FOR IMPORTANT DISCLOSURE INFORMATION relating to analyst certification, the Firm’s rating system, and potential
conflicts of interest regarding issuers that are the subject of this report, please refer to the Disclosure Appendix.
Mortgage Market Insights
Revisiting US Bank Models
Institutional Considerations in the MBS
Markets Bank buying of MBS thus far in 2006 has occurred in the face of a flat yield
curve, a low carry environment, and a rise in holdings of commercial and
industrial loans, all factors that have challenged conventional wisdom.
With this being a major change in the institutional landscape for MBS thus far in
2006, we revisit US bank models and how these impact bank activity in the
MBS sector. Specifically, we examine long-term industry trends, structural
changes within the US banking industry, the interplay between deposit, loan,
and securities portfolios, and recent trends that have influenced bank
participation in the MBS sector.
Key takeaways from this report include: • Banks are structurally motivated to be more active today in the liquid Agency
pass-through sector than before.
• Consolidation in the US banking industry has resulted in a relatively high
concentration of MBS holdings across a handful of institutions. • Banks can no longer be considered collectively, as one group. Rather several
institution-specific models dictate bank participation in the MBS sector today. • Growth of the securities portfolio is the net result of relative growth of deposits
and loans (commercial and industrial, mortgage, consumer, commercial real estate), with the latter the preferred habitat for bank investments.
• Bank portfolio managers are more relative value-oriented today, but applying
relative value in the classic sense is secondary to duration, earnings, and net interest margin targets as set by the asset liability management committees.
• Relative value views are more commonly expressed in the choice of hedges
for servicing portfolios, which are an increasingly important component of total bank assets.
• Share buybacks, securities portfolio run-off, mergers and acquisitions, and
loan acquisitions are all viable options for banks to manage financial targets. Sales of MBS are weighed against these more manageable options.
17 May 2006
Fixed Income Research
http://www.credit-suisse.com/researchandanalytics
Contributors
Satish Mansukhani
+1 212 325 5985
Adama Kah
+1 212 325 0318
1
Table of Contents
I. Executive Summary 2
II. Long-term industry trends 6
III. Recent industry trends (last 3-5 years) 25
IV. Near-term industry trends (last 3-6 months) 35
V. A final review of bank models today and some closing thoughts 44
VI. Trends at the top 4 banks 50
Executive Summary
3
Executive Summary
� Banks are buyers, not sellers of MBS
– Banks have been buyers of US MBS rather than sellers
– This buying has coincided with a flat yield curve, low carry, and an uptick in commercial and industrial loan growth, all of which defy conventional wisdom
� Bank portfolio management practices have changed due to structural changes within the US banking industry
– Bank portfolio management practices have evolved rapidly over the last few years. This has resulted from rapid industry consolidation, a shift in investment bogeys, an enterprise rather than just a portfolio level view on assets, and greater portfolio manager sophistication
– Today, banks can no longer be considered collectively, as one group, with similar portfolio management techniques, but rather as individual institutions with often markedly varying practices
– Consolidation has resulted in larger institutions today, with portfolio models shifting from traditional asset/liability management to a mix of favoring liquidity and taking relative value views
� Growth of the securities portfolio is subject to the interplay between deposit and loan growth
– The preferred habitat for banks is to invest in high-yielding loans (mortgage, commercial and industrial, consumer, commercial real estate). Analysts view loan growth favorably, as it is generally assumed to be organic
– Some rules of thumb:
� Deposit growth exceeds loan growth -> Invest excess deposit liquidity in securities portfolio (2001, 2004, year-to-date 2006)
� Deposit growth lags loan growth -> Reduce portfolio through runoff or sale to invest in loans (1999 and 2000)
� Deposit and loan growth high -> Deploy excess liquidity in loans. No need for securities
� Deposit and loan growth low -> Growing securities portfolio may not be best economic choice (results in ballooning the balance sheet). Buy back shares or retire debt.
4
Executive Summary
� Advantageous funding of securities through low-yielding deposits is a myth
– The notion that banks can fund securities at deposit rates is a myth
– Loan holdings exceed deposits, making incremental securities purchases being funded at market borrowings
– Executives of the branch network want their franchise to be viewed as a profit center, not a subsidy to growth of the
securities portfolio. Internal funds transfer pricing ensures banks evaluate securities at market funding levels
� Recent considerations – Are banks entirely relative value oriented today?
– No. Net interest margin and earnings, duration targets set by the ALCO (Asset/Liability Committees) remain driving
criteria.
– Some large banks have shifted performance bogeys to track broadly followed market indices instituted to better
manage duration drift. Banks are structurally motivated to be active in the pass-through sector more than before
– Despite this, banks do NOT apply relative value in the classic sense as ALCO targets, absolute over relative
performance all supercede true relative value decisions dictated by traditional RV metrics (nominal, Z, option-
adjusted spreads, etc.)
– Increased management of servicing assets by bank portfolio managers does provide some latitude for applying
relative value into their daily decision making
5
Executive Summary
� Recent considerations –Institution specific observations
– MBS growth has occurred mostly at large banks, not small banks. The top 4 banks, by MBS holdings, are Bank of America, Wachovia, Wells Fargo, and JPMorgan/Chase
– Bank purchases have been primarily in the form of Agency pass-throughs, not structured MBS
– Recent pick-up in purchases of MBS at one large institution has been as a catch up to incorrect calls on the market – Fed transparency and volatility - in Q4:05
– Recent pick-up in purchases of MBS at one large institution has been a repositioning of duration; sales of arms/hybrids in preference to 30-year pass-throughs
– Recent pick-up in purchases of MBS at one large institution was the result of a directive from the CEO to offset weak growth in other revenue lines
� Outlook
– Banks are expected to remain active in MBS. Strong deposit growth continues, outpacing loan growth (even with mild uptick in C and I loans, mortgage originations of preferred assets – arms, hybrids, prime quality fully amortizing fixed-rate – have declined, regulatory scrutiny on loan holdings has increased)
– Some banks are structurally motivated to favor pass-throughs for liquidity and changes to investment bogeys
– Some banks have raised exposure to credit (consumer or other) and pass-through holdings are viewed as a high credit quality offset to these holdings
– Some bank PMs manage servicing, which is hedged with pass-throughs
– Unrealized losses on AFS holdings are at record highs, turning any sales into a potential “earnings event”
Long-term industry trends
7
Investment portfolio guidelines direct banks to high credit quality assets
� Boards of directors generally prohibit banks from buying less than AAA, GSE, or US Treasury quality credit risk
� GSE credit quality
� High liquidity
� Offer yield spread relative to Treasuries and other highly rated assets
� Favorable risk-based capital
� Strong understanding of collateral, as banks are also large originators of mortgages
Mortgages and MBS are preferred assets at banks –Why do banks invest in mortgages and MBS?
8
Bank portfolios shift to higher quality assets, including mortgage loans and MBS
…. to residential mortgage-related loans and MBSShift from C&I and consumer loans ….
Asset Composition at 06/30/00
(Total assets = $3.3 trillion)
C&I
19%
Comm. Mort.
Loans
10%
Other Assets
30%
MBS
8%
Home Eq.
Loans
3%
Residential
Mortgage
Loans
14%
Credit Cards
and related
plans
3% Consumer
Loans
10%
Securitized
Consumer
Loans
3%
Asset Composition at 12/31/05
(Total assets = $4.5 trillion)
C&I
11%Comm. Mort.
Loans
9%
Other Assets
29%
Securitized
Consumer
Loans
4%
Consumer
Loans
9%
Credit Cards
and related
plans
3%
Home Eq.
Loans
7% Residential
Mortgage
Loans
16%
MBS
12%
Source: Credit Suisse (US Mortgage Strategy), Federal Reserve
Mortgage-related = 35%Mortgage-related = 25%
9
Banks are large originators of mortgages
2005 2004
2005 Volume Market Volume Market 2004
Rank Mortgage Originator ($B) Share (%) ($B) Share (% Rank
1 Countrywide Financial, CA 491 15.7% 363 12.9% 1
2 Wells Fargo Home Mortgage, IA 392 12.6% 298 10.6% 2
3 Washington Mutual 249 8.0% 255 9.1% 3
4 JP Morgan Chase 183 5.9% 197 7.0% 4
5 Bank of America Mtg. & Affiliate, NC 159 5.1% 144 5.1% 5
6 Citimortgage, Inc. MO 124 4.0% 103 3.7% 6
7 GMAC Residential Holding Corp, PA 92 2.9% 87 3.1% 7
8 Ameriquest Mortgage Co, CA 80 2.6% 83 2.9% 8
9 GMAC-RFC, MN 64 2.1% 51 1.8% 12
10 IndyMac, CA 61 1.9% 38 1.3% 17
Total for Top 10 1,895 60.7% 1,620 57.6%
Total for Top 30 Originations 2,739 87.8% 2,328 82.8%
Total Originations 3,120 100.0% 2,810 100.0%
Increased concentration of mortgage originations
by top 4 banks
0.6
1.0
2.1
2.7
3.8
2.83.1
8%
42%
34%
25%
40%43%
39%
0.0
1.0
2.0
3.0
4.0
5.0
1995 2000 2001 2002 2003 2004 2005
Origin
atio
n V
olu
me (
$ trilli
on)
0%
10%
20%
30%
40%
50%
Top 4
Origin
ato
rs S
hare
(%
, R
HS
)
1-4 Family Mortgage Origination Top 4
Source: Credit Suisse (US Mortgage Strategy), Inside MBS & ABS
10
Higher share of mortgage assets in bank portfolios has contributed to historically low credit losses currently
Source: Credit Suisse (US Mortgage Strategy), SNL
Net Charge-offs as % of loans
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Ne
t C
ha
rge-o
ffs (
% o
f lo
an
s)
NCO/Loans Nonaccrual Loans% of Loans
11
Mortgage loans versus MBS – What are bank preferences between mortgages and MBS?
The view on mortgage loans
� Wall Street equity analysts reward loan growth, given that banks are in the lending
business
� Loans offer higher yields and spreads, as they are funded with deposits
� Loans, however, are demand driven, and final approval is subject to internal credit
policies and regulatory supervision
The view on MBS
� Securities are used to help banks maintain stable earnings growth and deploy excess
deposit liquidity
12
Local demand factors for MBS – How do banks, at any given point in time, decide between investing in loans versus MBS?
� Start with deposit growth, examine loan growth relative to deposit growth
Strong deposit growth
� If deposit and loan growth are robust, loans remain the preferred asset and no need to
invest in securities
� If deposit growth exceeds loan growth, banks need to and can deploy excess liquidity
Weak deposit growth
� If deposit growth is lower than loan growth, potential for securities sales or portfolio run-
off to invest in loans
� If deposit growth and loan growth are low, evaluate option to buy back shares versus
growing securities portfolio to optimize financial targets
13
Drivers of Bank Portfolio Growth – A template
�Growing portfolio is dilutive to
net interest margin (NIM) and
return on assets (ROA)
�Best use of capital may be to
retire debt and buy back stock
�Actively reducing portfolio through
sale may be a better option than
increasing borrowings
BELOW TARGET
�Growing securities portfolio
maintains asset growth and
deploys excess deposit liquidity
�Deploy excess liquidity into loans.
Securities not needed to maintain
asset growth
�Securities portfolio may be
allowed to run off
AT/ABOVE TARGET
BELOW TARGETAT/ABOVE TARGETDEPOSIT GROWTH
ASSET/LOAN GROWTH
Source: Credit Suisse (US Mortgage Strategy)
14
Local demand factors for MBS – How do banks, at any given point in time, decide between investing in loans versus MBS?
� Historical scenarios – Low deposit growth/high loan growth – 1999 and 2000 – MBS
holdings declined at banks
� Historical scenarios – High deposit growth/low loan growth – 2001 and 2004 – MBS
holdings surged at banks
� Recent scenario - High deposit growth/slowing loan growth -> high securities growth
15
Strong growth in deposits and assets post-2000
Deposits and Assets (YOY change)
-5-25
258226
182 185220
160
337
240
22
115
4867
103
148 138
224
156
92
-50
0
50
100
150
200
250
300
350
400
1997 1998 1999 2000 2001 2002 2003 2004 2005 Q1:06
Ch
an
ge
($
B)
Deposits All Assets
Source: Credit Suisse (US Mortgage Strategy), Federal Reserve
16
Post-2000 growth concentrated in mortgage assets
Source: Credit Suisse (US Mortgage Strategy), Federal Reserve
MBS holdings (YOY change)
3244
-22
-4
8396
353647
35
-130
-80
-30
20
70
120
1997
1998
1999
2000
2001
2002
2003
2004
2005
Q1:06
Ch
an
ge (
$B
)
MBS
C&I loan holdings (YOY change)
5672
48
-71-57
-43
2
47
16
36
-130
-80
-30
20
70
120
1997
1998
1999
2000
2001
2002
2003
2004
2005
Q1:
06
Ch
an
ge (
$B
)
C&I
Residential mortgage loan holdings (YOY change)
3723
-10
96
12
82
8
-3 -6
14
86
-2
49
2414 17
54
41
2210
-130
-80
-30
20
70
120
1997
1998
1999
2000
2001
2002
2003
2004
2005
Q1:06
Change (
$B
)
Mortgage Loans HEL
Consumer and CRE loan holdings (YOY change)
-8
1
-21
-18
2333
-20
9134
35
142 2
292323
5
46
-130
-80
-30
20
70
120
1997
1998
1999
2000
2001
2002
2003
2004
2005
Q1:
06
Change (
$B
)
Consumer Loans CRE
17
Deposit growth and supply of assets for investment are key determinants of MBS holdings growth
� In recent years:In recent years:In recent years:In recent years: MBS holdings growth driven by need to deploy excess deposit liquidity
� In 1999/2000:In 1999/2000:In 1999/2000:In 1999/2000: Flat/decline in MBS holdings growth on slow deposit growth and strong growth in C&I and mortgage loan holdings
Source: Credit Suisse (US Mortgage Strategy), Fed
Cumulative change in Deposits and Assets
(1996-to-date)
-200
0
200
400
600
800
1000
1200
Dec-
96
Dec-
97
Dec-
98
Dec-
99
Dec-
00
Dec-
01
Dec-
02
Dec-
03
Dec-
04
Dec-
05
Cum
ula
tive C
hange in D
eposits
($B
)
(500)
-
500
1,000
1,500
2,000
2,500
Cum
ula
tive C
hange in A
ssets
($B
)
Deposits Assets (RHS)
Growth in
assets
and
deposits
Slow
deposit
growth
Cumulative change in MBS, Mortgage-
related Loans and C&I (1996-to-date)
-100
0
100
200
300
400
500
600
Dec-
96
Dec-
97
Dec-
98
Dec-
99
Dec-
00
Dec-
01
Dec-
02
Dec-
03
Dec-
04
Dec-
05
Cum
ula
tive C
hange (
$B
)
MBS Mortgage-related loans** C&I
Growth
in all
Growth in C&I
and loans;
MBS
declining/ flat
** Mortgage-related loans = raw mortgage loans +
HEL
18
Relative value views on MBS – Are banks more relative value oriented today?
� Net interest margins, earnings targets, search for yield and carry are primary driving
factors feeding into decisions to invest into MBS
� Relative value, in the classic sense as applies to a money manager or total-return
oriented investor, is a secondary consideration
� Accounting practices – FAS 115 – allow banks to maximize current yield and be less
concerned about any mark-to-market impact (1) or relative value
� MBS holdings have grown irrespective of trends in spreads (nominal, Z-spread,
OAS)
� MBS holdings have grown despite reduction in carry and flat yield curve
� MBS holdings have grown despite recent uptick in commercial and industrial
loans
� MBS holdings have grown as deposit growth has outpaced loan growth – banks
indeed face a challenging environment for asset growth
(1) FAS 115 – Securities holdings are classified under three categories – trading, available for sale (AFS), held to maturity (HTM). MBSholdings are primarily held under the AFS category. Gains and losses on AFS holdings flow through to the balance sheet, impacting equity capital. In comparison, any gains and losses on the trading account flow through to the income statement, potentially imparting volatility to earnings, and the relatively restrictive HTM classification is limiting in terms of optimal portfolio management.
19
MBS valuation metrics are not the sole determining factor …
� Loose relationship between bank MBS holdings growth and spread levels
Change in MBS holdings vs. Nominal basis
0
100
200
300
400
500
Dec-
96
Dec-
97
Dec-
98
Dec-
99
Dec-
00
Dec-
01
Dec-
02
Dec-
03
Dec-
04
Dec-
05
Cu
m.
Ch
g.
in M
BS
Ho
ldin
gs (
$B
)
0
20
40
60
80
100
120
30
-Yr
CC
No
m.
Sp
rea
d (
bp
)
Large Banks MBS Holdings (RHS)
30-Yr CC Nominal Basis (RHS)
Source: Credit Suisse (US Mortgage Strategy)
20
Flat curve and low carry are not a sufficient condition for bank selling of MBS
Carry vs. Cum. change in MBS holdings
0
3
6
9
12
15
Dec-9
6D
ec-9
7D
ec-9
8D
ec-9
9D
ec-0
0D
ec-0
1D
ec-0
2D
ec-0
3D
ec-0
4D
ec-0
5
Curr
ent C
oupon Y
ld S
pre
ad to
3-m
onth
LIB
OR
(%
)
0
100
200
300
400
500
Chg. in
MB
S H
old
ings (
$B
)
Raw Carry (ticks/month)
Large Banks MBS Holdings (RHS)
Small Banks MBS Holdings (RHS)
Low Carry
Flat/slight
decline in
MBS holdings
Low Carry
Increase in Large
bank MBS
Yield curve shape vs. rate levels
3.00
3.75
4.50
5.25
6.00
6.75
7.50
Dec-
96
Dec-
97
Dec-
98
Dec-
99
Dec-
00
Dec-
01
Dec-
02
Dec-
03
Dec-
04
Dec-
05
10-Y
r S
wap r
ate
(%
)
0
50
100
150
200
250
300
10s/2
s S
wap C
urv
e (
bp)
10-Yr Swaps 10s/2s Swap Spread (bp) -- RHS
Flat curve
environment
Flat curve
environment
Source: Credit Suisse (US Mortgage Strategy), Inside MBS & ABS
21
Majority of bank securities holdings are classified as AFS
AFS Securities % of Total Securities Holdings
40%
60%
80%
100%
2000Q
120
00Q
320
01Q
120
01Q
320
02Q
120
02Q
320
03Q
120
03Q
320
04Q
120
04Q
320
05Q
120
05Q
3AF
S C
lassif
ied
Secu
riti
es
Sh
are
(%
)Bank of America Wachovia
JP Morgan Chase Wells Fargo
Source: Credit Suisse (US Mortgage Strategy), SNL
22
Funding advantages at banks – Don’t banks have an advantage as they can fund at deposit rates?
� The notion that banks can fund at deposit rates is largely a myth
� As loan holdings exceed deposits, incremental securities purchases are funded at
market borrowings rather than through deposits
� Executives responsible for the branch franchises want these to be viewed as profit
centers, not just subsidizing a securities portfolio
� Internal funds transfer pricing (FTP) policies also force banks to evaluate securities
relative to duration-matched market funding levels
� So, while the banking institution benefits from inelastic deposit funding sources, these do
not directly influence the portfolio manager’s decision to buy
23
Strong growth in mortgage assets despite an increase in bank cost of funds, driving NIM to historical tights
Source: Credit Suisse (US Mortgage Strategy), SNL
Bank Cost of Funds vs. 1-month LIBOR
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Rate
(%
)
Cost of Funds 1-month LIBOR
Net Interest Margin
3.50
3.75
4.00
4.25
4.50
1996
1997
1998
1999
2000
2001
2003
2004
2005
NIM
(%
)
24
Share of CDs has surged, as rates are more attractive
Source: Credit Suisse (US Mortgage Strategy), SNL
CD Share of Total Deposits
20%
25%
30%
35%
40%
45%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
CD
Share
of
Tota
l D
eposits (
%)
Yields on CDs
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
CD
Rate
(%
)
Recent industry trends (last 3-5 years)
26
Bank portfolio manager sophistication – Given industry consolidation, aren’t bank portfolio managers and their practices far more sophisticated today? � Portfolio managers at some of the nation’s large banks are indeed far more sophisticated
today than 10 to 15 years ago
� The performance bogeys at some of the large banks are now broadly followed market indices. This developed as a way for banks to manage duration drift, especially extension
� Because of this trend, some banks are now more structurally motivated to be active in the pass-through sector
� However, the primary considerations remain net interest margin and earnings, duration targets as set by the Asset/Liability Committees (ALCO)
� Moreover, absolute performance supercedes relative performance
� Within the above constraints, portfolio managers at banks do make coupon, yield/convexity plays in their active day-to-day management
� Banks may be buyers of MBS even if traditional relative value metrics – nominal spreads, adjusted spreads, Z-spreads, OAS, price regressions – point to MBS being rich. This may not be the case for traditional relative value managers.
27
Pass-throughs represent a higher share of bank MBS holdings today
Growth in MBS holdings at banks
0
150
300
450
600
750
Dec-
96
Dec-
97
Dec-
98
Dec-
99
Dec-
00
Dec-
01
Dec-
02
Dec-
03
Dec-
04
Dec-
05
All
MB
S H
old
ings (
$B
)
0
100
200
300
400
500
Pass-t
hro
ughs (
$B
)
MBS Passthrus (Agy + Non-Agy)
c
Rising share of pass-throughs at banks
0
150
300
450
600
750
Dec-
96
Dec-
97
Dec-
98
Dec-
99
Dec-
00
Dec-
01
Dec-
02
Dec-
03
Dec-
04
Dec-
05
All
MB
S H
old
ings (
$B
)65%
70%
75%
80%
Pass-t
hro
ughs S
hare
(%
)
MBS Pass-throughs share (%, RHS)
Source: Credit Suisse (US Mortgage Strategy), SNL
28
High capital ratios – How have high capital ratios helped position banks vis-à-vis MBS?
� Capital ratios at banks are high today due to pressure from the rating agencies and the
Federal Reserve to establish enough of a cushion against a downturn in the credit cycle
� With a strong credit environment, banks are finding themselves more than adequately
capitalized
� This contrasts to the scenario during the late 1980s through the early- to mid-1990s
when banks were forced to de-lever and shrink their balance sheets as they were
relatively undercapitalized
� Today’s high capital ratios position banks to be more opportunistic
29
Adequate capital is not a limiting factor impacting bank asset selection decisions
Source: Credit Suisse (US Mortgage Strategy), SNL
Bank Tier 1 capital ratios are at high end of historical range
4
5
6
7
8
9
10
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Tie
r 1 C
apital R
atio (
%)
B of A Wachovia JP Morgan Chase
30
Earnings management – Aren’t net interest margins at banks declining? What are banks doing to improve earnings?
� Net interest margins at banks have indeed been on the decline
� Banks have been following a variety of strategies today
� One strategy is to buy back their own shares to manage earnings per share figures to
Wall Street equity analyst targets
� In an environment of strong deposit relative to loan growth, investing in securities has
been a more attractive option than buying back shares
� In an environment of weak deposit growth, buying back shares may be a more attractive
option and securities portfolio growth likely slows
� We have observed a combination of factors – high deposit growth, escalation in volume
of share buybacks, increased M&A activity, growth in commercial and industrial loans,
growth in MBS holdings, heavy demand for mortgage loans – all reflecting the flexibility
of options available to banks today to grow assets and manage earnings, net interest
margins, etc.
31
Bank appetite for assets – How does this compare to past environments?
� Our view has been that on the heels of the above factors – strong capital ratios, high
deposit growth – that banks have been challenged to find enough income-earning assets
� This is evidenced through the asset accumulation that has occurred – acquisitions of
credit card and home equity lenders, purchases of auto loans, mortgage loans and MBS
� The rules remain – favor loan growth (mortgages, home equity, commercial and
industrial), but if deposit growth continues, deploy into MBS
32
Escalated pace of share buybacks and dividend payouts
Source: Credit Suisse (US Mortgage Strategy), SNL
Bank
Avg. Purchase
Price of 2005
Buybacks 2005 2004 2003 2002 2001 2000
Bank of America 45.61$ 126 148 259 218 164 135
Wachovia 51.76$ 52 48 60 15 30 19
JPMorgan Chase 33.50$ 102 25 0 0 22 NA
Wells Fargo 59.80$ 53 38 31 43 39 79
U.S. Bancorp 70.77$ 3 94 15 45 20 33
SunTrust Bank 29.37$ 61 0 3 6 8 13
Natcity 34.31$ 45 42 11 1 9 3
Total Repurchases: NA 442 395 379 328 293 281
Change: 48 16 51 36 11
2005 2004 2003 2002 2001 2000
Bank of America 47 46 40 41 55 46
Wachovia 46 44 39 38 66 NM
JPMorgan Chase 57 88 42 170 170 45
Wells Fargo 44 45 41 35 51 39
U.S. Bancorp 40 47 44 46 85 49
SunTrust Bank 51 39 38 37 34 34
Natcity 47 31 36 46 51 40
High share buybacks (shares in millions) Stable to high dividend payout ratios
33
High equity market valuations
Bank Stocks Index: Valuations trending higher
100
200
300
400
500
Dec
-96
Dec
-97
Dec
-98
Dec
-99
Dec
-00
Dec
-01
Dec
-02
Dec
-03
Dec
-04
Dec
-05
Index L
evel
BIX Index
Source: Credit Suisse (US Mortgage Strategy
34
Rise in M&A activity, resulting in greater exposure to the consumer, search for income-generating assets
Acquired
Institution Date Deal
Bank or Portfolio Announced Industry Value
Bank of America GM auto loans Jul-05 Auto finance $55B over 5-yrs
Bank of America MBNA Jun-05 Credit card $35.7B
Wachovia Westcorp Sep-05 Thrift/Auto finance $3.4B
U.S Bancorp Aviation card business Feb-05 Credit card NA
HSBC Metris Aug-05 Credit card NA
Washington Mutual Providian Jun-05 Credit card NA
Source: Credit Suisse (US Mortgage Strategy), SNL
Near-term industry trends (last 3-6 months)
36
Regulatory scrutiny of mortgage loans and commercial real estate, declines in mortgage origination volumes –What has been and is the expected impact of these factors? � Banks have a preference for prime quality, fully amortizing ARMs and fixed-rate
mortgages
� Origination volumes of both are on the decline as a result of a flat yield curve (impacting
share of ARM originations) and higher rates (resulting in decline of fixed-rate mortgage
originations)
� The growing share of innovative mortgage products – interest-only, option ARMs – has
increased regulatory scrutiny of mortgage loan holdings at banks
� As stated before, the loan side of the asset mix is demand driven. Overlaying this with
declining origination volumes, increased regulatory scrutiny, and strict adherence to
credit policies dampens the outlook for significant growth in mortgage loan holdings.
(The appetite for mortgage loans remains considerable, driving securitized issuance
volumes of prime MBS lower and the non-Agency/Agency basis tighter)
37
Securities versus whole loan – How do practical factors impact a bank’s view on buying mortgage loans versus securities?
� Liquidity – lower on mortgage loans than on MBS
� Credit exposure – higher on mortgage loans than on Agency pass-throughs, CMOs, or
structured, AAA-rated non-Agency pass-throughs and CMOs
� Regulatory capital – 50% on mortgage loans, 20% on Agency pass-throughs, CMOs and
on AAA- or AA-rated non-Agency MBS
� Factors favoring loans include – higher yield, held-to-maturity (HTM) classification,
limiting mark-to-market impact, and favorable view by Wall Street equity analysts
� Factors favoring MBS include – operational ease in trading, settlement practices, fewer
hurdles to cross as they relate to credit quality and approvals
38
Current risk-based capital weightings on asset classes
Source: Credit Suisse (US Mortgage Strategy), Federal Reserve
Regulatory risk-based capital weightings
Security Rating Risk Weight
Minimum Total
RBC Charge
Securities
AAA- and AA-rated (including 20% 1.6%
Agency MBS)
A-rated 50% 4.0%
BBB 100% 8.0%
BB 200% 16.0%
Loans
first-lien mortgage loans 50% 4.0%
39
Do banks have greater appetite for credit risk today?
� Banks have displayed comfort in increasing exposure to the consumer sector. This has
been evident in their purchases of home equity and credit card lenders, acquisitions of
auto loans, etc.
� Some banks have also displayed appetite for lower credit quality products, either through
acquisition of lower than prime quality secured mortgages or through the addition of
lower-rated securities
� This has gone in tandem with the bank bid for high credit quality Agency pass-throughs
40
Mortgage servicing – How has this resulted in bank appetite for MBS?
� The largest banks, comprising the largest holders of MBS, also happen to be amongst
the largest servicers of mortgages
� Some banks take an “enterprise” level view, combining their need for MBS as it fits into
their portfolio as well as hedging mortgage servicing rights
� These hedging activities are often more relative value oriented given the active
management required of these assets
41
The largest banks are also amongst the largest servicers of mortgages…..
Source: Credit Suisse (US Mortgage Strategy), Inside MBS & ABS
2005 2004
2005 Volume Market Volume Market 2004
Rank Servicer ($B) Share (%) ($B) Share (%) Rank
1 Countrywide Financial 1,111 12.1% 838 10.5% 1
2 Wells Fargo Home Mortgage 1,005 11.0% 782 9.8% 2
3 Washington Mutual 747 8.2% 728 9.1% 3
4 JP Morgan Chase 604 6.6% 563 7.0% 4
5 CitiMortgage Inc. 403 4.4% 364 4.5% 5
6 Bank of America Mtg. & Affiliates 368 4.0% 332 4.1% 6
7 GMAC Mortgage Corp. 289 3.2% 232 2.9% 7
8 ABN Amro Mortgage Group 206 2.3% 201 2.5% 8
9 National City Mortgage Co. 170 1.9% 165 2.1% 9
10 PHH Mortgage (Cendant) 155 1.7% 146 1.8% 10
Total for Top 10 5,058 55.3% 4,351 54.3%
Total for Top 30 Servicers 6,491 70.9% 5,747 71.7%
1-4 Family Mortgages Outstanding 9,152 100.0% 8,014 100.0%
42
…with these banks applying TRR strategies
Source: Credit Suisse (US Mortgage Strategy), Inside MBS & ABS
Servicing assets outstanding have surged, increased
concentration of holdings
3.5
9.2
5.1
6.6%
24.9%
37.9%
0.0
2.0
4.0
6.0
8.0
10.0
1995 2000 2005
Serv
icin
g A
ssets
($ t
rilli
on)
0%
10%
20%
30%
40%
Top 4
Se
rvic
ers
Share
(%)
All Servicers Top 4 Servicers Share of Total (%, RHS)
43
Mortgage servicing – Does FAS 156 change the way banks have hedged mortgage servicing rights?
� FAS 156 is a new alternative to FAS 140 (also colloquially referred to as lower-of-cost-
or-market, LOCOM, accounting) and FAS 133 (also colloquially referred to as hedge
accounting)
� FAS 156 better aligns accounting treatment to economic reality of servicing assets and
hedges by moving to mark-to-market accounting for assets and hedges. FAS 140 often
resulted in a mis-alignment, with servicing assets recorded at LOCOM, but hedges
recorded at mark-to-market or available-for-sale
� Adoption of FAS 156, especially by banks that used FAS 140, we believe, has
resulted in an increase in one large bank’s recent purchases of Agency pass-throughs
� Adoption of FAS 156, by banks that used FAS 133, is expected to have limited impact
on their activities in the Agency pass-through sector
� Adoption of FAS 156 by smaller servicers that may not have used FAS 133 due to its
relative complexity and difficulty of implementation is expected to result in limited change
in their use of Agency pass-throughs for hedging purposes
A final review of bank models and some closing thoughts
45
No single model, but multiple models exist
� No single model dictates the portfolio management practices at banks. Rather multiple
models exist spanning across:
– Asset/liability management
� The norm at small- and mid- sized banks
� Pocket carry, position portfolio to take advantage of a “call” on the market, extract value through allocation into
specific coupons, sectors, structure
– Benchmark total rate of return
� Initially instituted as a means to manage duration drift in rising rate environments
� Relative performance, to a benchmark, counts for little if absolute performance is negative
– “Enterprise” level view on MBS
� Role of a bank portfolio manager, especially at any of the large money centre banks, has changed materially
over the last few years.
� Duration drift, which paralyzed banks in the past, is now minimized on an “enterprise” level, with some viewing
servicing assets as an offset to duration extension on their portfolio
46
Outlook for continued demand for MBS, as deposit growth is strong thus far in Q2:06
MBS holdings growing, mortgage loans slowing
2
24
(2)
35
8
(2)
22
8
1
(10)
-
10
20
30
40
MBS Residential Mortgage
Loans
Home Eq. Loans
Change (
$B
)
Q4:05 Q1:06 Q2:06-to-date (thru 04/19/06)
Source: Credit Suisse (US Mortgage Strategy), Federal Reserve
MBS holdings growth concentrated in pass-throughs
(4)
6
40
(6)
22
(0)
(10)
-
10
20
30
40
50
Pass-throughs (Agy + Non-Agy) CMOs (Agy + Non-Agy)
Change (
$B
)
Q4:05 Q1:06 Q2:06-to-date (thru 04/19/06)
C&I holdings growth continues, but lags deposit growth
17
7
(3)
16
5
99
42
(10)
(5)
-
5
10
15
20
C&I Comm. Mort. Loans Consumer Loans
Ch
an
ge
($
B)
Q4:05 Q1:06 Q2:06-to-date (thru 04/19/06)
Strong deposit and asset growth continues
115
95
(25)
22
6981
(50)
(25)
-
25
50
75
100
125
Deposits Assets
Change (
$B
)
Q4:05 Q1:06 Q2:06-to-date (thru 04/19/06)
47
Outlook for limited bank selling of securities given negative P&L currently on AFS holdings
Unrealized P&L of bank AFS securities: Near historical lows
-20
-15
-10
-5
0
5
10
15
Dec-
96
Dec-
97
Dec-
98
Dec-
99
Dec-
00
Dec-
01
Dec-
02
Dec-
03
Dec-
04
Dec-
05
P&
L o
f A
FS
Securities (
$B
)
2.0
3.0
4.0
5.0
6.0
7.0
8.0
10-Y
r S
wap Y
ield
(%
)
Net Unrealized Gains (Losses) on AFS Securities 10-Yr Swap Yield (%, RHS)
Source: Credit Suisse (US Mortgage Strategy), FDIC (at 12/31/05)
48
Declining origination volumes for mortgages
Source: Credit Suisse (US Mortgage Strategy), Inside Mortgage Finance (through 2005), MBA (2006 forecast)
0.91.0
0.8 0.7 0.8 0.9
1.51.3
1.0
2.1
2.7
3.8
2.8
3.1
2.2
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1992
1994
1996
1998
2000
2002
2004
2006 Est
.
Mort
gage O
rigin
atio
ns (
$T
)
49
Increased regulatory scrutiny, a concern for mortgage loan holdings growth at large banks
Primarily
small banks,
where CRE
loans
compromise
25% of
assets, in
aggregate
� Concerned that proposal
limits CRE activity
� Recommend that regulators
should take into consideration
geographical regions with
less cyclical
economies/property
valuations
� Regulators’ concerns center around risk of credit losses
at banks with high concentrations of CRE loans in an
economic downturn
Key proposals
� Requires banks with certain threshold CRE
concentrations to hold higher capital
� CRE concentrations of 300% or more of total capital is
considered high
� Comment period ended April 2006
Commercial
real estate
loans
CRE
concentrations
01/10/06
All banks, in
general
� Underwriting to a “worst
case” deemed too
conservative for IO loans
� Need for differentiation
between IO and neg-am
loans, given substantially
different risks.
� Guidance should apply to
all originators of these
loans; not only to federally
regulated institutions
� Regulators are concerned that nontraditional mortgages
are being offered to borrowers that might not otherwise
be qualified
Key proposals
� Underwrite nontraditional mortgages to a “worst case”
(Fully indexed, fully amortizing) assumption
� Proposal applies to all nontraditional mortgage
originations, irrespective of whether loans are retained in
portfolio or securitized
� Addresses appropriateness of high LTV and low doc
loans on nontraditional loans
� Extended comment period ended March 2006. Final
guidance expected summer 2006
� IO
mortgages
� Neg-am
mortgages
Underwriting
standards for non-
traditional
mortgages
12/19/05
Banks
impacted
Bank an other stakeholders
concerns and commentsRegulators’ concerns and key proposals
Products
impacted
Guidance focuses
onDate Issued
Source: Credit Suisse (US Mortgage Strategy)
Bank Regulatory Scrutiny
Trends at the top 4 banks
51
Substantial proportion of bank MBS and mortgage loan holdings held by a few large banks
Source: Credit Suisse (US Mortgage Strategy), FDIC (at 12/31/05)
Top banks' share of all bank holdings: By mortgage loans and MBS
35% 36%
53%
48%
0%
10%
20%
30%
40%
50%
60%
Mortgage Loans All MBS
Share
of
Tota
l (%
)
Subtotal for Top 4 banks Subtotal for Top 10 banks
52
Top 4 banks by mortgage holdings
Source: Credit Suisse (US Mortgage Strategy), FDIC (at 12/31/05)
Share of all bank mortgage holdings
Top 4 banks by mortgage assets
All
mortgage
holdings
Mortgage
Loans All MBS
Agency
Pass-
throughs
Agency
CMOs
Non-
Agency
Pass-
throughs
Non-
Agency
CMOs
1 Bank of America 18% 15% 21% 31% 0% 18% 4%
2 Wachovia 7% 5% 9% 12% 0% 0% 10%
3 Well Fargo 6% 8% 3% 4% 0% 0% 5%
4 JP Morgan Chase 5% 7% 2% 3% 0% 0% 0%
Subtotal for Top 4 banks 36% 35% 36% 51% 0% 18% 19%
Subtotal for Top 10 banks 51% 53% 48% 60% 23% 33% 29%
53
MBS holdings at these banks is concentrated in pass-throughs
Source: Credit Suisse (US Mortgage Strategy), FDIC (at 12/31/05)
Top banks' share of all bank holdings: By MBS type
51%
0%
18% 19%
60%
23%
33%29%
0%
10%
20%
30%
40%
50%
60%
70%
Agency Pass-throughs Agency CMOs Non-Agency Pass-
throughs
Non-Agency CMOs
Share
of
Tota
l (%
)
Subtotal for Top 4 banks Subtotal for Top 10 banks
54
Strong relationship between deposit growth and MBS holdings growth
**Residential mortgage loans + HEL
Source: Credit Suisse (US Mortgage Strategy), SNL
Wells Fargo
55
14 11 22
195
3410
-11
12 15
-26-9 -8
25 253 9 4 10
60
14
-10-8
11
-50
0
50
100
150
200
250
2000*
2001
2002
2003
2004
2005
Yearl
y C
han
ge (
$B
)
Deposits MBS C&I Residential Mort. Loans**
JP Morgan Chase
2317
30 31 27
40
4 4
-12
4 185
-1 -1
2 4 68
32
42
2520
8
-30
-15
0
15
30
45
2000*
2001
2002
2003
2004
2005
Yearl
y C
han
ge (
$B
)
Deposits MBS C&I Residential Mort. Loans**
Wachovia
-2
45
4
32
72
29
-6
714 17 13 12
-2
6
-6 -2
15
3
-6
6 410
2315
-20
0
20
40
60
80
2000*
2001
2002
2003
2004
2005
Yearl
y C
han
ge (
$B
)
Deposits MBS C&I Residential Mort. Loans**
Bank of America
8 9 1328
206
15
-4
36
-2
116
-7
24 18
-10
4227
6530
-15 -14-19-23
15
-32-50
0
50
100
150
200
250
2000*
2001
2002
2003
2004
2005
Yearl
y C
han
ge (
$B
)
Deposits MBS C&I Unsecuritzed Resid. Mort. Loans**
STRUCTURED PRODUCTS RESEARCH
Gail Lee, Managing Director Global Head of Structured Products Research
+1 212 325 1214
Bunt Ghosh, Managing Director Global Head of Fixed Income Research
+44 20 7888 3042
NORTH AMERICA Eleven Madison Avenue, New York, NY 10010
Asset-Backed Securities (ABS)
Rod Dubitsky, Managing Director Rajat Bhu, Vice President Jay Guo, Vice President Sergei Ivanov, Vice President
Senior Strategist, Group Head +1 212 325 4740 [email protected]
+1 212 325 5410 [email protected]
+1 212 325 3565 [email protected]
+1 212 325 2872 [email protected]
Larry Yang, Associate Thomas Suehr, Analyst
+1 212 325 2952 [email protected]
+1 212 325 3663 [email protected]
Collateralized Debt Obligations (CDO)
David Yan, Vice President Stephen Chow, Associate Willie Green
+1 212 325 5792 [email protected]
+1 212 538 5523 [email protected]
+1 212 325 1287 [email protected]
Commercial Mortgage Backed Securities (CMBS)
Gail Lee, Managing Director Paul Fitzsimmons, Vice President Manish Rajguru, Vice President Serif Ustun, Vice President
Senior Strategist, Group Head +1 212 325 1214 [email protected]
+1 212 538 8567 [email protected]
+1 212 325 4881 [email protected]
+1 212 538 4582 [email protected]
Mortgage Backed Securities — Residential (MBS)
Satish Mansukhani, Managing Director Mahesh Swaminathan, Director Adama Kah, Vice President Chandrajit Bhattacharya, Vice President
Senior Strategist, Group Head +1 212 325 5985
+1 212 325 8789 [email protected]
+1 212 325 0318 [email protected]
+1 212 325 1546 [email protected]
Mu’taz Qubbaj, Associate
+1 212 325 0172 [email protected]
EUROPE – Structured Products (All) One Cabot Square, London E14 4QJ, United Kingdom
Recai Güneşdoğdu, Director Tim Francis, Associate European Head +44 20 7883 7978 [email protected]
+44 20 7888 3969 [email protected]
JAPAN – Structured Products (All) Izumi Garden Tower, 1-6 Roppongi 1-Chome, Minato-ku, Tokyo 106-6024
Kenji Toukaku, Director Kaoru Kondo, Associate Japan Head + 81 3 4550 7172 [email protected]
[email protected] +81 3 4550 7171
For general inquiries or to be added to a distribution list, please contact:
Angela Chuang ([email protected]) or Werner Pauliks ([email protected])
Disclosure Appendix
Analyst Certification The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Important Disclosures Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail, please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse’s policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the market that may have a material impact on the research views or opinions stated herein. The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's Investment Banking and Fixed Income Divisions. Credit Suisse may trade as principal in the securities or derivatives of the issuers that are the subject of this report. At any point in time, Credit Suisse is likely to have significant holdings in the securities mentioned in this report. As at the date of this report, Credit Suisse acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in this report. For important disclosure information on securities recommended in this report, please call +1-212-538-7625. For the history of any relative value trade ideas suggested by the Fixed Income research department over the previous 12 months, please view the document at http://research-and-analytics.csfb.com/docpopup.asp?docid=35321113&type=pdf. Credit Suisse clients with access to the Locus website may refer to http://www.credit-suisse.com/locus. For the history of recommendations provided by Technical Analysis, please visit the website at http://www.credit-suisse.com/techanalysis. Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Emerging Markets Bond Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate. Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate.
Corporate Bond Fundamental Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector. Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles and are undervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return basis. These bonds may possess price risk in a volatile environment. Market Perform: Indicates a bond that is expected to return average performance in its sector. Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, or they may be stable credits that, we believe, are overvalued or rich relative to the sector. Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector. Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Corporate Bond Risk Category Definitions In addition to the recommendation, each issue may have a risk category indicating that it is an appropriate holding for an "average" high yield investor, designated as Market, or that it has a higher or lower risk profile, designated as Speculative and Conservative, respectively.
Credit Suisse Credit Rating Definitions Credit Suisse assigns rating opinions to investment-grade and crossover issuers. Ratings are based on our assessment of a company's creditworthiness and are not recommendations to buy or sell a security. The ratings scale (AAA, AA, A, BBB, BB, B) is dependent on our assessment of an issuer's ability to meet its financial commitments in a timely manner. Within each category, creditworthiness is further detailed with a scale of High, Mid, or Low – with High being the strongest sub-category rating: High AAA, Mid AAA, Low AAA – obligor's capacity to meet its financial commitments is extremely strong; High AA, Mid AA, Low AA – obligor's capacity to meet its financial commitments is very strong; High A, Mid A, Low A – obligor's capacity to meet its financial commitments is strong; High BBB, Mid BBB, Low BBB – obligor's capacity to meet its financial commitments is adequate, but adverse economic/operating/financial circumstances are more likely to lead to a weakened capacity to meet its obligations; High BB, Mid BB, Low BB – obligations have speculative characteristics and are subject to substantial credit risk; High B, Mid B, Low B – obligor's capacity to meet financial commitments is very weak and highly vulnerable to adverse economic, operating, and financial circumstances. Credit Suisse's rating opinions do not necessarily correlate with those of the rating agencies.
References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: http://www.credit-suisse.com/en/who_we_are/ourstructure.html. This report 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 Credit Suisse or its affiliates (“CS”) to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgement at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR’s, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS’s own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS’s website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is regulated in the United Kingdom by The Financial Services Authority (“FSA”). This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A; in Japan by Credit Suisse Securities (Japan) Limited; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse Singapore Branch, and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse, Taipei Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. Copyright © 2006 CREDIT SUISSE GROUP and/or its affiliates. All rights reserved.