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Perspectives on Trends in Banking 12 October 2006
Presentation to the Third Bankseta International
Conference by Tom Winterboer
PwC
connectedthinking
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Perspectives on Trends in BankingAgenda/Contents

• 1. Introduction
• 2. The global banking market
• Global Market Trends
• So why and how are things changing?
• Areas of strategic focus
• And the risks Banana Skins 2006
• 7. Conclusion five action points for management

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The Global Banking Market
TOP 10 BY TOTAL ASSETS (M)
(South Africa Standard Bank - 119,475m Absa -
64,263m Nedbank - 55,683m FirstRand -
52,284m)
Source The Banker 2006
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Global Market Trends

• Retail and Commercial Banking Trends
• Capital Markets Trends
• Wealth Management Trends
• Insurance Trends

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Retail and Commercial Banking Trends
Market Trends

• Market maturity and slowing growth are driving an
  acceleration in inter-regional and cross-border
  consolidation among US and European players.
• Consumer borrowing in developed nations has
  reached historically high levels, encouraging
  banks to seek growth in alternative or emerging
  markets
• Corporate borrowing continues to grow at strong
  rates, but credit risk trends remain benign at
  this point in the lending cycle.

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Capital Markets Trends
Market Trends

• Fixed income business has grown rapidly in an
  environment of low real interest rates, and
  innovation in derivatives is pushing activity to
  ever greater levels.
• Exceptional liquidity levels are also driving
  rapid developments in alternative asset classes
  such as commodities and private equity
• Potential conflicts of interest and the growing
  importance of new types of customers like hedge
  funds and private equity groups are among the
  factors encouraging investment banks to
  fundamentally alter their business models.

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Wealth Management Trends
Market Trends

• Asset gathering is accelerating rapidly in
  developing markets, generating growth in offshore
  funds. In contrast, onshore wealth managers in
  the US and Europe are gaining ground from
  traditional private banks
• Investment management inflows are increasingly
  polarised between quantitative strategies and
  alternative products
• Consolidation of the investment management
  industry is accelerating as the growing costs of
  research, innovation and compliance encourage
  players to seek economies of scale.

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Insurance Trends
Market Trends

• The non-life insurance industry is showing
  improved profitability compared to historic
  norms, helped by better controls and improved
  pricing discipline. The balance sheet impact of
  2005s catastrophes has been repaired with
  support from capital markets
• Life insurers are looking to participate in
  savings market growth. Now that solvency issues
  have receded the focus is on how best to use
  capital in order to maximise growth.
• Product mix is changing and products are evolving
  as life insurers pursue capital efficiency,
  respond to new performance measures and compete
  with asset managers.

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Piecing the Jigsaw - The Future of Financial
Services
So why and how are things changing?

• In June 2005 PwC produced this study considering
  the drivers, risks and opportunities facing the
  financial services industry and the impact and
  responses for existing and potential players in
  the market.
• In compiling this document PwC has drawn out the
  principle areas of commonality across different
  regions and territories.

Position for graphic or image
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So why and how are things changing?

• Piecing the Jigsaw the Future of Financial
  Services
• Drivers

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Drivers
So why and how are things changing?
Political
Demographic/ Cultural change
Economic Cycle/ Capital Markets
Regulation and Reporting
Technology
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Political
So why and how are things changing?

• Drivers
• Access
• Consumer protection
• Enhanced ethical standards/ expectations
• Stability

• Risks
• Agendas
• Enhanced ethical standards / expectations
• Instability
• Terrorism

• Opportunities
• Globalisation
• Government debt
• Single market

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Demographic/ Cultural change
So why and how are things changing?

• Drivers
• Population (developed markets greying)
  (developing markets emerging middle class)
• Evolving client needs
• High performance culture
• Trust

• Risks
• Consumer expectations
• Distribution
• Health
• High performance culture
• Pensions

• Opportunities
• Health
• Population
• Products
• Regional differentiation

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Economic Cycle/ Capital Markets
So why and how are things changing?

• Drivers
• Competition
• Performance
• Profitability

• Risks
• Competitive pressure
• Performance

• Opportunities
• Access to capital
• Consumer demands
• Structural change

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Regulation and Reporting
So why and how are things changing?

• Drivers
• Capital requirements
• Governance
• Level intensity
• Reporting

• Risks
• Compliance
• Product offerings
• Reporting
• Tax
• Transparency

• Opportunities
• Expansion
• Inclusion
• Stability
• Strategic alignment
• Transparency

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Technology
So why and how are things changing?

• Drivers
• Advances
• Customer optimisation
• Distribution
• Risk management

• Risks
• Adoption angst
• Legacy systems
• Security

• Opportunities
• Customer profiling and relationships
• Distribution
• Operational efficiencies

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What are the areas of Strategic Focus?
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The Strategic Responses of Financial Services
Companies to the Drivers of Change can be Broadly
Grouped into Five Categories
Areas of Strategic Focus

• Capital management responses include corporate
  simplification, a greater focus on capital
  allocation and share buybacks
• Customer focus responses include distribution
  channel development, brand management, product
  innovation, targeted marketing and customer
  relationship management
• Governance responses include enhancing corporate
  structures, compliance spending and investment in
  risk management
• Operational effectiveness responses include a
  greater focus on value creation, improving
  management information outsourcing, investing in
  more automation, and staff training and
  remuneration
• Restructuring responses include consolidation
  within countries and sectors, developing scale
  economies, stronger competition, increasing
  cross-border activity, and focusing on core
  capabilities.

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About the Banana Skins Survey

• Produced in July 2006
• 11th year, ranking banking risks by their
  perceived severity
• Sponsored by PwC and conducted by David Lascelles
  of Centre for the Study of Financial Innovation
  (CSFI)
• 468 responses (440), 60 countries (54), 6 South
  African respondents
• Many of the new respondents now come from
  emerging markets
• Replies confidential

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Banana Skins 2006(2005 Ranking in brackets)

• 1. Too much regulation (1)
• 2. Credit risk (2)
• 3. Derivatives (4)
• 4. Commodities (14)
• 5. Interest rates (12)

• - where is the next banking disaster coming
  from?
• there will be one it is the nature of the
  beast!
• Andrew Hilton Director CSFI

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Banana Skins 2006(2005 Ranking in brackets)

• 6. High dependence on technology (8)
• 7. Hedge funds (5)
• 8. Corporate governance (3)
• 9. Emerging Markets (15)
• 10. Risk management techniques (9)

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Banana Skins 2006(2005 Ranking in brackets)

• 11. Fraud (6)
• 12. Equities (18)
• 13. Currencies (7)
• 14. Macro-economic trends (10)
• 15. Political shocks (22)

• Conflicts of interest (-)
• Banking market overcapacity (20)
• Money laundering (13)
• Merger mania (27)
• Legal risk (17)

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Banana Skins 2006(2005 Ranking in brackets)

• 21. Business continuation (19)
• 22. Retail sales practices (23)
• 23. Insurance sector problems (11)
• 24. Back office (26)
• 25. Environmental risk (28)

• 26. Management incentives (21)
• 27. Rogue trader (24)
• 28. Competition from new entrants (29)
• 29. Payment systems (25)
• 30. Too little regulation (30)

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Big movers

• UP
• Commodities price volatility
• Merger mania - sharp rise in MA emergence of
  unwieldy groups
• - resulting in oligopolistic behaviour
  (Malaysia Taiwan)
• Emerging markets stability concerns
• Political shocks Iraq, N. Korea, Middle East
• Equities markets looking toppy

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BananaSkins2006

• And the risks?
• BANANA SKINS 2006
• The CSFIs annual survey of the risks facing
  banks
• CSFI
• Centre for the Study of Financial Innovation

• The CSFIs annual survey of the risks facing
  banks
• CSFI
• Centre for the Study
• of Financial Innovation

PwC
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Conclusion on Banana Skins
Banks readiness to deal with Banana Skins or
at least the perception of their readiness- has
improved. Regulators increased their rating of
bank preparedness as well.
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Conclusion
Five action points for Management?
There is no single, pre-determined route to
success over the coming years. As the leaders of
todays financial institutions think about the
shape of tomorrows leading players, their
strategies should embrace five key principles
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Conclusion

• Identify and articulate what your institution
  does best.
• A well defined corporate identity, in the minds
  of customers, investors, regulators and staff,
  will be critical.
• Whatever an institutions core activity, it
  should be at the
• heart of its strategy.

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Conclusion

• Simplify the offering to customers
• Whatever its core activity, trust will be the
  most precious asset.
• Fiercer regulatory scrutiny and a widening
  consumer base means - complexity is out
  simplicity is in.
• Products transparent and easy to understand
  risks clearly defined and explicitly understood
  product performance reported on regularly and
  objectively.
• Interface with the customers user-friendly above
  all else.
• Customer satisfaction metrics at the heart of
  management decision-making processes.

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Conclusion

• 3. and simplify the enterprise itself.
• As the corporate identity and product offering
  need to simplify, so will the organisation
  itself.
• Technology platforms to be consolidated and
  integrated.
• Risks should be assessed and managed on an
  enterprise-wide basis.
• Performance data a panoramic view of the
  institution.
• Cost efficiencies will arise as a result.
• Silos should fade and teams collaborate.
• Little room for hierarchies, whether based on
  products or functions, in tomorrows leading
  institution.

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Conclusion

• 4. Hone market positioning in line with
  demographic trends.
• Whether seeking to take advantage of growth
  potential of emergent middle class in developing
  markets, or target fast-expanding sub-populations
  through ethnic products and services, or pursuing
  life-cycle strategies aimed at tomorrows
  pensioners, successful institutions will put
  demographic trends at the heart of their business
  plans.
• To drive growth effectively, a core of
  high-potential customers should be identified,
  and offering built accordingly.

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Conclusion

• Dont forget the most important ingredient
  people.
• The industry landscape may change but the
  importance of
• people is permanent.
• Need high-quality employees at all levels of the
  organisation.
• Next few years will see two pronounced and
  convergent trends in employee capabilities
  towards better data analysis and enhanced
  customer-facing skills.

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Further information

• Piecing the jigsaw The future of financial
  services - http//www.pwc.com/financialservices
• Banana Skins - http//www.pwc.com/banking
• SA Strategic and Emerging Issues in South African
  Banking http//www.pwc.com/banking
• Emerging Trends and Strategic Issues in South
  African Insurance 2006 http//www.pwc.com/insura
  nce
• Strategic and Emerging Issues in the South
  African Insurance Broking Industry 2005
  http//www.pwc.com/insurance