State of the Financial Services Industry | 2008 About this report

Oliver Wyman’s annual State of the Financial Services Industry report reviews the industry’s performance and provides senior management with key insights for successfully navigating an evolving competitive landscape.

Our findings are supported by Oliver Wyman’s deep financial services expertise and a number of proprietary analyses, including:

„„ An objective ranking of the world’s largest 400 quoted financial services firms based upon our Shareholder Performance IndexSM (SPI)

„„ Projected industry value growth and top management priorities for the coming year from our annual CEO Growth Survey Note: Many of the names in this report are current and previous Oliver Wyman clients. Any statements pertaining to such clients have been derived from publicly available information. FinancialAn alarming short-term mix of bursting asset bubbles and sustained volatility will produce further disruptions, but long-term trends will remainservices intact 2008

Executive Summary

In last year’s edition of this report, Oliver Wyman cited a number of significant challenges confronting the financial services industry. Chief among these was concern over the sustained buoyancy of the real estate sector. Unfortunately for most, this concern proved wholly justified as property prices fell, new financing structures unraveled, credit markets seized up and liquidity evaporated.

As a result of these catastrophic events, total industry value dropped by 2% to US$10.5 TN, while the industry so far has incurred over US$300 BN of losses attributable to the subprime revaluation. The seven-year trend of returns above general equity indices ended abruptly. Below this surface, the industry divided into weakening mature and inflated emerging economies.

We do not expect significant improvements in 2008. While governments, central banks and regulators scramble to address the aftermath of the subprime fallout, several other crises are mounting:

„„ In mature markets, demand slowdown, asset price corrections, domestic liquidity squeezes and credit losses will create sustained volatility and significant exposure to further declines

„„ In emerging markets, equity and other asset prices will likely head for a correction and require planning for inevitable localized crises and dampened global growth

Despite the depth of the current crisis and our forecast for 2008, we still strongly believe that the direction that modern finance has taken over the last three decades is the right one. Recent events have exposed failings in certain areas of risk and liquidity management, as well as other excesses, that require correction. However, we are not witnessing the predicted collapse of modern risk management or the fundamental failure of a financial services business model that is based on the parsing and distribution of risks to the most efficient holders of that risk. If appropriate corrective actions are taken, the industry should emerge both stronger and more dynamic.

Against this background, our analyses of industry trends and performance skews highlight four important themes that CEOs must consider to thrive in the medium term:

„„ Risk and liquidity management will require a much tighter grasp of potential exposures and contingency plans for any worsening in the markets

„„ While global financial services remain highly attractive in the medium term, the sources of economic profit are shifting toward new regions, segments and propositions

„„ Many existing growth initiatives are focused on traditional (partly declining) sources of value, or are pursued without a clear risk appetite and dedicated capacity

„„ New forces, including giants in emerging markets, sovereign wealth funds and private capital, that are not directly affected by the current crisis, are best positioned to benefit and will be at the forefront of innovation in 2008

State of the Financial Services Industry | Page 1 We expect a stormy 2008 With regard to share-price stability, the full impact of the ongoing credit and liquidity crisis is unlikely „„ Industry performance is dividing into paths of to manifest itself before the end of 2008. Analysis of decline and inflation historical crises shows that even if the profit-and-loss „„ In addition to further subprime fallout, at least hits stopped today, consumer confidence would not four other areas have a high probability of causing return for another three quarters. disruptions

„„ Earnings and valuations will come under multiple Third, the industry is assuming “business as usual” pressures that the industry is ignoring in its own – implying continued capital and resource allocation growth estimates to existing operations – even though its short-term

„„ About half of financial services firms see major growth predictions were well off 2007 actuals. For market risks in 2008, while the other half is less 2008, 69% of surveyed CEOs3 expect their firms to likely to focus on required critical actions outperform the industry.

The well-documented events of 2007 (see page 14 Figure 2: Past and present CEO perspectives on financial for an overview) and the ongoing liquidity crunch services market value growth have left the financial services industry in a state of Market value (US$TN) uncertainty. Our analyses, based on public information 14 CEO “cone of expectation” 2008 and proprietary research, lead us to expect turbulent 13 CEO “cone of 12 expectation” 2007 conditions for 2008 and beyond. 11 10 1 9 First, total value in the industry is being eroded by an 8 alarming mix of unsustainable growth trends in 7 “Triple value 6 in 10 years” developed economies and asset bubbles in emerging 5 trajectory markets. Currency effects often detract from the real 4 2003 2004 2005 2006 2007 2008 magnitude of this issue. CEO Growth 236 320 306 327 274 Index4 Figure 1: Key drivers for change in total industry value 2007 Market value migration in global financial services Source: CEO Growth Survey, Oliver Wyman analysis Indexed, 100% = market value at year-end 2006 (US$10.7 TN) Finally, the industry is splitting into two groups 100% regarding views on future market conditions: “realists” and “optimists”. The strategic priorities of both +5.5% 95% -10.7% groups involve critical risk management, as well as

+3.5% cost and human capital management actions. These 90% 100% 98.3% will alleviate the inevitable downsides from further disruptions, but we expect widely varying levels of 85% successful execution.

80% Figure 3: CEO risk perceptions and management priorities Year-end Drop in Growth in US$ Year-end for 2008 2006 mature emerging devaluation 2007 (US$ terms) markets markets effect (US$ terms) ‘Realists’ vs. ‘Optimists’ Selected strategic (local (local priorities for 2008 currencies) currencies) Deteriorating market Cited % share of Source: Datastream, Oliver Wyman analysis conditions named as key priorities responses threat in CEO survey Second, the seizure of credit and liquidity was the Risk and capital 76 first of several potential disruptions in the system. management 65 Page 3 outlines four specific areas that could lead to additional losses and volatility in the next two years. Yes No Human capital 85 48% 52% management 59 Additionally, further losses from the subprime crisis

(in the estimated range of US$250-300 BN) have yet Substantial cost 41 to unfold2. To put this in perspective, these losses will reductions 50 equal 2006 North American banking pre-tax profits. Source: CEO Growth Survey

1 Based on the Datastream financial services index (excluding real estate and including health insurers) 2 Oliver Wyman projection, based on bottom-up estimates of losses from ~US$1.3 TN outstandings of US subprime mortgages, industry write-downs in 2007 and current market prices for subprime-linked securities 3 Oliver Wyman’s Fifth Annual CEO Growth Survey among top financial firms provided an executive-suite view of the industry’s future direction 4 Oliver Wyman’s CEO Growth IndexSM (CGI) is a short-term forecasting measure for estimating the prospects for value growth in the coming year; it incorporates polling results from the CEO Growth Survey. A CGI of 274 represents financial services industry growth of 2.74 times the global GDP growth

Page 2 | State of the Financial Services Industry Four potential disruptions to plan for in 2008

Real estate (e.g. Europe) Asian equities

UK Equities in China

„„ Increasing affordability issues in self-certificated „„ Domestic “A share” index trades at P/E ratios around mortgages segment (the UK equivalent of subprime) 50 and single shares often >50% above dual listings in Hong Kong „„ More than 125,000 households are in delay of mortgage payments „„ Bubble is additionally fueled by severe investment restrictions, negative real interest rates and the falling „„ 30% more foreclosures in H1/2007 vs. H1/2006 US dollar „„ Quarterly sales of commercial property in Q4/2007 Risks: Price deflation, severe slowdown of Chinese dropped to lowest level since 2002 GDP growth, immediate global knock-on effects Risks: More losses due to higher charges in adjustable rate mortgages, and further slowdown of the commercial property market

Spain Asset prices in India

„„ Supply overhang of ~200,000 houses after decade- „„ Main Indian stock market valuation in Mumbai climbed long construction boom by ~600% within five years

„„ Decline in prices necessary to clear overhang – most „„ Property values have been soaring: value of prime office mortgages are adjustable rate space in Mumbai went up 70% in 2006 Risk: Devaluation of assets to hit banks that borrowed Risk: Flow of foreign liquidity (main driver for asset during the boom to finance acquisitions prices) drying up once structural problems worsen

Currencies (US dollar) Global commodities

Situation Situation

„„ Further dollar devaluation is the only pragmatic way „„ Global commodity prices have seen a sharp increase to strengthen the weak US economy and reduce across a range of goods (oil, gold, coal, agricultural international debt products)

„„ Foreign governments that hold trillions of dollars in „„ Barrel of crude oil increased from its low of US$50 in US securities are starting to shift dollars to baskets of January 2007 to a high of US$100 by year-end currencies „„ While the dollar decline was inflating prices, it also „„ China has sent a psychological signal by agreeing to mitigated the impact felt in many other economies buy two atomic power plants from France in Euro „„ China, as the largest commodity consumer, is a major currency driving force of prices; all commodity exporters are „„ Bold US responses for strengthening its own currency long on China are still outstanding

Risk scenarios Risk scenarios

„„ Slowdown of global economic growth „„ Dramatic collapse of the Chinese economy causing commodity prices and then global economic stability –– Other central banks required to slowly drive down to crash own interest rates „„ (Unlikely) worst-case scenario: Conflagration in the –– Starting point for higher inflation and a long cycle of Middle East further inflating oil prices and driving a emerging bubbles serious world recession (oil price quadrupled in 1973 „„ (Unlikely) worst-case scenario: US (and others) forced and again in 1979) into recession by a major redeployment within China’s federal reserves (>US$1.4 TN)

State of the Financial Services Industry | Page 3 Underperformers exposed over periods of three, five and 10 years (the bottom-end analogy to the concept of Premier Performers, which „„ About half of all firms trade at “low trust” we developed in previous reports). valuations; overvalued firms will be on the watch list in 2008 The disruption in 2007 illustrates the sensitivity „„ Past underperformance is likely to point to poor of Steady Underperformers to future crises and performance in the future the predictive strength of the SPI measure: Steady

„„ Underperformers will come from all industry areas; Underperformers as of June 2007 faced significantly their downfall will result from poor execution larger hits by subsequent events than did their peers. rather than “bad luck” Figure 5: Past underperformers’ increased exposure to Our analysis1 suggests that investors put an average future crises (illustrated by shareholder losses in H2/2007) discount of 6% on retained capital, implying that 52% Cumulative percentage of companies Shareholder value Shareholder value destruction creation of individual firms are not trusted to create sufficient 100% value in 2008. The chances of standing out from the 90% crowd differ significantly by geography and business 80% sector. 70% 60% Figure 4: Investors’ skepticism in financial services value 50% creation in 2008 40% Expected value creation in 2008 per US$1 of retained earnings (implied by market valuations and projected dividend and return yields) 30% >2x 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 2.1 US$ 20% >3x Total financial services 10% 0% <-10% <-7.5% <-5% <-2.5% <0% <+5% all North America Japan EMEA Rest of world

Median value Excess shareholder losses/returns in H2/2007 by geography “Low trust” valuations “High trust” valuations Market does not believe that firms’ Market puts a premium on capital Steady Underperformers as of June 2007 Others growth plans will create value retained to support growth Source: Datastream, Oliver Wyman analysis  75% of diversified institutions  78% of specialty providers Steady Underperformers by the end of 2007 represent  73% of universal banks  65% of investment banks  66% of insurance providers about 20% of our surveyed firms and are spread  53% of retail/commercial banks Sector skews across all major regions and sectors (with some over- (% of companies) representation in North America and retail banking). Source: Datastream, Oliver Wyman analysis We conclude that macro crises can crystallize Overvalued firms are exposed to downside corrections, almost anywhere and that being struck involves especially once growth prospects, capital capacity and more than simply bad luck. The segment also lags operational performance see further erosion. Examples Premier Performers and all other SPI firms in terms of of absolute and relative overvaluations in P/E ratios operational profitability3. include:

„„ One-third of players in emerging markets trading Quantitative Steady Under- Other SPI Premier over 25 (industry average: 12) characteristic performers firms Performers Average SPI -52 124 223 „„ 70% of exchanges worldwide trading over 30 Return on revenues 11% 12% 16% Oliver Wyman’s Shareholder Performance IndexSM Return on equity 18 20 20 (SPI)2 is a global measure of relative risk-adjusted shareholder performance. It reacts to slowdowns Other distinctive features include: in growth as well as to increased volatility, and „„ An above-average share of small and helps characterize likely future underperformers. To undifferentiated players develop a profile of the firms most exposed to future „„ Large caps known to have faced specific challenges disruptions, we examined “Steady Underperformers”. in the recent past (e.g. heavily decentralized These are firms with SPI scores consistently below the governance, limited control of distribution and averages of their respective subsectors and regions excessive M&A activity)

1 Oliver Wyman’s proprietary projection for a large sample of the current top 400 financial services firms, based on their stocks’ beta, P/E valuations, dividend and return yields 2 Oliver Wyman’s Shareholder Performance IndexSM (SPI) enables consistent comparisons of shareholder returns by adjusting for the volatility of returns, differences in local interest rates and mergers and acquisitions. It covers the 400 largest quoted companies in global financial services, comprising almost 80% of the industry’s total value. More details are provided at the end of this report 3 Source: Datastream, Bloomberg, Bankscope, reflecting latest available data during 2007 for a large sample of global top 400 firms (mostly first half of 2007 for return on revenues, Q3 for return on equity results)

Page 4 | State of the Financial Services Industry Qualifying as elite: Premier Performers Premier Performers continuously crave selective add- on investment opportunities. For instance, this is an „„ Premier Performers provide models for thriving in a ideal time for insurers willing to enhance their credit volatile world capabilities – as talent and expertise are becoming „„ The winning short-term formula is one of available – and to invest more actively in credit. exceptional execution Following this route requires that execution and „„ Gearing to controlled growth and strategic evolution governance frameworks will be advanced accordingly. are key to being part of the elite Compared to 2007, smaller M&A transactions sit high „„ Several models can deliver the required on the CEO agenda for 2008, particularly for North performance levels American firms and European insurers. The priorities Premier Performers1 in the SPI 400 have remained of European banks and players in emerging markets strong after a turbulent year. In 2007, 50 firms qualified differ in the type of response. as elite, compared to 54 the year before. Their different Figure 7: M&A priorities on the CEO agenda for 2008 strategies for success suggest that the winning formula for future outperformance comprises three stages. Most frequently cited Segment M&A priority for 2008 % share of responses Figure 6: Premier Performer space today and routes to North American Smaller M&A transactions 67 future outperformance firms 60 European insurers Smaller M&A transactions 89 Rewarded Consistent Rising to the elite 30 risk excellence in three stages 49%, SPI 244 39%, SPI 221 European banks Integrating a recent 44 3 3. Driving acquisition/merger 25 Above strategic Firms in emerging Major cross-border 47 evolution markets acquisition/merger 36

Average 2 2. Gearing to controlled 2008 2007 1 growth Source: CEO Growth Survey

Below subindustry and region

Excess returns relative to Excess returns relative Large transactions will face inflated skepticism as 1. Enabling Exceptional execution demonstrated by the acquisition of ABN AMRO Bank in execution excellence 12%, SPI 183 2007. Selective in-market acquisitions of undervalued Above Average Below firms offer a “double leverage” opportunity for early Volatility of returns relative to subindustry and region movers once market conditions stabilize. A recovery Premier Performers today Routes to future in certain sectors can boost both the buyer’s price-to- (% of companies; average 3-, 5-, 10-year SPI) outperformance book ratio and the target’s underlying assets. Source: Datastream, Oliver Wyman analysis First, risk, liquidity and funding management need Attractive short-term opportunities for non-organic to take center stage in 2008. Quick wins include growth may lie in: the review of lending standards and limit setting, „„ The reconsolidation of subscale firms whose adjustments to approval processes and the review business models collapsed of early warning tools and exit instruments. Banks „„ Spin-offs from affected mega-firms pursuing a stronger decoupling from liquidity risk will rediscover the value of their deposit segment (e.g. 33% „„ US firms providing additional currency leverage to buyers from abroad ROE for Bank of America in 2006). „„ Undervalued firms/“cheap” talent in adjacent Second, gearing to controlled growth implies that firms businesses (e.g. reinsurers buying financial guaranty deepen and expand their existing core profit pools, companies) while finding the right levels of focus and innovation. Third, most dynamic Premier Performers will prompt Pages 6-7 illustrate related challenges and success or even drive industry evolution in the medium-term factors in specific business contexts of different by making selective investments in higher-risk product business model archetypes that protagonists in the or service innovations and alternative business models. global financial services industry have begun to adopt2. They accomplish this through the active management of strategic risk and available capital and resources.

1 Premier Performers defined as: Financial institutions with SPI scores consistently above the average SPI for their respective subindustries and regions over time periods of three, five and 10 years 2 Note: We see many financial services companies operating a combination of several of these archetype models more or less intertwined. We also find institutions with (parts of their) business in a transitional mode between these models

State of the Financial Services Industry | Page 5 Rising to the elite: Generalist models

Global titans (and aspirants) Regional and local incumbents (Global market leaders that have the required capital (Financial institutions that operate strong franchises in strength, brand, scale and distribution reach to serve only a few local markets, usually with a broad spectrum multiple markets in all major geographic regions) of products and services)

In most cases, global titans do not live up to their The main threat to regional and local incumbents, in terms of “powerhouse” ambition, as their global enterprises often crises and macro shocks, lies in their geographic focus. These run a high reputational risk and fail to outperform local institutions must leverage their client and market proximity to competitors. Global titans’ exposure to disruptions in parts of fend off competitive pressure from two fronts. the financial services market is highly diversified.

Figure 8: Global titans and aspirants lagging peers Figure 9: Competition for regional and local incumbents

Declining market share in global financial services Regional (based on 40 firms considered as global titans and aspirants) Global titans and local Specialist Share in total and aspirants incumbents models industry value 35% SPI gap to other 3%  Financial strength  Cherry picking 30% sector peers 10% 3% -58  Brand power  Tailor-made 25% solutions  International 20% 9% -22 expertise  Talent and innovation 15%  Scale opportunities 10% 21% Internal  Efficient economics 16% -55 competition 5%

0% 2003 2007 Diversified institutions Insurance providers Banks

Source: Datastream, Oliver Wyman analysis

Looking ahead, becoming part of the elite will require: Looking ahead, becoming part of the elite will require:

„„ Definition and execution of a clear strategic risk „„ Actively “de-risking” the core business through appetite for investments in growth segments and regular complementary low-risk revenue sources and adjustments in launches of innovative spearhead initiatives product design

„„ Efficient internal funding from high shares in today’s „„ Gaining depth from local intelligence to tailor product major revenue pools (e.g. the US) and from capital that has design and risk management systems to local specifics been freed up through more active management of balance „„ Strengthening the domestic franchise with investments sheet capacity in multi-channel and multi-technology access points and

„„ Superior cost management with smart efficiency uploads of service packages benchmarks, and with budgets, targets and liquidity (fixed „„ Actively anticipating a necessary business model vs. variable costs) structurally aligned with strategic portfolio transition to avoid drifting into a subscale position decisions Two alternative roadmaps are suitable for keeping „„ Building regional factory competencies and shared propositions distinctive over time: services models to achieve economies of scale in manufacturing (e.g. pan-EU variable annuities platforms) „„ Pursuing a “regional (or even global) powerhouse” and distribution (e.g. serving the global 50+ market) position, implying a heavy ramp-up of existing operations and a controlled appetite for entering adjacent operations „„ Formalizing the organizational steering of businesses (e.g. new B2B partnerships) (autonomy vs. control) and the role of the corporate center, which can act as “portfolio investor,” “activist shareholder” „„ Selective specialization that involves selling off parts of or “operational manager” the value chain; good customer proximity and a true selling culture may ultimately lead to open-architecture business models

Page 6 | State of the Financial Services Industry Rising to the elite: Specialist models

Category killers and cherry pickers Value chain specialists (Specialist product manufacturers and service providers (Companies that focus on particular parts of financial that are often positioned in a limited number of skill- services value chains, including asset managers, third- heavy niche categories or are closely aligned with one or party administrators, brokers, technology providers and a few target customer segments) trading platforms)

The main threat to these specialists is a shock event or crisis These specialists face the usual niche exposures. Some that crystallizes in the exact niche they exploit; for instance, particular models can actually decouple from major cycles many of the subprime lenders that exited business in 2007 (e.g. credit, inflation) and benefit from pure asset and risk were US consumer credit specialists. High margins and circulation in any direction. Investors appreciate the clarity of retention levels are the main drivers of value. specialty activity models.

Figure 10: Paths to value creation for category killers and cherry pickers Figure 11: Value chain specialists on the rise P/E ratio Demand-led innovation SPI (year-end) 200 35 High margins Customer cherry High and retention 175 pickers 30 levels 150 25 125 Entry 20 barriers 100 Product 15 category 75 10 Superior distribution killers 50 Deepening customer base Low 5

Customer capture and selection Customer capture 25

0 0 Superior manufacturing 2005 2006 2007

Low High SPI of value chain specialists P/E of value chain specialists Product category leadership/ownership P/E of global financial services

Source: Datastream, Oliver Wyman analysis

Looking ahead, becoming part of the elite will require: Looking ahead, becoming part of the elite will require:

„„ Risk-adjusted pricing and mitigation of concentrated „„ Scale or high-end specialization as alternative routes risk, for instance through risk transformation and transfer to building entry barriers (as seen in current trends of asset instruments management)

„„ Targeting sufficiently large and scalable niches, such as „„ Talent, high-end technology and innovation as key most pure health insurance and consumer finance specialists enablers for high-grade specialization that operate mainly in the US and Japan and generally „„ Risk appetite for opportunistic acquisitions of spin-offs benefit from demographic and socioeconomic trends from full-service providers

„„ Building entry barriers through distinctive product „„ Strong B2B customer capture for those value chain propositions and service customization that are enabled by specialists that directly serve parts of the banking and superior data, expertise and customer capture (e.g. loyalty insurance value chain programs) „„ Lean production structures coupled with high-quality „„ Strategic investments in maintaining innovation delivery as a basis for offering attractive outsourcing capabilities options (even to large-scale firms that could also run

„„ Long-term B2B partnerships, exemplified by BNP activities in-house) Paribas’ Cardif, a product specialist for creditor insurance that established partnerships with numerous banks, credit institutions and large distributors

State of the Financial Services Industry | Page 7 New growth opportunities will arise where Cross-sector offering for “dis-savers”: Players serving traditional businesses intersect the complex demands of “generation 50+” can succeed by transcending transitional boundaries among „„ Most CEOs set major growth targets in their home banking, insurance and wealth management. Where markets, attempting to reach them through organic offered, boundary-crossing products and services are growth and product and service innovation proving successful (e.g. reverse mortgages, variable „„ New cross-sector business models with attractive annuities with living benefits, financial advice potential are on the rise platforms). However, only a few bold moves have been „„ Premier Performers will drive innovation with made so far. advanced internal governance models Reinsurers thinking of providing asset protection CEOs continue to seek new growth primarily in their solutions for insurers: Either by serving purely as domestic markets and through organic expansion into an intermediary or by setting up their own in-house new areas. trading desks, reinsurers may become a “one-stop Figure 12: CEO priorities for new growth in 2008 shop” for all risk transfers, competing with investment Cited near-term priorities % share of survey responses banks on the back of structural arbitrage opportunities, client proximity and risk pooling facilities. This type Growth in domestic market 67 Organic expansion into new markets of new offering could help reinsurers fully exploit 73 (products, customers, international) synergies with other non-traditional solutions, such as securitization. Specific drivers for insurers’ demand in Source: CEO Growth Survey asset protection include hedging against reinvestment Furthermore, CEOs expect customers to become risks in life insurance, own investment restrictions in more demanding and selective in their product hedging instruments and outsourcing considerations. choices. Product and service innovations remain at the forefront of cited strategies to counter increasing B2B partnership models with non-financial sectors customer demands; the key challenge in this arena is (e.g. affinity sales) or with innovative entrants (e.g. talent attraction, retention and commitment. peer-to-peer auction platforms or aggregators in the insurance distribution chain in the UK). Through innovative concepts, successful firms will find and exploit new growth opportunities that arise at the New governance models arising intersections of traditional sector boundaries. Outperformers will steer non-traditional business Figure 13: Drivers for cross-sector innovation in financial development with aligned internal management and services reporting structures. Some integrated asset managers Evolution of client demand Shareholder value potential point to an unbundling of value chain activities. They „„ New needs „„ Complementary, scalable are re-organizing so that the different activity areas growth –– Aging, socioeconomic trends have separate reporting lines and higher autonomy –– Products, clients, skill sets –– New wealth, polarizing wealth –– Diversification with respect to applying new modular business

„„ Increasing sophistication „„ Early mover advantage concepts.

–– Active and educated buyers –– Attraction and awareness More generally, we expect that outperformers will –– Market transparency –– Premium margin opportunities „„ Higher expectations increasingly separate their profit-and-loss accounts „„ Investors’ appreciation –– Convenience and balance sheets for the main value-creating parts –– Differentiation and –– Technology uniqueness of their business, allowing them to identify and

–– Rewarded strategic risk quantify value-creating drivers. New growth launches thus can be monitored more efficiently. Linkages via A future that is already happening strategic planning, performance targets and limit The following examples of cross-sector models are setting will contribute to a more centralized process based on existing trends. that addresses the typical concerns of investors. Levels of application can range from granular individual New asset management propositions: High-grade business units to the group level; they can influence specialization in production will lead to overlaps with either the full legal entity structure or simply the investment banking that allow one side to develop operational management and reporting lines. cross-sector innovations on its own and/or both parties to develop joint propositions.

Page 8 | State of the Financial Services Industry Evolution of modern finance will continue As part of the transitional phase and further de- leveraging, banks may need to shrink their balance „„ We believe the established trends of modern sheets. This will put pressure not only on ROE levels, but finance are still strong also (through a reduced asset base) on total earnings, „„ “Originate and sell” and alternative risk transfer which shareholders tend to care more about. Over time, models will remain attractive after refinements the correlations between balance sheet growth and that the current crisis will trigger earnings are likely to be diluted. The set of expected „„ Firms must prepare for a short-term transitional adjustments to the “originate and sell” model will lead phase and the expected recovery and growth of the industry back to a state in which earnings will more these models under new conditions evenly depend on both risk quantity and quality.

“Originate and sell” will recover and grow Strategically, concerned firms must develop a vision under new conditions of how to adapt to future funding requirements The depth of the recent subprime crisis has raised under stricter market conditions. The starting point fundamental questions about whether modern finance for these firms is to define the appetite and capacity has ultimately failed. This is causing some to advocate for selectively holding originated risks on their own a return to the “buy and hold” model, searching for balance sheets. While a reduced dependence on further evidence in dried-up CDO and MBS issuance. In external investors provides more room for customer- our view, the “originate and sell” model will not see a facing innovation, it also requires higher levels fundamental reversal, but rather will undergo a more of excess capital, thus causing drags in relative narrow set of changes, addressing specific failings that performance. were exposed mainly on the business execution side. In general, companies that suffered had one or more of Insurance-linked securitization will advance the following characteristics: We expect that alternative capital markets „„ Failure to create transparency with regard to transactions for insurance risks, although currently aggregate risk exposures and sensitivities in stress difficult to arrange, will generally see more scenarios advancement as well. Recently, all involved parties „„ Poor risk control, underwriting and pricing have been sending strong signals: discipline, including the acceptance of maturity mismatches Insurance providers are increasingly willing to push the borderline of insurable risk (e.g. longevity), „„ Over-reliance on rating agencies, sometimes ignoring that ratings for CDO tranches are far from leveraging capital markets where feasible. 2007 saw the equivalent to bond rating standards first publicly announced longevity swap between Swiss Re and Friends Provident. Undoubtedly, these issues will take time to work through; however, basic economic considerations Large corporate clients’ appetite for further mitigation around arbitrage and performance leverage, which of “off-strategy” risks is driving new demand for capital brought securitization into life, will not go out of markets solutions; the share of “ERM-enabled” clients fashion. We believe that the industry and external is increasing, yet is unevenly spread across geographies parties will turn recent failures into successes by and industries. We see capital intensive industries and making necessary adjustments, most importantly: industries with long product lead times, such as the energy, defense and aerospace sectors, at the forefront „„ Improved governance and market discipline, as well as stricter standards (lending and pricing), both of moving from compliance-driven risk management to at the front end of origination and on the side of the sophisticated risk-return optimization frameworks. regulators Risk trading and risk financing facilities are improving „ „ Increased transparency regarding packaged risks, rapidly, evidenced by Guy Carpenter’s announcement implying simpler structures (most likely with less to launch trading indices for P&C risks and the release leverage) and the active preparation for life beyond rating agencies of JPMorgan’s “LifeMetrics” index.

„„ Independent, “educated” investors with a clear appetite for and understanding of underlying risks

State of the Financial Services Industry | Page 9 New forces for change: Giants in emerging The events of 2007 have confirmed this scenario: markets China’s outbound acquisition volumes in financial services rose to US$28 BN1. The most noticeable „„ Giants in emerging markets have more financial move was made in November 2007 by Ping An power than can be absorbed in their domestic Insurance Group which bought a 4.2% stake in capital markets Fortis for US$2.7 BN. The deal made Ping An the „„ These giants are becoming increasingly acquisitive top shareholder in Fortis and represents the largest in developed economies foreign purchase by a Chinese insurer. „„ Future industry impact is difficult to predict, as current funding mainly depends on domestic Domestically, the Chinese government actively bubbles and governmental policies encourages insurers to grow their profit streams by investing in adjacent sectors. Local firms are following Chinese giants: Surviving the inevitable this route. China Life Insurance Company formed a downturn? new asset management joint venture with Franklin On the back of the equity boom in China, Chinese Templeton Investments in Hong Kong, and took its first companies have risen to the top of the league of most step toward expanding into banking and becoming a valuable financial services players around the world. financial holding company.

Figure 14: Global top 10 financial services institutions by Russian state-owned firms: Stealing the lead in market value Eastern Europe? Industrial and Commercial Bank of China 338 As acquisition targets become scarce in the maturing Berkshire Hathaway 219

China Life Insurance Company 201 EU accession countries, the focus of M&A activity

China Construction Bank 200 in Eastern Europe has shifted farther to Southeast

Bank of China 199 Europe and the Commonwealth of Independent

HSBC Holdings 198 States (CIS). Russia remains the region’s focal

Bank of America 183 point for international bets on growth, but remains

American International Group 148 difficult to enter decisively due to its extreme market

Citigroup 147 fragmentation (there are more than 1,200 firms in the JP Morgan Chase & Co 147 Russian banking sector) and the nature of its local

0 50 100 150 200 250 300 350 400 institutions, which are much more acquisitive than End 2007 market value (US$BN) their peers in Eastern European countries. Chinese giants Companies in mature markets Russian companies will most likely lead the push Source: Bloomberg into CIS markets, stealing a lead on competitors from Flush with trillions of dollars in household savings, mature markets. One could argue that Russia’s state- excessive valuations and limited investment owned companies have few cash limitations when opportunities at home, these emerging markets giants making investments that can be justified by political are increasingly threatening established players in interest. Through investments in natural resource- Western economies. Foreign acquisitions or equity based sectors, Russia has already gained significant stakes appear to be a suitable way of surviving the economic and political influence across CIS markets; inevitable downturn in their home markets. more recent investment activities have been targeting „„ China’s capital markets are incapable of absorbing the telecom sector (Russian mobile companies all of the new financial power dominate the Ukrainian market), producers of dairy „„ The need for diversification is high. Almost the products and machinery, and finally also financial entire value of Chinese companies is based on a services. Russian banks VTB Bank OJSC (formerly domestic bubble, and the same is true for revenues Vneshtorgbank) and Sberbank, as well as Russian and earnings. Investments comprise a significant insurer Ingosstrakh, are among those firms that component of income for top financial institutions have recently acquired majority stakes in Ukrainian as well as insurance companies. financial services firms. „„ Chinese firms are aggressively seeking access to global expertise

1 Source: Thompson Financial, Oliver Wyman analysis

Page 10 | State of the Financial Services Industry New forces for change: Sovereign wealth funds Some also associate SWF capital flows with soaring asset prices, inflation and real currency appreciation. „„ Sovereign wealth funds (SWFs) represent a highly Put in perspective, SWF asset pools compare to a total concentrated source of capital that could be equity and debt market of more than US$100 TN. increasingly targeted at the financial services industry Largely non-transparent risks arise from SWF investments in high-leverage instruments. SWFs are „„ Continued asset inflows into SWFs will require typically unregulated and enjoy substantial freedom evaluation of a vast range of new investments, but the political environment around the uses of these to invest in a broad range of asset classes, including new assets remains uncertain private equity, hedge funds and derivative instruments. Asset allocation and risk management of a SWF are „„ Higher governance standards are the prerequisite for SWFs to become a permanent force in financial mainly driven by its investment purpose (e.g. economic services stabilization or intergenerational protection).

SWFs are a fast-growing but idiosyncratic force in Remaining uncertainties include political risk issues, financial markets. Today, they already manage more such as the potential for: than US$3 TN of highly concentrated assets. „„ Conflicting interests resulting from governments Figure 15: Rise and concentration of sovereign wealth funds investing in the private sector Growth of sovereign wealth funds... … and their asset concentration in 2007 „„ Loss of control over national core assets if political Assets under motivations take precedence over financial management (US$TN) By fund volume objectives 3.5 Top 10 funds, „„ Increased protectionism, slowing down market 3.0 86% Others, 14% liberalization 2.5 CAGR +78% China’s acquisition of a US$3 BN stake in Blackstone 2.0 Group in May 2007 will possibly allow access to By fund location 1.5 otherwise restricted deals in Europe and America, and CAGR Other, 5% 1.0 +5% will give Blackstone Group an entry route into China. Norway, 10% 0.5 In November, Citigroup offered to pay an 11% coupon Asia, 34% in return for a US$7.5 BN cash infusion from Abu 0.0 MEA, 51% 1990 ... 2005 2007 Dhabi Investment Authority; in December, Government

Source: SSGA, Deutsche Bank Research, Finance & Development (September of Singapore Investment Corporation announced the 2007), Oliver Wyman analysis purchase of about 9% of UBS. Temasek Holdings, one of the top 10 SWFs, invests 38%1 of its assets in financial services. If the whole SWFs can enrich the industry if higher governance SWF asset pool grew to this share, SWFs would own standards (e.g. voluntary codes of conduct) become the around 10% of the industry. SWFs are also set for subject of a wider debate and a common international further growth, with US$450 BN2 in expected annual effort. This effort would need to address issues such as: transfers from federal reserves. „„ Transparency of investment strategy and structures

Opportunities for the financial services industry can be „„ Minimum standards regarding financial reporting found in: and auditing

„„ A stream of additional liquidity into a diverse range „„ International guidelines regarding cooperation and of asset classes regulatory adherence

„„ Implied demand for asset management and Finding a starting point is not impossible, however. investment banking services from SWFs willing to International attention is rising, and SWFs are already outsource services formal members in the International Monetary Fund, „„ Potential catalyst effects with regard to increased which might assist the proposed efforts, with the foreign investments in protected countries World Bank playing another productive role.

1 Morgan Stanley Research 2 Economist, May 24, 2007

State of the Financial Services Industry | Page 11 Private capital and non-traditional providers are Retailers – a threat of serious scale: Retailers have positioned for further growth started to step beyond pure partnership models with financial services providers. Banque Accord, owned by „„ Private equity investors are likely to continue to leading French food retailer Auchan, acts as Auchan’s grow in importance catalyst for product innovation and diversification, „„ Other industries expanding into financial services and pursues aggressive international growth in Europe (e.g. retailers) represent localized threats to existing and China. Wal-Mart Stores sparked a nationwide industry participants firestorm in the US banking sector by seeking federal Opportunities for private equity approval to create an industrial loan corporation (ILC) in 2005. Moratoriums by the Federal Deposit Insurance With leveraged buyout (LBO) capacity currently Corporation on granting deposit insurance for all ILCs curtailed, opinions in the market regarding the future in 2006 caused Wal-Mart to finally withdraw its bid last role of private equity differ. We think LBO activity will year. This case illustrates the seriousness with which rebound soon: the industry views these competitors. „„ Despite many pulled leveraged financing deals since June (representing more than US$60 BN in funding Automotive – gradual expansion, but with a less for M&A), few transactions have been canceled aggressive mission: Captive automotive finance

„„ Private equity firms are still flush with cash, and houses are well established and of enormous investors are still committing cash to the sector size (US$100 BN collective revenues from leading (US$75 BN net raised in Q3/07 vs. US$76 BN in automotive firms2 in 2006). Yet, they primarily serve Q3/06) as uploads of car sales packages and as facilitators of „„ With valuations down across the board and likely customer retention and loyalty to repair shops. spin-offs of non-core assets and value chain break- ups, there are many opportunities Telecoms (mobile banking) – still too early to evaluate the threat: Even global technology pioneers, such as Banks with exposure to the industry, however, will Japanese NTT DoCoMO, are still waiting for demand likely drive tougher bargains around financing, such as in mobile banking to soar. There is little doubt that less leveraged capital structures, smaller deal sizes and further technological advancement will, at some point, wider spreads. cause this to happen. Financial institutions remain alert but defensive. Other industries with expansion into retail banking and insurance Affinity groups – some threatening signals from automobile clubs: Europe’s largest club, German ADAC, Non-traditional providers1 have become commonplace, sent a signal to the financial services industry in 2007 especially in retail banking and insurance. Having when it announced that it would, in cooperation with overcome entry barriers with regard to expertise, Zurich Financial Services, shift from serving purely as infrastructure and regulation, some operate as direct a broker to being an insurance risk carrier. This has competitors to banks and insurers. Will another made further shifts by these associations a very real disruption in financial services trigger additional proposition. Other types of affinity groups are less likely inroads from other industries that seek windows of to move beyond a pure third-party distributor role soon. “cheap” access to talent and existing vehicles?

Figure 16: Non-traditional providers in retail banking and insurance Which industries? Which products? Where? Savings and Selected countries with high Payments and deposits investments Consumer finance Insurance penetration Retailers „„ UK „„ Japan „„ France Automotive „„ Germany „„ US „„ UK Telecoms „„ Emerging „„ Japan (mobile banking) economies Affinity associations „„ UK „„ Germany „„ US Others „„ UK „„ Spain (utilities, airlines, etc.) „„ US Level of penetration in financial services markets (based on qualitative and quantitative assessments): None Low Medium High Source: Datamonitor, DB Research, Annual reports, Oliver Wyman analysis

1 Note: We abstract here from national post providers; their role in financial services is in many markets still less driven by own strategic moves, but rather by governmental decisions on privatization 2 General Motors, Ford, BMW, DaimlerChrysler, Toyota

Page 12 | State of the Financial Services Industry Review: Global financial services in 2007 Below this surface, performance skews across geographies and subsectors widened significantly. „„ In 2007, the market value of financial services As outlined earlier, financial services has become a dropped for the first time since 2002 two-speed world in which mature economies (with „„ Performance skews across geographies and sectors the exception of Australia/New Zealand) see a mean widened reversion, and emerging markets still enjoy a stellar „„ The impact of the subprime crisis was exceptionally performance. deep and widely dispersed Figure 18: Diverging paths of growth and performance in In 2007, the looming threat of a reversal in the fortune financial services of US mortgage markets, predicted a year ago by Oliver Change in market value 2007 Average SPI Wyman1, became a reality. As a result of unfolding -40% -20% -0% +20% +40% +60% events, global growth – which had been considerably Japan 44 above its long-term trend line from 2003 to 2006 – was North America 81 disrupted and so was investors’ trust. EMEA 108

Figure 17: Financial services’ relative valuation discount Australia/New Zealand 168 Financial services industry P/E in relation to Latin America 169 P/E of non-financial sectors Asia, excl. Japan 197 100% 90% Source: Datastream, Oliver Wyman analysis 80% The full profit-and-loss impacts of the crisis are yet to 70% be seen during 2008. Analyzing so far published results 60% that still largely reflect the “healthy” state of the 50% industry, we found that: Average annual valuation discounts of financial services 40% „„ Average revenues, comparing the first half of 2007 to 31% 41% 26% 31% 26% 28% 21% 18% 31% 30% the first half of 2006, grew by 23%, compared to 18% 20% the year before

10% „„ Average global nine-month profits (Q1-Q3) went up 0% by 14% compared to the same period in 2006 1999 2000 2001 2002 2003 2004 2005 2006 2007 „„ Average cost-income ratio (mid-year) improved by Source: Datastream, Oliver Wyman analysis one percentage point down to 60% The aggregate global value of all quoted financial services firms fell by 2% to a total of US$10.5 TN. At The insurance industry saw another year below stable exchange rates, the industry would have seen a the long-term loss trend from catastrophic events. value loss of 7.2%. The monthly volatility of industry Preliminary numbers2 point to an estimated US$61 BN value increased drastically compared to previous years. in losses from natural catastrophes, with insured property losses totaling US$22 BN.

Figure 19: Market value map of top 400 financial services institutions in 2007 Total year-end market value in 2007 = US$8.1 TN 100%

80%

60%

40%

20%

10% 20% 40% 60% 80% 100% North America EMEA Japan Asia, excl. Latin Japan America Specialty providers Diversified financial institutions Insurance providers AUS/NZ Universal banks Investment banks Retail & commercial banks

Source: Datastream, Oliver Wyman analysis

1 State of the Financial Services Industry 2007, page 21 2 According to Swiss Re’s forthcoming Sigma report

State of the Financial Services Industry | Page 13 The credit and liquidity crunch in perspective

Figure 20: Chronology of the 2007 mortgage crisis and subsequent events

Fear Panic Fallout recognition Rising defaults and risk Spreads, equity markets Sizing and fire-fighting Phases January-June July-September October-December January: July: October: HSBC issues first profit warning Credit agencies downgrade Citigroup declares write-downs of US$5.9 BN because of US$10.5 BN bad subprime bonds Group of banks discloses plan of launching superfund M-LEC debt charges over US mortgage IKB bailed out book Merrill Lynch revises total write-downs to US$8.4 BN; CEO O’Neal steps down August: UBS confirms write-downs of US$3.4 BN February: Bear Stearns’ hedge funds Fremont General sells subprime bankrupt FED lowers funds and discount rates by 25bp business Central Banks (FED, ECB, BoJ) November: New Century stops issuing loans pump funds of ~US$280 BN into Citigroup declares further write-downs of US$8-11 BN; CEO Prince resigns April: repo markets Swiss Re writes down US$1.07 BN New Century files for Fed cuts discount rate by Citigroup to sell stake to Abu Dhabi Investment Authority for US$7.5 BN Events bankruptcy 50bp to 5.75% E-trade receives US$2.6 BN from Citadel; CEO Caplan steps down NAR: 8.4% slump in existing September: December: home sales in Feb, largest Countrywide plans 12,000 job UBS writes down further US$10 BN; sale of stakes to GIC and Middle East investor monthly fall in 18 years cuts FED lowers funds and discount rates by 25bp June: Bank of England bails out Bear Stearns’ hedge funds near Northern Rock Five big Central Banks team up for cash loans of >US$100 BN; ECB to flood market with collapse; Merrill Lynch accepts record 2-week tender of US$500 BN US$850 MM for collateral assets FED lowers funds and discount rates by 50bp Largest decline ever recorded for Case-Shiller US home price index; new US home sales at 12-year low in November

Source: Oliver Wyman press research

Many of the dynamics driving the mortgage crisis Global top 400 firms in emerging markets were broadly were not new – the potential for a bursting US housing unaffected, still generating shareholder value of bubble was well understood prior to 2007. In 2006, US US$120 BN in H2/2007 in excess of risk-free rates. In national home price appreciation passed its inflection developed economies, investor panic wiped out about point and began moving toward a mean reversion. US$1.1 TN in the same period (see Figure 21). Unwilling to slow down their activities, many subprime Of the total US subprime mortgage market outstanding mortgage lenders kept loan volumes high by resorting (approximately US$1.3 TN), about 70% of exposure is to riskier lending practices. Both the boom and bust still to be accounted for. Write-downs in 2007 exceeded phases of a traditional mortgage cycle were magnified US$75 BN. As illustrated earlier, the line between by access to a global pool of investors that were winners and losers was mainly drawn by quality and hungry for incremental return. discipline in execution. Propelled by a market-wide “flight to quality” and de- leveraging of risk in the summer months, the industry Goldman Sachs Group: The smartest kid in class? encountered a so-far unknown and widespread liquidity crunch across sectors in mature markets. Profiting from striking earnings growth (net earnings up 28% in H2/2007) while most peers had to report record write-downs, Goldman Sachs saw its Figure 21: Localization of shareholder losses H2/2007 in success supported by four main factors: mature markets „„ Favorable impact of strategically anticipated hedge positions Shareholder excess returns in H2/2007 „„ Limited expansion into origination, but strong position as MBS underwriter 50% „„ Selective stakes in servicing firms (providing stable fees and pricing insights 40% on packaged loans) Exchanges 30% „„ Conservative securitization policy, suggesting a high level of asset discipline

20% Leading players by CDO issuance in Growth in CDO issuance Processors H1/2007 H1/2007 vs. H1/2006 10% All other specialty Diversified institutions Investment banks providers Merrill Lynch & Co. (#1) 46% 0% Goldman Sachs Group (#6) 6% -10% Asset managers Bear, Stearns & Co. (#11) 18% -20% Insurers Retail & commercial Universal banks Lehman Brothers Holding (#12) 57% -30% banks Morgan Stanley (#13) 75%

-40% Source: Asset-Backed Alert Consumer finance -50% 0% 20% 40% 60% 80% 100% Share of market value in mature markets at mid 2007

Source: Datastream, Oliver Wyman analysis

Page 14 | State of the Financial Services Industry Sector Insights

For ease of comparison, we group the firms in our SPI survey into six sectors. In this section, we will review each sector’s performance and discuss key themes for the coming year.

Figure 22: Average SPI trajectories and performance spread (top to bottom quartile) by industry sector Retail and commercial banks Investment banks Universal banks (Market value = US$2,067 BN) (Market value = US$413 BN) (Market value = US$2,238 BN) SPI SPI SPI 400 400 400 300 300 300 200 200 200 100 100 100 0 0 0 -100 -100 -100 -200 -200 -200 2002 2003 2004 2005 2006 2007 2002 2003 2004 2005 2006 2007 2002 2003 2004 2005 2006 2007

Insurance providers Diversified financial institutions Specialty providers (Market value = US$1,636 BN) (Market value = US$641 BN) (Market value = US$1,092 BN) SPI SPI SPI 400 400 400 Pure health insurers (US) Exchanges 300 300 300 200 P&C Life 200 200 Asset managers 100 100 100 0 Mixed 0 0 Processors -100 -100 -100 Consumer finance RI -200 -200 -200 2002 2003 2004 2005 2006 2007 2002 2003 2004 2005 2006 2007 2002 2003 2004 2005 2006 2007

Source: Datastream, Oliver Wyman analysis

Retail and commercial banks: Faltering wider demographic trends around the baby boomers’ performance lack of saving and the economic migration from East With a slightly reduced overall SPI of 126, retail to West, companies must now gain further size and and commercial banking became the second best- industrialization capabilities. New types of competitors performing sector in 2007. Asia (excluding Japan) and are emerging (e.g. peer-to-peer service innovators, Latin America stood out with market value growth online payment facilities). US regional banks will see around 50%, while value losses of US players totaled the traditional role of their branches change as a result US$160 BN (a 28% reduction; average SPI dropped from of modern technology and the emergence of successful 152 to ‑22). Japan (SPI 56) was the other major weak “light network” banks. spot in 2007. Retail and commercial banks in EMEA New potential customers reside in underserved (Europe, the Middle East and Africa) continued to segments such as (properly managed) near prime deliver high performance (SPI 174), although positions customers in continental Europe and previously among the sector’s top performers became scarce. unserved ethnic groups. Cross-border expansion and Banca CR Firenze, Italy (SPI 312) and Jyske Bank, consolidation will remain high on the agenda of those Denmark (SPI 298) were the only players from mature with purchasing power, particularly as depressed Western economies making the sector’s SPI top 10. valuations offer scope for bargains.

A number of factors suggest that the market will Investment banks: Opportunities on the horizon undergo substantive change. Macro factors turned less Investment banks increased their average SPI in favorable, particularly in markets where mortgage and 2007 to 90. While they improved their performance credit growth has been important. New conformance in some regions, with Australia (SPI 169) and Asia, rules (e.g. the Single Euro Payments Area initiative) excluding Japan (SPI 118) leading the field, the overall will impose substantial investment burdens on retail sector value shrank by 9%. The sector membership banks in Europe. US players must invest in revised and enjoyed continued stability, with only one new entrant adapted risk management and credit lending practices. (Babcock & Brown, Australia) joining the top 400 firms Retail and commercial banks in Europe have continued and with no major M&A activity. No firm made the list to improve their average efficiency, and the round of of Premier Performers in 2007; Goldman Sachs Group, cross-border consolidation has added fuel to this trend. US (SPI 183) was the only one making the first quartile With credit markets under pressure, and with of all financial services firms.

State of the Financial Services Industry | Page 15 Complementary business allowed the sector to limit Activist investors present another major threat. The profit declines. Structured rates and FX benefited case of ABN AMRO Bank demonstrated how influential from high market volatility, and will remain strong a small group of shareholders can be in clamoring for contributors to earnings in our projected macro the sale or break-up of underperforming companies. scenarios. The business areas that suffered most from Activist groups in several other large-cap universal the market downturn were structured credit and banks have already started campaigning for change. corporate and leveraged finance. With reduced demand Higher visibility in retail segments, resulting from and claims for greater product transparency, these leveraging strong brands and platform synergies, can lines will need to undergo specific adjustments before offer access to new growth and can stabilize earnings an expected rebound. Additional challenges will arise and funding. This applies to mass-market business as from the requirement to sell or re-integrate further SIV well as to private banking divisions, which can build up assets. scale and efficient service delivery based on platforms Events in 2007 revealed opportunities in M&A, as well of the broader enterprise. Large corporate clients’ as for recovery and servicing specialists. Continued appetite for risk financing solutions is driving new growth is expected to come from the public sector and demand for capital markets solutions. sovereign wealth funds, from retail capital protection products for the aging G8 population and from Insurance providers: Gearing toward business emerging markets, with new wealth and new pools model transformation of institutional money. Areas of convergence with Insurance providers improved their average SPI levels the energy sector, corporate supply chain/transaction across all subsectors in 20071. The stellar stock processing and the demand for structured/synthetic performance of China Life Insurance Company (SPI solutions from insurance and pensions can be further 272) and Ping An (SPI 337), combined with the exploited. Quality and countercyclical players will impressive SPI results of North America-based titans find consolidation opportunities in principal finance such as Manulife Financial (SPI 355) and Prudential and alternative investments; however, growth in these Financial (SPI 292), pushed the life insurance subsector areas will depend on innovative propositions. to a new SPI level of 177 (81 in 2006). Non-life players saw little change; in many mature markets, organic Universal banks: On the watch list growth in personal lines has become difficult. In The 2007 average SPI for universal banks improved addition, there are indications of a general softening of slightly to 87. The gap between top and bottom the P&C market. Reinsurers finally saw an end to their performers continued to narrow, with the sector SPI long, continuous decline; the worst performing of all close to the bottom-quartile level. The US portion of financial services subsectors in 2006 recovered slightly the sector is essentially a game of only three super to an average SPI of -64, still well below the global large-cap firms, each of which can cause overall median. Geographically, EMEA continued to be the performance discontinuities, such as the 29% drop worst-performing region for insurers (SPI 61), although in market value seen in 2007. Canadian players it is catching up with the US (SPI 75). performed best (SPI 166), even as their SPI fell from Looking ahead, the insurance industry will move 224 in 2006. Two Canadian companies qualified as further down the paths of increasing globalization Premier Performers: Scotiabank, SPI 247, and TD Bank and value chain unbundling. While globalization Financial Group, SPI 208. The sector saw a few major remains largely driven by a strong appetite to join acquisitions: the consortium around Royal Bank of the ongoing emerging markets’ boom, more insurers Scotland acquired ABN AMRO Bank, Banca Intesa are discovering the opportunity to grow through acquired Sanpaolo IMI, and BBVA acquired Compass replicating approaches in cross-regional platforms. Bancshares. This is exemplified by some of the larger exclusive The fundamental business model of universal banks bancassurance partnerships in Eastern Europe and will come under more pressure in 2008. Investment the emerging pan-European product manufacturing banking divisions are facing the same challenges as platforms. Value chain unbundling in a virtual form specialized investment banks, with the additional is increasingly driving transparency with regard to risk of falling behind specialists in terms of scale and true economics in different activities. As a result, innovation capabilities. business model redesign and spin-offs are on the rise. Advanced risk management structures are continuing

1 Note: Pure (US based) health insurance providers were reclassified as specialty providers

Page 16 | State of the Financial Services Industry to take hold with broadening hedge fund interest in performing sector. A strong contribution came from catastrophe bonds as well as specific risk tranches exchanges (SPI 366), which even managed to improve linked to local event conditions such as wind speeds. on their high 2006 score of 302 and represented seven of the top 10 performing specialty provider firms. Life insurers are beginning to reconsider new product Cross-border expansion and the race for scale propositions in order to serve more complex customer continued. Exchanges saw significant M&A activity, needs and to compete in the asset accumulation space. with big-ticket acquisitions by the Chicago Mercantile They also are investigating new ways to manage channel Exchange and the NYSE Group. fragmentation and polarization, as well as alternative asset management options. In an attempt to prepare Custody/processors (SPI 97, up from -29) also benefited for radical long-term transformation of the traditional from high activity levels in equity markets and from life insurance business model – which has lost the the low interest rate environment. Mergers in 2007 trust of many investors – CEOs will need to add issues included the Bank of New York Company’s acquisition of strategy, management structures and skill to their of Mellon Financial Corporation and State Street’s agenda. acquisition of Investors Financial Services. Scale is essential to competing successfully within this relatively Diversified financial institutions: Modest gains narrow specialist space, which is also served by the with few bright spots securities processing arms of large universal banks. All Sector SPI performance of diversified financial processors in the SPI 400 are US based. These firms can institutions improved from 13 to 77, but it still ranked find superior growth prospects by moving into more behind the other five sectors. For the first time, fragmented markets. Non-US growth is presently two- the five-year volatility of excess returns dropped to-three times faster than US growth and features better visibly below the global median, a slight indicator margins. Moves into trade and pre-trade functions and of diversification gains against “pure play” models. innovative offerings for servicing alternative customers Performance skews remained large; despite the low (e.g. hedge funds, exchange traded funds) also carry sector average, 20% of diversified institutions were opportunities for growth. awarded Premier Performer status in 2007. Asset managers had a very strong year, seeing their EMEA and Asia Pacific (including Australia) were SPI increase from 104 to 174. Asset management the only regions with more than one global top continues to be concentrated in Western Europe and 400 player in this sector in 2007. While Asia Pacific North America. The division of institutional demand significantly outperformed the global median, the SPI into specialized Alpha and low-cost Beta will prompt in EMEA remained low at 53 (up from -15). Suncorp- more players to focus on either building large-scale Metway, Australia, saw the highest rise in Asia Pacific, business for low-cost production or on pursuing the shooting up from #235 to #91 in the global top 400 control of selected product classes. Investment banks ranking. The leading diversified institution in Europe will most likely squeeze asset managers on passive was KBC Group, Belgium (SPI 302), a role model for quantitative business and structured funds. Geographic having established a truly integrated operational opportunities lie primarily in Asia Pacific and the structure and corporate culture. KBC Group pursues Middle East. Via holistic advice models and structured an integrated bancassurance approach with single solutions for asset protection, asset/wealth managers units and a parallel focus on banking, life and can gain a good access point to the growing retirement non-life insurance offerings in its core geographic market. However, distinct business models in the US regions. Management is jointly evaluated on bank (transaction-driven legacy brokerage model) and in and insurance performance. Looking forward, this Europe (trusted advisor model) present obstacles for kind of strategic and organizational alignment of cross-border approaches. operating units, reporting and incentive systems and Consumer finance was hit the hardest by the credit infrastructure will continue to be the key challenge for crunch, witnessing a 30% drop in market value; not many other players in this sector. surprisingly, 93% of this value destruction occurred in the US. The subsector’s SPI fell from 28 in 2006 to -62 Specialty providers: A story of different in 2007. The outlook for next year remains weak, with exposures to market cyclicality continued uncertainty regarding the future fate of 1 Specialty providers enjoyed a stellar year in 2007, retail markets and contagion effects on other consumer jumping from SPI 69 to 139, making them the best- credit products, such as credit cards and auto loans.

1 Including reclassified pure (US based) health insurance providers

State of the Financial Services Industry | Page 17 Regional Insights

Geography is another key determinant of peer-group performance levels. We group the firms in our SPI survey into six distinct regions, and discuss each in more detail below.

Figure 23: Average SPI trajectories and performance spread (top to bottom quartile) by geographical region North America Europe, Middle East and Africa Japan (Market value = US$3,058 BN) (Market value = US$3,217 BN) (Market value = US$499 BN) SPI SPI SPI 300 300 Other 300 Canada 200 200 200 100 100 100 0 US 0 Western 0 Europe -100 -100 -100 2002 2003 2004 2005 2006 2007 2002 2003 2004 2005 2006 2007 2002 2003 2004 2005 2006 2007

Asia, ex. Japan Australia/New Zealand Latin America (Market value = US$808 BN) (Market value = US$335 BN) (Market value = US$171 BN) SPI SPI SPI 300 300 300 200 200 200 100 100 100 0 0 0 -100 -100 -100 2002 2003 2004 2005 2006 2007 2002 2003 2004 2005 2006 2007 2002 2003 2004 2005 2006 2007

Source: Datastream, Oliver Wyman analysis

North America: The eye of the storm Both banks and insurance providers may consider building new distribution capabilities around public For North American financial services firms, 2007 was brand affinity via partnerships with far-reaching non- an unfortunate year. Declines in SPI performance (from financial services partners. In terms of client segments, 103 in 2006 to 81 in 2007) and in market value (by 13%) some see potential for the US to become a nucleus for made North America the second worst-performing global UHNW (ultra high net worth) propositions. region after Japan. Performance remains mixed as, in contrast to the US, Canada posted an impressive 12% Europe, the Middle East and Africa (EMEA): growth in market value and a stable SPI of 208. In the Dealing with diversity US, insurers (especially life insurers) and specialty providers together captured 16 out of the achieved 19 Western Europe positions in the global top 100 SPI ranking. Western Europe continued to improve its performance in 2007, its average SPI rising from 39 to 97. All sectors North American financial services firms will have a contributed to this trend, although performance skews tough year in 2008. Market uncertainty, combined with remained. Retail and commercial banks (SPI 140) further write-downs and expected home price and loan and investment banks (SPI 112), along with specialty volume declines, implies more squeezes on earnings. providers (SPI 209) outperformed sectors such as Banks most likely will have to increase loan loss insurance (SPI 60) and diversified banks (SPI 52). The reserves, while pressure on wholesale funding costs Nordic countries (SPI 187) performed well ahead of the will mount and result in more deposit competition. UK (SPI 30). Deutsche Boerse (SPI 344) ranked highest The weakness of the dollar will make it difficult for among Western European large caps, and UK insurance international US players to leverage their local core provider Admiral Group (SPI 353) led among the mid business to fund international expansion. caps. New value and growth opportunities are scarce In 2008, worsening credit conditions will slow down but do exist. Institutions with advanced customer the region’s organic growth. In this environment, we intelligence and data infrastructure will identify high- expect successful players to improve operational value niches through deeper micro-segmentation effectiveness, increase efforts around building factory and the knowledge of regional differences in loss competencies, compete intensively for client deposits patterns and risk exposures. Winning health and P&C and strengthen innovation capabilities to serve new insurance providers exemplify excellence in this field. and more sophisticated client needs (e.g. those of

Page 18 | State of the Financial Services Industry aging populations and more polarized wealth). The Japan: A troubling case, but with promise interest for further in-sector consolidation across With an overall SPI of 44, Japan was the worst- Europe is on most CEOs’ agenda for 2008. performing region in financial services in 2007. The vision of a single EU financial services Japanese specialty providers faced the largest drop market is being delayed by heterogeneous local in market value (by 34%), along with universal banks market conditions, be they macro conditions (e.g. (28% decline). Japanese insurers’ average SPI dropped differentiated property markets), tax incentives for from 130 to 70. The gap between top- and bottom- certain product types (e.g. unit-linked insurance), quartile Japanese firms continued to narrow, indicating consumer preferences or levels of price regulation a poorly performing economy with few outstanding (e.g. challenges experienced in the UK and Italy). performers. The Bank of Kyoto (SPI 202) is the only Tax and regulatory havens, such as Ireland and player in the top quartile of global performers. Luxembourg, will continue to be attractive as capital- The trend of consolidation in banking remains efficient domiciles and as hubs for innovative product unchanged. However, increased operating costs have engineering. However, financial effectiveness across kept earnings from improving. After a few years in the EU will not primarily depend on regulatory which rising M&A volumes created momentum in the arbitrage, but rather on practical risk-based and investment banking sector, 2007 proved dismal as a market-consistent valuation frameworks. In this result of minimal primary debt and equity issuance respect, the review of liquidity risk issues by the and a lackluster equity market on the investor side. Basel II Committee, as well as the subsequent Private equity firms made inroads into Japan in 2006 steps of convergence in Solvency II and CFO forum and 2007, although they have found investment initiatives in the European insurance sector, are all conditions prohibitive. geared to advance European financial services in the international context. The macro outlook remains challenging for the banking sector. After a slight recovery in 2006, Eastern Europe and Middle East and Africa (MEA) consumer prices fell in the first half of 2007, and In 2007, financial services firms in Eastern Europe domestic loan markets remain a low-growth area. In (SPI 324) significantly outperformed those in Western contrast, life insurers can find attractive conditions Europe (SPI 97) and the MEA region (SPI 148). The pole to strengthen their relative growth proposition in the position was taken by Russia’s Premier Performer world’s second-largest life insurance market: A high Sberbank (SPI 390). The market value of institutions share of Japan’s financial assets resides in low-yielding from these markets relative to Western Europe is only deposits, and provisions in state and company pension about 6% in the group of top 400 firms, but profit and funds are decreasing. revenue pools represent a much higher share given the Major growth opportunities arise from the long- significant international ownership levels. awaited privatization of the national post office. Banks We estimate the 2007 revenue pool for banking and appreciate the new access to the huge postal savings insurance (in comparable terms) in Eastern Europe pool (holding ~US$1.6 TN of assets). Life insurers are to be US$70-75 BN1. Today, a significant number of looking forward to targeting lucrative distribution international players have many small operations deals with postal insurance arm Kampo. Other positive across the region, but only a few have truly dominant signals from the regulatory authorities include the positions across markets. The challenge for most will recent opening of the bancassurance model in general, be to build strong, comprehensive business portfolios a considered shift toward a UK-style, principles-based and sustainable models beyond “vanilla” market regulatory model, as well as reduced barriers between entries. banking and securities house operations.

In the Middle East, Bahrain opened the first phase of Asia, excluding Japan: Local equity fuels a the Bahrain Financial Harbour (BFH) in 2007, which winning year 2007 will house the island’s own one-stop financial center. It Backed by strong local equity booms, Asia’s (excluding is pursuing leadership in Islamic financing; the Central Japan) average SPI rose to 197. Specialty and insurance Bank of Bahrain supports this move and has set up its providers distinguished themselves with respective own Sectoral Islamic Fund. SPI scores of 291 and 264. Top performers contributed most to the region’s rise, and Premier Performers came

1 Source: Oliver Wyman analysis; please refer also to our report Seizing the €170 BN opportunity in Emerging Europe, Oliver Wyman, 2007

State of the Financial Services Industry | Page 19 from five different countries. The regional league priority the application of advanced risk analytics in tables of large and mid caps were led by Hong Kong areas such as business planning and performance Exchanges & Clearing (SPI 381) and the Singapore measurement and management. Exchange (SPI 471). Second, the emerging recognition of the value of The ability to move from branch status to locally wealth management is driving up the valuations incorporated firms has provided organic growth of firms with a significant presence in this sector. opportunities to foreign institutions in China. More Similarly, IT and operations businesses attract high than 15 large international banks so far have cleared valuations. Therefore, Australian financial institutions or entered the application process or are seriously would do well to communicate to investors more considering application. Still, slow processing, caps clearly the share of businesses that are effectively on stakes and capital/foreign exchange restrictions engaged in these subsectors. remain major causes of frustration. Third, overall growth is camouflaging incumbents’ India’s established banking sector is facing increased market share loss in most categories as well as ongoing competition from mutual funds, asset managers margin decline. We believe the future winners will be and life insurers, all of whom wish to expand into those with the ability to either generate idiosyncratic the increasing wealth space. Life insurers have growth (through innovation or targeted globalization) succeeded in this regard by positioning their product or by winning the local analytics arms race to ensure as a long-term savings platform and by offering the they capture value as well as volume. largest conduit for household savings into booming equity markets. All leading private players in this Latin America: Significant improvement and a segment have aggressively built up distribution scale positive outlook either through tied-agent ramp-ups or in foreign Latin America enjoyed another buoyant period of bancassurance partnerships. financial services growth, improving its SPI from 134 to 169 and adding 55% to its market value. Growth and Other near-term growth opportunities exist in value are still highly concentrated in retail banking Singapore and Taiwan, both prepared for more cross- and, geographically, in Brazil. The gap between top- border M&A. In addition, a strong local property and bottom-quartile players narrowed significantly. market and the complete regulatory opening of the Mid-cap players generally outperformed large caps. bancassurance channel in 2008 provide attractive opportunities in Indonesia and Korea, respectively. The outlook for financial services remains positive: Commodity prices (if sustained) are stimulating the Australia/New Zealand: Overall growth economy, real income levels are on the rise, and credit camouflages underlying challenges is becoming more widely available. Banks can build Among mature economies, the Australian financial upon solid deposit franchises, while high investments services industry was the best performing in 2007. in IT infrastructure are starting to pay off on the cost Its overall SPI improved from 135 to 168, and its side. Consumer lending will see further penetration, market value grew by 22%; the retail banking sector and SME lending is expected to outpace traditional contributed 66% of this growth. One-third of individual large-scale corporate lending. Consolidation remains a Australian firms in the SPI 400 reached the top quartile theme in the region, as seen with the Grupo Santander- of global performers, while the Australian Securities ABN AMRO Bank deal and additional investments Exchange came in at #1 (SPI 555). made by other foreign players. Against this favorable background, the region’s markets are still lagging This strong performance is primarily due to continued in sophistication across a number of areas, such as asset growth, driven by many years of strong economic mortgage markets and poorly funded pension funds. growth and Australia’s compulsory private pension system. To continue this performance, we highlight three major opportunities for Australian players:

First, although capital efficiency has improved as banks have worked toward Basel II accreditation, firms have yet to realize the full benefit from their investments in new capabilities. We identify as a

Page 20 | State of the Financial Services Industry Shareholder performance hall of fame

The firms below have outperformed the other 400 companies on one or another dimension in the last five years. 2007 SPI winners

Large cap Mid cap The 20 best-performing companies (out of 185) with an average The 20 best-performing companies (out of 215) with an average market value over 2007 of greater than US$10 BN market value over 2007 of less than US$10 BN Sub- 2007 Avg MV1 # Name industry (US$BN) SPI Sub- 2007 Avg MV # Name industry (US$BN) SPI 1 Chicago Mercantile Exchange (US) EXC 30.5 434 1 Australian Securities Exchange EXC 7.0 555 2 QBE Insurance Group (Australia) PPC 22.9 408 (Australia)

3 Sberbank (Russia) R/CB 81.2 390 2 Singapore Exchange (Singapore) EXC 6.9 471 4 Hong Kong Exchanges & Clearing EXC 19.2 381 3 Indiabulls Financial (India) BR 3.0 435 (Hong Kong) 4 MCB Bank (Pakistan) R/CB 3.3 415 5 Manulife Financial (Canada) PLI 57.7 355 5 Nacional Financiera (Mexico) SPO 2.3 402 6 Deutsche Boerse (Germany) EXC 25.7 344 6 Kotak Mahindra Bank (India) R/CB 5.9 378 7 NYSE Euronext (US) EXC 22.6 337 7 Public Bank Berhad (Malaysia) R/CB 9.8 361 8 Ping An Insurance Group (China) MI 20.9 337 8 Dongbu Insurance (Korea) PLI 2.7 355 9 HDFC Bank (India) R/CB 10.3 320 9 Admiral Group (UK) PPC 5.2 353 10 T. Rowe Price (US) AM 13.9 306 10 Credicorp (Peru) DB 5.5 338 11 China Merchants Bank (China) R/CB 44.7 304 11 Sydbank (Denmark) UB 3.4 315 12 KBC Group (Belgium) DB 47.3 302 12 The Bank of East Asia (Hong Kong) R/CB 9.3 313 13 OCBC Bank (Singapore) DB 18.1 295 13 Banca CR Firenze (Italy) R/CB 6.8 312 14 Prudential Financial (US) PLI 43.0 292 14 Attijariwafa Bank (Morocco) R/CB 6.8 309 15 Franklin Templeton Investments (US) AM 31.0 290 15 TSX Group (Canada) EXC 3.0 303 16 Housing Development Finance CON 13.3 279 16 Jyske Bank (Denmark) R/CB 4.7 298 Corporation (India) 17 Wing Hang Bank (Hong Kong) R/CB 3.6 296 17 Piraeus Bank (Greece) R/CB 10.8 276 18 Banco de Valencia (Spain) R/CB 5.8 294 18 China Life Insurance Company (China) PLI 30.8 272 19 Grupo Financiero Banorte (Mexico) R/CB 8.7 288 19 Humana (US) PHI 10.8 269 20 National Bank of Pakistan (Pakistan) R/CB 3.2 273 20 Alpha Bank (Greece) R/CB 13.4 268

The “US$50 BN Club” Consistent large cap performers The 10 best-performing companies with an average market value The top 10 companies (out of 161 with SPI observations for the last over 2007 of greater than US$50 BN over the previous year 5 years), with an average market value over 2007 of greater than US$10 BN and the highest average SPI over the last five years

Sub- 2007 Avg MV Avg SPI # Name industry (US$BN) SPI Sub- 2007 Avg MV over last # Name industry (US$BN) five years 1 Sberbank (Russia) R/CB 81.2 390 1 Anglo Irish Bank (Ireland) R/CB 14.8 387 2 Manulife Financial (Canada) PLI 57.7 355 2 UnitedHealth Group (US) PHI 69.4 367 3 Commonwealth Bank of Australia R/CB 59.6 266 (Australia) 3 Housing Development Finance CON 13.3 292 4 Intesa San Paolo (Italy) UB 90.8 233 Corporation (India)

5 UnitedHealth Group (US) PHI 69.4 214 4 Erste Bank (Austria) R/CB 24.1 290

6 Goldman Sachs Group (US) IB 86.0 183 5 Scotiabank (Canada) UB 48.1 272

7 Unicredit Group (Italy) R/CB 117.9 163 6 QBE Insurance Group (Australia) PPC 22.9 255

8 Grupo Santander (Spain) UB 120.8 163 7 HDFC Bank (India) R/CB 10.3 244

9 RBC Financial Group (Canada) DB 66.0 163 8 ST. George Bank (Australia) R/CB 15.6 243

10 BNP Paribas (France) UB 102.9 148 9 Great-West Life Assurance Company PLI 29.5 243 (Canada)

10 Aetna (US) PHI 25.3 238

The “US$50 BN Club” comprised 42 firms in 2007, up from 37 the The five-year average SPI for large cap companies is 68, significantly year before. The group’s average SPI is 76, significantly below the below the global median; only 67 companies scored greater than overall average of 100. Thus, super-large-cap firms continue to 100. The group of top 10 consistent large cap performers remained deliver lower shareholder performance, on average, than smaller remarkably stable, with 6 out of last year’s top 10 players awarded companies. top 10 status again.

Subindustry key: AM = Asset Manager EXC = Exchange PHI = Pure Health Insurance R/CB = Retail and Commercial Bank BR = Broker IB = Investment Bank PLI = Pure Life Insurance RI = Reinsurance CON = Consumer Finance INBR = Insurance Broker PPC = Pure Property & Casualty Insurance SPO = Other Specialty Provider DB = Diversified Financial Institution MI = Mixed Insurance PRO = Custody/Processor UB = Universal Bank

1 Market values for Chinese companies exclude domestic “A share” listings with highly restricted access for international investors

State of the Financial Services Industry | Page 21 Performance league tables by sector and region, end 2007

The tables below list the top-performing financial services companies with SPIs greater than 100 (the global median) by region and sector.

Retail and commercial banks Other banks and diversified institutions North America Large cap Large cap Sub- 2007 Avg MV Sub- 2007 Avg MV # Name industry (US$BN) SPI # Name industry (US$BN) SPI

In 2007, no US large cap retail and 1 Scotiabank (Canada) UB 48.1 247 commercial bank achieved an SPI 2 TD Bank Financial Group (Canada) UB 47.9 208 above 100. 3 Goldman Sachs Group (US) IB 86.0 183

4 RBC Financial Group (Canada) DB 66.0 163

5 PNC Financial Services Group (US) UB 24.7 150

Mid cap Mid cap

1 People’s Bank (US) R/CB 5.6 264 1 National Bank of Canada (Canada) UB 8.9 118

2 Hudson City Bancorp (US) R/CB 8.1 194

Europe, Middle East & Africa Large cap Large cap Sub- 2007 Avg MV Sub- 2007 Avg MV # Name industry (US$BN) SPI # Name industry (US$BN) SPI

1 Sberbank (Russia) R/CB 81.2 390 1 KBC Group (Belgium) DB 47.3 302

2 Piraeus Bank (Greece) R/CB 10.8 276 2 Nordea (Sweden) DB 42.3 258

3 Alpha Bank (Greece) R/CB 13.4 268 3 Intesa San Paolo (Italy) UB 90.8 233

4 Erste Bank (Austria) R/CB 24.1 263 4 Deutsche Postbank (Germany) UB 13.7 200

5 National Bank of Greece (Greece) R/CB 27.8 223 5 PKO Bank (Poland) UB 19.0 174

Mid cap Mid cap

1 Banca CR Firenze (Italy) R/CB 6.8 312 1 Sydbank (Denmark) UB 3.4 315

2 Attijariwafa Bank (Morocco) R/CB 6.8 309 2 Moscow Municipal Bank (Russia) UB 6.8 249

3 Jyske Bank (Denmark) R/CB 4.7 298 3 RMB Holdings (South Africa) DB 5.8 152

4 Banco de Valencia (Spain) R/CB 5.8 294 4 Investec (UK) IB 5.1 144

5 Bank of Cyprus (Cyprus) R/CB 9.3 263

Rest of World1 Large cap Large cap Sub- 2007 Avg MV Sub- 2007 Avg MV # Name industry (US$BN) SPI # Name industry (US$ BN) SPI

1 HDFC Bank (India) R/CB 10.3 320 1 OCBC Bank (Singapore) DB 18.1 295

2 China Merchants Bank (China) R/CB 44.7 304 2 Standard Chartered2 (UK) UB 45.3 195

3 Commonwealth Bank of Australia R/CB 59.6 266 3 Suncorp-Metway (Australia) DB 15.4 192 (Australia) 4 Macquaire Group (Australia) IB 18.0 170 4 ICICI Bank (India) R/CB 24.3 242 5 Citic Securities International Company IB 27.2 170 5 State Bank of India (India) R/CB 20.1 231 (China)

Mid cap Mid cap

1 MCB Bank (Pakistan) R/CB 3.3 415 1 Credicorp (Peru) DB 5.5 338

2 Kotak Mahindra Bank (India) R/CB 5.9 378 2 Babcock & Brown (Australia) IB 6.6 167

3 Public Bank Berhad (Malaysia) R/CB 9.8 361 3 Bank Mandiri (Indonesia) UB 7.0 163

4 The Bank of East Asia (Hong Kong) R/CB 9.3 313 4 Korea Exchange Bank (Korea) UB 9.9 123

5 Wing Hang Bank (Hong Kong) R/CB 3.6 296

1 Market values for Chinese companies exclude domestic “A share” listings with highly restricted access for international investors 2 Classification of Standard Chartered under “Rest of World” is because of business concentration in Asia

Page 22 | State of the Financial Services Industry Insurance providers Specialty providers North America Large cap Large cap Sub- 2007 Avg MV Sub- 2007 Avg MV # Name industry (US$BN) SPI # Name industry (US$BN) SPI

1 Manulife Financial (Canada) PLI 57.7 355 1 Chicago Mercantile Exchange (US) EXC 30.5 434

2 Prudential Financial (US) PLI 43.0 292 2 NYSE Euronext (US) EXC 22.6 337

3 Great-West Life Assurance Company PLI 29.5 249 3 T. Rowe Price (US) AM 13.9 306 (Canada) 4 Franklin Templeton Investments (US) AM 31.0 290 4 Sun Life Financial (Canada) PLI 27.6 244 5 Humana (US) PHI 10.8 269 5 Principal Financial Group (US) PLI 16.4 220

Mid cap Mid cap

1 Assurant (US) MI 6.9 260 1 TSX Group (Canada) EXC 3.0 303

2 Industrial Alliance Insurance and PLI 2.9 259 2 GFI Group (US) BR 2.2 244 Financial Services (Canada) 3 CI Financial (Canada) AM 3.5 243 3 W.R. Berkley (US) PPC 6.0 186 4 Eaton Vance (US) AM 5.0 200 4 Markel (US) PPC 4.8 167 5 Affiliated Managers Group (US) AM 3.5 183 5 Philadelphia Consolidated Holding (US) PPC 3.0 165

Europe, Middle East & Africa Large cap Large cap Sub- 2007 Avg MV Sub- 2007 Avg MV # Name industry (US$BN) SPI # Name industry (US$BN) SPI

1 Sampo (Finland) MI 16.9 235 1 Deutsche Boerse (Germany) EXC 25.7 344

2 CNP Assurances (France) PLI 18.3 224 2 Man Group (UK) AM 21.0 192

3 Zurich Financial Services (Switzerland) MI 42.2 156 3 Julius Baer (Switzerland) AM 16.0 171

4 AXA Group (France) MI 88.6 129 4 Hypo Real Estate Holding (Germany) SPO 12.0 126

Mid cap Mid cap

1 Admiral Group (UK) PPC 5.2 353 1 Wincor Nixdorf (Germany) SPO 2.9 248

2 Wiener Staedtische Versicherung MI 7.6 189 2 London Stock Exchange (UK) EXC 6.6 219 (Austria) 3 OMX (Sweden) EXC 3.7 209 3 Helvetia Group (Switzerland) MI 3.3 184 4 ICAP (UK) BR 7.0 184 4 April Group (France) MI 2.3 175 5 Vontobel Holdings (Switzerland) AM 3.4 105 5 Sanlam (South Africa) PLI 7.2 149

Rest of World1 Large cap Large cap Sub- 2007 Avg MV Sub- 2007 Avg MV # Name industry (US$BN) SPI # Name industry (US$BN) SPI

1 QBE Insurance Group (Australia) PPC 22.9 408 1 Hong Kong Exchanges & Clearing EXC 19.2 381 (Hong Kong) 2 Ping An Insurance Group (China) MI 20.9 337 2 Housing Development Finance CON 13.3 279 3 China Life Insurance Company (China) PLI 30.8 272 Corporation (India)

Mid cap Mid cap

1 Dongbu Insurance (Korea) PLI 2.7 355 1 Australian Securities Exchange EXC 7.0 555 (Australia) 2 Samsung Fire & Marine Insurance PPC 9.8 179 Company (Korea) 2 Singapore Exchange (Singapore) EXC 6.9 471

3 Nipponkoa Insurance (Japan) PPC 7.3 153 3 Indiabulls Financial (India) BR 3.0 435

4 Porto Seguro (Brazil) MI 2.8 125 4 Nacional Financiera (Mexico) SPO 2.3 402 5 Korea Investment Holding Company BR 3.4 241 (Korea)

1 Market values for Chinese companies exclude domestic “A share” listings with highly restricted access for international investors

State of the Financial Services Industry | Page 23 Premier Performers of the past decade

Premier Performers represent the 50 firms with SPI scores consistently above the average SPI for their respective subindustries and regions over time periods of three, five and 10 years.

Large cap Mid cap The 20 best-performing Premier Performers (out of 25) with an The 20 best-performing Premier Performers (out of 25) with an average market value over 2007 of greater than US$10 BN average market value over 2007 of less than US$10 BN

Sub- 2007 Avg MV Sub- 2007 Avg MV # Name industry (US$BN) SPI # Name industry (US$BN) SPI

1 QBE Insurance Group (Australia) PPC 22.9 408 1 MCB Bank (Pakistan) R/CB 3.3 415

2 Sberbank (Russia) R/CB 81.2 390 2 Kotak Mahindra Bank (India) R/CB 5.9 378

3 HDFC Bank (India) R/CB 10.3 320 3 Public Bank Berhad (Malaysia) R/CB 9.8 361

4 T. Rowe Price (US) AM 13.9 306 4 Dongbu Insurance (Korea) PLI 2.7 355

5 KBC Group (Belgium) DB 47.3 302 5 Credicorp (Peru) DB 5.5 338

6 Housing Development Finance CON 13.3 279 6 Sydbank (Denmark) UB 3.4 315 Corporation (India) 7 The Bank of East Asia (Hong Kong) R/CB 9.3 313 7 Piraeus Bank (Greece) R/CB 10.8 276 8 Attijariwafa Bank (Morocco) R/CB 6.8 309 8 Alpha Bank (Greece) R/CB 13.4 268 9 Jyske Bank (Denmark) R/CB 4.7 298 9 Commonwealth Bank of Australia R/CB 59.6 266 (Spain) (Australia) 10 Banco de Valencia R/CB 5.8 294 11 Grupo Financiero Banorte (Mexico) R/CB 8.7 288 10 Nordea (Sweden) DB 42.3 258 11 Great-West Life Assurance Company PLI 29.5 249 12 Bank of Cyprus (Cyprus) R/CB 9.3 263 (Canada) 13 Bank Leumi le-Israel (Israel) R/CB 5.8 242

12 Scotiabank (Canada) UB 48.1 247 14 Banca Carige (Italy) R/CB 5.9 226 13 Sampo (Finland) MI 16.9 235 15 Wiener Staedtische Versicherung MI 7.6 189 (Austria) 14 State Bank of India (India) R/CB 20.1 231 16 April Group (France) MI 2.3 175 15 National Bank of Greece (Greece) R/CB 27.8 223 17 OKO Bank (Finland) R/CB 3.0 169 16 TD Bank Financial Group (Canada) UB 47.9 208 18 Philadelphia Insurance Companies (US) PPC 3.0 165 17 Standard Chartered (UK) UB 45.3 195 19 Nipponkoa Insurance (Japan) PPC 7.3 153 18 Man Group (UK) AM 21.0 192 20 Banco Pastor (Spain) R/CB 5.2 147 19 DnB Nor (Norway) UB 19.2 164

20 Grupo Santander (Spain) UB 120.8 163

Below, we provide short profiles of selected Premier Performers from different industry sectors and regions.

Large cap Mid cap Sberbank, Russia’s largest banking institution, completed one of Public Bank Berhad maintains a strong retail banking franchise in Russia’s largest share offerings in early 2007, raising US$8.8 BN. The Malaysia. Its domestic lending business is focused on the financing growth and maturing of the Russian market has helped Sberbank of SMEs, residential properties and passenger vehicles that together realize high double digit growth rates while keeping efficiency account for 70% of the total loan portfolio. The company also offers levels under control. Sberbank’s major franchise is retail banking; it innovative products in Islamic banking. In 2006, Public Bank Berhad holds a 55% market share in the retail deposit market on the back acquired Asia Commercial Bank in Hong Kong, which significantly of its unique nationwide network comprising over 800 branches and increased the scale, scope and growth opportunities of its business in 19,400 retail outlets. Hong Kong and Greater China.

T. Rowe Price, a US-based global asset manager, offers separately Credicorp controls Peru’s largest bank, Banco de Credito, the main managed investment portfolios for institutions and a broad range contributor to overall business, comprising retail and wholesale of mutual funds for individual investors and corporate retirement banking, financial planning and asset management. On the back programs. Shareholder performance has benefited from consistently of a booming economy, Credicorp has performed strongly through high returns on equity, with virtually no leverage and a stable growth in consumer finance and SME lending, coupled with selective EPS and dividend growth over time. With its “target date” fund targeting of profitable niche segments. In 2006, Credicorp acquired offering and strong existing presence in the 401(k) market, T. Rowe the private pension fund AFP Union, raising its share in the domestic Price is well positioned to take advantage of the growing dis-saver private pension market from 6.4% to 28.5%. opportunity.

Great-West Life Assurance Company operates a diversified portfolio Sydbank, Denmark’s fourth largest bank with branches in Germany of life and health insurance, retirement savings and reinsurance and a subsidiary in Switzerland, provides a comprehensive range of in Canada, Europe and the US. The recent exit from the US health universal banking services to retail and private banking customers market and the acquisition of investment manager Putnam and corporate clients. Shareholder performance has remained Investments Trust is suited to further align the company’s proposition high on the back of strong trading income, profitable growth in with its core strengths. Great-West’s product suite is highly tailored non‑domestic lending and limited mortgage and CDO exposures. to different client segments such as employer groups, families A strong position in the corporate segment and high customer and the dis-saver market which is served through the Freedom 55 satisfaction levels provide opportunities for further value growth. Financial™ division of London Life.

Page 24 | State of the Financial Services Industry METHODOLOGY The first step in calculating the SPI is to compute the five-year Sharpe Ratio for a given institution: Background and approach Sharpe Ratio(firm) = Return(r*)/Risk(r*) where

The financial services industry is becoming increasingly global. r* = Monthly measurements of total merger-adjusted shareholder Financial services firms can pursue opportunities in many different return net of the risk free rate (Excess Returns) sectors and geographies. Their senior managers thus require an Return(r*) = Geometric average of r* objective measure of risk-adjusted shareholder value performance specific to their sector/geography that can be used to track their Risk(r*) = Standard deviation of r* performance relative to peers. We calculate the Sharpe ratio for each of the 400 institutions in Investors, meanwhile, have correspondingly broad options when our universe and rank them from highest to lowest. The SPI for a allocating capital in the financial services industry. As such, they given firm is then defined by comparing it to the median firm in require a relevant benchmark that puts all financial services our universe: providers on an even playing field, regardless of the sectors and SPI (firm) = [Sharpe Ratio(firm)-Sharpe Ratio(median firm)] x 1000 geographies in which they operate. + 100 Oliver Wyman has created, and systematically tracks, a single performance index that provides a solution to both needs. Since Sector definitions creating the Shareholder Performance IndexSM (SPI) in 1997, we Retail and commercial banks primarily serve retail customers have calculated it annually as a benchmark for the volatility- and small- to medium-sized companies. They do not have adjusted shareholder value performance of the world’s largest significant wholesale/capital markets operations and their activities financial institutions. are predominantly domestic. Examples include Wells Fargo, Several features distinguish the SPI from other performance-based Danske Bank, Commonwealth Bank of Australia and ICICI Bank. indices for financial institutions: Universal banks are multi-line commercial banks that combine

„„ It is a measure of risk-adjusted performance. If two firms have a retail network with a significant wholesale/capital markets produced the same absolute return to shareholders, the one operation. Their wholesale activities tend to give universal whose returns are less volatile is ranked higher banks a significant international presence and they are among the most visible global financial institutions. Examples include „„ It covers all parts of the global financial services “value chain”. HSBC, JPMorgan Chase, Barclays, Citigroup, Deutsche Bank and Sector definitions are given below Sumitomo Mitsui Banking Corporation.

„„ Takeovers, mergers, spin-offs and currency effects are explicitly Investment banks are firms that engage primarily in corporate captured and used to adjust raw performance data. A firm advisory work, securities underwriting, brokerage and sales and cannot move up the rankings simply by getting bigger in a trading of capital market instruments. Examples include Wall local currency Street bulge bracket firms, such as Merrill Lynch and Morgan Stanley, and non-US investment banks such as Nomura Holdings The SPI calculation and Macquarie Group. Each calculation of the SPI is based on a five-year moving Diversified financial institutions are companies that operate “window” of performance data for the top 400 financial both major banking and insurance operations. Examples include institutions worldwide, in terms of market valuation at the end Fortis, ING Group, Lloyds TSB and Allianz. of the period. Consequently, the present index is calculated over the period January 2003-December 2007 and for the 400 largest Insurance providers include firms whose sole or primary firms worldwide as of December 31, 2007. business is insurance (whether pure life, pure P&C, mixed and/or reinsurance), such as Aegon, AXA Group, Chubb and This five-year window is designed to measure shareholder Swiss Re. performance over the medium-term. As a result, SPI scores can be affected both by the inclusion of the past year’s data, and the Specialty providers are “narrow-line” or “monoline” companies exclusion of data from over five years ago. Changes in SPI from that are primarily engaged in a single activity (or a related set year to year do not solely reflect performance in the last year of activities). We cover seven sub-segments: asset managers, – rather, they reflect changes in a company’s five-year medium- brokers, consumer finance, custody/processors, exchanges, pure term performance. (US based) health insurers and insurance brokers. Examples include State Street (custody), Fannie Mae (consumer finance) and Charles Schwab (broker). n Oliver Wyman is the leading management consulting firm that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development.

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