Webinar: A look at the Top-10 China Financial Industry Trends for 2013 February 7th, 2013-17:00 17:45 Beijing Standard Time The webinar will start in a few minutes. For more information about the topics covered in this webinar or Kapronasia, please visit www.kapronasia.com or send us an email: research@kapronasia.com. Twitter: @chinafintech
A look at the Top-10 China Financial Industry Trends for 2013 Prepared by Victor Fan, Ken Ding Moderated by Paul Robinson Presented by Zennon Kapron February 7 th, 2013
Methodology Findings based on Secondary research - internal knowledge, government, vendor and financial institutions reports. Primary research Interviews with FIs, vendors and industry experts. Report purpose: Identify China s Top-10 trends for 2013 Banking NEW Capital Markets Explore the current situation Evaluate the potential opportunities Forecast what will happen in 2013
China s Financial Market Situation Economy growing; banking assets growing 5 year demand for trade finance and international settlement will remain strong Slowing pace of credit lending and non-performing loans are expected to remain risk factors to continued growth China s financial market will continue to reform; 12th Five-Year Plan: financial institutions need more business innovation 12 th Five-Year Plan period : from 2011 to 2015
Financial IT infrastructure Outlook Continued reforms -> pushing banks to invest in IT infrastructure Overlooked opportunities from small and medium banks Local vendors are more familiar with market, more competitive; localization for foreign players is important 20 Chinese banking industry IT spend, 2009-2012 USD Billions 15 10 5 9.0 10.4 12.4 14.6 0 2009 2010 2011 2012 Bankcards include credit and debit cards Source: Kapronasia, PBOC 2010
Top-10 China Capital Market Trends for 2013 1. Increased inflows of foreign Capital into China 2. The gradual recovery of Chinese Stock Market 3. Increased focus on Wealth Management Product risk control 4. Changes in the composition of equity investors 5. Emergence of New Financial Derivatives 6. Consolidation of Market Regulators 7. New IPO Listing / de-listing regulations 8. Pension Funds entering Chinese Stock Market 9. Increasing number of Hedge Funds Entering China 10. Maturation and expansion of Algorithmic Trading
Top-10 China Capital Market Trends for 2013 Trend Number 1: Foreign Capital in China Trend Number 5: New Financial Derivatives Trend Number 9: Hedge Funds Entering China
Top-10 Capital Markets Trends Foreign Capital in China Investment and interest in China driven by: Increased demand from foreign investors Government push for more foreign capital Opening of China s Capital markets to foreign investment will accelerate in 2013 -> increased inflows Although the current scale of QFII and RQFII still small ~1.5% market cap: Number of QFII licensed investors increased greatly in 2012 Likely see better access to domestic investment products / services e.g. QFIIs -> index futures QFII 2 and RQFII 2 For high net worth qualified foreign individual investors to invest in China *QFII Qualified Foreign Institutional Investor *RQFII Renminbi Qualified Foreign Institutional Investor
Top-10 Capital Markets Trends Foreign Capital in China 72 firms obtained QFII licenses in 2012, far more than any year since QFII program inception in 2003 80 70 60 50 40 30 20 10 0 Number of New QFII Licenses 72 32 23 18 12 14 17 13 7 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: CSRC, Kapronasia, 2013
Top-10 Capital Markets Trends Foreign Capital in China CSRC President Guo Shuqing indicated that current scale of QFII and RQFII should shift from 1.5% -> 15% in future Current A-Share 1.5% Future A-Share 15.0% Expected 98.5% 85.0% QFII & RQFII Chinese Capital QFII & RQFII Chinese Capital Source: CSRC, Kapronasia, 2013
Trend Number 1: Foreign Capital in China Trend Number 5: New Financial Derivatives Trend Number 9: Hedge Funds Entering China
Top-10 Capital Markets Trends New Financial Derivatives Likely to be a number of new financial derivatives / products available in the market during 2013 Commodity Futures egg, crude oil, gold, charred coal Egg, like pork etc. key part of daily life Lower cost of investment entry Account minimums Contracts smaller value Financial Futures Government Bond futures Options on Futures
Top-10 Capital Markets Trends New Financial Derivatives History of Government Bond Futures Government Bond futures are actually not completely new 1992 Shanghai Stock Exchange launched Government Bond Futures On 27 March, 1995, the market went through a tremendous fluctuation due to a battle between a government supported bull side and a Wanguo Securities supported bear side Although Wanguo prevailed in end, government intervened, arrested chief manager of Wanguo and shut the market down Re-opening of bond futures market -> important market signal New futures options Which are completely new to the market, will likely be launched in in 2013; testing already in progress -> will be an important hedging tool as a 2 nd -order derivative
Trend Number 1: Foreign Capital in China Trend Number 5: New Financial Derivatives Trend Number 9: Hedge Funds Entering China
Top-10 Capital Markets Trends Hedge Funds Markets today: A-share market is at near-term lows -> relatively cheap opportunity to get into the market Although growing more slowly, Chinese economy is still one of the fastest growing in the world -> better investment returns compared to other markets Demand for more mature finance industry from govern. / investors Government initiatives: Shanghai IFC 2020 Investor needs: lack of investment channel / product for HNWIs Market seems to be ripe for Hedge Funds to enter, but
Top-10 Capital Markets Trends Hedge Funds Barriers to entry 1. Lack of a mature credit system SMEs struggle to obtain bank financing -> informal lending Banks are lending mainly to SOEs Pilot reform in Wenzhou, Zhejiang -> innovative SME financing 2. Regulators still unsure -> hedge fund governance not clear cut 3. Multiple government industry regulators & ownership is unclear -> moving forward in any particular direction is challenging 4. Local competing products: PE funds, trusts and wealth management services in China considered substitutes 5. QFII / QDLP are really only 2 legal means for hedge funds to enter QFII quota not allocated to hedge funds -> some additional legal structuring needs to be done QDLP is currently more suited for PE rather than hedge funds and typically not really suitable for large scale financing
Top-10 Capital Markets Trends Hedge Funds Basic entry options: 1. Opening private retail accounts using Chinese citizen ID cards, which is within the grey area of current regulations 2. H-Shares in Hong Kong another option -> exposure to economy and financial markets; yet not a perfect hedge 3. Additional China-hedge products in HK So although opportunities are large, there are challenges for hedge funds entering, yet we see this being an area of strong development in 2013
Top-10 China Banking Trends for 2013 1. Core Banking Systems for Small and Medium Banks 2. Mobile Payment in China 3. Online-to-Offline (O2O) Business 4. PBOC 3.0 China s EMV Migration 5. Big Data Era for China s Banks 6. Risk management update for Chinese commercial banks 7. China's National Advanced Payment System 2 (CNAPS2) 8. Prepaid Card Market Trend 9. Overseas Shopping 10. The Development of China s Rural Payment Market
Trend Number 3: Online-to-Offline Business Trend Number 5: Big Data Era for China s Banks Trend Number 7: China s CNAPS2
Top-10 China Banking Trends Online-to-Offline Business Enormous amount of online Shopping in China E-commerce transactions projected to rise from 7.5 trillion in 2012 RMB to 18 trillion 2015 to become the largest global market Hand in hand with development of e-commerce, online shopping increasingly popular 221M shoppers by end 2012 China's Online Shoppers, 2010-2015e Population Million 500 450 400 350 300 250 200 150 100 50 0 50.2% 45.7% 41.2% 32.4% 35.2% 36.8% 148 187 221 270 314 363 2010 2011 2012 2013e 2014e 2015e 60% 50% 40% 30% 20% 10% 0% Population of Online Shopper (Million) Num of Online Shoppers / Num of Online Users Source: China Internet Network Information Center, Kapronasia, 2012
Top-10 China Banking Trends Online-to-Offline Business O2O trend is driven by: Increasingly fierce competition in offline consumption => more physical retailers want to focus online Online shopping growing rapidly, but low profit because of price competition => needs innovative / value-add services As an emerging trend, O2O connects online with offline Flexible payment methods => customers shop offline and then pay online or vice versa More interaction opportunities for users and businesses Other value-added services: LBS (location-based services), group buy, COD (cash on delivery)
Top-10 China Banking Trends Online-to-Offline Business Number of O2O users (for shopping) increased 65% in 2012, and is projected to account for over 80% of total online shopping in 2015 The total market size (shopping value) of O2O in 2012 was 75 billion RMB and will grow 50% annually from 2013 to 2015 Million 350 300 250 200 150 100 50 Number of O2O Users in China, 2010-2015E 240 185 135 82 39 293 0 Source: iresearch, Kapronasia, 2012 2010 2011 2012 2013E 2014E 2015E
Top-10 China Banking Trends Online-to-Offline Business Future Trends: Internet companies, payment companies, and e-commerce merchants will invest more into various O2O business models Alipay, the 3 rd largest payment provider, invested 500 million RMB in O2O -> distributed 60,000 POS terminals for COD Baidu, China s biggest search engine, setup its LBS (local-based service) Department specifically to develop their O2O business Going mobile is a promising direction of O2O business Dianping.com* emerging as most popular mobile O2O platform - 432 million downloads of Dianping mobile app as of end 2012 More opportunities for IT vendors Software solutions: O2O platform, data mining, loyalty and other value added services Hardware: IT infrastructure, POS terminals, mobile devices *Dianping is similar to Yelp in the west - local directory service with social networking and user reviews.
Trend Number 3: Online-to-Offline Business Trend Number 5: Big Data Era for China s Banks Trend Number 7: China s CNAPS2
Top-10 China Banking Trends Big Data & China s Banks Big Data is something somewhat new for China s banks Extraordinary progress on China s banking industry => massive amounts of data, especially for large commercial banks Data consolidation into centralized data-warehouses complete for most banks => need cost-effective / easy solutions to manage tremendous data volume Competition domestically and from global players; regulators push on finance reformation => need to innovate to handle and use data Big Data is coming => banks must enhance customer experience and acquire more customers through deep data mining and analysis.
Top-10 China Banking Trends Big Data & China s Banks More Challenges for banks Vast and real-time sensory (customer behavior) data Different types of data from different channels: social media, mobile, online, and physical branches How to collect, store and analyze big data High performance and stable IT infrastructure to support data mining How to analyze data and make the right decision, build stronger customer relationships, and improve risk management Global expansion => improve competitive edge, especially for big banks, such as ICBC and BOC
Top-10 China Banking Trends Big Data & China s Banks Leading to more opportunities for vendors: Analyze massive data sets that cannot be dealt with by using traditional databases and architectures Being able to provide high-end analytics based on big data is real value for banks USD Million 200 180 160 140 120 100 80 60 40 20 0 China Data Mining / BI (Business Intelligence) Bank Spend, 2009-2014E 60 74 96 117 144 180 2009 2010 2011 2012 2013E 2014E Source: Kapronasia analysis, 2012
Trend Number 3: Online-to-Offline Business Trend Number 5: Big Data Era for China s Banks Trend Number 7: China s CNAPS2
Top-10 China Banking Trends China s CNAPS2 Background: Launched in 2007, the China National Advanced Payment System (CNAPS) is composed of three parts: 1. High Value Payment System (HVPS) => real-time processing of large-value payments 2. Bulk-Entry Payment System (BEPS) => small-value payments 3. Settlement Account Processing System (SAPS) for common operations related to settlement accounts 2 nd generation of CNAPS was launched in 2012 to make the processing of both domestic and cross-border RMB payments more efficient among banks
Top-10 China Banking Trends China s CNAPS2 Key advantages of CNAPS2: efficiency, safety and lowered cost Currently Unified connection -> banks can connect with PBOC s payment system through only one MBFE (Merchant Bank Front End) Facilitates cross-border RMB payment and settlement by adopting the international messaging (SWIFT standards) => promoting the global use of the Chinese currency In the past Each bank needed several MBFEs => more cost and less efficient Chinese payment messages needed to be converted manually to international standards: labor-intensive and high cost process
Top-10 China Banking Trends China s CNAPS2 Implications for banks: Need to update their payment systems and optimize their MBFE to connect with the new system More efficient and faster processing means higher standards on risk control Spending on payment systems will continue to grow in 2013 China Banking Payment System Spend, 2009-2013E USD Million 600 500 400 300 200 220 262 311 366 428 504 100 0 2009 2010 2011 2012 2013E 2014E Source: Kapronasia analysis, 2012
Top-10 China Banking Trends China s CNAPS2 Vendors solutions must: Connect banks systems with CNAPS smoothly => make sure payments are processed in real-time Strong processing capability and stable performance Automatic account checking High efficiency and able to process large amounts of data Easy to find and correct errors through the monitoring system Fault - tolerance and repair function
Report Availability Slides will be available in next few days on Kapronasia.com General availability February 13 th Will also be available on: www.kapronasia.com
Webinar: A look at the Top-10 China Financial Technology Trends for 2013 Thank You For more information about the topics covered in this webinar or Kapronasia, please visit www.kapronasia.com or send us an email: research@kapronasia.com. Twitter: @chinafintech