www.fitchratings.com December 27, 2012 BanksU.S.A. U.S. Banking Quarterly Comment: 3Q12 Two Sides of Mortgage Banking Coin Special Report Revenues Spurred by Capital Markets: For the largest U.S. banks, 3Q revenues were spurred by capital markets. Strong debt issuance, tighter fixed income spreads, and an equity market rally fueled a healthy rebound in capital markets revenues from depressed levels in 3Q11 and subdued activity in the prior quarter. Core profitability for the major banks was slightly improved and better than expected during the quarter. Mortgage Refinance Boom: The mortgage refinance boom also contributed to stronger revenues for the quarter. This reflects the effects of the Federal Reserve‟s quantitative easing measures, which have brought long-term rates down to very low levels. Although refinance activity will continue into 2013, Fitch Ratings expects that refinance activity will level off and thus current levels are not considered sustainable. OCC Guidance: While banks benefitted from the refinance boom, many national banks were also hurt by a change in accounting guidance during the quarter, when the Comptroller of the Currency (OCC) issued new guidance related to borrowers that have filed Chapter 7 bankruptcy. The new guidance requires banks to write these down to collateral value regardless of their performing status. This caused a number of banks to accelerate charge-offs, with a few incurring additional provisions to implement. Basel III Capital Disclosed: The larger U.S. banks began to disclose expected Basel III Tier I common ratios using the published guidance from U.S. bank regulators. Although this guidance is not finalized, Fitch expects that most its rated banks will be in compliance ahead of full implementation. Analysts Christopher Wolfe +1 212 908-0771 christopher.wolfe@fitchratings.com Julie Solar +1 312 368-5472 julie.solar@fitchratings.com Joo-Yung Lee +1 212 908-0560 joo-yung.lee@fitchratings.com Related Research Large Regional Bank Periodic Review  Situated Well for a Challenging Environment (November 2012) 2013 Outlook: U.S. Banks (November 2012) U.S. Banks: Rationalizing the Branch Network (September 2012) Global Trading and Universal Banks Periodic Review (October 2012) Top Six U.S. Banks BAC C JPM WFC GS MS Reported Pretax Income 1.3 (1.0) 8.0 7.5 2.3 (1.5) CVA/DVA Losses/(Gains) 1.9 0.8 0.2  0.4 2.3 Net Investment Losses/(Gains) (1.5) 4.7  (0.7) (0.1)  Other Losses/(Gains) 2.7 (0.9)   0.2 Adjusted Pretax Income 4.4 4.5 7.3 6.8 2.6 1.0 Adjusted Pretax ROA (%) 0.8 0.9 1.3 2.0 1.1 0.5 C  $776m CVA/DVA loss, $4,684m pretax loss on sale of the 14% interest in the Morgan Stanley JV. WFC  Includes gains from trading activities, debt securities AFS, and equity investments. BAC  $1.3bn FVO charge, $0.6bn DVA charge, Inv. Gains of 1.491bn, $1.6bn Merrill class action, 0.8bn UK tax charge, 0.325m settlement with Syncora. JPM  $211m DVA loss, $888m of pretax gains from redemption of trust preferred securities. MS  $2.3bn DVA loss; $193m GWm integration charge. GS: $370m DVA loss; $99m ICBC gain. Source: Company reports, Fitch. U.S. Banking Quarterly Comment: 3Q12 2 December 27, 2012 BanksCommunity Bank Periodic Review Completed Fitch Ratings completed a peer review of 10 rated community banks in mid-October. The Community Bank Peer Review resulted in the affirmation and Stable Outlook of eight banks and the affirmation and Negative Outlook for two banks. Fitch‟s Community Bank Peer Group is mostly defined by banks with less than $10bn in assets that typically operate in a limited number of markets and, in general, are conservative, traditional on-balance sheet lenders for local communities. In Fitch‟s view, the outlook for community banks is trending negative. This group‟s operating business models will likely come under pressures given the lack of revenue diversity and scale and aspects of the Dodd-Frank bill which may affect consumer lending, corporate governance, and increased capital and liquidity Basel III requirements. As such, Fitch believes M&A activity will be greater for community banks compared to larger banks over the next several years. Fitch believes management teams at smaller companies may need to consider M&A as a way of increasing economies of scale and enhance geographic and product diversity, which may help offset the present challenges from increased regulatory oversight, capital limitations and the low rate environment. Further, given weak loan demand, competition is fierce for loan growth. While growing loans continues to be a difficult for the sector as a w