries of

AllianceBernstein L P ~1345 Avenue of the Americas ~ NY NY 10105 ~212/756 4400 All rights reservedAllianceBernstein L.P. ~1345 Avenue of the Americas ~ NY, NY 10105 ~212/756-4400. All rights reserved.

This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Bernstein or any of their subsidiaries or affiliates to any registration or licensing requirement within such jurisdiction. This publication is based upon public sources we believe to be reliable, but no representation is made by us that the publication is accurate or complete. We do not undertake to advise you of any change in the reported information or in the opinions herein. This publication was prepared and issued by Bernstein for distribution to eligible counterparties or professional clients. This publication is not an offer to buy or sell any security, and it does not constitute investment, legal or tax advice. The investments referred to herein may not be suitable for you. Investors must make their own investment decisions in consultation with their professional advisors in light of their specific circumstances. The value of investments may fluctuate, and investments that are denominated in foreign currencies may fluctuate in value as a result of exposure to exchange rate movements. Information about past y g y p g pperformance of an investment is not necessarily a guide to, indicator of, or assurance of, future performance.


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