2013 china financial industry trends and outlook

Webinar: A look at the Top-10 China Financial Industry Trends for 2013

February 7th, 2013 - 17:00 – 17:45 Beijing Standard Time

The webinar will start in a few minutes.

For more information about the topics covered in this webinar or

Kapronasia, please visit www.kapronasia.com or send us an email: [email protected]. Twitter: @chinafintech

A look at the Top-10 China Financial Industry Trends for 2013 Prepared by Victor Fan, Ken Ding Moderated by Paul Robinson Presented by Zennon Kapron February 7th, 2013

Methodology

•  Findings based on •  Secondary research - internal knowledge, government,

vendor and financial institutions’ reports. •  Primary research – Interviews with FIs, vendors and industry

experts.

•  Report purpose: •  Identify China’s Top-10 trends for 2013

–  Banking – NEW – Capital Markets

•  Explore the current situation •  Evaluate the potential opportunities •  Forecast what will happen in 2013

China’s Financial Market Situation

•  Economy growing; banking assets growing •  5 year demand for trade finance and international settlement will

remain strong •  Slowing pace of credit lending and non-performing loans are

expected to remain risk factors to continued growth •  China’s financial market will continue to reform; 12th Five-Year Plan:

“financial institutions need more business innovation”

12th Five-Year Plan period : from 2011 to 2015

Financial IT infrastructure Outlook

•  Continued reforms -> pushing banks to invest in IT infrastructure •  Overlooked opportunities from small and medium banks •  Local vendors are more familiar with market, more competitive;

localization for foreign players is important

Bankcards include credit and debit cards Source: Kapronasia, PBOC 2010

9.0 10.4 12.4 14.6

0

5

10

15

20

2009 2010 2011 2012

US

D B

illio

ns

Chinese banking industry IT spend, 2009-2012

Top-10 China Capital Market Trends for 2013

1.  Increased inflows of foreign Capital into China 2.  The gradual recovery of Chinese Stock Market 3.  Increased focus on Wealth Management Product risk control 4.  Changes in the composition of equity investors 5.  Emergence of New Financial Derivatives 6.  Consolidation of Market Regulators 7.  New IPO Listing / de-listing regulations 8.  Pension Funds entering Chinese Stock Market 9.  Increasing number of Hedge Funds Entering China 10.  Maturation and expansion of Algorithmic Trading

Top-10 China Capital Market Trends for 2013 Trend Number 1: Foreign Capital in China Trend Number 5: New Financial Derivatives Trend Number 9: Hedge Funds Entering China

Top-10 Capital Markets Trends – Foreign Capital in China

Investment and interest in China driven by: –  Increased demand from foreign investors –  Government push for more foreign capital

•  Opening of China’s Capital markets to foreign investment will accelerate in 2013 -> increased inflows

•  Although the current scale of QFII and RQFII still small ~1.5% market cap: –  Number of QFII licensed investors increased greatly in 2012 –  Likely see better access to domestic investment products /

services – e.g. QFIIs -> index futures •  QFII 2 and RQFII 2 – For high net worth qualified foreign individual

investors to invest in China

*QFII – Qualified Foreign Institutional Investor *RQFII – Renminbi Qualified Foreign Institutional Investor


12 14 7

18

0

23 17 13

32

72

0 10 20 30 40 50 60 70 80

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Number of New QFII Licenses

Source: CSRC, Kapronasia, 2013

72 firms obtained QFII licenses in 2012, far more than any year since QFII program inception in 2003


1.5%

98.5%

Current A-Share

QFII & RQFII Chinese Capital

15.0%

85.0%

Future A-Share

QFII & RQFII Chinese Capital

Expected

CSRC President Guo Shuqing indicated that current scale of QFII and RQFII should shift from 1.5% -> 15% in future

Source: CSRC, Kapronasia, 2013

Trend Number 1: Foreign Capital in China Trend Number 5: New Financial Derivatives Trend Number 9: Hedge Funds Entering China

Top-10 Capital Markets Trends – New Financial Derivatives

•  Likely to be a number of new financial derivatives / products available in the market during 2013

•  Commodity Futures – egg, crude oil, gold, charred coal –  Egg, like pork etc. – key part of daily life –  Lower cost of investment entry

•  Account minimums •  Contracts smaller value

•  Financial Futures – Government Bond futures •  Options on Futures

History of Government Bond Futures •  Government Bond futures are actually not completely ‘new’ •  1992 – Shanghai Stock Exchange launched Government Bond

Futures •  On 27 March, 1995, the market went through a tremendous

fluctuation due to a ‘battle’ between a government supported bull side and a Wanguo Securities supported bear side

•  Although Wanguo ‘prevailed’ in end, government intervened, arrested chief manager of Wanguo and shut the market down

•  Re-opening of bond futures market -> important market signal

New futures options •  Which are completely new to the market, will likely be launched in in

2013; testing already in progress -> will be an important hedging tool as a ‘2nd-order’ derivative

Top-10 Capital Markets Trends – New Financial Derivatives

Trend Number 1: Foreign Capital in China Trend Number 5: New Financial Derivatives Trend Number 9: Hedge Funds Entering China

Top-10 Capital Markets Trends – Hedge Funds

Markets today: •  A-share market is at near-term lows -> relatively cheap opportunity

to get into the market •  Although growing more slowly, Chinese economy is still one of the

fastest growing in the world -> better investment returns compared to other markets

•  Demand for more mature finance industry from govern. / investors –  Government initiatives: Shanghai IFC 2020 –  Investor needs: lack of investment channel / product for HNWIs

Market seems to be ripe for Hedge Funds to enter, but…

Barriers to entry… 1.  Lack of a mature credit system

–  SMEs struggle to obtain bank financing -> informal lending –  Banks are lending mainly to SOEs –  Pilot reform in Wenzhou, Zhejiang -> innovative SME financing

2.  Regulators still unsure -> hedge fund governance not clear cut 3.  Multiple government industry regulators & ‘ownership’ is unclear ->

moving forward in any particular direction is challenging 4.  Local competing products: PE funds, trusts and wealth

management services in China considered substitutes 5.  QFII / QDLP are really only 2 legal means for hedge funds to enter

•  QFII quota not allocated to hedge funds -> some additional legal structuring needs to be done

•  QDLP is currently more suited for PE rather than hedge funds and typically not really suitable for large scale financing


Basic entry options: 1.  Opening private retail accounts using Chinese citizen ID cards,

which is within the grey area of current regulations 2.  H-Shares in Hong Kong another option -> exposure to economy

and financial markets; yet not a perfect hedge 3.  Additional China-hedge products in HK

So although opportunities are large, there are challenges for hedge funds entering, yet we see this being an area of strong development in 2013


Top-10 China Banking Trends for 2013

1.  Core Banking Systems for Small and Medium Banks 2.  Mobile Payment in China 3.  Online-to-Offline (O2O) Business 4.  PBOC 3.0 – China’s EMV Migration 5.  Big Data Era for China’s Banks 6.  Risk management update for Chinese commercial banks 7.  China's National Advanced Payment System 2 (CNAPS2) 8.  Prepaid Card Market Trend 9.  Overseas Shopping 10.  The Development of China’s Rural Payment Market

Trend Number 3: Online-to-Offline Business Trend Number 5: Big Data Era for China’s Banks Trend Number 7: China’s CNAPS2

Top-10 China Banking Trends – Online-to-Offline Business

148 187 221 270 314 363

32.4% 35.2% 36.8% 41.2%

45.7% 50.2%

0%

10%

20%

30%

40%

50%

60%

0 50

100 150 200 250 300 350 400 450 500

2010 2011 2012 2013e 2014e 2015e

Popu

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China's Online Shoppers, 2010-2015e

Population of Online Shopper (Million)

Num of Online Shoppers / Num of Online Users Source: China Internet Network Information Center, Kapronasia, 2012

Enormous amount of online Shopping in China… •  E-commerce transactions projected to rise from 7.5 trillion in 2012

RMB to 18 trillion 2015 to become the largest global market •  Hand in hand with development of e-commerce, online shopping

increasingly popular – 221M shoppers by end 2012

•  O2O trend is driven by: –  Increasingly fierce competition in offline consumption => more

physical retailers want to focus online –  Online shopping growing rapidly, but low profit because of price

competition => needs innovative / value-add services •  As an emerging trend, O2O connects online with offline

–  Flexible payment methods => customers shop offline and then pay online or vice versa

–  More ‘interaction opportunities’ for users and businesses –  Other value-added services: LBS (location-based services),

group buy, COD (cash on delivery)


•  Number of O2O users (for shopping) increased 65% in 2012, and is projected to account for over 80% of total online shopping in 2015

•  The total market size (shopping value) of O2O in 2012 was 75 billion RMB and will grow 50% annually from 2013 to 2015

39 82

135

185

240

293

0

50

100

150

200

250

300

350

2010 2011 2012 2013E 2014E 2015E

Mill

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Number of O2O Users in China, 2010-2015E

Source: iResearch, Kapronasia, 2012


Future Trends: •  Internet companies, payment companies, and e-commerce

merchants will invest more into various O2O business models –  Alipay, the 3rd largest payment provider, invested 500 million

RMB in O2O -> distributed 60,000 POS terminals for COD –  Baidu, China’s biggest search engine, setup its LBS (local-based

service) Department specifically to develop their O2O business •  Going mobile is a promising direction of O2O business

–  Dianping.com* emerging as most popular mobile O2O platform - 432 million downloads of Dianping mobile app as of end 2012

•  More opportunities for IT vendors –  Software solutions: O2O platform, data mining, loyalty and other

value added services –  Hardware: IT infrastructure, POS terminals, mobile devices


*Dianping is similar to Yelp in the west - local directory service with social networking and user reviews.

Top-10 China Banking Trends – Big Data & China’s Banks

Big Data is something somewhat new for China’s banks… •  Extraordinary progress on China’s banking industry => massive

amounts of data, especially for large commercial banks •  Data consolidation into centralized data-warehouses complete for

most banks => need cost-effective / easy solutions to manage tremendous data volume

•  Competition domestically and from global players; regulators’ push on finance reformation => need to innovate to handle and use data

Big Data is coming => banks must enhance customer experience and acquire more customers through deep data mining and analysis.

More Challenges for banks… •  Vast and real-time sensory (customer behavior) data •  Different types of data from different channels: social media, mobile,

online, and physical branches •  How to collect, store and analyze big data •  High performance and stable IT infrastructure to support data mining •  How to analyze data and make the right decision, build stronger

customer relationships, and improve risk management •  Global expansion => improve competitive edge, especially for big

banks, such as ICBC and BOC


60 74

96 117

144

180

0 20 40 60 80

100 120 140 160 180 200

2009 2010 2011 2012 2013E 2014E

USD

Mill

ion

China Data Mining / BI (Business Intelligence) Bank Spend, 2009-2014E

Leading to more opportunities for vendors: –  Analyze massive data sets that cannot be dealt with by using

traditional databases and architectures –  Being able to provide high-end analytics based on big data is

real value for banks

Source: Kapronasia analysis, 2012


Top-10 China Banking Trends – China’s CNAPS2

Background: •  Launched in 2007, the China National Advanced Payment System

(CNAPS) is composed of three parts: 1.  High Value Payment System (HVPS) => real-time processing of

large-value payments 2.  Bulk-Entry Payment System (BEPS) => small-value payments 3.  Settlement Account Processing System (SAPS) for common

operations related to settlement accounts

•  2nd generation of CNAPS was launched in 2012 to make the processing of both domestic and cross-border RMB payments more efficient among banks

Currently In the past

Unified connection -> banks can connect with PBOC’s payment system through only one MBFE (Merchant Bank Front End)

Each bank needed several MBFEs => more cost and less efficient

Facilitates cross-border RMB payment and settlement by adopting the international messaging (SWIFT standards) => promoting the global use of the Chinese currency

Chinese payment messages needed to be converted manually to international standards: labor-intensive and high cost process

Key advantages of CNAPS2: efficiency, safety and lowered cost


Implications for banks: –  Need to update their payment systems and optimize their MBFE

to connect with the new system –  More efficient and faster processing means higher standards on

risk control –  Spending on payment systems will continue to grow in 2013

Source: Kapronasia analysis, 2012

220 262

311 366

428 504

0

100

200

300

400

500

600

2009 2010 2011 2012 2013E 2014E

USD

Mill

ion

China Banking Payment System Spend, 2009-2013E


Vendors’ solutions must:

–  Connect banks’ systems with CNAPS smoothly => make sure payments are processed in real-time

–  Strong processing capability and stable performance –  Automatic account checking –  High efficiency and able to process large amounts of data –  Easy to find and correct errors through the monitoring system –  Fault - tolerance and repair function


Report Availability

•  Slides will be available in next few days on Kapronasia.com •  General availability February 13th •  Will also be available on:

–  www.kapronasia.com

Webinar: A look at the Top-10 China Financial Technology Trends for 2013

For more information about the topics covered in this webinar or Kapronasia, please visit www.kapronasia.com or send us an email: [email protected]. Twitter: @chinafintech

Thank You