Presentación del evento: https://bit.ly/2JsbPdd Santiago López es partner y managing director de Exane BNP y responsable tanto de la oficina en España como del análisis del sector financiero. Lleva más de 20 años analizando empresas financieras en distintos mercados. Su análisis es diferente al del resto de la industria del sell side, puesto que combina principios de la Escuela Austriaca de economía y de la economía del comportamiento, con el value investing y el enfoque a largo plazo. Sinopsis La banca se ha convertido en una industria cada vez más arriesgada e inestable. Las actuaciones de los bancos centrales han creado un entorno en el que el riesgo se ha transferido del accionista al contribuyente. Santiago López nos explica los conceptos clave para entender el funcionamiento del sistema financiero (y otras industrias) desde el prisma del value investing de Benjamin Graham, con un toque de economía de la Escuela Asustriaca. Será imprescindible entender conceptos como el dinero (mucho menos intuitivo de lo que parece) y el sistema de reserva fraccionaria, para compararlos con las acciones de los bancos centrales y lo que ha ocurrido a lo largo de los siglos en la historia económica. A juicio de nuestro invitado, las conclusiones no son precisamente halagüeñas.

1. Banks and the XXI century Gosplan
Value school and an Austrian approach
Santiago López Díaz, CFA

2. 2
Where are we?
Are we here?

3. 3
The Old Alchemists. Beware of “expert” advice
Sir Isaac Newton investments in the
South Sea stock (1718-1721)
Source: Marc Faber, Gloom Boom and Doom report

4. 4
The Modern Alchemists: The Manipulation of Money
Top 10 largest central banks’ balance sheet (assets) ECB Balance Sheet
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
European High Yield vs 10-yr US Treasury yield

5. 5
The Modern Alchemists; The Manipulation of Interest
Rates
Global risk-free rate (1273-2017)
Source: Bank of England
Spain’s reference rate (1857-2017)
Source: Exane BNPP estimates, Spain historical statistics from BBVA Foundation

6. 6
The Modern Alchemists. Never seen before
Bank Assets as a % of world GDP
Source: The Interest Rate Observer

7. 7
Price-fixing doesn’t work: why even try?
“From Hammurabi to Modern Times
Babylon: the Code of Hammurabi
Egypt: the grain crop
China: the Official System of Chou
Ancient India: Kautilya and the Arthashastra
Greece: the army of grain inspectors
(Sitophylakes)
Rome: the Lex Sempronia

8. 8
First do no Harm
The Tao Te Ching and Taoism

9. 9
Stock market capitalisation & S&P 500 Price to sales S&P P/E ratio (CAPE)
0
2
4
6
8
10
12
14
16
18
0
5
10
15
20
25
30
35
40
45
50
1860 1880 1900 1920 1940 1960 1980 2000 2020 2040
Long-TermInterestRates
Price-EarningsRatio(CAPE,P/E10)
Price-Earnings
Ratio
Long-Term
Interest Rates
2000
1981
1929
1901
1921
33.60
1966
“Would I say there will never, ever be another
financial crisis?... You know, probably that would
be going too far, but I do think we're much safer
and I hope that it will not be in our lifetimes and I
don't believe it will be”, Janet Yellen
Source: Yardeni.com
Source: Robert Shiller
The Modern Alchemists. Problem #1; Malinvestments

10. 10
The Modern Alchemists. Problem #1; Malinvestments
Leonardo Da Vinci: Salvador Mundi Cy Twombly: Untitled

11. 11
Thanks, Vincenzo Peruggia for discovering
a 400 year old hidden value (1506-1911)!
The Modern Alchemists. Problem #1; Malinvestments
Price is what you pay, value is what you get
● Don’t confuse Money with Wealth
● Markets are not efficient and the perception
of value is subjective

12. 12
● 1. Deus ex Machina
“The modern champions of the “easy money”
policy take pride in calling themselves
unorthodox and slander their adversaries as
orthodox, old-fashioned and reactionary… While
emphatically asserting that a return to the
nineteenth century’s economic policies is out of
the question, they are zealously advocating a
revival of the methods of the Dark Ages and of
the orthodoxy of old canons”. Ludwig Von Mises
in The Economic Consequences of Cheap
Money (1946)
Source: Bank of Japan, Investment Trust Association data, company data, Bloomberg
The Modern Alchemists. Problem #2; Deus ex Machina
“We should never underestimate monetary authorities’
ability to deal with adversity”, Gideon Gono
“There are no limits to our actions
to bring inflation up to its target”,
Mario Draghi…..
• FOMC days account for 25% of the total returns we have
witnessed since 1984!
• The chance of this occurring randonly is 0.0086% (86 out
of 1 million)

13. 13
● 3. The Fatal Conceit
Companies like Iberdrola and Repsol placing debt directly with
the ECB through private placements???
The seen and the unseen
● 4. Fatigue Failure
From 1952 to 2000; USD1.7 of debt to generate USD1 of GDP
Since 2000; USD3.3 of debt to generate USD1 of GDP
“We are bearish on the debt of overextended
governments. We are bullish on the alternatives
enumerated in the periodic table (when the rest of the
world will come around to the view that central bankers
have lost their marbles)”, Jim Grant
● 5. Tail Risk
”Model (v.), to write complex mathematical formulae that
capture every conceivable variable in every possible
situation — except, that is, the one that is about to
happen next, which will destroy the value of the portfolio
that has been built around the model. Jason Zweig’s in
his “The Devil Financial dictionary Source: Federal Reserve, Emolument.com
The Modern Alchemists. Problem #3, #4 and #5

14. 14
History Lessons
Lesson #1: Progress is cumulative in science and engineering but cyclical in finance. This time is not different
• “Optimism is highly valued; people and companies reward the providers of misleading information more than they reward truth
tellers”, Nassim Taleb.
• The Optimism bias and The Crowd Folly.
Lesson #2: Risk management doesn’t work
• “It ain’t what you don’t know what gets you into trouble. It’s what you know for sure that just ain’t so.” Mark Twain
• Tail risks are always underestimated. What is the probability of advance civilizations in the Universe
Evolution of NPLs and NPAs
Source: Exane BNP Paribas estimates, Bank of Spain
Exposure to real estate developers
as a % of the system’s equity
Source: Exane BNP Paribas estimates, Bank of Spain

15. 15
Abondisapromisetopaymoney.Inthe21stcentury apromisetopayfiatmoneywhich thecentral banks havepledgedtodepreciate by2%
p.a.Thatpeople arelending money atless thanzerointhecertainty oflosingmuchoftheir purchasingpowermustmake today’s bond
bubbletheworld’sgreatbubble”,JimGrant.
Simplicity ….and the forest needs to burn!
History Lessons

16. 16
History Lessons
Lesson #3: Lending Growth and leverage are not the solution. They are the mother of all evils.
• Credit bubbles follow the traditional script of debt default and currency devaluation
The Economic Consequences of
Cheap Money
The artificial prosperity linked to
unlimited loan growth in an artificially low
interest rate environment creates the
illusion that many projects offer the
chances of profitability, which squanders
huge amounts of capital.
Ludwig von Mises, 1946
• The power of geometric
progression

17. 17
History Lessons
Lesson #4: Incentives drive behaviour but nobody cares
● Variable share-based remuneration for 2014 was related to: a) the total shareholder return relative to a peer group, b) the group’s
recurring Economic Value Added without one-offs and c) the group’s net attributable profit without one-offs
● “Except for” should be excised from the lexicon… be suspicious of those managers who fail to deliver for extended periods of time and
blame it on their long-term focus”, Warren Buffett
It’s not greed what drives the
world. It’s envy!

18. 18

19. 19
Cosas Veredes, querido Sancho
Source: Exane BNPP estimates
● 1. Cash Ban
● 2. People’s QE; an economic lobotomy?
● 3. Monetary Debasement
“There are 1011 stars in the galaxy. That used to be a huge number. But it's only a hundred billion. It's
less than the national deficit! We used to call them astronomical numbers. Now we should call them
economical numbers”, Richard Feynman, Nobel Prize in Physics in 1965
What “price stability” are we talking about?
“(If government can find ways to engage in counterfeiting- the creation of
money out of thin air)…it can then appropriate resources slyly and almost
unnoticed, without rousing the hostility touched off by taxation. In fact,
counterfeiting can create in its very victims the blissful illusion of unparalleled
prosperity. Counterfeiting is evidently but another name for inflation”, Murray N.
Rothbard (“What Has Government Done to our Money? (1963)

20. 20
The Modern Alchemists; The Inevitable Ending
What Has Government Done With Our
Money and The Case for a 100 percent
Gold Dollar
“…therefore the state, with its ever-
tightening monopoly of money creation,
has a simple route that it can take to
benefit its own members and its favoured
supporters. And it is a more enticing and
less disturbing route than taxes—which
might provoke open opposition.
…counterfeiting is evidently but another
name for inflation”…
“The economist who sees the free market
working splendidly in all other fields
should hesitate before dismissing it in the
sphere of money”…(through the
monopoly of money creation) the state
will be able to quietly add effectively to its
own wealth and to the wealth of its
favourite groups and without incurring the
wrath that taxes often invoke. The state
has understood this lesson since the
Purchasing Power of the Consumer Dollar
Source: St Louis Fed
647 year old Chinese banknote
Counterfeiters will be
decapitated
Check what your euros
say...

21. 21
Remember what money is
A Buck
Another buck
Meet the Joachimsthaler…the original buck

22. 22
“ If one does not terminate the expansionist policy in time by a return to balanced budgets, by abstaining
from government borrowing from the commercial banks and by letting the market determine the height of
interest rates, one chooses the German way of 1923”,
Ludwig Von Mises in The Economic Consequences of Cheap Money (1946)
Global Reserve Currencies
Source: Exane BNP Paribas estimates based on a chart by JP Morgan-M ichael Cembalest
The Modern Alchemists; The Inevitable Ending

23. Source: INE
23
Miracle or mirage? The Effects of framing
Spain: q/q GDP growth
“There are only two ways to live your life. One is as though nothing is a miracle. The other is as
though everything is a miracle”, Albert EinsteinSpanish Public Debt per family
(EUR000 in real terms)
Source: Exane BNPP estimates
Organ donation (effective percentage of consent)
Source: Dan Ariely
The magical effect of framing

24. 24
Murray Rothbard’s Modets Proposal. The Spirit of Vivian
Kellems
“I would like to offer a Modest Proposal, giving us a chance to see precisely
how vital to our survival and prosperity is the Leviathan federal government,
and how much we are truly willing to pay for its care and feeding. Let us try a
great social experiment: for one year, one exhilarating jubilee year, we
furlough, without pay, the Internal Revenue Service and the rest of the
revenue-gathering functions of the Department of Treasury.
…It will then be fascinating to see how much the American public is truly
willing to pay, how much it thinks the federal government is really worth”
In the same spirit, Vivien Kellems, an American entrepreneur and industrialist,
fought (and lost) a bitter fight against the implementation of the withholding
tax by the IRS.
People don’t miss the income which they never touch. But if taxpayers were
able to keep all their untaxed earnings and the government, later, were to
charge all taxes in a lump sum (approaching 50%-70% of earnings) “in six
months we would have a tax revolution or a contraction of the budget”.

25. 25
Banking myth #1. Is this really progress?? Is the system
safer??
“The banking business is no favorite of ours. When assets are twenty times equity -- a common ratio
in this industry -- mistakes that involve only a small portion of assets can destroy a major portion of
equity. And mistakes have been the rule rather than the exception at many major banks." – Warren
BuffettSpanish financial system equity (EURbn)
Source: Exane BNPP estimates, Bank of Spain
46
77
123
181
232
0
50
100
150
200
250
1995 2000 2005 2010 2017
5x
2007 2017e % Change
Phased-in CET1 ratio 6.0% 12.7% 114%
RWA / Total Assets 67% 43% -35%
Equity / Total Assets 4.3% 5.4% 25%
Leverage (x times) 23 19 -20%
Regulatory capital vs leverage
Source: Exane BNPP estimates.
“I do not think you can trust bankers to control
themselves. They are like heroin addicts”, Charlie
Munger
“The Wall Street firms of 50 years ago were
organized as general partnerships. They next
became limited-liability corporations. And they next
became too big to fail. Whose idea of progress is
this?” , Jim Grant
Year Event Equity / Assets
1840 55%
1863 National Bankig Act 36%
1914 Creation of the Federal Reserve 16%
1933 Creation of the FDIC 13%
1990 Implementation of Risk-Based Capita Requirements 5%
Equity / assets US banks
Source: Statistical Abstracts through 1970
(€m) SAN BBVA CABK BKIA SAB BKT Total / Avg
DTAs (Converted into tax credits) 11,000 9,424 6,000 7,500 5,553 64 39,541
as a %of
TE 17% 25% 32% 55% 51% 2% 30%
RWA 1.8% 2.6% 4.0% 8.7% 7.2% 0.2% 4.1%
DTAs
Source: Exane BNPP estimates.

26. 26
Hedge Banks?
Source: Exane BNPP estimates
Banking myth #1. Is this really progress?? Is the system
safer??
(€m) SAN BBVA CABK BKIA SAB BKT UNI Total / Avg
ALCO Book (€bn) 35.0 31.1 29.5 51.5 24.6 5.9 14.9 192.5
as a % of TE 0.5 0.8 1.6 3.8 2.3 1.5 3.8 2.0
As a % of Revenues
Securities Income 6% 5% 7% 16% 8% 9% 17% 10%
Trading Gains 4% 8% 3% 14% 11% 3% 10% 8%
Securities + Trading 9% 13% 10% 31% 19% 12% 27% 17%
as a % of PBT 35% 46% 41% 124% 126% 33% 189% 85%

27. 27
Banking myth #2: Reverse M&A: Hold…on…tight
Renta 4 B. March BKT SAB BKIA CABK BBVA SAN
Tangible Equity 0.1 1.6 4.1 10.9 13.6 18.7 37.9 65.8
Leverage (x times) 15 11 18 20 16 20 18 22
FL B3 CET1 16.2% 22.2% 11.5% 12.8% 12.3% 11.7% 10.9% 10.8%
ROTE 17% 8% 13% 7% 3% 9% 9% 10%
Assets (€bn) 1 18 71 221 214 383 690 1,444
10 yr CAGR
Assets 4% 11% n.a. 5% 3% 5%
NAV per share plus cash DPS 11% 0% 4% -2% 5% 1%
% of years with a declining NAV per share 0% 60% 57% 57% 40% 40%
% of years w ith a ROTE> Ke 50% 10% 0% 0% 30% 40%
Is bigger really better or more solvent?
Source: Exane BNPP estimates
-27%
-32%
(40%)
(35%)
(30%)
(25%)
(20%)
(15%)
(10%)
(5%)
0%
SAN BBVA
Corporate / business units
Source: Exane BNPP estimates

28. 28
Banking myth #3– Past, Present and Future
SAN total assets (1857-2017e); from EUR21k to EUR1.4trn
Source: Exane BNPP estimates, Company data

29. 29
Banking myth #4: Reverse M&A: Hold…on…tight
“Home-made” SAN
Source: Exane BNPP estimates
-
50
100
150
200
250
300
Jan00
Jul00
Jan01
Jul01
Jan02
Jul02
Jan03
Jul03
Jan04
Jul04
Jan05
Jul05
Jan06
Jul06
Jan07
Jul07
Jan08
Jul08
Jan09
Jul09
Jan10
Jul10
Jan11
Jul11
Jan12
Jul12
Jan13
Jul13
Jan14
Jul14
Jan15
Jul15
Jan16
Jul16
Jan17
Jul17
Jan18
"Home made" SAN SAN
-
50
100
150
200
250
300
350
400
Jan00
Jul00
Jan01
Jul01
Jan02
Jul02
Jan03
Jul03
Jan04
Jul04
Jan05
Jul05
Jan06
Jul06
Jan07
Jul07
Jan08
Jul08
Jan09
Jul09
Jan10
Jul10
Jan11
Jul11
Jan12
Jul12
Jan13
Jul13
Jan14
Jul14
Jan15
Jul15
Jan16
Jul16
Jan17
Jul17
Jan18
"Home made BBVA" BBVA
“Home-made” BBVA
Source: Exane BNPP estimates
SANTANDER BBVA
Country Proxy 2000 2017 Return Country Proxy 2000 2017 Return
Spain Bankinter 70% 35% 46% Spain Bankinter 66% 30% 46%
UK Lloyds 0% 15% -74% Mexico Banorte 15% 35% 1259%
Brazil Itaú 10% 22% 502% Argentina Banco Francés 8% 2% 11%
Mexico Banorte 8% 8% 1259% Chile Banco de Chile 7% 3% 281%
Chile Banco de Chile 8% 7% 281% US Wells Fargo 0% 12% 93%
Portugal BES 4% 4% -97% Turkey Garanti 0% 15% -35%
US Wells Fargo 0% 5% 93% China Citic 0% 0% 28%
Poland Pekao 0% 4% 4% TEF Telefónica 4% 3% -61%
"Home-made SAN" 155% "Home-made BBVA" 233%
SAN -42% BBVA -45%
Relative difference 197% Relative difference 278%
Total Return XXI st century 60% 22%
CAGR 3% 1%
Capital allocatedCapital allocated

30. 30
Banking myth #5: Interest Rates to the Rescue?
Average projected NII 2017-2019
by interest rate shocks
Source: ECB
The mere exposure effect
Robert Zajonc experiment in 1969
kardirga, saricik, nansoma…
repetition gave the words an aura of warmth and
trustworthiness

31. 31
A Good Investment advice??