VLB KBW Note 10 December 2010 Amended

Year-end Dec 2010E 2011E 2012E 2010E 2011E 2012E

KBW op EPS new (€) 1.85 3.40 3.94KBW op EPS old (€) 1.78 2.96 3.83IBES EPS (€) 2.10 3.03 3.54KBW EPS % ch YoY 94.7 83.8 15.9KBW op P/E 16.8 9.1 7.9IBES P/E 14.8 10.2 8.8

Net Profit (€) 85.00 148.00 170.00NAVPS (€) 26.80 28.70 30.90P/NAV 1.16 1.08 1.00DPS (€) 0.83 1.53 1.77Yield (%) 2.7 4.9 5.7RONAV (%) 6.9 11.8 12.8

Shares (mn) 40.7 Market Cap (€bn) 1.3

European Miscellaneous Financial: Netherlands 10 December 2010

Van Lanschot(LANS.NA, €31.00, Market Perform, Target: €38.80)

Upside driven by fees and commissions

After two difficult years, VLB returned to profit in 1H10. We expect profitabilitywill further improve in 2011 thanks to AuM inflows, NIM improvement, and costcontrol. In our view, there is little downside risk at the current market price. Due tofixed costs associated with mid-size scale, VLB’s profitability is sensitive to thecyclical behaviour of fees and commissions, and its full share price potential will belifted in our view as the equity markets and AuM pick up. We increase our pricetarget from €38 to €38.8 and maintain our Market Perform recommendation.

The Dutch private banking market. There are an estimated 122k Dutch residents withinvestable assets of over $1mn, of which ~50% are entrepreneurs, and thus fall in VLBtargets. VLB estimates its target market in the Netherlands to be €150bn AuM, and itsmarket share to be 10-12%.

What is different about VLB. (1) alternative to large banks; (2) client service and clientsatisfaction; (2) private/business banking, with a focus on entrepreneurs; (3) distributionbased on branch network; (4) servicing of mass affluents.

Key issues (1) lifting up the RoNAV; (2) dealing with the cost base; (3) the size debate;(4) servicing more efficiently the mass affluents; (5) deposit margins pressure easing; (6)improvement in mortgage margins; (7) pro-cyclical commission income to bounce back;(8) IT platform mainly outsourced; (9) exiting non-core activities; (10) well positioned forthe Basel 3 environment.

Change in operating EPS. We increase EPS for 2010E (from €1.78 to €1.85), for 2011E(from €2.96 to €3.40) and for 2012E (from €3.83 to €3.94).

Valuation drivers. (1) The CoE (potentially reduced if free float is increased); (2) thegrowth rate of fees and commissions (dependent on AuM inflows and equity markets).Assuming 9.5% CoE (instead of 10%), and 10% growth in fees and commissions (insteadof 7%) would lift the valuation to €46.

Investment case. We like the bank’s client-based approach, focusing on personalised,quality services to a selected number of customers. The bank RoNAV should improveover time thanks to a strict cost control and a more efficient servicing of the mass affluent.In our view, VLB is an option on the recovery of the equity market, which wouldaccelerate AuM inflows and commission income.

Company UpdateEstimates ChangePrice Target Change

Jean PierreLambertAnalyst+44 20 7663 [email protected]

Please refer to important disclosures and analyst certification information on pages 27 - 30.

Contents

Valuation/investment case ............................................................................................. 3

Changes in forecasts ...................................................................................................... 5

Management financial targets .................................................................................... 5

The Dutch private banking market ................................................................................ 6

VLB presence in the market ...................................................................................... 6

Introduction to Van Lanschot ........................................................................................ 7

(1) Description ........................................................................................................... 7

(2) What is different about VLB................................................................................ 8

(3) History ................................................................................................................. 9

(4) Kempen acquisition ........................................................................................... 10

(5) Client base ......................................................................................................... 10

(6) Assets under management ................................................................................. 11

(7) Staffing and IT and operations ........................................................................... 11

(8) Branches and distribution .................................................................................. 11

Key issues .................................................................................................................... 12

(1) Lifting the RoNAV ............................................................................................ 12

(2) Dealing with the cost base ................................................................................. 12

(3) The size debate................................................................................................... 13

(4) Servicing more efficiently the mass affluent segment ....................................... 14

(5) Deposit margins pressure easing ........................................................................ 15

(6) Improvement in mortgage margins .................................................................... 16

(7) Pro-cyclical commission income to bounce back .............................................. 18

(8) IT platform mainly outsourced .......................................................................... 19

(9) Exiting non-core activities ................................................................................. 19

(10) Well positioned for the B3 regulatory environment ........................................ 19

Appendix 1: Previous valuation .................................................................................. 21

Appendix 3: Key trends in the Dutch economy .......................................................... 22

Please refer to important disclosures and analyst certification information on pages 27 - 30. 2

10 December 2010

Figure 1: Share price performance

25.0

27.5

30.0

32.5

35.0

37.5

40.0

42.5

45.0

Nov-

09

Dec-

09

Jan-

10

Feb-

10

Mar-

10

Apr-

10

May-

10

Jun-

10

Jul-

10

Aug-

10

Sep-

10

Oct-

10

Nov-

10

Van Lanschot rel. to FTSE Eurofirst 300 Banks

Source: Datastream

Valuation/investment case

We increase our price target from €38 to €38.8, reflecting the time effect on the PV

(see Appendix for previous valuation). The upside potential for the share is ~29%

(25%?), slightly above the average upside of 24% for the European banking universe

at KBW, which supports our Market Perform recommendation.

Figure 2: Valuation

Cost of Equity 10.0%

g 3.0%

2012 RoNAV 12.8%

Implied P/NAV 1.4

2012 NAVPS 31

Implied value of 2012 NAVPS 43

Discounted present value of 2012 NAVPS 38.8 Source: KBW estimates

The upside risks to our price target relate predominantly to a potential acquisition

from a larger banking institution or a more positive scenario than we currently expect

(rapid growth in AuM combined with a reduction of the cost base).

Two variables in our view are key drivers of the valuation of VLB – the cost of equity

and the growth in fees and commissions – as can be seen in Figure 3.

Figure 3: Sensitivity analysis

% growth in fees & commissions (2011-2012)

3879% 4% 5% 6% 7% 8% 9% 10%

9.0% 41.5 42.9 44.3 45.8 47.2 48.6 50.1

9.5% 38.1 39.4 40.7 42.0 43.3 44.6 46.0

CoE 10.0% 35.2 36.4 37.6 38.8 40.0 41.2 42.5

10.5% 32.7 33.8 34.9 36.0 37.1 38.3 39.4

11.0% 30.5 31.5 32.5 33.6 34.6 35.7 36.7 Source: KBW estimates


10 December 2010

The cost of equity of 10% for VLB reflects the current shareholding structure, and

the limited current free float. A move to increase the free float and liquidity would

contribute to the reduction in the cost of equity, which would trigger a higher

valuation.

Due to the fixed cost associated with its mid-size scale, VLB’s profitability is more

sensitive than larger banks to the cyclical behaviour of fees and commissions. The

growth of fees and commissions in 2011-12 is therefore a key driver of valuation.

We have assumed 7% growth pa on the following rationale: (1) fees and commissions

were up 8% YoY in 1H10, but with a likely seasonal deceleration in 2H10; (2) VLB

has introduced the “A la Carte” discretionary asset management product, and its AuM

targets suggest potentially a 10% pa increase in AuM; (3) commission income at VLB

is strongly influenced by the performance of the financial markets, in particular the

equity markets.

Assuming a 9.5% cost of equity and a 10% growth in fees and commissions, the

valuation would be potentially lifted to €46, presenting upside potential of more than

45% in a positive scenario.

The downside risks relate to weak equity markets performance putting pressure on

commission income, and a failure of provisions in the corporate loan book to decline

as expected.

A constraint for large investors is the limited free float. The company indicates the

Delta Lloyd shareholding at ~30%, Friesland Bank at ~23%, Van Lanschot family at

~11%, ABP at ~13%, and SNS Reaal at ~5%. The free float includes a 4%

shareholding by management and staff.

Figure 4: Valuation metrics versus Swiss Private Banks

Rec. Price Target Mcap (€bn) NAVPS 10E P/NAVPS RoE 11E KBW Op. EPS 11E P/E 11E DPS 10E Yield

Julius Baer M 42.5 42 6.7 13.2 3.17x 10.1% 3.22 13.2 0.60 1.4%

EFG Int. M 12.7 14 1.4 - - 26.0% 1.52 8.4 0.10 0.8%

Bank Sarasin O 39.8 42 1.6 17.5 2.40x 15.8% 3.21 12.4 1.20 3.0%

Vontobel M 33.4 34 1.7 21.0 1.62x 12.3% 2.98 11.2 1.50 4.5%

Van Lanschot M 31.0 38.8 1.3 26.8 1.45x 9.3% 3.40 9.1 0.83 2.9% Source: KBW estimates

Figure 4 compares the valuation metrics of VLB to Swiss private banks. The RoE is

lower than its peers, reflecting an on-shore business model, leading to a discount in

terms of PE and P/NAV multiples.


10 December 2010

Changes in forecasts

We have amended our profit forecasts to take into account new information released

with the 3Q10 trading update and at the Investor day of 1 December. We are fine-

tuning our 2010E forecasts to take into account expected trends in 2H10, such as

weaker fees and commissions in 4Q10.

For 2011E, the upgrade results from a combination of stricter expense control and

lower provisions. We have also adjusted our revenue expectation, overall expecting

improvement in NIM, but a more conservative growth in fees and commissions (6%

pa).

Our Operating EPS forecast is increased from €1.78 to €1.85 for 2010E, from €2.96

to €3.40 for 2011E and from €3.83 to €3.94 for 2012E.

Figure 5: Change in forecasts

2010E 2011E 2012E

€m / € p/s Previous New Chge Previous New Chge Previous New Chge

NII 326 336 3% 326 344 5% 343 346 1%

Commissions 238 229 -4% 260 245 -6% 280 262 -6%

Trading Income 13 13 0% 28 27 -2% 28 28 1%

Securities & Associates 21 21 0% 25 25 0% 27 27 0%

Total Revenues 599 600 0% 639 642 0% 678 663 -2%

Expenses -416 -405 -3% -431 -415 -4% -445 -429 -4%

Operating Income 184 195 6% 208 227 9% 233 235 1%

Provisions -76 -85 12% -44 -41 -6% -26 -22 -15%

PBT 108 111 3% 164 185 13% 208 213 3%

Tax -25 -25 3% -33 -37 13% -42 -43 3%

Net Income 83 85 3% 131 148 13% 166 170 3%

Operating EPS 1.78 1.85 4% 2.96 3.40 15% 3.83 3.94 3% Source: KBW estimates

Management financial targets

EPS: VLB management considers €4 to €5 EPS the normalised level, and is

aiming for growth of 5% per annum (after returning to normalised profit levels).

RoE: VLB is targeting an average of 2% higher than the cost of equity – with a

range of 9-12%.

Dividend policy: 40-50% payout ratio.

The key drivers of profitability are seen to be: (1) inflows of clients and assets; (2)

improving NIM (customer deposits and loan book); (3) migration towards discretionary management; (4) stable cost base; (5) declining loan losses.


10 December 2010

The Dutch private banking market

According to the World Wealth Report 20101, there are 121,700 Dutch residents with

investable assets over $1mn, of which an estimated 50% are entrepreneurs and thus

fall directly in the VLB target group.

VLB estimates its target market in the Netherlands to be about €150bn in AuM, and

its market share to be 10-12% – the Private Banking division has €19.2bn in AuM at

the end of 1H10.

We estimate about 10-15% of Dutch HNW belong to the “ultra high net worth”

category as defined by VLB (over €5mn in investible assets). In our estimate, people

with over €30mn represent about 1% of the total number of HNW.

VLB presence in the market

According to Euromoney (2009), VLB holds the top position in the Dutch super

affluent segment (€0.5 to €1mn in assets). Its markets shares are, however, much

lower in the HNW (7th position) and UHNW (not in the top ranks) segments.

Figure 6: Netherlands private banking 2009 rankings

Super affluent High net worth I High net worth II Ultrahigh net worth

€0.5-1mn €1-10mn €10-30mn > €30mn

1. VLB 1. Fortis 1. ABN AMRO 1. UBS

2. Rabobank 2. ABN AMRO 2. Fortis 2. ABN AMRO

3. ING 3. Nachenius Tjeenk 3. UBS 3. Fortis

4. ABN AMRO 4. Rabobank 4. Merril Lynch 4. HSBC

5. Fortis 5. ING 5. HSBC 5. BNP Paribas

6. Theodoor Gilssen 6. ING 6. Deutsche Bank

7. VLB

Source: Euromoney, KBW estimates

ABN AMRO MeesPierson, the combination of ABN AMRO and Fortis private

banks, will be holding the top positions in most PB customer segments, with an

estimated €49bn in AuM. However with the ongoing integration process, a possible

scenario is that clients will consider alternative private banks. This may present

opportunities for VLB to attract clients but also private bankers.

ING Bank, with an estimated €17bn in AuM, holds important market shares in the

super affluent and lower-end of HNW segments. The perception generally held is that

ING does not benefit from a strong private banking profile or image, and ranks #5

and #6 in high net worth I and II (figure 6).

Insinger de Beaufort merged with Nachenius Tjeenk in 2009, a subsidiary of BNPP,

as the French bank took a majority stake in Insiger. The new entity, with an estimated

€9bn in AuM, is concentrated in the HNW segment.

1 Published by Capgemini and Merrill Lynch


10 December 2010

Rabobank offers private banking services, with local branches having a private bank

specialist. Rabobank subsidiary Schretlen & Co, however, targets the same client

base as VLB and has an estimated €8bn in AuM.

VermogensGroep, which was acquired by UBS in 2008, counts about €4bn in AuM

and 100 clients – thus mainly UHNW individuals.

Most other small private banks have a much lower scale than VLB; some of them are

attracting clients via low mortgage rates.

Introduction to Van Lanschot

(1) Description

Van Lanschot Bankiers (“VLB”) is an independent medium-sized bank providing

wealth/asset management services, lending and other financial services for high-net-

worth and affluent individuals and family businesses in the Netherlands and Belgium.

In private banking (51% of 1H10 revenues), VLB provides a full range of banking

products such as current accounts, mortgages, credit cards, asset management and

securities services. In business banking (23% of 1H10 revenues, with Corporate

finance another 6.3%), the bank offers mainly specialised asset management,

corporate and investment banking and treasury services, targeting primarily family-

owned corporations.

Figure 7: Breakdown of 1H2010 revenues by business line

PB

51%

AM

6.8%

Business Banking

23.0%

Corporate Finance

& Securities

6.3%

Other and non-

core

12.7%

Source: Company, KBW estimates


10 December 2010

Figure 8: Breakdown of 1H2010 revenues by income line

Net interest

income

48%

Net commission

income

32.5%

Securities and

associates, profits

on financial

transactions and other

4.2%

Insurance

premiums and

other

15.6%


(2) What is different about VLB

Alternative to large banks. Van Lanschot positions itself as an alternative to the

large banks. VLB wants to be large enough to be able to offer a full range of

services, but flexible enough to give priority to the personal relationship with

clients.

Client service and client satisfaction. The strength of VLB is in the interaction

between its front office staff and the clients. VLB develops a detailed knowledge

of its clients, offers comprehensive advice, personal attention and a premium

quality service – these are the main principles underlying its services.

Figure 9: Client quotes suggest a high level of client satisfaction

“Unlike with ABN Amro, they know who I am. They also know about

things I don’t want to know about or deal with.”

“I can call them 24h a day, and I don’t need to fill out 25 forms to get a

new credit card.”

“The other private banks think they can get away with bad service by

giving you free tickets to polo games”. Furthermore, they “don’t offer

mortgages”.

“I can do everything on their website, but I can also call them to get

advice – sometimes it will be very valuable advice.”

“Van Lanschot has a great reputation.”

“I have two contacts at Van Lanschot: one for standard banking

services, one for wealth management and trading.”

Source: Company, KBW interviews


10 December 2010

Private/business banking, with a focus on entrepreneurs. Private banking and

business banking have been further integrated and now operate as one unit. The

key principle is that VLB can only provide good private banking advice if the

bank understands the client’s business. The business banking and corporate

finance divisions target mainly family-owned businesses, thus VLB is naturally

involved in succession advisory. VLB has a competitive advantage in its flat

management structure; as for the other banks, the SME/private banking

coordination is only taking place at the management level.

Branch network. Despite the short distances between cities and internet/phone

distribution, VLB believes in its branch network. The local marketing/local

network allows the generation of more client introductions and the extraction of

more business from the existing client base. According to the bank, 80% of new

clients come from within 20km of a branch. Overall, the location of branches

appears rational: there are more branches where the population is concentrated

and have a high income.

Figure 10: Number of branches by location

Source: KBW estimates

Servicing of mass affluents. VLB has successfully managed to attract over time

mass affluent customers – the sweet spot of retail banking – but is in the process

of addressing the issue of the efficient servicing of such accounts (centralisation

of servicing, simplified processes and products).

(3) History

Van Lanschot history goes back to 1737. The bank was formerly owned entirely by

the van Lanschot family, but since 1972, the ownership was gradually transferred to

other shareholders. The family now has a 10% shareholding, with Dutch financial

0

2

4

6

8

10

13,000 13,500 14,000 14,500 15,000 15,500 16,000 16,500 17,000

Area disposable income per capita (€)

Num

ber

of

bra

nch

es in a

rea

Area population


10 December 2010

institutions (e.g. Delta Lloyd, Friesland Bank) controlling most of the remaining

shares.

In 2004, Floris Deckers took over as CEO. Since then, the company has continued to

increase its client focus, aiming to be the best private bank in the Netherlands and

Belgium.

A key step was the acquisition of asset management and corporate finance company

Kempen & Co. in 2007. The bank also started to disengage from the insurance

business by selling 51% of Chabot in 2007.

During the 2007-2009 financial crisis, VLB was one of a few banks in the

Netherlands that did not need the support of the government. In December 2008,

VLB, however, raised €150mn in preference shares, which were then converted to

common shares in June 2010 so as to bolster the bank’s equity capital.

(4) Kempen acquisition

Kempen was acquired in 2006 for a consideration of €300mn, which was partly

financed with the issuance of €170.5mn in new shares. The strategic rationale behind

the acquisition of Kempen was that the combined entity would reach a scale allowing

it to improve possibilities in terms of product range. Kempen’s strong position in

asset management and Van Lanschot’s private banking distribution network would

generate the following benefits:

Complementarities between fund offerings (small/mid cap equities for Kempen,

large cap equities and bonds for VLB) and between institutional clients (pension

funds and insurers for Kempen, associations and foundations for Van Lanschot).

The bank’s range of products in asset and wealth management was improved,

while simultaneously Kempen’s funds gained access to a broader client base. The

AM activities were integrated in 2007.

Complementarities between Kempen’s corporate finance clients (small and

midcap companies) and VLB HNW and entrepreneur clients.

The combined entity became less dependent on interest income, which was 52%

of revenues before the acquisition (FY2006), 43% after (pro-forma 2006).

Kempen continues to operate with an important degree of autonomy. Brokerage

operations were fully integrated into Kempen & Co Securities. In 2010 Van Lanschot

Private Office was created, combining teams from both institutions.

(5) Client base

VLB provides banking services to about 57,000 clients (in our estimate), mostly in

the Netherlands but also in Belgium.

VLB focuses on higher-income and high-net-worth individuals (with assets between

€0.5mn and €5mn). Clients with investible assets of €10mn are offered Private Office

services, which include corporate finance and access to private equity investments.

VLB also has a large number of clients with less than €250k investible assets, for

which a more standardized service is provided.


10 December 2010

(6) Assets under management

The bank estimates it has a market share of around 10-12% of a target market

consisting of €150bn in AuM. Van Lanschot Private Banking division has €19.2bn

AuM in private banking, while asset management manages separately €11.7bn.

Assets under management have almost recovered the ground lost during the financial

crisis (€31.6bn in 1H10 versus €32.6bn in 1H07). The share of discretionary

management is increasing after a big drop in 1H09, which leads to improving average

margins (discretionary margins are about 20bp higher than non-discretionary

according to the company).

Figure 11: AuM breakdown (€bn)

17.3513.2

15.718.1

11.4

12.2

13.7

13.5

28.8

25.4

29.4

31.6

0

10

20

30

40

2H08 1H09 2H09 1H10

Non-discretionary Discretionary


(7) Staffing and IT and operations

In our estimate, VLB employs 420-450 private bankers, 120-130 investment advisors

and 20-25 fund managers. The number of senior/front-office staff increased in recent

years following the acquisition of Kempen and as VLB proceeded with selective

hiring during the financial crisis, which hit its competitors.

The number of back office staff decreased with the outsourcing of IT operations.

Most IT activities have been outsourced: infrastructure (IBM), telephony and

networks (KPN Getronics), application management (Accenture). Most mid- and

back-office activities have been centralised, instead of being done at the branch or

regional office centre level.

(8) Branches and distribution

The bank counts 30 branches in the Netherlands and eight branches in Belgium (in

Brussels and the Dutch speaking area), where it provides private banking services. In

addition, the bank has branches in Switzerland, Luxemburg, Curaçao and Jersey, and

offices in France and Spain.


10 December 2010

Business banking is offered in a dozen locations, which are located in private banking

branches. In our estimate, business banking comprises ~150 business bankers, each

covering 30-40 accounts.

Key issues

(1) Lifting the RoNAV

Thanks to a conservative and traditional business model, VLB went through the 2007-

2009 financial crises and the 2010 sovereign debt crisis fairly undamaged. However,

with the slow development and uncertainty of the securities markets, the recovery in

profits has been modest, with 2010 RoNAV of 6.9% in our estimate. Further

normalisation will occur in 2011-2012, leading to close to 13% RoNAV in 2012E.

However, a combination of accelerated AuM inflows and a stable/declining cost base

could push the RoNAV above 13%.

Figure 12: RoNAV and cost/income ratio forecasts

20.7%

2.3%

-2.9%

6.9%

11.8%12.8%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

2007 2008 2009 2010E 2011E 2012E

-5%

0%

5%

10%

15%

20%

25%

Cost/income (LHS) RoNAV (RHS)


(2) Dealing with the cost base

At the Investor day (1 December), management presented its plans to manage the cost

base of the bank. Management estimates that a stable cost base can be achieved,

despite the higher IT expenditures expected for regulatory requirements.

The operations will be restructured from one based on functions (operations,

product management, process and information management) to one based on


10 December 2010

products/processes (securities, financing, payments and client administration).

Some product lines will be reduced or simplified. In some areas, 25-30% cost

reductions are considered possible by VLB management. While payment

processing is in relatively good shape, the securities services are labour intensive.

Potentially, some of those services could be outsourced. Specific procedures have

been introduced to support tailor-made services: this involves too much complex,

manual handling, and will be phased out.

Improvement in IT outsourcing costs: management considers around 40-50% of

the outsourcing cost base can be better managed and reduced. Regarding IT

management, the key directions are to keep it simple, to develop on existing

proven technology and to take a phased approach.

The central servicing of <€250k accounts will potentially liberate 10% of the

branch staff at VLB (total staff of around 800-1000 at branch level). Some client

accounts were low maintenance (mortgage, cash deposits), while some others can

be very time consuming and require a disproportionate amount of resources

(particularly in asset management).

(3) The size debate

The plan to keep the cost base stable is a positive development. Yet in our view an

issue is that the bank could become caught in the middle – not sufficiently large to

benefit from economies of scale, and too large to be considered a pure private bank.

This is somehow paradoxical as VLB is successfully managing to attract the clients

belonging to the sweet spot of retail banking, but does not manage to extract

sufficient returns from those clients.

Illustrating this issue is the lower AuM per branch and AuM per staff than peers.

Figure 13: AuM per staff (€mn)

0

25

50

75

100

125

Van

Lan

schot

Odd

o &

Cie

EFG

Insi

nger

Fortis G

roup

Del

en

ABN

Am

ro N

L

Med

ian

Saras

in

Mee

sPie

rson

Fortis N

L

Juliu

s Bae

r

BNPP W

AM

Von

tobe

l

Deg

roof



10 December 2010

Figure 14: AuM per branch (€mn)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Van

Lan

schot

Del

en

Peter

cam

Von

tobe

l

Fortis W

MEFG

Med

ian

Deg

roof

Schre

tlen

Mee

sPie

rson

Odd

o &

Cie

Insi

nger

Saras

in

Juliu

s Bae

r


(4) Servicing more efficiently the mass affluent segment

The affluent segments are the ones where VLB has the most success: it ranks first

place in the “super affluent” segment (i.e. €0.5mn to €1mn in assets) according to

Euromoney (see figure 15).

However, according to our estimates, the lower-end segments are significantly less

profitable than the higher-end segments for VLB: cost/income is between 76% and

88% for the Affluent and Mass Affluent segments versus a much lower 37% to 59%

for the HNW segments. Based on an activity-based costing, it is most likely that the

Mass Affluent segment is not profitable for VLB.

Figure 15: Estimates of Private banking P&L by customer segments (€mn) Client segment Mass Affluent Affluent Hight net worth Ultra high net worth Total

AuM bucket €0-€250k €250k-€1mn €1mn-€5mn €5mn+

Revenues 77.6 123.3 95.1 70.9 366.8

Commisions 13.3 30.7 41.8 35.4 121.1

Net interest income 64.3 92.5 53.3 35.6 245.7

Total expenses -78.8 -99.7 -58.2 -27.0 -266.2

Operating profit before tax -1.2 23.5 36.9 43.9 100.6

Cost/Income 88% 76% 59% 37% 68%

RoA -0.03% 0.42% 1.09% 1.90% 0.68% Source: KBW estimates

Management is taking steps to address this issue. The Mass Affluent segment will

now be serviced centrally to reduce the operational burden and liberate time for

private bankers to focus on more profitable clients. This could potentially allow a

10% reduction in branch staffing over time according to the company. However VLB

will be proceeding cautiously as it does not want to alienate clients:

The Mass Affluent clients are active in networks and are ambassadors for the

bank, helping advance its reputation;


10 December 2010

Some of them are HNW clients who have spread their assets among several

banks, while others may be a family member of HNW clients.

Over the past several years, the bank has made efforts to move the cursor towards

higher-end segments, with encouraging results: the share of AuM of clients with

assets above €1mn has increased from 62% to 67% over the past two years.

Figure 16: Share of AuM by client segment

67%

62%

33%

38%

0% 25% 50% 75% 100%

1H2010

2H2008

Clients with over €1mn in assets Clients with less than €1mn in assets


At the Investor day (1 December), the company unveiled a new unit, which will help

it to further increase its exposure to VHNW customers: Van Lanschot Private Office.

Integrating three teams (Kempen, International Wealth and Director-Owner), the

division will provide high-end, highly customised services including corporate

finance and private equity investments.

(5) Deposit margins pressure easing

Since the height of the financial crisis and nationalisation of large Dutch banks,

savings accounts margins have been negative. Banks under restructuring under EC

plans now refrain from competing too aggressively on price, and are focusing on

returning to profitability.

At the branch level, Van Lanschot deposits margins fell from 0.4% in June 2008 to -

1% in June 2009. Spreads between deposits and Euribor rates have tightened and thus

margins have become less negative: on our estimates, they are currently running at

about -0.75%.


10 December 2010

Figure 17: Dutch deposit rates and Euribor (%)

-2

-1

0

1

2

3

4

5

6

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

Spread Deposits redeemable at 3 months notice Euribor 12M

Source: DNB, Bloomberg, KBW estimates

(6) Improvement in mortgage margins

VLB currently has 48% of its loan book secured on residential property (€7.9bn), and

12% on commercial property (12%). The remainder is divided between corporate

loans (26%) and retail customer loans and advances (14%). We estimate the average

mortgage loan on VLB books to be between €400k and €450k, close to double the

average Dutch mortgage.

At the investor day, management indicated it expects the re-pricing of the loan book

to continue to have a positive impact on interest margin. The average maturity of

VLB mortgages is not disclosed but, on our understanding, Van Lanschot mortgages

have fixed rate payments for a period of usually 10 years. This initial period is

followed, not by floating rate payments, but a renewal of the mortgage (at a new fixed

rate) for another 5-10 year period. The mortgages used as collateral for the Citadel

securitizations have a weighted average maturity of about 24 years (these

securitisations represent about 53% of all the mortgages on VLB books).


10 December 2010

Figure 18: Dutch mortgage rates and euro swap rates (%)

0

1

2

3

4

5

6

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Spread Fixed rate mortgage rates 5Y euro swap rate

Source: DNB, Bloomberg, KBW estimates

Figure 19: House price indices (2005 =100)

Source: Central Bureau voor de Statistiek, KBW estimates

N o o rd-

Ho lla nd

Zuid-

Ho lla nd

N o o rd-

B ra ba nt

95

100

105

110

115

120

J ul-

05

J an-

06

J ul-

06

J an-

07

J ul-

07

J an-

08

J ul-

08

J an-

09

J ul-

09

J an-

10

J ul-

10


10 December 2010

House prices in VLB key regions have stabilised since end 2009. Given the high

income/ wealth profile of the borrowers and absent a double dip, pressure on

mortgage LLC should continue to subside from an already low level (2% of impaired

mortgages at the end of 1H10).

(7) Pro-cyclical commission income to bounce back

Figure 20: Share of commissions in total revenues

20%

25%

30%

35%

40%

45%

50%

55%

60%

1H02 1H03 1H04 1H05 1H06 1H07 1H08 1H09 1H10


Figure 21: Van Lanschot commission income and AEX share price index

50

75

100

125

150

175

1H02 1H03 1H04 1H05 1H06 1H07 1H08 1H09 1H10

250

500

750

1000

Commissions before Kempen integration (€mn)

Commissions after Kempen integration (€mn)

Amsterdam Exchange All Share Index price (RHS)

Source: Company, Bloomberg, KBW estimates

VLB is dependent on commission income across all its divisions (net commissions

were 32.5% of revenue in 1H10). This source of revenue tends to relate to the

performance of financial markets, the most volatile being the securities transaction


10 December 2010

fees, while the fees charged on AuM are relatively more stable as some assets are

allocated to fixed income.

The bank expects AuM to increase sharply, from €31.6bn in 1H10 to about €48bn in

2013, thanks to net new inflows and steady growth in market value. According to our

estimates, assuming 5% market effect, this would imply around 5% net inflows per

annum.

Helping to drive this growth is the recent “A la Carte” discretionary management

product, which is contributing about 50% of AuM inflows. The fees of the new

product vary, according to the chosen risk profile (five different risk profiles to chose

from), between 80bp and 120bp (gross), above the company average of 60-100bp.

This new product is also helping to standardize the offering to the Mass Affluent

segment.

(8) IT platform mainly outsourced

A significant upgrade of the group IT infrastructure started at the beginning of 2006

with the deployment of 186 employees and consultants. The budget for the project

was €90mn. The main applications were (1) Internet Banking and a new Customer

Relationship Management system at first, followed by (2) information management

systems for compliance with new laws and regulations, then by (3) the core banking

system, which was implemented in 2009. A number of other projects were put into

service in 2010.

The development and deployment of the new applications did not go as planned, the

long-term overhaul of the IT systems experienced delays and unforeseen costs. This

issue is now over as IT was mainly outsourced, resulting in 120 FTEs moving to

outside IT companies. The bank booked an accelerated write-down of €20.5mn in

2008 and €39.4mn in 2009 (pretax).

(9) Exiting non-core activities

Robein Leven: The insurer, acquired as collateral on a failed loan in 2009, has had a

non-material impact on profits. Not part of VLB’s core businesses, the company was

sold to investment company Ohpen on 10 December 2010 for an undisclosed amount.

Van Lanschot Chabot: The insurance brokerage company (49% stake) provides

insurance to the target clients of the bank and is an independent intermediary. Several

smaller divisions within insurance services specialise in private individuals, non-life,

art and severance pay for employees. The broker works closely with the branch

networks and VLB sees added value in offering insurance products with private and

business banking.

(10) Well positioned for the B3 regulatory environment

Thanks to a traditional and conservative business model VLB is less exposed to

regulatory uncertainty than most banking institutions in Europe.

Private banks tend to operate with high capital ratios, as a reputation of financial

solidity helps attract and retain high-end customers. We estimate VLB will reach a B3

common tier 1 ratio of close to 10% by end 2013.


10 December 2010

VLB management feels comfortable with the B3 liquidity requirements and expects

to comply with the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio

(NSFR) well before the introduction date. Some adjustment will however need to take

place, such as the issue of longer term market funding, and an optimisation of the

banks investment portfolio.

Figure 22: Forecasts of Basel 3 common tier 1 ratio and leverage ratio

2009 2010 2011 2012 2013

Basel 2 Equity tier 1 904 1,152 1,228 1,316 1,408

Minority capital -0.2 -0.2 -0.2 -0.3 -0.3

Sub-total 904 1,151 1,227 1,316 1,408

Basel 3 common tier 1 capital 904 1,151 1,227 1,316 1,408

Basel 2 RWA 13,975 11,950 11,850 12,206 12,816

Extra Counterparty credit risk 763 801 842 884 928

Basel 3 RWA 14,738 12,751 12,692 13,089 13,744

Basel 2 equity tier 1 ratio 6.5% 9.6% 10.4% 10.8% 11.0%

Basel 3 common tier 1 ratio 6.1% 9.0% 9.7% 10.1% 10.2%

Leverage ratio

Total balance sheet assets 21,265 20,733 20,919 21,130 21,130

Items deducted from capital 0 0 0 0 0

Derivatives netting 971 1,000 1,030 1,061 1,093

Basel 3 leverage ratio assets 22,235 21,733 21,949 22,190 22,222

Common tier 1 leverage ratio 4.1% 5.3% 5.6% 5.9% 6.3% Source: KBW estimates


10 December 2010

Appendix 1: Previous valuation

Valuation – Discounted NAVPS Cost of Equity 10%

g 3%

2012 RoNAV 13%

Implied P/NAV 1.4

2012 NAVPS 29

Implied value of 2012 NAVPS 42

Discounted present value of 2012 NAVPS 34

Implied Target Price 38 Source: KBW estimates


10 December 2010

Appendix 3: Key trends in the Dutch economy

Netherlands real GDP growth YoY (%)

-6%

-4%

-2%

0%

2%

4%

6%

1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10

Source: Datastream, Eurostat

Netherlands unemployment rate (%)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10

Source: Datastream, Eurostat


10 December 2010

Netherlands business and individual bankruptcies

0

500

1,000

1,500

2,000

2,500

3,000

Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010

Source: Datastream


10 December 2010

Group and divisional earnings

Group

€m 2008 1H09 2H09 2009 1H10 2H10E 2010E 09/ 08 1H10/1H09 10/ 09

NII 294 127 146 273 160 176 336 -7 26 23

Fees 218 107 118 225 115 114 229 3 8 2

Trading -1 20 25 45 5 8 13 nm -75 -70

Other -17 5 21 27 7 14 21 nm 40 -20

Total Revenues 494 259 310 569 288 312 600 15 11 6

Expenses -422 -220 -209 -429 -206 -199 -405 2 -7 -6

Gross Operating Income 72 39 101 140 82 114 195 95 nm 40

Provisions -50 -99 -77 -176 -51 -34 -85 nm -48 -52

PBT 21 -60 24 -36 31 80 111 nm nm nm

Tax 9 14 8 22 -9 -17 -25 nm nm nm

Net Income 30 -46 32 -15 22 63 85 nm nm nm

Private Banking

€m 2008 1H09 2H09 2009 1H10 2H10E 2010E 09/ 08 1H10/1H09 10/ 09

NII 0 104 115 219 124 nm 19

Fees 0 58 60 118 58 nm -1

Trading 0 1 1 2 2 nm nm

Total Revenues 318 163 175 339 184 6 13

Expenses -246 -136 -84 -220 125 -11 nm

Gross Operating Income 73 28 91 119 309 64 nm

Impairments -7 -12 -25 -37 -9 nm -25

PBT 59 15 29 45 68 -24 nm

Asset Management

€m 2008 1H09 2H09 2009 1H10 2H10E 2010E 09/ 08 1H10/1H09 10/ 09

NII 0 0 0 0 0 nm 0

Fees 0 18 25 42 23 nm 30

Trading 0 0 0 0 0 nm -67

Total Revenues 40 17 25 42 23 7 32

Expenses -26 -15 -18 -34 -17 31 10

Gross Operating Income 14 2 7 9 6 -38 nm

Impairments -1 0 0 0 0 nm nm

PBT 13 2 7 9 6 -33 nm

Business banking

€m 2008 1H09 2H09 2009 1H10 2H10E 2010E 09/ 08 1H10/1H09 10/ 09

NII 0 60 69 128 67 nm 12

Fees 0 9 10 19 8 nm -18

Trading 0 2 3 4 3 nm 93

Total Revenues 162 71 85 156 81 -4 14

Expenses -69 -34 -32 -66 -31 -3 -11

Gross Operating Income 93 37 53 89 50 -4 38

Impairments -12 -42 -42 -83 -41 nm -3

PBT 69 -47 -30 -77 10 nm nm

Securities & Corporate Finance

€m 2008 1H09 2H09 2009 1H10 2H10E 2010E 09/ 08 1H10/1H09 10/ 09

NII 0 0 1 1 1 nm nm

Fees 0 20 25 44 26 nm 33

Trading 0 4 3 6 -1 nm nm

Total Revenues 50 24 28 52 27 4 14

Expenses -36 -20 -19 -38 -20 6 2

Gross Operating Income 0 0 0 0 0 nm nm

Impairments 0 0 -1 -1 -1 nm nm

PBT 14 4 9 13 6 -7 41 Source: Company, KBW estimates


10 December 2010

Group and divisional earnings [continued] Other

€m 2008 1H09 2H09 2009 1H10 2H10E 2010E 09/ 08 1H10/1H09 10/ 09

NII 0 -37 -39 -76 -22 nm -39

Fees 0 2 -1 1 1 nm -42

Trading 0 14 18 32 1 nm -92

Insurance premium 0 0 0 0 59 nm nm

Insurance gains 0 0 0 0 -3 nm nm

Total Revenues -76 -16 -4 -20 42 -74 nm

Expenses (banking) 0 -15 -19 -34 -22 nm 42

Underwriting expenses 0 0 0 0 -63 nm nm

Expenses (total) 3 -15 -19 -34 -85 nm nm

Gross Operating Income -73 -31 -23 -54 -43 -26 38

Impairments -31 -45 -10 -55 -1 77 -99

PBT -104 -76 -33 -109 -44 5 -43 Source: Company, KBW estimates


10 December 2010

Van Lanschot key data 2009 2010E 2011E 2012E 2013E

PROFIT & LOSS (€mn)

Net interest income 273 336 344 346 349

Net commission income 225 229 245 262 281

Trading gains 45 13 27 28 29

Other revenues 27 21 25 27 29

Total revenues 569 600 642 663 688

Costs -429 -405 -415 -429 -442

Operating profit 140 195 227 235 246

Loan loss charge -176 -85 -41 -22 -23

Associate income

Gains on disposals

Goodwill amortisation

Other items

Pre-tax profit -36 111 185 213 223

Tax 22 -25 -37 -43 -45

Discontinued Operations

Net profit -15 85 148 170 179

ASSETS

Interbank 1,241 930 949 978 1,017

Gross customer loans 17,205 16,330 16,375 16,396 16,494

Securities holdings 1,187 1,425 1,453 1,483 1,527

Total assets 21,265 20,733 20,919 21,130 21,385

Net interest-earning assets 19,464 18,540 18,668 18,807 18,972

LIABILITIES

Interbank 2,521 2,016 2,057 2,098 2,140

Deposits 13,380 13,113 13,506 14,181 15,032

Subordinated debt 593 438 443 447 451

Shareholders' equity 1,551 1,763 1,849 1,947 2,050

GROWTH RATES (%)

Total revenues 15.2% 5.5% 7.0% 3.4% 3.7%

Costs 1.6% -5.7% 2.6% 3.2% 3.1%

Operating profit 95.4% 39.9% 16.0% 3.6% 4.8%

Net profit -149.2% -675.4% 74.1% 14.9% 4.8%

Gross customer loans 0.3% -5.1% 0.3% 0.1% 0.6%

Deposits -12.7% -2.0% 3.0% 5.0% 6.0%

Total assets 2.8% -2.5% 0.9% 1.0% 1.2%

RATIOS - PROFITABILITY (%)

Return on ave. assets -0.1% 0.4% 0.7% 0.8% 0.8%

Return on ave. equity -2.0% 5.6% 9.3% 10.1% 10.0%

Cost/income (less trading gains) 81.8% 69.0% 67.5% 67.5% 67.0%

Cost/income 75.4% 67.4% 64.7% 64.6% 64.2%

Tax rate 59.2% 23.0% 20.0% 20.0% 20.0%

Payout 0.0% 45.0% 45.0% 45.0% 45.0%

NII/average NIEA 1.5% 1.8% 1.8% 1.8% 1.8%

NII/total revenues 48.0% 56.0% 53.6% 52.2% 50.7%

RATIOS - BALANCE SHEET (%)

Tier 1 ratio 9.5% 11.8% 12.5% 12.9% 13.0%

Equity/total assets 7.3% 8.5% 8.8% 9.2% 9.6%

NIEA/total assets 91.5% 89.4% 89.2% 89.0% 88.7%

Gross loans/total assets 80.9% 78.8% 78.3% 77.6% 77.1%

Deposits/gross loans 77.8% 80.3% 82.5% 86.5% 91.1%

RATIOS - ASSET QUALITY (%)

Loan loss charge/ave. net loans 1.03% 0.51% 0.26% 0.13% 0.14%

Gross NPLs/gross loans 2.95% 2.97% 1.49% 0.50% 0.50%

Loan loss reserves/gross NPLs 33% 30% 45% 60% 80%

PER SHARE DATA (€)

EPS reported -0.72 1.85 3.40 3.94 4.14

EPS operating 0.95 1.85 3.40 3.94 4.14

NAV 25.0 26.8 28.7 30.9 32.9

NII = net interest income; NIEA = net interest earning assets. Source: Company, KBW estimates


10 December 2010

IMPORTANT DISCLOSURES

RESEARCH ANALYST CERTIFICATION: I, Jean Pierre Lambert, hereby certify that the views expressed in this research reportaccurately reflect my personal views about the subject company and its securities. I also certify that I have not been, and will not bereceiving direct or indirect compensation in exchange for expressing the specific recommendation in this report.

Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based uponvarious factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, whichinclude revenues from, among other business units, Institutional Equities and Investment Banking.

COMPANY SPECIFIC DISCLOSURES

KBW expects to receive or intends to seek compensation for investment banking services from Van Lanschot in the next three months.

For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recentlypublished company report or visit our global disclosures page on our website at http://www.kbw.com/research/disclosures.html or see thesection below titled "Disclosure Information" for further information on how to obtain these disclosures.

AFFILIATE DISCLOSURES: This report has been prepared by Keefe, Bruyette & Woods Inc. (“KBWI”) and/or its affiliates Keefe,Bruyette & Woods Limited and Keefe, Bruyette & Woods Asia Limited all of which are subsidiaries of KBW, Inc. (collectively“KBW”). Keefe, Bruyette & Woods Inc. is regulated by FINRA, NYSE, and the United States Securities and Exchange Commission, andits headquarters is located at 787 7th Avenue, New York, NY 10019. Keefe, Bruyette & Woods Limited is registered in England andWales, no. 04605071 and its registered office is 7th Floor, One Broadgate, London EC2M 2QS. KBWL is authorised and regulated by theUK Financial Services Authority ("FSA"), entered on the FSA's register, no. 221627 and is a member of the London Stock Exchange.Keefe, Bruyette & Woods Asia Limited is a licensed corporation regulated by the Securities and Futures Commission of Hong Kong("SFC") (CE No.: AUI281). Its headquarters is located at 3101, 31/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong. Disclosuresin the Important Disclosures section referencing KBW include one or all affiliated entities unless otherwise specified.

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Disclosure Information: For current company specific disclosures please write to one of the KBW entities: Keefe, Bruyette &Woods Research Department at the following address: 787 7th Avenue, 4th Floor, New York, NY 10019. The Compliance Officer,Keefe, Bruyette and Woods Limited, 7th Floor, One Broadgate, London EC2M 2QS. The Compliance Officer, Keefe, Bruyette andWoods Asia Limited, 3101, 31/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong. Or visit our website athttp://www.kbw.com/research/disclosures.html. KBW has arrangements in place to manage conflicts of interest including informationbarriers between the Research Department and certain other business groups. As a result, KBW does not disclose certain clientrelationships with, or compensation received from, such companies in its research reports.

Van Lanschot (LANS.NA)

Target Price: €38.80

Risk Factors:

The upside risks to our price target relate predominantly to a potential acquisition from a larger banking institution or a more positivescenario than we currently expect (rapid growth in AuM combined with a reduction of the cost base).

The downside risks relate to the potential for further losses from non-strategic assets, weak equity markets performance putting pressureon commission income, and a failure of provisions in the corporate loan book to decline as expected.

RATING AND PRICE TARGET HISTORY


10 December 2010

http://www.kbw.com/research/disclosures.html?

http://www.kbw.com/research/disclosures.html?

Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q315

30

45

60

75

2008 2009 2010 2011

03/26/08MP:€74

08/13/08MP:€66

08/19/08MP:€63

12/03/08MP:€57

03/23/09MP:€49

08/13/09MP:€40

08/11/10MP:€38

Rating and Price Target History for: Van Lanschot (LANS.NA) as of 12-08-2010

Created by BlueMatrix

Rating KEY: OP – Outperform MP – MarketPerform U – Underperform RS – Restricted S –Suspended

Note: The boxes on the Rating and Price Target History Chart above indicate the date ofReport/Note, the rating and price target. Each box represents a date on which an analyst made achange to a rating or price target.

Distribution of Ratings/IB ServicesKBW

*IB Serv./Past 12 Mos.

Rating Count Percent Count Percent

Outperform [BUY] 212 31.64 51 24.06Market Perform [HOLD] 393 58.66 90 22.90Underperform [SELL] 52 7.76 4 7.69Restricted [RES] 0 0.00 0 0.00Suspended [SP] 13 1.94 1 7.69

* KBW maintains separate research departments; however, the above chart, "Distribution of Ratings/IBServices," reflects combined information related to the distribution of research ratings and the receipt ofinvestment banking fees globally.

Explanation of Ratings: KBW Research Department provides three core ratings: Outperform, Market Perform and Underperform, andtwo ancillary ratings: Suspended and Restricted. For purposes of New York Stock Exchange Rule 472 and FINRA Rule 2711,Outperform is classified as a Buy, Market Perform is classified as a Hold, and Underperform is classified as a Sell. Suspended indicatesthat KBW's investment rating and target price have been temporarily suspended due to a lack of publicly available information and/or tocomply with applicable regulations and/or KBW policies. Restricted indicates that KBW is precluded from providing an investmentrating or price target due to the firm's role in connection with a merger or other strategic financial transaction.

North American Stocks are rated based on an absolute rate of return (percentage price change plus dividend yield).Outperformrepresents a total rate of return of 15% or greater. Market Perform represents a total rate of return in a range between -5% and+15%.Underperform represents a total rate of return at or below -5%.

European and Asian Stocks are rated based on the share price upside to target price relative to the relevant sector index performance ona 12-month horizon. Outperform rated stocks have a greater than 10 percentage point (“pp”) relative performance versus the sector,Market Perform rated stocks between +10pp to -10pp relative performance versus the sector, and Underperform rated stocks a lower than10pp relative performance versus the sector. The 12-month price target may be determined by the stock’s fundamentally-driven fair valueand/or other factors (e.g., takeover premium or illiquidity discount).

KBW Model Portfolio: "Model Portfolio Buy" - Companies placed on this list are expected to generate a total rate of return (percentageprice change plus dividend yield) of 10% or more over the next 3 to 6 months.

"Model Portfolio Sell" - Companies placed on this list are expected to generate a total rate of return (percentage price change plusdividend yield) at or below -10% over the next 3 to 6 months.


10 December 2010

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OTHER DISCLOSURES

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Most ProShares ETFs seek a return that is a multiple (e.g., -200%, -300%) of the return of an index or other benchmark (target) for asingle day. Due to the compounding of daily returns, Ultra and Short ProShares' returns over periods other than one day will likely differin amount and possibly direction from the target return for the same period. Investors should monitor holdings consistent with theirstrategies, as frequently as daily. For more on correlation, leverage and other risks, please read the prospectus. ProShares are distributedby SEI Investments Distribution Co. which is not affiliated with ProFunds Group or its affiliates.

“KBW Regional Banking IndexSM” is a service mark of Keefe, Bruyette & Woods, Inc. (KBWI), and has been licensed for use byProShares. ProShares have not been passed on by this entity or its subsidiaries or affiliates as to their legality or suitability. ProShares arenot sponsored, endorsed, or promoted by this entity or its subsidiaries or affiliates, and they make no representation regarding theadvisability of investing in these products. THIS ENTITY AND ITS SUBSIDIARIES AND AFFILIATES MAKE NOWARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO PROSHARES. Before investing, consider the funds investmentobjectives, risks, charges and expenses. To obtain a prospectus which contains this and other information, call 1-866-787-2257 or visithttps://www.spdrs.com/resources/materials/productLiteratureOverlay.seam.

In general, ETFs can be expected to move up or down in value with the value of the applicable index. Although ETFs may be bought andsold on the exchange through any brokerage account, ETFs are not individually redeemable from the Fund. Investors may acquire ETFsand tender them for redemption through the Fund in Creation Unit Aggregations only, please see the prospectus for more details.

Shares of the ETFs funds are not insured by the FDIC or by another governmental agency; they are not obligations of the FDIC nor arethey deposits or obligations of or guaranteed by KBWI or State Street Bank and Trust Company. Funds investing in a single sector maybe subject to more volatility than funds investing in a diverse group of sectors. ETFs are distributed by State Street Global. Markets, LLC,member FINRA (http://www.finra.org/index.htm), SIPC (http://www.sipc.org/). Past performance is not necessarily indicative of futureresults. ETFs trade like stocks, are subject to investment risk and will fluctuate in market value.


10 December 2010

http://www.proshares.com/funds/performance/the_universal_effects_of_compounding.html?

http://www.proshares.com/resources/litcenter/?

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http://www.sipc.org/?

General Risk Disclosure: Investments in securities or financial instrument involve numerous risks which may include market risk,counterparty default risk, liquidity risk and exchange rate risk. No security or financial instrument is suitable for all investors and someinvestors may be prohibited in certain states or other jurisdictions from purchasing securities mentioned in this communication. Thesecurities of some issuers may not be subject to the audit and reporting standards, practices and requirements comparable to thosecompanies located in the investor’s local jurisdiction. Where net dividends to ADR investors are discussed, these are estimated, usingwithholding tax rate conventions, and deemed accurate, but recipients should always consult their tax advisor for exact dividendcomputations.

COUNTRY SPECIFIC AND JURISDICTIONAL DISCLOSURES: United States: This report is being distributed in the US byKeefe, Bruyette & Woods Inc. Where the report has been prepared by a non-US affiliate, Keefe, Bruyette & Woods Inc., acceptsresponsibility for its contents. U.K. and European Economic Area (EEA): This report is issued and approved for distribution in theEEA by Keefe Bruyette & Woods Limited, which is regulated in the United Kingdom by the Financial Services Authority. Hong Kong:This document has been distributed by Keefe, Bruyette & Woods Asia Limited for the information of institutional customers and is notintended for, and should not be distributed to, retail investors in Hong Kong. Keefe, Bruyette & Woods Asia Limited acceptsresponsibility for the information set out in this document. Singapore: This communication is distributed in Singapore only to personswho are "institutional investors" as defined in the Securities and Futures Act, Chapter 289 of Singapore and is not intended for, andshould not be distributed to, any person in Singapore who is not an "institutional investor”.

In jurisdictions where KBW is not already licensed or registered to trade securities, transactions will only be affected in accordance withlocal securities legislation which will vary from jurisdiction to jurisdiction and may require that a transaction is carried out in accordancewith applicable exemptions from registration and licensing requirements. Non US customers wishing to effect a transaction shouldcontact a representative of the KBW entity in their regional jurisdiction except where governing law permits otherwise. US customerswishing to effect a transaction should do so by contacting a representative of Keefe, Bruyette & Woods Inc.

ONLY DISTRIBUTE UNDER REGULATORY LICENSE: This communication is only intended for and will only be distributed topersons residing in any jurisdictions where such distribution or availability would not be contrary to local law or regulation. Thiscommunication must not be acted upon or relied on by persons in any jurisdiction other than in accordance with local law or regulationand where such person is an investment professional with the requisite sophistication and resources to understand an investment in suchsecurities of the type communicated and assume the risks associated therewith.

CONFIDENTIAL INFO: This communication is confidential and is intended solely for the addressee. It is not to be forwarded to anyother person or copied without the permission of the sender. Please notify the sender in the event you have received this communicationin error.

NO SOLICITATION OR PERSONAL ADVICE: This communication is provided for information purposes only. It is not a personalrecommendation or an offer to sell or a solicitation to buy the securities mentioned. Investors should obtain independent professionaladvice before making an investment.

ASSUMPTIONS, EFFECTIVE DATE AND UPDATES: Certain assumptions may have been made in connection with the analysispresented herein, so changes to assumptions may have a material impact on the conclusions or statements made in this communication.Facts and views presented in this communication have not been reviewed by, and may not reflect information known to, professionals inother business areas of KBW, including investment banking personnel.

The information relating to any company herein is derived from publicly available sources and KBW makes no representation as to theaccuracy or completeness of such information. Neither KBW nor any of its officers or employees accept any liability whatsoever for anydirect, indirect or consequential damages or losses arising from any use of this report or its content.

This communication has been prepared as of the date of the report.

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COPYRIGHT: This report is produced for the use of KBW customers and may not be reproduced, re-distributed or passed to any otherperson or published in whole or in part for any purpose without the prior consent of KBW.


10 December 2010

Asset Management Banks European Banks Asian StrategyRobert Lee 1 212 887 7732 Regional Banks Matthew Clark +44 20 7663 5280 Bill Stacey +852 3973 8332

Jacob Troutman 1 212 887 3688 Jefferson Harralson, CFA 1 404 231 6540 Aldo Comi +44 20 7663 3211Larry Hedden, CFA 1 212 887 3884 Mathew Gilbert +44 20 7663 5288 Asian BanksAaron D. Teitelbaum 1 212 887 3692 Large-Cap Banks David Hyman +44 20 7663 3123 Warren Blight +852 3973 8322

David J. Konrad, CFA 1 212 887 6719 Jean-Pierre Lambert +44 20 7663 5292 Sam Hilton +852 3973 8330Broker/Dealer Kyle O’Brien 1 212 887 6751 Mark Phin, CFA +44 20 7663 5279 Brian Hunsaker +852 3973 8324Lauren A. Smith 1 212 887 7712 Julianna Balicka 1 415 591 5078 Antonio Ramirez +44 20 7663 5283 Jun Oishi +813 3405 4064Joel Jeffrey 1 212 887 3865 Robert Bohlen, CFA 1 415 591 5073 Ronny Rehn +44 20 7663 3214 David Threadgold, CFA +813 5770 2551

Jacquelynne Chimera, CFA 1 415 591 5074 Andrew Stimpson +44 20 7663 3233Exchanges & Order Execution Matthew T. Clark 1 212 887 3841 Asian ExchangesNiamh Alexander 1 212 887 3695 Damon DelMonte 1 860 722 5908 European Insurance Sam Hilton +852 3973 8330

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Christopher McGratty, CFA 1 212 887 7704 Greig Paterson, CFA, FFA +44 20 7663 5289Property Casualty Insurance Catherine Mealor 1 404 231 6548Cliff Gallant, CFA 1 212 887 7705 Eileen Rooney 1 212 887 7739 Miscellaneous Financials

Brett Shirreffs 1 212 887 4713 John Barber 1 212 887 7747 Justin Bates +44 20 7663 3219Matthew Rohrmann 1 212 887 3677 Bain Slack 1 404 231 6545 Matthew Clark +44 20 7663 5280Dean Evans 1 212 887 7701 Derek Hewett 1 404 231 6549 Karl Morris +44 20 7663 5296

Frank Lee 1 212 887 7709Robert Farnam 1 860 722 5901 Canadian Banks

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Equity REITs Catherine Klinchuch 1 415 591 5075Sheila McGrath 1 212 887 7793

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Smedes Rose 1 212 887 3696 Jade J. Rahmani 1 212 887 3882Daniel Cooney, CFA 1 212 887 7740 Sameer Gokhale, CPA 1 212 887 7726Haendel St. Juste 1 212 887 3842 Brendan J. Sheehy 1 212 887 7721Benjamin Yang, CFA 1 415 591 1631 Nathaniel Otis 1 860 722 5907

Patrick Glennon, CPA 1 415 591 1632 William T. Clark 1 860 722 5936Sanjay Sakhrani 1 212 887 7723

Index Products Steven Kwok, CFA 1 212 887 7713Siddharth Jain 1 212 887 3835

Equity StrategyQuantitative Research Frederick Cannon, CFA 1 212 887 3887Melissa A. Roberts 1 212 887 3820 Brian Kleinhanzl 1 415 591 5077

Mark Pawlak, CFA 1 212 887 7780Washington ResearchBrian Gardner 1 202 450 3576

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Documents

VLB KBW Note 10 December 2010 Amended