Transcript Mr Peter Heidinger - INDIAN BANKS' ASSOCIATION

CONSOLIDATION IN BANKING: A SNAPSHOT
OF EMERGING MARKET THEMES
Panel Discussion on Consolidation in the
Banking Sector
FICCA – IBA Conference on “Global Banking:
Paradigm Shift”
Peter Heidinger
Managing Director,
Financial Institutions Group, Asia
Mumbai, India
October 7, 2005
AGENDA
1.
CURRENT MARKET THEMES

Capital & Growth

Risk

Basel II
2.
THE SURGE IN EMERGING MARKET CROSS BORDER
ACTIVITY WITHIN AND ACROSS THE FINANCIAL SECTOR
3.
THE OPTIMAL NUMBER OF BANKS? (No exact formula,
but…)
4.
KEY SUCCESS FACTORS
2
FINANCIAL SECTOR MARKET
CAPITALIZATION
Market Capitalization of Financial Institutions in Asia
90,000
85,471
FI Market Cap (US$ in millions)
80,000
73,673
70,000
63,449
59,419
60,000
50,000
42,885
40,000
35,021
30,000
22,078
21,919
19,320
20,000
6,036
10,000
0
Korea
Hong Kong
India
Taiwan
Singapore Malaysia
China
Thailand
Indonesia Philippines
Regional Tier Comparisons
ROA (3)
Average data
(1)
(2)
(3)
(4)
(5)
ROE
(3)
Market Cap/Assets (4)
Market cap/banks (4)
(US$mn)
GDP growth
05-09
(5)
Domestic credit
growth rate 05-09 (5)
2004
2004
Developed systems (1)
1.35%
15.7%
10.7%
$3,286
6.6%
5.5%
Developing systems (2)
1.00%
14.8%
13.8%
276
9.4%
9.5%
Includes Singapore and Hong Kong.
Includes Korea, Taiwan, Malaysia, India, Thailand
The Asian Banker Journal, September 2005 . Data as of as of latest fiscal year ended 2004
Bloomberg. Market capitalization data as of September 30, 2005. Listed institutions only.
EIU reports. GDP growth rates are compounded annual growth rates, domestic credit growth rates are average growth rates for 2005 - 2009
3
SCALE AND QUALITY OF CAPITAL
BUILDING ACROSS THE REGION
Total CAR - Developed Asia-Pacific
Tier 1 CAR - Asia-Pacific Banks
20.0%
18.0%
11%
16.0%
14.0%
10%
12.0%
9%
10.0%
8%
8.0%
6.0%
7%
4.0%
1998
6%
1999
2000
2001
Stated Total CAR
2002
2003
2004
NPL adjusted Total CAR
2005E
2006E
Economic Total CAR
5%
Total CAR - Developing Asia-Pacific
4%
1998
14.0%
1999
2000
2001
2002
2003
2004
2005E 2006E
13.0%
12.0%
11.0%
Stated Tier 1 CAR
NPL adjusted Tier 1 CAR
Economic Tier 1 CAR
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
1998
Source: Financial Statements; Citigroup Smith Barney Estimates
1999
2000
Stated Total CAR
2001
2002
2003
NPL adjusted Total CAR
2004
2005E
2006E
Economic Total CAR
4
…AGAINST A BACKDROP OF A
CHANGING RISK AND REGULATORY
ENVIRONMENT…
The 2005 “Banking Banana Skins” risk survey yielded some interesting results…
10. 
Macro-economic Trends (Rank in 2003 survey = 3)
9.

Risk Management Techniques (16)
8.

High Dependence on Technology (12)
7.

Currencies (18)
6.

Fraud (11)
5.

Hedge Funds (15)
4.

Derivatives (1)
3.

Corporate Governance (8)
2.
1.
Credit Risk (2)

Too Much Regulation (6)
Source: Centre for Financial Innovation
5
…AND OF COURSE THERE IS BASEL II
BASEL II CONTINUES TO BE A SOURCE OF CAPITAL LEVEL AND RISK
MANAGEMENT UNCERTAINTY

Never has the industry been under so much pressure to reform
and recalibrate internal risk systems and capital adequacy

Basel II has the potential to be the biggest single strategic
change agent to the global banking industry

Asian banks are being encouraged by their regulators to
accelerate their response to the Accord in line with OECD
practises.

While in some instances, implementation target dates may be
difficult to reach, best of breed banks are using change to reaccess their franchise.

Key QIS5 Capital Survey to be undertaken at the end of this
year will be critical to reaffirming commitment to implement.
6
WITH CAPITAL CONTINUING TO GROW,
BANKS FACE SOME STRATEGIC
DECISIONS
"Excess" Capital
Reinvestment
Capital Building
Share Buybacks
M&A
Franchise Growth
7
FINANCIAL INSTITUTIONS SHARE
BUYBACK ACTIVITIES
Share Buyback Activities By
Country (2000 – 2005YTD)
Share Buyback Activities By Year
Total Value (US$ mn)
Number of Deals
2,000
Value (US$ mn)
1,600
1,752
1,400
1,186
8
1,000
8
600
3
216
200
2
HK
7%
12
1,200
621
Korea
35%
14
14
800
Thailand
1%
776
10
8
6
Excluding
Kookmin share
buyback
4
# of Deals
14
India
2%
Taiw an
8%
16
1,800
400
Indonesia
4%
Malaysia
17%
2
27
2000
2001
2002
2003
2004
2005 YTD
Source: SDC, Announced deals by financial institutions in Asia-Pacific
excluding Australia and Japan
Singapore
26%
Note: Korea share repurchases are repurchases of Government holdings
8
CROSS BORDER FINANCIAL
INSTITUTIONS M&A – BY COUNTRY OF
ACQUIRER (EMERGING MARKETS)
1995-1999: 11 Transactions
Argentina
0%
Chile
0%
2000-2004: 299 Transactions
Mexico Brazil
0%
0%
China
9%
South Africa
27%
South Africa
14%
India
9%
Chile
Argentina
0%
Brazil
2%
3%
Mexico
2%
China
18%
Russia
12%
Russia
0%
Indonesia
28%
Israel
9%
Thailand
0%
Taiw an
9%
South Korea
0%
5
Indonesia
1%
Thailand
2%
Taiw an
5%
Malaysia
9%
India
4%
Israel
7%
South Korea
3%
Malaysia
27%
Source: SDC and Citigroup.
9
THE OPTIMAL NUMBER OF BANKS ?

We believe that the optimal number of banks in a particular market
depends on various macro and micro-economic factors
No. of Banks = ƒ(Rate of economic growth, extent of market
disintermediation, banking assets per
capita, foreign reserves, overseas/offshore
banking unit assets, population per branch,
banks’ geographic reach, access to capital,
overall sector profitability,…)
10
GETTING THE RIGHT ASSET/MARKET
CONCENTRATION OF BANKING ASSETS
Total Assets 2004 (1)
(Market Share of Top 3 Banks)
China
2004
167%
127
146
24
150
49
93
14
68
57
76
5
92
13
117
10
49
103
22%
Korea
46%
India
33%
Singapore
90%
Thailand
49%
Malaysia
50%
Indonesia
500
2004
49%
Taiwan
Philippines
3 Banks
# Domestic Banks (3)
43%
43%
53% Kong
Hong
46%
Domestic Bank Credit / GDP (2)
44%
30%
US$ -Bn
53
Top 3 Banks
1,000
500
1,500
1,000
2,000
1,500
2,500
24
2,000
2,500
(1) EIU Country Finance reports 2005 and central bank data, latest available data. Market share data for India as of March 31, 2004
(2) Central Bank of the Philippines
(3) EIU Country Finance reports 2005 and central bank data. Excludes credit cooperatives and rural and thrift banks and foreign banks (other than acquired local banks). Hong Kong
11
data includes three locally incorporated foreign banks
GETTING THE “RIGHT” NUMBER OF
BANKS AFTER CONSOLIDATION
Singapore
Hong
Kong
Taiwan
Korea
Malaysia
Thailand
China
Indonesia
Philippines
India
GDP per Capita
(US$)
25,170
23,780
13,548
14,120
4,630
2,530
1, 290
1,150
981
610
Banking Assets
per Capita (US$)
56,039
133,350
33,838
16,073
7,921
2,957
2,960
552
758
400
2004 data
# of Domestic
Banks
High banking
asset reflecting
position as
financial hub
Growth markets
5
24
49
14
10
13
127
103
24
57
Population / Bank
(000)
840
288
459
3,443
2,550
4,962
10,235
2,173
3,592
18,947
Banking Assets
per Capita / Bank
(US$)
11,208
5,556
691
1,148
792
227
23
5
32
7
GDP per Capita /
Bank (US$)
5,034
991
276
1,009
463
195
10
11
41
11
Source: EIU reports 2005; central bank data
12
STATE OF PLAY AMONG ASIAN BANKING
MARKETS IN CONSOLIDATION
From 1997 - 2004
High
Storm Building: M&A Delayed
Restructured on Distress:
1st Wave M&A Complete
Philippines
37  24
Thailand
21  13
Indonesia
240  103
Malaysia
20  10
Japan
157  153
China
127
Intensity
of “NPL
Crisis”
Competition
Intensifying:
1st Wave M&A soon
Korea
27  14
India
61  57
Competition Changing the Game:
Consolidation Completed
Taiwan
52  49
Hong Kong
28  24
Singapore
12  5
Low
Low
High
Degree of Consolidation
Source: Mckinsey & Co. and central bank data
13
KEY INGREDIENTS FOR SUCCESSFUL
REGIONAL EXPANSION
Having the key ingredients is a pre-requisite for successful regional expansion.




World-class operational platform
Top-notch management talent
Large domestic scale
Strong capital base

Multiple acquisition currencies including cash and stock listed both onshore and off-shore

Accommodating regulations
14
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