1. 0 Bank Productivity What’s Happened Since 1998? 11.17.03

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

3. 2 Productivity programs of the 90s Process redesignProcess redesign Overhead value analysisOverhead value analysis CentralizationCentralization Mergers & acquisitionsMergers & acquisitions Strategic sourcingStrategic sourcing

4. 3 Bank mergers have slowed considerably US Bank Mergers Source: SNL Database

5. 4 Bank Concentration Source: SNL Database

6. 5 $14B 1994 1998 Average Bank Assets (top 120 banks) Source: SNL Database 2002 $38B 27.8% CAGR $48B 6.4% CAGR

7. 6 Change in Number of US Banks 9,144 Source: FDIC Statistical Abstract of the U.S. 1987 1997 2002 13,723 7,887

8. 7 U.S. Bank Branch Growth Source: FDIC Statistical Abstracts 45,537 1987 60,320 1997 5.78% CAGR 66,185 2002 1.87% CAGR

9. 8 61.4% 65.6% 1994 1998 Cost to Income Ratio Source: SNL Database 57.8% 2002

10. 9 59.7% 64.3% 1994 1998 Normalized Cost to Income Source: SNL Database 58.0% 2002

11. 10 C/I Improvement CAGR Source: SNL Database 23% 18% 33% 26%

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

13. 12 What’s driving C/I? 3.4% 19941998 5.3% 19941998 3.1% 5.1% Costs/AssetsIncome/Assets Source: Creating Value in Financial Services, Nov 1999 (Normalised Revenue & Costs) 2002 3.1% 5.2% 2002

14. 13 Another “gross” industry measure indicates only marginal improvement 0.6% 1.0% 12.8% 19.3% 1.8% Average Annual Increase in Labor Productivity, 1994-1998 and 1998-2002 -0.5% Banks Department Stores Grocery Stores Non-store retailers Electronics & Appliance Stores 24.1% Computer & Peripherals Radio & TV 3.1% 1.4% 6.8% 10.4% -1.1% 0.5% 25.3% Source: Bureau of Labor Statistics

15. 14 What happened between 1998- 2002? Recession – cost cutting (layoffs, projects deferred, reduced IT spend)Recession – cost cutting (layoffs, projects deferred, reduced IT spend) Declining interest rates yielding improving marginsDeclining interest rates yielding improving margins Improved fee income from record-breaking refinancingImproved fee income from record-breaking refinancing Continued mergers/scaleContinued mergers/scale Channel migrationChannel migration

16. 15 What will happen in the future? CategoryForecastC/I Interest RatesInterest rates rise, reducing NII  GNPGNP increases deposit & loan balances and related branch services  Capital InvestmentMore capital for labor and greater channel migration ? SourcingAccelarated offshore servicing  Products/ServicesCustomization of offerings 

17. 16 Case Study – Abbey Bank (UK) Position -- Abbey is the sixth largest bank in the UK ($200+ billion in assets) -- second largest provider of mortgages and savings in the UK Staff -- Abbey National employs 28,300 FTEs Customer Focus – principally consumers and small businesses Service Channels – all of the typical channels (750 Branches, 12 telephone centers, internet, 3,000 ATMs, etc) and several retail partners such as Safeway, Costa Coffee and Homebase

18. 17 Source: 2002 Company Annual Reports 56% 46%54% HSBC Royal Bank of Scotland Barclays Lloyds Bank of Scotland (Halifax) Abbey National 54% 47% 41% Cost to Income Ratio (2002)

19. 18 Project approach 1. Initial Overview and Data Requests 1. Initial Overview and Data Requests 2. Data Gathering / Analysis: Phase I 2. Data Gathering / Analysis: Phase I 4. Analysis and Recommendations 4. Analysis and Recommendations 2 weeks Conductoperational sitetours Develop high-level operational map Meet key contacts Review existing documentation Submitinitial data requests Develop Operational Baseline Conduct in-depth interviews with appropriate parties Review data received for clarification Develop initial performance flash report Compile results Conduct joint meetings to review results DevelopOperations Strategyand Plan 3. Data Gathering / Analysis: Phase II 3. Data Gathering / Analysis: Phase II Conduct deep-dive and follow-up data clarification interviews Compile data in operationalflows Meet with businesses to understand operational requirements 2 weeks Deliver preliminary Operational Baseline Finalized Operational Baseline Operational Strategy Timeline and Tasks 1. Initial Overview and Data Requests 1. Initial Overview and Data Requests 2. Data Gathering / Analysis: Phase I 2. Data Gathering / Analysis: Phase I 4. Analysis and Recommendations 4. Analysis and Recommendations 2 weeks Conductoperational sitetours Develop high-level operational map Meet key contacts Review existing documentation Submitinitial data requests Develop Operational Baseline Conduct in-depth interviews with appropriate parties Review data received for clarification Develop initial performance flash report Compile results Conduct joint meetings to review results DevelopOperations Strategyand Plan 3. Data Gathering / Analysis: Phase II 3. Data Gathering / Analysis: Phase II Conduct deep-dive and follow-up data clarification interviews Compile data in operationalflows Meet with businesses to understand operational requirements 2 weeks Deliver preliminary Operational Baseline Finalized Operational Baseline Operational Strategy Timeline and Tasks

20. 19 Strategic cost positioning TargetTarget TargetTarget Acceptable investment Current Organization Target Operating costs Income Non-strategic/ dormant/closed products Core productsNew strategic products Over time