Contents

1. Project Blue - Overview

2. Project Blue Overview - Chinesetranslation

3. SAAAME details

4. Brazil

5. China

6. Hong Kong

7. India

8. Middle East

9. Singapore

10.South Africa

11.Future trends for the FS Indusry

12.Perspectives for the AssetManagement Industry

13.Perspectives for the Bankingand Capital Markets Industry

14.Perspectives for the InsuranceIndustry

Financial services are set for transformation as their role, industry structure andcommercial realities are disrupted by the major trends currently reshaping the globaleconomy. Many businesses will be unrecognisable by the end of the decade and the list ofmarket leaders could be very different as smart and agile players leapfrog slower movingcompetitors. Will your business model still be relevant in the new global economy? How canyou take advantage of the shake-up ahead?

www.pwc.com/projectblue

Project BlueAssessing the future trendsfor financial services

2 PwC Project Blue

PwC Project Blue 1

02 Introduction

04 The new market realities04 Adapting to global instability

08 Planning for transformation08 The rise and interconnectivity of the emerging markets10 Demographic change11 Social and behavioural change12 Technological change13 The war for natural resources16 The rise of state-directed capitalism

18 Taking control of your future

20 Contacts

Contents

2 PwC Project Blue

Is your business model still viable?Three years on from the onset of thefinancial crisis, financial services boardsare working around the clock to deal witha whirlwind of regulatory upheaval andeconomic instability. The urgency toadapt to this complex and uncertainenvironment is leading to reactive short-term strategic responses within manyfinancial services organisations.

There has been little space left in theexecutive agenda to consider the long-term future. Few organisations have evenbegun to establish a clear vision of howtheir business will be effected by the more

fundamental and enduring changesahead and how they can sustaincompetitive relevance in a rapidlyevolving global economy.

Yet some forward-looking organisationsare using the shake-up as an opportunityto redefine their strategies and businessmodels, and take advantage of the once-in-a-generation opportunity when thecompetitive structure of their industries isrelatively open to change. In times ofchange, the gap between high performersand low performers widens. Slowermoving competitors could soon findthemselves struggling to secure sufficientinvestment and overcome decliningdemand and profitability in many of theirkey markets.

Introduction

The financial services industry is at a watershed. While most organisationsare finding it difficult to look beyond the current market turmoil, theirsurvival and success will also depend on being able to deal with the longerterm trends that are transforming the market and competitive landscape.These include the rise and interconnectivity of the emerging markets andstate-directed approaches to economic development. Financial servicesbusinesses are also facing the impact of new technology, demographics,social change and mounting pressure on the worlds most critical naturalresources.

Figure 1: The Project Blue framework

Source: PwC Project Blue analysis

Project Blue Framework

Global instability

Regulatory environment Fiscal pressures Political and social unrestAdapt

Rise and interconnectivityof the emerging markets(SAAAME)

Economic strength Trade Foreign direct investment

Demographic change Population growthdiscrepancies

Ageing populations

Social and behaviouralchange

Urbanisation Global affluence Talent

Capital balances Resource allocation Population

Changing family structures Belief structures

Changing customerbehaviours social media

Attitudes to financialinstitutions

Technological change Disruptive technologiesimpacting FS

Digital and mobile

War for natural resources Oil, gas and fossil fuels Food and water Key commodities

Rise of state-directedcapitalism

State intervention Country/city economicstrategies

Technological andscientific R&D andinnovation

Ecosystems Climate change andsustainability

Investment strategies SWFs/development banks

Plan

Many industryparticipants(particularly in theWest) are focused onadapting to globalinstability; however,the market is changingand opportunityexists for those whosee it.

PwC Project Blue 3

Project Blue draws on the experience ofthe PwC global network and has beendeveloped through interaction withfinancial services leaders around theworld. It provides a framework to helpindustry executives organise theirassessment of a world in flux, debate theimplications for their business, rethinktheir strategies and, if necessary, reinventtheir organisations. Seeing the futureclearly, being first to adapt strategies andbusiness models, and breeding a culturethat shapes, rather than reacts to, thechanging business environment will bethe building blocks of sustainablecompetitive advantage in the future.

The Project Blue framework (see Figure 1opposite) considers the major trends thatare reshaping the global economy andtransforming the behaviour of consumers,businesses and governments. These arethe fundamental underlying drivers, butbusiness opportunities may be definedby a combination of these trends.

For example, infrastructure finance isbeing driven by urbanisation, but thistrend is occurring largely in emergingmarkets, raising issues around sovereignrisk and the role of the state in economicdevelopment in these countries.Such opportunities can only be fullyrealised by rethinking approaches to risk,publicprivate partnership models andshort-term versus long-term returns.

Rather than offering one way forward,the Project Blue framework is flexibleenough to be applicable to all the manydifferent organisations within the sector.The framework recognises that whetherthe drivers of change are threats oropportunities depends on the nature ofyour business and where in the world youoperate. The results will help you to targetinvestment, identify talent requirementsand develop the necessary operationalcapabilities needed to make the most ofyour competitive potential.

In this introductory overview we describethe main drivers of change and theresulting considerations for yourstrategies and business models.

We believe thatbusinesses whichdevelop strategies andbusiness models thatadapt and profit fromthe current globalinstability, as well asposition the businessto ride the waves ofchange in the globaleconomy, will notonly succeed, butprosper.

Adapting to globalinstabilityRegulatory changes, fiscal pressures, andpolitical and social unrest are creating anuncertain business environment. Thisinstability makes the future of financialservices difficult to predict. It alsoconsumes a significant amount ofmanagement time by necessitating afocus on short-term optimisation and insome cases survival, at the expense oflong-term strategy and execution.This unstable environment challengestraditional risk methodologies and hasthe potential to disrupt commercialmodels and organisational structures.The immediate challenge for yourbusiness is how to anticipate and adapt toglobal instability, rather than simply reactto events.

Regulatory changeRegulatory change will be a way of lifefor the foreseeable future, driven by therequirement to better manage risk in theglobal financial system, public outragefollowing the financial crisis and politicalagenda this has engendered. The changestaking place are creating greateruncertainty and complexity now, and theprospect of further industry restructuringand unintended consequences ahead.While the reforms are still in the earlystages of development, they will come toredefine the role of financial institutionsand with it, their strategies and businessmodels. Its vital to look beyondcompliance to understand how thesedevelopments will effect product andbusiness portfolios, how they willdetermine the allowable cost structure ofyour organisation and ultimately howthey will influence the fundamentaldesign of your organisation.

The new market realities

Regulatory changewill challenge you toidentify which areasof your business offerthe greatest potentialand to identify thecore attributes onwhich to establishsustainablecompetitiveadvantage.

4 PwC Project Blue

Fiscal pressuresFiscal pressures are further underminingglobal financial stability by forcing someeconomies to the brink of default,threatening the solvency of weakenedbanks and making capital markets morevolatile. Governments are implementingausterity measures and new taxes, whichare likely to have a substantial impact ongrowth and profitability within thefinancial services sector.

Moreover, while emerging markets haveexperienced a credit boom, driven in partby supplies of Western credit, there areworries that instability within the global

financial system could affect or indeedundermine future lending.

Political and social unrestThe world has become increasinglyunstable in recent years. Factors rangingfrom corruption and repression to fiscalausterity, unemployment and rising foodprices are igniting ever-more frequentsocial and political unrest. A furtherspur for this upsurge in protest andinsurrection is the advent of social media,which is making it easier to communicateinformation, circumvent censorship andcoordinate action.

Figure 2: Regulation expenditure and employees in the UK and Hong Kong

500

400

300

200

100

02002 2003 2004 2005 2006 2007 2008 2009 2010

CAGRTotal 10%200207 8%200710 15%

Sources: FSA, OCC and HKMA websites; PwC analysisNotes: The FSA is the Financial Services Authority, and the HKMA is the Hong Kong Monetary Authority, which are the main financial regulatory bodies for the UK andHong Kong respectively; *The FSAs 12-month reporting period begins in April of the year reported

United Kingdom: FSA* Hong Kong: HKMA

Total FSA regulation expenditure, millions, 20022010

FSA regulation employees, 20022010

Total HKMA regulation expenditure, US$ millions, 20042010

Financial Crisis

5,000

4,000

3,000

2,000

1,000

02002 2003 2004 2005 2006 2007 2008 2009 2010

CAGRTotal 7%200207 3%200710 14%

1000

800

600

400

200

02003

N/A

2004 2005 2006 2007 2008 2009 2010

CAGRTotal 6%200407 4%200710 6%

CAGRTotal 3%200307 2%200710 3%

Financial Crisis

750

600

450

300

150

02003 2004 2005 2006 2007 2008 2009 2010

HKMA regulation employees, 20032010

PwC Project Blue 5

The intensity of regulatory oversight has increased as a result of therecent crisis.

6 PwC Project Blue

Figure 3: Global current account balances, US$ billions, 19902010

n Rest of world n Japan n China n OPEC n United States n Other OECD

Sources: The Turner Review, FSA, 2009; IMFNotes: OPEC is the Organization of the Petroleum Exporting Countries and members are listed in the appendix; OECD is the Organisation for Economic Co-operationand Development; for OECD countries see appendix; current account balance is defined by the IMF as the net transactions in all items other than the financial andcapital items; the major classifications are goods and services, income and current transfers

A current account balance (balance of payments) can be expressed as 1) the difference between the value of exports of goods and services, and the value ofimports of goods and services, or 2) the difference between national (both public and private) savings and investment

1,200

900

600

300

0

-300

-600

-900

-1,2001990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 4: Eurozone current account balances, US$ billions, 19952010

n Other Eurozone n Netherlands n Germany n Italy n Spain n France n Greece n Portugal

Sources: The Turner Review, FSA, 2009; IMF World Economic Outlook, September 2011Notes: Current account balance is the net transactions in all items other than the financial and capital items; the major classifications are goods and services, incomeand current transfers

A current account balance (balance of payments) can be expressed as 1) the difference between the value of exports of goods and services, and the value ofimports of goods and services, or 2) the difference between national (both public and private) savings and investment

400

300

200

100

0

-100

-200

-300

-4001995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Current account surpluses in China, Japan and the Middle East alongsidedeficits in the United States and Eurozone led to macro-imbalances in theglobal economy.

Across the Eurozone, the gap between surplus countries (Germany and theNetherlands) and deficit countries (including Italy, Spain, France andGreece) grew.

PwC Project Blue 7

Figure 5: A more unstable world Political instability index,*by country,2007 and 200910

10

9

8

7

6

5

4

3

2

1

00 20 40

Proportion of countries, globally

60 80 100

20092010 2007

Sources: Economist Intelligence Unit ViewsWire; PwC analysisNote: Index measured for 164 countries; *The political instability index represents the level of political instabilityin a country, with a greater value indicating that the country has greater instability. The chart shows the globalchange in political instability between 2007 and 2009/10. It plots the index against the proportion of countrieswith that score. For example, in 2007, around 45% of countries had a score greater than 5 while in 2009/10,around 75% did, indicating greater levels of political instability in 2009/10

Less politically unstable

More politically unstable

Increase in politicalinstability

Over the past three years the world has becomeincreasingly unstable.

Your business willneed to consider howheightened politicalinstability could effectyour risk profile,especially investmentsand operations incountries andcommercial sectorsthat are potentiallyvulnerable to protestand unrest.

8 PwC Project Blue

The rise andinterconnectivity of theemerging marketsThe focus of global growth has shifted.Western economic dominance is arelatively recent phenomenon and thedevelopments we see are essentially arebalancing of the global economies.

While many commentators are focusingtheir attention on what are considered to

be the largest and fastest growing BRICmarkets (Brazil, Russia, India and China),the commercial potential is far greaterthan these countries alone.

Along with the growth and size of theemerging markets, its important toappreciate the interconnectivity of thetrade and investment flows betweenthem, which are growing much fasterthan the traditional routes fromdeveloped-to-emerging and developed-to-developed countries (see Figure 6).Indeed, South America, Africa, Asia andthe Middle East (SAAAME) are emergingas an increasingly interconnected tradingzone, which, in physical terms at leasteffectively bypasses the West.

Planning for transformation

Figure 6: World trade flows, SAAAME and non-SAAAME, US$ trillions, 2010

Trade value: $6.92trCAGR 200210: 8.0%

Non-SAAAME

SAAAME

Trade value: $2.82trCAGR 200210: 19.4%

Trade value: $2.67trCAGR 200210: 13.6%

Trade value: $2.16trCAGR 200210: 12.9%

Sources: WTO; PwC analysisNote: Russia and the Commonwealth of Independent States (CIS) have not been included in SAAAME definition because trade is largely international and/or withEurope. Mexico is excluded as it trades mainly within the North American free trade zone and less with SAAAME. Both areas remain very important growth markets andshould be considered in relation to the SAAAME region.

South America, Africa, Asia and the Middle East (SAAAME) are emerging asan increasingly important network for international trade.

PwC Project Blue 9

The SAAAME region covers a significantproportion of the worlds land surfaceand has access to many of its naturalresources. It also has substantialmanufacturing capabilities and accessto the labour to support this, large andgrowing consumer markets, and asizeable pool of both educationalestablishments and well-educatedprofessionals. Its significant liquidinvestable capital includes a growing(albeit slowly) proportion of globalassets under management (AUM) andnearly 80% of overall sovereign wealthfund AUM.1

To make the most of the opportunitiesfor growth, your business will need tocontend with rising consumerexpectations in these markets, a morecomplex risk environment and thegrowing battle for talent. As an increasingamount of emerging-to-emerging marketcommerce misses out the West altogether.Western institutions also need to findways to tap into business flows they maynever physically see.

SAAAME financial institutionsSuccess will depend on being able todevelop your organisational skills to keeppace with the growth of SAAAMEmarkets, to build the customer-centricmodel needed to keep pace withconsumer expectations, and to constructbusiness models and partnerships that arerelevant to the markets you serve. Youalso need to work out how to attract andretain scarce talent when competitors andcompanies from other sectors are lookingto lure your best people away.

Western financial institutionsThe opportunities are evident, butregulation and local competition aremaking it increasingly difficult topenetrate SAAAME markets. Successwill depend on being able to deliverproducts and capabilities that domesticplayers cannot do and being sensitiveto the realities of doing business inthese countries.

Our latest researchanticipates thatdomestic credit inChina could overtakethe US by 2023 andIndia will become thethird largest domesticbanking sector afterChina and the USby 2050.2

1 Sovereign Wealth Fund Institute, 2010 andPwC analysis

2 PwC, Banking in 2050, 2011 update

Demographic change Your customers and their demands arechanging. Population growth and declinein different countries, combined with anageing population around the world, willcreate a markedly different consumermarket by 2050.

In some European countries, the workingpopulation will decline by more than10%3 and this gap will need to be filledby immigration, later retirements andproductivity gains, which could beaccelerated by growth of the digitalmachine-to-machine economy.

While much has been made of the impactof ageing in the Western world, the mostdramatic changes will be seen inemerging markets as birth rates and lifeexpectancy around the world begin toconverge (see Figure 7).

Your business will need to anticipatedemographic developments and bringproducts and services into line with thechanging customer base in the marketsyou serve.

As people live longer and state supportdeclines, the competitive frontlinewill likely shift from lending towardshelping people to fund and manage theirretirements. Reputation and trust willbe crucial in sustaining market share inan increasingly empowered andknowledgeable retirement market.

10 PwC Project Blue

Figure 7: Asia, total population against mortality and fertility rates, 20002050

6,000 24

20

16

12

8

4

0

5,000

4,000

3,000

2,000

1,000

0

n Population Fertility rate Mortality rate

Sources: United Nations Population DivisionNotes: Mortality and fertility rates are the number of births and deaths per 1,000 population; population sizebased on UN population figures for 200010 and medium variant projections for 201550; five-year populationfigures calculated using average across the five years; population forecast by UN using estimated populationat 1 July 2010 and assumptions for mortality, fertility and net migration rates

Population size,five-year average,millions Forecast

Rate,per 1,000

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Population CAGR 20102050: 0.53%Population CAGR20002010: 1.14%

In Asia, population growth is forecast to slow asmortality and fertility rates converge.

The number of peopleaged over 65 in Japan,Italy and Spain isforecast to be 60% ofthe total working agepopulation (1564)by 2050.4

3 United Nations Department of Economicand Social Affairs, August 2011

4 World Population Prospects The 2010Revision, Volume I: ComprehensiveTables, United Nations, 2011; PwCanalysis

Social and behaviouralchangeSocial and behavioural change isoccurring at a faster pace than at anytime in history.

Consumers are more informed andempowered than ever before, and oldnotions of value and loyalty are breakingdown as digital technology allowsthem to both compare value and expandtheir choices. Continuing digitaltransformation is also changing the waypeople interact, share ideas and accessproducts and services, with socialnetworking now making up one in sixminutes of time spent online.5

In emerging markets, increasing affluenceand urbanisation are creating new andexpanding markets for financialinstitutions. City dwellers average wealthand demand for financial products andservices are generally much higher thantheir rural counterparts. Indeed, someobservers now see the real distinction inthe financial services sector as notemerging and developed markets, butrather city and rural areas.

How your company responds to thesesocial and behavioural changes coulddefine your market position for decadesto come, providing a once-in-a-generationopportunity to put clear distance betweenyou and your rivals if you judge theimplications correctly and a mortal threatif you dont. The key differentiator will bethe ability to anticipate where the marketis going on the back of these changesand get in ahead of your competitors.Experience in the travel and musicindustries suggests that companies thatare slow to grasp the implications ofchange could be quickly marginalised.

PwC Project Blue 11

The global middle class is forecast to grow byaround 180% between 2010 and 2040. Asia isexpected to replace Europe as the region withthe highest proportion of the global middle classby 2015.

Figure 8: Forecast size of middle class, by region, millions, 20102050

2010 2015 2020 2025 2030 2035 2040 2045 2050

CAGR201040: 4050:

Overall 3.5% -0.7%

n Sub-Saharan 5.9% 4.2%Africa

n Middle East 3.5% 1.8%& North Africa

n Central & 2.3% 1.0%South America

n North America -0.5% -1.2%

n Asia Pacific 6.3% -1.1%

n Europe -0.3% -1.9%

Sources: European Environment Agency; OECD Development Centre; PwC analysisNotes: Data is forecast and was last uploaded by the European Environment Agency on 29 November 2010;middle class is defined as households with daily expenditures between USD10 and USD100 per person inpurchasing power parity terms

6,000

5,000

4,000

3,000

2,000

1,000

0

Over the next 30 years the urban population isforecast to grow by almost 1.8 billion people. Mostof this urbanisation is expected in Asia and Africa,increasing the worlds urban population to 5.6billion6 and creating one of the most importantcompetitive battlegrounds for financial servicesbusinesses.

5 ComScore, July 2011

6 United Nations, Department of Economic andSocial Affairs, Population Division, 2009 Revision

Technological changeTechnology has always shaped societyand commerce in unpredictable ways,changing customer behaviour, spawningnew enterprises and wiping out existingbusinesses that are unable to keep pace.As the speed of technologicaldevelopment accelerates, the risk offalling behind becomes more acute.

Breakthroughs in biotechnology,nanotechnology and other frontiers ofresearch and development (R&D) areincreasing productive potential andopening up new investmentopportunities. Whole new industries arebeing created, which could have asignificant impact on the size and shapeof the worlds manufacturing, andhigh-tech sectors and the companies thatoperate within them. The key question foryour business is: Are you ready and able

to support and capitalise on thesedevelopments? These emergingtechnologies and the industries theygenerate also carry a new set of risks,which need to be fully understood if youare to make the most of the financingopportunity.

In the digital world, the internet, mobilephones, data analytics and cloudcomputing are well established. Yet, manycompanies across all sectors are stillgrappling with how these developmentswill affect consumer expectations, theway they interact with their customersand the underlying business models thatsupport this.

While the transformational impact ofdigital technology has been slower toreach financial services than other fieldsof commerce, the sector has finally

reached a tipping point. Enhanced digitalinteraction would offer your business theopportunity to engage more closely withits customers and increase wallet share.At the same time, digital transformationcould be highly disruptive, allowing newentrants to break into the banking market,pick off the most valuable revenueopportunities and seize control ofcustomer relationships. In a digital world,it will be harder for your business todifferentiate itself, especially if serviceexpectations are set by non-financialcompetitors. The ease of switchingafforded by digital technology could alsodrive down margins and profits. Someorganisations could be strained tobreaking point.

12 PwC Project Blue

Figure 9: Income split of those who currently use a mobile to purchasefinancial services, all geographies*, 2011

Sources: PwC Digital Tipping Point Survey 2011; (Based on approximately 3,000 responses) PwC analysisNotes: *Geographies surveyed were United Kingdom, United Arab Emirates, Poland, Mexico, India,Hong Kong, France, China and Canada

Proportion of responses, %

100

80

60

40

20

0Mass Market Savings >25,000 Savings >50,000

More than 40% of people using social networksites in the US are interested in interacting withfinancial services firms via Facebook andMySpace.7

The demand for branchless banking is significant in all segments of thepopulation, regardless of geography.

The war for naturalresourcesThe expanding size and prosperity ofthe global population is leading torapidly rising consumption and puttingunsustainable pressures on the worldsmost critical natural resources.

Even basic commodities such as waterare now in increasingly short supply,providing the spur for the developmentof new markets, technologies andinvestments on the one side and thepotential for unrest, commercialdisruption and protectionist behaviouron the other. The growing shortages of

resources will be exacerbated by climatechange, heightening catastrophe risk andputting further pressure on land, watersupplies and food production.

The war for natural resources is likelyto play out on multiple fronts. Examplesinclude the response to the increase inwater withdrawals, which are forecastto rise dramatically. Food production willnaturally gravitate to more plentifulsources of water, which may be outside acountrys border and therefore extend thesupply chains of and potential cost offood production.

PwC Project Blue 13

7 The Social Tools Consumers Want From TheirFavourite Brands, Forrester, 16 April 2009

14 PwC Project Blue

In turn, demand for energy is forecast toincrease by around a third by 2030.8

While alternative energy sources will gainmarket share, the overall global demandfor oil, gas and coal is forecast to remainstrong, particularly as technologytransforms currently uneconomic sourcesof oil.

Globalisation is creating global supplychains that are tying countries togetherthrough trade as never before. China andother manufacturing-based economiesdepend on emerging markets in Africaand South America to supply theirindustries. Conducting business in someof these countries is likely to require newinvestment models and fresh approachesto understanding and mitigating risk.

Economic disparities are likely to spurshort-term responses in production andconsumption that undermine long-termsustainability. Shortages could causesocial and political instability, geopoliticalconflict and irreparable environmentaldamage.

The war for natural resources and theimpact of climate change are phenomenathat will have a fundamental impact onthe way people live and companies dobusiness. Its likely to become one of themain, if not the key driver of, governmentpolicies. It will also open up new marketsand business models for organisationsthat both understand the changingdynamics of supply and demand, andknow how to mitigate the risks.

As environmental risk increasinglyimpinges on clients (examples includehigher resource costs, pollution damageand changes in productive land), yourbusiness will need to assess the impacton your loan book, risk profile andinvestments.

Figure 10: Model simulations of global warming by the Intergovernmental Panel on Climate Change

Temperature changeC at 209099 relative to 198099

Scenario Best estimate Likely range

High growth 3.4 2.05.4

Moderate growth 2.8 1.74.4

Low growth 1.8 1.12.9

Constant CO2 0.6 0.30.9

Sources: Intergovernmental Panel on Climate Change Fourth Assessment Report: Climate Change 2007, NASA Earth ObservatoryNotes: Surface warming is relative to 19801999

GlobalTemperatureAnomaly, C

5.0

4.0

3.0

2.0

0.0

-1.01900 2000

Year

2100

Variability between models

High growth (A2)Moderate growth (A1B)

Low growth (B1)

Constant CO2

Global scientific consensus is that temperatures could rise between 2C and5C by the end of the 21st century.

PwC Project Blue 15

Water stress is often localised. For example,within the high population areas of the NorthChina Plain, aquifers are reported to havedepleted significantly. The North China Plain ishome to around 10% of Chinas population andincludes the cities of Beijing and Tianjin.9

Higher growthscenarios

Figure 11: Possible climate impact of a rise in global temperatures (Stern Review)

Temperature rise 1C 2C 3C 4C 5C

Source: Stern Review, 2006

Small glaciers in theAndes disappearcompletely, threateningwater supplies for 50million people

Water Potentially 2030%decrease in wateravailability in somevulnerable regions

14 billion morepeople suffer watershortages, while 15billion gain water,which may increaseflood risk

Potentially 3050%decrease in wateravailability inSouthern Africa andMediterranean

Possible disappearanceof large glaciers inHimalayas, affectingone-quarter of Chinaspopulation andhundreds of millionsin India

Modest increases incereal yields intemperate regions

Food

Health

Sharp declines in cropyield in tropical regions(510% in Africa)

150550 additionalmillions at risk ofhunger (if carbonfertilisation weak)

Agricultural yieldsdecline by 1535%in Africa

Reduction in wintermortality in higherlatitudes

4060 million morepeople exposed tomalaria in Africa

13 million morepeople die frommalnutrition (if carbonfertilisation weak)

Up to 80 million more people exposed to malariain Africa

Land Permafrost thawingdamages buildingsand roads in parts ofCanada and Russia

Up to 10 million morepeople affected bycoastal flooding eachyear

1170 million morepeople affected bycoastal flooding eachyear

7300 million morepeople affected bycoastal flooding eachyear

Sea level rise threatenssmall islands, low-lyingcoastal areas (e.g.Florida) and majorworld cities such asNew York and London

Environment/Ecosystems

80% bleaching ofcoral reefs, includingGreat Barrier Reef

High risk of extinctionof Arctic species,including polar bearand caribou

2050% of speciesfacing extinction(according to oneestimate)

Loss of around half Arctic tundra

Abrupt andlarge-scaleimpacts

Atlantic thermohalinecirculation starts toweaken

Potential for Greenland ice sheet to begin melting irreversibly, accelerating sea level rise and committing worldto an eventual 7 m sea level riseRising risk of abrupt changes to atmospheric circulations, e.g. The monsoonRising risk of collapse of West Antarctic Ice Sheet and Atlantic thermohaline circulation

Continued increase inocean acidity seriouslydisrupting marineecosystems andpossibly fish stocks

Low growthscenario

The impact of global temperature rises could be extreme.

8 International Energy Agency International EnergyOutlook 2011

9 World Bank China Agenda for Water SectorStrategy for North China, April 2001

16 PwC Project Blue

The rise of state-directedcapitalismThe pendulum swing away from the freemarket towards state-directed capitalismin the wake of the financial crisis ismanifesting itself in governmentsincreasing direction of financial servicesand the wider economy. Governments arealso becoming more competitive in theway they vie with other states for talent,investment and the primacy of keyfinancial, industrial and other productivecentres in the countries they govern.

Payback for supportWestern governments have spentconsiderable sums to stabilise theirfinancial systems. Greater stateintervention and pressure on financialinstitutions to support the real economy(e.g. through increased bank lending tosmall businesses) are likely to be a keypart of the payback required.

Greater intervention is the paybackfor the bailoutsProfitability and growth are likely to bemore dependent on the fortunes of thereal economy than before the financialcrisis, which will in turn be more closelytied to government policies.

Pledged andutilised support, % of GDP, 2009

14

12

10

8

6

4

2

0AdvancedG20

economies

EmergingG20

economies

AverageG20

economies

UK US

Figure 12: Costs to governments of supporting the financial sector,percentage of GDP, as at December 2009

n Utilised support n Additional pledged support

Sources: A fair and substantial contribution by the financial sector, IMF, June 2010Notes: Data based on International Monetary Fund (IMF) survey sent to all G-20 members in December 2009

The high public cost prompts many Westerngovernments to take a more active role.

PwC Project Blue 17

As such, it will be important to work withindustry and consumer groups to helpinfluence and shape government policies.It will also be important to develop astrong relationship with government tomake sure your strategy anticipates andis aligned to government priorities andinvestment plans. Globalisation isintensifying the competition betweencountries and cities. Local leaders areever more aware of their sources ofcompetitive advantage and how to attractthe businesses, facilitate investment ininfrastructure and the secure supplychains needed to make the most of thispotential. As cities expand and develop,local and central government face thechallenges of how to attract the necessaryinvestment in housing and infrastructurewhile balancing the inevitable strains onnatural resources.

Many governments, particularly in theSAAAME states, realise that the privatesector cannot finance and deliverimportant national economic and socialpriorities on its own. As a result, werelikely to see an increase in PublicPrivatePartnerships (PPP), particularly inemerging markets, as well as government-to-government agreements to mitigatesovereign risks, mobilise sovereign capitaland piece together industry supply chains.

PPP investment aroundthe world rose fromUS$50 billion in 2002to US$170 billion in2010.10

10 World Bank, Infrastructure Database, dataextracted from database on 30 November 2011;PwC analysis

18 PwC Project Blue

Being able to see into the future andjudge the implications will give you aninvaluable edge. Project Blue is designedto provide you with a framework fororganising your views of the globaldevelopments ahead, the implications foryour business and your resulting visionfor the future.

Coming through strongerAs weve developed Project Blue, wevespoken with business leaders around the

world to assess how these drivers willaffect them. Drawing on these discussionsand our research into the impact of themain forces of change, the graphic (seeFigure 13) highlights the key areas thatboards will need to assess and address asthey look to sustain and sharpencompetitive relevance.

Shaping the futureIts vital that your business plays an activepart in the debate over the changesahead. This includes engaging as closelyas possible with clients, regulators,governments, consumer and communitygroups, and other key stakeholders to

Taking control of your future

Disruption to long-established business models is the one clear certaintythat the future holds. The key question is whether the various forcesshaping the sector present an opportunity or a threat to your business.

Sources: PwC analysis

Shaping the future

Economic rebalancing

Industry structure

Fiscal and monetary policy

Regulation

Social policy

Investor expectations

Community engagement

Reinventing the organisation

Rethinking the strategy

New stakeholder objectives

Short-term adaptation

Alignment to global trends

Determining risk appetite

Redefining performance targets

Portfolio rebalancing

Relative competitive advantage

Figure 13: The CEO agenda

1 2

Governance

Board compositionand qualifications

Executive remuneration

Regulatory compliance

Risk management

Financial reportingand controls

Target operating model

Legal and physicalstructure

Tax and capitalefficiency

Allowable cost structure

Technology

Partnership structure

People and resources

Competitive advantage

Seeing the future

War for talent

Constant reinvention

Product innovation

Strategic agility

Operational alignment

Project Blue assesses the impact of these changeson all aspects of the leadership agenda.

3

make sure the full impact is understoodand help get important messages across topolicymakers ultimately driving animproved financial system for all.

Rethinking your strategyThe pressing challenge for allorganisations is how to balance theadaptations needed to deal with thecurrent instability with the longer termchanges in strategy, operations andbusiness focus demanded by the driversidentified in Project Blue. Your businesscan gain significant market share if itadapts to the reforms and changingcommercial realities faster than yourcompetitors.

Reinventing your organisationAt the heart of sustainable commercialmodels are the organisational capabilitiesand flexibility needed to identify andrespond proactively to changing customerand market demands. Operations willneed to become more agile toaccommodate changing conditions.Risk and finance teams also need tobecome more proactive in managing arapidly changing and often uncertainrisk and regulatory environment.Organisational and people strategieswill be key differentiators in determiningwhich businesses are most relevantgoing forward.

As the CEO agenda highlights, theunderlying considerations include whatkind of leadership is required in thiscomplex and uncertain environment,how your risk profile is likely to change,and what kind of governance andreporting systems will be required toplot a successful course through thechanges ahead.

The businesses that come out on top willhave a superior capacity for innovationand constant reinvention, agile enoughto quickly capitalise on emergingopportunities and with the strategicapproach to talent needed to make surethat the right people are available in theright places at the right time. If yourbusiness is constantly scrambling to keeppace with unfolding events, its going tofind itself on the back foot competitivelyand risks losing out.

A reshaped sectorDealing with the mega-trends highlightedin Project Blue cant be put off while youcontend with seemingly more immediateconcerns. Some developments such as theincrease in regulation, state interventionand possible protectionism that form partof the rise of state-directed capitalismare already manifesting themselves.Others, such as the increasing ageingand urbanisation of emerging marketpopulations and their impact on productand growth strategies are moving rapidlyonto the horizon. How you plan andinvest now will determine your futurechances of success.

So how will strategies change and whatkind of financial institutions will emergefrom the shake-up ahead?

SAAAME financial institutionsMany emerging markets remain relativelyunder-penetrated and have considerableroom for further development in boththe size and sophistication of thefinancial services sector. Traditionalmodels are still viable in these markets,but new partnership models withtelecommunications and retail companiesto reach the unbanked will continue togrow. Your business will need to keeppace with steadily increasing customerexpectations and associated changes inthe regulation, complexity and risk profileof your operations. The pressing prioritiesalso include the need to engage in thewar for talent to make sure yourorganisation can develop the right skillsto meet the challenges and seize theopportunities in your markets.

Western financial institutionsThe constraints on funding and domesticgrowth will make it increasingly difficultto be all things to all people (ubiquity).Successful institutions are therefore likelyto adopt a more ruthless focus on theircore relationships and sources of value(precision). Were already seeing sharpercustomer segmentation, greater disciplinein deploying resources and withdrawalfrom markets that offer little prospect ofdelivering an economic return. This isunderpinned by a better understanding ofcomponent costs and real returns.

The key considerations are: What exactlyare my core sources of value, whowill be my most important customersand who will be my main competitors inten years from now? in short,continually re-evaluating what you needto do to ensure your business modelremains relevant.

PwC Project Blue 19

20 PwC Project Blue

Were working with a range of financial services organisations to facilitatediscussions on the impact of the mega-trends shaping their industry andwhere and how they can compete most effectively. If youd like to discussany of the issues raised in Project Blue, please contact those listed below, oryour usual PwC contact.

Making sense of anuncertain future

Nigel VooghtGlobal Financial Services Leader(PwC UK)Tel: +44 (0) 20 7213 3960 Email: nigel.j.vooght@uk.pwc.com

Andrew Dawson Author and Global lead for Project Blue(PwC UK)Tel: +44 (0) 20 7804 0130 Email: andrew.j.dawson@uk.pwc.com

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents donot accept or assume any liability, responsibility, or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the informationcontained in this publication, or for any decision based on it.

For more information on Project Blue, or other Financial Services programmes, please contact ine Bryn, Global & UK Financial Services Marketing, PwC (UK)on +44 207 212 8839, or aine.bryn@uk.pwc.com.

For additional copies, please contact Maya Bhatti, Global & UK Financial Services Marketing, PwC (UK) on +44 207 213 2302, or maya.bhatti@uk.pwc.com.

www.pwc.com/projectblue 2012 PricewaterhouseCoopers LLP.All rights reserved. In this document, PwC refers to PricewaterhouseCoopers LLP (a limited liability partnership in the UnitedKingdom). As the context requires, PwC may also refer to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separatelegal entity. Each member firm is a separate legal entity and PricewaterhouseCoopers LLP does not act as agent of PwCIL, or any other member firm, nor can it controlthe exercise of another member firm's professional judgement or bind another member firm or PwCIL in any way.

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(Mervyn Jacob)+852 2289 2700mervyn.jacob@hk.pwc.com

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www.pwc.com/projectblue 2012 (PwC) PricewaterhouseCoopers International Limited () ,

Rapidly accelerating growth within SouthAmerica, Africa, Asia and the Middle East(SAAAME) is leading to a radical shake-upin the competitive environment forfinancial services businesses, both withinthe SAAAME region and beyond. How willthe industry landscape be transformed?Where do the real opportunities lie andhow can your business capitalise on them?

www.pwc.com/projectblue

Project BlueCapitalising onthe rise andinterconnectivityof the emergingmarkets

2 PwC Project Blue

PwC Project Blue 1

02 Foreword

04 IntroductionThe real story behind the headlines

06 Section 1The shake-up ahead: Why SAAAME is so important

06 The shifting centre of gravity

12 The new battlegrounds

16 Section 2The CEO Agenda: Aligning your business with the new globaldynamics

16 Shaping the future

19 Rethinking your strategy

24 Reinventing the organisation

28 ConclusionA new DNA

29 Making sense of an uncertain future

32 Project Blue framework

Contents

2 PwC Project Blue

Project Blue explores the major trends that are reshaping the competitive andinvestment landscape for financial services (FS) businesses. It draws on theperspectives of industry leaders and PwCs network around the world. It also bringstogether a huge amount of research into the forces shaping the global economy,customer expectations and government policy. The key aim of Project Blue is to providea framework to help CEOs assess the implications of these trends and use this analysisto drive sustainable strategic and operational advantage.

The rise and interconnectivity of the emerging markets is in many ways the most far-reaching of the developments facing FS organisations, worldwide. This paper looks atthe opportunities for business development created by the accelerating growth inSouth America, Africa, Asia and the Middle East (together forming what PwC termsSAAAME) and how to sustain relevance in the new global economic order. The paperis designed to be relevant to organisations based within SAAAME markets and thosebased outside.

There could be no universally applicable formula for success when countries and evenregions within countries within SAAAME are so markedly different. Indeed, those thathave ignored the considerable cultural and commercial complexities of doing businessin these markets have very quickly come unstuck. What this paper does seek to provideis a stable starting point and clear set of considerations for strategic evaluations, bothnow and in the future.

I hope you find this paper interesting and useful. If you would like to discuss any of theissues raised, please feel free to contact either me or one of my colleagues listed onpages 2931.

Nigel VooghtGlobal Financial Services Leader, PwC, (UK)

Foreword

Welcome to Capitalising on the riseand interconnectivity of theemerging markets, the first in aseries of papers being published aspart of Project Blue.

PwC Project Blue 3

PwC Project Blue 3

The rise and interconnectivity of the emergingmarkets is in many ways the most far-reaching ofthe developments facing FS organisations,worldwide.

4 PwC Project Blue

As intra-SAAAME trade proliferates, an ever-greater proportion of global commerce isset to bypass the West altogether, leaving Western financial institutions at risk of beingcut out of the loop. They need to find ways to tap into this emerging-to-emergingmarket commerce if they are to sustain competitive relevance.

The window of opportunity that allowed some FS groups to rapidly build up theirinternational footprint prior to the global financial crisis now appears to have closed.All international groups are likely to face restrictions on foreign ownership andentrenched competition from dominant local rivals, especially within the mostpromising SAAAME markets. Even if some market share is available for acquisition, theprice may be prohibitive for groups affected by the crisis. A more targeted growthmodel is emerging as a result, in which the ability to differentiate, develop nichemarkets and gain access to new digital distribution networks is critical.

Institutions based within the SAAAME region have the advantage of being closer to thenew epicentres of global trade and growth. But the development of financialinfrastructure, governance and regulatory practices may still have some way to gobefore the potential of the different markets can be fulfilled. As markets develop, FSorganisations will need to contend with rising consumer expectations, a more complexrisk environment and the growing battle for talent. Failure to keep pace could leaveestablished players at risk of losing business to sharper competitors includingambitious start-ups and Western organisations.

Five out of the top ten banks by market capitalisation are based within SAAAME.2 Yet,their global footprint is far less extensive than their leading Western counterparts. Thebig question is: Do they have the opportunity or appetite to begin to rival the globallyoperating players? Do they simply follow the international expansion of their domesticcustomers, or limit their ambitions to being regional players as most have done to date?Alternatively, do they seek to acquire or partner with Western institutions as they lookto develop the technological capabilities, product expertise and managementexperience needed to compete on the global stage? How would such strategies affectthe business plans and prospects for todays globally active elite?

As the Project Blue framework highlights, the backdrop to these developments is arapidly changing social, demographic, environmental, political and technologicallandscape. What could prove disruptive and even threaten the existence of some FSbusinesses could provide others with a once-in-a-generation opportunity to leapfrogtheir competitors. All organisations will need to consider how these coalescing trendswill affect the commercial potential and risk profile in their current operatingterritories and those theyre targeting for the future.

IntroductionThe real story behind the headlines

In December 2011, it was reportedthat the GDP of Brazil hadovertaken that of the UK.1 For manyobservers, this news markedanother major milestone in theaccelerating shift in globaleconomic power from developedWestern states to the emergingmarkets of South America, Africa,Asia and the Middle East(SAAAME). Yet, the real story isnot so much the speed of growthwithin SAAAME, but howinterconnected the trade flowsbetween these markets havebecome.

1 Centre for Economics and Business Research/BBCNews Online, 26.12.11

2 Financial Times Global 500 and PwC analysis

PwC Project Blue 5

What do we mean by SAAAME?SAAAME refers to South America, Africa, Asia and the Middle East. SAAAMEdoesnt include Japan as this is a large G7 developed economy. Mexico isexcluded as it trades mainly within the North American Free Trade Agreementzone and less with SAAAME. For now, Russia and the Commonwealth ofIndependent States (CIS) are also excluded from SAAAME as trade is largelyinternal or with Europe, though trade is increasing with SAAAME from itspreviously low base and it may not be long before Russia is included to formSAAAMER. To provide an indication of future trends, many of the forecasts inthis publication compare the G7 developed markets with an E7, which bringstogether the seven largest emerging economies (China, India, Russia, Brazil,Turkey, Mexico and Indonesia).

6 PwC Project Blue

The shifting centre of gravity

Rapid rise: Financial crisis accelerates shift in global economic powerThe financial crisis has accelerated the rise in economic importance of SAAAMEmarkets as they continue to expand, while growth in many developed markets hasstalled. This shift is reflected in projections for the growth and eventual size of thefinancial services markets within the major E7 emerging economies, which are set toovertake their G7 counterparts over the next 20 years (see Figure 1).

The worlds two largest banks by market capitalisation are based in China.4 Lookingahead, Chinas banking assets could overtake the US by around 2023.5 India hasparticularly strong long-term growth potential and could become the third largestbanking sector by assets after China and the US, by 2050.5 In turn, Brazil could rise tofifth place in the global banking rankings by 2050.5 Two of its banks already feature inthe global top 20 in terms of market capitalisation and are seeking to follow thecountrys fast growing multinational corporations by developing their presence in Asia,Africa and South America.

Section 1The shake-up ahead: Why SAAAME is so important

Both domestic and foreign financialinstitutions see clear growthpotential in SAAAME.3While asimple extrapolation of economicgrowth and the relatively lowmarket penetration as a proportionof GDP provides some indicationof the market potential, the waythese markets develop and theimplications for the FS sector maybe more complex and competitivelyfar-reaching, as we explore inthis section.

Figure 1: Emerging markets overtake G7

GDP of G7 and E7 countries at Purchasing PowerParity (PPP), US$ billions, 2009 and 2050

Proportion of global banking assets,% 2009 and 2050

250,000

200,000

150,000

100,000

50,000

0

100

80

60

40

20

02009 2050 2009 2050

Sources: PwC World in 2050 (January 2011); Banking in 2050 (May 2011); PwC analysisNotes: G7 = US, Japan, Germany, UK, France, Italy, Canada; E7 = China, India, Brazil, Russia, Indonesia,Mexico, Turkey

3 More than half of the 368 FS leaders in PwCs 15thAnnual Global CEO Survey (published in January2012) see emerging markets as more importantthan developed markets to their companys future

4 Financial Times Global 500 and PwC analysis

5 Banking in 2050, 2011 update, published byPwC on 18.05.11

CAGR200950

n E7 4.7%

n G7 2.1%

n Restofworld

n E7

n G7

PwC Project Blue 7

As the centre of gravity within global FScontinues to shift, Hong Kong andSingapore have come to rival London andNew York as the worlds leading financialcentres. Regional centres such as SoPaulo are also seeing a rapid rise. As theglobal FS market becomes moremultipolar and SAAAME institutions lookto expand overseas, their Westerncounterparts could become targets foracquisition. Western businesses could beespecially attractive to SAAAME giantsthat are looking to acquire thetechnology, product expertise, ormanagement experience that would allowthem to compete on the global stage.Takeover prices in some developedmarkets are generally favourable for now,especially within the mid-market, butmay not be so for long.

Challenges ahead: Creatingthe platform for continuedgrowthSAAAME is clearly not a homogeneousregion. Countries vary in economicgrowth, social indicators and wealthdistribution, which is reflected in thelevels of FS development and penetration.Figure 2 highlights the variations bycomparing insurance penetration indifferent regions around the world. AsFigure 3 highlights, countries also vary intheir competitiveness, safeguards againstcorruption and ease of doing business.

Figure 2: Insurance penetration in selected SAAAME markets

Country Total life and non-life Change on Premiums as a Premiums perinsurance premiums 2009* (%) percentage capita (US$)

2010 (US$bn) of GDP

Latin America and the Caribbean 128 8.1 2.6 219

Brazil 64 10.7 3.0 329

Asia** 1,163 7.3 6.1 282

India 74 (0.4) 4.7 61

China 215 26.2 3.8 158

Hong Kong 25 7.9 11.3 3,599

Indonesia 12 16.1 1.6 50

Singapore 17 6.9 6.1 2,823

South Korea 114 7.5 11.1 2,332

Middle East and Central Asia 34 7.1 1.5 107

Saudi Arabia 4 6.5 1.0 166

UAE 6 8.4 2.0 1,268

Africa 62 (8.3) 3.6 61

Egypt 2 (9.4) 0.7 19

South Africa 49 (9.9) 13.4 962

*In real terms, i.e. adjusted for inflation at local consumer price indices. **Includes Japan Source: Swiss Re Sigma No. 2/2011, Statistical Appendix, January 2012

The challenges ahead include increasingmarket penetration, putting in place anappropriate legal and regulatoryframework, developing the financialinfrastructure in areas such as creditevaluation and customer service, andestablishing the low-cost distributionneeded to increase financial inclusion.Businesses from countries further alongthe development curve have faced thesechallenges and will therefore be able tohelp local partners tackle them andprovide the systems and expertise tosupport this.

Increasing interconnectivity: Rapidexpansion of intra-SAAAME commercetransforms global trade flowsThe increasing interconnectivity of intra-SAAAME trade and investment flows is assignificant as the growth and projectedsize of the emerging markets. These flowsare growing much faster than thetraditional routes from developed-to-emerging and developed-to-developedmarkets (see Figure 4). Within SAAAME,there are pockets of particularly hightrade growth, notably between Asia andLatin America and between Africa and theMiddle East (see Figure 5).

8 PwC Project Blue

Figure 3: How favourable is the location?

100

90

50

60

70

80

40

30

0

10

20

UnitedKingdom

UnitedStates

Germany SaudiArabia

UAE SouthAfrica

China Egypt Brazil India

n Global competitiveness n Low perceptions of corruption n Ease of doing business

Sources: Ease of Doing Business, World Bank, 2011; Global Competitiveness Index, World Economic Forum,20112012; Corruption Perceptions Index, Transparency International, 2010; PwC analysisNotes: Low perceptions of corruption derived from the Corruption Perceptions Index: a high score suggestslow perceptions of corruption within a country

The chart gauges relative levels of competitiveness, safeguards against corruption and ease of doingbusiness, giving each a score out of 33.3, to arrive at an overall percentage rating

PwC Project Blue 9

Figure 4: Transformation in global trade flows

Trade value: $6.92trCAGR 200210: 8.0%

Non-SAAAME

SAAAME

Trade value: $2.82trCAGR 200210: 19.4%

Trade value: $2.67trCAGR 200210: 13.6%

Trade value: $2.16trCAGR 200210: 12.9%

Sources: WTO and PwC analysisNote: Russia and the Commonwealth of Independent States (CIS) have not been included in SAAAME definition because trade is largely international and/or withEurope. Mexico is excluded as it trades mainly within the North American free trade zone and less with SAAAME. Both areas remain very important growth markets andshould be considered in relation to the SAAAME region.

Figure 5: Trading hot spots (growth in value of imports and exports)

N America

N America

5.4

4.5

17.7

8.8

19.2

8.7

10.0

8.0

8.6

18.8

13.6

12.6

14.7

12.8

13.4

17.5

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24.1

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22.5

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16.4

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20.2

Europe CIS South andCentral America

Africa Asia Middle East

Europe

CIS

South andCentral America

Africa

Asia

Middle East

ORIGIN

DESTINATION

SAAAMECAGR % 20022010: n 25

Sources: WTO and PwC analysisNotes: North America includes Mexico; Asia includes Japan, Australia and New Zealand

At present, these intra-SAAAME flows aredominated by commodities, but asconsumer markets continue to expand onthe back of rising affluence (see Figure6), the pattern of trade will beincreasingly focused on manufacturedgoods. SAAAME has establishedsubstantial manufacturing capabilitiesand access to the labour to support this.Services are also set for significantdevelopment, taking advantage of thegrowing talent base and focus oninnovation within SAAAME, with boththe number and quality of universitygraduates within many emerging marketsnow beginning to rival the West (seeFigure 7).

The development of financialinfrastructure, greater access to long-termfunding and the ability to tap into fast

growing sources of liquidity andinvestment such as Islamic finance willalso play a key role in sustaining thisexpansion in trade and provides animportant opportunity for FS businesses.

At present, the US dollar remains theprimary global exchange currency.However, as intra-SAAAME tradedevelops, bringing currency usage intoline with trading relationships will help toreduce exchange-rate risk and overcomebarriers to commerce. Key developmentsinclude the increasing use of theRenminbi in cross-border trade betweenChina and its neighbours, along with aseries of bilateral currency swapagreements between China andinternational trading partners includingJapan, Turkey and the United ArabEmirates (UAE).

10 PwC Project Blue

Figure 6: Rising middle class

GDP per capita growth, CAGR, 19802010

SAAAME Non-SAAAME

Sources: United Nations Population Division; World Bank World Development Indicators and PwC analysisNotes: GDP per capita is in constant 2005 US$

10

9

8

7

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1

00 0.5 1 1.5 2

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Indonesia

Turkey

FranceItaly

Germany

Chile

Philippines

United States

Brazil Nigeria

Japan

2.5 3

China

United Kingdom

Canada

Population growth, CAGR % 19802010

PwC Project Blue 11

Figure 7: Nurturing talent

10,000

8,000

6,000

4,000

2,000

0

2004

2011

China Brazil Indonesia Thailand Mexico Saudi Arabia

Total graduates in all tertiary education programmes, 2004 and 2009 n 2004 n 2009

Asian universities, excluding Japan, within the top 200 of the QS world university rankings, 2004 and 2011

n China n Hong Kong n South Korea n Singapore n Malaysia n Taiwan n Thailand

Sources: QS University Rankings; The Times; PwC analysis

CAGR14.2%

CAGR8.8%

CAGR5.5%

CAGR2.3%

CAGR5.5%

CAGR8.5%

0 5 10 15 20 25

Many SAAAME markets are alreadyhighly concentrated and the leadingplayers may need to look overseas if theywant to expand their market share. Manywill be looking to take advantage of theirgrowing scale and dominance at themanufacturing end of global trade flowsby banking both ends of the pipeline.What remains to be seen is how far theywant to build on these foundations.Some of the larger Brazilian, Indian andChinese banks are seeking to provideglobal services for their corporatecustomers around the world. Yet, noSAAAME-based banks have so far soughtto build a global presence comparableto one of the European or North Americangiants.

Foreign penetration within SAAAMEvaries (see Figure 8, overleaf). In somemarkets including China its almostnegligible. Even in an open market likeBrazil, further acquisition may beprohibitively expensive, even if targetswere to come up for sale. Yet, while a newentrant may find it difficult to achieve aleading position in a SAAAME market,they may still want to tap into the growthprospects. Indeed, they may concludethat they cant afford not to be present insome of the leading SAAAME markets.Even a relatively small market share in alarge and fast expanding market likeChina, India or Brazil would still provide asignificant source of business and long-term growth.

The new battlegrounds

Growth and innovation is changing theplaying field for financial institutionsGrowing SAAAME middle classes aredemanding more differentiated andtailored banking, insurance andinvestment products, putting pressure ondomestic institutions to keep pace. Thiswill offer Western institutions possibleopenings for investment and partnership.

At the other end of the spectrum, manypoor or remote communities have untilrecently had little or no access to financialservices. The penetration of mobilenetworks is now bringing financialservices to these once unbanked SAAAMEpopulations. A notable example is M-pesain Kenya, which provides access topayment and deposits via the mobilephone network and now has 15 millioncustomers, more than all of the countrysbanks put together.6 The GSM

Association a global group of mobilephone operators estimates that around300 million previously unbankedcustomers will be using some form ofmobile banking by the end of 2012.7

As mobile banking takes hold as adistribution channel within SAAAME, itsusage within FS has leapfroggeddeveloped markets (see Figure 9) andcreated pockets of innovation inparticular countries that others couldfollow. Indeed, rather than following thepath to maturity seen in the West, itslikely that SAAAME markets will createtheir own patterns of development,leading innovation in many areas andcreating a new DNA for financial servicesworldwide. Regulatory barriers couldpresent a potential challenge toinnovation and so one of the keys tomaking the most of these opportunities ishow quickly market controls evolve.

12 PwC Project Blue

Figure 8: Penetration of foreign banks within SAAAME markets, 2009

100

90

50

60

70

80

40

30

0

10

20

HongKong

Singapore Indonesia Egypt Brazil* SouthKorea

SouthAfrica

China India

n% of foreign banks among total banks n% of foreign bank assets among total bank assets

Sources: IMF, Foreign Banks: Trends, Impact and Financial Stability working paper, Jan 2012Notes: *Latest available year, 2008. Note: Foreign is defined as more than 50% holding by an investor basedoutside the country (minority holdings including those in countries that do not permit holdings above 50% arenot included). Bank sample draws together all active banks reporting to Bankscope including commercialbanks, savings banks, co-operative banks, investment banks and private banks.

Questions for the board

What is an achievable goal andwhat is the most feasible route tobusiness expansion in markets thatmay effectively be closed to foreignacquisition?

How can primarily domesticallyfocused groups develop or acquirethe necessary capabilitiesincluding talent, strategic agilityand deep cultural understandingto operate effectively acrossmultiple territories?

How can banks in developedmarkets make inroads into intra-SAAAME trade flows they maynever physically see? What canthey offer that their SAAAMEcompetitors cant?

6 www.thinkm-pesa.com, 16.04.12

7 Mobile banking for the unbanked, HarvardBusiness Review, 27.09.10

PwC Project Blue 13

Figure 9: Global use of internet and mobile phone channelsin banking

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60

70

80

40

30

0

10

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India China UAE HongKong

Mexico UK Poland Canada France Total

n Percentage who currently use mobiles to purchase financial productsn Percentage who currently use the internet to purchase financial products

Source: 3,800 consumers were polled for The new digital tipping point, a report published by PwC inJanuary 2012

Influx into cities opens upcritical battleground forcompetitionEconomic development will acceleratethe move from rural areas to cities.Over the next 30 years, some 1.8 billionpeople are expected to move into cities,most of them in Asia and Africa,increasing the worlds urban populationto 5.6 billion8 and creating one of themost important competitivebattlegrounds for FS businesses.

Urban expansion creates significanthousing and infrastructure investmentopportunities for financial institutions.On the retail side, city dwellers averagewealth and demand for financial productsand services are generally much higherthan their rural counterparts.Indeed,some observers now see the real

distinction in the FS sector as no longeremerging and developed markets, but rather, city and rural areas. The challengewill be how to capitalise on urban growth,while developing profitable services forrural customers in areas such as mobilepayments, micro-credits and micro-insurance.

Imbalances remain to beironed outCredit continues to flow from Western toSAAAME markets (see Figure 10), evenas the relative capital strength of thelatter increases. Much of this SAAAMEcapital is still managed in the West. Theseanomalies are unlikely to endure and theeventual re balancing will have a strongimpact on financial markets and otherbusinesses that operate within them.

14 PwC Project Blue

8 United Nations, Department of Economic and Social Affairs, Population Division, 2009 Revision

PwC Project Blue 15

Figure 10: Foreign direct investment (FDI)

FDI from non-SAAAME countries to SAAAME countries, US$ billions, 20032011*

Sources: The Financial Times and PwC analysisNotes: *2011 data is year to date, available as of 7 December 2011

600

450

300

150

02003 2004 2005 2006 2007 2008 2009 2010 2011

Largest 12 destination countries for FDI to SAAAME, US$ billions, 2010

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China

India

Brazil

Vietnam

Saudi Arabia

Indonesia

UAE

Singapore

South Korea

Chile

Turkey

Nigeria

United

States Ja

pan

UK

France

Germany

Spain

Switzerland

Canada Ita

ly

Russia

Netherlands

Australia

Largest 12 source countries for FDI to SAAAME, US$ billions, 2010

80

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40

20

0

16 PwC Project Blue

Shaping the future

Creating a more stable financial systemThe financial crisis highlighted the vulnerability of many smaller and less developedmarkets to asset bubbles and destabilising short-term investment flows.

Many of these hot flows of foreign capital were directed towards banks, with themarket values of many emerging market banks multiplying up to ten times in a matterof years. The repatriation of much of this capital following the collapse of liquidity inmany developed markets in 200708 meant that the credit lines for many frontiermarket institutions were quickly withdrawn, leaving them high and dry.

In some countries, further difficulties have been created by the inability of relativelyunderdeveloped or overstretched operational infrastructures, governance systemsand supervisory controls to cope with the rapid increase in FS demand, penetrationand complexity.

Crucial priorities in creating a more stable financial system include identifying,monitoring and managing the risk of asset price bubbles. A number of governments haveintroduced more stringent capital controls to prevent hot flows. More timely financialinformation and strengthening IT and payments systems would also help FS organisationsto meet growing demand and provide more effective support for customers.

Section 2The CEO Agenda: Aligning your businesswith the new global dynamics

Financial services organisationsmust find ways to differentiateand make themselves relevantwithin their target markets andtrade routes.

Questions for the board

How robust is your 5-, 10- or even 15-year vision for the evolution of the market?

How developed are payment systems, credit checks, recovery and other keyaspects of financial infrastructure in the target market?

How strong are the governance and controls within companies targeted forpartnership or acquisition?

How susceptible is growth to fluctuations in international commodity prices?

What is the best model of governance to follow in each SAAAME market and howfar will local rules need to change as international regulation becomes morealigned?

Will the need to comply with many different regulatory rules and approachesin various operating territories put international groups at a disadvantage todomestic competitors?

Gulf Cooperation Council Monetary union within the Gulf Cooperation Council(GCC) would provide a further spur for the developmentof financial services in one of the worlds fastest growingregions.

The GCC was formed in 1981 to promote political andeconomic collaboration between Kuwait, Oman, Bahrain,Qatar, Saudi Arabia and the UAE, and to help thesecountries to address security challenges collectively. TheCouncil reflects the close cultural, linguistic and religiousties within the Gulf and is seen as giving the GCC statesgreater influence within the Middle East and globally. Itincludes a joint military force and a common marketapplying to most sectors apart from financial services atthis stage.

Investment in diversifying the economy beyond oil and gasis a key priority in these countries, with growth in the non-energy sector predicted to be around 5% a year over thenext five years.9 A significant feature of the economy is theimportance of family-owned companies and corporations.We estimate that the combined assets of these businessesmake up around 75% of the private sector and that theyemploy some 70% of the workforce in the Gulf States.

The development of international centres for banking,insurance and asset management is a key part of thediversification of the economy. Within the GCC itself,banking sector assets have risen rapidly over the pastdecade to reach $1.4 trillion at the end of 201110 and theinsurance sector has been growing at an average of morethan 5% a year in the past decade,11 albeit from a lowbase. The GCC is also the worlds largest Islamic financialservices market. Furthermore, its sovereign wealth fundsare major investors in FS businesses worldwide.

Most GCC currencies are currently pegged to the USdollar. The exception is the Kuwaiti dinar, which since2007 has been aligned to a basket of currencies. Accordingto the Central Bank of Kuwait, the basket peg providesmore room for manoeuvre in monetary policy and helps toinsulate the economy from external inflationary pressureslinked to exchange rate fluctuations.12

Monetary union has been a longstanding ambition withinthe GCC. If enacted, it would create the second largestsingle currency after the euro and is likely to provide anumber of benefits to FS organisations. These includepromoting regulatory harmonisation. Monetary unioncould also make it easier to develop common products andto operate in any of the member states.

In 2009, the GCC Monetary Council was established theprecursor to a common central bank and an importantstep towards monetary union. Yet, the road to a singlecurrency continues to be challenging. One of the pointsof contention has been the location of the central bank,with the UAE withdrawing from the single currencyproject in 2009 following the announcement of plans tosite the bank in Riyadh. Oman has also opted out for nowas it would like more time to develop its financialinfrastructure, though it is likely to rejoin the process inthe future. The remaining four states are pressing on withthe project, though it could take some time before theunion comes to fruition.

9 Economist Intelligence Unit, 30.10.10 and National Bank of Kuwait, 28.01.12

10 NBK GCC Brief, 30.04.12

11 Swiss Re Sigma World Insurance in 2010

12 Arab Times, 08.04.10

PwC Project Blue 17

ChinaChina 2030, a recently published report, sponsoredthrough a collaborative effort between the World Bankand the Chinese Government, highlights the challengesfacing China as its development moves into a new stage.13

China 2030 identifies the key emerging trends that willfundamentally affect Chinas economic development. Italso provides recommendations for changes to thecountrys policy and institutional framework as it seeks toachieve sustainable and socially responsible economicgrowth through to 2030.

While these trends and recommendations arecomprehensive, China 2030 highlights a number of keypolicy and institutional priorities for sustaining stableeconomic growth. These include the liberalisation ofinterest rate controls and the internationalisation of theRenminbi. Although these changes must be carefullymanaged to avoid unintended consequences, they, alongwith others, will provide benefits to the Chinese economywhich include widened sources of funding and moreefficient capital markets. However, Chinese banks willneed to develop the systems and processes required tomanage the more complex market risks that willaccompany these developments.

The relevant trends, both domestic and global, discussedin China 2030 are as varied as Chinas economy. However,they will define the domestic financial services marketthrough to 2030. Perhaps most significant and pervasiveamong these trends is the Chinese Governments keennessto transform domestic economic demand, which iscurrently reliant on exports and domestic infrastructureinvestment, to include a significantly higher proportion ofretail consumption.

The discussion of trends also includes the effects of anageing population, growing urbanisation and theincreasing scarcity of the natural resources needed to fuelChinas economic growth. These developments present amyriad of implications for Chinas banks. Among thesewill be the opportunity to create asset managementproducts that will enable Chinese consumers, who alreadyhave one of the highest savings rates in the world, to moreeffectively fund their retirement needs. The Governmentis also looking to banks to invest in cleaner technologiesand other forms of green development.

These, along with the other China 2030 recommendationsand trends, foreshadow fundamental and inevitablechanges for both the Chinese economy and its FSorganisations. Those with the foresight to envision theimpact of these changes and transform their businesses inresponse will claim the competitive high ground for thenext generation.

18 PwC Project Blue

13 China 2030 Building a Modern, Harmonious, and Creative High-Income Society, 2011, The World Bank and Development ResearchCentre, the Peoples Republic of China.

Rethinking your strategy

Adapting your modelTraditional Western financial servicesmodels may have little relevance in someSAAAME markets. While certaininnovations can be adapted for localmarkets, strategies must reflect the localculture, distribution preferences andrelative levels of sophistication in demandand technology. Even within countriesthemselves, there are likely to be markedregional distinctions.

As FS organisations move into newterritories, they will need people on theground who understand the local marketsand can forge the all-important personalrelationships such people know theirimportance and understand their value.In certain SAAAME markets, the customerrelationship is almost entirely personaland takes many years to develop, whichrequires patience and puts obviouspressure on employee retention. In turn,a crucial part of the licence to operateis convincing local and nationalgovernments that the companysdevelopment plans can complement andaugment their own. Governments are alsolikely to be crucial customers in their ownright as investment in urban andinfrastructure development acceleratesand the public/private partnerships thatsupport this proliferate.

Demographics will have a powerfulinfluence on economic growth anddemand for financial services within eachof the SAAAME markets. In India, forexample, the relative youth of thepopulation is sometimes described as itsdemographic dividend, stimulating long-term growth, offering huge potential forlenders and providing a strong spur foracceptance of technology and innovation.In contrast, China has an ageingpopulation and its public pension, healthand welfare systems are likely to requiremuch grea