W02/0254 CONFIDENTIAL J.P. Morgan Securities Pte Ltd


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W02/0254 CONFIDENTIAL J.P. Morgan Securities Pte Ltd

  1. 1. Bank of Thailand Forces of Change – The Future of Financial Services January 23, 2002 CONFIDENTIAL J.P. Morgan Securities Pte Ltd
  2. 2. Agenda <ul><li>Introduction </li></ul><ul><li>Two relevant precedents: Sweden and the U.S. </li></ul><ul><li>Implications for emerging Asia </li></ul>
  3. 3. The strategic environment for financial institutions around the world is changing rapidly … Consolidation Globalization Convergence
  4. 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 Convergence Consolidation Convergence Globalization Consolidation Consolidation Globalization
  5. 5. However, strategic considerations present only one angle of the future landscape Financial Operational Strategic
  6. 6. Agenda <ul><li>Introduction </li></ul><ul><li>Two relevant precedents: Sweden & the U.S. </li></ul><ul><li>Implications for Emerging Asia </li></ul>
  7. 7. The factors underlying the Swedish banking sector crisis of the early 1990s are similar to much of Asian experience <ul><li>Excesses of the 1980s </li></ul><ul><li>Currency weakness </li></ul><ul><li>Deregulation of financial industry </li></ul><ul><li>Bank exposure to property management & construction sectors </li></ul><ul><li>Narrow focus of banks </li></ul><ul><ul><li>Domestic asset base </li></ul></ul>Key highlights NPLs in the Swedish Banking Sector % Source: Company data
  8. 8. The Swedish Government responded aggressively to address the crisis Key developments <ul><li>Government agreed to guarantee commitments of Swedish banks with depositors and creditors </li></ul><ul><li>Establishment of systematic support for banks </li></ul>Regulatory <ul><li>Floating of the Swedish Krona on November 1992 </li></ul><ul><li>Redesign of monetary policy (through inflation targeting) </li></ul><ul><li>Fiscal stimulus </li></ul>Economic <ul><li>Introduction of repo rate to manage payment systems in May 1994 </li></ul><ul><li>Tighter supervision over banks </li></ul>Supervisory
  9. 9. The evolution of ForeningsSparbanken (“Swedbank”) 1990 1995 2000 2002 <ul><li>Internet banking service launched </li></ul><ul><li>Listing of Sparbanken Sverige in June 1995 </li></ul><ul><li>Restructuring of distribution channel </li></ul><ul><li>Sales channels restructured into new retail operations </li></ul><ul><li>WAP banking launched </li></ul><ul><li>Digital TV banking services launched </li></ul><ul><li>Swedish Financial Crisis </li></ul><ul><ul><li>Floating of the Krona </li></ul></ul><ul><li>Eleven regional savings banks merge with Sparbankernas Bank to form Sparbanken Sverige </li></ul><ul><li>12 regional cooperative banks merge to form Sveriges Foreningsbank </li></ul><ul><li>Listing of Foreningsbanken AB in Jan 1994 </li></ul><ul><li>Merger of Foreningsbanken and Sparbanken </li></ul><ul><li>Followed by internal restructuring and cost-cutting measures </li></ul><ul><li>Subsequent merger of Sveriges Foreningsbank with local cooperative banks to form Foreningsbanken AB </li></ul><ul><li>Swedbank initiates alliances with regional banks </li></ul>
  10. 10. SwedBank maintains an extensive distribution network and has focused on cross-selling opportunities <ul><li>890 branches across the country </li></ul><ul><li>274 in-store banks </li></ul><ul><li>1,109 ATM’s </li></ul><ul><li>Bank by Telephone and Internet </li></ul><ul><ul><li>2.0 million customers are connected by telephone </li></ul></ul><ul><ul><li>965,000 customers are connected by internet </li></ul></ul><ul><li>Alliances have increased reach </li></ul><ul><ul><li>Retail customers increased from 5.2mm to 11.2mm </li></ul></ul>Distribution channel Key highlights Cross-selling Avg. no. of products sold to each corporate customer +17.4% Source: SwedBank; presentation to analysts, Nov 2001
  11. 11. In the U.S., the industry has been shaped by the changing regulatory and technology environment … <ul><li>Deregulation </li></ul><ul><ul><li>Interstate Banking and Branch Act </li></ul></ul><ul><ul><li>Gramm-Leach-Bliley Act </li></ul></ul><ul><li>Increasing competition </li></ul><ul><ul><li>Cross-border deals </li></ul></ul><ul><li>Disintermediation </li></ul><ul><li>Technological innovation </li></ul><ul><ul><li>Development of sophisticated capital markets </li></ul></ul><ul><li>Emergence of super-regional banks </li></ul><ul><li>Move towards convergence transactions </li></ul><ul><li>Explosion of credit </li></ul><ul><ul><li>Category killers </li></ul></ul><ul><li>Focus on capital management </li></ul><ul><ul><li>Leveraging of balance sheet to optimize capital mix </li></ul></ul><ul><ul><li>Reassesment of risk management processes </li></ul></ul>Impact on banking industry Key drivers of change
  12. 12. … and substantial consolidation in the late 1990s has led to the emergence of dominant super-regional players 289.0 542.7 1994 vs January 2002 $ billions Wells Fargo 76.9 JPM/Chase 70.9 Bank of America 95.7 Citigroup 257.0 Note: Data as of January 18, 2002 Source: Datastream, Bloomberg, SDC Total volume for announced U.S. financial services sector transactions Comparative market capitalisation Wachovia 42.2 (2,280) (2,538) (3,024) (3,756) (4,073) (3,679) (4,194) (3,454) (3,070) (2,368) US$bn (number of deals in brackets) In the past 10 years, the number of banks operating in the United States has decreased by over 30%
  13. 13. Banks in the U.S. have countered disintermediation by taking advantage of a more permissive regulatory environment ... Source: David Polk & Wardwell; JPMogan Banking Hldgs Co Act enacted 1956 1970 1978 1982 1987 1989 1991 1995 1996 1997 1998 Non-banking limitations extended to one-bank hldg cos Non-banking limitations extended to foreign banks Explicit prohibition from insurance agency and underwriting (Gam-St. Germain) “ Non-bank banks” curtailed (CEBA) Debt underwriting powers Equity underwriting powers The VALIC case determined that annuities were not insurance but finacial products Barnett Supreme Court decision ratifies “Town of 5,000” rule Ineligible revenue threshold raised to 25% House Resolution 10 under consideration JPMorgan net interest income to total revenues Limiations Extensions
  14. 14. … and by moving towards a new “risk underwriting and distribution” model Loans Commitments Bonds Credit derivatives BISTRO etc. Underwrite risk Disaggregation of risk Default probability Recovery rates Correlation New channel Bundled risk Single borrower Traditional channel Broad base of capital & insurance markets investors Narrow base of loan/bond investors
  15. 15. Recap: Key lessons from the Swedish and U.S. experience Key Lessons Distribution Risk management Scale Alliances Cross-selling Disintermediation
  16. 16. Agenda <ul><li>Introduction </li></ul><ul><li>Two relevant precedents: Sweden & the U.S. </li></ul><ul><li>Implications for Emerging Asia </li></ul>
  17. 17. Disintermediation: Banks will no longer be the primary source of keeping money <ul><li>Banking sector assets currently constitute a large part of financial sector assets in Asia </li></ul><ul><li>Korea an anomaly due to developed insurance and credit card sectors </li></ul><ul><li>Various likely sources of disintermediation: </li></ul><ul><ul><li>Maturity of capital markets </li></ul></ul><ul><ul><li>Rise in private banking and asset management </li></ul></ul><ul><ul><li>Increase in insurance penetration </li></ul></ul>Key highlights Breakdown of financial sector assets Banking assets as a % of total financial sector assets Source: JPMorgan estimates
  18. 18. Risk management: Banks will focus increasingly on risk management as a key part of their strategy Developing portfolio level risk assessment tools Shifting the institutional mentality Engaging the rating agencies in a dialogue on risk reduction and economic capital Actively distributing credit risk In the late 1990s, JPMorgan set out an aggressive plan to reduce credit risk and economic capital requirements
  19. 19. Distribution: Bank branches will continue to remain the key distribution channel Consumer preferences for bank distribution % Potential for internet distribution Internet penetration (%) 2000 GDP per capita (US$’000) Australia Singapore China Hong Kong South Korea Taiwan Philippines Indonesia Malaysia Thailand India Source: Mastercard survey of banking customers in Singapore; JPMorgan research; IDC
  20. 20. Scale: Big does not necessarily equate to beautiful Competing with scale % of customers who agree: Large financial services firms offer more services Provide better services Are more personal Consumer perception of large banks Source: U.S. Gallop poll
  21. 21. 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 Hua An 2001 Tai Ping
  22. 22. Conclusions <ul><li>Banks are providers of wholesale and retail services </li></ul><ul><ul><li>Increasingly less capital intensive </li></ul></ul><ul><li>Risk management and trading portfolios to become increasingly important for both balance sheet management and profit generation </li></ul><ul><li>Differentiation will be based on service & quality not scale </li></ul>Role of information and capital provider will continue but in different forms