Bank of the Future: The Emerging Operating Model Robert Joslin, Principal Steve Haas, Principal Everest Group October 31, 2007

Proprietary & Confidential. © 2007 Everest Partners, L.P. 2 Industry trends are transforming the operating models of global banks Banking Industry Drivers Continuing consolidation at regional and national level Technology playing an ever increasing role – both in back office and front office Increasing cost and effort required to comply with regulatory requirements Implications for bank’s operating model Increasing use of outsourcing and offshoring as levers to achieve highly efficient and sophisticated back offices Transformation in banks’ operating models driven by outsourcing and offshoring requires fundamental changes Managing people to managing outcomes Management by service levels New governance models and capabilities Changing risk profile Given the significant benefits of outsource/ offshore-centric models, this trend is here to stay and likely to accelerate Regulators are taking note of above and will try to manage macro level risks Stronger capabilities are required to manage new complexities and risks

Proprietary & Confidential. © 2007 Everest Partners, L.P. 3 Taxonomy – Outsourcing and Offshoring TYPICAL FUNCTIONS IN SCOPE Information Technology Application development and maintenance IT Infrastructure Business Support Processes Customer services Finance and accounting Human resources Procurement Legal services Facilities management and administration Financial Services industry specific processes Loan processing and underwriting Mortgage servicing Insurance underwriting Others OUTSOURCING vs. OFFSHORING “Outsourcing” is the transfer of ownership of a business function or process to a supplier “Offshoring” refers to transfer of service delivery location to another country, different from the one using/consuming those services A subset of offshoring is “near-shoring” refers to transfer of work to a country which is geographically close Offshoring can be done through suppliers (offshore outsourcing) or through a subsidiary located offshore (captive center)

Proprietary & Confidential. © 2007 Everest Partners, L.P. 4 Banks are increasingly using outsourcing and offshoring as levers to achieve highly efficient and sophisticated back offices The increasing use of outsourcing and offshoring is transforming the operating model of banks in an unprecedented manner This emerging operating model would bring significant benefits and risks to banks To succeed, banks must design their operating model to take full advantage of the benefits of outsourcing and offshoring while building the capabilities to actively manage new complexities and risks Contents

Proprietary & Confidential. © 2007 Everest Partners, L.P. 5 Financial Services firms spend almost US$29B annually for offshore services … Offshore imports by industry 2006; Percentage Telecom and hi-tech Others Manufacturing Retail Transportation Healthcare Pharmaceuticals 19% 16% 12% 4% 3% 100% = US$63-68 billion 45% 0.5% 1Banking, Financial Services & Insurance Sources:Supplier Interviews; Everest Research Institute analysis Banking, Financial Services and Insurance

Proprietary & Confidential. © 2007 Everest Partners, L.P. 6 … and more than half involves operations in India Firms with Major Indian Operations* ABN Amro American Express Aviva AXA Bank of America CapitalOne Citibank Deutsche Bank Goldman Sachs HSBC IndyMac JP Morgan Chase Lehman Bros Morgan Stanley National Australian Bank Prudential Standard Chartered Winterthur Typical Operations IT Application Development and Maintenance IT Infrastructure Management G&A activities Call centers Business-specific processes Data entry Equity research and investment support Data mining Credit-risk modeling Actuarial support 57% 43% India Other offshore locations 100% = US$16.2 billion, 2006 Offshore spending by financial services firms

Proprietary & Confidential. © 2007 Everest Partners, L.P. 7 Over the next few years, we see banks gearing up to offshore an increasing proportion of their operations Offshore workforce as % of total firm workforce 2006, Percentage Number of offshore workers 2006 Plans to grow to 9,000 by 2007 ~ 5,000 ~2,000 ~ 4,500 ~ 2,000 ~2,500 ~5,000 ~7,000 ~59,000 ESTIMATED Plans to grow to 4,000 by 2007 Plans to grow to 25,000 by 2007 Many of these firms have aggressive plans for additional growth of their offshore centers ~1 2-3 ~21,000 ~10,000 Sources:Dataquest, Everest Research Institute estimates and analysis, companies’ press releases and websites, and other public sources

Proprietary & Confidential. © 2007 Everest Partners, L.P. 8 IT functions and business processes are following the offshoring trend as the models and locations mature Pioneers Emerging rapid growthReaching maturity Market value creation Contact Centers IT – ADM IT – Infrastructure Management Services Maturity BPO – Finance and Accounting BPO – Core processes Source:Everest Research Institute IT Infrastructure Outsourcing US Domestic Offshore Banking process and technology HR

Proprietary & Confidential. © 2007 Everest Partners, L.P. 9 Banks are increasingly using outsourcing and offshoring as levers to achieve highly efficient and sophisticated back offices The increasing use of outsourcing and offshoring is transforming the operating model of banks in an unprecedented manner This emerging operating model would bring significant benefits and risks to banks To succeed, banks must design their operating model to take full advantage of the benefits of outsourcing and offshoring while building the capabilities to actively manage new complexities and risks Contents

Proprietary & Confidential. © 2007 Everest Partners, L.P. 10 The Bank of the Future will include an expanding network of internal and external service providers Canada B 1 B 2 B n C1 C2 Cn B 1 C1 Customers Bank locations (headquarters, branch offices, domestic shared services centers and data centers, and other points of presence like ATM) Captive Center (offshore based) Supplier’s service delivery location B 1 B 2 B n CC 1 C1 C2 Cn India Philippines S1 S2 S1 S2 S3 CC 1 Current Operating Model Emerging Operating Model CC 2 CC 3 S4 Eastern Europe Canada

Proprietary & Confidential. © 2007 Everest Partners, L.P. 11 The transformation will have a significant impact on the bank’s relationships with the its key stakeholders Work across geography, time zones and culture Use of virtual collaboration tools, paper less workflow Learning to manage outcomes rather than activities Significantly changed career path Serviced by multiple entities (in-house operations, domestic suppliers, offshore captives & offshore suppliers) Improved response time, quality and service levels Round the clock support for most needs Expectation of successful transition to the new emerging operating model and results from the same (higher profitability) Risk of earnings volatility in the process Understanding of macro level impact as they understand offshoring and related risks Changes in the regulatory framework to increase scrutiny as banks go offshore Regulators Shareholders Customers Employees

Proprietary & Confidential. © 2007 Everest Partners, L.P. 12 Banks are increasingly using outsourcing and offshoring as levers to achieve highly efficient and sophisticated back offices The increasing use of outsourcing and offshoring is transforming the operating model of banks in an unprecedented manner This emerging operating model would bring significant benefits and risks to banks To succeed, banks must design their operating model to take full advantage of the benefits of outsourcing and offshoring while building the capabilities to actively manage new complexities and risks Contents

Proprietary & Confidential. © 2007 Everest Partners, L.P. 13 Everest analysis indicates that the benefits of labor arbitrage will be sustained for a very long time, especially in IT applications development … Projected sustainability 1 of labor arbitrage for IT ADM Number of years 1Assuming sustainability of labor arbitrage until destination country salaries are 60% of source country salaries for offshore pairs and 75% of the source country salary for near-shore players Source:Everest Research Institute analysis Sustainability estimates are based on ‘as-is’ momentum. The rate of increase in salary levels as well as exchange rate movements are driven by a complex interplay of dynamic macro-economic factors. 30+ years IndiaChina Philip- pines Czech Republic PolandMexico US UK France Germany Japan Destination countries Source countries

Proprietary & Confidential. © 2007 Everest Partners, L.P. 14 …and potentially even longer for Business Process Outsourcing functions Source:Everest Research Institute Projected sustainability of labor arbitrage for BPO functions Number of years IndiaChina Philip- pines Czech Republic MexicoIrelandCanada US years years 7-10 years UK30+ ~20 years 30+ France30+ Japan years years years 30+ years Source countries Destination countries Hurdle rates used: Near-shore pairs (75%); Offshore pairs (60%)

Proprietary & Confidential. © 2007 Everest Partners, L.P. 15 However, the new operating model also introduces new risks for banks Dimensions of risk Financial Description of risk Factors that could change the expected financial outcome of a solution Examples of risk Total charges/savings Pricing Productivity Inflation Currency fluctuations Local taxes Liabilities Factors that could prevent the solution from meeting current or evolving business requirements Factors that hinder the organization’s (i.e., buyer, supplier, or governance) ability to enable the desired outcomes Factors that could place the relationship out of legal conformity (e.g., contract, regulations, enforceability) Factors that the solution would not support or would fall out of alignment with the strategy of the organization Quality Process control Buyer adaptability to offshoring Transition management and knowledge transfer Geopolitical Infrastructure Attrition Cultural fit and communication Stakeholder backlash Governance Regulatory compliance Termination Data security and privacy Intellectual property Limits on immigration Fit with strategic imperatives Control Illegal transfer of funds Money laundering Operational (including technical) Organizational Legal Strategic Source:Everest Research Institute

Proprietary & Confidential. © 2007 Everest Partners, L.P. 16 At a macro-system level, the increase in the scale of offshoring raises new issues for the Bank of the Future operating model Concentration Are financial services firms’ operations and technology functions offshore getting concentrated in certain countries, cities and vendors? Will banks and other financial services firms unable to leverage offshore (directly or indirectly) become attractive takeover candidates? Management Are firms adopting sourcing models that stretch their capabilities to effectively manage operations on a global scale? How do firms demonstrate willingness and compliance with applicable rules and regulations as more and more activities are performed offshore? How do firms actively manage the potential for fraud, money laundering and other illegal activities in offshore operations?

Proprietary & Confidential. © 2007 Everest Partners, L.P. 17 Banks are increasingly using outsourcing and offshoring as levers to achieve highly efficient and sophisticated back offices The increasing use of outsourcing and offshoring is transforming the operating model of banks in an unprecedented manner This emerging operating model would bring significant benefits and risks to banks To succeed, banks must design their operating model to take full advantage of the benefits of outsourcing and offshoring while building the capabilities to actively manage new complexities and risks Contents

Proprietary & Confidential. © 2007 Everest Partners, L.P. 18 The changes to a bank’s operating model are highly reliant on the decisions it makes in key areas 1. Which functions should be outsourced or offshored? 2. Should processes be outsourced individually or as full service BPO? 3. Should technology be bundled with processes being outsourced? 4. Is it better to outsource or offshore to a captive centers? 5. What should be destination for the offshored operations? IT (application development and maintenance, infrastructure management services) Business support services like HR, F&A, Procurement and others Industry specific processes like credit card processing and underwriting Stand alone process/task outsourcing Full service BPO Multi-functional outsourcing Stand alone process and technology outsourcing Outsourcing of process and technology maintenance Outsourcing of complete platform (including infrastructure) Outsourcing to domestic or offshore based suppliers Captive center (subsidiary or branch operations) Partnership based models like JV or BOT Onshore, nearshore or offshore locations Indian versus non-Indian locations Decision ChoicesDesign Points

Proprietary & Confidential. © 2007 Everest Partners, L.P. 19 Banks are increasingly using outsourcing and offshoring as levers to achieve highly efficient and sophisticated back offices The increasing use of outsourcing and offshoring is transforming the operating model of banks in an unprecedented manner This emerging operating model would bring significant benefits and risks to banks To succeed, banks must design their operating model to take full advantage of the benefits of outsourcing and offshoring while building the capabilities to actively manage new complexities and risks Summary

Proprietary & Confidential. © 2007 Everest Partners, L.P. 20 The Everest Group serves its global clients from eight offices around the world Everest Group & Everest Research Institute Two Galleria Tower Noel Road, Suite 2100 Dallas, TX U.S.A Everest Australasia Level 6, 90 Mount Street North Sydney, NSW 2060 Australia Everest India Ground Floor, Tower A Unitech Business Park South City – I, Gurgaon National Capital Region India Everest UK 83 Baker Street London, W1U 6LA United Kingdom Everest Group 150 E., 52 nd Street, 16 th Floor New York, NY U.S.A Everest Canada The Exchange Tower 130 King Street West, Suite 1800 Toronto, ON Canada M5X 1E Everest Australia 409a Wattletree Road East Malvern Melbourne, VIC 3145 Australia Everest Benelux Atrium Building 3rd Floor Strawinskylaan ZX Amsterdam

Proprietary & Confidential. © 2007 Everest Partners, L.P. 21 Further Questions? If you would like to discuss anything further, please contact: Robert Joslin / Steve Haas /