HOUSE OVERSIGHT 014862 attractive valuations of EU banks vs. US peers (EU banks on 12.0x 2017E PIE vs. US Banks on -14x and some EU banks still on a large discount vs 10-year historical median P/B valuations). What the EU banks bears are saying: EU macro declining, US lead re-flation trade cooling (tax, deregulation, healthcare headwinds) and toppy multiples/high ownership of EU banks going into Q1 results. They believe the pressure will be off Draghi to act on the deposit rate if the macro starts to reverse which may cause people to push back the assumed timing of European rate hikes and tapering. The French election is also a big risk factor which is clearly holding back some global investors from buying into Europe. Rates Update Consensus has started to factor in the higher rate outlook in Europe. The bears are pointing out that these probabilities have fallen a lot this week while the bulls argue it's just a matter of timing. I monitor market expectations for ECB normalisation in rates using the World Interest Rate Probability (WIRP) function on Bloomberg. It's been very volatile recently. I currently see the market is pricing a 16.6% probability of a EUR rate hike before the end of 2017 (row 6, column 2 below). a 32.7% probability in the next 12 months (row 9, column 2) and a 67.6% probability in the next 18 months. Ei Ir.-. • Instrument 3 Future Implied Probability Current Implied Probabilities 1) Overview OIS: Eurozone OIS - Deposit F( Dates o Meeting Calculation Meeting Prob Of Hike Prob of Cut 04/27/2017 0.0% 2A' 06/08/2017 0.0% 3.3% 07/20/2017 2.1% 3.2% 09/07/2017 7.2% 3.1% 10/26/2017 8.8% 3.0% 12/14/2017 16.6% 2.8% 01/25/2018 21.6% 2.6% 03/08/2018 29.4% 2.3% 04/26/2018 32.7% 2.2% 06/14/2018 41.4% 1.9% • Historical Analysis for Meeting :17/2017 ) Add ikal ted -0.6 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% • Current Rate -0.40 ,•2 rates In Based on rate -0.40 .)-1 '07/2017 -0.5 2