Bank of Thailand Forces of Change – The Future of Financial Services

1. January 23, 2002 CONFIDENTIAL J.P. Morgan Securities Pte Ltd Bank of ThailandForces of Change – The Future of Financial Services

2. Agenda • Introduction • Two relevant precedents: Sweden and the U.S. • Implications for emerging Asia

3. Consolidation Globalization Convergence The strategic environment for financial institutions around the world is changing rapidly …

4. … and these forces continue to be prevalent in Asia Top Ten Emerging Asia Bank M&A transactions by deal value since 1999 Globalization Consolidation Consolidation Consolidation Globalization Consolidation Consolidation Convergence Consolidation Convergence Globalization Globalization Consolidation

5. However, strategic considerations present only one angle of the future landscape Financial Operational Strategic

6. Agenda • Introduction • Two relevant precedents: Sweden & the U.S. • Implications for Emerging Asia

7. Excesses of the 1980s Currency weakness Deregulation of financial industry Bank exposure to property management & construction sectors Narrow focus of banks Domestic asset base The factors underlying the Swedish banking sector crisis of the early 1990s are similar to much of Asian experience Key highlights NPLs in the Swedish Banking Sector % Source: Company data

8. Key developments Supervisory • Introduction of repo rate to manage payment systems in May 1994 • Tighter supervision over banks The Swedish Government responded aggressively to address the crisis Economic • Floating of the Swedish Krona on November 1992 • Redesign of monetary policy (through inflation targeting) • Fiscal stimulus Regulatory • Government agreed to guarantee commitments of Swedish banks with depositors and creditors • Establishment of systematic support for banks

9. The evolution of ForeningsSparbanken (“Swedbank”) • Internet banking service launched • Eleven regional savings banks merge with Sparbankernas Bank to form Sparbanken Sverige • Restructuring of distribution channel • Sales channels restructured into new retail operations • WAP banking launched • Digital TV banking services launched • Listing of Sparbanken Sverige in June 1995 • Swedish Financial Crisis • Floating of the Krona 1990 1995 2000 2002 • Swedbank initiates alliances with regional banks • 12 regional cooperative banks merge to form Sveriges Foreningsbank • Listing of Foreningsbanken AB in Jan 1994 • Merger of Foreningsbanken and Sparbanken • Followed by internal restructuring and cost-cutting measures • Subsequent merger of Sveriges Foreningsbank with local cooperative banks to form Foreningsbanken AB

10. SwedBank maintains an extensive distribution network and has focused on cross-selling opportunities • 890 branches across the country • 274 in-store banks • 1,109 ATM’s • Bank by Telephone and Internet • 2.0 million customers are connected by telephone • 965,000 customers are connected by internet • Alliances have increased reach • Retail customers increased from 5.2mm to 11.2mm Key highlights Distribution channel Cross-selling Avg. no. of products sold to each corporate customer +17.4% Source: SwedBank; presentation to analysts, Nov 2001

11. Deregulation Interstate Banking and Branch Act Gramm-Leach-Bliley Act Increasing competition Cross-border deals Disintermediation Technological innovation Development of sophisticated capital markets Emergence of super-regional banks Move towards convergence transactions Explosion of credit Category killers Focus on capital management Leveraging of balance sheet to optimize capital mix Reassesment of risk management processes In the U.S., the industry has been shaped by the changing regulatory and technology environment … Key drivers of change Impact on banking industry

12. … and substantial consolidation in the late 1990s has led to the emergence of dominant super-regional players In the past 10 years, the number of banks operating in the United States has decreased by over 30% Total volume for announced U.S. financial services sector transactions Comparative market capitalisation 1994 vs January 2002 542.7 US$bn (number of deals in brackets) $ billions Wachovia42.2 (4,194) Wells Fargo76.9 (3,070) JPM/Chase70.9 (3,454) (3,679) 289.0 Bank of America95.7 (3,756) (2,368) (4,073) (3,024) Citigroup257.0 (2,538) (2,280) Note: Data as of January 18, 2002 Source: Datastream, Bloomberg, SDC

13. Limiations JPMorgan net interest income to total revenues Explicit prohibition from insurance agency and underwriting (Gam-St. Germain) Non-banking limitations extended to one-bank hldg cos Non-banking limitations extended to foreign banks “Non-bank banks” curtailed (CEBA) Banking Hldgs Co Act enacted 1956 1970 1978 1982 1987 1989 1991 1995 1996 1997 1998 Debt underwriting powers Equity underwriting powers Barnett Supreme Court decision ratifies “Town of 5,000” rule The VALIC case determined that annuities were not insurance but finacial products House Resolution 10 under consideration Ineligible revenue threshold raised to 25% Extensions Banks in the U.S. have countered disintermediation by taking advantage of a more permissive regulatory environment ... Source: David Polk & Wardwell; JPMogan

14. … and by moving towards a new “risk underwriting and distribution” model Underwrite risk Bundled risk Single borrower Disaggregation of risk Default probability Recovery rates Correlation Traditional channel New channel Loans Commitments Bonds Credit derivatives BISTRO etc. Narrow base of loan/bond investors Broad base of capital & insurance markets investors

15. Recap: Key lessons from the Swedish and U.S. experience Key Lessons Cross-selling Disintermediation Distribution Risk management Alliances Scale

16. Agenda • Introduction • Two relevant precedents: Sweden & the U.S. • Implications for Emerging Asia

17. Disintermediation: Banks will no longer be the primary source of keeping money Key highlights Breakdown of financial sector assets Banking assets as a % of total financial sector assets • Banking sector assets currently constitute a large part of financial sector assets in Asia • Korea an anomaly due to developed insurance and credit card sectors • Various likely sources of disintermediation: • Maturity of capital markets • Rise in private banking and asset management • Increase in insurance penetration Source: JPMorgan estimates

18. Risk management: Banks will focus increasingly on risk management as a key part of their strategy In the late 1990s, JPMorgan set out an aggressive plan to reduce credit risk and economic capital requirements Shifting the institutional mentality Developing portfolio level risk assessment tools Engaging the rating agencies in a dialogue on risk reduction and economic capital Actively distributing credit risk

19. Distribution: Bank branches will continue to remain the key distribution channel Consumer preferences for bank distribution Potential for internet distribution % Singapore Australia South Korea Hong Kong Internet penetration (%) Taiwan Malaysia India Philippines Thailand China Indonesia 2000 GDP per capita (US$’000) Source: Mastercard survey of banking customers in Singapore; JPMorgan research; IDC

20. Scale: Big does not necessarily equate to beautiful Competing with scale Consumer perception of large banks % of customers who agree: Large financial services firms offer more services Provide better services Are more personal Source: U.S. Gallop poll

21. Tai Ping 2001 Hua An Alliances/Cross-selling: Partnerships are clearly one of the key themes of recent strategic initiatives in the region Selected banking partnerships in Emerging Asia since Jan 2001 Source: Industry data; company press releases

22. Conclusions • Banks are providers of wholesale and retail services • Increasingly less capital intensive • Risk management and trading portfolios to become increasingly important for both balance sheet management and profit generation • Differentiation will be based on service & quality not scale Role of information and capital provider will continue but in different forms