THE CHANGING WEALTH MANAGEMENT MARKET LANDSCAPE IN CHINA

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1 THE CHANGING WEALTH MANAGEMENT MARKET LANDSCAPE IN CHINA NOVEMBER 23, 2017 Ray Chou Partner, Oliver Wyman

2 An nascent but rapidly developing market in Structure of the overall financial system Indirect and direct financing Cash and Deposit of corporates % of GDP, avg % of GDP, avg % 11% 69% 10% 166% Indirect Penetration of the capital markets Stock trading volume % of GDP, % 29% Corporate bond outstanding % of GDP, 201 2% % Direct 0% Securitized s outstanding % of GDP, 201 1% 6% Availability of financial s EQUITY FIXED INCOME COMMODITIES FX OTHER ALTERNATIVES Product Type (Launch year) Cash Equities ETFs Margin financing Stock options/warrants 201 Index options 201 Index futures 2010 Total return swaps 201 Synthetics Money market instruments Interest rate swaps Interest rate options Structured credit 2008 Corporate bonds Distressed debt 2003 Securitized s 200 Credit derivatives Oil & Gas futures Precious metals futures 2008 Agricultural futures 2013 Commodity ETFs 201 Commodity options FX spot/forward FX swaps FX options 2003 FX exotics PE/VC 200 Quant/Algo funds 2009 REITs Insurance-linked securities Developed Emerging Under -developed 1. Including bank loans, foreign currency-denominated loans, entrusted loans, trust loans, undisclosed bankers acceptances Source: CBRC, PBOC, Wind, SIFMA, FRB, Bloomberg, Oliver Wyman analysis 1

3 In the past immature demand and supply caused an imbalance vicious cycle Chinese HNW wealth management market historical background HNWI Mindset Unsophisticated demand Lack knowledge and experience in the financial market Behavior Actively handle Professional service not prevalent Demand only stays at level Demand: Immature demand from HNWIs Main demand lies in cash management, high yield fixed income and equity market Implicit guarantee leads to investors reliance on high-yield fixed income s Lack the incentive to adopt professional services Lack of innovation from financial institutions High degree of homogeneity Over-focus on sales instead of needs Supply: Long-term dominance of non-standard assets by banks Behavior Individuals: High degree of allocation of bank wealth management s Banks: Scaled up their on- and offbalance sheet credit assets to earn interest margin Corporates: Ease of obtaining capital from banks and shadow banking led to abundance of non-standard asset Market characteristics Channel: Banks dominated with their retail branch network Macro: The economy was experience high growth Financial system: Financing is mostly done indirectly Source: Oliver Wyman Analysis 2

4 WM business shifting away from traditional mainstream offerings Breaking of implicit guarantee Rebalancing of Financial System 1 Slowing economic growth Gradually declining yield for non-standard assets %, % 9% 2 3 Less favourable industry fundamentals Lower interest rates 8% 7% 6% % % 3% 2013 Bank WMP year Trust Real Estate year Trust - Infra 2016 Bank WMP shifting towards NAV-based structure RMB TN, , balance (LHS), % of non-guaranteed s (RHS) Inflection point for credit cycle % 67% 7% 6 77% 6 80% 60% Breaking of implicit guarantee % 20% 0% Source: Wind, Oliver Wyman analysis Principle-guaranteed Non-principle-guaranteed % on non-guaranteed s 3

5 Size of Wealth (Investible Assets, 201) Segment Demand side: Distinctive Chinese HNWI segments emerging with increasing demand sophistication Segmentation of Chinese HNWIs Demand by major HNWI segments UHNW (100M RMB and above) HNW (6-100M RMB) Family ~10k ~3.2 TN ~300 MN Entrepreneur s ~600k ~2 TN ~0 MN Professional Investors Traditional HNWIs ~700k ~10 TN ~1 MN ~13k ~2.2 TN ~160 MN Entre. Family Prof. Inves tor Financial Needs Category 1 2 Full-cycle Business Capital Management 3 Private Banking Version of Asset Management Institutional Transaction Service High-end Tailored Service for Family Core Needs Corporateoriented financial advisory Tailored crossmarket mgmt. service Prime brokerage service Mass Affluent (Less than 6M RMB) Family Inheritance Total number of people Business Operation New Rich ~,600k ~10 TN ~2 MN Wage Major Source of Wealth Total investible assets (RMB) Investment Average investible assets per person (RMB) Trad. HNW New Rich Strategic Asset Allocation Products 6 One-stop Intelligent Investment Mgmt Equity Transaction Service Personal Credit Lines Investment Transaction Financing Service Financial Needs Level of relevance to capital market VIP Valueadding Service Relatively stable financial return Passive & onestop service High Mid Low Source: Hurun, Forbes, Securities Depository and Clearing Corporation Limited, Oliver Wyman Analysis

6 Supply side: key trends along wealth mgmt. value chain suggest opportunities for differentiated proposition Wealth and Asset management value chain RMB TN, 201 (number refer to AuM or size of wealth) Key trends Investor 1 Channel Product Manager/Originator Asset Institutions 1 78 Bank 2 Insurance 12 NSSF 2 Pension 6 Corporate 32 Enterprise Annuities 1 Overseas 0.9 Retail 1 Mass & affluent 33 HNWI & UHNWI 30 Overseas Direct-to-manager/originator ( 直接募资 ) Direct institutional sales Retail Channels Bank 2 Securities firm 2 Insurance 0. 3 rd party offline 1. 3 rd party online 2 Direct-to-asset ( 直接交易 / 投资 ) Bank WMP Mutual fund Private fund Segregated account Insurance -linked Securities program Trust program P2P program Retail deposit, corporate deposit and other sources of fund 2 Bank AM Insurance AM Securities Co. AM Note: numbers may not add up due to rounding error; 1. Total investable wealth, includes net real estate, self-directed assets and assets managed through managers/through s, excludes deposits; 2. Deposits (8TN household deposit and 6TN corporate and financial institution deposit) and other source of fund outside of the asset management industry, e.g. bonds held by policy banks and the central bank.; 3. Restricted shares of listed companies and equity in unlisted companies by private funds;. Include net in real-estate, commodities, allocation to overseas assets and other assets Source: WIND, AMAC, PBoC, CIRC, CSRC, Expert Interview, Oliver Wyman analysis FMC Trust Private fund manager Alternative lender (e.g. P2P, micro lending) Equities Bonds Securitized s MM instruments Non-bank nonstandard credit asset Private equities 3 Others Bank loans Diversified demand Digital transformation Active management Platform development Non-std to standard

7 Non-bank FIs and digital disruptors gaining strong growth momentum leveraging differentiated capabilities in the WM market Banks Other traditional FIs Digital disruptors 10 Category Target retail segment Bank Securities firm UMA, MA, Mass mainly Mass covered by retail bank for trading business HNWI covered with private bank HNWI, UMA, MA addressed by emerging WM business Insurance company HNWI, UMA, MA, Mass (targeted via differentiated offerings) FA AM company (direct) HNWI, UMA UMA, MA, as main target Mass through s standard MF/MMF offerings Integrated digital FS player Mass with simple /financing needs and frequent internet use Online aggregator Mass and mass affluent with certain knowledge and frequent internet use Internet direct bank Mass with simple /financing needs and frequent internet use P2P player Mainly Mass with frequent internet use and higher risk appetite Digital Industrial FS player Mass and mass affluent with certain knowledge and specific asset appetite Competitive advantages Strong acquisition and sticky relationship through bank accounts All-rounded/ integrated financial services Extensive offline footprint (RM/ branch network) Strong acquisition and sticky relationship through stock trading accounts Capital market, AM and capabilities Extensive offline distribution network (agents) and direct salesforce (remote center) Insurance offerings ( and protection) High-end RM resources Expertise in favored PE/ fixed income s Product issuing capabilities (multi asset classes, etc.) Top talents in / fund mgmt. (, secondary market insights etc.) Scaled online user base with frequent touch points (e.g. spend use cases) Abundant data for monetization ( conversion, pricing, risk mgmt. etc.) Leading technologies Economy of scale Strong variety (std./ non-std. supermarket + proprietary assets) Highly WMrelevant use cases Leading technologies Scaled existing digital FS base Access to offline FI capabilities from partners Product capability A scalable platform with superior experience Attractive high yield s (via direct investing/ financing) Proprietary lending assets with strong risk mgmt. and transparency in industrial/ supply chain ecosystem WM channel share ~60% ~30% ~10% 6

8 Implications of key winning factors in WM in the new digital era A B C D E F G H Dimensions Use cases Insights generation Customer conversion Product offerings Asset acquisition Customer services Account Risk management Key winning factors Engage users/ prospects through various FS and non-fs offerings, creating traffic and sticky relationships Complete profile/ portraits/ attributes (internet + FS data) and generate insights on digital FS/WM opportunities Leverage various use cases within ecosystem and offline touchpoints for traffic entry and conversion Provide Internet-based, info-transparent and comprehensive FS/WM s Diversify asset sourcing while differentiating through unique access/ generation of underlying assets Integrate O2O experience for wealth management offerings (offline capabilities are part of key differentiators) Interface s with super account to address personalized/ various FS + non-fs needs Make full use of static financial data + dynamic Internet data to establish intelligence and strong risk control over entry and investor matching Source: Oliver Wyman analysis 7

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