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ROCKEFELLER & CO.

A New Course for Financials

Banks and insurance companies play a vital role in our financial system, providing savings, financing, investment, and payment services to consumers and businesses of all sizes. Our modern economy requires a stable, trustworthy, and efficient financial services industry to function and grow. Active stewardship can serve a role in maintaining a strong financial system.

Bank managements should be motivated to pursue best practices, having experienced the consequences of bad behavior long after the Global Financial Crisis. Tighter regulations, enacted in the aftermath of the Global Financial Crisis, including Basel III and the Dodd-Frank Wall Street Reform and Consumer Protection Act, have increased capital requirements and compliance costs for financial institutions. They have also limited aggressive forms of lending and risk-taking.

In addition, banks have also incurred substantial legal penalties for poor conduct ranging from consumer loan servicing, market manipulation, fraudulent activity, and money laundering.

However, while new regulations and legal settlements have placed incremental financial burdens on the financial services industry, banks and insurers have since made substantial progress to comply with new rules and adjusted their business models accordingly. Balance sheets have been reinforced with additional capital and liquidity, and tighter underwriting. While this may limit loan growth, it has also resulted in reduced risk costs in their lending businesses. Banks have added headcount in their compliance and risk control divisions in an effort to monitor and prevent future misconduct.

With a new administration in power in the United States, there is some concern that an aggressive pullback of regulations is imminent. However, we believe that higher quality banks and insurers should remain conservative in maintaining their increased regulatory capital, underwriting standards, and compliance and risk monitoring capabilities, as failing to do so could draw the ire of legislators and regulatory bodies, as well as the general public. This could lead to additional costs

through loan losses, further litigation expenses, and even more stringent regulations. We believe that through active stewardship, we can continue to promote responsible practices among these companies.

Going forward, we expect banks and other financial institutions with adjusted business models, that exhibit greater stability in earnings and balance sheet quality to benefit financially in the long run. A reduction of earnings cyclicality should result in higher investor confidence in dividend payouts over time, and financial stocks could see higher valuations as a result. Swedish banks are a prime example. Highly capitalized by global standards, with minimal loan losses in their home market even during economic downturns, Swedish banks have maintained premium valuations (14x to 16x forward earnings, 1.6x to 2x book value) compared to their European peers (many trade at 10x to 12x forward earnings, <1x book value). We believe this represents significant potential upside for long-term investors in the sector.

"OUR MODERN ECONOMY REQUIRES A STABLE, TRUSTWORTHY, AND EFFICIENT FINANCIAL SERVICES INDUSTRY TO FUNCTION AND GROW. ACTIVE STEWARDSHIP CAN SERVE A ROLE IN MAINTAINING A STRONG FINANCIAL SYSTEM."

5 ACTIVE STEWARDSHIP IN FINANCIAL SERVICES

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