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Perspectives on Trends in Banking* 12 October 2006. Presentation to the Third Bankseta International Conference by Tom Winterboer. *connectedthinking. PwC. Perspectives on Trends in Banking Agenda/Contents. 1. Introduction 2. The global banking market Global Market Trends

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  1. Perspectives on Trends in Banking* 12 October 2006 Presentation to the Third Bankseta International Conference by Tom Winterboer *connectedthinking PwC

  2. 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

  3. 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 Perspectives on Trends in Banking

  4. Global Market Trends Retail and Commercial Banking Trends Capital Markets Trends Wealth Management Trends Insurance Trends

  5. Market Trends Retail and Commercial Banking 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. Perspectives on Trends in Banking

  6. Market Trends Capital Markets 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. Perspectives on Trends in Banking

  7. Market Trends Wealth Management 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. Perspectives on Trends in Banking

  8. Market Trends Insurance 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 2005’s 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. Perspectives on Trends in Banking

  9. So why and how are things changing? Piecing the Jigsaw - The Future of Financial Services • 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 Perspectives on Trends in Banking

  10. So why and how are things changing? Piecing the Jigsaw – the Future of Financial Services Drivers

  11. So why and how are things changing? Drivers Political Demographic/ Cultural change Economic Cycle/ Capital Markets Regulation and Reporting Technology Perspectives on Trends in Banking

  12. So why and how are things changing? Political • Drivers • Access • Consumer protection • Enhanced ethical standards/ expectations • Stability • Risks • Agendas • Enhanced ethical standards / expectations • Instability • Terrorism • Opportunities • Globalisation • Government debt • Single market Perspectives on Trends in Banking

  13. So why and how are things changing? Demographic/ Cultural change • 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 Perspectives on Trends in Banking

  14. So why and how are things changing? Economic Cycle/ Capital Markets • Drivers • Competition • Performance • Profitability • Risks • Competitive pressure • Performance • Opportunities • Access to capital • Consumer demands • Structural change Perspectives on Trends in Banking

  15. So why and how are things changing? Regulation and Reporting • Drivers • Capital requirements • Governance • Level & intensity • Reporting • Risks • Compliance • Product offerings • Reporting • Tax • Transparency • Opportunities • Expansion • Inclusion • Stability • Strategic alignment • Transparency Perspectives on Trends in Banking

  16. So why and how are things changing? Technology • Drivers • Advances • Customer optimisation • Distribution • Risk management • Risks • Adoption angst • Legacy systems • Security • Opportunities • Customer profiling and relationships • Distribution • Operational efficiencies Perspectives on Trends in Banking

  17. What are the areas of Strategic Focus?

  18. Areas of Strategic Focus The Strategic Responses of Financial Services Companies to the Drivers of Change can be Broadly Grouped into Five Categories: • Capital management responses include corporate simplification, a greater focus on capital allocation and share buybacks; • Customer focusresponses include distribution channel development, brand management, product innovation, targeted marketing and customer relationship management; • Governanceresponses include enhancing corporate structures, compliance spending and investment in risk management; • Operational effectivenessresponses include a greater focus on value creation, improving management information outsourcing, investing in more automation, and staff training and remuneration; • Restructuringresponses include consolidation within countries and sectors, developing scale economies, stronger competition, increasing cross-border activity, and focusing on core capabilities. Perspectives on Trends in Banking

  19. 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 Perspectives on Trends in Banking

  20. 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 Banana Skins 2006(2005 Ranking in brackets) Perspectives on Trends in Banking

  21. 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) Perspectives on Trends in Banking

  22. 11. Fraud (6) 12. Equities (18) 13. Currencies (7) 14. Macro-economic trends (10) 15. Political shocks (22) Banana Skins 2006(2005 Ranking in brackets) Conflicts of interest (-) Banking market overcapacity (20) Money laundering (13) Merger mania (27) Legal risk (17) Perspectives on Trends in Banking

  23. 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) Banana Skins 2006(2005 Ranking in brackets) Perspectives on Trends in Banking

  24. Big movers • UP: • Commodities: price volatility • Merger mania: - sharp rise in M&A 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” Perspectives on Trends in Banking

  25. The CSFI’s annual survey of the risks facing banks CSFI Centre for the Study of Financial Innovation And the risks? BANANA SKINS 2006 The CSFI’s annual survey of the risks facing banks CSFI Centre for the Study of Financial Innovation BananaSkins2006 PwC Perspectives on Trends in Banking

  26. 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.” Perspectives on Trends in Banking

  27. Conclusion Five action points for Management? There is no single, pre-determined route to success over the coming years. As the leaders of today’s financial institutions think about the shape of tomorrow’s leading players, their strategies should embrace five key principles: Perspectives on Trends in Banking

  28. 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 institution’s core activity, it should be at the • heart of its strategy. Perspectives on Trends in Banking

  29. 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. Perspectives on Trends in Banking

  30. 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 tomorrow’s leading institution. Perspectives on Trends in Banking

  31. 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 tomorrow’s 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. Perspectives on Trends in Banking

  32. Conclusion • Don’t 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. Perspectives on Trends in Banking

  33. PwC © 2004 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers. 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/insurance • Strategic and Emerging Issues in the South African Insurance Broking Industry 2005 – http://www.pwc.com/insurance Perspectives on Trends in Banking

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