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Noel Final

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Published on October 12, 2007

Author: Danielle

Source: authorstream.com

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Slide1:  Strategic Partnerships with Foreign Institutions: Myth or Reality? Conference on “Global Banking: Paradigm Shift” September 14, 2004 P. Noel Kullavanijaya Managing Director and Head, Financial Institutions Asia Pacific Investment Banking New Banking Paradigm … An Evolving Landscape in Commercial Banking:  New Banking Paradigm … An Evolving Landscape in Commercial Banking Traditional Banking… …into the New Age Banking is a “Local” Business… Local brand names thrive… …Protected by regulations enacted in the “national interest” “Plain vanilla” products e.g. credit, trust, etc. From MonoLine Organizations… Financial institutions operate vertically-segregated businesses Partly constrained by regulations Limited also by ability to collect, analyze and act on reliable information (e.g. on customers, market, assets, etc.) …that’s becoming “Global” Emergence of truly global and powerful regional institutions Managing the business as a “portfolio” Customers! Customers! Customers! Competition Organizational Structure …to Multi-Dimensional Institutions Spanning markets, products and geography Adopting one of two basic structures: Universal Bank e.g. Barclays, Deutsche Bank Diversified Financial Holding Company e.g. Citigroup, HSBC Adopting M&A as a Key Competitive Tool…:  Adopting M&A as a Key Competitive Tool… Strategic Needs for, and Benefits of, M&A Gaining market share as a complement / supplement to organic growth Rapid expansion or access to new markets / products Acquisition of partners’ capabilities and customers “if you can’t beat ‘em, [buy] ‘em…” Getting a jump on competition Market Requirements Mature market / saturation reached Availability of attractive targets Transparent company information Wide range of funding options Regulatory Backdrop Accommodating regulations Open to foreign ownership / competition Repatriation conditions not too onerous M&A is accepted as a critical aspect of strategic planning and a key component of business strategy execution … or Strategic Investments … where Traditional M&A is Not Possible:  … or Strategic Investments … where Traditional M&A is Not Possible For serious buyers, acquiring a strategic stake is a viable alternative… though the ultimate aim is always control and full ownership Majority stake or full ownership is not available Occurs If:   Benefits:   Reduced initial financial commitment Option for future expansion Chance to study market – get to know the local scene and government Opportunity to better evaluate target company Strategic Partnership = “M&A Lite” Foreign Bank Ownership Ceiling   Korea 100% Hong Kong 100% Indonesia 100% Philippines 100% China 100%(1) Thailand 49%(2) India 74% Malaysia 30% Full-liberalization w.e.f. Jan ’07 100% permitted under certain circumstances What are the Conditions for a Successful Partnership?:  What are the Conditions for a Successful Partnership? Macroeconomic Conditions Business Conditions Deal Conditions A successful partnership requires market, business and deal features combined in a conducive and “deal-friendly” fashion… Accommodating regulations & practical-minded government Strong underlying economic growth Workable business infrastructure (e.g. legal, communications & accounting framework) Market receptivity to foreign ownership of operating businesses Critical mass of possible targets Stable markets Availability of funding “Willing Buyer + Willing Seller” Reasonable market valuation Commercial (and international) standards in non-price business terms The Indian banking sector has most of the necessary ingredients to attract strategic investors – True or False? Does India have What It Takes to Attract Investors?:  Does India have What It Takes to Attract Investors? Source: Thomson Financial Securities Data Company (SDC) Note: India data excludes Temasek Holding’s acquisition of ICICI Bank stake via open market Cross Border Banking M&A - Asia 10 Targets - Source: Thomson Financial Securities Data Company (SDC) Note: Asia 10 refers to China, Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand Cross Border Banking M&A - India vs. China Targets - Macroeconomics … More Subtle Than Meets the Eyes…:  Macroeconomics … More Subtle Than Meets the Eyes… Reality Myth Hard to assess the true size of “bankable” population…though concentrated in key cities Growth has been geographically-concentrated and varies widely with government policies Regulatory process can be overwhelmingly cumbersome and not always obviously practical Wide use of international “business language” + clear legal system = True Market Advantage!! Attractive market with favorable macroeconomic growth conditions Rapid growth provides abundant economic opportunities Organized regulatory backdrop English-speaking population and common law framework facilitates ease of doing business … Although Demographics Remain Very Promising:  … Although Demographics Remain Very Promising % breakdown of urban households at various income levels 1995-96 2001-02 2006-07 100% = >Rs.1.6 mn Rs.0.8-1.6 mn Rs.4.5 – 8 lakh Rs.0.16 – 0.45 mn <Rs.0.16 mn 57 38 30 33 45 46 7 12 16 3 5 2 3 2 1 47mn HH 52mn HH 60mn HH Income Per Annum of Urban Households Consumer Credit Balances* / Household Income (%) Include mortgages, secured and unsecured personal loans, and credit card receivables Source: NCAER; McKinsey analysis Given a low starting base, India has much room to grow. But the ability to tackle other macroeconomic imperfections will determine how rapidly Indian banks can capture the opportunities Income p.a. Source: NCAER; McKinsey analysis Business Conditions …Not for the Timid!!:  Business Conditions …Not for the Timid!! Reality Myth National market is fragmented –few national banks, while the rest are very small Well-entrenched but local players Plentiful potential local partners Still under-developed communications infrastructure Large component of total workforce is not well-trained which dilutes cost advantages… …While the skilled workers and managers are becoming more expensive Well-built and well-developed business procedures Low cost labor Plentiful talent and skills Slide10:  Number of Realistic Targets is Small… Note: Market capitalization data correct as of August 19, 2004 Deal Conditions… “Give and Take” Must Apply! …:  Deal Conditions… “Give and Take” Must Apply! … Reality Myth Real investors want real results i.e. solid earnings and ROE – pricing must be reasonable Real investors want to have (at least a clear path to) control and say over management Real investors balance strategic considerations i.e. near- vs. long-term returns Real investors want confidence over the long-term security of and return on their investments Foreign strategic investors are willing to buy mainly to “learn about the market” Companies invest to “get their foot in the door” Valuation drives M&A activities Companies want to curry favor with the government Valuation, Even if Justified, is Demanding:  Valuation, Even if Justified, is Demanding Note: Country data refer to median ratios of banks sampled by Citigroup. Price to Earnings ratio is based on 2004E EPS from I/B/E/S; Price to Book ratio is based on reported FY2003 book value Lessons from Recent Notable Strategic Bank Investments in Asia:  Lessons from Recent Notable Strategic Bank Investments in Asia Accommodating Regulations Foreign capital is needed to fuel economic growth Flexible & Creative Structures Parties sometimes need to consider structures different from what they originally conceived Ability & Willingness to Adapt to Changes Willingness to Share or Cede (in Some Respect) Control Strong Fundamentals Ability to commit needed resources to make the venture work Consistent Senior-Level Sponsorship & Institution-Wide Participation / Support Features Consistent Across Successful Partnerships Citigroup - Shanghai Pudong Development Bank:  Citigroup - Shanghai Pudong Development Bank Takeaways China liberalized its investment regulations to allow foreign banks to acquire state and legal person shares in 2002 Citigroup exercised flexibility in accepting an initial stake of 5% with a view to subsequent increase Both parties brought complementary strengths to the table, especially in the development of the credit card venture Shanghai Pudong Development Bank offered a successful China franchise Citigroup was expected to impart skills in risk management and offer technical support Partnership culminated with Citigroup launching a Visa-branded credit card with Shanghai Pudong Development Bank in February 2004 Partnership Overview: Citigroup acquired 5% in Shanghai Pudong Development Bank in Dec 2002 Deal Size: US$72mn Creative & Flexible Structure: The partnership saw both parties bring complementary strengths to the table and the successful launch of a breakthrough credit card JV in China ING Groep – Kookmin Bank:  ING Groep – Kookmin Bank Opportunities in bancassurance (35% of new life business in Korea) provided the key strategic logic Kookmin Bank launched its bancassurance business in September 2003 and was keen to tap ING’s global expertise For ING Life Insurance, Kookmin’s 1,100 branches offered an attractive way to rapidly expand distribution Although not partners by design, ING was adaptable and stayed in its relationship with Kookmin even after the latter’s merger with Housing & Commercial Bank The good working relationship led to the enlargement of the partnership, seen most recently in the 49% acquisition of KB Life Insurance by ING Groep in June 2004 Partnership Overview: ING Groep held a 3.78% stake in Kookmin since Nov 2001, following the latter’s merger with Housing & Commercial Bank Adaptability: ING remained committed to its original investment in Housing & Commercial Bank. Today, the partnership includes three subsidiary collaborating in insurance, as well as asset management Takeaways ACE Limited – Huatai Insurance Company :  ACE Limited – Huatai Insurance Company Both parties brought complementary capabilities to tap opportunities in China’s insurance sector Huatai was China’s fourth largest property and casualty insurer and helped ACE ramp-up its China distribution rapidly ACE provided Huatai with actuarial, financial, underwriting and IT consulting through secondment of senior-level personnel ACE also obtained three board seats on Huatai’s board of directors In June 2004, China regulators granted approval for Huatai to set up a life insurance business, with ACE continuing as an investor Senior-Commitment / Sponsorship: Since being the first significant post-WTO foreign investment, the partnership has been enlarged to include co-operation in the life insurance business Takeaways Partnership Overview: ACE Limited acquired 22% of Huatai Insurance in May 2002 Deal Size: US$150mn Takeaways: Quid Pro Quo is Key :  Takeaways: Quid Pro Quo is Key Customer Reach Open and shared access Control Participation in day-to-day decision-making Option to increase stake over time Board level participation Clear and Open Communication Downside Protection-Assurance Clear exit / termination conditions World-Class Products / Services Long-term business relationship in return for access to market Improved Performance Standards Best practices, know-how, products, as well as management support Best Practices in Governance Capital Strength Access to alternative source(s) – from the partner and the market What Do Indian Banks Have to Give? What Can Indian Banks Expect? Indian banks can derive a clear competitive edge through partnership with the right strategic investors. However, fulfillment of mutual interest is critical for a successful partnership Regulatory Developments Will Shape Outcome:  Regulatory Developments Will Shape Outcome The current regulatory environment continues to challenge strategic investors. Clear commitment to open up the market is necessary to attract robust banking FDI, whether M&A or “M&A Lite” FDI limit in private sector Indian banks increased from 49% to 74% in March 2004 Registered Foreign Institutional Investors (FIIs) can hold up to 49% through stock market purchases, but within the 74% overall ceiling Voting rights of a single shareholder in a bank restricted to 10% Individuals and groups acting in concert not allowed to own more than 10% of a bank Foreign entities operating in India not allowed to own more than 5% of a private bank Foreign Investment Limit Limits on Individual Ownership Cap on Voting Rights Conclusion:  Conclusion Given its significant long-term potential, India is a market that few international financial institutions can afford to ignore Foreign institutions are keen on building up their presence quickly and partnership with a local institution is critical to their growth strategy The need for capital is obvious; foreign capital is critical However, we need to dispel previously held myths about foreign investment The wide-eyed naïve interest in Indian markets is now replaced by a more realistic and business-like approach to strategic partnership – investors now have an increased focus on long-term strategic and financial objectives. Buy-in price, commensurate control & influence, ongoing return opportunities, and reasonable downside protection (including flexible exit venues / options) are essential Local institutions need to be aware of foreign investors’ goals and prepare accordingly – anticipating the interests of foreign investors can help yield the best results Citigroup: Over 100 Years in India:  Citigroup: Over 100 Years in India Serves the entire breadth of the Indian economy with over 3.7 million retail clients and 900 corporate clients Provides full range of financial products and services Present across the entire spectrum of financial services activities – banking (commercial and consumer), investment banking (M&A, equity, debt, sales & trading, research) and private equity Citigroup is the leader in raising foreign currency loans for Indian corporates Citigroup is a market leader in the Indian rupee fixed income markets Citigroup has invested over US$900 million of capital in India Citigroup provides a fully comprehensive range of financial products and services to a breadth of clients across the entire spectrum of the Indian economic landscape #1 in Announced Indian M&A in 2004YTD Clear Leadership in Int’l Equity/ Equity-Linked Issues from India in 2004YTD Citigroup is the leading M&A investment bank in India having advised on some of the most prominent M&A and capital raising transactions

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