The Future of European Retail Banking Frank Schwab Friday, 5 th March 2004 European Banking Forum

The future of European retail banking Where we are ? 2. Where do we go to ? 3. Where do we come from ? 1.

1980 -2000: Europe’s universal bank system European private banks focussed on investment banking. Retail banking was largely neglected Trading & Sales Mergers & Acquisitions IPO’s 0 1,000 2,000 3,000 4,000 5,000 6,000 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 DJ EuroStoxx50 0 500 1,000 1,500 2,000 1990 1992 1994 1996 1998 2000 Domestic Cross border Mergers & Acquisitions Source: OECD

European private banks focussed on investment

banking. Retail banking was largely neglected

Trading & Sales

Mergers & Acquisitions

IPO’s

1995 - 2000: The hype of e-commerce & online banking Attacker The bubble did burst, but additional competition for traditional retail banks is left and margins decreased Customer Traditional Retail Banking

The bubble did burst, but additional competition for

traditional retail banks is left and margins decreased

The future of European retail banking Where we are ? 2. Where do we go to ? 3. Where do we come from ? 1.

Branch and bank density (2002) The UK banking market is the most consolidated, followed by Spain. Branch density per 1,000 inhabitants Bank density per 100,000 inhabitants UK Spain Italy Germany France Average Source: DB Research 0.21 0.64 0.95 0.67 0.52 1.43 0.46 3.14 0.44 1.70 0.52 1.52 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 No of inhabitants No of banks UK Branch 4,762 UK Bank 156,250 445 ES Branch 1,053 ES Bank 149,254 349 I Branch 1,923 I Bank 69,930 808 D Branch 2,174 D Bank 31,847 2,232 F Branch 2,273 F Bank 58,824 952 AVG Branch 2,437 AVG Bank 93,221 957

The UK banking market is the most consolidated,

followed by Spain.

Cost/Income Ratios (Average 1992-2001) The UK banking market is the most profitable, followed by Spain. 60.4 60.7 63.1 64.3 67.1 63.1 58 59 60 61 62 63 64 65 66 67 68 UK Spain Italy Germany France Average CIR in % Source: DB Research

The UK banking market is the most profitable,

followed by Spain.

Income growth and cost/income ratio of retail banks across Europe, 1998 - 2001 Sources: Annual reports; McKinsey analysis Financially successful retail banks can be characterised by low cost/income ratios and high income growth Average = 4.3 0 5 15 45 50 55 60 65 70 75 80 BNP ING Barclays Lloyds Crédit Suisse UBS Citibank UniCredito Raiffeisenb. Banca Fideuram Average = 63.4 Citibank PC MLP (42% growth) Coba (85) ABN Amro HSBC SEB Banco Popular Dreba (-1) HVB 10 DB PBC C/I ratio 98-01 in % Income growth 98-01 in %

Financially successful retail banks can be characterised

by low cost/income ratios and high income growth

Value creation of different industries Compared to other industries, banks still have a high internal labour rate 50 % 50 % 30 % 70 % 80 % 20 % 20 % 80 % Banking industry Capital goods industry Automotive industry Electrical industry Internal labour External labour Sources: DZ-Bank, CSFB, Roland Berger, 2002

Compared to other industries, banks still have a

high internal labour rate

The future of European retail banking Where we are ? 2. Where do we go to ? 3. Where do we come from ? 1.

Disintegration of the traditional banking value chain Specialisation and development of core competencies can be a key for success in retail banking Scoring Traditional Trend Business Dev. Product Dev. Processing HR Customer segmentation Marketing Sales Online

Specialisation and development of core competencies

can be a key for success in retail banking

German age structure: half of the population is older than 50 years in 2050 Germany is a front-runner of a dramatic structural change of the European age structure Source: German Federal Statistical Office 1950 Women Men 2050 Women Men

Germany is a front-runner of a dramatic structural

change of the European age structure

Financial wealth per capita of European citizens increases on a high level There is a continuous increasing demand of investment and asset management products Source: Organisation for Economic Co-operation and Development 48 47 31 30 33 16 34 77 66 47 47 44 29 52 0 10 20 30 40 50 60 70 80 90 Netherlands UK France Italy Germany Spain Average 1995 2000 ‘ 000 Euro 9,0 9,9 7,0 9,1 9,6 6,0 12,6 CAGR

There is a continuous increasing demand of investment

and asset management products

Scenario 1: Set single focus on older people targets customers older than 55 years focus on Central Europe coverage of the full product range, customised for this special period of life building partnerships with relevant organisations and networks like “ http://www.age-platform.org” Older people as the only target group of a retail bank with focus on Central Europe

targets customers older than 55

years

focus on Central Europe

coverage of the full product

range, customised for this

special period of life

building partnerships with

relevant organisations and

networks like

“ http://www.age-platform.org”

Older people as the only target group of a retail bank

with focus on Central Europe

IT spend matters ... Some of the most successful European retail banks have a high IT spend level IT cost / operating costs 10% 15% 20% 25% 5% Cost / income ratio 20% 40% 60% 80% 100% DB PBC 2001 2002 Median Median Citibank PC Unicredito Barclays Lloyds CS UBS Dresdner Bank HVB BNP Pariba HSBC SCH BBVA

Some of the most successful European retail banks

have a high IT spend level

... and information technology can be a source of competitive advantage No single mega trend, but many parallel trends increase the need for tight alignment of IT and business strategy Private & Business Clients – Rahmenbedingungen zur Strategieentwicklung visibility / publicity low high maturity low high Mobile Services Web Services CRM Electronic signature IT Infrastructure Outsourcing BPO Outsourcing LINUX “ Farms” & “ Blades” replacement of OS/2 network bandwidth Offshore Application Outsourcing Business intelligence

No single mega trend, but many parallel trends increase

the need for tight alignment of IT and business strategy

European union: eastern enlargement 1 Estonia 2 Latvia 3 Lithuania 4 Poland 5 Czech Republic 6 Slovakia 7 Hungary 8 Slovenia 9 Romania (2007) 10 Bulgaria (2007) 11 Malta 12 Cyprus 13 Turkey (open) Increase of existing European market by 75 million inhabitants to 375 million customer on 1 st of May 2004

Increase of existing European market by 75 million

inhabitants to 375 million customer on 1 st of May 2004

Scenario 2: Serve the “not banked” customer “ Small loan terminal” targets “non bank” customer in Eastern Europe small loans up to 500 Euro above average interest rate placed at supermarkets, retailers, malls online authentication by phone number, social security number, address, date of birth, ... online scoring instant loan, paid cash and cash pay back “ Small loan terminal” as the single business activity of a specialised retail bank in the Eastern Europe market “ Small loan” terminal

“ Small loan terminal”

targets “non bank” customer in

Eastern Europe

small loans up to 500 Euro

above average interest rate

placed at supermarkets,

retailers, malls

online authentication by phone

number, social security number,

address, date of birth, ...

online scoring

instant loan, paid cash and

cash pay back

“ Small loan terminal” as the single business activity of

a specialised retail bank in the Eastern Europe market

Whatever strategy you choose ... ... be excellent ! Excel your customers’ expectation Excel in training and motivating your employees Excel the quality of your processes Excellence in these three dimension leads to sustainable financial success

Excellence in these three dimension leads to

sustainable financial success

Thank you ! Let’ s discover our individual Futures of the European Retail Banking and discuss possible co-operations & solutions in the sessions of the next two days.