Emergence of Asia in the Global Banking System FICCI- IBA Conference October 5-7, 2005-Hotel Hilton Towers, Mumbai

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 2 Agenda Asia China and City Commercial banks Opportunities and Challenges

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 3 Major Industry Events Technology Rapid uptake of telephone / internet banking Electronic trading Products Rapid uptake in retail hedge funds Credit / Equity Derivatives Equitable Life Crisis Collapse of Barings Corporate Crises Parmalat Enron WorldCom Dotcom Boom Global crash in equities Far East Crash Socio- Economic 9/11 Repeal of Glass Steagall Act EURO Hong Kong Sovereignty to China EU Expansion to 25 nations Regulations Spitzer & Banks Spitzer & Insurance Sarbanes Oxley

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 4 Asia India GDP: USD bn Area: 3,287,590 sq km Population: 1,080,264,388 China GDP: USD 1,681.3 bn Area: 9,596,960 sq km Population: 1,306,313,812 Thailand GDP: USD bn Area: 514,000 sq km Population: 65,240,000 South Korea GDP: USD bn Area: 99,601 sq km Population: 48,200,000 Japan GDP: USD bn Area: 377,899 sq km Population: 127,600,000 Hong Kong GDP: USD bn Area: 1,098 sq km Population: 6,803,100 Singapore GDP: USD bn Area: sq km Population: 3,500,000 Bangladesh GDP: USD 56.3 bn Area: 147,570 sq km Population: 129,300,000 Asia Area: 30% of World’s Population: 60% of World’s Source: Economist Intelligence Unit

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 5 Asia (contd.) Working – age Asians driving consumption patterns Source: UN (* People aged under 15 and over 65 as % of people aged 15-65) Asia’s demographic dividend - Dependency Rates* Growth Rate Per Capita GDP (% per year) Source: Asian Development Outlook Gross Domestic Savings (% of GDP) Source: Asian Development Outlook

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 6 Source: World Wealth Report 2005 (Capgemini and Merrill Lynch) HNWI Population Growth by Market, High-net-worth Investors (HNWIs) across the World GDP growth and stock market capitalization drove wealth accumulation around the world Europe’s HNWIs grew at a slow rate North America exceeded all other regions in both number and accumulated wealth of HNWI population Asia-Pacific region overall enjoyed much higher growth rates Asia (contd.)

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 7 Regional/global expansionDomestic ConsolidationAttract Cross-border investments Stages of Consolidation Market Characteristics Government Involvement Drivers India Taiwan Japan Korea Australia North America China Indonesia New Zealand Malaysia Thailand Singapore Hong Kong Developed European Countries Fragmented Domestic Market Large no. of small and medium-sized banks Improved bank structure Fewer but strong banks; reduced risk for investors Home market saturation Policies and guidelines to encourage domestic consolidation Schemes to restructure national and state-owned banks Changes to banking regulations to reduce cross-holding Increase capital adequacy ratio Initiate deregulation initiatives Implementation of international banking standards, e.g. Basel Accord, corporate governance, tax laws and accountancy transparency Implement deregulation programs Develop capital markets, e.g. debt markets Asia Financial Crisis Bank Failures High domestic economic growth Economic growth requiring additional capital from foreign investors Competition Increase shareholder value Seeking growth opportunities Competition Asian Banking Industry – Present Status Source: Deloitte – The Changing Landscape of Asian Banking

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 8 Result of intense competition and low credit demand, with different countries in different credit cycles Some key parameter trends in Asian banking Volume Loan Growth Deposit Growth Loans to deposit ratio Source: Smith Barney, Citigroup Loan-to-Deposits Ratio (percentage) Loan Growth (percentage change YoY) Deposit Growth (percentage change YoY)

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 9 Profitability Profitability in Asia’s biggest banks smartly bounced back in 2004, as compared to losses in 2003 ROA and ROE have witnessed positive uptrend Non-interest revenue is increasing Information not available for Singapore and Indonesia in 2000 Source: IMF Bank Return on Assets (percentage) Bank Return on Equity (percentage) Some key parameter trends in Asian banking Source: IMF

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 10 Asset quality Asset Quality continues to improve Banking reforms and restructuring schemes are having its effect Source: IMF Non-performing loans to total loans (percentage) Banking provisions to non-performing loans (percentage) Some key parameter trends in Asian banking Source: IMF

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 11 Some global banks’ exposure to the region - HSBC HSBC December 2004 AssetsNPLs as % of total loans Pre-tax Profit USD bn% totalUSD bn% total Hong Kong %1.0%4, % Singapore % Malaysia % Thailand % India % Taiwan % Total Asia-Pacific (ex-HK) %1.9%1, % Europe %2.2%5, % Americas %2.0%5, % Total1,2651.9%17,608 Source: Smith Barney, Citigroup

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 12 StanChart December 2004 AssetsNPLs as % of total loans Pre-tax Profit USD bn% totalUSD bn% total Hong Kong48, %2.2% % Singapore20, %2.8% % India8,5284.8%2.4%1959.0% Malaysia7,1304.0%4.7%1245.7% Other Asia-Pacific21, %6.7% % Total Asia-Pacific (ex-HK) 57, %4.2% % UAE & Other MESA 12,8647.2%3.1% % Africa, Americas, UK & Group 59, %7.8% % Total178,0524.1%2,158 Source: Smith Barney, Citigroup Some global banks’ exposure to the region – Standard Chartered

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 13 Agenda Asia China and City Commercial banks Opportunities and Challenges

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 14 The Chinese economy has seen strong growth Post – 1978 The “Great Leap Forward” Cultural Revolution Economic reform begins WTO China’s GDP Source: National Bureau of Statistics of China, China Statistical Yearbook Rmb11,725 bn

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 15 Overview of the Chinese banking sector China Banking Sector China Banking Regulatory Commission People’s Bank of China Others (a) State Policy Banks (3) Credit Cooperatives (~30,000) Commercial Banks (~336) State-owned Commercial Banks (4) Joint-stock Commercial Banks (12) City Commercial Banks (112) Rural Commercial Banks (8) Urban Credit Cooperatives (~2,000) Rural Credit Cooperatives (~28,000) Foreign Banks (~200) Total assets: Rmb trillion Total assets: Rmb 5.25 trillion Total assets: Rmb 1.80 trillion Notes: Number of banks in brackets Assets as at 30 June 2005 (a) Includes postal savings and other non-banking financial institutes Source: KPMG analysis of publicly available information

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 16 City Commercial Banks China’s banking assets China banking industry share by assets 2004 Opportunities for foreign investors - Relatively small investment - Foreign investors can’t buy control - City Commercial Banks are also looking for something - Investing is a relatively easy – but lengthy – process Which banks are left? What issues have foreign investors faced? - Strategic alignment - Local government control - Key operating personnel Source: KPMG Analysis, China’s city commercial banks Source: Asian Wall Street Journal; China Banking Regulatory Commission website

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 17 Emerging Trends Improved oversight of the banking system - Formation of Chinese Banking Regulatory Commission in early 2003 Steps taken for asset disposal and recapitalisation - USD 170 bn of NPLs transferred to ARCs by March 2004 and USD 60 bn worth of assets disposed off Reducing NPL Ratios - NPL ratio of state-owned commercial bank was 16 percent in 2004 (Source: China Banking Regulatory Commission website May 2005) - Government has planned injection of capital - NPL ratios have been decreasing, but are still some way off international levels Better Capital Adequacy - Considerable progress made by Chinese banks in meeting Basel I Capital Adequacy of 8% Abundant growth in car and housing loan and bank - card business

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 18 Emerging Trends contd. Foreign strategic investors invited to take stakes in large banks August 2005Goldman Sachs, American Express, Allianz took a combined stake of 10% (worth USD 3 bn) in state-owned bank industrial and Commercial Bank of China (ICBC) July 2005Temasek invested USD 1 bn in China Construction Bank July 2005Royal Bank of Scotland, Meryll Lynch and Li Ka-shing bought 10% of Bank of China (BOC) June 2005Bank of America invested USD 3.1 bn in China Construction Bank (CCB)

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 19 Agenda Asia China and City Commercial banks Opportunities and Challenges

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 20 Opportunities and Challenges Growth & Business Development Efficiency and cost management People management Corporate governance Risk and capital management

© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. 21 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Presenter’s contact details Russell Parera, National Industry Director, Financial Services KPMG India +91 (22)