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

Emergence of Asia in the Global Banking System

FICCI- IBA Conference October 5-7, 2005-Hotel Hilton Towers, Mumbai

2© 2005 KPMG India Private Limited, the sub-licensee of KPMG, the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved.

Agenda

• Asia

• China and City Commercial banks

• Opportunities and Challenges


Major Industry Events

20001995 20052000

Tech

no

log

y

Rapid uptake of telephone / internet banking

Electronic trading

Pro

du

cts

Rapid uptake in retail hedge funds

Credit / Equity Derivatives

Equitable Life Crisis

Collapse of Barings

Co

rpo

rateC

rises

ParmalatEnron

WorldCom

Dotcom Boom

Global crash in equities

Far East Crash

So

cio-

Eco

no

mic

9/11

Repeal of Glass Steagall Act

EUROHong Kong Sovereignty to China

EU Expansion to 25 nations

Reg

ulatio

ns

Spitzer & Banks Spitzer & Insurance

Sarbanes Oxley


Asia

IndiaGDP: USD 669.9 bnArea: 3,287,590 sq kmPopulation: 1,080,264,388

ChinaGDP: USD 1,681.3 bnArea: 9,596,960 sq kmPopulation: 1,306,313,812

ThailandGDP: USD 163.5 bnArea: 514,000 sq km Population: 65,240,000

South KoreaGDP: USD 680.7 bnArea: 99,601 sq kmPopulation: 48,200,000

JapanGDP: USD 4669.6 bnArea: 377,899 sq km Population: 127,600,000

Hong KongGDP: USD 165.7 bnArea: 1,098 sq kmPopulation: 6,803,100

SingaporeGDP: USD 106.8 bnArea: 682.3 sq km Population: 3,500,000

BangladeshGDP: USD 56.3 bnArea: 147,570 sq kmPopulation: 129,300,000

Asia

Area: 30% of World’s

Population: 60% of World’s

Source: Economist Intelligence Unit


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


Regional/global expansion Domestic Consolidation Attract 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


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)


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)


Source: IMF


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)


Source: IMF


Some global banks’ exposure to the region - HSBC

HSBC December 2004

Assets NPLs as % of total loans

Pre-tax Profit

USD bn % total USD bn % total

Hong Kong 217 17.2% 1.0% 4,744 26.9%

Singapore - - - 274 1.6%

Malaysia - - - 216 1.2%

Thailand - - - 59 0.3%

India - - - 180 1.0%

Taiwan - - - 108 0.6%

Total Asia-Pacific (ex-HK)

121 9.5% 1.9% 1,805 10.3%

Europe 539 42.6% 2.2% 5,225 29.7%

Americas 388 30.7% 2.0% 5,834 33.1%

Total 1,265 1.9% 17,608



StanChart December 2004

Assets NPLs as % of total loans

Pre-tax Profit

USD bn % total USD bn % total

Hong Kong 48,459 27.2% 2.2% 629 29.1%

Singapore 20,419 11.5% 2.8% 254 11.8%

India 8,528 4.8% 2.4% 195 9.0%

Malaysia 7,130 4.0% 4.7% 124 5.7%

Other Asia-Pacific 21,424 12.0% 6.7% 267 12.4%

Total Asia-Pacific (ex-HK)

57,501 32.3% 4.2% 840 38.9%

UAE & Other MESA

12,864 7.2% 3.1% 378 17.5%

Africa, Americas, UK & Group

59,228 33.3% 7.8% 311 14.4%

Total 178,052 4.1% 2,158


Some global banks’ exposure to the region – Standard Chartered


Agenda

• Asia




The Chinese economy has seen strong growth

Post 1978

1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

1949 – 1978

The “GreatLeap

Forward”

CulturalRevolution

Economic reform

begins

WTO

China’s GDP

Source: National Bureau of Statistics of China, China Statistical Yearbook

Rm

b1

1,7

25

bn


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 18.35 trillion



Notes: Number of banks in bracketsAssets as at 30 June 2005 (a) Includes postal savings and other non-banking financial institutes

Source: KPMG analysis of publicly available information


City Commercial Banks

China’s banking assets 2000-2004

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


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


Emerging Trends contd.

Foreign strategic investors invited to take stakes in large banks

• August 2005 Goldman 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 2005 Temasek invested USD 1 bn in China Construction Bank

• July 2005 Royal Bank of Scotland, Meryll Lynch and Li Ka-shing bought 10% of Bank of China (BOC)

• June 2005 Bank of America invested USD 3.1 bn in China Construction Bank (CCB)


Agenda

• Asia




Opportunities and Challenges

Growth & Business Development

Efficiency and cost management

People management Corporate governance

Risk andcapital management


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) 2491 3030

[email protected]

www.in.kpmg.com

Documents

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