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Panel Discussion on Consolidation in the Banking Sector FICCA – IBA Conference on “Global Banking: Paradigm Shift” Peter Heidinger Managing Director, Mumbai,

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Presentation on theme: "Panel Discussion on Consolidation in the Banking Sector FICCA – IBA Conference on “Global Banking: Paradigm Shift” Peter Heidinger Managing Director, Mumbai,"— Presentation transcript:

1 Panel Discussion on Consolidation in the Banking Sector FICCA – IBA Conference on “Global Banking: Paradigm Shift” Peter Heidinger Managing Director, Mumbai, India Financial Institutions Group, Asia October 7, 2005 CONSOLIDATION IN BANKING: A SNAPSHOT OF EMERGING MARKET THEMES

2 go to View, Header and Footer to set date 2 1.CURRENT MARKET THEMES  Capital & Growth  Risk  Basel II 2.THE SURGE IN EMERGING MARKET CROSS BORDER ACTIVITY WITHIN AND ACROSS THE FINANCIAL SECTOR 3.THE OPTIMAL NUMBER OF BANKS? (No exact formula, but…) 4.KEY SUCCESS FACTORS AGENDA

3 go to View, Header and Footer to set date 3 FINANCIAL SECTOR MARKET CAPITALIZATION Market Capitalization of Financial Institutions in Asia Regional Tier Comparisons Average data ROA (3) 2004 ROE (3) 2004 Market Cap/Assets (4) Market cap/banks (4) (US$mn) GDP growth (5) Domestic credit growth rate (5) Developed systems (1) 1.35%15.7%10.7%$3,2866.6%5.5% Developing systems (2) 1.00%14.8%13.8%2769.4%9.5% (1)Includes Singapore and Hong Kong. (2)Includes Korea, Taiwan, Malaysia, India, Thailand (3)The Asian Banker Journal, September Data as of as of latest fiscal year ended 2004 (4)Bloomberg. Market capitalization data as of September 30, Listed institutions only. (5)EIU reports. GDP growth rates are compounded annual growth rates, domestic credit growth rates are average growth rates for

4 go to View, Header and Footer to set date 4 SCALE AND QUALITY OF CAPITAL BUILDING ACROSS THE REGION Source: Financial Statements; Citigroup Smith Barney Estimates Total CAR - Developed Asia-Pacific Total CAR - Developing Asia-Pacific 4% 5% 6% 7% 8% 9% 10% 11% E2006E Stated Tier 1 CARNPL adjusted Tier 1 CAREconomic Tier 1 CAR Tier 1 CAR - Asia-Pacific Banks

5 go to View, Header and Footer to set date 5 The 2005 “Banking Banana Skins” risk survey yielded some interesting results… 10.  Macro-economic Trends (Rank in 2003 survey = 3) 9.  Risk Management Techniques (16) 8.  High Dependence on Technology (12) 7.  Currencies (18) 6.  Fraud (11) 5.  Hedge Funds (15) 4.  Derivatives (1) 3.  Corporate Governance (8) 1.  Too Much Regulation (6) 2.Credit Risk (2) Source: Centre for Financial Innovation …AGAINST A BACKDROP OF A CHANGING RISK AND REGULATORY ENVIRONMENT…

6 go to View, Header and Footer to set date 6  Never has the industry been under so much pressure to reform and recalibrate internal risk systems and capital adequacy  Basel II has the potential to be the biggest single strategic change agent to the global banking industry  Asian banks are being encouraged by their regulators to accelerate their response to the Accord in line with OECD practises.  While in some instances, implementation target dates may be difficult to reach, best of breed banks are using change to re- access their franchise.  Key QIS5 Capital Survey to be undertaken at the end of this year will be critical to reaffirming commitment to implement. BASEL II CONTINUES TO BE A SOURCE OF CAPITAL LEVEL AND RISK MANAGEMENT UNCERTAINTY …AND OF COURSE THERE IS BASEL II

7 go to View, Header and Footer to set date 7 WITH CAPITAL CONTINUING TO GROW, BANKS FACE SOME STRATEGIC DECISIONS

8 go to View, Header and Footer to set date 8 FINANCIAL INSTITUTIONS SHARE BUYBACK ACTIVITIES Source: SDC, Announced deals by financial institutions in Asia-Pacific excluding Australia and Japan Share Buyback Activities By Year YTD Share Buyback Activities By Country (2000 – 2005YTD) Note: Korea share repurchases are repurchases of Government holdings Excluding Kookmin share buyback

9 go to View, Header and Footer to set date 9 CROSS BORDER FINANCIAL INSTITUTIONS M&A – BY COUNTRY OF ACQUIRER (EMERGING MARKETS) Source: SDC and Citigroup : 11 Transactions : 299 Transactions

10 go to View, Header and Footer to set date 10 n We believe that the optimal number of banks in a particular market depends on various macro and micro-economic factors No. of Banks = ƒ (Rate of economic growth, extent of market disintermediation, banking assets per capita, foreign reserves, overseas/offshore banking unit assets, population per branch, banks’ geographic reach, access to capital, overall sector profitability,…) THE OPTIMAL NUMBER OF BANKS ?

11 go to View, Header and Footer to set date 11 GETTING THE RIGHT ASSET/MARKET CONCENTRATION OF BANKING ASSETS (1)EIU Country Finance reports 2005 and central bank data, latest available data. Market share data for India as of March 31, 2004 (2)Central Bank of the Philippines (3)EIU Country Finance reports 2005 and central bank data. Excludes credit cooperatives and rural and thrift banks and foreign banks (other than acquired local banks). Hong Kong data includes three locally incorporated foreign banks Total Assets 2004 (1) (Market Share of Top 3 Banks) Domestic Bank Credit / GDP (2) 2004 # Domestic Banks (3) % US$ Bn

12 go to View, Header and Footer to set date 12 GETTING THE “ RIGHT ” NUMBER OF BANKS AFTER CONSOLIDATION 2004 data SingaporeHong Kong TaiwanKoreaMalaysiaThailandChinaIndonesiaPhilippinesIndia GDP per Capita (US$) 25,17023,78013,54814,1204,6302,5301, 2901, Banking Assets per Capita (US$) 56,039133,35033,83816,0737,9212,9572, # of Domestic Banks Population / Bank (000) ,4432,5504,96210,2352,1733,59218,947 Banking Assets per Capita / Bank (US$) 11,2085, , GDP per Capita / Bank (US$) 5, , Source: EIU reports 2005; central bank data Growth markets High banking asset reflecting position as financial hub

13 go to View, Header and Footer to set date 13 STATE OF PLAY AMONG ASIAN BANKING MARKETS IN CONSOLIDATION Source: Mckinsey & Co. and central bank data Taiwan 52  49 Hong Kong 28  24 India 61  57 Thailand 21  13 Philippines 37  24 Indonesia 240  103 China 127 Malaysia 20  10 Korea 27  14 Singapore 12  5 Storm Building: M&A DelayedRestructured on Distress: 1 st Wave M&A Complete Competition Intensifying: 1 st Wave M&A soon Competition Changing the Game: Consolidation Completed Intensity of “NPL Crisis” Degree of Consolidation High Low High Japan 157  153 From

14 go to View, Header and Footer to set date 14 KEY INGREDIENTS FOR SUCCESSFUL REGIONAL EXPANSION Having the key ingredients is a pre-requisite for successful regional expansion. World-class operational platform   Top-notch management talent  Large domestic scale  Strong capital base  Multiple acquisition currencies including cash and stock listed both on- shore and off-shore  Accommodating regulations

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