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®) ROCKEFELLER & CO. A \ New Cot re A, Banks and insurance companies play a vital role in our financial system, providing savings, fi- nancing, investment, and pay- ment services to consumers and businesses of all sizes. Our mod- ern economy requires a stable, trustworthy, and efficient finan- cial 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 practic- es, having experienced the con- sequences of bad behavior long after the Global Financial Crisis. Tighter regulations, enacted in the aftermath of the Global Fi- nancial Crisis, including Basel III and the Dodd-Frank Wall Street Reform and Consumer Protec- tion 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 in- curred 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 in- dustry, 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 result- ed in reduced risk costs in their lending businesses. Banks have added headcount in their compli- ance 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 aggres- sive pullback of regulations is imminent. However, we believe that higher quality banks and insurers should remain conserva- tive 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 bod- ies, as well as the general public. This could lead to additional costs TAIN CIAL through loan losses, further liti- gation expenses, and even more stringent regulations. We believe that through active stewardship, we can continue to promote re- sponsible 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 qual- ity 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 capi- talized 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, <x book value). We believe this represents significant potential upside for long-term investors in the sector. HOUSE_ OVERSIGHT _ 012076