Banks U.S.A. Special Report U.S. Banking Quarterly 4Q10 — A Focus on Deposits Analysts Joseph Scott Overview Recently, Fitch Ratings reiterated its Stable Rating Outlook for the U.S. banking sector, which was revised to Stable from Negative in June 2010. Fitch’s Stable Rating Outlook is predicated on modestly improving fundamentals against a backdrop of still weak macro conditions. For more details, see Fitch’s recent outlook report “2011 Outlook: U.S. Banks,” dated Jan. 4, 2011. At this juncture, over 80% of rating outlooks among banks in this report are Stable (excluding issuers on Rating Watch). For the U.S. banking sector, 4Q10 was characterized by a continuance of favorable asset quality trends. Nonperforming loans, NCOs and early stage delinquencies continued to diminish allowing for a continued decline in loan loss provisions. Given the prospect for further declines in problematic loans, loan loss provisions are expected by Fitch to decrease further in 2011. Reduced provisions will help offset revenue headwinds emanating from U.S. legislative actions as well as heightened costs associated with various legal actions, investigations and financial regulation. Along with the effects of the Card Act and limits on overdraft fees, banks likely will have to contend with tough limits on debt card interchange fees under the Durbin Amendment. The Federal Reserve recently proposed draft limits on interchange fees which if imposed would have a sizable effect on fee generation. For some, significant costs associated with mortgage reps and warranties remain on the horizon. See Fitch’s Special Report “U.S. Banks’ Mortgage Repurchase Risks: GSE Claims Abate as Private Label Remains a Concern” dated Feb. 1, 2011. In addition, Fitch is expecting a renewed downturn in residential real estate values with a 10% decline projected for 2011 (see Fitch’s report “U.S. Structured Finance Snapshot: January 2011” dated Jan. 20, 2011). In aggregate, these issues could exert pressure on performance, yet are considered generally manageable in the context of core earnings, reserves and capital positions. A Focus on Deposits Since the time of the financial crisis and its aftermath, U.S. banks have placed renewed focus on building up depository funding and boosting liquidity. More recently, banks have continued to manage liquidity and funding in a conservative fashion in view of the eventual implementation of Basel III liquidity standards. While U.S. banks have noticeably strengthened their liquidity and funding structures, it is still too early to tell how they would fare under Basel III minimum liquidity standards. Items which may require national regulatory discretion, such as treatment of GSE securities and lines from Federal Home Loan Banks, need to be decided. +1 212 908-0624 joseph.scott@fitchratings.com Christopher D. Wolfe +1 212 908-0771 christopher.wolfe@fitchratings.com Thomas Abruzzo +1 212 908-0793 thomas.abruzzo@fitchratings.com Related Research  Macro-Prudential Risk Monitor, Nov. 10, 2010  CDS Spreads and Default Risk—Interpreting the Signals, Oct. 12, 2010  Global Economic Outlook, Oct. 1, 2010  Private Equity: An Industry Overview, Oct. 8, 2010  Improving Bank Liquidity Standards, May 5, 2010 In their deposit building efforts, banks have generally emphasized low-cost and comparatively stable core deposits, while reducing balances of higher cost CDs and nondepository funding sources. Banks have been aided in their efforts by a higher propensity of business customers to hold larger deposit balances amidst economic uncertainties. Given a greater portion of core deposits, funding structures at U.S. banks are currently more resilient than in the past. www.fitchratings.com February 11, 2011 Banks Deposit Mix  U.S. Banks with Greater than $1bn in Total Assets (%) 9/30/10 12/31/09 12/31/08 12/31/07 Non-Interest Bearing 24.1 23.4 22.2 20.5 Interest Bearing 75.9 76.6 77.8 79.5 Total Domestic Deposits 100 100 100 100 Core Deposits 89.8 88.1 84.3 82.6 Time Deposits 22.2 26.2 33.9 33.4 For banks with over $1bn in total assets, core deposits have steadily increased to reach 90% of domestic deposits compared with less than 83% at YE07. Deposi