Table of Contents
Executive Summary ...................................................................................... 3
Key Themes ................................................................... 4
Theme 1 – Review of capital requirements for investment banking - Not as harsh as expected 4
Theme 2 - JPM methodology for UK investment banking capital - We see capital requirements
increasing between 30-100%..........................................................10
Theme 3 – Revenue/return opportunity for UK investment banking - Despite 15-20%
management targets we see sustainable RoEs lower at 10-15%............14
BarCap - Achieving critical mass.........................................18
Barclays - Valuation and recommendation.......................................20
RBS – Banker of choice for the UK government ..............................23
RBS - Valuation and recommendation.................................................24
HSBC – GBM likely to meet cost of equity.......................................26
HSBC - Valuation and recommendation ........................................27
Standard Chartered – Smallest of UK investment banks................30
Themes......................................................................................................... 31
Theme 1 - Reviewing Trading Book Risks................................................ 32
Current Regulatory Framework..............................................................33
Main differences between credit risk- weighted assets and market risk-weighted assets .34
Limitations of the current market risk framework – Market risk did not change between Basel I
and Basel II... ..............................................................................................36
What is VaR and what are the limitations of VaR?....................................37
Standardised Methodology for Market Risk..................................................39
Internal Models Approach..............................................................................43
Pro-Cyclicality of the Current Market Risk Charge .......................................46
Proposals to address some of the weaknesses in the current framework..............47
Counterparty Credit Risk (CCR).................................................................49
Securitisation Capital Requirements ........................................................55
Overall Findings on Trading book Risks................................................58
More liquid balance sheets and how to unwind a bank in an orderly
manner ......................................................................................................... 59
Theme 2 - JPM calculation of market risk for the UK Investment Banks
....................................................................................................................... 63
BarCap will need c. 3 times its current level of economic capital by 2010E............69
HSBC - £23bn capital necessary to run GBM..............................................71
RBS – GBM key for government to maximise its investment - Additional capital necessary .73
Standard Chartered - £8bn economic capital necessary to run Wholesale......75
Theme 3 - Revenue/return opportunity for UK investment banking...... 77
Tying it all in – returns by product.............................................................79
Company Profiles........................................................................................ 83
Barclays ....................................................................................................... 84
RBS............................................................................................................... 96
HSBC .......................................................................................................... 101
Standard Chartered................................................................................... 106
Valuation Methodology and Risks........................................................... 130
Appendices
Appendix I: Glossary of Terms ................................................................ 109
Appendix II: Product Summaries............................................................. 110
Appendix III: Divisional P&Ls .................................................................. 114
Appendix IV: Aggregate P&Ls ................................................................. 117
Appendix V: Reference Reading.............................................................. 123
Appendix VI: Summary Financials .......................................................... 124