Managing capital in the quest for profitable growth

Banking Managing capital in the quest for profitable growth Navigating through the new Asia Pacific banking landscape

Contents Executive summary... 2 Asia Pacific s new banking landscape...3 A framework for balancing growth and capital constraints...5 Confronting challenges to growth and capital deployment...8 Strategic levers for building growth...9 APAC banks in the spotlight: four case studies...13 Conclusion: Targeting opportunities for growth...15 Appendix A: Framework methodology...17 Appendix B: Research sample...18 1

Executive Summary Since 2008, and in the face of challenging market conditions, banks in the Asia Pacific (APAC) region have had to adjust to a subdued growth environment. From now on, a critical differentiator will be their ability to seize opportunities for future growth within the capital constraints of key markets across the region. To help them navigate this journey, we have developed the APAC Banking Navigator model: a framework for balancing growth and capital constraints. This benchmarking tool compares APAC banking markets to illustrate capital usage and highlight growth potential across the region. Knowing where profitable growth opportunities exist, and knowing how to capture them, are two sides of the same coin. As such we have simplified the formula for capturing capital-effective growth opportunities into three strategic levers 1. Differentiation, 2. Diversification and 3. Industrialization. In this Point of View, we explain the ways in which these levers can be prioritized to match market conditions in APAC. 2

Asia Pacific s new banking landscape Banks across the APAC region have seen their profitability fall. A principal driver of this fall has been the increase of risk and capital constraints. Although APAC banks have progressively rebuilt their return on equity (ROE) performance since 2009, as figures 1 and 2 illustrate there is little prospect for improvement, with ongoing downward pressure on ROE forecast over the next three years. Asia Pacific banks appear to be following a slow recovery path despite operating in a lower risk environment and having robust fundamentals. Margin compression, slowing growth and intensifying competition In the past, strong credit demand, favorable interest rate environments and expansion opportunities fueled growth in Asia Pacific banks. Today, however, banks across the region are operating in a market where margin compression, slowing growth and intensifying competition are the norm. These trends are ushering in a period of more subdued and consolidated growth. As banks in APAC brace themselves for tougher competition for high-quality borrowers and depositors, their interest margins will come under greater pressure, particularly in already over-banked maturing markets. Meanwhile, in emerging markets such as China and India, rising inflationary pressures have spurred monetary tightening by regulatory authorities. In the short term, sharper interest rate rises in these markets pose a risk to banks credit quality. Constraints on bank capital With European banks still under pressure from weak growth and high debt repayments, a long and substantial de-leveraging process is underway. According to the International Monetary Fund (IMF), 1 this could result in the largest EU-based banks shrinking their combined balance sheets by an estimated US$2.6 trillion, equivalent to seven percent of total assets. The majority of this de-leveraging is expected to come from sales of securities and non-core assets, equivalent to around 1.7 percent of credit growth across the euro area. 2 These developments profoundly impact APAC, with sharp reductions in wholesale funding to banks and associated derivatives markets disrupting credit supply and pushing costs upwards. Figure 1. Pretax return on equity (ROE) in Asia Pacific markets Pre-crisis Recession Recovery 40% 37.6% 30% 22.4% 22.8% 23.6% 25.3% 20% 17.5% 10% 16.9% 11.7% 8.1% 12.4% 10.0% 11.9% 9.3% 14.7% 14.5% 0% 2007 2008 2009 2010 2011 Advanced Asia Emerging Asia Maturing Asia ROE = Profit Before Tax/ Shareholders equity Source: Accenture APAC Banking Benchmark, Accenture Research 3

In addition, volatile capital markets are putting pressure on fees and commissions due to the erosion of customer trust. Regulatory developments, notably compliance with Basel III, are limiting opportunities for gaining liquidity by making interbank lending less attractive. The Basel rules are leading to higher capital requirements for trading assets, trade finance, proprietary trading and derivatives. These are increasing the cost of doing business and reducing profitability, even across some low capital-intensive areas. Balancing capital, efficiency and growth Taking a closer look at the growth and capital equations of banks retail, commercial, wealth management and investment banking activities, we can identify a path to profitable growth. At a fundamental level, this means understanding banks ability to access capital (where capital is a combination of funding access and business model) relative to their potential for growth (where growth is the product of a particular market s growth potential and their own ability to grow). Provided banks can distil insights from this analysis into their operating models, they should be well positioned to plot a new course for growth. To assist with this process, Accenture has developed the APAC Banking Navigator: a framework for balancing growth and capital constraints. This is a benchmarking tool that assists banks to measure capital usage and the growth potential of the relative markets in which they operate. The tool identifies the combinations of levers banks can use to drive growth in capital constrained environments. Figure 2. ROE forecast for largest banks in Asia Pacific 3,100,000 30% FY11 Total Assets in US$ mn 2,600,000 2,100,000 1,600,000 1,100,000 600,000 25% 20% 15% 10% 5% 100,000 MUFG* ICBC MIZUHO* CCB BOC SMFG* NAB BCOMM CBA WESTPAC ANZ CHINA MERCH CHINA CITIC SHANG PUDONG INDUSTRIAL BANK SBI INDIA* CHINA MINSHENG DBS BOC HK OCBC 0% Total Assets FY11 (US$ mn) Post Tax ROE FY2011 Post Tax ROE Forward 3yr Estimate Ranked left to right by descending order of Asset Size *For Japanese and Indian Banks, ROE as of fiscal year end March 2012 Source: Bloomberg data accessed on 10 Dec 2012 4

A framework for balancing growth and capital constraints Accenture has conducted an analysis of current capital usage and growth potential in each key APAC banking market, and scored banks accordingly. First, a Growth score, which measures a country and bank s overall growth prospects. And second, a Capital score, which measures banks capital constraints, taking into account both their business and funding models. 3 Shown in figure 3, our assessment of capital constraints for a particular country or business unit focused on two core components 1. Capital access (the funding model) and 2. Capital intensity (the business model). Our analysis of growth potential incorporated a twin focus on the potential for - 1. Market growth and 2. The potential for individual bank growth. Understanding the current capital usage and business growth potential is critical for banks to achieve sustainable growth. Capital Access (the funding model) This component examines a bank s balance sheet structure, including the balance of its deposit and debt liabilities, its leverage and the cost of these financial resources. This provides a comparative understanding of APAC banks funding stability and cost of capital resources. Banks in parts of advanced and maturing Asia face capital constraints from their dependence on wholesale funding and high leverage. In emerging Asia, high levels of access to low-cost retail deposits mean lower dependence on wholesale funding. In Australia and South Korea, on the other hand, opportunities for growth in retail deposits are nearly exhausted. Leverage ratios vary considerably across APAC. For instance, Japanese mega banks use leverage to improve returns in sluggish markets, whilst traditionally more conservative banks in Singapore and Hong Kong have an opportunity to boost ROE by using more leverage. *A description of the methodology is set out in greater detail in Appendix A. 5

Capital Intensity (the business model) Capital intensity measures a bank s share of interest income and riskweighted assets/total assets to provide a comparative understanding of lending models and asset quality in APAC banks. To reduce the strain on capital, banks can diversify their product offerings and income streams to generate revenue at low capital intensity. Banks in maturing and emerging Asia currently have higher percentages of risk-weighted assets (RWAs) than their counterparts in advanced Asia. These banks are more likely to diversify their product mix and increase their reliance on fee income (which requires fewer risks than traditional lending). Market Growth Market Growth examines a country s GDP growth forecast for 2011 to 2015, 4 and its system asset growth (four-year CAGR). 5 Growth is largely dependent on the potential of the domestic market and the ability of banks to identify profitable opportunities. Despite the current growth slowdown in many APAC economies, the longer-term prognosis is favorable (and ahead of most other regions around the world). This is especially true of markets in emerging Asia, such as India and China. Bank Growth Bank growth benchmarks a bank s four-year CAGR in loan volume and revenue against market growth to provide a comparative understanding of actual growth realized during 2007-2011. In parts of advanced and maturing Asia, realization of bank growth potential has been weak. This is particularly true in Japan, Hong Kong, South Korea and Taiwan, largely due to slower credit growth, falling interest spreads and strains on non-interest income. Meanwhile, banks in emerging Asia have experienced healthy revenue growth, driven by economic and trade flow-led demand for credit. Figure 3. APAC Banking Navigator: A framework for balancing growth and capital Capital Assessing capital constraints for a country or bank provides an understanding of the nature of the capital intensity of the business models as well as how banks are accessing sources of funding. Growth Analyzing growth potential facilitates an understanding of the specific market opportunity that a bank operates in, balanced with the specific bank growth realized. Capital Access Funding Model Capital Intensity Business Model Market Growth Potential Bank Growth Potential Deposits/Total Assets (%) Share of Net Interest Income (%) Banking System Assets Growth (%) Asset Turnover (%) Advanced Asia Australia Japan Singapore Hong Kong Maturing Asia Taiwan South Korea Malaysia Thailand Emerging Asia ndonesia ndia Philippines China 0 % 20 % 40 % 60 % 80 % 100 % 0 % 20 % 40 % 60 % 80 % 100 % 0 % 10 % 20 % 0 % 2 % 4 % 6 % 8 % 2011 2007 2011 2007 2007-11 CAGR 2011 2007 6

Overall, a bank s potential for growth seems to be correlated to their ability to tap into trade, personal incomes and wealth opportunities. The jury is still out on whether banks can create long-term potential by serving the region s large low income and un-banked populations. Using the Asia Pacific Banking Navigator model, figure 4 illustrates where each Asian geography falls within the four quadrants. Figure 4. The Asia Pacific banking capital/growth landscape High capital constraints High growth potential Growth potential High Low capital constraints High growth potential India Indonesia China Philippines Thailand Malaysia High Singapore Capital constraints Hong Kong Low South Korea Taiwan Australia Japan High capital constraints Low growth potential Low Low capital constraints Low growth potential Key Advanced Asia Maturing Asia Emerging Asia Growth Score The growth score is a combination of market growth (as measured by forecast GDP, and historic loan growth); and benchmarked bank s growth (as measured by loan and revenue growth and asset turnover). Capital Score The capital score is a combination of business model (as measured by share of interest income and RWA/total assets); and funding model (as measured by deposits/total assets, wholesale funding and cost of equity/assets). 7

Confronting challenges to growth and capital deployment Banks in each of the four market clusters of the Asia Pacific Banking Navigator model are confronted with a unique set of challenges. Ultimately, how each bank chooses to resolve these challenges, boost ROE and drive growth, will determine its future competitiveness. Figure 5. Quadrants of the APAC Banking Navigator Growth potential High High capital constraints High growth potential Banks in this quadrant place heavy reliance on credit-based revenue and narrow business and product portfolios. This makes their growth potential particularly vulnerable to capital availability. Credit quality issues are a major concern, due to rising loan book provisioning and the downward impact of Tier 1 capital requirements on ROE. As depositors move on to more sophisticated investments, there is a focus on sustaining access to cheap retail funds. Low capital constraints High growth potential Banks in this quadrant have plenty of market opportunity and a good funding position. This means there are strong opportunities to grow revenues, although competition is increasing all the time (e.g. from Singaporean banks expanding in ASEAN). At present, many banks in these markets are struggling to sustain the growth momentum needed to consistently generate returns on accumulated capital. They are also encountering high credit quality issues due to rising loan book provisioning and resultant Tier 1 capital requirements depressing ROE. High Capital constraints Low High capital constraints Low growth potential Banks in this quadrant are experiencing pressure on pricing and yields, with market saturation and high competition leading to low asset turnover from existing businesses. Peaked deposit gathering and high-cost wholesale funds are also impairing growth potential. Low capital constraints Low growth potential Banks in this quadrant have limited growth opportunities for generating return on accumulated capital and lower fee income due to depressed institutional and investment banking. Pricing and yields are both under pressure, and market saturation and high levels of competition mean low asset turnover from existing businesses. Low capital constraints do, however, create opportunities for diversification. Low 8

Strategic levers for building growth Three strategic levers can be used to improve performance and achieve profitable growth. Depending on their position, banks can combine these levers to reduce exposure to risk-weighted assets and wholesale funding, deploy surplus liquidity toward more viable opportunities, and realize growth through high-value segments and/or core industrialization. Key features of each of these levers and the initiatives that support them are summarized below: Figure 6. The strategic levers recommended for APAC banks Diversification Differentiation Industrialization Strategic priorities are to diversify into other geographies and business segments, while decreasing reliance on capital-intensive, credit-based cash cow business: Customer diversification Change the mix between wholesale and retail banking. Offering diversification Diversify into new offerings like wealth and asset management to capitalize on existing sales of thirdparty products, as well as increasing cross-/up-selling. Geographic diversification and expansion Grow into markets with different savings habits and credit needs. Service diversification Increase asset turnover through frequency transactions; increase share-of-wallet through advice services. The strategic priority is to differentiate the bank from its competitors by leveraging key strengths: Value-chain specialization Maintain liquidity and/or capital balance with deep treasury and risk functions. Capability differentiation Invest in capability-building and/ or technology-driven models to establish long-term cost advantage. Technology innovation Create unique propositions to improve customer engagement, efficiency and productivity (eg through mobile services and/or cloud-based SaaS deployments). Reinvent customer relationships Improve customer engagement (eg leverage social media strategies). Product differentiation Develop unique product offerings (eg product bundling) to increase revenue and profitability. Business network collaboration Leverage overseas customer base and/or optimize platforms to increase asset turnover. The strategic priority is to move toward a flexible and scalable operating model, where infrastructure can be shared and value driven by reusing bank assets/capabilities: Immediate processing A high degree of automation and real-time processing ensures immediate updates to positions and a superior customer experience, while reducing exceptional cases and subsequent back-office re-work. Simplification Facilitating lean processes with horizontal applications (eg origination, product factory and collateral management) supporting different products and lines of business, and consistent user interface and seamless integration of all applications based on the same technical principles. Scalability Processes enable system consolidation among business units, entities and territories. 9

Making the right moves As figure 7 illustrates, the choice of initiatives under each strategic lever will depend on the current positioning of the market or bank. The business mix of a bank has a major impact on how it uses the strategic levers to achieve growth. For example, banks seeking to grow retail banking operations in mature markets have made sustained investments in differentiation and industrialization. On the other hand, commercial/ institutional and investment banking operations have sought diversification ahead of industrialization in an effort to support their customers growing franchises. Figure 7. Key strategic levers per quadrant Growth potential High High capital constraints High growth potential Diversification Increase frequency of transactions, innovate products and services, increase non-interest income in both wholesale and retail banking. Industrialization Manage cost growth with operational scale-up, increase variability of cost base. Differentiation Balance liquidity and capital, i.e. active asset-liability management with deep treasury and risk functions. Low capital constraints High growth potential Diversification Invest in distribution and frontline infrastructure, explore acquisitions and make strategic investments domestic/overseas. Industrialization Manage cost growth with operational scale-up. Differentiation Invest in capability-/ specialization-building (e.g. project finance), invest in technologydriven models to establish long term value proposition. High High capital constraints Low growth potential Capital constraints Low capital constraints Low growth potential Low Diversification Develop related offerings like wealth and asset management to capitalize on existing distribution infrastructure, sell third party products, increase product cross/up-sell, increase margins through pricing. Industrialization Reduce transaction costs with technology platforms/digital channels, increase staff productivity and process re-engineering. Differentiation Establish unique value proposition to deepen customer satisfaction and relationships. Low Diversification Deploy (excess) liquidity in new growth geographies and businesses, pursue acquisitions and strategic alliances. Industrialization Reduce transaction costs with technology platforms/digital channels, increase staff productivity and process re-engineering. Differentiation Invest in capability-/ specialization-building (e.g. project finance), invest in technology-driven models to establish unique value proposition. 10

There are a variety of ways banks in APAC are using these strategic levers to address specific capital and growth issues and realize competitive advantage: Reduce capital intensity through diversification Because banks in most countries in maturing and emerging Asia depend on interest income as a core revenue source, margin improvements demand an increase in non-interest income. Recognizing this, banks in China have diversified into feebased businesses such as insurance, fund distribution, cash management, investment banking, personal wealth management and private banking. A heavy reliance on unsecured lending means that banks in maturing and emerging Asia currently have higher RWAs than their counterparts in advanced Asia. This can be addressed by diversifying portfolios to incorporate more secured lending and/or differentiating the business through build-up of specialist risk functions to help lower RWAs. Figure 8. Reduce capital intensity through diversification Remove constraints to capital access through diversification and differentiation While countries in advanced and maturing Asian markets are slowly improving their share of deposits, their high exposure to wholesale funding remains. At a country level, banks in Malaysia have driven deposit growth by moving to a customer segment-driven banking model that differentiates their operations. Maybank, for example, is increasingly focused on attracting deposits from business and SME segments. Diversification brings opportunities for improved capital access to banks elsewhere in advanced and maturing Asia. In Japan, banks have an opportunity to improve revenue generation by deploying liquidity overseas, while banks in Taiwan can leverage excess liquidity to improve margins via lending opportunities in Greater China. Figure 9. Remove constraints to capital access through diversification and differentiation Key for figures 8, 9, 10, 11 Diversification Differentiation Industrialization 11

Seize market potential through diversification In advanced and maturing Asia, large banks with low domestic market potential are chasing growth outside their home markets. Singapore s DBS Bank, for example, is successfully targeting the Greater China, India and Indonesia markets to diversify its revenue mix. In another example, banks like CIMB have been driving growth by diversifying their operations into strong Islamic markets such as Malaysia and Indonesia taking advantage of the stellar revenue growth in this sector (47 percent CAGR for Islamic banking revenues between 2007 and 2011). 6 Maximize bank potential through differentiation and industrialization Banks in Japan and Singapore have low domestic revenue potential and low capital constraints. The leaders in these markets are increasingly targeting project finance lending as the key driver for overseas revenue growth. Japan s Mitsubishi UFJ Financial Group (MUFG) and Singapore s DBS Bank have exceeded their respective country averages over the years by differentiating into project and trade finance. Most banks in China have been driving profitability through industrialization, rationalizing transaction costs by adopting technology platforms and new digital channels. For example, China Construction Bank (CCB) has pushed ahead with its branch transformation program, segregating application systems between front and back office and enhancing business processing efficiency. As a result, cost-to-income declined by 1.1 percent in 2011 (to 36.19 percent). 7 Figure 11. Maximize bank potential through differentiation and industrialization Figure 10. Seize market potential through diversification 12

APAC banks in the spotlight: four case studies Four leading APAC banks illustrate how banks can outperform their peers by using a combination of the three strategic levers. The four banks have been selected to provide different perspectives on what it takes to achieve profitability in APAC banking. Commonwealth Bank of Australia (CBA) Mitsubishi UFJ Financial Group (MUFG) CIMB Group (CIMB) ICBC 1. Commonwealth Bank of Australia: A real-time universal bank Relative to the market, CBA has maintained its profitability by differentiating itself with real-time retail banking, as well as diversifying into business and private banking operations where considerable upside potential exists. Differentiation The bank has leveraged technology as an enabler and a differentiator. Its core-banking program has delivered a streamlined, real-time banking customer experience targeted at retail and SME clients through assisted and un-assisted channels. Other technology innovations include NetBank, an online vault service for digital assets and Commbank Kaching, a mobile app for retail banking. In the corporate banking sector, CommBiz enables everyday settlement and foreign exchange capabilities. Key outcomes include the introduction of 29 new-to-bank institutional transaction banking clients in FY2011 and an increase in customer satisfaction from 65 percent in 2006 to 78 percent in 2012. 8 Industrialization Over the last four years, the bank has invested over AUD$1 billion (over US$1 billion) in technology and productivity initiatives, as well as streamlining processes enterprise-wide, including back-office process consolidation and lean process engineering. Key outcomes include reducing retail bank cost-income by eight percent over the last four years (to 38.3 percent in fiscal 2011) and improving investment productivity by 53 percent. 9 Looking ahead growth through diversification CBA can drive further scale in its wealth management business by leveraging distribution channels, analytics and brand positioning to improve sales per customer (~2.6) in line with global peers (>3.0). Opportunities also exist to improve market share in business banking by empowering frontline staff and targeting specific industries to increase lending volumes and improve margins. Technologies can be used to generate higher revenue from international rollout of virtual/real-time banking. 13

2. Mitsubishi UFJ Financial Group: A specialist financier reinventing itself through geographic expansion MUFG has significantly improved its profitability by focusing on its global institutional business (which includes Morgan Stanley) and differentiating through specialized business solutions. This strategy has successfully offset declining profitability in its retail and corporate banking business segments. 10 Diversification The bank has been pro-actively seeking geographic expansion through strategic investments and alliances with, amongst others, Morgan Stanley, Australia s AMP Capital, a US regional bank, CIMB and Bank of China. As part of this strategy, it has renewed its focus on Asia and on the emerging markets of Latin America, Russia and Turkey. Key outcomes include enhanced international revenues (rising from 24 percent of total revenues in 2007 to 27 percent in 2011) and robust future targets have been set (eg the Latin America business aims to increase gross profits for FY2014 by 30 percent from FY2011). 11 Differentiation The bank is pursuing business specialization by developing new solutions in transaction banking, sales and trading, and project finance. Among its technology innovations are customized solutions for cash management and trade finance. MUFG is raising sales and trading targets to achieve 40 percent growth in gross profit by FY2014 by focusing on areas including emerging currencies, operation infrastructure innovation and crossgeographic organizations. 12 Looking ahead growth through industrialization MUFG s strategy includes efficiency improvements through MUFG Groupbased shared services in operations and system infrastructure. 3. CIMB Group: A regional universal consumer bank Although CIMB has achieved healthy returns by diversifying business lines, expanding internationally and building its online channel, opportunities remain to improve operational efficiencies and cross-sell capabilities. Diversification The bank has successfully achieved geographic diversification in international operations. A successful program of acquisitions and local partnerships has delivered higher market share in Indonesia, Singapore, Thailand and the Philippines, as well as Australia, Hong Kong, India and Sri Lanka. As a result, international revenues now account for 52 percent of net interest income. 13 Aside from geographic diversification, the bank has also achieved business diversification, with growth in fee-based business such as Islamic banking and wealth management. As a result, CIMB has achieved a balanced revenue mix of 55/45 for interest/non-interest income. 14 Differentiation CIMB uses differentiated alternative channels to deliver services to its regional customer base. These include its regional online banking platform and BizChannel, a cash management solution for corporate customers. The online banking platform has experienced substantial growth, with 57.3 percent CAGR in the number of internet banking users since 2006. Added protection from fraudulent transactions has also increased the number of users of CIMB Clicks, the bank s online banking portal. As at December 2011, the number of users in Indonesia had increased by 141 percent, followed by a 26.2 percent increase in Malaysia and a 14.8 percent increase in Singapore. 15 Looking ahead growth through industrialization Industrialization of the bank s regional operating model would drive long-term value. Process re-engineering in retail business lines could be used to reduce high cost/income ratios in consumer banking and asset management/ insurance (from 65-70 percent down to 50 percent or less). In investment banking, a regionalized management platform could generate higher returns on invested assets by improving internal efficiencies and facilitating product cross-selling. 4. ICBC: Leveraging technology and business scale to drive performance ICBC has improved its performance with technology innovation, business scale and diversification in revenue mix and geographies. Diversification Geographic expansion includes organic growth through acquisitions (eg Standard Bank of South Africa and Bank of East Asia in the US) and regional expansion to service outbound customers. Business and product lines have been diversified, with ICBC expediting implementation of its universal banking model and expanding fee-based businesses. The bank has also enhanced its lending portfolio, introducing over 50 new products as well as optimizing the functions of 200 existing e-banking related products in 2011. As a result, ICBC increased its non-interest income by 41.2 percent in 2011. 16 Industrialization ICBC embarked on an IT/technology transformation to further improve efficiency. This included implementing the One ICBC unified IT and operating management system, as well as optimizing network layout and adjusting business outlet functions. The bank s commitment to technology innovation includes investment in mobile and electronic channels and its fourth-generation technology application system (NOVA+), focusing on globalization, integrated services and group development. 17 Looking ahead growth through differentiation ICBC can drive future growth by building and promoting a strong brand across all business lines and geographic areas, emphasizing the bank s strong global service capacity and unified IT platforms. Retail revenues could be increased by developing a customer-centric business model to drive up/cross-sell and generate more value from existing relationships. 14

Conclusion: Targeting opportunities for growth Since the global financial crisis, APAC banks have made significant progress toward rebuilding their ROE performance. Notwithstanding the significant capital and growth challenges that exist in markets across the region, exciting opportunities for profitable growth can be identified in the retail, commercial, wealth management and investment banking sectors. As APAC banks seek to rejuvenate their performance by seizing these opportunities, actions will be required across the three strategic levers identified in this Point of View. Combinations of these strategic levers can be used to reduce exposure to riskweighted assets and wholesale funding, to deploy surplus liquidity toward more viable opportunities and to realize growth through high-value segments or core industrialization. Our APAC Banking Navigator model highlights the capital constraints and growth potential in banking markets throughout the region. As we have shown, these call for different strategic responses from banks. However, irrespective of the particular conditions that apply, all APAC banks need to prepare for the journey ahead by assessing their current capital management capabilities, prioritizing opportunities for sustainable growth and identifying the execution capabilities needed to deliver these opportunities. As banks embark on this process, the following questions should assist in defining the optimum approach: 1. Rethink capital access and intensity How is your bank managing capital in the current market environment? Are your existing product strategies geared to enable deposit growth and minimize funding costs? Has your bank diversified into businesses and cross-sell capabilities that will help support growth of noninterest income? Are your current risk management and treasury capabilities sufficiently robust to counter adverse pressure on asset quality or liquidity? 2. Prioritize opportunities for growth How is your bank planning to drive optimal revenues, given the unique market characteristics and/or constraints that apply? Are there existing opportunities to drive growth from core operations or other new lines of business? If you are experiencing weak domestic growth, could your bank s current strengths be leveraged outside your home market? If so, where and how? Are there additional opportunities to industrialize and achieve operating efficiencies to drive healthier margins? 3. Diversify, differentiate and industrialize Which capability gaps could undermine execution of diversification, differentiation and industrialization strategies? Is your core business managed efficiently and are current capabilities scalable? Is decision-making in your organization efficient and does market information flow effectively from level to level? Is your organization and leadership focused on growth and ready to implement change? 15

For an in-depth discussion on any of the issues in this Point of View, please contact: Greg Carroll Accenture Asia Pacific Banking Lead +61 2 9005 5506 greg.c.carroll@accenture.com 16

Appendix A: Framework methodology The key objective of Accenture s APAC Banking Navigator benchmarking model is to provide a view on the relative competitive position of countries and banks, in terms of their business growth potential and capital constraints. Banks are scored across the following two dimensions: 1. Capital score measures the capital constraints of a country, taking into account: Business model: Share of net interest income at Group level and riskweighted assets to total assets. Funding model: Deposits to assets, wholesale funding, leverage, cost of equity, cost of assets. 2. Growth score measures a country and bank s overall growth prospects, taking into account: Market s growth potential: GDP growth forecast (2011 2015), system asset growth (4-year CAGR). Banks growth potential: Benchmark banks loans (4-year CAGR) and banks revenues (4-year CAGR). Higher capital scores indicate higher constraint from capital as a growth driver. Higher growth scores reflect greater levels of market opportunity realized over past four years. 17

Appendix B: Research sample Our analysis on performance trends is based on a sample of 75 banks across 12 countries representing the advanced, maturing and emerging Asia market segments, including: India China Thailand Malaysia Japan South Korea Taiwan Hong Kong Philippines Singapore Advanced Asia High banking penetration; GDP/capita: <US$30,000/year Maturing Asia Moderate to high banking penetration; GDP/capita US$10,000-US$30,000/year Indonesia Australia Emerging Asia Moderate banking penetration; GDP per capita: US$5,000/year National Australia Bank Commonwealth Bank of Australia Australia and New Zealand Banking Group Westpac Banking Corporation Macquarie Group Suncorp-Metway Bendigo and Adelaide Bank Mitsubishi UFJ Financial Group Mizuho Financial Group Sumitomo Mitsui Financial Group Resona Holdings Sumitomo Trust and Banking Chuo Mitsui Trust Holdings Bank of Yokohama Fukuoka Financial Group DBS Group United Overseas Bank Overseas Chinese Banking Corporation BOC Hong Kong Holdings Hang Seng Bank Bank of East Asia Hong Kong and Shanghai Banking Corporation (HSBC Asia) Bank of Taiwan Taiwan Cooperative Bank Mega Financial Holdings Land Bank of Taiwan First Financial Holding Co China Trust Financial Holdings Hua Nan Financial Holdings Taiwan Business Bank Chan Hwa Commercial Bank Cathay Financial Holding Woori Finance Holdings Co KB Financial Group Inc Shinhan Financial Group Ltd Industrial Bank of Korea Korea Exchange Bank Malayan Banking BHD CIMB Group Holdings BHD Public Bank Berhad RHB Capital BHD AMMB Holdings BHD Hong Leong Bank Berhad Bangkok Bank Public Co Ltd Krung Thai Bank Pub Co Ltd Kasikorn Bank PCL Siam Commercial Bank Pub Co Bank of Ayudhya PCL TMB Bank PCL Bank Mandiri TBK Bank Rakyat Indonesia Bank Central Asia PT Bank Negara Indonesia Bank CIMB Niaga State Bank of India ICICI Bank Ltd Punjab National Bank Bank of Baroda Bank of India HDFC Bank Ltd Union Bank of India Axis Bank Ltd Banco de Oro Unibank Inc Metropolitan Bank & Trust Bank of Philippine Islands ICBC China Construction Bank Agricultural Bank of China Bank of China Bank of Communications China Merchants Bank Shanghai Pudong Development Bank China CITIC Bank China Minsheng Banking Corp Industrial Bank Market data is not available for unlisted banks, e.g. Bank of Taiwan and Land Bank of Taiwan; and globally listed HSBC. 18

Authors Pascal Gautheron Pascal Gautheron is Managing Director of Accenture s Banking Management Group in Australia and leads Accenture s work with one of the major banks in the region. Throughout his career with Accenture, Pascal has worked with Financial Services clients across the Asia Pacific region. Pascal s work and research is focused on transforming client s banking franchises, having led clients through strategy definition to execution of large scale change programs. Manisha Sahni Manisha Sahni leads the market development activities for Accenture s wealth management practice in ASEAN. She is also a member of the Accenture Management Consulting Innovation Centre where she has led several research and thought leadership initiatives. Manisha s management consulting and industry experience spans business strategy and investment management in the Financial Services and Telecoms industries. She holds a MBA in Finance and a Bachelor s degree in Architecture. Madhu Vazirani Madhu Vazirani is a Senior Manager in Accenture Research, serving as the Asia Pacific research lead for Financial Services. Madhu s research and consulting experience at Accenture is centered on thought leadership and business strategy in banking and capital markets industry, including financial inclusion across emerging markets. If you have a QR reader installed on your smartphone, simply scan this code to be taken directly to the Accenture Banking Microsite. www.accenture.com/au-en/pages/insightmanaging-capital-quest-growth.aspx Reference 1 International Monetary Fund, Global Financial Stability Report, April 2012 2 International Monetary Fund, Global Financial Stability Report, April 2012 3 A description of the methodology is set out in greater detail in Appendix A. 4 IMF, World Economic Outlook 5 Central Banks websites 6 CIMB Annual Report 7 China Construction Bank Annual Report 8 Institutional Transaction Banking, CBA_ Group Strategy April 2012, pg 11; and Increase in Customer Satisfaction - CBA_ Group Strategy April 2012, pg 7. (http://www. commbank.com.au/about-us shareholders/pdfs/2012-asx Commonwealth_Bank_Group Strategy_Update_19_April_2012.pdf) 9 CBA Annual Report 2011 10 BAML Presentation Sept 2012, pg 15 (http://www.mufg.jp/english/ir/ presentation/backnumber/pdffile slides120906_e.pdf) 11 International Revenues- FY2012 Annual report, pg 95; and Latin America Business Target- BAML Investor Presentation Sept 2012 (http:/www.mufg.jp/english/ir/ presentation backnumber/pdffile/ slides120906_e.pdf) 12 MUFG presentation May 2012. Pg 35 (http://www.mufg.jp/englishir/ presentation/backnumber/pdffile/ slides1203_e.pdf) 13 Annual Report 2011, pg 147. 14 Financial Statements 2011, pg 2. 15 CIMB 4Q2011 Results Presentation, pg 17. 16 ICBC 2011 Annual Report 17 ICBC 2011 Annual Report, 2011 Results Investor Presentation About Accenture Research Group The Accenture Research Group is made up of business and research professionals in locations throughout the world. The team works together virtually to gather and synthesize research data, develop original points of view and conduct primary research. This research is used to support client proposals, engagements and board briefings, as well as to support Accenture s own strategy and market offerings. About Management Consulting Innovation Centre The Management Consulting Innovation Center brings Accenture s thought leadership and ideas to life through highly interactive and facilitated workshop experiences that help organizations explore solutions and develop a course of action for their most important business issues that will differentiate high performers from their peers. The Center also serves as a research hub where industry experts debate, develop and publish insights with specific relevance to the Asia Pacific region to help organizations innovate and outperform their competition. For more information, visit www.accenture.com/mcic. About Accenture Accenture is a global management consulting, technology services and outsourcing company, with approximately 259,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$27.9 billion for the fiscal year ended Aug. 31, 2012. Its home page is www.accenture.com. Copyright 2013 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. 12-3867 / 11-5555