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Global Bank Outlook Outlook in Middle East 11th May 2006 Lars Kalbreier Global Head of Equity and Alternatives Research CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Comm. & Equities Trading Research Date: April 2006 Slide 1 Global view: what is moving international banks? Globalization Concentration, M&A activities Enrichment Slump of basic commissions (cheques, transfers,…) Private banking, Asset management Pressure on traditional teller banking systems Growth of derivatives lower dependence on interest rates and cycles higher risk IT, bank infrastructure development higher consumer finance higher IT and personnel costs Positive for global banks Challenges for: retail banking (commission and interest rate dependent) Key divisions to benefit: Private Banking, Asset management, Investment banking CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 2 Trend on world banks will likely follow US example of past 20 years … The US example US regional banks: +10% earnings growth p.a. in the 80s, +5% in the 90s +2% in 2000s Reasons: slump of commissions, rising competition, increased sophistication of clients lack, Real end of Glass Steagall Act Asset managers 10 to 15% p.a. earnings growth past 10 years, brokers +15 to +20% Growth opportunities: IB & brokerage, asset managers, private banking, size (economies of scale) Same likely to happen to all banks worldwide. Catalyst: regulation. US trend applied to EU in 80s and started in EM in the 90s CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 3 Sector trends: Investment banking, backed by M&A … M&A will likely continue in next years: Saturated markets in US/Europe, economies of scale, globalization of markets, deregulation International M&A toward EM target will continue Global M&A M & A Activity – LatAm: move well advanced – Asia: the current priority 1'200'000 1'000'000 Gulf countries: limited so far by tomorrow the next big trend ? 800'000 $MM regulation, PENDING 600'000 400'000 200'000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Prudential CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 4 … and the stronger growth of capital markets long term The Global Debt and Equity Market Capitalization 100000 80000 60000 40000 20000 0 1990 1991 Equities 1992 1993 1994 1995 1996 1997 1998 1999 2000 Fixed Income 2001 2002 2003 2004 Source: Prudential 1990: 50% of world GDP = total market cap debt + equity Today: 85% (US: 120%, China: 12%, India: 7%,…) “We will never look like the US capitalism” Edith Cresson, French Prime Minister, 1992 CAC40 now: 70% of French GDP 80% of European companies still finance needs via corporate banking, 85% of Asian companies, 90 to 95% of non OECD companies, against 20% got US companies CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 5 Sector trend: Asset mgt: growth in US/EU to continue… Strong and regular return of equities Rise of private pension schemes Demand for risk diversification Increasing complexity of financial products New investment vehicle: Hedge funds Hedge fund size and number Global Fund Management Of Conventional Assets 1200 USD 50 45 40 35 30 25 20 15 10 5 0 markets 1000 800 600 400 200 0 85 90 95 96 97 98 99 00 01 02 03 04 USD bn assets Number of hedge funds 1998 1999 Insurance 2000 2001 Pension 2002 2003 2004 Mutual Source: International Financial Service, Hennessee Group LLC, Hedge Fund Research CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 6 … and under representation of EM makes it the next big trend OECD: 61% of GDP, 78% of funds under management Conventional Investment Management Sources of Funds 22% Share of global GDP 11% 2% 2% 4% 30% 45% 2% 2% 4% 5% 33% 8% 12% 5% 1% 6% 1% 5% United States France Switzerland Germany Netherlands UK Other China India Japan Korea Source: International Financial Services for asset mix and IMF for GDP mix Europe similar to the U.S. a decade ago and Asia similar to the U.S. 2 decades ago Fund assets = 166% of GDP in USA, 85% non US Catch up likely with more activity, liquidity, and investment confidence CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 7 Sector trend: Private banking: moving up the value chain + be local (1) Trend for Private Banking worldwide Focus on personalization, easy of contact & navigation and revival of personal client Development of a highly dedication approach with high added value integral financial services & products linked to UHNWI Tailor made services, incl. Ad hoc structured products, alternative investments (hedge funds) and less liquid investment (private equity, arts,…) + trading scenario analysis, risk modelling and performance attribution managements EM Develop networks locally instead in large financial capitals to increase personalization and availability Synergies with corporate finance (ex: sale of business RM goes to client to offer investment ideas with the cash) One Research centre / decentralized distribution networks Rise of local branches, Research to be leveraged to international needs CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 8 Private banking: moving up the value chain + be local (2) Example of worldwide priorities: UHNWI HNWI financial wealth is expected to grow by 7% p.a. and to exceed USD 40.7 trillions by 2008. The ultra-HNWI financial wealth (USD 30 millions per individual) growth is expected even to exceed the HNWI wealth growth by 2008 (Source: World Wealth report, Cap Gemini Merrill Lynch) HNWI Wealth distribution by regions (in USD Trillions) Annual expected growth rate 2004-09 45 40 35 9.00% 30 25 20 6.00% 15 10 5 fic Am er ic a Eu ro pe ci tin La As ia -P a ica t m er .A Source: World Wealth Report Ea s Europe Latin America 2009E N 2004 dl e N. America Asia-Pacific Middle East & Africa 2003 ba 2002 M id 2001 G lo 2000 l 3.00% 0 PB majors all streamline their UHNWI strategy based on RM’s input in order to offer a uniform “best of breed” service CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 9 Sector trend: Retail banking: consolidation and investment Retail banking key drivers Europe / US: consolidation, further technological innovations (commodization of services, electronic payments), outsourcing to low-cost countries (India, China etc) IT, Cost cutting and M&A key competitive advantage EM: deployment of services: credit cards, ATMs, cash advances, international transfers, … Gain on fees of new services / losses of cash cows (charge for account opening, charge for balance checking, charge for check, …) Size and investment key competitive advantage Likely outcome for EM banks M&A and partnerships in emerging markets from US/EU banks New regulation to open new services CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 10 Financial services outlook by 2010 : Engines of growth Catalysts estimated to have the highest impact on banks Others Home country consolidation and convergence Innovation 3% 22% 30% 31% Technology 24% Demographics shifts 46% Risk management 54% Regulation & Compliance 55% Globalization 0% 10% 20% 30% 40% 50% 60% Source: Survey Deloitte Touche 2005-06 in collaboration with EIU; 175 respondents: AM firms 23%, Banks 28%, Insurances 27%, Securities firms 22% CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 11 Conclusion on global banking trends IB, brokerage, asset management, private banking to continue flourishing Retail banking needs to adapt Size matters: expected sales growth long term (all banks): 5-6% mid size 8-9% large caps Expected earnings growth: 6-7% mid size, 10-12% large cap Worldwide standardization of services and narrowing of major differentials between countries Besides Private Banking: increased local distribution CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 12 Middle East banks: regulation change to unlock development ? Main problems Regulation / Property laws Lack of market transparency Ownership of large domestic companies Solutions under development Privatization of stock exchanges: sale of Saudi Tadawul Stock Exchange New financial districts: Dubai Financial Center, King Abdullah International financial district near Riyad, Qatar financial center in order to attract international banks Privatisations of companies: Saudi Aramco international equity offering in March 2006, privatization calendar from the Egyptian government Ownership of large domestic companies CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 13 Middle East banking: catalysts in the short term for Private Banking (1): new opportunities for structured products Past issues – Sharia rules limited investment scope and hedging possibilities – Local banks lack international presence Recent catalysts: – lower regulation, higher liquidity new asset classes: Mortgage Backed Securities – (Sukuk) Sharia-compliant structured products: Arboun (Islamic version of option) and Murabaha (Islamic version of future for physically owned commodity), takaful (sharia-compliant insurance) New trend are just starting May 2005: Deutsche Bank issued what is thought to be the first capital-protected commodity-linked product sold to Abu Dhabi Commercial Bank, 4Q05: HSBC sold CPPI on the Dow Jones Islamic Asia-Pacific index Dec 4 to 6, 2005: Inaugural Middle East Hedge Fund Investment summit in Dubai. CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 14 Middle East banking: catalysts in the short term for Private Banking (2): expected sustainable oil revenues Islamic banking and finance: already over USD 300 bn in assets Oil prices jump: major catalyst for 2006: countries’ oil export revenues exp. > USD 300 bn in 2006, 3 times average level in the ten years up to 2003 Long term sustainable: peak oil scenario (only 35 to 45 year of oil left according to IEA?), geopolitical risks, Chinese and Indian thirst for crude oil scenario of sustained high oil prices HSBC estimates petro-related net new money (Russia, Middle East, Latam) in 2006 = USD 51.4 bn allocated to PB & AM. Est. cumulative sum of new petro dollars going forward to 2025E = more than USD 1 trillion, mostly from Middle East. CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 15 Middle East banking: catalysts for other bank activities Strong GDP growth (ex: Saudi Arabia +6% 2005) Potential for local branch development Spending on projects 2006-07 = $150 bn, 4 x the USD 35 bn in 2003 Potential for Corporate banking, IPOs Gulf countries to reshape their economies from oil to tourism and trading Potential for Investment Banking, IPO advice to government and real estate investment CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 16 Middle East : most advanced country for banking business: UAE No income tax No corporate tax (besides banks, telecom and oil companies) No control on foreign investment Freedom for real estate investment for non nationals Strong protection of patents and IP New investment law 2004: local “partner” in business: only 30% of stakes CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 17 Conclusions Trend remains positive for banks, particularly PB and IB, globally Middle East countries to benefit from: - new investment vehicles (structured products) - sustained oil revenues - new regulation to ease international money transfer, credit card use, access to capital markets - major reforms underway in several Middle East countries Positive outlook for economic growth in the region positive for Corporate banking CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 18 Disclaimer This document was produced by and the opinions expressed are those of Credit Suisse as of the date of writing and are subject to change. It has been prepared solely for information purposes and for the use of the recipient. It does not constitute an offer or an invitation by or on behalf of Credit Suisse to any person to buy or sell any security. Any reference to past performance is not necessarily a guide to the future. The information and analysis contained in this publication have been compiled or arrived at from sources believed to be reliable but Credit Suisse does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. An affiliate of Credit Suisse has contributed in whole or in part to the preparation of reports, which comment on US listed companies and/or US markets, however Credit Suisse is solely responsible for the report’s content and analysis and any related opinion and recommendations. The issuer of the securities referred to herein or a Credit Suisse Group company may have acted upon the information and analysis contained in this publication before being made available to clients of Credit Suisse. A Credit Suisse Group company may, to the extent permitted by law, participate or invest in other financing transactions with the issuer of the securities referred to herein, perform services or solicit business from such issuers, and/or have a position or effect transactions in the securities or options thereof. An investment in the funds described in this document should be made only after careful study of the most recent sales prospectus and other fund regulations and basic legal information contained therein. The sales prospectuses and other fund regulations may be obtained free of charge from the fund management companies and/or from their agents. Neither this document nor any copy thereof may be sent to or taken into the United States or distributed in the United States or to a US person, in certain other jurisdictions the distribution may be restricted by local law or regulation. This document may not be reproduced either in whole, or in part, without the written permission of Credit Suisse. © 2006, Credit Suisse CREDIT SUISSE PRIVATE BANKING Produced by:Lars Kalbreier Date: May 2006 Slide 19