pects the deposit beta to remain low given the competitive dynamics in the Hawaii landscape. Management anticipates that another 25bp increase in the Fed Funds rate in December could have a similar impact on the NIM (+6bp) as it experienced following the previous rate hike in Dec '15. ¢ Cash deployment to s

led by the belly of the curve. The market is only pricing in a one and a quarter rate hike in 2017, and another one and a quarter hike in 2018, with Fed Funds futures implying that the Fed Funds rates will be only at 1.25% at the end of 2018 (Chart 6). We think the 5y part of the curve offers the best risk-

by —12%. As a result. SCHW's return on equity in 2015 was 42% below it's long run avenge. This is because SCHW is very sensitive to changes in the Fed Funds rate as it invests client cash in 2yr duration. liquid securities. It also charges money market management fees. which it has had to waive in orde

nd beta are calculated over rolling weekly returns. Volatility is calculated with daily returns. MSCI World Excess Return is calculated by deducting Fed Funds daily from MSCI World Net Total Return Index (NDDUWI). Barclays Agg Excess Return is calculated by deducting Fed Funds daily from Barclays Agg Total

nd beta are calculated over rolling weekly returns. Volatility is calculated with daily returns. MSCI World Excess Return is calculated by deducting Fed Funds daily from MSCI World Net Total Return Index (NDDUWI). Barclays Agg Excess Return is calculated by deducting Fed Funds daily from Barclays Agg Total

nd beta are calculated over rolling weekly returns. Volatility is calculated with daily returns. MSCI World Excess Return is calculated by deducting Fed Funds daily from MSCI World Net Total Return Index (NDDUWI). Barclays Agg Excess Return is calculated by deducting Fed Funds daily from Barclays Agg Total

nd beta are calculated over rolling weekly returns. Volatility is calculated with daily returns. MSCI World Excess Return is calculated by deducting Fed Funds daily from MSCI World Net Total Return Index (NDDUWI). Barclays Agg Excess Return is calculated by deducting Fed Funds daily from Barclays Agg Total

nd beta are calculated over rolling weekly returns. Volatility is calculated with daily returns. MSCI World Excess Return is calculated by deducting Fed Funds daily from MSCI World Net Total Return Index (NDDUWI). Barclays Agg Excess Return is calculated by deducting Fed Funds daily from Barclays Agg Total

nd beta are calculated over rolling weekly returns. Volatility is calculated with daily returns. MSCI World Excess Return is calculated by deducting Fed Funds daily from MSCI World Net Total Return Index (NDDUWI). Barclays Agg Excess Return is calculated by deducting Fed Funds daily from Barclays Agg Total

nd beta are calculated over rolling weekly returns. Volatility is calculated with daily returns. MSCI World Excess Return is calculated by deducting Fed Funds daily from MSCI World Net Total Return Index (NDDUWI). Barclays Agg Excess Return is calculated by deducting Fed Funds daily from Barclays Agg Total

nd beta are calculated over rolling weekly returns. Volatility is calculated with daily returns. MSCI World Excess Return is calculated by deducting Fed Funds daily from MSCI World Net Total Return Index (NDDUWI). Barclays Agg Excess Return is calculated by deducting Fed Funds daily from Barclays Agg Total

nd beta are calculated over rolling weekly returns. Volatility is calculated with daily returns. MSCI World Excess Return is calculated by deducting Fed Funds daily from MSCI World Net Total Return Index (NDDUWI). Barclays Agg Excess Return is calculated by deducting Fed Funds daily from Barclays Agg Total

r. Bank EPS is likely down 5% in 2016 rather than up 5% as we previously thought, as only for 2 Fed hikes in late 2016 won't raise the average 2016 Fed Funds rate much. This makes Banks vulnerable to down EPS if markets business stays weak for longer and credit costs rise from low levels to more normal l

. Crucially, this assumes that credit costs do not exceed normal levels upon such higher overnight rates. But it also assumes that the climb in the Fed Funds rate doesn't entirely follow through to the rate paid on deposits, but does follow through on variable rate loans and other very short-term assets.

t on S&P EPS post a cyclical recovery other than the late 1990s. But we believe it's fair given persistently low long-term real interest rates. If Fed Funds and 10yr Treasury yields rise slowly and plateau around 2% and 3.0-3.5% (10yr TIPS yield <1.5%) in late 2017, then an 18x trailing PE looks fair on