1. Copyright The Asian Banker 2009. All rights reserved Asian Banker Research Opportunities and risks of joint ventures for international banks to gain a foothold in China’s retail banking industry September 2009

2. Copyright The Asian Banker 2009. All rights reserved Agenda 1.Evolution of Consumer Banking in Asia 2.Assessment of the Retail Banking landscape in China 3.Outlook over operational initiatives and trends in retail banking in China

3. Copyright The Asian Banker 2009. All rights reserved Is the market in China ready to move into a relationship based focus? Korea Product FocusSales FocusMkt Share FocusRelationship Focus Market is opening up Banks launch new but basic products Operational Efficiencies first Cheaper forms of distribution Accessibility Convenience Transactional champions Increasing IT cost and risk More aggressive and new competitors Declining margins New business models Product/Service innovation Customer focus Market consistency Channel integration Brand building Improving Customer Insights and Relationships Building up asset portfolio Further deregulation Market share focus Pricing games Pressure on Margins Low High Strategy Turning Point Planning Gap India Indonesia China Singapore Hong Kong Australia Thailand Productivity Profitability Cost Efficiencies Evolution of Consumer Banking Source: The Asian Banker Research

4. Copyright The Asian Banker 2009. All rights reserved % of Investor Response, N=50 Please indicate your key concerns for Chinese banks (1H 2009). Top Concerns By International Investors for Banks in China

5. Copyright The Asian Banker 2009. All rights reserved EBIT YoY % Retail Financial Services Countries with potential negative earnings for 2009 Barriers to development in consumer banking in China are regulated interest rate regime and over-reliance on mortgages Growth in Operating Income between 2006 -2009f for countries in Asia Pacific

6. Copyright The Asian Banker 2009. All rights reserved Emerging market banks have risen to the top in this years AB300 agenda based on strong growth in loans, deposits and profit Ranking Asia Pacific Strongest Banks (AB300) N=300 Banks 1.HDFC Bank (India) 2.Punjab National Bank (India) 3.Public Bank (Malaysia) 4.Bank of Nanjing (China) 5.Bank Central Asia (Indonesia) 6.China CITIC Bank (China) 10. China Construction Bank (China) 13. Bank of Ningbo (China) 14. China Merchants Bank 26. ICBC 31. Bank of China 47. SPDB (China) 57. Bank of Shanghai 1.Public Bank (Malaysia) 2.OCBC (Singapore) 3.ANZ (Australia) 4.CBA (Australia) 5.Hang Seng Bank (Hong Kong) 6.UOB (Singapore) 7.Westpac (Australia) 8.HSBC (Hong Kong) 13. China Merchants Bank 20. ICBC (China) 29. China Construction Bank 32. SPDB (China) 36. China CITIC Bank Ranking Excellence in Retail Banking N=134 Banks

7. Copyright The Asian Banker 2009. All rights reserved Banks do not believe that fundamental changes in consumer banking are necessary Disagree Agree Executives do not see a fundamental break with the past, except in WM Executives believe their balance sheets and ability to market their franchise is robust enough to be able to weather 2009 Source: Asian Banker Research “What will be the Impact on Retail Financial Services?”

8. Copyright The Asian Banker 2009. All rights reserved Biggest gainers: Credit Card Management, Mortgages, Mobile Phone Banking Biggest drops: Brand Building, Employee Engagement, Wealth Management Key business focus : Mortgages, Bancassurance, SME, Deposits, Personal loans and Payments No major shifts in retail asset configuration Alternate channels continue to be key focus Top 5 Submission Categories The front line and customer experience continue to rank strongly in the top 5 submission categories Note: < 2% of Submissions: Remittances, Channel Network Integration, Customer Advocacy/Loyalty, Islamic Finance, Internet Only Banking, Micro-financing, Business Model Innovation, Crisis Management

9. Copyright The Asian Banker 2009. All rights reserved Major Focus Top 3 Tactical Growth Areas More than 60% of executives do not see that entering new businesses or markets will be key to drive growth in 2009 “What are Key Tactical Growth Drivers in 2009”

10. Copyright The Asian Banker 2009. All rights reserved The 10 best retail banks in the region experienced a decline in scoring in Sustainability and People’s skill Dimensions Performance Score Value of Franchise* Financial Performance Sustainability Transparency Ethical Banking Sales Capabilities Risk Management Processes &Technology Distribution People Skills Change YoY 0 0 0 0 0 0 0 0 5 4 2 5 5 5 5 5 Average Improved Maintained Decreased significantly Decreased slightly Increased Decreased Maintained Decrease 07 05 20072008

11. Copyright The Asian Banker 2009. All rights reserved GAP of Top 10 China banks compared to top 10 peers in the region shows highest gap in Value of Franchise and Processes & Technology Dimensions Performance Score Value of Franchise Financial Performance Sustainability Transparency Ethical Banking Sales Capabilities Risk Management Processes &Technology Distribution People Skills 0 0 0 0 0 0 0 0 5 4 2 5 5 5 5 5 Average 0 7 Top Asia Top China GAP 3.07 3.13 2.04 2.76 1.53 2.58 3.06 3.03 2.33 4 1.76 3.44 1.78 2.22 1.01 2.22 2.32 1.87 2.14 1.87 1.31 +0.31 0.26 0.54 0.52 0.36 0.74 1.19 0.89 0.46 0 Top Asia Top China

12. Copyright The Asian Banker 2009. All rights reserved Organisation Value of Franchise Financial Performance Sustain ability Transparency in Strategy Ethical Bankin g Sales Risk Mgmt Process, Technolo gy & Efficienc y Penetration & Efficiency Distribution Channels People Skills Total Scores Bank/Maximum Score 4.007.005.004.002.005.00 47.0 China Merchants Bank2.304.002.202.701.002.80 2.002.40 24.70 ICBC2.503.902.002.701.202.702.301.802.601.80 23.50 China Construction Bank2.503.401.802.001.202.602.302.002.401.80 22.0 SPDB1.803.601.902.401.201.902.601.902.302.10 21.7 China CITIC Bank1.703.401.602.600.802.702.301.902.301.90 21.1 Bank of Communications2.003.001.902.201.301.902.502.002.401.60 20.9 China Minsheng Bank1.803.201.80 0.802.002.201.801.901.80 19.0 Bank of Beijing0.803.301.602.401.001.802.201.801.601.70 18.1 Bank of Shanghai1.003.201.50 1.001.902.101.80 1.90 17.6 Shenzhen Development Bank1.203.401.501.900.601.90 1.70 17.6 Agricultural Bank of China2.402.801.30 1.401.701.40 1.801.40 16.9 Bank of Ningbo0.702.901.301.800.901.401.901.661.501.70 15.6 HSBC0.601.600.801.901.001.502.801.901.401.60 15.1 Bank of East Asia0.501.400.701.301.001.102.502.001.201.50 13.2 Citibank0.501.200.601.100.901.202.802.101.001.30 12.6 Standard Chartered Bank0.601.200.601.100.901.202.501.901.101.20 12.2 The Asian Banker Excellence evaluation identifies key weaknesses among Chinese banks

13. Copyright The Asian Banker 2009. All rights reserved Key operational initiatives in China  Banks are actively seeking to build and solidify their mid and high-end client bases by elevating product, service and channel capabilities, with limited disruption over the last year despite the crisis  In this same vein, banks are investing significant resources into platforms intended to help them understand customer behavior, trends, requirements, etc  While banks are developing the means – i.e. knowledge and tools – to deliver to customers and build brand and franchise loyalty, process and execution gaps persist  Frontline training, management and coordination are white spots that undermine banks’ capacity to serve clients, assess risks and forge lasting, profitable relationships whatever the market environment  Human resource cuts have been widespread across the industry during the crisis in order to lower operating costs and training spend remains weak, casting doubt over HR issues as a relative priority

14. Copyright The Asian Banker 2009. All rights reserved  The financial crisis has been an important eye opener for the industry in China as retail banking continues to grow in asset size, strategic focus and bottom line significance  Customer expectations and requirements are quickly evolving, raising the bar for banks and pushing them to keep up or risk losing business  Demand for value add products and services is rising while tolerance for missteps or errors is shrinking  Banks’ handling of loss bearing investment products and the implications for customers, non-interest income and brand standing has been revealing  Complacency will become increasingly costly as competition grows between banks for lucrative customers and the rewards more significant as mid and high end segments deepen Future Developments in Retail Financial Services in China

15. Copyright The Asian Banker 2009. All rights reserved Conclusion  Surge in lending a key concern for the investor community worldwide  Banks want to develop consumer lending but there are huge barriers  Revenue drawing up-market business is a key focus of retail banks, but remains in its nascent stages and tenuous  To capitalise, banks must balance operational investments and priorities, but are currently falling short  Retail cost-to-income pressures could force tough decision-making

16. Copyright The Asian Banker 2009. All rights reserved “The banks we like” HSBC and Bank of Communications transform their joint credit card activities in China to a new joint venture company, which specialises in credit card and unsecured consumer finance operations based on credit cards. Citibank and Agricultural Bank of China, where Citi provides the ABC with international payments processing for on-site check services that enable expansion of its banking services to consumer clients. Citi has served as Agricultural Bank of China's US Dollar Clearing provider. The partnership between Citi and Agricultural Bank of China has deepened as the bank expands its consumer banking business to meet the growing demands of customers travelling overseas.

17. Copyright The Asian Banker 2009. All rights reserved For further information  Members and subscribers to this programme may request further explanations and consult with Asian Banker Research analysts on additional information and specific needs.  If the additional information you require can be repackaged from primary data we have already collected previously, the analyst will send it to you as part of your subscription or membership.  If the additional information you request requires new primary work that is unique to your organisation, then a small fee may be applicable.  For more information about this article and Project BankMetrics please contact us at analyst@theasianbanker.com.analyst@theasianbanker.com