e normal levels led by energy exposures. However, big Banks are now 10x or less our lowered 2016 EPS vs. a 13 average PE since 1995. On a PB basis, S&P Banks trade at 0.9x vs. -2x on average since 1995. Figun 16: Forward PE of Banks. Financials. and S&P 500 4 17 • Zi• • 1437 1$ f n 23 21 19 rt r

Worth the wait. Banks must wait longer for an earnings boost from Fed hikes We estimate that every 25bp climb in the annual average FF rate boosts S&P Banks EPS by 3.5% or nearly $0.50 of S&P EPS. Crucially, this assumes that credit costs do not exceed normal levels upon such higher overnight rates. We

sumption. If a bank earns an ROE of 8% and general interest rates rise 25bp then the ROE would rise to 8.25% and profits up 3%. The average ROE for S&P Banks was 8% in 2015. If ROE climbs in line with the Fed Funds rate then it should boost earnings by about 3%. This is an overly simplistic assumption, b