Project Blue PWC 2012

Contents
1. Project Blue - Overview

2. Project Blue Overview - Chinese
translation
3. SAAAME details
4. Brazil
5. China
6. Hong Kong
7. India
8. Middle East
9. Singapore
10.South Africa
11. Future trends for the FS Indusry
12.Perspectives for the Asset
Management Industry
13.Perspectives for the Banking
and Capital Markets Industry
14.Perspectives for the Insurance
Industry
Financial services are set for transformation as their role, industry structure and
commercial realities are disrupted by the major trends currently reshaping the global
economy. Many businesses will be unrecognisable by the end of the decade and the list of
market leaders could be very different as smart and agile players leapfrog slower moving
competitors. Will your business model still be relevant in the new global economy? How can
you take advantage of the shake-up ahead?
www.pwc.com/projectblue
Project Blue
Assessing the future trends
for financial services
2 PwC Project Blue
PwC Project Blue 1
02 Introduction
04 The new market realities
04 Adapting to global instability
08 Planning for transformation
08 The rise and interconnectivity of the emerging markets
10 Demographic change
11 Social and behavioural change
12 Technological change
13 The war for natural resources
16 The rise of state-directed capitalism
18 Taking control of your future
20 Contacts
Contents
2 PwC Project Blue
Is your business model still viable?
Three years on from the onset of the
financial crisis, financial services boards
are working around the clock to deal with
a whirlwind of regulatory upheaval and
economic instability. The urgency to
adapt to this complex and uncertain
environment is leading to reactive short-
term strategic responses within many
financial services organisations.
There has been little space left in the
executive agenda to consider the long-
term future. Few organisations have even
begun to establish a clear vision of how
their business will be effected by the more
fundamental and enduring changes
ahead and how they can sustain
competitive relevance in a rapidly
evolving global economy.
Yet some forward-looking organisations
are using the shake-up as an opportunity
to redefine their strategies and business
models, and take advantage of the once-
in-a-generation opportunity when the
competitive structure of their industries is
relatively open to change. In times of
change, the gap between high performers
and low performers widens. Slower
moving competitors could soon find
themselves struggling to secure sufficient
investment and overcome declining
demand and profitability in many of their
key markets.
Introduction
The financial services industry is at a watershed. While most organisations
are finding it difficult to look beyond the current market turmoil, their
survival and success will also depend on being able to deal with the longer
term trends that are transforming the market and competitive landscape.
These include the rise and interconnectivity of the emerging markets and
state-directed approaches to economic development. Financial services
businesses are also facing the impact of new technology, demographics,
social change and mounting pressure on the worlds most critical natural
resources.
Figure 1: The Project Blue framework
Source: PwC Project Blue analysis
P
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Global instability
Regulatory environment Fiscal pressures Political and social unrest
A
d
a
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Rise and interconnectivity
of the emerging markets
(SAAAME)
Economic strength
Trade
Foreign direct investment
Demographic change Population growth
discrepancies
Ageing populations
Social and behavioural
change
Urbanisation
Global affluence
Talent
Capital balances
Resource allocation
Population
Changing family structures
Belief structures
Changing customer
behaviours social media
Attitudes to financial
institutions
Technological change Disruptive technologies
impacting FS
Digital and mobile
War for natural resources Oil, gas and fossil fuels
Food and water
Key commodities
Rise of state-directed
capitalism
State intervention
Country/city economic
strategies
Technological and
scientific R&D and
innovation
Ecosystems
Climate change and
sustainability
Investment strategies
SWFs/development banks
P
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Many industry
participants
(particularly in the
West) are focused on
adapting to global
instability; however,
the market is changing
and opportunity
exists for those who
see it.
PwC Project Blue 3
Project Blue draws on the experience of
the PwC global network and has been
developed through interaction with
financial services leaders around the
world. It provides a framework to help
industry executives organise their
assessment of a world in flux, debate the
implications for their business, rethink
their strategies and, if necessary, reinvent
their organisations. Seeing the future
clearly, being first to adapt strategies and
business models, and breeding a culture
that shapes, rather than reacts to, the
changing business environment will be
the building blocks of sustainable
competitive advantage in the future.
The Project Blue framework (see Figure 1
opposite) considers the major trends that
are reshaping the global economy and
transforming the behaviour of consumers,
businesses and governments. These are
the fundamental underlying drivers, but
business opportunities may be defined
by a combination of these trends.
For example, infrastructure finance is
being driven by urbanisation, but this
trend is occurring largely in emerging
markets, raising issues around sovereign
risk and the role of the state in economic
development in these countries.
Such opportunities can only be fully
realised by rethinking approaches to risk,
publicprivate partnership models and
short-term versus long-term returns.
Rather than offering one way forward,
the Project Blue framework is flexible
enough to be applicable to all the many
different organisations within the sector.
The framework recognises that whether
the drivers of change are threats or
opportunities depends on the nature of
your business and where in the world you
operate. The results will help you to target
investment, identify talent requirements
and develop the necessary operational
capabilities needed to make the most of
your competitive potential.
In this introductory overview we describe
the main drivers of change and the
resulting considerations for your
strategies and business models.
We believe that
businesses which
develop strategies and
business models that
adapt and profit from
the current global
instability, as well as
position the business
to ride the waves of
change in the global
economy, will not
only succeed, but
prosper.
Adapting to global
instability
Regulatory changes, fiscal pressures, and
political and social unrest are creating an
uncertain business environment. This
instability makes the future of financial
services difficult to predict. It also
consumes a significant amount of
management time by necessitating a
focus on short-term optimisation and in
some cases survival, at the expense of
long-term strategy and execution.
This unstable environment challenges
traditional risk methodologies and has
the potential to disrupt commercial
models and organisational structures.
The immediate challenge for your
business is how to anticipate and adapt to
global instability, rather than simply react
to events.
Regulatory change
Regulatory change will be a way of life
for the foreseeable future, driven by the
requirement to better manage risk in the
global financial system, public outrage
following the financial crisis and political
agenda this has engendered. The changes
taking place are creating greater
uncertainty and complexity now, and the
prospect of further industry restructuring
and unintended consequences ahead.
While the reforms are still in the early
stages of development, they will come to
redefine the role of financial institutions
and with it, their strategies and business
models. Its vital to look beyond
compliance to understand how these
developments will effect product and
business portfolios, how they will
determine the allowable cost structure of
your organisation and ultimately how
they will influence the fundamental
design of your organisation.
The new market realities
Regulatory change
will challenge you to
identify which areas
of your business offer
the greatest potential
and to identify the
core attributes on
which to establish
sustainable
competitive
advantage.
4 PwC Project Blue
Fiscal pressures
Fiscal pressures are further undermining
global financial stability by forcing some
economies to the brink of default,
threatening the solvency of weakened
banks and making capital markets more
volatile. Governments are implementing
austerity measures and new taxes, which
are likely to have a substantial impact on
growth and profitability within the
financial services sector.
Moreover, while emerging markets have
experienced a credit boom, driven in part
by supplies of Western credit, there are
worries that instability within the global
financial system could affect or indeed
undermine future lending.
Political and social unrest
The world has become increasingly
unstable in recent years. Factors ranging
from corruption and repression to fiscal
austerity, unemployment and rising food
prices are igniting ever-more frequent
social and political unrest. A further
spur for this upsurge in protest and
insurrection is the advent of social media,
which is making it easier to communicate
information, circumvent censorship and
coordinate action.
Figure 2: Regulation expenditure and employees in the UK and Hong Kong
500
400
300
200
100
0
2002 2003 2004 2005 2006 2007 2008 2009 2010
CAGR
Total 10%
200207 8%
200710 15%
Sources: FSA, OCC and HKMA websites; PwC analysis
Notes: The FSA is the Financial Services Authority, and the HKMA is the Hong Kong Monetary Authority, which are the main financial regulatory bodies for the UK and
Hong Kong respectively; *The FSAs 12-month reporting period begins in April of the year reported
United Kingdom: FSA* Hong Kong: HKMA
Total FSA regulation expenditure, millions, 20022010
FSA regulation employees, 20022010
Total HKMA regulation expenditure, US$ millions, 20042010
Financial Crisis
5,000
4,000
3,000
2,000
1,000
0
2002 2003 2004 2005 2006 2007 2008 2009 2010
CAGR
Total 7%
200207 3%
200710 14%
1000
800
600
400
200
0
2003
N/A
2004 2005 2006 2007 2008 2009 2010
CAGR
Total 6%
200407 4%
200710 6%
CAGR
Total 3%
200307 2%
200710 3%
Financial Crisis
750
600
450
300
150
0
2003 2004 2005 2006 2007 2008 2009 2010
HKMA regulation employees, 20032010
PwC Project Blue 5
The intensity of regulatory oversight has increased as a result of the
recent crisis.
6 PwC Project Blue
Figure 3: Global current account balances, US$ billions, 19902010
n Rest of world n Japan n China n OPEC n United States n Other OECD
Sources: The Turner Review, FSA, 2009; IMF
Notes: OPEC is the Organization of the Petroleum Exporting Countries and members are listed in the appendix; OECD is the Organisation for Economic Co-operation
and Development; for OECD countries see appendix; current account balance is defined by the IMF as the net transactions in all items other than the financial and
capital items; the major classifications are goods and services, income and current transfers
A current account balance (balance of payments) can be expressed as 1) the difference between the value of exports of goods and services, and the value of
imports of goods and services, or 2) the difference between national (both public and private) savings and investment
1,200
900
600
300
0
-300
-600
-900
-1,200
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Figure 4: Eurozone current account balances, US$ billions, 19952010
n Other Eurozone n Netherlands n Germany n Italy n Spain n France n Greece n Portugal
Sources: The Turner Review, FSA, 2009; IMF World Economic Outlook, September 2011
Notes: Current account balance is the net transactions in all items other than the financial and capital items; the major classifications are goods and services, income
and current transfers
400
300
200
100
0
-100
-200
-300
-400
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Current account surpluses in China, Japan and the Middle East alongside
deficits in the United States and Eurozone led to macro-imbalances in the
global economy.
Across the Eurozone, the gap between surplus countries (Germany and the
Netherlands) and deficit countries (including Italy, Spain, France and
Greece) grew.
PwC Project Blue 7
Figure 5: A more unstable world Political instability index,* by country,
2007 and 200910
10
9
8
7
6
5
4
3
2
1
0
0 20 40
Proportion of countries, globally
60 80 100
20092010 2007
Sources: Economist Intelligence Unit ViewsWire; PwC analysis
Note: Index measured for 164 countries; *The political instability index represents the level of political instability
in a country, with a greater value indicating that the country has greater instability. The chart shows the global
change in political instability between 2007 and 2009/10. It plots the index against the proportion of countries
with that score. For example, in 2007, around 45% of countries had a score greater than 5 while in 2009/10,
around 75% did, indicating greater levels of political instability in 2009/10
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Increase in political
instability
Over the past three years the world has become
increasingly unstable.
Your business will
need to consider how
heightened political
instability could effect
your risk profile,
especially investments
and operations in
countries and
commercial sectors
that are potentially
vulnerable to protest
and unrest.
8 PwC Project Blue
The rise and
interconnectivity of the
emerging markets
The focus of global growth has shifted.
Western economic dominance is a
relatively recent phenomenon and the
developments we see are essentially a
rebalancing of the global economies.
While many commentators are focusing
their attention on what are considered to
be the largest and fastest growing BRIC
markets (Brazil, Russia, India and China),
the commercial potential is far greater
than these countries alone.
Along with the growth and size of the
emerging markets, its important to
appreciate the interconnectivity of the
trade and investment flows between
them, which are growing much faster
than the traditional routes from
developed-to-emerging and developed-to-
developed countries (see Figure 6).
Indeed, South America, Africa, Asia and
the Middle East (SAAAME) are emerging
as an increasingly interconnected trading
zone, which, in physical terms at least
effectively bypasses the West.
Planning for transformation
Figure 6: World trade flows, SAAAME and non-SAAAME, US$ trillions, 2010
Trade value: $6.92tr
CAGR 200210: 8.0%
Non-SAAAME
SAAAME
CAGR 200210: 19.4%
CAGR 200210: 13.6%
CAGR 200210: 12.9%
Sources: WTO; PwC analysis
Note: Russia and the Commonwealth of Independent States (CIS) have not been included in SAAAME definition because trade is largely international and/or with
Europe. Mexico is excluded as it trades mainly within the North American free trade zone and less with SAAAME. Both areas remain very important growth markets and
should be considered in relation to the SAAAME region.
South America, Africa, Asia and the Middle East (SAAAME) are emerging as
an increasingly important network for international trade.
PwC Project Blue 9
The SAAAME region covers a significant
proportion of the worlds land surface
and has access to many of its natural
resources. It also has substantial
manufacturing capabilities and access
to the labour to support this, large and
growing consumer markets, and a
sizeable pool of both educational
establishments and well-educated
professionals. Its significant liquid
investable capital includes a growing
(albeit slowly) proportion of global
assets under management (AUM) and
nearly 80% of overall sovereign wealth
fund AUM.
1
To make the most of the opportunities
for growth, your business will need to
contend with rising consumer
expectations in these markets, a more
complex risk environment and the
growing battle for talent. As an increasing
amount of emerging-to-emerging market
commerce misses out the West altogether.
Western institutions also need to find
ways to tap into business flows they may
never physically see.
SAAAME financial institutions
Success will depend on being able to
develop your organisational skills to keep
pace with the growth of SAAAME
markets, to build the customer-centric
model needed to keep pace with
consumer expectations, and to construct
business models and partnerships that are
relevant to the markets you serve. You
also need to work out how to attract and
retain scarce talent when competitors and
companies from other sectors are looking
to lure your best people away.
Western financial institutions
The opportunities are evident, but
regulation and local competition are
making it increasingly difficult to
penetrate SAAAME markets. Success
will depend on being able to deliver
products and capabilities that domestic
players cannot do and being sensitive
to the realities of doing business in
these countries.
Our latest research
anticipates that
domestic credit in
China could overtake
the US by 2023 and
India will become the
third largest domestic
banking sector after
China and the US
by 2050.
2
1 Sovereign Wealth Fund Institute, 2010 and
PwC analysis
2 PwC, Banking in 2050, 2011 update
Demographic change
Your customers and their demands are
changing. Population growth and decline
in different countries, combined with an
ageing population around the world, will
create a markedly different consumer
market by 2050.
In some European countries, the working
population will decline by more than
10%
3
and this gap will need to be filled
by immigration, later retirements and
productivity gains, which could be
accelerated by growth of the digital
machine-to-machine economy.
While much has been made of the impact
of ageing in the Western world, the most
dramatic changes will be seen in
emerging markets as birth rates and life
expectancy around the world begin to
converge (see Figure 7).
Your business will need to anticipate
demographic developments and bring
products and services into line with the
changing customer base in the markets
you serve.
As people live longer and state support
declines, the competitive frontline
will likely shift from lending towards
helping people to fund and manage their
retirements. Reputation and trust will
be crucial in sustaining market share in
an increasingly empowered and
knowledgeable retirement market.
10 PwC Project Blue
Figure 7: Asia, total population against mortality and fertility rates, 20002050
6,000 24
20
16
12
8
4
0
5,000
4,000
3,000
2,000
1,000
0
n Population Fertility rate Mortality rate
Sources: United Nations Population Division
Notes: Mortality and fertility rates are the number of births and deaths per 1,000 population; population size
based on UN population figures for 200010 and medium variant projections for 201550; five-year population
figures calculated using average across the five years; population forecast by UN using estimated population
at 1 July 2010 and assumptions for mortality, fertility and net migration rates
Population size,
five-year average,
millions Forecast
Rate,
per 1,000
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Population CAGR 20102050: 0.53% Population CAGR
20002010: 1.14%
In Asia, population growth is forecast to slow as
mortality and fertility rates converge.
The number of people
aged over 65 in Japan,
Italy and Spain is
forecast to be 60% of
the total working age
population (1564)
by 2050.
4
3 United Nations Department of Economic
and Social Affairs, August 2011
4 World Population Prospects The 2010
Revision, Volume I: Comprehensive
Tables, United Nations, 2011; PwC
analysis
change
Social and behavioural change is
occurring at a faster pace than at any
time in history.
Consumers are more informed and
empowered than ever before, and old
notions of value and loyalty are breaking
down as digital technology allows
them to both compare value and expand
their choices. Continuing digital
transformation is also changing the way
people interact, share ideas and access
products and services, with social
networking now making up one in six
minutes of time spent online.
5
In emerging markets, increasing affluence
and urbanisation are creating new and
expanding markets for financial
institutions. City dwellers average wealth
and demand for financial products and
services are generally much higher than
their rural counterparts. Indeed, some
observers now see the real distinction in
the financial services sector as not
emerging and developed markets, but
rather city and rural areas.
How your company responds to these
social and behavioural changes could
define your market position for decades
to come, providing a once-in-a-generation
opportunity to put clear distance between
you and your rivals if you judge the
implications correctly and a mortal threat
if you dont. The key differentiator will be
the ability to anticipate where the market
is going on the back of these changes
and get in ahead of your competitors.
Experience in the travel and music
industries suggests that companies that
are slow to grasp the implications of
change could be quickly marginalised.
PwC Project Blue 11
The global middle class is forecast to grow by
around 180% between 2010 and 2040. Asia is
expected to replace Europe as the region with
the highest proportion of the global middle class
by 2015.
Figure 8: Forecast size of middle class, by region, millions, 20102050
2010 2015 2020 2025 2030 2035 2040 2045 2050
CAGR
201040: 4050:
Overall 3.5% -0.7%
n Sub-Saharan 5.9% 4.2%
Africa
n Middle East 3.5% 1.8%
& North Africa
n Central & 2.3% 1.0%
South America
n North America -0.5% -1.2%
n Asia Pacific 6.3% -1.1%
n Europe -0.3% -1.9%
Sources: European Environment Agency; OECD Development Centre; PwC analysis
Notes: Data is forecast and was last uploaded by the European Environment Agency on 29 November 2010;
middle class is defined as households with daily expenditures between USD10 and USD100 per person in
purchasing power parity terms
6,000
5,000
4,000
3,000
2,000
1,000
0
Over the next 30 years the urban population is
forecast to grow by almost 1.8 billion people. Most
of this urbanisation is expected in Asia and Africa,
increasing the worlds urban population to 5.6
billion
6
and creating one of the most important
competitive battlegrounds for financial services
businesses.
5 ComScore, July 2011
6 United Nations, Department of Economic and
Social Affairs, Population Division, 2009 Revision
Technological change
Technology has always shaped society
and commerce in unpredictable ways,
changing customer behaviour, spawning
new enterprises and wiping out existing
businesses that are unable to keep pace.
As the speed of technological
development accelerates, the risk of
falling behind becomes more acute.
Breakthroughs in biotechnology,
nanotechnology and other frontiers of
research and development (R&D) are
increasing productive potential and
opening up new investment
opportunities. Whole new industries are
being created, which could have a
significant impact on the size and shape
of the worlds manufacturing, and
high-tech sectors and the companies that
operate within them. The key question for
your business is: Are you ready and able
to support and capitalise on these
developments? These emerging
technologies and the industries they
generate also carry a new set of risks,
which need to be fully understood if you
are to make the most of the financing
opportunity.
In the digital world, the internet, mobile
phones, data analytics and cloud
computing are well established. Yet, many
companies across all sectors are still
grappling with how these developments
will affect consumer expectations, the
way they interact with their customers
and the underlying business models that
support this.
While the transformational impact of
digital technology has been slower to
reach financial services than other fields
of commerce, the sector has finally
reached a tipping point. Enhanced digital
interaction would offer your business the
opportunity to engage more closely with
its customers and increase wallet share.
At the same time, digital transformation
could be highly disruptive, allowing new
entrants to break into the banking market,
pick off the most valuable revenue
opportunities and seize control of
customer relationships. In a digital world,
it will be harder for your business to
differentiate itself, especially if service
expectations are set by non-financial
competitors. The ease of switching
afforded by digital technology could also
drive down margins and profits. Some
organisations could be strained to
breaking point.
12 PwC Project Blue
Figure 9: Income split of those who currently use a mobile to purchase
financial services, all geographies*, 2011
Sources: PwC Digital Tipping Point Survey 2011; (Based on approximately 3,000 responses) PwC analysis
Notes: *Geographies surveyed were United Kingdom, United Arab Emirates, Poland, Mexico, India,
Hong Kong, France, China and Canada
Proportion of
responses, %
100
80
60
40
20
0
Mass Market Savings >25,000 Savings >50,000
More than 40% of people using social network
sites in the US are interested in interacting with
financial services firms via Facebook and
MySpace.
7
The demand for branchless banking is significant in all segments of the
population, regardless of geography.
The war for natural
resources
The expanding size and prosperity of
the global population is leading to
rapidly rising consumption and putting
unsustainable pressures on the worlds
most critical natural resources.
Even basic commodities such as water
are now in increasingly short supply,
providing the spur for the development
of new markets, technologies and
investments on the one side and the
potential for unrest, commercial
disruption and protectionist behaviour
on the other. The growing shortages of
resources will be exacerbated by climate
change, heightening catastrophe risk and
putting further pressure on land, water
supplies and food production.
The war for natural resources is likely
to play out on multiple fronts. Examples
include the response to the increase in
water withdrawals, which are forecast
to rise dramatically. Food production will
naturally gravitate to more plentiful
sources of water, which may be outside a
countrys border and therefore extend the
supply chains of and potential cost of
food production.
PwC Project Blue 13
7 The Social Tools Consumers Want From Their
Favourite Brands, Forrester, 16 April 2009
14 PwC Project Blue
In turn, demand for energy is forecast to
increase by around a third by 2030.
8
While alternative energy sources will gain
market share, the overall global demand
for oil, gas and coal is forecast to remain
strong, particularly as technology
transforms currently uneconomic sources
of oil.
Globalisation is creating global supply
chains that are tying countries together
through trade as never before. China and
other manufacturing-based economies
depend on emerging markets in Africa
and South America to supply their
industries. Conducting business in some
of these countries is likely to require new
investment models and fresh approaches
to understanding and mitigating risk.
Economic disparities are likely to spur
short-term responses in production and
consumption that undermine long-term
sustainability. Shortages could cause
social and political instability, geopolitical
conflict and irreparable environmental
damage.
The war for natural resources and the
impact of climate change are phenomena
that will have a fundamental impact on
the way people live and companies do
business. Its likely to become one of the
main, if not the key driver of, government
policies. It will also open up new markets
and business models for organisations
that both understand the changing
dynamics of supply and demand, and
know how to mitigate the risks.
As environmental risk increasingly
impinges on clients (examples include
higher resource costs, pollution damage
and changes in productive land), your
business will need to assess the impact
on your loan book, risk profile and
investments.
Figure 10: Model simulations of global warming by the Intergovernmental Panel on Climate Change
Temperature change
C at 209099 relative to 198099
Scenario Best estimate Likely range
High growth 3.4 2.05.4
Moderate growth 2.8 1.74.4
Low growth 1.8 1.12.9
Constant CO2 0.6 0.30.9
Sources: Intergovernmental Panel on Climate Change Fourth Assessment Report: Climate Change 2007, NASA Earth Observatory
Notes: Surface warming is relative to 19801999
Global
Temperature
Anomaly, C
5.0
4.0
3.0
2.0
0.0
-1.0
1900 2000
Year
2100
Variability between models
High growth (A2)
Moderate growth (A1B)
Low growth (B1)
Constant CO2
Global scientific consensus is that temperatures could rise between 2C and
5C by the end of the 21st century.
PwC Project Blue 15
Water stress is often localised. For example,
within the high population areas of the North
China Plain, aquifers are reported to have
depleted significantly. The North China Plain is
home to around 10% of Chinas population and
includes the cities of Beijing and Tianjin.
9
Higher growth
scenarios
Figure 11: Possible climate impact of a rise in global temperatures (Stern Review)
Temperature rise 1C 2C 3C 4C 5C
Source: Stern Review, 2006
Small glaciers in the
Andes disappear
completely, threatening
water supplies for 50
million people
Water
Potentially 2030%
decrease in water
availability in some
vulnerable regions
14 billion more
people suffer water
shortages, while 15
billion gain water,
which may increase
flood risk
Potentially 3050%
decrease in water
availability in
Southern Africa and
Mediterranean
Possible disappearance
of large glaciers in
Himalayas, affecting
one-quarter of Chinas
population and
hundreds of millions
in India
Modest increases in
cereal yields in
temperate regions
Food
Health
Sharp declines in crop
yield in tropical regions
(510% in Africa)
150550 additional
millions at risk of
hunger (if carbon
fertilisation weak)
Agricultural yields
decline by 1535%
in Africa
Reduction in winter
mortality in higher
latitudes
4060 million more
people exposed to
malaria in Africa
13 million more
people die from
malnutrition (if carbon
fertilisation weak)
Up to 80 million more people exposed to malaria
in Africa
Land
Permafrost thawing
damages buildings
and roads in parts of
Canada and Russia
Up to 10 million more
people affected by
coastal flooding each
year
1170 million more
people affected by
year
7300 million more
people affected by
year
Sea level rise threatens
small islands, low-lying
coastal areas (e.g.
Florida) and major
world cities such as
New York and London
Environment/
Ecosystems
80% bleaching of
coral reefs, including
Great Barrier Reef
High risk of extinction
of Arctic species,
including polar bear
and caribou
2050% of species
facing extinction
(according to one
estimate)
Loss of around half Arctic tundra
Abrupt and
large-scale
impacts
Atlantic thermohaline
circulation starts to
weaken
Potential for Greenland ice sheet to begin melting irreversibly, accelerating sea level rise and committing world
to an eventual 7 m sea level rise
Rising risk of abrupt changes to atmospheric circulations, e.g. The monsoon
Rising risk of collapse of West Antarctic Ice Sheet and Atlantic thermohaline circulation
Continued increase in
ocean acidity seriously
disrupting marine
ecosystems and
possibly fish stocks
Low growth
scenario
The impact of global temperature rises could be extreme.
8 International Energy Agency International Energy
Outlook 2011
9 World Bank China Agenda for Water Sector
Strategy for North China, April 2001
16 PwC Project Blue
The rise of state-directed
capitalism
The pendulum swing away from the free
market towards state-directed capitalism
in the wake of the financial crisis is
manifesting itself in governments
increasing direction of financial services
and the wider economy. Governments are
also becoming more competitive in the
way they vie with other states for talent,
investment and the primacy of key
financial, industrial and other productive
centres in the countries they govern.
Payback for support
Western governments have spent
considerable sums to stabilise their
financial systems. Greater state
intervention and pressure on financial
institutions to support the real economy
(e.g. through increased bank lending to
small businesses) are likely to be a key
part of the payback required.
Greater intervention is the payback
for the bailouts
Profitability and growth are likely to be
more dependent on the fortunes of the
real economy than before the financial
crisis, which will in turn be more closely
tied to government policies.
Pledged and
utilised support,
% of GDP, 2009
14
12
10
8
6
4
2
0
Advanced
G20
economies
Emerging
G20
economies
Average
G20
economies
UK US
Figure 12: Costs to governments of supporting the financial sector,
percentage of GDP, as at December 2009
n Utilised support n Additional pledged support
Sources: A fair and substantial contribution by the financial sector, IMF, June 2010
Notes: Data based on International Monetary Fund (IMF) survey sent to all G-20 members in December 2009
The high public cost prompts many Western
governments to take a more active role.
PwC Project Blue 17
As such, it will be important to work with
industry and consumer groups to help
influence and shape government policies.
It will also be important to develop a
strong relationship with government to
make sure your strategy anticipates and
is aligned to government priorities and
investment plans. Globalisation is
intensifying the competition between
countries and cities. Local leaders are
ever more aware of their sources of
competitive advantage and how to attract
the businesses, facilitate investment in
infrastructure and the secure supply
chains needed to make the most of this
potential. As cities expand and develop,
local and central government face the
challenges of how to attract the necessary
investment in housing and infrastructure
while balancing the inevitable strains on
natural resources.
Many governments, particularly in the
SAAAME states, realise that the private
sector cannot finance and deliver
important national economic and social
priorities on its own. As a result, were
likely to see an increase in PublicPrivate
Partnerships (PPP), particularly in
emerging markets, as well as government-
to-government agreements to mitigate
sovereign risks, mobilise sovereign capital
and piece together industry supply chains.
PPP investment around
the world rose from
US$50 billion in 2002
to US$170 billion in
2010.
10
10 World Bank, Infrastructure Database, data
extracted from database on 30 November 2011;
PwC analysis
18 PwC Project Blue
Being able to see into the future and
judge the implications will give you an
invaluable edge. Project Blue is designed
to provide you with a framework for
organising your views of the global
developments ahead, the implications for
your business and your resulting vision
for the future.
Coming through stronger
As weve developed Project Blue, weve
spoken with business leaders around the
world to assess how these drivers will
affect them. Drawing on these discussions
and our research into the impact of the
main forces of change, the graphic (see
Figure 13) highlights the key areas that
boards will need to assess and address as
they look to sustain and sharpen
competitive relevance.
Shaping the future
Its vital that your business plays an active
part in the debate over the changes
ahead. This includes engaging as closely
as possible with clients, regulators,
governments, consumer and community
groups, and other key stakeholders to
Taking control of your future
Disruption to long-established business models is the one clear certainty
that the future holds. The key question is whether the various forces
shaping the sector present an opportunity or a threat to your business.
Sources: PwC analysis
Shaping the future
Economic rebalancing
Industry structure
Fiscal and monetary policy
Regulation
Social policy
Investor expectations
Community engagement
Reinventing the organisation
Rethinking the strategy
New stakeholder objectives
Short-term adaptation
Alignment to global trends
Determining risk appetite
Redefining performance targets
Portfolio rebalancing
Relative competitive advantage
Figure 13: The CEO agenda
1 2
Governance
Board composition
and qualifications
Executive remuneration
Regulatory compliance
Risk management
Financial reporting
and controls
Target operating model
Legal and physical
structure
Tax and capital
efficiency
Allowable cost structure
Technology
Partnership structure
People and resources
Competitive advantage
Seeing the future
War for talent
Constant reinvention
Product innovation
Strategic agility
Operational alignment
Project Blue assesses the impact of these changes
on all aspects of the leadership agenda.
3
make sure the full impact is understood
and help get important messages across to
policymakers ultimately driving an
improved financial system for all.
Rethinking your strategy
The pressing challenge for all
organisations is how to balance the
adaptations needed to deal with the
current instability with the longer term
changes in strategy, operations and
business focus demanded by the drivers
identified in Project Blue. Your business
can gain significant market share if it
adapts to the reforms and changing
commercial realities faster than your
competitors.
Reinventing your organisation
At the heart of sustainable commercial
models are the organisational capabilities
and flexibility needed to identify and
respond proactively to changing customer
and market demands. Operations will
need to become more agile to
accommodate changing conditions.
Risk and finance teams also need to
become more proactive in managing a
rapidly changing and often uncertain
risk and regulatory environment.
Organisational and people strategies
will be key differentiators in determining
which businesses are most relevant
going forward.
As the CEO agenda highlights, the
underlying considerations include what
kind of leadership is required in this
complex and uncertain environment,
how your risk profile is likely to change,
and what kind of governance and
reporting systems will be required to
plot a successful course through the
changes ahead.
The businesses that come out on top will
have a superior capacity for innovation
and constant reinvention, agile enough
to quickly capitalise on emerging
opportunities and with the strategic
approach to talent needed to make sure
that the right people are available in the
right places at the right time. If your
business is constantly scrambling to keep
pace with unfolding events, its going to
find itself on the back foot competitively
and risks losing out.
A reshaped sector
Dealing with the mega-trends highlighted
in Project Blue cant be put off while you
contend with seemingly more immediate
concerns. Some developments such as the
increase in regulation, state intervention
and possible protectionism that form part
of the rise of state-directed capitalism
are already manifesting themselves.
Others, such as the increasing ageing
and urbanisation of emerging market
populations and their impact on product
and growth strategies are moving rapidly
onto the horizon. How you plan and
invest now will determine your future
chances of success.
So how will strategies change and what
kind of financial institutions will emerge
from the shake-up ahead?
Many emerging markets remain relatively
under-penetrated and have considerable
room for further development in both
the size and sophistication of the
financial services sector. Traditional
models are still viable in these markets,
but new partnership models with
telecommunications and retail companies
to reach the unbanked will continue to
grow. Your business will need to keep
pace with steadily increasing customer
expectations and associated changes in
the regulation, complexity and risk profile
of your operations. The pressing priorities
also include the need to engage in the
war for talent to make sure your
organisation can develop the right skills
to meet the challenges and seize the
opportunities in your markets.
The constraints on funding and domestic
growth will make it increasingly difficult
to be all things to all people (ubiquity).
Successful institutions are therefore likely
to adopt a more ruthless focus on their
core relationships and sources of value
(precision). Were already seeing sharper
customer segmentation, greater discipline
in deploying resources and withdrawal
from markets that offer little prospect of
delivering an economic return. This is
underpinned by a better understanding of
component costs and real returns.
The key considerations are: What exactly
are my core sources of value, who
will be my most important customers
and who will be my main competitors in
ten years from now? in short,
continually re-evaluating what you need
to do to ensure your business model
remains relevant.
PwC Project Blue 19
20 PwC Project Blue
Were working with a range of financial services organisations to facilitate
discussions on the impact of the mega-trends shaping their industry and
where and how they can compete most effectively. If youd like to discuss
any of the issues raised in Project Blue, please contact those listed below, or
your usual PwC contact.
Making sense of an
uncertain future
Nigel Vooght
Global Financial Services Leader
(PwC UK)
Tel: +44 (0) 20 7213 3960
Email: nigel.j.vooght@uk.pwc.com
Andrew Dawson
Author and Global lead for Project Blue
(PwC UK)
Tel: +44 (0) 20 7804 0130
Email: andrew.j.dawson@uk.pwc.com
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the
information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or
completeness of the information contained in this publication and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do
not accept or assume any liability, responsibility, or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information
contained in this publication, or for any decision based on it.
For more information on Project Blue, or other Financial Services programmes, please contact ine Bryn, Global & UK Financial Services Marketing, PwC (UK)
on +44 207 212 8839, or aine.bryn@uk.pwc.com.
For additional copies, please contact Maya Bhatti, Global & UK Financial Services Marketing, PwC (UK) on +44 207 213 2302, or maya.bhatti@uk.pwc.com.
2012 PricewaterhouseCoopers LLP.All rights reserved. In this document, PwC refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United
Kingdom). As the context requires, PwC may also refer to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate
legal entity. Each member firm is a separate legal entity and PricewaterhouseCoopers LLP does not act as agent of PwCIL, or any other member firm, nor can it control
the exercise of another member firm's professional judgement or bind another member firm or PwCIL in any way.
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(Mervyn Jacob)
+852 2289 2700
mervyn.jacob@hk.pwc.com
+86 (10) 6533 2121
raymond.yung@cn.pwc.com
Jeffrey Boyle
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+86 (10) 6533 2755
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www.pwc.com/ projectblue
2012 (PwC) PricewaterhouseCoopers International Limited ( )
,
Rapidly accelerating growth within South
America, Africa, Asia and the Middle East
(SAAAME) is leading to a radical shake-up
in the competitive environment for
financial services businesses, both within
the SAAAME region and beyond. How will
the industry landscape be transformed?
Where do the real opportunities lie and
how can your business capitalise on them?
Project Blue
Capitalising on
the rise and
interconnectivity
of the emerging
markets
2 PwC Project Blue
PwC Project Blue 1
02 Foreword
04 Introduction
The real story behind the headlines
06 Section 1
The shake-up ahead: Why SAAAME is so important
06 The shifting centre of gravity
12 The new battlegrounds
16 Section 2
The CEO Agenda: Aligning your business with the new global
dynamics
16 Shaping the future
19 Rethinking your strategy
24 Reinventing the organisation
28 Conclusion
A new DNA
29 Making sense of an uncertain future
32 Project Blue framework
Contents
2 PwC Project Blue
Project Blue explores the major trends that are reshaping the competitive and
investment landscape for financial services (FS) businesses. It draws on the
perspectives of industry leaders and PwCs network around the world. It also brings
together a huge amount of research into the forces shaping the global economy,
customer expectations and government policy. The key aim of Project Blue is to provide
a framework to help CEOs assess the implications of these trends and use this analysis
to drive sustainable strategic and operational advantage.
The rise and interconnectivity of the emerging markets is in many ways the most far-
reaching of the developments facing FS organisations, worldwide. This paper looks at
the opportunities for business development created by the accelerating growth in
South America, Africa, Asia and the Middle East (together forming what PwC terms
SAAAME) and how to sustain relevance in the new global economic order. The paper
is designed to be relevant to organisations based within SAAAME markets and those
based outside.
There could be no universally applicable formula for success when countries and even
regions within countries within SAAAME are so markedly different. Indeed, those that
have ignored the considerable cultural and commercial complexities of doing business
in these markets have very quickly come unstuck. What this paper does seek to provide
is a stable starting point and clear set of considerations for strategic evaluations, both
now and in the future.
I hope you find this paper interesting and useful. If you would like to discuss any of the
issues raised, please feel free to contact either me or one of my colleagues listed on
pages 2931.
Nigel Vooght
Global Financial Services Leader, PwC, (UK)
Foreword
Welcome to Capitalising on the rise
and interconnectivity of the
emerging markets, the first in a
series of papers being published as
part of Project Blue.
PwC Project Blue 3
PwC Project Blue 3
The rise and interconnectivity of the emerging
markets is in many ways the most far-reaching of
the developments facing FS organisations,
worldwide.
4 PwC Project Blue
As intra-SAAAME trade proliferates, an ever-greater proportion of global commerce is
set to bypass the West altogether, leaving Western financial institutions at risk of being
cut out of the loop. They need to find ways to tap into this emerging-to-emerging
market commerce if they are to sustain competitive relevance.
The window of opportunity that allowed some FS groups to rapidly build up their
international footprint prior to the global financial crisis now appears to have closed.
All international groups are likely to face restrictions on foreign ownership and
entrenched competition from dominant local rivals, especially within the most
promising SAAAME markets. Even if some market share is available for acquisition, the
price may be prohibitive for groups affected by the crisis. A more targeted growth
model is emerging as a result, in which the ability to differentiate, develop niche
markets and gain access to new digital distribution networks is critical.
Institutions based within the SAAAME region have the advantage of being closer to the
new epicentres of global trade and growth. But the development of financial
infrastructure, governance and regulatory practices may still have some way to go
before the potential of the different markets can be fulfilled. As markets develop, FS
organisations will need to contend with rising consumer expectations, a more complex
risk environment and the growing battle for talent. Failure to keep pace could leave
established players at risk of losing business to sharper competitors including
ambitious start-ups and Western organisations.
Five out of the top ten banks by market capitalisation are based within SAAAME.
2
Yet,
their global footprint is far less extensive than their leading Western counterparts. The
big question is: Do they have the opportunity or appetite to begin to rival the globally
operating players? Do they simply follow the international expansion of their domestic
customers, or limit their ambitions to being regional players as most have done to date?
Alternatively, do they seek to acquire or partner with Western institutions as they look
to develop the technological capabilities, product expertise and management
experience needed to compete on the global stage? How would such strategies affect
the business plans and prospects for todays globally active elite?
As the Project Blue framework highlights, the backdrop to these developments is a
rapidly changing social, demographic, environmental, political and technological
landscape. What could prove disruptive and even threaten the existence of some FS
businesses could provide others with a once-in-a-generation opportunity to leapfrog
their competitors. All organisations will need to consider how these coalescing trends
will affect the commercial potential and risk profile in their current operating
territories and those theyre targeting for the future.
Introduction
The real story behind the headlines
In December 2011, it was reported
that the GDP of Brazil had
overtaken that of the UK.
1
For many
observers, this news marked
another major milestone in the
accelerating shift in global
economic power from developed
Western states to the emerging
markets of South America, Africa,
Asia and the Middle East
(SAAAME). Yet, the real story is
not so much the speed of growth
within SAAAME, but how
interconnected the trade flows
between these markets have
become.
1 Centre for Economics and Business Research/BBC
News Online, 26.12.11
2 Financial Times Global 500 and PwC analysis
PwC Project Blue 5
What do we mean by SAAAME?
SAAAME refers to South America, Africa, Asia and the Middle East. SAAAME
doesnt include Japan as this is a large G7 developed economy. Mexico is
excluded as it trades mainly within the North American Free Trade Agreement
zone and less with SAAAME. For now, Russia and the Commonwealth of
Independent States (CIS) are also excluded from SAAAME as trade is largely
internal or with Europe, though trade is increasing with SAAAME from its
previously low base and it may not be long before Russia is included to form
SAAAMER. To provide an indication of future trends, many of the forecasts in
this publication compare the G7 developed markets with an E7, which brings
together the seven largest emerging economies (China, India, Russia, Brazil,
Turkey, Mexico and Indonesia).
6 PwC Project Blue
The shifting centre of gravity
Rapid rise: Financial crisis accelerates shift in global economic power
The financial crisis has accelerated the rise in economic importance of SAAAME
markets as they continue to expand, while growth in many developed markets has
stalled. This shift is reflected in projections for the growth and eventual size of the
financial services markets within the major E7 emerging economies, which are set to
overtake their G7 counterparts over the next 20 years (see Figure 1).
The worlds two largest banks by market capitalisation are based in China.
4
Looking
ahead, Chinas banking assets could overtake the US by around 2023.
5
India has
particularly strong long-term growth potential and could become the third largest
banking sector by assets after China and the US, by 2050.
5
In turn, Brazil could rise to
fifth place in the global banking rankings by 2050.
5
Two of its banks already feature in
the global top 20 in terms of market capitalisation and are seeking to follow the
countrys fast growing multinational corporations by developing their presence in Asia,
Africa and South America.
Section 1
The shake-up ahead: Why SAAAME is so important
Both domestic and foreign financial
institutions see clear growth
potential in SAAAME.
3
While a
simple extrapolation of economic
growth and the relatively low
market penetration as a proportion
of GDP provides some indication
of the market potential, the way
these markets develop and the
implications for the FS sector may
be more complex and competitively
far-reaching, as we explore in
this section.
Figure 1: Emerging markets overtake G7
GDP of G7 and E7 countries at Purchasing Power
Parity (PPP), US$ billions, 2009 and 2050
Proportion of global banking assets,
% 2009 and 2050
250,000
200,000
150,000
100,000
50,000
0
100
80
60
40
20
0
2009 2050 2009 2050
Sources: PwC World in 2050 (January 2011); Banking in 2050 (May 2011); PwC analysis
Notes: G7 = US, Japan, Germany, UK, France, Italy, Canada; E7 = China, India, Brazil, Russia, Indonesia,
Mexico, Turkey
3 More than half of the 368 FS leaders in PwCs 15th
Annual Global CEO Survey (published in January
2012) see emerging markets as more important
than developed markets to their companys future
4 Financial Times Global 500 and PwC analysis
5 Banking in 2050, 2011 update, published by
PwC on 18.05.11
CAGR
200950
n E7 4.7%
n G7 2.1%
n Rest
of
world
n E7
n G7
PwC Project Blue 7
As the centre of gravity within global FS
continues to shift, Hong Kong and
Singapore have come to rival London and
New York as the worlds leading financial
centres. Regional centres such as So
Paulo are also seeing a rapid rise. As the
global FS market becomes more
multipolar and SAAAME institutions look
to expand overseas, their Western
counterparts could become targets for
acquisition. Western businesses could be
especially attractive to SAAAME giants
that are looking to acquire the
technology, product expertise, or
management experience that would allow
them to compete on the global stage.
Takeover prices in some developed
markets are generally favourable for now,
especially within the mid-market, but
may not be so for long.
Challenges ahead: Creating
the platform for continued
growth
SAAAME is clearly not a homogeneous
region. Countries vary in economic
growth, social indicators and wealth
distribution, which is reflected in the
levels of FS development and penetration.
Figure 2 highlights the variations by
comparing insurance penetration in
different regions around the world. As
Figure 3 highlights, countries also vary in
their competitiveness, safeguards against
corruption and ease of doing business.
Figure 2: Insurance penetration in selected SAAAME markets
Country Total life and non-life Change on Premiums as a Premiums per
insurance premiums 2009* (%) percentage capita (US$)
2010 (US$bn) of GDP
Latin America and the Caribbean 128 8.1 2.6 219
Brazil 64 10.7 3.0 329
Asia** 1,163 7.3 6.1 282
India 74 (0.4) 4.7 61
China 215 26.2 3.8 158
Hong Kong 25 7.9 11.3 3,599
Indonesia 12 16.1 1.6 50
Singapore 17 6.9 6.1 2,823
South Korea 114 7.5 11.1 2,332
Middle East and Central Asia 34 7.1 1.5 107
Saudi Arabia 4 6.5 1.0 166
UAE 6 8.4 2.0 1,268
Africa 62 (8.3) 3.6 61
Egypt 2 (9.4) 0.7 19
South Africa 49 (9.9) 13.4 962
*In real terms, i.e. adjusted for inflation at local consumer price indices. **Includes Japan
Source: Swiss Re Sigma No. 2/2011, Statistical Appendix, January 2012
The challenges ahead include increasing
market penetration, putting in place an
appropriate legal and regulatory
framework, developing the financial
infrastructure in areas such as credit
evaluation and customer service, and
establishing the low-cost distribution
needed to increase financial inclusion.
Businesses from countries further along
the development curve have faced these
challenges and will therefore be able to
help local partners tackle them and
provide the systems and expertise to
support this.
Increasing interconnectivity: Rapid
expansion of intra-SAAAME commerce
transforms global trade flows
The increasing interconnectivity of intra-
SAAAME trade and investment flows is as
significant as the growth and projected
size of the emerging markets. These flows
are growing much faster than the
traditional routes from developed-to-
emerging and developed-to-developed
markets (see Figure 4). Within SAAAME,
there are pockets of particularly high
trade growth, notably between Asia and
Latin America and between Africa and the
Middle East (see Figure 5).
8 PwC Project Blue
Figure 3: How favourable is the location?
100
90
50
60
70
80
40
30
0
10
20
United
Kingdom
United
States
Germany Saudi
Arabia
UAE South
Africa
China Egypt Brazil India
n Global competitiveness n Low perceptions of corruption n Ease of doing business
Sources: Ease of Doing Business, World Bank, 2011; Global Competitiveness Index, World Economic Forum,
20112012; Corruption Perceptions Index, Transparency International, 2010; PwC analysis
Notes: Low perceptions of corruption derived from the Corruption Perceptions Index: a high score suggests
low perceptions of corruption within a country
The chart gauges relative levels of competitiveness, safeguards against corruption and ease of doing
business, giving each a score out of 33.3, to arrive at an overall percentage rating
PwC Project Blue 9
Figure 4: Transformation in global trade flows
CAGR 200210: 8.0%
Non-SAAAME
SAAAME
CAGR 200210: 19.4%
CAGR 200210: 13.6%
CAGR 200210: 12.9%
Sources: WTO and PwC analysis
Figure 5: Trading hot spots (growth in value of imports and exports)
N America
N America
5.4
4.5
17.7
8.8
19.2
8.7
10.0
8.0
8.6
18.8
13.6
12.6
14.7
12.8
13.4
17.5
17.2
16.0
21.2
29.9
24.1
13.7
11.3
5.4
16.8
21.6
24.1
15.1
13.5
12.6
16.4
17.9
19.0
22.5
15.7
9.1
12.0
19.3
25.6
24.5
15.2
18.9
12.9
11.7
16.4
18.0
27.8
18.7
20.2
Europe CIS South and
Central America
Africa Asia Middle East
Europe
CIS
South and
Central America
Africa
Asia
Middle East
O
R
I
G
I
N
DESTINATION
SAAAME CAGR % 20022010: n <5 n 510 n 1015 n 1520 n 2025 n >25
Notes: North America includes Mexico; Asia includes Japan, Australia and New Zealand
At present, these intra-SAAAME flows are
dominated by commodities, but as
consumer markets continue to expand on
the back of rising affluence (see Figure
6), the pattern of trade will be
increasingly focused on manufactured
goods. SAAAME has established
substantial manufacturing capabilities
and access to the labour to support this.
Services are also set for significant
development, taking advantage of the
growing talent base and focus on
innovation within SAAAME, with both
the number and quality of university
graduates within many emerging markets
now beginning to rival the West (see
Figure 7).
The development of financial
infrastructure, greater access to long-term
funding and the ability to tap into fast
growing sources of liquidity and
investment such as Islamic finance will
also play a key role in sustaining this
expansion in trade and provides an
important opportunity for FS businesses.
At present, the US dollar remains the
primary global exchange currency.
However, as intra-SAAAME trade
develops, bringing currency usage into
line with trading relationships will help to
reduce exchange-rate risk and overcome
barriers to commerce. Key developments
include the increasing use of the
Renminbi in cross-border trade between
China and its neighbours, along with a
series of bilateral currency swap
agreements between China and
international trading partners including
Japan, Turkey and the United Arab
Emirates (UAE).
10 PwC Project Blue
Figure 6: Rising middle class
GDP per capita growth, CAGR, 19802010
SAAAME Non-SAAAME
Sources: United Nations Population Division; World Bank World Development Indicators and PwC analysis
Notes: GDP per capita is in constant 2005 US$
10
9
8
7
6
5
4
3
2
1
0
0 0.5 1 1.5 2
India
Thailand
Indonesia
Turkey
France
Italy
Germany
Chile
Philippines
United States
Brazil
Nigeria
Japan
2.5 3
China
United Kingdom
Canada
Population growth, CAGR % 19802010
PwC Project Blue 11
Figure 7: Nurturing talent
10,000
8,000
6,000
4,000
2,000
0
2004
2011
China Brazil Indonesia Thailand Mexico Saudi Arabia
Total graduates in all tertiary education programmes, 2004 and 2009 n 2004 n 2009
Asian universities, excluding Japan, within the top 200 of the QS world university rankings, 2004 and 2011
n China n Hong Kong n South Korea n Singapore n Malaysia n Taiwan n Thailand
Sources: QS University Rankings; The Times; PwC analysis
CAGR
14.2%
CAGR
8.8%
CAGR
5.5%
CAGR
2.3%
CAGR
5.5%
CAGR
8.5%
0 5 10 15 20 25
Many SAAAME markets are already
highly concentrated and the leading
players may need to look overseas if they
want to expand their market share. Many
will be looking to take advantage of their
growing scale and dominance at the
manufacturing end of global trade flows
by banking both ends of the pipeline.
What remains to be seen is how far they
want to build on these foundations.
Some of the larger Brazilian, Indian and
Chinese banks are seeking to provide
global services for their corporate
customers around the world. Yet, no
SAAAME-based banks have so far sought
to build a global presence comparable
to one of the European or North American
giants.
Foreign penetration within SAAAME
varies (see Figure 8, overleaf). In some
markets including China its almost
negligible. Even in an open market like
Brazil, further acquisition may be
prohibitively expensive, even if targets
were to come up for sale. Yet, while a new
entrant may find it difficult to achieve a
leading position in a SAAAME market,
they may still want to tap into the growth
prospects. Indeed, they may conclude
that they cant afford not to be present in
some of the leading SAAAME markets.
Even a relatively small market share in a
large and fast expanding market like
China, India or Brazil would still provide a
significant source of business and long-
term growth.
The new battlegrounds
Growth and innovation is changing the
playing field for financial institutions
Growing SAAAME middle classes are
demanding more differentiated and
tailored banking, insurance and
investment products, putting pressure on
domestic institutions to keep pace. This
will offer Western institutions possible
openings for investment and partnership.
At the other end of the spectrum, many
poor or remote communities have until
recently had little or no access to financial
services. The penetration of mobile
networks is now bringing financial
services to these once unbanked SAAAME
populations. A notable example is M-pesa
in Kenya, which provides access to
payment and deposits via the mobile
phone network and now has 15 million
customers, more than all of the countrys
banks put together.
6
The GSM
Association a global group of mobile
phone operators estimates that around
300 million previously unbanked
customers will be using some form of
mobile banking by the end of 2012.
7
As mobile banking takes hold as a
distribution channel within SAAAME, its
usage within FS has leapfrogged
developed markets (see Figure 9) and
created pockets of innovation in
particular countries that others could
follow. Indeed, rather than following the
path to maturity seen in the West, its
likely that SAAAME markets will create
their own patterns of development,
leading innovation in many areas and
creating a new DNA for financial services
worldwide. Regulatory barriers could
present a potential challenge to
innovation and so one of the keys to
making the most of these opportunities is
how quickly market controls evolve.
12 PwC Project Blue
Figure 8: Penetration of foreign banks within SAAAME markets, 2009
100
90
50
60
70
80
40
30
0
10
20
Hong
Kong
Singapore Indonesia Egypt Brazil* South
Korea
South
Africa
China India
n % of foreign banks among total banks n % of foreign bank assets among total bank assets
Sources: IMF, Foreign Banks: Trends, Impact and Financial Stability working paper, Jan 2012
Notes: *Latest available year, 2008. Note: Foreign is defined as more than 50% holding by an investor based
outside the country (minority holdings including those in countries that do not permit holdings above 50% are
not included). Bank sample draws together all active banks reporting to Bankscope including commercial
banks, savings banks, co-operative banks, investment banks and private banks.
Questions for the board
What is an achievable goal and
what is the most feasible route to
business expansion in markets that
may effectively be closed to foreign
acquisition?
How can primarily domestically
focused groups develop or acquire
the necessary capabilities
including talent, strategic agility
and deep cultural understanding
to operate effectively across
multiple territories?
How can banks in developed
markets make inroads into intra-
SAAAME trade flows they may
never physically see? What can
they offer that their SAAAME
competitors cant?
6 www.thinkm-pesa.com, 16.04.12
7 Mobile banking for the unbanked, Harvard
Business Review, 27.09.10
PwC Project Blue 13
Figure 9: Global use of internet and mobile phone channels
in banking
100
90
50
60
70
80
40
30
0
10
20
India China UAE Hong
Kong
Mexico UK Poland Canada France Total
n Percentage who currently use mobiles to purchase financial products
n Percentage who currently use the internet to purchase financial products
Source: 3,800 consumers were polled for The new digital tipping point, a report published by PwC in
January 2012
Influx into cities opens up
critical battleground for
competition
Economic development will accelerate
the move from rural areas to cities.
Over the next 30 years, some 1.8 billion
people are expected to move into cities,
most of them in Asia and Africa,
increasing the worlds urban population
to 5.6 billion
8
and creating one of the
most important competitive
battlegrounds for FS businesses.
Urban expansion creates significant
housing and infrastructure investment
opportunities for financial institutions.
On the retail side, city dwellers average
wealth and demand for financial products
and services are generally much higher
than their rural counterparts.Indeed,
some observers now see the real
distinction in the FS sector as no longer
rather, city and rural areas. The challenge
will be how to capitalise on urban growth,
while developing profitable services for
rural customers in areas such as mobile
payments, micro-credits and micro-
insurance.
Imbalances remain to be
ironed out
Credit continues to flow from Western to
SAAAME markets (see Figure 10), even
as the relative capital strength of the
latter increases. Much of this SAAAME
capital is still managed in the West. These
anomalies are unlikely to endure and the
eventual re balancing will have a strong
impact on financial markets and other
businesses that operate within them.
14 PwC Project Blue
8 United Nations, Department of Economic and Social Affairs, Population Division, 2009 Revision
PwC Project Blue 15
Figure 10: Foreign direct investment (FDI)
FDI from non-SAAAME countries to SAAAME countries, US$ billions, 20032011*
Sources: The Financial Times and PwC analysis
Notes: *2011 data is year to date, available as of 7 December 2011
600
450
300
150
0
2003 2004 2005 2006 2007 2008 2009 2010 2011
Largest 12 destination countries for FDI to SAAAME, US$ billions, 2010
80
60
40
20
0
C
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a
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a
Largest 12 source countries for FDI to SAAAME, US$ billions, 2010
80
60
40
20
0
16 PwC Project Blue
Shaping the future
Creating a more stable financial system
The financial crisis highlighted the vulnerability of many smaller and less developed
markets to asset bubbles and destabilising short-term investment flows.
Many of these hot flows of foreign capital were directed towards banks, with the
market values of many emerging market banks multiplying up to ten times in a matter
of years. The repatriation of much of this capital following the collapse of liquidity in
many developed markets in 200708 meant that the credit lines for many frontier
market institutions were quickly withdrawn, leaving them high and dry.
In some countries, further difficulties have been created by the inability of relatively
underdeveloped or overstretched operational infrastructures, governance systems
and supervisory controls to cope with the rapid increase in FS demand, penetration
and complexity.
Crucial priorities in creating a more stable financial system include identifying,
monitoring and managing the risk of asset price bubbles. A number of governments have
introduced more stringent capital controls to prevent hot flows. More timely financial
information and strengthening IT and payments systems would also help FS organisations
to meet growing demand and provide more effective support for customers.
Section 2
The CEO Agenda: Aligning your business
with the new global dynamics
Financial services organisations
must find ways to differentiate
and make themselves relevant
within their target markets and
trade routes.
How robust is your 5-, 10- or even 15-year vision for the evolution of the market?
How developed are payment systems, credit checks, recovery and other key
aspects of financial infrastructure in the target market?
How strong are the governance and controls within companies targeted for
partnership or acquisition?
How susceptible is growth to fluctuations in international commodity prices?
What is the best model of governance to follow in each SAAAME market and how
far will local rules need to change as international regulation becomes more
aligned?
Will the need to comply with many different regulatory rules and approaches
in various operating territories put international groups at a disadvantage to
domestic competitors?
Gulf Cooperation Council
Monetary union within the Gulf Cooperation Council
(GCC) would provide a further spur for the development
of financial services in one of the worlds fastest growing
regions.
The GCC was formed in 1981 to promote political and
economic collaboration between Kuwait, Oman, Bahrain,
Qatar, Saudi Arabia and the UAE, and to help these
countries to address security challenges collectively. The
Council reflects the close cultural, linguistic and religious
ties within the Gulf and is seen as giving the GCC states
greater influence within the Middle East and globally. It
includes a joint military force and a common market
applying to most sectors apart from financial services at
this stage.
Investment in diversifying the economy beyond oil and gas
is a key priority in these countries, with growth in the non-
energy sector predicted to be around 5% a year over the
next five years.
9
A significant feature of the economy is the
importance of family-owned companies and corporations.
We estimate that the combined assets of these businesses
make up around 75% of the private sector and that they
employ some 70% of the workforce in the Gulf States.
The development of international centres for banking,
insurance and asset management is a key part of the
diversification of the economy. Within the GCC itself,
banking sector assets have risen rapidly over the past
decade to reach $1.4 trillion at the end of 2011
10
and the
insurance sector has been growing at an average of more
than 5% a year in the past decade,
11
albeit from a low
base. The GCC is also the worlds largest Islamic financial
services market. Furthermore, its sovereign wealth funds
are major investors in FS businesses worldwide.
Most GCC currencies are currently pegged to the US
dollar. The exception is the Kuwaiti dinar, which since
2007 has been aligned to a basket of currencies. According
to the Central Bank of Kuwait, the basket peg provides
more room for manoeuvre in monetary policy and helps to
insulate the economy from external inflationary pressures
linked to exchange rate fluctuations.
12
Monetary union has been a longstanding ambition within
the GCC. If enacted, it would create the second largest
single currency after the euro and is likely to provide a
number of benefits to FS organisations. These include
promoting regulatory harmonisation. Monetary union
could also make it easier to develop common products and
to operate in any of the member states.
In 2009, the GCC Monetary Council was established the
precursor to a common central bank and an important
step towards monetary union. Yet, the road to a single
currency continues to be challenging. One of the points
of contention has been the location of the central bank,
with the UAE withdrawing from the single currency
project in 2009 following the announcement of plans to
site the bank in Riyadh. Oman has also opted out for now
as it would like more time to develop its financial
infrastructure, though it is likely to rejoin the process in
the future. The remaining four states are pressing on with
the project, though it could take some time before the
union comes to fruition.
9 Economist Intelligence Unit, 30.10.10 and National Bank of Kuwait, 28.01.12
10 NBK GCC Brief, 30.04.12
11 Swiss Re Sigma World Insurance in 2010
12 Arab Times, 08.04.10
PwC Project Blue 17
China
China 2030, a recently published report, sponsored
through a collaborative effort between the World Bank
and the Chinese Government, highlights the challenges
facing China as its development moves into a new stage.
13
China 2030 identifies the key emerging trends that will
fundamentally affect Chinas economic development. It
also provides recommendations for changes to the
countrys policy and institutional framework as it seeks to
achieve sustainable and socially responsible economic
growth through to 2030.
While these trends and recommendations are
comprehensive, China 2030 highlights a number of key
policy and institutional priorities for sustaining stable
economic growth. These include the liberalisation of
interest rate controls and the internationalisation of the
Renminbi. Although these changes must be carefully
managed to avoid unintended consequences, they, along
with others, will provide benefits to the Chinese economy
which include widened sources of funding and more
efficient capital markets. However, Chinese banks will
need to develop the systems and processes required to
manage the more complex market risks that will
accompany these developments.
The relevant trends, both domestic and global, discussed
in China 2030 are as varied as Chinas economy. However,
they will define the domestic financial services market
through to 2030. Perhaps most significant and pervasive
among these trends is the Chinese Governments keenness
to transform domestic economic demand, which is
currently reliant on exports and domestic infrastructure
investment, to include a significantly higher proportion of
retail consumption.
The discussion of trends also includes the effects of an
ageing population, growing urbanisation and the
increasing scarcity of the natural resources needed to fuel
Chinas economic growth. These developments present a
myriad of implications for Chinas banks. Among these
will be the opportunity to create asset management
products that will enable Chinese consumers, who already
have one of the highest savings rates in the world, to more
effectively fund their retirement needs. The Government
is also looking to banks to invest in cleaner technologies
and other forms of green development.
These, along with the other China 2030 recommendations
and trends, foreshadow fundamental and inevitable
changes for both the Chinese economy and its FS
organisations. Those with the foresight to envision the
impact of these changes and transform their businesses in
response will claim the competitive high ground for the
next generation.
18 PwC Project Blue
13 China 2030 Building a Modern, Harmonious, and Creative High-
Income Society, 2011, The World Bank and Development Research
Centre, the Peoples Republic of China.
Adapting your model
Traditional Western financial services
models may have little relevance in some
SAAAME markets. While certain
innovations can be adapted for local
markets, strategies must reflect the local
culture, distribution preferences and
relative levels of sophistication in demand
and technology. Even within countries
themselves, there are likely to be marked
regional distinctions.
As FS organisations move into new
territories, they will need people on the
ground who understand the local markets
and can forge the all-important personal
relationships such people know their
importance and understand their value.
In certain SAAAME markets, the customer
relationship is almost entirely personal
and takes many years to develop, which
requires patience and puts obvious
pressure on employee retention. In turn,
a crucial part of the licence to operate
is convincing local and national
governments that the companys
development plans can complement and
augment their own. Governments are also
likely to be crucial customers in their own
right as investment in urban and
infrastructure development accelerates
and the public/private partnerships that
support this proliferate.
Demographics will have a powerful
influence on economic growth and
demand for financial services within each
of the SAAAME markets. In India, for
example, the relative youth of the
population is sometimes described as its
demographic dividend, stimulating long-
term growth, offering huge potential for
lenders and providing a strong spur for
acceptance of technology and innovation.
In contrast, China has an ageing
population and its public pension, health
and welfare systems are likely to require
much greater support from the private
sector. As greater affluence spurs
continued increases in life expectancy in
China and many other parts of Asia,
meeting the demands of an older
population presents a huge and, as yet,
largely untapped commercial
opportunity.
PwC Project Blue 19
How adaptable are your people, products and business development strategies
to local needs?
How can you develop the necessary relationships with regulators, governments
and distribution partners?
As you look for a way-in to key target markets, what opportunities are there in
helping governments to support economic development plans or bridge their
pension, welfare and healthcare gaps?
What would be the most efficient distribution networks? Could digital
developments help bypass the need for well-established branch or agent
networks?
Following your customers
The international FS groups that will have
the strongest prospects within SAAAME
are actively following the evolving global
trade flows and seeking to support
domestic clients in developing their
overseas reach. This could equally apply
to a developed market group setting up a
branch within the SAAAME region, or a
SAAAME institution seeking to extend its
presence to its clients key supply or
customer markets.
The ability to target investment and meet
customer needs demands effective trade
flow projections and the ability to discern
where clients are planning to invest and
develop their businesses. Organisations
can then work with their clients to help
bridge any potential gaps in the local
financial infrastructure and overcome
challenges in areas such as financing,
risk management, currency convertibility
and repatriation of revenues.
Few financial institutions are going to be
able to sustain a global infrastructure
covering all the necessary corporate
services, so partnerships with local
providers and even competitors will be
necessary (coopetition). This will, in
turn, demand more effective partner
analysis and greater expertise in
managing commercial networks.
20 PwC Project Blue
Do your investment and business development plans reflect the shift in global
trade flows?
How can you identify and tap into business that may bypass traditional financial
centres and trade flows?
Are you able to serve both ends of the trading pipeline for your key customers
and, if not, how can you develop the necessary presence on the ground?
Will leading SAAAME groups need to become global to serve their customers
and sustain competitive relevance?
Can models developed in one country be replicated in another?
India
India is home to a fast-growing and often, innovative, though still under-
penetrated, financial services market.
Indias large and increasingly affluent millennial generation is changing the
outlook and opportunities for FS businesses in the country. A key opportunity is
developing investment products for a generation that may be prepared to take
more risk than their older and more conservative counterparts. The challenge is
how to make sure that pursuit of these opportunities doesnt lead to mis-selling,
or risk creating a market bubble. This will require both effective regulatory
controls and a more mature distribution structure led by a well-supported
independent financial adviser network. The underlying requirement is for a
deeper and broader based capital market, with a robust governance architecture
encouraging retail investors to access these markets. One factor effecting
development in the securities markets is that unlike most other countries, bank
deposits pay higher rates of interest as compared to other investments.
The second key market opportunity is financial inclusion. Banks are developing
no frills accounts to draw in unbanked customers and help develop the habit of
participating in organised financial services and investing in financial assets. The
countrys well-developed mobile phone network also provides a platform for
bringing services into remote and poorer communities quickly and efficiently.
The challenge is how to deliver consistent profits from these operations.
For Indian banks, the presence of Indian communities (the Indian diaspora)
worldwide is providing openings for international development and expansion.
The Government is also keen to develop international financial centres within
India itself. The necessary expertise and technological infrastructure are
developing rapidly. However, more robust ownership and contract laws will be
needed before these centres can begin to develop in earnest and attract
international participants.
Although Indias banking sector is growing rapidly, difficulties in securing
licences, tight restrictions on foreign ownership (5% limit for each firm and 74%
overall) and restricted voting rights have deterred inbound investment in the
sector. A more favourable route is investment in non-bank financial institutions,
which allow 100% foreign ownership and offer access to fast-growing segments
such as mortgages, vehicle finance, credit cards and stockbroking.
Foreign groups can also acquire full control of an asset management company.
With assets under management more than tripling between 2001 and 2010 to
top 100 billion in 2010.
14
India doesn't have a state-sponsored social security system and therefore further
development of the pension and annuities sectors is vital. Businesses in these
sectors can also contribute to the development of long-term money markets and
help fund the infrastructure development.
PwC Project Blue 21
14 Association of Mutual Funds of India, 18.05.11
Breaking into new markets
Many SAAAME governments have
strategic plans for their economies,
which could include favouring domestic
institutions, directing investment
priorities and dictating how far foreign
organisations can compete. In turn, many
Western governments will want to
promote their own financial centres and
encourage domestic institutions to direct
investment into the local economy
rather than overseas, especially if theyve
received state aid in the crisis.
Protectionist barriers to foreign
ownership and licences are making it
difficult for some foreign institutions to
penetrate SAAAME markets, though
investors from other SAAAME states may
in some cases be favoured over their
Western counterparts. The financial crisis
may make some SAAAME governments
more reluctant to embrace market
liberalisation and foreign ownership.
Even if there are no such ownership or
licensing restrictions, entrants may face
entrenched domestic competition, or find
it difficult to differentiate themselves
from increasingly capable local
counterparts. For most, the route to
market is therefore going to be through
start-ups and joint ventures. Its therefore
vital that financial institutions think
about what they can offer customers and
potential partners that their competitors
cannot. This may be particular risk
management or product expertise. It may
also be international coverage. Other key
opportunities include helping local
partners to develop their operational
capabilities in areas such as foreign
exchange and international payments.
To compete, banks will need to secure a
stable source of funding in local currency.
This will be hard without a retail
presence, which is expensive and difficult
to build in the face of established local
competitors with extensive branch
networks.
Globally, Islamic finance continues to
grow faster than conventional finance,
with sharia-compliant assets worldwide
passing a trillion dollars at the end of
2011.
15
Islamic banking, insurance and
asset management are attracting people
who havent used financial services
before. Its also providing a diversified
source of funding for infrastructure
development through the renewed
interest in Islamic bonds (sukuk). Interest
in such instruments is coming from both
Islamic investors and non-Islamic
investors looking to diversify their
holdings. Notable recent developments
include the sukuk issued in February
2012 to help finance the expansion of
Jeddahs international airport, which at
$4 billion was the largest single tranche
Islamic bond.
16
Yet, differences over
financial reporting and interpretations of
sharia law remain and will need to be
resolved before the market can begin to
reach its full potential.
22 PwC Project Blue
How can you make sure your business development plans are aligned with
long-term domestic and target market government agendas?
What strengths and innovations would help to differentiate your offering from
local competitors?
How can you ensure a stable and reliable source of local currency funding?
If many of the best joint venture and strategic investment opportunities have
already been taken up, could there be openings for partnerships within other
sectors, for example with telecommunications firms?
Will greater foreign competition in specialist and niche areas take away business
and erode the margins for domestic players? What market segments are under
greatest threat and how fast will be the impact?
15 Financial Times, 14.12.11
Brazil
Brazil is experiencing its most prosperous economic period in 30 years and has arguably emerged stronger and more attractive
from the global financial crisis.
A small number of international FS groups were able to develop a strong market presence in the years leading up to the financial
crisis. However, further entry opportunities are limited by the lack of available acquisition targets and a long and complex
licensing process. A number of FS businesses that have attempted to break into Brazil in recent years have also faltered through
lack of a distinctive competitive proposition in a market that is already relatively concentrated and sophisticated, albeit under-
penetrated in certain market segments. Areas with significant market potential include serving the countrys rapidly expanding
middle class.
Partnership could provide access to distribution, which is the major challenge in establishing a local presence. Partnership would
also provide access to local funding and market knowledge. In return, local institutions would be looking for product and
operational expertise. Crucially, within a market where several FS groups are looking to provide global services for their domestic
and regional clients, they might favour foreign partners that could provide access to their international platform.
Most local FS groups already have a number of joint ventures in place and will only be attracted if the potential foreign partners
can offer new or, as yet, untapped market potential. Top domestic banks are already working in partnership with
telecommunications companies to develop mobile banking, an area where penetration is currently limited, but has significant
promise.
Challenges within the market as a whole include the need to develop longer term lending facilities for both consumer and
corporate clients, amid pressure to lower spreads. This will affect the profitability of financial institutions.
PwC Project Blue 23
Designing the organisation of the future is
a crucial part of the CEO agenda as
financial institutions seek to create more
nimble and adaptive operational
capabilities and make sure their talent,
structure and board composition reflect
the changing market environment.
Adapting operating models and
governance structures
As business models evolve, so will the
demands on governance, organisational
and operating models.
Operating models will need to reflect
what may be a changing geographical
focus of the business. They will also need
to deal with more extensive partnership
and coopetition arrangements and be
sufficiently agile to respond quickly to
evolving and possibly unfamiliar market
conditions, distribution channels and
cultural preferences. In turn, reporting
and controls will need to adapt to reflect
these more extended operations.
Legal and physical structures will evolve
as new growth markets come to the fore
and groups look at how to operate in the
most tax- and capital-efficient way.
The composition and qualifications of the
board are also likely to change as groups
and their customers become more
culturally diverse and partnership with
government becomes an evermore crucial
feature of FS businesses.
Securing the talent to meet your
objectives
As SAAAME becomes evermore crucial to
growth, local and incoming firms will
need to train, hire or relocate
unprecedented numbers of skilled people
in markets where suitably qualified and
experienced people are already in short
supply. As emerging market organisations
expand their footprint and become more
global in scope, they will also need to
integrate and manage people from many
different cultures within their businesses.
Yet, many organisations are still relying
on short-term approaches, be this seeking
to lure key people from competitors, or
bringing in large numbers of expatriate
personnel, even though this is likely to
prove excessively costly and may still fail
to provide the people needed to meet
their strategic objectives.
A more systematic and forward-looking
workforce plan, capable of anticipating
and meeting skills needs could reduce
costs, give financial institutions the edge
24 PwC Project Blue
Do the bases and structures of your global and regional operations reflect the
changing centre of gravity of your business?
Does your board have the right skills and are your current governance
arrangements equipped to deal with multiple partnerships and extended global
operations?
Does the composition of your board provide you with sufficient business know-
how, relationships and cultural understanding in your target markets?
Are information flows timely and reliable enough to support your evolving
operations?
Could shortages of talent impede or even derail your growth plans?
How are you planning to bridge gaps in talent in key growth markets?
Are you doing enough to encourage your staff to seek out international
opportunities and make the most of this experience when they get back?
Are you doing enough to develop the right skills and behaviour to take your
business forward?
PwC Project Blue 25
in a competitive job market and allow
them to build a more sustainable platform
for business development. A further
priority is more effective communication
and collaboration across markets.
Promoting diversity within the
management of the organisation and
creating career paths that extend across
all its geographical operations are going
to be crucial in competing for the best
people against domestic companies in
emerging markets. It sends a clear
message that advancement is open to all
rather than just people from the home
market.
As they seek to attract top talent,
SAAAME groups have advantages over
competitors from outside the region.
Following the financial crisis, many of the
best graduates are favouring local over
international groups as they believe the
business and career development
prospects are superior. Yet, challenges
remain. With international groups setting
ambitious targets for developing their
presence in the region, salaries could rise
further and retention is going to be more
difficult.
Managing a new and unfamiliar set
of risks
The pace of growth of financial services
within many SAAAME markets creates its
own inherent risks. There may also be
limited credit data or systematic checks to
manage the risks in a way that would be
possible in a more mature market.
The broader risk profile and how its
assessed and priced are also going to be
very different. SAAAME countries have
varied legal and regulatory frameworks,
political systems, business ethics, cultures
and sometimes, non-Western views on
capitalism. Its important for incoming
institutions to make sure they understand
the ways of working required to operate
in these jurisdictions.
The pace of development is also
heightening pressure on natural
resources. The competition for access is
already going beyond oil and minerals
to include water and land as countries
seek to secure guaranteed food supplies.
Helping businesses to manage
commodity, supply chain and other risks
provides a clear opportunity; financial
institutions will need to take account of
the associated shifts in investment risks
and asset prices.
Country risk profiles are also changing.
The Arab Spring highlights how a
combination of demographics (a young
population, disaffected by unemployment
and its limited political voice) and
technological development (protesters
use of social media to communicate)
can quickly ignite and fan the flames
of instability.
How much freedom will you have to operate in a particular country?
What kind of restrictions might you face?
How vulnerable is your investment in a particular country to political
instability, regulatory risks, a change of government, or consumer boycotts
of particular countries or groups?
What environmental risks does the country face and how could this affect
stability and asset prices?
Africa
Africa is at the centre of the SAAAME opportunity, both in its
geographical position and in its still largely untapped
economic and commercial potential. A strategy for Africa is
set to form an important part of the long-term planning for
financial services groups.
Africa is home to more than 800 million people and has total
purchasing power of nearly two trillion dollars.
17
Its GDP has
been increasing by more than 5% a year over the past
decade, with the continent accounting for six out of ten of
the fastest growing economies in the world over this period.
18
According to the IMF, these buoyant economic trends will
continue over the next five years, bolstering the case for
further investment by financial services businesses.
Africa continues to offer significant opportunities for
resource and infrastructure companies, with a large amount
of investment coming from India and China as the needs of
their economies increase. For FS businesses, the attractions
include Africas increasing access, to and integration into,
international capital markets. Other important developments
include regulatory reform and privatisation, and the
increases in demand created by expanding populations and
urbanisation.
Lack of infrastructure presents one of the largest challenges
for companies seeking to do business in Africa, but also an
investment opportunity. The continent currently lags in the
availability of paved roads, telephone lines, electricity
coverage and sanitation. There is also significant room for IT
development. The Global Competitiveness Index (GCI)
provides potential investors with useful information on the
most pressing infrastructure shortfalls. According to the GCI,
countries offering the biggest opportunities for infrastructure
development (South Africa, Nigeria, Angola, Ethiopia,
Uganda, Tanzania and Ghana) will have to spend money on
electricity and railways infrastructure to improve their
competitiveness. Additionally, Nigeria, Angola, Tanzania and
Uganda will have to develop their roads, ports and air
transport.
Companies considering investment in Africa need a thorough
understanding of the business environment. They should
also consider areas of heightened risk. Risk of nationalisation
is a particular concern in some countries and sectors. A
recent example is Zimbabwes new mining regulation, which
requires companies to hand over a 51% stake in their shares
to local designated entities.
19
So while FS businesses will need to weigh up the risks and
rewards, the case for investment in Africa is growing and the
continent is set to become an important competitive arena
from FS organisations in the coming years.
17 RMB media release, 15.08.11
18 IMF World Economic Outlook, April 2012
19 Mining Review, 10.03.11
26 PwC Project Blue
PwC Project Blue 27
For FS businesses, the attractions include
Africas increasing access, to and integration
into, international capital markets.
28 PwC Project Blue
The overriding questions for all FS groups are how to keep pace with the rapid rise and
interconnectivity of the emerging markets and what will be the profile of successful
international groups as the industry landscape evolves. New strategies, operational
models and ways of measuring success are set to emerge. New countries, notably
Russia, may eventually be brought into the SAAAME fold as they trade more widely,
creating an even more prolific trading region.
As SAAAME-based groups look to follow their customers and take advantage of their
growing financial strength, the key question they face concerns whether they develop
in cautious incremental steps, or seek to follow the more ambitious model of global
expansion, developed by their Western counterparts, prior to the financial crisis. Most
have so far chosen the former. Could they lose out to faster moving competitors as a
result? Acquiring Western businesses would provide a foothold in local markets and
access to some of the capabilities they will need to sustain expansion and competitive
relevance. The acquisition prices for some developed market targets are much lower
than before the financial crisis. But this window of opportunity could be short-lived.
In an increasingly globalised FS sector, the impact of the rise and interconnectivity of
the emerging markets will be felt in the West as much as SAAAME itself. Western
businesses cant simply assume theyll be able to transfer investment and growth into
new markets. Theyre going to face growing competition from SAAAME-based
international groups and could become targets for acquisition themselves.
Establishing and developing a global footprint are only part of the challenge. Success is
also likely to depend on being able to anticipate and respond quickly to the changes in
customer expectations, behaviour and use of technology that are shaping SAAAME and
wider global markets. Further priorities include effective analysis of what may be
unfamiliar and increased risks, their impact on the business and how this squares with
overall objectives and risk appetite. Strategies will need to be finely tuned to the
cultural, technological and regulatory realities on the ground. FS businesses will also
need to take account of the influence of governments on how their sector develops and
what they can offer in support of social, economic and environmental objectives.
In the face of these challenges, executives will need to consider how they can
sufficiently differentiate their business to win over customers, investors and
governments. They will also need to consider how to foster the cultural diversity,
international experience and succession planning needed to ensure the organisation
remains agile enough to meet the required business changes as they arise.
Smart businesses are already moving quickly to anticipate and adapt to the new
industry DNA, while managing the risks. For others, simply relying on tried and trusted
models developed in the pre-crisis era will no longer be enough.
Conclusion
A new DNA
Western economic pre-eminence is
a relatively recent phenomenon.
Rather than looking ahead to the
emergence of some new dominant
country or region, were actually
seeing a return to the equilibrium
of a multipolar global economy that
has prevailed throughout most
of the past 500 years.
PwC Project Blue 29
Making sense of an
uncertain future
Were working with a range of financial services organisations to assess the impact of the mega-trends shaping
their industry and where and how they can compete most effectively. If you would like to discuss any of the issues
raised in this paper, or the impact of other trends examined in Project Blue, please contact any of those who are
listed, or your usual PwC contact:
Nigel Vooght
PwC (UK)
Tel: +44 (0) 20 7213 3960
Andrew Dawson
Author and Global Leader for Project Blue
PwC (UK)
Tel: +44 (0) 20 7804 0130
Global
SAAAME territory contacts
Alvaro Taiar Junior
Financial Services leader
PwC (Brazil)
Tel: +55 11 3674-3628
Email: alvaro.taiar@br.pwc.com
Alfredo Sneyers
Partner, Financial Services
PwC (Brazil)
Tel: +55 11 3674 2664
E-mail: alfredo.sneyers@br.pwc.com
Marianella Alarcn
PwC (Brazil)
Tel: +55 11 3674 3571
Email: marianella.alarcon@br.pwc.com
Brazil
30 PwC Project Blue
Mervyn Jacob
Financial Services Leader for Hong Kong
and China
PwC (Hong Kong)
Tel: +852 2289 2700
Email: mervyn.jacob@hk.pwc.com
Peter PT Li
Partner, Banking and Capital Markets
Leader
PwC (Hong Kong)
Tel: +852 2289 2982
Email: peter.pt.li@hk.pwc.com
Stephen A Woolley
PwC (Hong Kong)
Tel: +852 2289 5089
Email: stephen.woolley@hk.pwc.com
Harjeet Baura
PwC (Hong Kong)
Tel: +852 2289 2715
Email: harjeet.baura@hk.pwc.com
Josephine Kwan
PwC (Hong Kong)
Tel: +852 2289 1203
Email: josephine.wt.kwan@hk.pwc.com
David Eldon
Senior Advisor
PwC (Hong Kong and China)
Tel:+ 852 2289 2788
Email: david.eldon@hk.pwc.com
Duncan Fitzgerald
PwC (Hong Kong)
Tel: +852 2289 1190
Email: duncan.fitzgerald@hk.pwc.com
Hong Kong
Margarita Ho
PwC (China)
Tel: +86 (10) 6533 2368
Email: margarita.ho@cn.pwc.com
David Wu
PwC (China)
Tel: +86 (10) 6533 2456
Email: david.wu@cn.pwc.com
Raymond Yung
Financial Services Leader
PwC (China)
Tel:+86 (10) 6533 2121
Email: raymond.yung@cn.pwc.com
China
Mohammad Faiz Azmi
Executive Chairman Designate
PwC (Malaysia)
Tel : +603 2173 0867
Email : mohammad.faiz.azmi@my.pwc.com
Malaysia
Manoj K Kashyap
PwC (India)
Tel: +91 (22) 6669 1401
Email: manoj.k.kashyap@in.pwc.com
Robin Roy
Associate Director, Financial Services
PwC (India)
Tel:+ 91 (80) 4079 4009
Email: robin.roy@in.pwc.com
India
Chris Matten
PwC (Singapore)
Tel:+65 6236 3878
Email: chris.matten@sg.pwc.com
Dominic Nixon
Asia Financial Services Leader
PwC (Singapore)
Tel:+65 6236 3188
Email: dominic.nixon@sg.pwc.com
Singapore
PwC Project Blue 31
Tom Winterboer
Financial Services Leader for Southern
Africa and Africa
PwC (South Africa)
Tel: +27 (11) 797 5407
Email: tom.winterboer@za.pwc.com
Keith Ackerman
PwC (South Africa)
Tel: +27 (11) 797 5205
Email: keith.ackerman@za.pwc.com
South Africa
Graham A Hayward
Middle East Region
PwC (Bahrain)
Tel: +973 1754 0554
Email: graham.a.hayward@bh.pwc.com
Akhilesh Khera
Director, Advisory, Financial Services
PwC (UAE)
Tel: +971 (4) 3043 195
Email: akhilesh.khera@ae.pwc.com
Middle East
32 PwC Project Blue
The Project Blue framework seen here begins with the considerations needed to adapt
to the current instability. It then goes on to assess what businesses need to do to plan
for, and ideally take advantage of, the changes ahead.
One of the main things weve been looking at is the extent to which these developments
could disrupt existing business models. Weve also been looking at how these trends
are feeding off each other. A clear case in point is the extent to which rapid growth in
emerging markets is spurring a mass influx of people into the cities.
Our clients are using the framework to help them judge the implications of these
developments for their particular business, and look at how to take advantage of the
changes ahead. Will business and operational models still be viable in this new
landscape? What strengths within the business would allow it to develop a leading
position? What talent and investment will need to be put in place now, to prepare for
the changes ahead?
Project Blue framework
The Project Blue framework
considers the major trends that
are reshaping the global economy
and transforming the behaviour
of consumers, businesses and
governments.
P
r
o
j
e
c
t

B
l
u
e

F
r
a
m
e
w
o
r
k
Global instability
A
d
a
p
t
(SAAAME)
Economic strength
Trade
discrepancies
Ageing populations
change
Urbanisation
Global affluence
Talent
Capital balances
Resource allocation
Population
Belief structures
Changing customer
institutions
impacting FS
Digital and mobile
Food and water
Key commodities
capitalism
State intervention
strategies
Technological and
scientific R&D and
innovation
Ecosystems
Climate change and
sustainability
P
l
a
n
PwC Project Blue 33
information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy
or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability,
responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for
any decision based on it.
For more information on Project Blue, or other Financial Services programmes, please contact ine Bryn, Global Financial Services Marketing Leader, PwC (UK)
2012 PwC. All rights reserved. Not for further distribution without the permission of PwC. PwC refers to the network of member firms of PricewaterhouseCoopers
International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as
agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its
member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of
any other member firm nor can it control the exercise of another member firms professional judgment or bind another member firm or PwCIL in any way.
Reaping the rewards of the new
global economy
Project Blue
Capitalising on the
growth and global
emerging markets:
Financial services
in Brazil
2 PwC Project Blue
04 Foreword
05 Section one:
Emerging superpower
10 Section two:
A new model of growth
12 Where next?
Contents
PwC Project Blue 3
Project Blue explores the major trends that are reshaping the competitive environment
for financial services (FS) businesses worldwide. Our clients are using the framework
to help them judge the implications of these developments for their particular business
and look at how to take advantage of the changes ahead.
The rise and interconnectivity of the emerging markets of South America, Asia, Africa
and the Middle East (together these regions form what PwC terms SAAAME) is in
many ways the most far-reaching of the developments facing the FS sector. Trade
within SAAAME is growing much faster than the developed-to-developed and
developed-to-emerging market flows.
As Brazils economy grows and its businesses reach into new markets, FS organisations
are following suit. Brazil is building the capacity to become an FS hub for South
America and businesses within the sector are aiming to extend their footprint not only
into US and Europe, but also into Asia, Africa and selected South American countries.
At the same time, there are key challenges that Brazils FS environment presents to
foreign institutions which are reassessing their potential within the SAAAME region.
First is how to break into the market when acquisition costs are increasing, competition
is so strong and there are several barriers to entry. The second is differentiation, both in
how products and services are developed and distributed, and how banks, insurers and
asset managers engage with an increasingly demanding client base.
Opportunities for growth will continue to exist in different sectors. The underlying
challenge is that the Brazilian FS sector will need to undergo significant changes to
prepare itself for a lower interest rate and spread environment.
page 13.
Alvaro Taiar
PwC (Brazil)
Foreword
Welcome to Capitalising on the
growth and global interconnectivity
of the emerging markets: Financial
services in Brazil. The paper is
a Brazil-focused companion to
our global paper: Capitalising
on the rise and interconnectivity
of the emerging markets,
the latest viewpoint in our
Project Blue framework.
4 PwC Project Blue
doesnt include Japan as this is a developed G7 economy. Mexico is excluded as it
trades mainly within the North American Free Trade Agreement zone and less
with SAAAME. For now, Russia and the Commonwealth of Independent States
(CIS) are also excluded from SAAAME, as trade is largely internal or with Europe.
Financial crisis accelerates Brazils economic rise
Already growing strongly in the lead-up to the global financial crisis, Brazils move to
economic superpower status has accelerated since.
Of the all BRICs (Brazil, Russia, India and China), Brazil has the most developed
capitalist system in terms of market liberalisation, openness to foreign investment and
the stability of its democratic and legal institutions (Figure 1 outlines the key strengths
and challenges of this fast growing market).
Section one:
Emerging superpower
Why Brazil is so pivotal in the
rise and interconnectivity of
the emerging markets and
what the accelerating shift in
global economic power means for
your business.
PwC Project Blue 5
Figure 1: Snapshot of Brazil
Source: Banco Central do Brasil statistics and Instituto Brasileiro de Geografia e Estatstica
In Brazil, we have:
Nearly 200 million people;
demographic bonus
Portuguese as single language despite
being a melting pot society
Clean and renewable energy sources
(hydro, ethanol, wind and solar)
Will become net exporter of oil
(pre-salt layer)
GDP of nearly US$2.3 trillion,
32 million new consumers over last
5 years; 5.5% unemployment rate
Net foreign creditor: US$355 billion
of reserves
One of the most internet-connected
countries (over 67 million people
wired)
Sophisticated financial services sector
and regulatory system
Strong and stable democratic
institutions
In Brazil, we do not have:
Border conflicts
Major natural disasters
Ethnic/racial/religious
tensions/terrorism or conflicts
However, we still have:
Social inequality
Education challenges
Slow judicial decisions
Bureaucracy
High interest rates
Complex tax environment and
heavy tax burden
Infrastructure gaps
Brazil is the sixth largest economy in the
world and is expected to rise to fifth by
the end of 2012.
1
Despite the prospect of a
weaker global economy, it is possible for
Brazil to expand at long-term rates of 4%
a year, based on the still strong domestic
market and the realisation of the many
investment opportunities.
2
A further
boost in investment and international
profile will come from the World Cup in
2014 and Olympics in 2016.
On the world stage, national champions
such as Vale, JBS, Embraer, Odebrecht
and AMBEV are becoming multinational
companies as they expand across
SAAAME and non-SAAAME markets.
Domestic potential
In terms of demand, products, technology
and regulation, Brazil has one of the
most advanced FS sectors in SAAAME.
Its banks are highly profitable and well-
capitalised (17% average capital ratio
3
)
and have suffered little impact from the
global financial crisis.
While a number of international FS
groups have been able to establish a
strong position in the Brazilian market,
domestic financial institutions are taking
advantage of the significant retail growth
over the past decade and using their
dominant distribution networks to create
a high barrier to further outside entry.
FS in Brazil is now entering the next
phase of its development, creating both
challenges and opportunities. While
relatively high by South American
standards, credit penetration is less than
half of major Asian economies such as
South Korea,
3
highlighting the potential
for further growth as aspirations and
affluence increase.
More long-term finance is needed
to meet the increasing retail demand
for mortgages and durable goods
consumption, and meet the corporate and
infrastructure investment requirements.
In turn, the capital markets will need to
mature and expand by providing more
debt instruments, increasing their market
liquidity and by enhancing the
sophistication of the stock market.
Saving for retirement is a further growth
area. The country has more pensioners
for every 100 contributing workers (35)
than the US (34) and the government
spends more on pensions as a percentage
of GDP than Germany, France, or Japan.
4
The private savings and pensions sector
will need to grow quickly to relieve the
pressure on the public purse and provide
for an ageing population the
government has already begun to put a
cap on its liabilities.
5
While assets under
management are the highest in the
region,
6
the market is still weighted
towards the institutional sector, opening
up considerable opportunities on the
retail side. In the past, asset managers
were able to rely on the countrys high
interest rates to deliver good profits and
returns for investors. But as interest rates
fall, asset managers may need to diversify
their portfolios, both through fixed and
variable rate instruments and, in time,
more foreign investments.
Both life and non-life insurance sectors
achieved double digit growth in 2009.
7
At 3.1%, however, insurance spending as
a percentage of GDP is lower than China
(3.8%) and India (5.1%), highlighting the
room for further growth as the economy
expands and affluence increases.
The main challenge is how to make sure
market growth is sustainable. Rapid
expansion could create asset bubbles.
While overall debt is low, household debts
are rising to levels that are beginning to
cause concern. FS businesses will also
need to look at how to improve efficiency
and control costs now they can no longer
rely on high interest rates to sustain
margins and returns.
6 PwC Project Blue
1 IMF World Economic Outlook
2 Brazil Ministry of Finance, February 2012
3 Banco Central do Brasil statistics, 30.06.11
4 Economist, 24.03.12
5 Bloomberg, 29.02.12
6 FTSE Global Markets, 08.02.12
7 Swiss Re Sigma, World Insurance in 2010
PwC Project Blue 7
Growing global
interconnectivity
While Brazils domestic potential is
considerable, the countrys position at
the epicentre of intra-SAAAME trade
opens up even greater opportunities
for its FS sector.
The trading relationship between
China and Brazil exemplifies the growing
interconnectivity of SAAAME. China
has now overtaken the US as Brazils
biggest trading partner, with trade
growing exponentially in recent years
(see Figure 2).
Landmark deals include the
memorandum of understanding between
the Shanghai Stock Exchange and
Brazils BM&F Bovespa exchange,
which could eventually pave the way
for the cross-listing of stocks.
8
At present, only around 5% of Brazils
trade is with Africa and the next stage
of development for FS and Brazilian
companies as a whole will be building
up these links. The importance of
AfricaBrazil trade to the governments
plans was highlighted by President
Rousseffs extensive tour of the continent
in 2011 and the creation of a high level
Africa Group, led by the countrys trade
and industry minister.
9
Figure 2: Brazilian trade balance with China (US$ million)
35,000
15,000
20,000
25,000
30,000
10,000
5,000
-10,000
-5,000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
n Exports n Imports Surplus
Source: Secretariat for Foreign Trade (SECEX)/Ministry of Development, Industry and Foreign Trade (MDIC).
8 BBC News Online, 18.02.11
9 Reuters 17.11.11
Major player on the
world stage
The expansion of Brazilian financial
institutions abroad is going to be
complementary to their local strategy and
business focus.
The international comparison in Figure 3
highlights Brazils status as a major
banking centre. Two of its banks already
feature in the global top 20 in terms of
market capitalisation and a number of
groups are seeking to follow the countrys
multinational corporations by developing
their presence in Asia, Africa and other
parts of Latin America. Building on these
strong domestic foundations and growing
international presence, we anticipate that
Brazil will have risen to fifth place in the
global banking rankings in terms of assets
by 2050.
10
8 PwC Project Blue
10 Banking in 2050, 2011 update, published by PwC on 18.05.11
PwC Project Blue 9
The international ambitions of Brazils
financial institutions are exemplified by
Ita Unibancos aim to be the global Latin
American bank.
11
Ita Unibanco is
consolidating its position in Brazil as a
leading institution among high-income
customers and middle to large corporates.
Its expansion abroad is building on these
local foundations as it develops a niche
position in selected South American
economies, as well as Asia, Europe and
the US.
Banco do Brasil is establishing operations
in Asia, Africa and other parts of
South America
12
as it follows Brazilian
capital investment and corporate
expansion abroad.
Bradesco has developed a strong
distribution network, especially among
lower and middle income retail customers
and small- and medium-sized businesses.
While consolidating its growing strategy
in Brazil, it is looking to expand
selectively in niche segments in South
America, Africa and Asia as it seeks to
evolve the international presence needed
to support its clients.
Following its tie-up with Celfin, a broker
dealer in Chile, BTG Pactual wants
to be the leading Latin American
investment bank
13
.
Figure 3: Comparison of global banking markets
10
9
8
7
6
5
4
3
2
1
0
Number of banks in the top 50 ranking
Brazil
China
Japan
France
United States
United Kingdom
Germany
Netherlands
Sumitomo
Group
Mitsubishi
Group
Bank of
China
ICBC
Group
BPCE
Others
2,194
Others
3,414
2,964
1,725
2,025
1,219
1,281
2,440
1,482
1,856
Others
2,309
Others
2,559
Switzerland
Belgium
Sweden
Russia
Denmark
Ita
Unibanco
Holding
Banco do
Brasil
Bradesco
Italy
Spain
Canada
Australia
Crdit
Agricole
PNP
Paribas
Royal
Bank of
Scotland
2,749
HSBC
Holding
2,364
Citigroup
JP
Morgan
2,031
Bank of
America
2,223
Barclays
2,234
Others
2,100
407
349
290
0 2000 4000 5400 5600 9200 9400 9600
Aggrevated relevance of top 50 banks total assets ($US Mil)
Source: The Banker 2010, PwC analysis. Note: The ranking refers to the net equity values
11 Ita Unibanco www.itau.com, 24.05.12
12 Banco do Brasil www.bb.com/br, 24.05.12
13 BTG Pactual www.btgpactual.com, 24.05.12
Developing a pan-SAAAME footprint
Prior to the global financial crisis, a number of FS groups from Europe and North
America were able to make multiple acquisitions to rapidly build up their international
footprint in SAAAME markets. The challenge for Brazilian groups looking to follow suit
by extending their international presence is that this type of fast acquisitive growth is
now much more difficult, at least within the most attractive SAAAME markets.
Prospective entrants may face restrictions on foreign ownership, China and India
being notable examples. Even in open markets, there may be little market share for
sale and it may be prohibitively expensive if it is. Entrants may also face entrenched
competition from dominant local rivals. In some cases, the markets are less evolved
and an entry strategy may consider participating in the development of the financial
system as a whole.
A more targeted growth model could emerge as a result, in which the ability to
differentiate, develop niche segments, seek out untapped geographical markets and
gain access to new digital distribution networks is critical.
In many of the hard-to-access markets, the main route to entry would potentially
be to form joint ventures. With many local businesses already having established
partnerships in a number of areas, incoming organisations will need to think about
what distinctive attractions they can offer that competitors cannot. It might be product
or credit risk expertise. It might also be complementary international coverage.
Very few groups are going to be able to cover all the key markets. So collaboration
between competitors co-opetition as its sometime called is going to become
evermore common.
Designing the organisation of the future will be crucial as Brazils FS businesses seek to
create more nimble and adaptive operational capabilities and make sure their talent,
structure and governance reflect their increasingly international horizons.
Operating models will need to reflect the changing geographical focus of the business.
They will also need to deal with more extensive partnership and co-opetition
arrangements, and be sufficiently agile to respond quickly to unfamiliar market
conditions, distribution channels and cultural preferences.
Section two:
A new model of growth
As many Brazilian FS businesses
look to be regional and pan-
SAAAME leaders, they will need to
find ways to differentiate and make
themselves relevant within their
target markets and trade routes.
10 PwC Project Blue
PwC Project Blue 11
Businesses also need to contend with a
more complex risk profile. SAAAME
countries have varied legal and regulatory
frameworks, political systems, business
ethics and cultures. It is important for
Brazilian institutions to make sure they
understand the ways of working required
to operate in these jurisdictions.
In turn, reporting will need to be
upgraded to reflect these more extended
operations. For Brazilian businesses,
the particular challenge is that many
of the measures used in its FS sector vary
from international norms, which can
make it difficult to track performance
across borders.
The underlying challenge is the need to
train, hire or relocate unprecedented
numbers of skilled people in SAAAME
markets where suitably qualified and
experienced people may already be in
short supply. Short-term and reactive
approaches, be this seeking to lure key
people from competitors or bringing in
large numbers of expatriate personnel,
are likely to prove excessively costly
and may still fail to provide the people
needed to meet strategic objectives.
workforce plan capable of anticipating
and meeting skills needs could reduce
costs and enable FS organisations to
build a more sustainable platform for
business development.
The ability to adapt and take advantage of technology and economic interconnectivity
will be the key differentiators for FS businesses in the new global economy.
We believe that there are four key questions that FS businesses should consider as they
look at how to gear their strategy and operations to the rise and interconnectivity of the
SAAAME markets:
How are your corporate clients following the shift in the focus of global growth and
how can you help them to respond more effectively?
If you cant develop a pan-SAAAME presence, what specific sectors or regions could
you target as you look at how to build on your strengths and existing relationships?
How can you use technology to provide customer access and financial services in
different parts of the world?
How will you need to adjust your risk management capabilities, talent management
and operating model (more joint ventures, longer lines of communication etc.) as
you extend your international presence?
Where next?
As Brazilian FS groups look to
follow their corporate customers
into new markets and take
advantage of their increasing
financial strength, the key questions
are where, how and how quickly
they should grow.
12 PwC Project Blue
Making sense of an uncertain future
Were working with a range of
FS organisations to judge the
impact of the mega-trends shaping
their industry, and where and how
they can compete most effectively.
If youd like to discuss any of the
issues raised in this paper, or the
impact of other trends examined in
Project Blue, please contact either
of those who are listed here, or your
usual PwC contact.
PwC Project Blue 13
Alvaro Taiar Junior
Financial Services leader
PwC (Brazil)
Tel: +55 11 3674-3628
Email: alvaro.taiar@br.pwc.com
Alfredo Sneyers
PwC (Brazil)
Tel: +55 11 3674 2664
E-mail: alfredo.sneyers@br.pwc.com
Marianella Alarcn
PwC (Brazil)
Tel: +55 11 3674 3571
Email: marianella.alarcon@br.pwc.com
14 PwC Project Blue
to the current instability. It then goes on to assess what FS businesses need to do to plan
the changes ahead?
considers the major trends
that are reshaping the global
economy and transforming the
behaviour of consumers, businesses
and governments.
P
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B
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F
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a
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e
w
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Global instability
A
d
a
p
t
(SAAAME)
Economic strength
Trade
discrepancies
Ageing populations
change
Urbanisation
Global affluence
Talent
Capital balances
Resource allocation
Population
Belief structures
Changing customer
institutions
impacting FS
Digital and mobile
Food and water
Key commodities
capitalism
State intervention
strategies
Technological and scientific
research and development
and innovation
Ecosystems
Climate change and
sustainability
Sovereign wealth funds/
development banks
P
l
a
n
global economy
Project Blue
Capitalising on the
growth and global
emerging markets:
Financial services in
China
2 PwC Project Blue
05 Section one:
Economic superpower moves to next stage of development
09 Section two:
Creating a platform for international expansion
11 Opening up new frontiers
Contents
PwC Project Blue 3
Project Blue assesses the social, political, economic, environmental, technological and
demographic trends that are reshaping the competitive and investment landscape for
financial services (FS) businesses worldwide.
many ways the most far-reaching of the developments facing the FS sector. The value
of intra-SAAAME commerce is now much larger and growing much faster than the
trade flows to, and between, developed markets.
Chinas FS institutions are set to play a key role in supporting their customers as they
seek to take advantage of increased intra-SAAAME trade. As we examine in this paper,
key considerations include how to develop the presence on the ground needed to
support clients overseas expansion and how to manage risk and talent across more
complex and diverse international operations. New approaches to growth and
organisational design may be needed as a result.
page 12.
Raymond Yung
PwC (China)
Foreword
services in China. The paper is
a China-focused companion to
our global paper: Capitalising on
the rise and interconnectivity
4 PwC Project Blue
Chinas rise to become the biggest manufacturer and second largest economy in the
world over the past 25 years has been remarkable. The country is now entering a new
phase of development as it seeks to sustain growth and promote rising income levels
for the general population.
The challenges and opportunities were examined in China 2030, a study prepared by
the World Bank in collaboration with the Chinese government. The study identifies
the key emerging trends that will fundamentally affect Chinas economic development
and provides recommendations for changes to the countrys policy and institutional
framework in order to achieve sustainable and socially responsible economic growth.
1
Proposals include strengthening the market economy, promoting innovation, enacting
laws and incentives to promote green development and bolstering public services
through privatepublic partnerships. Of particular relevance to FS businesses are the
further internationalisation of the renminbi and closer integration of Chinas FS
businesses into the global FS sector.
As demand for Chinas products in the developed markets slows, seeking out new
opportunities in the SAAAME markets is going to be a key part of sustaining growth
within China. Emerging-to-emerging market commerce is now more valuable and
growing much more quickly that emerging-to-developed and developed-to-developed
trade (see Figure 1 overleaf). As Figure 2 overleaf highlights, among the fastest
growing trade routes are those between Asia and Africa, and Asia and South America.
At present, China-SAAAME trade flows are dominated by commodities, but as
consumer markets in China and other parts of SAAAME continue to expand on the
back of rising affluence (see Figure 3 overleaf), the pattern of trade will be increasingly
focused on manufactured goods. Services are also set for significant development,
taking advantage of the growing talent base within China the number of students in
tertiary education has nearly doubled since 2004 and seven of Chinas universities are
now ranked in the QS Top 200.
2
The value of Chinas exports is still weighted towards the developed markets (the US,
Hong Kong and Japan lead the list), but India is now in the top ten.
3
Exports to India
reached $40 billion in 2010, an annual increase of nearly 40%. The value of goods and
services moving the other way reached $21 billion, a rise of more than 50% from
2009.
4
Exports from China to Brazil increased by around $10 billion to more than $25
billion in 2010, making China the second biggest source of imports in Brazil after the
US. In turn, China is Brazils biggest export market ($31 billion in 2010).
5
With Chinas
exports to Brazil being around $130 per capita compared to more than $600 per capita
to Germany, the potential for further growth is considerable.
6
Section one:
Economic superpower moves to next stage
of development
As the main focus of global growth
and investment shifts from the
developed to the emerging markets,
Chinas FS businesses will need to
find ways to follow their customers
into new markets and help them
capitalise on the increase in intra-
SAAAME commerce.
PwC Project Blue 5
1 China 2030 Building a Modern, Harmonious, and
Creative High-Income Society, 2011, The World
Bank and Development Research Centre, the
Peoples Republic of China.
2 QS University Rankings, The Times, PwC analysis
3 IMF balance of payment statistics, PwC analysis
4 China Briefing, 02.06.11
5 BrazilChina Fact Sheet, www.brazil.gov, 30.05.12
6 IMF balance of payment statistics, government
census data, PwC analysis
6 PwC Project Blue
CAGR 200210: 8.0%
Non-SAAAME
SAAAME
CAGR 200210: 19.4%
CAGR 200210: 13.6%
CAGR 200210: 12.9%
Europe. Mexico is excluded as it trades mainly within the North American Free Trade Agreement zone and less with SAAAME. Both areas remain very important growth
markets and should be considered in relation to the SAAAME region.
N America
N America
5.4
4.5
17.7
8.8
19.2
8.7
10.0
8.0
8.6
18.8
13.6
12.6
14.7
12.8
13.4
17.5
17.2
16.0
21.2
29.9
24.1
13.7
11.3
5.4
16.8
21.6
24.1
15.1
13.5
12.6
16.4
17.9
19.0
22.5
15.7
9.1
12.0
19.3
25.6
24.5
15.2
18.9
12.9
11.7
16.4
18.0
27.8
18.7
20.2
Central America
Europe
CIS
South and
Central America
Africa
Asia
Middle East
O
R
I
G
I
N
DESTINATION
PwC Project Blue 7
FS follows intra-SAAAME
trade flows
Already a global giant, Chinas FS sector
has considerable potential for further
growth. The worlds two largest banks by
market capitalisation are based in China.
7
Looking ahead, we anticipate that the size
of Chinas banking sector will overtake
the US in the next 15 years.
8
In turn,
China accounts for around a third of
SAAAME insurance premiums.
9
Here too,
there is significant further growth
potential as the economy expands and
affluence increases. At 3.8%, insurance
spending as a percentage of GDP in China
is a fraction of the more than 10% in
regional neighbours Japan, Hong Kong
and South Korea.
Yet, while much of the focus has been on
the domestic potential within the sector,
the ability to support clients as they move
into new markets is a key part of the
growth story. Chinese institutions can
take advantage of their growing scale and
dominance at the manufacturing end of
global trade flows by seeking to bank both
ends of the pipeline. There are also
opportunities to use their considerable
capital and liquidity to support
infrastructure and commercial
developments within Africa, South
America and the Middle East.
As China seeks to secure access to
resources, investment in South America
ranges from a stake in Vale SA the
worlds biggest iron ore mining
company to the new Au industrial port
complex, the largest in the region.
10
But investment is also moving into non-
resource areas as the political and
commercial relationships between China
and South America mature. Recent
investments range from a $622 million
hydroelectric scheme (Ecuador) to a
$2.4 billion resort complex (Bahamas).
11
In addition to helping to fund such
investments, a number of Chinese banks
have, or are, establishing a presence on
the ground.
Figure 3: Rising middle class
GDP per capita growth, CAGR %, 19802010
SAAAME Non-SAAAME
10
9
8
7
6
5
4
3
2
1
0
0 0.5 1 1.5 2
India
Thailand
Indonesia
Turkey
France
Italy
Germany
Chile
Philippines
United States
Brazil
Nigeria
Japan
2.5 3
China
United Kingdom
Canada
Population growth, CAGR %, 19802010
07 Financial Times Global 500/PwC analysis
PwC on 18.05.11
10 Guardian, 15.09.10
11 Chinese finance in Latin America, published by
Inter-American Dialogue, 12.03.12
8 PwC Project Blue
Notable investments in African FS
institutions have included ICBCs
acquisition of a 20% stake in South
Africas Standard Bank in 2008, which
has paved the way for a number of joint
ventures in areas such as project
finance.
12
ICBC has also purchased an
80% stake in Standard Banks Argentinian
operations.
13
Further investment in Africa
includes the signing of a strategic
partnership between China Construction
Bank and South Africas FirstRand Bank,
which includes providing advisory and
structured services for Chinese clients
looking to invest in Africa.
14
Easing exchange rate risk
As intra-SAAAME trade develops,
bringing currency usage into line with
trading relationships by allowing greater
internationalisation of the renminbi will
help to reduce exchange-rate risk and
overcome barriers to commerce. Key
developments include the increasing use
of the renminbi in cross-border trade
between China and its neighbours, along
with a series of bilateral currency swap
agreements between China and
international trading partners including
Japan, Turkey and the United Arab
Emirates (UAE).
12 Standard Bank media release, 19.03.08
14 FirstRand media release, 30.07.09
PwC Project Blue 9
Many of Chinas FS groups have significant funds at their disposal, allowing them to
make acquisitions and extend their footprint into new markets. However, in some
markets, notably India and the Middle East, they may face a lengthy licensing process,
or possible restrictions on foreign ownership. Even in open markets such as Brazil,
there may be little market share for sale and it may be prohibitively expensive if it is.
A more targeted growth model is emerging as a result, in which the ability to
differentiate, develop niche segments, seek out untapped geographical opportunities
and gain access to new digital distribution networks is critical.
In many of the hard-to-access markets, the main route to customers is going to be joint
ventures. But with many leading local firms having partners already, it will be
important to think about what to offer them that existing partners and potential rivals
cannot. This might be particular product- or credit-risk expertise. It might also be
complementary international coverage or access to customers and investment
opportunities within China. Very few groups are going to be able to cover all the key
markets. So collaboration between competitors (co-opetition) is going to become ever
more common in the future.
Moving into some of the frontier and still largely unsaturated markets in Africa or
South America could provide an important foundation for future growth. The ability to
support infrastructure development and facilitate two-way trade is going to be
important in winning over governments and customers.
Technology is going to be crucial in giving Chinese groups the option to move into new
markets without the need for branch or agency networks on the ground. One way to
augment technological capabilities would be to buy a Western institution. This could
also provide access to additional product expertise or experience of managing
international operations. Takeover prices in some developed markets are generally
favourable for now, especially within the mid-market, but may not be so for long.
Section two:
Creating a platform for international expansion
As FS groups seek to follow their
customers into new territories,
they will need to develop the
infrastructure, reliable information
and cultural understanding
needed to manage diverse
international operations.
A new approach to organisational
design may be needed as Chinas FS
businesses seek to create more nimble
and adaptive operational capabilities
and make sure their talent, structure and
governance reflect their increasingly
international horizons.
ethics and cultures. Its important for
Chinese groups to develop the timely and
reliable management information and
risk management systems needed to
operate in new and unfamiliar markets.
the changing geographical focus of the
business. They will also need to deal
with more extensive partnership and
co-opetition arrangements and be
unfamiliar market conditions, distribution
channels and cultural preferences.
The underlying challenge is securing
sufficient talent in markets where suitably
qualified and experienced people may
already be in short supply. Short-term and
reactive approaches be this seeking to
lure key people from competitors or
personnel are likely to prove excessively
costly and may still fail to provide the
people needed to meet strategic
objectives. A more systematic and
forward-looking workforce plan, capable
of anticipating and meeting skills needs,
could reduce costs and allow FS
organisations to build a more sustainable
platform for business development.
10 PwC Project Blue
PwC Project Blue 11
We believe that there are five key questions that FS businesses should consider as they
look at how to gear their strategy and operations to the rise and interconnectivity of the
SAAAME markets:
How are your corporate clients responding to the shift in the focus of global growth
and how can you develop your services and geographical reach to support them
more effectively?
How is technology reshaping the expectations of your customers and how can you
develop the intuitive and interactive services that would put you at the forefront of
the market?
Are there opportunities to extend your regional and wider international footprint
and what strengths would you be looking to leverage as part of such a strategy?
Is your governance and risk management equipped to deal with a more complex and
globalised sector?
Is the recruitment, retention and development of talent within your organisation
equipped to meet long-term strategic objectives and how can you develop a more
proactive strategic plan?
Opening up new frontiers
Having acquired a number of
strategic stakes around the world in
recent years, some Chinese FS
groups may wish to consolidate
their position before they
contemplate further expansion.
Some may also be reluctant to
pursue international growth and
acquisition amid the current
uncertainty within the global
financial markets. But their
customers will want them to
develop the international reach
needed to support their investment
and business development across
SAAAME. Failure to keep pace could
leave some players at risk of losing
business to faster moving
competitors, including Western or
SAAAME groups.
Project Blue, please contact any of
those who are listed here, or your
usual PwC contact.
12 PwC Project Blue
Raymond Yung
PwC (China)
Tel:+86 (10) 6533 2121
Email: raymond.yung@cn.pwc.com
David Wu
PwC (China)
Tel: +86 (10) 6533 2456
Email: david.wu@cn.pwc.com
Margarita Ho
PwC (China)
Tel: +86 (10) 6533 2368
Email: margarita.ho@cn.pwc.com
PwC Project Blue 13
the changes ahead?
and governments.
P
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B
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F
r
a
m
e
w
o
r
k
Global instability
A
d
a
p
t
(SAAAME)
Economic strength
Trade
discrepancies
Ageing populations
change
Urbanisation
Global affluence
Talent
Capital balances
Resource allocation
Population
Belief structures
Changing customer
institutions
impacting FS
Digital and mobile
Food and water
Key commodities
capitalism
State intervention
strategies
and innovation
Ecosystems
Climate change and
sustainability
development banks
P
l
a
n
global economy
Project Blue
Capitalising on the
growth and global
emerging markets:
Hong Kong
04 Foreword
05 Section one:
Opening up new routes to growth
07 Section two:
Developing a competitive global presence
08 Going with the flow
Contents
PwC Project Blue 3
within SAAAME is growing much faster than the developed-to-developed and
developed-to-emerging market flows.
As one of the main gateways into China, Hong Kong is in an ideal position to benefit
from the growth in intra-SAAAME commerce. This includes providing a launch pad for
SAAAME companies looking to do business in China and Chinese companies seeking to
extend their reach into other parts of SAAAME. As we examine in this paper, the
opportunity and, indeed, challenge for Hong Kongs FS businesses is how to provide the
international presence and full service support that would allow their clients to develop
their business in new markets.
pages 9 and 10.
Mervyn Jacobs
PwC (Hong Kong)
Financial Services Leader for Hong Kong and China
Foreword
services in Hong Kong. The paper
is a Hong Kong-focused companion
to our global paper: Capitalising
4 PwC Project Blue
Hong Kong is a key trade, logistics and FS hub for China and Asia as a whole.
While the city has been overtaken by both Shanghai and Singapore as the worlds
busiest container port,
1
Hong Kong has the advantage of being the largest air freight
centre in the world.
2
The citys strong presence in air freight reflects its investment
in multimodal air, sea, road and rail links, and will be further bolstered by the
planned opening of a new air freight terminal in 2013
2
and government approval for
a third runway.
3
Trade and FS have always gone hand in hand in Hong Kong. Investors and corporations
are attracted by the citys robust legal system, free movement of funds and access to
well-developed banking and capital market facilities the city came second overall in
the latest global Ease of Doing Business index, ranking in the top five for getting
credit, enforcing contracts, protecting investors and trading across borders.
4
More than 70 of the worlds top 100 banks have subsidiaries or representative offices in
Hong Kong.
5
Its capital market is the third largest in Asia after Tokyo and Shanghai
(ranked by domestic equity market capitalisation)
6
and has in recent years provided an
important conduit for investment into China. The value of IPOs in 2011 was the third
highest in the world,
6
with a number of commodities companies listing in Hong Kong
because of the proximity to their markets in China. The close trade and investment
links with the Mainland are further reflected in Hong Kongs emergence as an offshore
centre for renminbi deposits and bond trading. In turn, many regional and
multinational groups have their headquarters in, and operate their treasury services
from, Hong Kong.
The intra-SAAAME opportunity
As intra-SAAAME commerce continues to grow (see Figure 1 overleaf), Hong Kong is
set to play an even bigger role as a gateway for international trade.
Many Chinese companies will want to use Hong Kong as a staging post for reaching
into Africa, Latin America, the Middle East and other parts of Asia. In turn, many
companies from across SAAAME will want to use Hong Kong as a bridgehead for
developing their business and tapping into investment opportunities in China.
Section one:
Opening up new routes to growth
Hong Kongs role as a gateway
into, and out of, China is evolving
as the growth in intra-SAAAME
trade accelerates.
PwC Project Blue 5
1 World Shipping Council Top 50 Container Ports
2010 and Straits Times, 08.01.11
2 Business Monitor International Hong Kong Freight
Transport Report Q2 2012
3 BBC News Online, 20.03.12
4 The World Bank Doing Business 2012
5 Hong Kong Government website Hong Kong:
The Facts, November 2011
6 World Federation of Exchanges 2011 Highlights,
19.01.12
What Hong Kongs FS businesses have
learned from helping their clients to open
up trade and investment links with China
will provide useful experience in
developing new trading relationships and
overcoming potential barriers in other
parts of SAAAME. This includes
negotiating licences, arranging trade
finance and providing support for
acquisitions, plant and infrastructure
development. They can also help
personnel to relocate and settle in new
markets. Further openings include wealth
management and access to new
investment opportunities.
6 PwC Project Blue
CAGR 200210: 8.0%
Non-SAAAME
SAAAME
CAGR 200210: 19.4%
CAGR 200210: 13.6%
CAGR 200210: 12.9%
To capitalise on the opportunities opened up by the growth in intra-SAAAME trade,
Hong Kongs FS businesses will need to extend their presence into new markets and be
able to offer a full suite of trade, investment and other support services along the trade
routes being developed by their clients.
Some organisations will look to set up China and Hong Kong desks on the ground.
They might also augment this with acquisitions. But a physical presence may be costly
and difficult to set up in many countries. It is therefore going to be important to
make the most of technology in extending customer access and providing end-to-end
trade services.
Joint ventures and collaborations with companies on the ground, including
competitors (co-opetition) and non-FS providers such as telecom firms, are also going
to be important in extending international reach. And to attract the right partners, FS
groups need to think about what they can offer them that others cannot. This might be
complementary international coverage or access to a target customer base in Asia.
Some of the bigger players will be able to develop a pan-SAAAME presence to serve
clients across all sectors. While smaller FS businesses will not have the funds to match
this, they will have opportunities to specialise. This might be focusing on particular
countries/regions or targeting particular types of business.
Working closely with key clients and being able to follow them as they reach into new
markets will be critical in helping to judge what regions and sectors to focus on. FS
organisations can then work with their clients to help bridge any potential gaps in the
local financial infrastructure and overcome challenges in areas such as financing, risk
management, currency convertibility and repatriation of revenues.
Managing more complex and diverse operations
As they reach into new markets, FS businesses will need to contend with a more
complex risk profile. SAAAME countries have varied legal and regulatory frameworks,
political systems, business ethics and cultures. It will be important to develop the
timely and reliable management information and risk management systems needed to
Operating models will need to reflect the changing geographical focus of the business.
They will also need to deal with more extensive partnership arrangements and be
sufficiently agile to respond quickly to unfamiliar market conditions, distribution
The underlying challenge is talent. As their businesses grow, FS organisations will need
to find ways to develop and attract more talent. A particular challenge for the sector is
that salaries, rents and other costs are often higher in Hong Kong than many other
SAAAME markets, including some of its nearest rivals such as Singapore. As FS
businesses reach out beyond Hong Kong, they face the further challenge of securing
sufficient talent in markets where suitably qualified and experienced people may
already be in short supply.
Section two:
Developing a competitive global presence
As Hong Kongs FS businesses seek
to extend their international
footprint, they will face new growth
and management challenges.
PwC Project Blue 7
look at how to take advantage of these openings and provide the most effective support
for their clients:
If you cant develop a pan-SAAAME presence, what specific sectors or regions could
How can you use technology to provide customer access and trade services in
different parts of the world?
and operating model (more joint ventures, longer lines of communication etc.) as
Going with the flow
Hong Kongs position as a key
launch pad for intra-SAAAME
commerce will open up huge
commercial opportunities for its FS
businesses. But to capitalise on these
opportunities, clients will expect full
service support where and when
they need it.
8 PwC Project Blue
PwC Project Blue 9
Project Blue, please contact any of
usual PwC contact.
Mervyn Jacob
Financial Services Leader for Hong
Kong and China
PwC (Hong Kong)
Tel: +852 2289 2700
Email: mervyn.jacob@hk.pwc.com
Harjeet Baura
PwC (Hong Kong)
Tel: +852 2289 2715
Email: harjeet.baura@hk.pwc.com
David Eldon
Senior Advisor
PwC (Hong Kong)
Tel:+ 852 2289 2788
Email: david.eldon@hk.pwc.com
Duncan Fitzgerald
PwC (Hong Kong)
Tel: +852 2289 1190
Email: duncan.fitzgerald@hk.pwc.com
10 PwC Project Blue
Josephine Kwan
PwC (Hong Kong)
Tel: +852 2289 1203
Email: josephine.wt.kwan@hk.pwc.com
Peter PT Li
Partner, Banking and Capital Markets Leader
PwC (Hong Kong)
Tel: +852 2289 2982
Email: peter.pt.li@hk.pwc.com
Stephen A Woolley
PwC (Hong Kong)
Tel: +852 2289 5089
Email: stephen.woolley@hk.pwc.com
the changes ahead?
and governments.
P
r
o
j
e
c
t

B
l
u
e

F
r
a
m
e
w
o
r
k
Global instability
A
d
a
p
t
(SAAAME)
Economic strength
Trade
discrepancies
Ageing populations
change
Urbanisation
Global affluence
Talent
Capital balances
Resource allocation
Population
Belief structures
Changing customer
institutions
impacting FS
Digital and mobile
Food and water
Key commodities
capitalism
State intervention
strategies
and innovation
Ecosystems
Climate change and
sustainability
development banks
P
l
a
n
global economy
Project Blue
Capitalising on the
growth and global
emerging markets:
India
2 PwC Project Blue
04 Foreword
05 Section one:
Emerging superpower
10 Section two:
Creating a platform for expansion
13 Opening up new frontiers
Contents
PwC Project Blue 3
to help them judge the implications of these developments for their particular business,
within SAAAME is growing much faster than the flows between developed-to-
developed and developed-to-emerging markets.
Indias businesses are well-placed to take advantage of this shift in the focus of global
growth and investment. Yet, they face strong competition from Chinese, Brazilian
and other SAAAME multinationals, as well as businesses from the West. Indias FS
businesses are set to play a key role in supporting their customers as they seek to make
the most of the acceleration in intra-SAAAME trade. As we examine in this paper, key
considerations include how to develop the presence on the ground needed to support
clients overseas expansion and how to manage risk and talent across more complex
and diverse international operations. New approaches to growth and organisational
design may be needed as a result.
issues raised, please feel free to contact either me or my colleague, Robin Roy (contact
details on page 14).
Manoj Kashyap
PwC (India)
Foreword
services in India. The paper is
an India-focused companion to
4 PwC Project Blue
Indias emergence as an economic superpower over the past 20 years has been
meteoric. While it may be difficult to sustain such a high rate of growth in the coming
years, the long-term potential remains strong.
Indias key strengths include the demographic dividend of a young and expanding
population. Figure 1 compares Indias working age population to East Asia. If we
compare India to China, Chinas working age population will begin to decline from
2014, but Indias will continue to grow.
1
Further potential comes from the increasing sophistication of Indias global delivery
model, a key engine of growth, particularly in the services sector. Business service
companies are moving up the value chain to create centres of excellence in areas such
as software programming, financial reporting and legal support. Global FS businesses
are following suit as their shared service centres here build up their delivery
capabilities in target areas such as trade finance, treasury settlements and transaction
banking. Many of these centres employ 10,000 people or more. They could provide
increasing competition for domestic FS businesses as international groups use them as
a platform for expansion within India and Asia as a whole.
Section one:
Emerging superpower
As Indias economy evolves and
customer expectations increase, its
FS sector will need to keep pace. FS
businesses will also need to find
ways to follow or help their
customers into new markets and
help them capitalise on the increase
in intra-SAAAME commerce.
PwC Project Blue 5
1 Euromonitor International, 17.10.10
Figure 1: Growth of the working age to non-working age ratio
in India
2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
East Asia India low India med India high
Source: United Nations
Ratio of working age to non-working age population
Domestic opportunities
and challenges
Anticipated growth within the FS sector
reflects the continued expansion in the
overall economy. In particular, India is
set to become the third largest domestic
banking sector after China and the US
by 2050.
2
Much of this potential is built
around the increasing affluence of the
population (see Figure 2).
However, structural challenges remain.
The high level of state ownership and
control particularly within the banking
sector is reflected in significant
mandatory lending to priority segments
like SMEs and agriculture, accounting for
almost 35% of deposits raised by the large
state-owned banks.
Encouraging savers to move funds to
capital market investments would help to
generate more finance for infrastructure
and other key economic priorities
Indias savings rate is more than 30% of
GDP, one of the highest in the world.
3
Yet, as savers can often get better and
more consistent returns on their bank
deposits than potentially riskier
investments where the returns are linked
to market movements (mutual funds,
other fixed income products),
encouraging them to switch is a key
challenge for banks, insurers and
asset managers.
India doesnt have a state-sponsored
social security system and therefore
further development of the pension and
annuities sectors is vital. The National
Pension Scheme (NPS), which is targeted
towards the unorganised sectors, has
been a slow starter and many
modifications are required to encourage
both the intermediaries (banks, insurance
companies, post offices) and pension
fund managers to participate more
tangibly. Businesses in these sectors can
also contribute to the development of
long-term money markets and help fund
infrastructure development.
Indias millennial generation is likely to be
an important target market for investment
businesses as they may be prepared to
take more risk over a longer period of
time than their older and more
conservative counterparts. The challenge
is how to make sure that pursuit of these
opportunities doesnt lead to mis-selling
or risk creating a market bubble. This will
require both effective regulatory controls
and a more mature product distribution
structure, led by a well-supported
independent financial advisers network.
6 PwC Project Blue
PwC on 18.05.11
3 www.tradingeconomics.com, 30.05.12
Figure 2: Indias increasing influence
100
90
60
70
80
50
40
30
20
10
0
100 1000 10000 100000
Indias income distribution 20052039 2005 2015 2025 2035 2039
Source: Brookings Institution
% Cumulative distribution of population
$100
a day
$10
a day
$5
a day
$2.50
a day
$1.25
a day
PwC Project Blue 7
More than 50% of the population does
not have a bank account.
4
Bringing this
unbanked population into formal FS
services is a key focus of the governments
inclusive growth agenda, reflected in the
five-year plans and long-term growth
plans of the economy.
5
Reaching out into
rural areas and bringing their financial
savings into the formal banking system is
going to be critical, using a mix of
intermediaries and innovative
partnerships. Among these are plans to
capitalise on well-established distribution
chains like the network of post offices,
where the rural and semi-urban
population deposit much of their cash
savings, indicating the strong element of
trust. At the same time, making use of
mobile phones for quicker and efficient
payments is also going to be important
as technology and regulations are
converging to make such peer-to-peer
transactions easier.
At US$61, insurance premiums per capita
are some way behind China (US$158),
Brazil (US$329) and South Africa
(US$1,055),
6
highlighting room for
further growth. But while health
insurance is growing strongly, life and
non-life businesses continue to face
difficult challenges on profitability and
maintaining increasing solvency ratios.
The life insurance sector is undergoing
a significant overhaul, following the
introduction of caps on agent
commissions for unit-linked insurance
plans (ULIPs). ULIPs had been the
mainstay of the sector over the last few
years, accounting for the bulk of new
business. The curbs on ULIP commissions
precipitated a 9% fall in overall life
premiums in 2011.
7
The difficulties within
the ULIP market are leading to a shift
towards more traditional products such as
whole life insurance. The pressure on
top-line growth should also provide the
impetus for better cost control and
customer focus.
The mainstay of non-life insurance
business continues to be property
and casualty, motor (including
mandatory third-party motor covers)
and health. Some good traction has been
seen in travel-related products. Yet, the
premiums in the non-life sector are failing
to cover the losses, particularly in motor,
due to high claims ratios. The challenge
will be how to develop the potential in
other areas including comprehensive
motor, home cover, personal asset cover
and health, while improving the quality of
underwriting overall.
Looking ahead, insurers will need to
contend with a combination of tighter
regulation and the difficult global
economic environment, calling for
changes in strategy, governance and
risk management, as well as opening the
way for M&A and consolidation within
the market.
4 New York Times reporting SBI, 29.09.11
5 Indian Banking Sector: Towards the Next Orbit,
Inaugural address delivered by Dr K. C.
Chakrabarty, Deputy Governor, Reserve Bank of
India at 9th Advanced Management Programme at
IMI, Delhi, 13.02.12
FS follows intra-SAAAME
trade flows
Alongside domestic growth, the rapid rise
in intra-SAAAME trade opens up
significant opportunities for the FS sector.
Emerging-to-emerging market commerce
is now more valuable and growing much
more quickly that emerging-to-developed
and developed-to-developed trade (see
Figure 3). As Figure 4 highlights, among
the fastest growing trade routes are those
between Asia and Africa and Asia and
South America.
At present, SAAAME trade flows are
dominated by commodities, but as
consumer markets continue to expand
on the back of rising affluence
(see Figure 5), the pattern of trade
will be increasingly focused on
manufactured goods.
Indias growing presence on the SAAAME
and wider global stage is exemplified by
multinational conglomerates such as
Tata. Tata employs more than 2,000
people in China and generated sales of
more than $3 billion in the country in
2010.
8
In South America, its companies
employ more than 5,000 people.
8 PwC Project Blue
CAGR 200210: 8.0%
Non-SAAAME
SAAAME
CAGR 200210: 19.4%
CAGR 200210: 13.6%
CAGR 200210: 12.9%
8 www.tata.com, 30.05.12
PwC Project Blue 9
The challenge for other businesses is how
to follow the lead of groups like Tata by
developing and strengthening trade links
and operations within SAAAME. In doing
so, they will face strong competition from
other countries, notably China and Brazil,
which have been moving quickly to secure
resources and tap into rising demand.
Indias exports to China increased in
2011, but the deficit was still $27 billion
on overall trade of $74 billion and Indias
businesses will be looking to close the
gap. Notably, Brazil maintains a net
surplus on trade with China.
9
Africa is emerging as a key competitive
arena. Indias trade with Africa has grown
from $620 million in 2001 to $62 billion
in 2011. But ChinaAfrica trade has
developed quicker, rising from $10.6
billion to more than $160 billion during
this period.
10
Clients are looking to FS institutions to
provide trade finance, insurance, merger
and acquisition services, and debt finance
in export markets. Serving Indian
communities abroad has already given
Indian banks and insurers a presence on
the ground in many SAAAME countries.
The challenge will be how to build on this
bridgehead and move into new markets.
N America
N America
5.4
4.5
17.7
8.8
19.2
8.7
10.0
8.0
8.6
18.8
13.6
12.6
14.7
12.8
13.4
17.5
17.2
16.0
21.2
29.9
24.1
13.7
11.3
5.4
16.8
21.6
24.1
15.1
13.5
12.6
16.4
17.9
19.0
22.5
15.7
9.1
12.0
19.3
25.6
24.5
15.2
18.9
12.9
11.7
16.4
18.0
27.8
18.7
20.2
Central America
Europe
CIS
South and
Central America
Africa
Asia
Middle East
O
R
I
G
I
N
DESTINATION
Figure 5: Increasing affluence in SAAAME markets
GDP per capita growth, CAGR %, 19802010
SAAAME Non-SAAAME
10
9
8
7
6
5
4
3
2
1
0
0 0.5 1 1.5 2
India
Thailand
Indonesia
Turkey
France
Italy
Germany
Chile
Philippines
United States
Brazil
Nigeria
Japan
2.5 3
China
United Kingdom
Canada
Population growth, CAGR %, 19802010
09 Brazil-China Fact Sheet, www.brazil.gov, 30.05.12
10 Economic Times, 17.03.12
Using innovation to build market share
India was one of the countries analysed in a recent PwC study of digital banking.
Demand and usage are exceptionally high in comparison to both developed and
emerging markets (see Figure 6).
Digital FS can enhance customer insight and engagement and allow financial
institutions to move into new markets without the need for branch or agency networks
on the ground. It could be especially important in serving the highly connected
millennial generation. It can also provide unbanked and remote customers with access
to payment and deposits via the mobile phone network successful models include
Kenyas M-Pesa, which now has 15 million customers, more than all of the countrys
banks put together.
11
Moreover, digital banking is going to be a key element of wealth
management, offering intuitive and interactive anytime and anywhere services.
Section two:
Creating a platform for expansion
The ability to develop effective
digital services, forge partnerships
in hard-to-access territories and
move ahead of competitors in
seeking out untapped markets will
be crucial in helping FS institutions
to build a platform for sustainable
domestic and international growth.
10 PwC Project Blue
Figure 6: The global usage of internet and mobile usage in banking
100
90
80
70
60
50
40
30
20
10
0
C
a
n
a
d
a
C
h
i
n
a
F
r
a
n
c
e
H
o
n
g
K
o
n
g
I
n
d
i
a
M
e
x
i
c
o
P
o
l
a
n
d
U
A
E
U
K
T
o
t
a
l
n % who currently use mobiles to purchase financial products
n % who currently use the internet to purchase financial products
January 2012
11 www.thinkm-pesa.com, 16.04.12
PwC Project Blue 11
One way to augment technological
capabilities would be to buy a Western
institution. This could also provide access
to additional product expertise, or
experience of managing international
operations. Takeover prices in some
developed markets are generally
favourable for now, especially within the
mid-market, but may not be so for long.
Reaching into new markets
Prior to the global financial crisis, a
number of leading international FS
groups were able to make multiple
acquisitions to rapidly build up their
presence in SAAAME. The problem is that
this type of fast acquisitive growth is now
much more difficult, at least within the
most attractive SAAAME markets.
Prospective entrants may face ceilings on
foreign holdings, China and the Middle
East being notable examples. Even in
open markets such as Brazil, there may
be little market share for sale and it may
be prohibitively expensive if it is.
Entrants may also face entrenched
competition from dominant local rivals,
especially within the core savings and
credit markets.
In many of the hard-to-access markets,
the main route to customers is therefore
going to be joint ventures. But with many
leading local firms having partners
already, it will be important to think
about what to offer them that existing
partners and potential rivals cannot.
This might be particular product or
credit risk expertise. It might also be
complementary international coverage,
or access to customers and investment
opportunities within India. Very few
groups are going to be able to cover all the
key markets. So collaboration between
competitors (co-opetition) is going to
become evermore common in the future.
Moving into some of the frontier and
still largely unsaturated markets in Africa
or South America could provide an
important foundation for future growth.
The ability to support infrastructure
development and facilitate two-way trade
is going to be important in winning over
governments and customers.
A new approach to organisational
design may be needed as Indias FS
businesses seek to create more nimble
and adaptive operational capabilities and
make sure their talent, structure and
governance reflect their increasingly
international horizons.
ethics and cultures. Its important for
Indian groups to develop the timely and
reliable management information and
risk management systems needed to
with more extensive partnership and
co-opetition arrangements and be
unfamiliar market conditions, distribution
already be in short supply. Short-term and
reactive approaches, be this seeking to
lure key people from competitors, or
personnel are likely to prove excessively
costly and may still fail to provide the
people needed to meet strategic
objectives. A more systematic and
forward-looking workforce plan, capable
of anticipating and meeting skills needs
could reduce costs and allow FS
organisations to build a more sustainable
platform for business development.
Moving into India
International businesses looking to move
into India face a number of challenges.
Difficulties in securing licences, tight
restrictions on foreign ownership (5%
limit for each firm and 74% overall) and
restricted voting rights have deterred
inbound investment in the banking sector.
Foreign stakes in Indian insurers are
limited to 26%, though M&A and IPO
rules are under review. A more
straightforward route into India may be
investment in non-bank financial
institutions, which allow 100% foreign
ownership and offer access to fast-
growing segments such as mortgages,
vehicle finance, credit cards distribution
and stockbroking.
12 PwC Project Blue
look at how to gear their strategy and operations to an increasingly competitive and
globalised sector:
How is technology reshaping the expectations of your customers and how can you
develop the intuitive and interactive services that would put you at the forefront of
the market?
more effectively?
globalised sector?
Opening up new frontiers
Indias financial institutions have
developed rapidly in recent years.
But they can no longer rely on the
countrys GDP growth to deliver
assured profitability and
expansion. They will need to meet
rising customer expectations,
increase financial inclusion and
support corporate clients as they
reach into new markets. Failure to
keep pace could leave some players
at risk of losing business to faster
moving competitors, including
Western or SAAAME groups.
PwC Project Blue 13
14 PwC Project Blue
usual PwC contact.
Manoj K Kashyap
PwC (India)
Tel: +91 (22) 6669 1401
Email: manoj.k.kashyap@in.pwc.com
Robin Roy
Associate Director, Financial Services
PwC (India)
Tel:+ 91 (80) 4079 4009
Email: robin.roy@in.pwc.com
the changes ahead?
and governments.
P
r
o
j
e
c
t

B
l
u
e

F
r
a
m
e
w
o
r
k
Global instability
A
d
a
p
t
(SAAAME)
Economic strength
Trade
discrepancies
Ageing populations
change
Urbanisation
Global affluence
Talent
Capital balances
Resource allocation
Population
Belief structures
Changing customer
institutions
impacting FS
Digital and mobile
Food and water
Key commodities
capitalism
State intervention
strategies
and innovation
Ecosystems
Climate change and
sustainability
development banks
P
l
a
n
global economy
Project Blue
Capitalising on the
growth and global
emerging markets:
Financial services
in the Middle East
2 PwC Project Blue
04 Foreword
05 Section one
Emerging opportunities
10 Section two
Capitalising on the opportunities
13 Geared up for transformation
Contents
PwC Project Blue 3
many ways the most far-reaching of the developments facing the FS sector. SAAAME
economies are expected to grow at a faster rate than the rest of the world and trade
within SAAAME is expanding more quickly than the developed-to-developed and
developed-to-emerging market flows. This interconnectedness and the growing trade
flows are creating significant opportunities for FS businesses.
The economies of the Middle East have bounced back from the downturn of 2008 and
2009. Huge further potential comes from the regions position as the fulcrum of
accelerating growth across SAAAME. Clearly, oil and gas are the bedrock of the Middle
Easts hugely important economic role. But there is much more. The economic power
and potential of the Middle East is being bolstered by the accelerating diversification of
domestic economies, global investments by regional sovereign wealth funds and the
regions growing presence as a global trading hub.
In our view, FS organisations within the Middle East are ideally placed to take
advantage of both domestic and intra-SAAAME growth. But this will require a high
level of ambition and innovation. It may also require a rethink of talent management
and organisational design.
The primary focus of this paper is the Gulf Co-operation Council (GCC) states as they
are at the forefront of the rapidly growing intra-SAAAME trade flows. But we also
include other important regional economies in our analysis. Many like Egypt and Libya
are coming firmly back onto the investment radar as they emerge from the turmoil of
the past years.
issues raised, please feel free to contact either me or my colleague Akhilesh Khera
(contact details on page 14).
Graham Hayward
PwC (Bahrain)
Foreword
services in the Middle East. The
paper is a Middle East-focused
companion to our global paper:
Capitalising on the rise and
interconnectivity of the emerging
markets, the latest viewpoint in our
4 PwC Project Blue
Section one
Emerging opportunities
PwC Project Blue 5
1 IMF World Economic Outlook, Regional Economic Outlook and Global Research
2 IMF World Economic Outlook April 2012
Opportunities open up as the economies rebound
Figure 1 highlights the economic power of the GCC countries compared to the size of
their populations. The GCCs economy expanded by nearly 8% in 2011, ahead of
overall regional (3.5%), world (4%) and emerging market (6.5%) growth.
1
While there
are variations in the trajectory of growth between the six states, all are moving in a
positive direction.
In turn, while Egypt, Libya and Tunisia have struggled to sustain growth over the past
year in the face of political upheaval, they too are gearing up for a rebound. Tunisia
and Egypt are leading the way with projected growth of 6.7% and 6.5%, respectively, by
2017.
2
Growth in the Middle East and North Africa as a whole is projected to be 4.4% in
2017, significantly higher than the 2.7% for the advanced economies of Japan, Europe
and North America, underlining how the Middle East is pivotal to global growth.
Why the Middle East is so pivotal
in the rise and interconnectivity
of the emerging markets and
what the accelerating shift in
global economic power means for
your business.
Figure 1: Overview of main regional economies
Morocco Algeria Tunisia Libya Egypt Syria Iraq
GDP $100bn $192bn $46.6bn $74.3bn $231.1bn $68.3bn $108.4bn
Population 32mn 36.6mn 10.6mn 6.5mn 79.9mn 21.2mn 32.8mn
Debt % GDP 52% 0.81% n/a n/a 63% 15.8% n/a
Current account -$6bn $34.2bn -$3.6bn $11.8bn -$6.25bn -$3.1bn -$3.2bn
Iran Kuwait Bahrain Saudi Arabia UAE Oman Qatar
GDP $420.8bn $172.7bn $26.4bn $578bn $363bn $66bn $194.2bn
Population 76.6mn 3.6mn 1.12mn 26.6mn 7mn 3mn 1.7mn
Debt % GDP n/a n/a 24.7% n/a n/a n/a 10.3%
Current account $49.2bn $39.4bn $3.4bn $114bn $37.7bn $9.8bn $70.8bn
Algeria
Morocco
Tunisia
Kuwait
Bahrain
Qatar
Lebanon
Libya Egypt
Saudi Arabia
Yemen
Oman
UAE
Iran
Turkey
Syria
Iraq
Jordan
Source: CIA World Factbook, EIU Database, PwC Analysis
GCC sustains intra-SAAAME
trade and investment
The increasing interconnectivity of intra-
SAAAME trade and investment flows is as
significant as the growth and projected
size of the Middle Eastern and other
emerging markets. As Figure 2 highlights,
trade between the Middle East and other
SAAAME regions is growing much faster
than with Europe or North America.
Trade with Asia reached $624 billion in
2011, compared to $106 billion with
North America and $181 billion with the
European Union.
3
This importance of intra-SAAAME
commerce is also reflected in global oil
flows (see Figure 3). China is the fastest
growing customer for Saudi Arabian oil
and now vies with the US as the
kingdoms biggest oil market.
4
A clear sign
of the increasing focus on opportunities in
Asia-Pacific was the opening of the giant
Fujian refinery in China, which was built
by Saudi Aramco. In turn, Saudi Arabian
oil exports to India have grown sevenfold
since 2000 and now account for around a
quarter of the countrys needs.
5
Globally,
reliance on GCC oil is set to increase in
the coming years, reaching nearly 25% by
2020 (see Figure 4 overleaf).
Growth in oil and gas exports from the
Middle East to SAAAME markets has
paved the way for sovereign wealth fund
investments globally, with FS-related
investments following close behind.
Sovereign wealth funds have acquired
major stakes in a number of leading
Western banks.
6
This is being followed by
investment in SAAAME banks. Examples
include the acquisition of shares in the
Agricultural Bank of China by the Kuwait
Investment Authority and Qatar
Investment Authority.
7
While the initial
investments have been strategic, FS
companies will be looking to develop the
presence needed to support their business
clients as they expand into SAAAME.
6 PwC Project Blue
N America
N America
5.4
4.5
17.7
8.8
19.2
8.7
10.0
8.0
8.6
18.8
13.6
12.6
14.7
12.8
13.4
17.5
17.2
16.0
21.2
29.9
24.1
13.7
11.3
5.4
16.8
21.6
24.1
15.1
13.5
12.6
16.4
17.9
19.0
22.5
15.7
9.1
12.0
19.3
25.6
24.5
15.2
18.9
12.9
11.7
16.4
18.0
27.8
18.7
20.2
Central America
Europe
CIS
South and
Central America
Africa
Asia
Middle East
O
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I
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DESTINATION
3 IMF Direction of Trade Statistics Database Update, January 2012
5 Financial Times, 28.09.11/PwC analysis
6 Daily Telegraph, 29.04.12
7 Doha Bank website, 23.04.12
The inward trade flows include virtually
all of the GCCs vehicles, machinery and
consumer goods the GCC would be a net
importer without oil and gas. GCC
countries are looking to secure stable
supplies of food and are investing in land
and water resources in other parts of the
world, notably Africa, to help secure it.
The trading of oil for food has created
something of a mutually supporting
bartering relationship, though the long
leases on land in countries where food
may be in short supply have proved
controversial. Some GCC countries are
therefore looking into an alternative
approach to sustainability, which seeks
to diversify rather than tie down sources
of supply.
These trading relationships are creating
evermore complex and extended supply
chains. In turn, conducting business in
some of these countries is likely to
require new investment models and
fresh approaches to understanding and
mitigating risk. FS companies can play an
important role in supporting the opening
up of new trade channels and helping to
manage the risks.
Initially, this support includes trade
finance. Once commerce develops,
many FS institutions will be looking to
develop a presence on the ground.
Recent examples include the Qatar
National Banks acquisition of a 49%
stake in Libyas Bank of Commerce.
8
PwC Project Blue 7
Figure 3: Inter-regional oil supplies, million tonnes, 2010
8 Reuters, 15.04.12
South and Central
America
Africa
Middle East
Asia-Pacific
Russia and CIS
Europe North America
128.8
60.0 178.7
90.3
125.4
74.7
112.1
707.5
116.7
295.2
Sources: BP Statistical Review of World Energy 2011; PwC analysis
All inter-area movements of oil greater than 50 million tonnes shown
Accelerating diversification
spurs investment
The development of new SAAAME
markets is running in parallel with the
diversification of regional economies,
which is a key priority for governments
within the GCC. Non-energy output
currently accounts for around 60% of
GCC GDP,
9
and is expected to make up
around three-quarters of overall growth
in 2012 and 2013.
10
The non-energy
sector is expected to make up nearly
70% of GDP by 2020.
9
The investment focus ranges from
petrochemicals and other energy-
intensive manufacturing to service sectors
including financial services. Financing the
infrastructure development needed to
sustain economic diversification opens up
important opportunities for FS
businesses, both as investors in their own
right and as underwriters for Islamic and
conventional capital raising. In turn,
focusing on fast growth non-hydrocarbon
sectors would enhance fee income and
open up opportunities for innovative
product packaging.
Family-oriented economic
model
A significant feature of the GCC economy
is the importance of family-owned
corporations. We estimate that the
combined assets of these businesses make
up approximately 75% of the private
sector and that they employ between
60% and 70% of the workforce in these
Gulf states.
The cultural ties and relationships within
the leading families increase the potential
for greater interconnectedness between
the economies of the GCC, though inter-
familial ownership across borders is at
present limited. As the region becomes
more economically integrated, the ties
between family-owned corporations in
different countries could grow.
In turn, the royal families interaction
with government means that they have
a strong influence on the state-owned
enterprises in these countries. These
include national oil companies such as
Saudi Aramco, which manages the
worlds largest crude oil reserves (260
billion barrels).
11
They also include some
of the leading banks and other financial
institutions in the region.
The strong family presence within the
businesses creates a very different
economic model to the one that would
be familiar to investors in Europe and
North America (though perhaps not
quite as unfamiliar as it once was, as
governments come to play a stronger role
in the running of economies worldwide).
Foreign investment tends to be
channelled through co-sponsorship
arrangements, in which the domestic
partner retains a controlling stake. Family
ownership and the personal nature of
business can create particular governance
issues. Business development and
investment would benefit from greater
transparency and more formal
governance. FS companies can play an
important role in supporting this, as well
as advising on areas such as succession
planning and the passing on of
control/assets.
8 PwC Project Blue
Figure 4: GCC crude oil production (thousands of barrels per day)
and percentage of global demand
09 The GCC in 2020: Broadening the economy,
published by the Economist Intelligence Unit,
21.10.10
10 IMF Regional Economic Outlook Update,
April 2012
11 Saudi Aramco website, 23.05.11
Source: The Economist Intelligence Unit, PwC analysis
2007
15,877
15,742 15,753
15,010
18,692
24,115
24%
20%
18%
19% 18% 18%
2008 2009 2010 2015 2020
PwC Project Blue 9
Governments are currently investing in
health, education and job creation all
are high priorities. The fact that more
than 40% of the GCC population is under-
30
12
creates a demographic dividend
and spur for long-term growth. Yet, the
need to fund education and develop
employment opportunities for young
and growing populations is putting
government budgets under increasing
strain. Governments will be looking to
develop more publicprivate investment
partnerships to bridge this spending
gap, creating further opportunities for
FS groups.
The other main corollary of family
ownership is the considerable number of
high net worth (HNW) individuals in the
region (there are estimated to be around
400,000 people in the Middle East with
investable assets of more than $1 million,
with their combined wealth being some
$1.7 trillion
13
). In the past, a large
proportion of their funds would have
been managed and invested abroad.
A considerable amount of capital from
the wider Middle East region has come
into the GCC over the past year as wealthy
individuals seek safe havens in the face
of social and political unrest. As more
wealth is held within or comes into
the GCC, there are valuable growth
opportunities for private banks operating
within the region, both domestic
and foreign.
Dealing with risk and
instability
The key risk that cuts across politics and
the economies in the region is oil price
volatility. Any prolonged dip would not
only reduce GDP, but also cut off funds
for investment in infrastructure and
economic diversification. In June 2012,
prices were edging towards the $85 a
barrel that many economists believe is the
point at which government budgets
would come under pressure and spending
would come under strain if such a dip
were to be sustained over a long period.
14
However, GCC governments have built up
significant reserves to tide them over in
the short to medium terms.
While further investment in infrastructure
is crucial to continued development, the
region is still reliant on global banks for
much of its large project financing. In
particular, European banks have lent
more than $200 billion to GCC
countries.
15
With countries in the GCC
planning some $1.8 trillion in capital
spending over the next 15 years, any
possible retrenchment by European banks
could leave a significant funding gap.
Other risks that could affect development
include overreliance on the expatriate
labour force. While local people take up
the vast majority of public sector jobs,
private sector posts are predominantly
filled by expatriates, partly because pay
and job security may be better in the
public sector, but also because the skills
needed in the private sector may not
be available locally.
16
Investment in
education would help to develop the skills
needed to meet the requirements of the
private sector.
The social unrest that swept away the
governments of Tunisia, Egypt and Libya
and the continuing conflict in other parts
of the region have had a significant
impact on government policies and
investor sentiment within the GCC
and wider Middle East. Spending on
welfare and job creation has been stepped
up across the GCC in the wake of the
Arab Spring.
12 QNB GCC Economic Insight 2012
13 Merrill Lynch 2011 World Wealth Report
14 IMF World Economic Outlook April 2012 and
Financial Times, 21.06.12
15 Moodys Investment Services media release,
19.03.12
16 The GCC: Prospering in uncertain times,
published by Samba Financial Group,
September 2011
Strong capacity for growth
Despite having a large number of banks, most of the market share within the GCC
countries is concentrated in a relatively small number of leading groups. Total banking
sector assets of GCC banks rose by 9% to reach $1.4 trillion at the end of 2011,
17
though
at around 100% of GDP, compared to more than 300% in the UK, there is still room for
expansion.
18
A further indication of the growth potential is the ratio of loans to GDP in
the GCC countries, which is less than 60%. This is comparable with Brazil, but far less
than many Asian markets such as Thailand and Korea, which are around 100%.
19
While growing, take-up of insurance remains exceptionally low in the Middle East
(premiums are 1.5% of GDP) in comparison to other SAAAME regions.
20
Premiums as a
portion of GDP are 3.8% in China and 2.7% in South America, for example. The Middle
Easts low level of penetration offers evident long-term potential.
Fund management also has room to grow. Mutual funds in the GCC have around $34
billion in assets under management. These assets are spread across 480 funds, many of
which are quite small, suggesting the potential for consolidation.
21
Using innovation to build market share
Digital innovation will be critical in allowing financial institutions in the region to
develop their businesses, domestically and internationally.
The UAE was one of the countries analysed in a recent PwC study of digital banking.
Demand and usage are relatively high in comparison to both developed and emerging
markets (see Figure 5).
As costs, spreads and margins come under increasing pressure, the development of
digital services would allow banks to serve customers at lower cost, while creating
closer client interaction and understanding. It could be especially important in serving
the regions highly connected millennial generation. It would also provide easier access
to transfers, real estate lending and other international services for the regions large
expatriate population nearly half of the GCC population comes from outside the
region.
22
In turn, digital transformation would allow private banks to provide anytime
and anywhere engagement for HNW clients through video conferencing, email or
mobile phone. For new entrants, there is the particular advantage of being able to
reach target customers without the need to develop or acquire a large branch network.
Further openings for innovation would come from serving the GCCs female
population. In more conservative states, it may be difficult for a woman to enter a
branch on her own. A combination of female-only branches and digital services would
allow women wider reach to financial services.
Section two
Capitalising on the opportunities
When aligned with digital
connectivity, the increasing
interconnectivity of the global and
regional economy offers
opportunities for FS businesses to
build market share and reach into
new markets.
10 PwC Project Blue
17 NBK GCC Brief, 30.04.12
18 The City UKs Banking 2012 Report, 30.04.12
19 Analysis of central bank data, 22.05.12
21 GCC Mutual Fund Industry Survey 2011
22 Daily Telegraph, 22.02.12
PwC Project Blue 11
Moves towards
monetary union
While there is a common market in most
sectors within the GCC the notable
exception being financial services intra-
GCC trade makes up only a small
proportion of overall GDP (around $90
billion in 2011).
23
Monetary union would help to strengthen
trading within the region. The year 2009
saw the establishment of the GCC
Monetary Council, the precursor to a
common central bank and an important
step towards monetary union. Yet, the
road to a single currency continues to be
challenging. One of the points of
contention has been the location of the
central bank, with the UAE withdrawing
from the single currency project in 2009
following the announcement of plans
to site the bank in Riyadh. Oman has
also opted out for now as it would like
more time to develop its financial
infrastructure, though it is likely to rejoin
the process in the future. The remaining
four states are pressing on with the
project, though it may take some time
before the union comes to fruition.
The move towards monetary union is a
promising development for FS
organisations. It would help to harmonise
regulation and make it easier for FS
businesses to develop common products
and to operate in any of the member
states. Further advantages include unified
monetary policies and better negotiating
power across global markets.
A number of stronger regional FS players
are likely to emerge as monetary union
opens up opportunities for greater pan-
GCC trade. This could in turn provide the
foundation for their emergence as
significant players within the wider
SAAAME markets.
As GCC businesses extend their presence
into Asia, Africa and other SAAAME
markets, it will be important to follow
them. While developed markets have
Figure 5: The global usage of internet and mobile usage in banking
100
90
80
70
60
50
40
30
20
10
0
C
a
n
a
d
a
C
h
i
n
a
F
r
a
n
c
e
H
o
n
g
K
o
n
g
I
n
d
i
a
M
e
x
i
c
o
P
o
l
a
n
d
U
A
E
U
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T
o
t
a
l
n % who currently use mobiles to purchase financial products
n % who currently use the internet to purchase financial products
January 2012
23 Reuters, 23.10.11
been the main destination for acquisitions
outside the region in recent years,
developing and transition economies have
been the primary focus of greenfield
foreign direct investment.
24
Real estate
makes up over half this greenfield
investment. Other target sectors include
energy, metals and chemicals, as well as
hotel and tourism developments.
Initially, customer support would include
providing trade finance and some limited
representation on the ground. Trade
finance and other export services for
SMEs is still a largely untapped area for
many FS organisations in the GCC and
wider Middle East. The high level of
liquidity within the GCC FS sector also
opens up opportunities for acquisition.
Some organisations will look to develop a
physical presence on the ground, but this
may be costly and difficult to set up in
some countries. It is therefore going to be
important to make the most of technology
in extending customer access and
providing end-to-end trade services.
Some of the bigger players will be able to
develop a broad pan-SAAAME presence to
serve clients across all sectors. While
smaller FS businesses will not have the
funds to match this, they will have
opportunities to specialise. This might be
focusing on particular countries/regions
or targeting particular types of business.
Developing Sharia-compliant
services
GCC institutions have pioneered many
of the key developments in modern
Islamic banking, insurance and asset
management, which are now attracting
certain segments of the population who
havent used conventional banking and
financial services before.
Islamic finance is also providing a
diversified source of funding for
infrastructure development through the
renewed interest in Islamic bonds
(Sukuk). Interest in such instruments is
coming from both Islamic investors and
conventional investors looking to diversify
their holdings. Notable recent
developments include the Sukuk issued in
February 2012 to help finance the
expansion of Jeddahs international
airport, which at US$4 billion was the
largest single tranche Islamic bond.
25
GCC institutions have openings to
strengthen their presence in the Islamic
market, both regionally and globally. Yet,
differences over financial reporting and
interpretations of Sharia law remain and
will need to be resolved before the market
can begin to reach its full potential.
Designing the organisation of the future
will also be crucial as financial
institutions seek to create more nimble
and adaptive operational capabilities and
make sure their talent, structure and
governance reflect the changing market
environment.
Sharp institutions are already developing
the operational capabilities needed to
offer seamless and intuitive services.
In turn, their governance and decision-
making structures reflect their more
complex and geographically diverse
operations.
When aligned to the standardisation and
simplification of processes, technology is
going to play a key part in improving
efficiency and controlling costs. Internet
and digital interaction are cheaper than
branch or telephone services. They also
allow businesses to reach into new
markets without the cost of acquisition or
branch development.
As markets grow, FS businesses will need
to recruit and retain qualified people in a
sector where experienced people are
already in short supply. As they expand
overseas, they will also need to integrate
and manage people from many different
cultures within their businesses.
While expatriate personnel will continue
to be important in the development of the
FS sector, they can be an expensive option
once all the relocation, compensation and
benefits costs are totted up. It is important
to make sure that expatriate personnel
pass on their skills as part of their
assignment. The recruitment and
development of local talent provides a
more sustainable approach to long-term
expansion. This includes providing
opportunities for people to gain
experience outside the Middle East.
12 PwC Project Blue
24 UNCTAD World Investment Report 2011
We believe that the ability to adapt and take advantage of economic interconnectivity
and developments in technology will be the key differentiators for FS businesses in
the region.
While some FS businesses are looking to extend their reach, these developments are
still largely tentative at present. A more systematic push into Africa and the wider
SAAAME markets is likely to follow as clients seek to develop their presence in high
growth SAAAME markets.
look at how to gear their strategy and operations for these market developments:
more effectively?
How is technology reshaping the expectations of your customers and how can
you develop the intuitive interactive services that would put you at the forefront of
the market?
globalised sector?
Geared up for transformation
Financial services in the Middle
East is at a watershed as global
economic power shifts from the
West to the SAAAME regions and
technological developments
reshape customer demand.
PwC Project Blue 13
usual PwC contact.
14 PwC Project Blue
Graham A Hayward
Middle East Region
PwC (Bahrain)
Tel: +973 1754 0554
Email: graham.a.hayward@bh.pwc.com
Akhilesh Khera
Director, Advisory, Financial Services
PwC (UAE)
Tel: +971 (4) 3043 195
Email: akhilesh.khera@ae.pwc.com
the changes ahead?
and governments.
P
r
o
j
e
c
t

B
l
u
e

F
r
a
m
e
w
o
r
k
Global instability
A
d
a
p
t
(SAAAME)
Economic strength
Trade
discrepancies
Ageing populations
change
Urbanisation
Global affluence
Talent
Capital balances
Resource allocation
Population
Belief structures
Changing customer
institutions
impacting FS
Digital and mobile
Food and water
Key commodities
capitalism
State intervention
strategies
and innovation
Ecosystems
Climate change and
sustainability
development banks
P
l
a
n
For additional copies, please contact Maya Bhatti, Global Financial Services Marketing, PwC (UK) on +44 207 213 2302, or maya.bhatti@uk.pwc.com.
global economy
Project Blue
Capitalising on the
growth and global
emerging markets:
Singapore
04 Foreword
05 Gateway to Asia
08 Following your customers
Contents
PwC Project Blue 3
for FS businesses worldwide. Our clients are using the framework to help them judge
the implications of these developments for their particular business, and look at how to
take advantage of the changes ahead.
within SAAAME is growing much faster than the flows between developed-to-
With its port complex providing one of the main gateways to Asia, Singapore is at
the heart of the growth in intra-SAAAME commerce. As we explore in this paper,
Singapores FS sector is capitalising on these developments as it augments its position
as a regional hub for trade finance and emerges as the one of the worlds leading
commodities trading centres. The coming challenge for Singapores FS businesses
is how to extend their presence into Africa, South America and the Middle East.
This in turn opens up the challenges of how to establish a foothold in hard-to-enter
markets and how to manage risk and talent across more complex and diverse
international operations.
I hope you find this paper interesting and useful. If you would like to discuss any
of the issues raised, please feel free to contact either me or my colleague, Chris Matten
(contact details on page 9).
Dominic Nixon
PwC (Singapore)
Foreword
services in Singapore. The paper is
a Singapore-focused companion to
4 PwC Project Blue
This transhipment business is a key foundation for the citys FS sector, with Singapore
operating as a major centre for trade finance, insurance and, through notable recent
developments, commodities trading.
The value of commodities trading in Singapore has more than doubled over the past
ten years to exceed a trillion dollars in 2011, with the number of people employed
increasing to 12,000.
2
In 2012, Trafigura, one of the worlds biggest commodity traders,
moved its main trading operations from Switzerland to Singapore, joining BHP Billiton
and Anglo American, which both have their main regional trading desks in the city.
Notable recent entrants include the Bank of China, which set up its first overseas
forfeiting and commodity finance unit in the city in 2011.
3
Singapores low tax rate is clearly an attraction. The availability of specialist expertise
in commodities, trade finance and related areas is also important. But competition for
talent is growing in a country with minimal unemployment and will need to be
managed to make sure it doesnt become a constraint on growth.
Reaching across SAAAME
The shift in the focus of global trade and investment is accelerating (see Figure 1
overleaf). Clients will be looking to their FS providers for acquisition support, trade
services, insurance and finance in local currencies as they seek to tap into Asias fastest
growing trade flows (see Figure 2 overleaf). Yet, while Singapore-based institutions
have developed good coverage across Asia, their presence in Africa, Latin America and
the Middle East is still limited.
Breaking into new markets
FS groups face challenges in expanding into new markets. There may be restrictions on
licences or foreign ownership in some markets. Even in open markets such as Brazil,
there may be little market share for sale, and it may be prohibitively expensive if it is.
So a lot of forward-looking financial institutions are going to be seeking out smaller
and less saturated markets. Trade flows in and out of Africa are growing rapidly, for
example. This suggests that participating in some key African markets early could
provide an important foundation for future growth.
Elsewhere, partnership is going to be crucial. And to attract the right partners, FS
groups need to think about what they can offer them that their competitors cannot.
This might be complementary international coverage, or access to a target customer
base in Asia.
Very few groups are going to be able to cover all the key markets. So, collaboration with
other financial institutions and businesses outside the sector, such as telecom firms, is
going to become more common in the future.
Gateway to Asia
Singapore is the second biggest
container port in the world, only
surpassed by Shanghai.
1
Straddling
the main trade route from China
to India, Singapore is the focal
point of a web of intra-regional
transport links, with goods being
shipped in from, and despatched
out to, smaller local ports around
the region.
PwC Project Blue 5
1 World Shipping Council Top 50 Container Ports
2010 and Straits Times, 08.01.11
2 Bloomberg, 02.05.12 and Financial Times, 22.05.12
3 China Daily, 22.09.11
CAGR 200210: 8.0%
Non-SAAAME
SAAAME
CAGR 200210: 19.4%
CAGR 200210: 13.6%
CAGR 200210: 12.9%
markets and should be considered in relation to the SAAAME region
N America
N America
5.4
4.5
17.7
8.8
19.2
8.7
10.0
8.0
8.6
18.8
13.6
12.6
14.7
12.8
13.4
17.5
17.2
16.0
21.2
29.9
24.1
13.7
11.3
5.4
16.8
21.6
24.1
15.1
13.5
12.6
16.4
17.9
19.0
22.5
15.7
9.1
12.0
19.3
25.6
24.5
15.2
18.9
12.9
11.7
16.4
18.0
27.8
18.7
20.2
Central America
Europe
CIS
South and
Central America
Africa
Asia
Middle East
O
R
I
G
I
N
DESTINATION
6 PwC Project Blue
PwC Project Blue 7
Managing more complex and
diverse operations
As they reach into new markets, FS
businesses will need to contend with a
ethics and cultures. It will be important
to develop the timely and reliable
management information and risk
management systems needed to operate
in new and unfamiliar markets.
with more extensive partnership
arrangements and be sufficiently agile to
respond quickly to unfamiliar market
conditions, distribution channels and
cultural preferences.
sufficient talent in emerging SAAAME
markets where suitably qualified and
experienced people may already be in
short supply. Short-term and reactive
approaches be this seeking to lure key
people from competitors or bringing in
large numbers of expatriate personnel
are likely to prove excessively costly
and may still fail to provide the people
needed to meet strategic objectives.
workforce plan, capable of anticipating
and meeting skills needs, could reduce
costs and allow FS organisations to
build a more sustainable platform for
business development.
look at how to gear their strategy and operations to the changing global economy:
more effectively?
globalised sector?
FS businesses in Singapore are
well placed to take advantage
of the rise in intra-SAAAME trade.
But they will need to broaden
their international reach if
they are to make the most of
these opportunities.
8 PwC Project Blue
PwC Project Blue 9
Project Blue, please contact either of
usual PwC contact.
Dominic Nixon
PwC (Singapore)
Tel:+65 6236 3188
Email: dominic.nixon@sg.pwc.com
Chris Matten
PwC (Singapore)
Tel:+65 6236 3878
Email: chris.matten@sg.pwc.com
10 PwC Project Blue
the changes ahead?
and governments.
P
r
o
j
e
c
t

B
l
u
e

F
r
a
m
e
w
o
r
k
Global instability
A
d
a
p
t
(SAAAME)
Economic strength
Trade
discrepancies
Ageing populations
change
Urbanisation
Global affluence
Talent
Capital balances
Resource allocation
Population
Belief structures
Changing customer
institutions
impacting FS
Digital and mobile
Food and water
Key commodities
capitalism
State intervention
strategies
and innovation
Ecosystems
Climate change and
sustainability
development banks
P
l
a
n
global economy
Project Blue
Capitalising on the
growth and global
emerging markets:
Financial services
in South Africa
2 PwC Project Blue
04 Foreword
05 Section one:
Gateway to Africa
07 Section two:
Developing a competitive pan-African presence
09 Making the most of the opportunity
Contents
PwC Project Blue 3
to help them judge the implications of these developments for their particular business,
The rise and interconnectivity of the emerging markets of South America, Asia,
Africa and the Middle East (together these regions form what PwC terms SAAAME)
is in many ways the most far-reaching of the developments facing the FS sector.
Trade within SAAAME is growing much faster than the flows between developed-to-
As one of the main trading and FS gateways in and out of Africa, South Africa is in an
ideal position to benefit from the growth in intra-SAAAME commerce. This includes
providing a launch pad for SAAAME companies looking to do business in Africa and
African companies seeking to extend their reach into other parts of SAAAME. As we
examine in this paper, the opportunity, and indeed, challenge, for South Africas FS
companies is how to provide the international presence and full service support that
would allow their clients to develop their business in new markets.
issues raised, please feel free to contact either me or my colleague Keith Ackerman
(please see contacts on page 10).
Tom Winterboer
PwC (South Africa)
Financial Services Leader for Southern Africa and Africa
Foreword
services in South Africa. The paper
is a South African-focused
companion to our global paper:
Capitalising on the rise and
interconnectivity of the emerging
markets, the latest viewpoint in our
4 PwC Project Blue
(CIS) are also excluded from SAAAME, as trade is largely internal, or with Europe.
With growth of more than 5% a year over the past decade, a population of over 800
million people and total purchasing power of $1.9 trillion,
1
Africa is emerging as one of
the most attractive frontiers for growth. According to the IMF, this strong economic
performance will continue over the next five years.
2
Demand for natural resources has fuelled a rapid increase in AfricaChina (growing
from $10.6 billion in 2001 to more than $160 billion in 2011) and AfricaIndia trade
(growing from $620 million in 2001 to $62 billion in 2011),
3
with China having
surpassed Europe and North America as Africas main trading partner.
4
While much of
the recent investment into Africa has centred on energy and mining, a second wave of
opportunities is opening up in areas ranging from high-speed rail links to fibre optics
and other technological developments.
Looking to the future, Africas demographic dividend the population is expected to
double to some two billion by 2045
5
is set to provide the spur for major industrial
investment and development. On the back of these developments, Africas urban
population is expected to grow by nearly 500 million by 2030,
6
creating further
opportunities for housing and infrastructure investment, and opening up an important
growth market for FS businesses. While other continents are ageing, Africas median
age will still be only 28 by 2050.
6
With so many people reaching this economically
active age, financial institutions will need to think about how their young customers
will want to interact with them and how to encourage them to save and invest, with
digital development likely to be crucial.
The intra-SAAAME opportunity
As intra-SAAAME commerce continues to grow (see Figure 1 overleaf), South Africa
has an opportunity to play an even bigger role as a bridgehead for international trade.
South Africa has large and well-developed banking (more than 40% of Africas assets
7
)
and insurance sectors (more than 70% of Africas premiums
8
). Its financial institutions
growing presence in other parts of the continent allows them to provide trade finance
and acquisition support for companies looking to invest and develop trade links in
Africa. In turn, their links with Chinese and Indian partners allow them to provide
advice and assistance for businesses seeking to move into other parts of SAAAME.
Section one:
Gateway to Africa
As growth and investment in
Africa continues to accelerate,
South Africa offers a portal through
which companies from Asia,
South America and the Middle East
can tap into opportunities across
the continent and African
companies can reach out to other
parts of SAAAME.
PwC Project Blue 5
1 RMB media release, 15.08.11
2 IMF World Economic Outlook April 2012
3 Economic Times, 17.03.12
4 BBC News, 21.05.12
5 Economist, 17.12.11
7 The Africa Report: Top 200 banks in Africa 2010
Notable investments in recent years have
included ICBCs acquisition of a 20%
stake in Standard Bank in 2008 South
Africas largest bank which has paved
the way for a number of joint ventures in
areas such as project finance.
9
This was
followed in 2009 by the signing of a
strategic partnership between China
Construction Bank and FirstRand, South
Africas third largest bank, which includes
providing advisory and structured
services for Chinese clients looking to
invest in Africa.
10
More recent
developments in ChinaAfrica FS links
include ABSAs launch of direct
yuan/rand trading in 2012.
11
6 PwC Project Blue
CAGR 200210: 8.0%
Non-SAAAME
SAAAME
CAGR 200210: 19.4%
CAGR 200210: 13.6%
CAGR 200210: 12.9%
Note: Russia and the Commonwealth of Independent States (CIS) have not been included in the SAAAME definition because trade is largely international and/or with
09 Standard Bank media release, 26.01.10
10 FirstRand media release, 30.07.09
11 Wall Street Journal, 04.05.12
Key strategic questions for South Africas financial institutions include where and
how to invest as they seek to bolster their support for growing intra-SAAAME trade.
At present, most insurers and banks are focusing on strengthening their presence
within Africa rather than reaching out beyond the continent.
12
Some organisations will look to greenfield development. They might also augment this
with acquisitions. But a physical presence may be costly and difficult to set up in some
countries.
It is therefore going to be important to make the most of technology in extending
customer access and providing end-to-end trade services. Digital FS allows financial
institutions to move into new markets without the need for branch or agency networks
on the ground. Kenyas highly successful M-Pesa model is now being replicated in other
parts of the continent, providing unbanked and remote customers with access to
payment and deposits via the mobile phone network.
Joint ventures and collaborations will also be important in extending and
strengthening services. Notable examples include the alliance between Nedbank and
Ecobank, which has created what the partners describe as the largest banking network
in Africa (1,500 branches in 35 countries
13
).
Some of the bigger players will be able to develop a pan-SAAAME presence to serve
clients across all sectors. While smaller FS businesses will not have the funds to match
this, they will have opportunities to specialise. This might be focusing on particular
countries, or targeting particular types of business.
Working closely with key clients and being able to follow them as they reach into new
markets will be critical in helping to judge what countries and sectors to focus on. FS
organisations can then work with their clients to help bridge any potential gaps in the
local financial infrastructure and overcome challenges in areas such as financing, risk
management, currency convertibility and repatriation of revenues.
Managing more complex and diverse operations
As they reach into new markets, FS businesses will need to contend with a more
complex risk profile. African countries have varied legal and regulatory frameworks,
political systems, business ethics and cultures. It will be important to develop the
timely and reliable management information and risk management systems needed to
Section two:
Developing a competitive pan-African presence
As South Africas FS businesses
seek to extend their footprint,
they will face new competitive and
management challenges.
PwC Project Blue 7
12 Maintaining stability amid uncertainty, South
Africa major banks analysis, published by
PwC on 14.03.12 and Maximising value from
todays opportunities, strategic and emerging
issues in Southern African insurance, published
by PwC on 03.06.12
13 Nedbank business banking website, 11.06.12
Operating models will need to reflect the
changing geographical focus of the
business. They will also need to deal with
more extensive partnership arrangements
and be sufficiently agile to respond
quickly to unfamiliar market conditions,
distribution channels and cultural
preferences.
The particular challenge for South
Africas FS businesses is whether applying
the new banking and insurance capital
demands might put them at a competitive
disadvantage. From a trade perspective,
this includes the significantly higher
capital loadings for letters of credit under
the incoming Basel III regulations.
14
It will
therefore be important to develop the
scale and automation with which to
compete.
The underlying challenge is talent. As
their businesses expand, FS organisations
will need international management
experience and be able to secure
already be in short supply.
8 PwC Project Blue
14 Basel III: A global regulatory framework for more
resilient banks and banking systems, June 2011
update, published by the Bank of International
Settlements
look at how to take advantage of these openings and provide the most effective support
for their clients:
If you cant develop a pan-African presence, what specific sectors or regions could
How can you use technology to provide customer access and trade services in
different parts of the continent?
and operating model (more joint ventures, longer lines of communication, etc.) as
How can you help to promote South Africa as the leading FS centre for Africa?
Making the most of the opportunity
South Africas position as a key
launch pad for intra-SAAAME
commerce will open up important
commercial opportunities for its
FS businesses. But to capitalise on
these opportunities, businesses will
need to look at how to create a
cost-effective and competitive
suite for Africa-wide services for
their clients.
PwC Project Blue 9
usual PwC contact.
10 PwC Project Blue
Tom Winterboer
Financial Services Leader for Southern
Africa and Africa
PwC (South Africa)
Tel: +27 (11) 797 5407
Email: tom.winterboer@za.pwc.com
Keith Ackerman
PwC (South Africa)
Tel: +27 (11) 797 5205
Email: keith.ackerman@za.pwc.com
developments for their particular business and look at how to take advantage of the
the changes ahead?
and governments.
P
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B
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F
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Global instability
A
d
a
p
t
(SAAAME)
Economic strength
Trade
discrepancies
Ageing populations
change
Urbanisation
Global affluence
Talent
Capital balances
Resource allocation
Population
Belief structures
Changing customer
institutions
impacting FS
Digital and mobile
Food and water
Key commodities
capitalism
State intervention
strategies
and innovation
Ecosystems
Climate change and
sustainability
development banks
P
l
a
n
Financial services are set for transformation as their role, industry structure and
commercial realities are disrupted by the major trends currently reshaping the global
economy. Many businesses will be unrecognisable by the end of the decade and the list of
market leaders could be very different as smart and agile players leapfrog slower moving
competitors. Will your business model still be relevant in the new global economy? How can
you take advantage of the shake-up ahead?
How Are You Operating in the
New Normal?
Future trends for the FS industry
and their impact on those within it
2 PwC How Are You Operating in the New Normal?
PwC How Are You Operating in the New Normal? 1
02 Introduction why the New Normal theme?
04 Foreword Sir Howard Davies
06 Global Instability the New Normal realities
06 Dealing with new regulation
10 Navigating the moral dimension
11 Dealing with external scrutiny and social media
11 Living in a Western no growth environment
12 Managing sovereign and currency risk
14 Planning for transformation the emerging picture
14 Rise and interconnectivity of the emerging markets
16 Demographic change
17 Social and behavioural change
18 Technological change
19 The war for natural resources
20 The rise of state-directed capitalism
22 Taking control of your future
Contents
The research underpinning this document is part of a framework we have
developed to help financial services businesses respond to the challenges that
face them. This research and new approach is called Project Blue.
Is there any hope that we will return to
some kind of pre-2007 state? We dont
think so and what is more we believe that
many of the key issues facing the FS
industry have probably changed forever.
We can debate this at our 2012
conference but essentially this is why
How Are You Operating in the New
Normal? seemed to us to be the right
theme for 2012.
FS organisations are made up of people;
main boards, senior management, risk
and compliance officers, tax directors and
many more. For each there is a similar
challenge; what role can I play in this
New Normal environment?
Introduction
Why the New Normal theme?
In 2012 the financial services industry is at a watershed. While most
organisations are finding it difficult to look beyond the current market
turmoil and new regulation, their survival and success will also depend on
being able to deal with the longer term trends that are transforming the
market and competitive landscape. These include the rise and
interconnectivity of the emerging markets and state-directed approaches to
economic development. Financial services businesses are also facing the
impact of new technology, demographics, social change and mounting
pressure on the worlds most critical natural resources (see Figure 1).
Global Instability the New Normal realities
Dealing with new
regulation
Navigating the moral
dimension
Dealing with
external scrutiny and
social media
Living in a Western
no growth environment
Managing Sovereign and
currency risk
T
a
c
t
i
c
a
l

M
a
n
a
g
e
m
e
n
t
Rise and
interconnectivity of
the emerging markets
Economic strength
Trade
discrepancies
Ageing populations
change
Urbanisation
Global affluence
Talent
Capital balances
Resource allocation
Population
Belief structures
Changing customer
Attitudes to financial institutions
impacting FS
Digital and mobile
The war for natural
resources
Oil, gas and fossil fuels
Food and water
Key commodities
capitalism
State intervention
strategies
R&D and innovation
Ecosystems
Climate change and
sustainability
S
t
r
a
t
e
g
i
c

A
l
i
g
n
m
e
n
t
Many industry
participants
(particularly in the
West) are focused on
tactically managing
the global instability
that is the New
Normal reality;
however, the market
is changing and
opportunity exists for
those who see it and can
strategically align with
the emerging picture.
Planning for transformation the emerging picture
Source: PwC
1
Project Blue analysis
1 PwC refers to the PwC network and/or one or
more of its member firms, each of which is a
separate legal entity.
We have worked closely with a small
team of main board directors and senior
management at our clients in developing
this agenda. One thing that has really
encouraged us in putting together the
conference agenda is the extremely
positive comments from our clients about
the direction we have chosen.
We have had comments like:
My department needs to develop new
skill sets
The board has a much greater fear of the
media and reputational risk
We need to push journalists and other
media outlets to report our tax perspectives
My department needs to be on top of
changes happening in world, tax and non
tax, and how they impact the group and
within that its tax affairs
The balance in the global economy has
shifted. For me and my department that is
going to mean a real change of focus to
different parts of the world. I would not rule
out that I and we have to relocate ourselves
We hope you enjoy this look at the world,
and find it a useful catalyst to developing
your own agenda for dealing with the
New Normal.
I first joined the Board of an FTSE 100
company at the end of 1989.
I have not kept copies of the agendas of
our meetings at that time, but I would
hazard a guess that the phrases social
media or risk managementdid not
feature prominently. Even the word
regulation would have been unusual.
Regulators were kept at a decent distance
and dealt with by lawyers, if absolutely
necessary. It was a good board, well
engaged with the corporate strategy, but
although the group was big and global, it
was rare for Directors to be troubled
between meetings.
Things are a little different today. The
time commitment of a main board
director is radically greater than it was 20
years ago, especially in financial services
businesses. As the Chair of two board risk
committees, I am in regular touch with
executives. Corporate governance
processes are far more open to public
scrutiny, and regulation cannot be
regarded as an optional extra for Boards
in any company.
For Directors, therefore, the New
Normal is both more burdensome and
more demanding. There is no cosy hiding
place on a Board these days. It is
potentially more interesting, too, though
only if one can prevent the hygiene
functions of the board audit, risk etc
crowding out strategy and the oversight
of business management. And that is a big
if. The hygiene work can never be safely
set aside for another day, so time must be
dedicated to strategy decisions over and
above the regular board agendas. It is
vital for the Board to keep an eye on the
longer term. Management can help by
preparing broad papers for Directors,
looking at the way big global trends may
affect the business. How, for example, will
demographic change impact the firm?
Many directors regret the changing
boardrom diet, and the increased focus on
compliance. I cannot say I am
unambiguously enthusiastic about it
myself, but I can see no prospect of a
return to a more leisured age. The
expectations of board members have been
increasing for some time, but a series of
dramatic events, beginning with the
collapse of Enron and continuing through
the financial crisis, have further ratcheted
up the pressure. Investors, regulators and
governments now expect Boards to have
far more detailed knowledge of the
companies they oversee. Those
expectations are unlikely to be
downgraded in the foreseeable future.
The changing role of the Board has
consequences for management, of course.
Those who report to the Board need to
understand its information needs, and
especially to appreciate the Boards
interest in the companys business ethics,
its approach to regulatory compliance,
and to social responsibility. Tax matters
come into the mix, too. Recent cases have
shown that it is now very risky for
companies to adopt a simplistic strategy
of tax minimisation within the letter of
the law. The reputational consequences of
being seen to push the envelope can be
severe, and the financial consequences
too, if the tax authorities are provoked to
make a retrospective change.
Foreword
by Sir Howard Davies, Professor of
Practice, Sciences Po, Paris. Former
Chairman FSA. Director, Morgan
Stanley and Prudential plc.
My impression is that Boards of Directors
are beginning to trace the outlines of the
New Normal and are responding to it
quickly. Western corporate governance
models have shown themselves in the
past to be able to adapt well to change,
once the nature of that change has been
understood. I hope the discussions at this
conference will help participants to
understand what the changes mean for
them, and how best to respond.
For Directors, therefore,
the New Normal is
both more burdensome
and more demanding...
It is vital for the Board
to keep an eye on the
longer term.
Management can help
by preparing broad
papers for Directors,
looking at the way big
global trends may affect
the business... I hope
the discussions at this
conference will help
participants to
understand what the
changes mean for
them, and how best to
respond.
Regulatory changes, fiscal pressures and
political and social unrest are creating an
uncertain business environment. This
instability makes the future of financial
services difficult to predict. It also
consumes a significant amount of
management time, necessitating a focus on
short-term optimisation and in some cases
survival, potentially at the expense of long-
term strategy and execution. This unstable
environment challenges traditional risk
methodologies and has the potential to
disrupt commercial models and
organisational structures. The immediate
challenge for business is how to anticipate
and adapt to global instability, rather than
simply react to events.
Dealing with new
regulation
Significant regulatory change will be a
way of life for the foreseeable future,
driven by the requirement to better
manage risk in the global financial
system, public outrage following the
financial crisis and the political agenda
this has engendered. The changes taking
place are creating greater uncertainty and
complexity now, with the prospect of
further industry restructuring and
unintended consequences ahead. While
the reforms are still in the early stages of
development, they will come to redefine
the role of financial institutions and with
it, their strategies and business models.
Its vital to look beyond compliance to
understand how these developments will
affect product and business portfolios,
how they will determine acceptable cost
structures of organisations and ultimately
how they will influence the fundamental
design of business models in the industry.
Global instability the New
Normal realities
Regulatory change
will challenge
businesses to identify
which areas of their
business offer the
greatest potential and
to identify the core
attributes on which to
establish sustainable
competitive
advantage.
While absolute amounts may have decreased,
not much has changed! Surplus and deficit
countries remain the same...
Figure 2: How trade and budget deficits moved 2008 2012
Budget Balance % of GDP
Countries 2008 2012 est.
UK -5.9 -7.7
Spain -3.0 -6.0
Germany 1.2 -1.3
Italy -3.6 -2.2
US -3.1 -7.6
Australia 0.4 -0.7
Canada 0.2 -3.5
Japan -3.4 -8.0
Russia 4.9 -1.0
Brazil n/a -2.5
India -1.6 -5.7
China 0.2 -2.1
Source: PwC analysis, 2008 data Forbes Special Report Best countries for business, March 2009
[www.forbes.com/lists/2009/6/], 2012 estimated data, The Economist Intelligence Unit as published in
the Economist 5 May 2012
Fiscal pressures
Fiscal pressures are further undermining
global financial stability by forcing some
economies to the brink of default,
threatening the solvency of weakened
banks and making capital markets more
volatile.
Four years after the start of the 2008
financial crisis many of the worlds
economies face ongoing budget deficit
pressures as Figure 2 shows, and many
countries have responded by significantly
increasing regulatory oversight as shown
in Figure 3 overleaf.
In addition to increased regulation, there
is renewed focus on the position
of the financial services industry and its
contribution to tax revenues. Both the
IMF and the EU Commission have
suggested that in some countries financial
services as a sector maybe relatively
undertaxed compared to other sectors of
the economy. In the EU at least this type
of argument has been used in part to
justify new taxes on financial services
such as a Tobin or Financial
Transactions Tax or possibly a Financial
Activities Tax.
Another aspect of the post crisis response
has been the notion that the financial
services sector should make a fair and
substantial contribution to pay for the
costs of rescuing the system from
collapse. This too has been used as a
justification for further tax measures
aimed at the financial sector, such as bank
levies that we now see in 8 countries.
There is little doubt that FS groups will be
expected to pay more in tax and that this
will create challenges including. How
do we lobby effectively? What is the Board
attitude towards mitigating the costs
and risks of new taxes? Should we do
more to publicise what is already an
exceptional contribution to tax revenues?
And ultimately At what point might we
want to consider relocating to get to a fairer
position for our stakeholders?
Figure 3: Regulation expenditure and employees in the UK and Hong Kong
500
400
300
200
100
0
2002 2003 2004 2005 2006 2007 2008 2009 2010
CAGR
Total 10%
200207 8%
200710 15%
Sources: FSA, OCC and HKMA websites; PwC analysis
Notes: The FSA is the Financial Services Authority, and the HKMA is the Hong Kong Monetary Authority, which are the main financial regulatory bodies for the UK and
Hong Kong respectively; *The FSAs 12-month reporting period begins in April of the year reported
United Kingdom: FSA* Hong Kong: HKMA
Total FSA regulation expenditure, millions, 20022010
FSA regulation employees, 20022010
Total HKMA regulation expenditure, US$ millions, 20042010
Financial Crisis
5,000
4,000
3,000
2,000
1,000
0
2002 2003 2004 2005 2006 2007 2008 2009 2010
CAGR
Total 7%
200207 3%
200710 14%
1000
800
600
400
200
0
2003
N/A
2004 2005 2006 2007 2008 2009 2010
CAGR
Total 6%
200407 4%
200710 6%
CAGR
Total 3%
200307 2%
200710 3%
Financial Crisis
750
600
450
300
150
0
2003 2004 2005 2006 2007 2008 2009 2010
HKMA regulation employees, 20032010
The intensity of regulatory oversight has increased as a result of the
recent crisis.
Political and social unrest
The world has become increasingly
unstable in recent years (see Figure 4).
Factors ranging from corruption and
repression to fiscal austerity,
unemployment and rising food prices are
igniting ever-more frequent social and
political unrest. In democratic elections
we are beginning to see a response to this
in part through the election of parties
who represent more extreme solutions
to the problems we face. The recent
election in France and Greece are a
reflection of this trend.
A further spur for change is the advent
of social media, which is making it easier
to communicate information, circumvent
censorship and coordinate action. Even
corporate entities have started to find
themselves at the centre of increasingly
effective social media campaigns.
It is clear that FS groups and their
boards need to take into account both
the economic and political stability of
countries during what seems to be a
period of heightened susceptibility to
outright political turmoil. Considerations
could include: Do we have contingency
plans?, Are we monitoring key countries
and our exposures to them? and
What impact does this have on our
investment plans?
Governments are implementing austerity
measures and new taxes, which are likely to have
a substantial impact on growth and profitability
within the financial services sector.
Figure 4: A more unstable world Political instability index,*by country,
2007 and 200910
10
9
8
7
6
5
4
3
2
1
0
0 20 40
Proportion of countries, globally
60 80 100
20092010 2007
Sources: Economist Intelligence Unit ViewsWire; PwC analysis
Note: Index measured for 164 countries; *The political instability index represents the level of political instability
in a country, with a greater value indicating that the country has greater instability. The chart shows the global
change in political instability between 2007 and 2009/10. It plots the index against the proportion of countries
with that score. For example, in 2007, around 45% of countries had a score greater than 5 while in 2009/10,
around 75% did, indicating greater levels of political instability in 2009/10
L
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Increase in political
instability
Over the past three years the world has become
increasingly unstable.
Navigating the moral
dimension
In many parts of the world the financial
services industry finds itself at the centre
of a moral debate which while not
entirely new has reached a level of
intensity that we have not seen before
and which definitely cannot be ignored.
This moral dimension has many facets.
As one senior regulator put it some
financial activities which proliferated over
the last ten years were socially useless
and some parts of the system were
swollen beyond their optimal size
2
.
Later on, the speaker said that he wished
he had used the phrase economically
useless
2
. Whatever the words, the
message is clear: we should debate the
social utility of financial activity.
Other facets of this moral debate include
the notion of pay back. The EU
Commission in September 2011 said
The financial sector has played a major
role in causing the economic crisis whilst
governments and European citizens at
large have borne the cost. There is a
strong consensus within Europe and
internationally that the financial sector
should contribute more fairly given the
costs of dealing with the crisis and the
current under-taxation of the sector
3
.
The EU Commission went on to say that
financial institutions should make a fair
contribution to covering the costs of the
recent crisis
3
.
2 Speech by Adair Turner, Chairman, FSA, the
City Banquet, The Mansion House, London
3 EU Commission: Explanatory Memorandum,
proposal for a Council Directive on a common
system of financial transaction tax and amending
Directive 2008/7/EC
These comments from the European
Commission echoed earlier comments
from the G20 that financial services
should make a fair and substantial
contribution to help pay for the crisis.
Most financial services organisations
want to project themselves as being
responsible citizens
2
. The challenge for
main boards and senior management
teams is in working out what these
debates mean for the organisation and
importantly, where it wants to position
itself given that there is a spectrum of
possible positions it could take.
In many ways this is one of the most
challenging parts of running a modern
financial services organisation. And as
recent high profile examples have shown
getting this wrong can have enormous
reputational impacts and even career
impact for those affected. Difficult though
the terrain may be, this is an issue that
teams cannot duck.
Dealing with external scrutiny
and social media
Ten years ago if you had suggested that
should be concerning themselves with
tweeting it would probably have been
career limiting!
But as a number of FS organisations have
found out new forms of social media such
as Twitter can be used to create enormous
and often unhelpful pressure on an
organisation. Equally these media can be
used in a positive way to get the
organisations point of view across.
In this digital era there is also another fact
of life which seems to hold true: if you
have some data that you wish to keep
under wraps and is embarrassing for the
organisation, there is a high probability
that it will emerge into the public domain,
often at bewildering speed.
Journalists and others are becoming
increasingly adept at understanding the
real issues, their wider impact and also
how to achieve maximum embarrassment
for the organisation.
Aspects of this new era of information
sharing include the possibility that CEOs
or other board members may at any time
have to deal with questions from well-
informed journalists about such matters
as how much tax they pay, why more
profits are not being reported in a
particular country or even, as recently,
whether it is right not to pay VAT in a
particular country when services are
being supplied via the internet.
FS organisations need to develop a
strategy for dealing with these new
challenges. Key questions to address
include: How do we avoid inappropriate
positions and comments in the first place?,
How can we make sure the whole
organisation knows where we stand on
particular issues and can articulate it
safely?, How does the main board
communicate our position?, and if a
media firestorm emerges: Do we have a
plan to deal with it and how do we make the
key decisions in responding?.
Living in a Western no
growth environment
For many organisations in the West or for
organisations with operations in Western
countries, a key issue is how to respond to
the challenge of running a business in a
low or no growth economic environment.
There is probably no organisation within
the FS industry that does not have cost
reduction on its corporate agenda in an
effort to improve stakeholder returns,
and pressure is intense to identify ways in
which the organisation can run itself
more efficiently, using fewer people,
and more technology where possible to
drive efficiencies. Against this, there is
significant upward cost pressure
including the external and internal cost
involved just to respond to the wave of
new regulation and tax rules.
Couple this with new capital regulation
which requires FS organisations to
optimize their capital and free up
resources by reducing costs and one can
rapidly come to conclusion that these
are almost impossible to reconcile.
The question for boards and senior
management is how to achieve cost
containment and drive efficiencies while
responding to regulatory and capital
needs and focus on growing the top line
whilst putting the customer at the centre
of the business. Part of this is the
approach to tax mitigation.
Managing sovereign and
currency risk
Eight years ago, had you suggested that
the eighth largest economy in the world
might have to be considered as a default
risk, you might have been met with
incredulous looks.
FS groups have for some time had to
deal with the possibility that at any one
time particular countries may face
solvency and possible default risk. Such
occurrences while serious could usually
be navigated so that ultimately they did
not threaten the organisation.
Today this is not the case. FS and non-FS
organisations (and even whole countries)
have to grapple with scenario planning
Figure 5: Global current account balances, US$ billions, 19902010
n Rest of world n Japan n China n OPEC n United States n Other OECD
Sources: The Turner Review, FSA, 2009; IMF
Notes: OPEC is the Organization of the Petroleum Exporting Countries and members are listed in the appendix; OECD is the Organisation for Economic Co-operation
and Development; for OECD countries see appendix; current account balance is defined by the IMF as the net transactions in all items other than the financial and
capital items; the major classifications are goods and services, income and current transfers
1,200
900
600
300
0
-300
-600
-900
-1,200
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Current account surpluses in China, Japan and the Middle East alongside
deficits in the United States and Eurozone led to macro-imbalances in the
global economy.
and developing defensive strategies to
cope with the possible failure of
systemically important economies or even
currency unions.
Those organisations that have undertaken
such scenario planning have invariably
found it very challenging, requiring them
to think the unthinkable. But hard
though it may be this is critical and can
lead to sensible measures to limit
downside risks and exposures, for
example by taking decisions to limit
exposures or activities in certain
sovereigns, regions or counterparties.
Figures 5 and 6 illustrate the growing
imbalances in the Global and Eurozone
economies.
Figure 6: Eurozone current account balances, US$ billions, 19952010
n Other Eurozone n Netherlands n Germany n Italy n Spain n France n Greece n Portugal
Sources: The Turner Review, FSA, 2009; IMF World Economic Outlook, September 2011
Notes: Current account balance is the net transactions in all items other than the financial and capital items; the major classifications are goods and services, income
and current transfers
400
300
200
100
0
-100
-200
-300
-400
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Across the Eurozone, the gap between surplus countries (Germany and the
Netherlands) and deficit countries (including Italy, Spain, France and
Greece) grew.
Businesses will need to consider how heightened
financial and political instability could affect
their risk profile, especially investments and
operations in countries and commercial sectors
that are potentially vulnerable to protest
and unrest.
Rise and
emerging markets
The focus of global growth has shifted.
Western economic dominance is a
relatively recent phenomenon and the
developments we see are essentially a
rebalancing of the global economies.
While many commentators are focusing
their attention on what are considered to
be the largest and fastest growing BRIC
markets (Brazil, Russia, India and China),
the commercial potential is far greater
than these countries alone.
Along with the growth and size of the
emerging markets, its important to
appreciate the interconnectivity of the
trade and investment flows between
them, which are growing much faster
than the traditional routes from
developed-to-emerging and developed-to-
developed countries (see Figure 7).
Indeed, South America, Africa, Asia and
the Middle East (SAAAME) are emerging
as an increasingly interconnected trading
zone, which, in physical terms at least
effectively bypasses the West.
Planning for transformation
the emerging picture
Figure 7: World trade flows, SAAAME and non-SAAAME, US$ trillions, 2010
CAGR 200210: 8.0%
Non-SAAAME
SAAAME
CAGR 200210: 19.4%
CAGR 200210: 13.6%
CAGR 200210: 12.9%
Sources: WTO; PwC analysis
South America, Africa, Asia and the Middle East (SAAAME) are emerging as
an increasingly important network for international trade.
For both Western and SAAME financial
institutions, key questions could include:
What are the risks inherent in each
country?, How do we structure our
investment and operations for maximum
efficiency? and Have we got enough
certainty of the tax position in emerging
markets, particularly as local tax
authorities are rapidly developing their
thinking?
The SAAAME region covers a significant
proportion of the worlds land surface
and has access to many of its natural
resources. It also has substantial
manufacturing capabilities and access
to the labour to support this, large and
growing consumer markets, and a
sizeable pool of both educational
establishments and well-educated
professionals. Its significant liquid
investable capital includes a growing
(albeit slowly) proportion of global
assets under management (AUM) and
nearly 80% of overall sovereign wealth
fund AUM.
4
To make the most of the opportunities for
growth, businesses will need to contend
with rising consumer expectations in
these markets, a more complex risk
environment and the growing battle for
talent. As an increasing amount of
emerging-to-emerging market commerce
misses out the West altogether, Western
institutions also need to find ways to tap
into business flows they may never
physically see.
Success will depend on being able to
develop organisational skills to keep pace
with the growth of SAAAME markets, to
build the customer-centric model needed
to keep pace with consumer expectations,
and to construct business models and
partnerships that are relevant to the
markets served. Businesses need to work
out how to attract and retain scarce talent
when competitors and companies from
other sectors are looking to lure the best
people away.
The opportunities are evident, but
regulation and local competition are
making it increasingly difficult to
penetrate SAAAME markets. Success
will depend on being able to deliver
products and capabilities that domestic
players cannot do and being sensitive
to the realities of doing business in
these countries.
Our latest research
anticipates that
domestic credit in
China could overtake
the US by 2023 and
India will become the
third largest domestic
banking sector after
China and the US
by 2050.
5
4 Sovereign Wealth Fund Institute, 2010 and
PwC analysis
5 PwC, Banking in 2050, 2011 update
Demographic change
Customers and their demands are
changing. Population growth and decline
in different countries, combined with an
ageing population around the world, will
create a markedly different consumer
market by 2050.
In some European countries, the working
population will decline by more than
10%
6
and this gap will need to be filled by
immigration, later retirements and
productivity gains, which could be
accelerated by growth of the digital
machine-to-machine economy.
While much has been made of the impact
of ageing in the Western world, the most
dramatic changes will be seen in
emerging markets as birth rates and life
expectancy around the world begin to
converge (see Figure 8).
Businesses will need to anticipate
demographic developments and bring
products and services into line with the
changing customer base in the markets
they serve.
As people live longer and state support
declines, the competitive frontline is likely
to shift from lending towards helping
people to fund and manage their
retirements. Reputation and trust will be
crucial in sustaining market share in an
increasingly empowered and
knowledgeable retirement market.
Many groups have contemplated the
impact of demographic changes but many
have found it a challenging subject. For
each operational market a view will be
needed on Do we understand the way in
which demographic change will affect our
product mix?, Are we aligned with the
likely development of new or hybrid
products in these markets and their tax
consequences? and Are we influencing the
debate on the development of responses to
demographic change?
Figure 8: Asia, total population against mortality and fertility rates, 20002050
6,000 24
20
16
12
8
4
0
5,000
4,000
3,000
2,000
1,000
0
n Population Fertility rate Mortality rate
Sources: United Nations Population Division
Notes: Mortality and fertility rates are the number of births and deaths per 1,000 population; population size
based on UN population figures for 200010 and medium variant projections for 201550; five-year population
figures calculated using average across the five years; population forecast by UN using estimated population
at 1 July 2010 and assumptions for mortality, fertility and net migration rates
Population size,
five-year average,
millions Forecast
Rate,
per 1,000
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Population CAGR 20102050: 0.53% Population CAGR
20002010: 1.14%
In Asia, population growth is forecast to slow as
mortality and fertility rates converge.
The number of people
aged over 65 in Japan,
Italy and Spain is
forecast to be 60% of
the total working age
population (1564)
by 2050.
7
6 United Nations Department of Economic
and Social Affairs, August 2011
7 World Population Prospects The 2010
Revision, Volume I: Comprehensive Tables,
United Nations, 2011; PwC analysis
Social and
behavioural change
Social and behavioural change is
occurring at a faster pace than at any time
in history.
Consumers are more informed and
empowered than ever before, and old
notions of value and loyalty are breaking
down as digital technology allows them
to both compare value and expand their
choices. Continuing digital
transformation is also changing the way
people interact, share ideas and access
products and services, with social
networking now making up one in six
minutes of time spent online.
8
In emerging markets, increasing affluence
and urbanisation are creating new and
expanding markets for financial
institutions. City dwellers average wealth
and demand for financial products and
services are generally much higher than
their rural counterparts. Indeed, some
observers now see the real distinction in
the financial services sector not as
rather city and rural areas (see Figure 9).
How companies respond to these social
and behavioural changes could define
their market position for decades to come,
providing a once-in-a-generation
opportunity to put clear distance between
them and their rivals if they can align
their strategies with the emerging
position and a mortal threat if they dont.
The key differentiator will be the ability to
anticipate where the market is going on
the back of these changes and get in
ahead of the competition. Experience in
the travel and music industries suggests
that companies that are slow to grasp the
implications of change could quickly be
marginalised.
The global middle class is forecast to grow by
around 180% between 2010 and 2040. Asia is
expected to replace Europe as the region with
the highest proportion of the global middle class
by 2015.
Figure 9: Forecast size of middle class, by region, millions, 20102050
2010 2015 2020 2025 2030 2035 2040 2045 2050
CAGR
201040: 4050:
Overall 3.5% -0.7%
n Sub-Saharan 5.9% 4.2%
Africa
n Middle East 3.5% 1.8%
& North Africa
n Central & 2.3% 1.0%
South America
n North America -0.5% -1.2%
n Asia Pacific 6.3% -1.1%
n Europe -0.3% -1.9%
Sources: European Environment Agency; OECD Development Centre; PwC analysis
Notes: Data is forecast and was last uploaded by the European Environment Agency on 29 November 2010;
middle class is defined as households with daily expenditures between USD10 and USD100 per person in
purchasing power parity terms
6,000
5,000
4,000
3,000
2,000
1,000
0
Over the next 30 years the urban population is
forecast to grow by almost 1.8 billion people. Most
of this urbanisation is expected in Asia and Africa,
increasing the worlds urban population to 5.6
billion
9
and creating one of the most important
competitive battlegrounds for financial services
businesses.
8 ComScore, July 2011
Technological change
Technology has always shaped society
and commerce in unpredictable ways,
changing customer behaviour, spawning
new enterprises and wiping out existing
businesses that are unable to keep pace.
As the speed of technological
development accelerates, the risk of
falling behind becomes more acute.
Breakthroughs in biotechnology,
nanotechnology and other frontiers of
research and development (R&D) are
increasing productive potential and
are opening up new investment
opportunities. Whole new industries are
being created, which could have a
significant impact on the size and shape
of the worlds manufacturing, and high-
tech sectors and the companies that
operate within them. The key question for
business is: Are you ready and able to
support and capitalise on these
developments? These emerging
technologies and the industries they
generate carry a new set of risks, which
need to be fully understood to make the
most of the financing and insurance
opportunities.
In the digital world, the internet,
mobile phones, data analytics and cloud
computing are well established. Yet, many
companies across all sectors are still
grappling with how these developments
will affect consumer expectations, the
way they will need to interact with their
customers and the underlying business
models that support this.
While the transformational impact of
digital technology has been slower to
reach financial services than other fields
of commerce, the sector has finally
reached a tipping point. Enhanced digital
interaction could offer businesses the
opportunity to engage more closely with
its customers and increase wallet share.
At the same time, digital transformation
could be highly disruptive, allowing new
entrants to break into the market, pick off
the most valuable revenue opportunities
and seize control of customer
relationships. In a digital world, it will be
harder for businesses to differentiate
themselves, especially if service
expectations are set by non-financial
competitors and the product on offer is
not physical. The ease of switching
afforded by digital technology could also
drive down margins and profits and some
organisations could be strained to
breaking point.
There are clearly significant issues that
flow from this including: Where do
we best serve and contract with our
customers?, How and where do we
recognise brand value?, Who owns the
customer relationships and where? and if
services are being supplied across borders
there are likely to be significant indirect
tax issues.
Figure 10: Income split of those who currently use a mobile to purchase
financial services, all geographies*, 2011
Sources: PwC Digital Tipping Point Survey 2011; (Based on approximately 3,000 responses) PwC analysis
Notes: *Geographies surveyed were United Kingdom, United Arab Emirates, Poland, Mexico, India,
Hong Kong, France, China and Canada
Proportion of
responses, %
100
80
60
40
20
0
Mass Market Savings >25,000 Savings >50,000
More than 40% of people using social network
sites in the US are interested in interacting with
financial services firms via Facebook and
MySpace.
10
The demand for branchless banking is significant in all segments of the
population, regardless of geography.
10 The Social Tools Consumers Want From Their
Favourite Brands, Forrester, 16 April 2009
The war for natural
resources
The expanding size and prosperity of
the global population is leading to
rapidly rising consumption and putting
unsustainable pressures on the worlds
most critical natural resources.
Even basic commodities such as water
are now in increasingly short supply,
providing the spur for the development
of new markets, technologies and
investments on the one side and the
potential for unrest, commercial
disruption and protectionist behaviour
on the other. The growing shortages of
resources will be exacerbated by climate
change, heightening catastrophe risk
and putting further pressure on land,
water supplies and food production (see
Figure 11).
Water stress is often localised. For example, within the high population
areas of the North China Plain, aquifers are reported to have depleted
significantly. The North China Plain is home to around 10% of Chinas
population and includes the cities of Beijing and Tianjin.
11
Higher growth
scenarios
Figure 11: Possible climate impact of a rise in global temperatures (Stern Review)
Temperature rise 1C 2C 3C 4C 5C
Source: Stern Review, 2006
Small glaciers in the
Andes disappear
completely, threatening
water supplies for 50
million people
Water
Potentially 2030%
decrease in water
availability in some
vulnerable regions
14 billion more
people suffer water
shortages, while 15
billion gain water,
which may increase
flood risk
Potentially 3050%
decrease in water
availability in
Southern Africa and
Mediterranean
Possible disappearance
of large glaciers in
Himalayas, affecting
one-quarter of Chinas
population and
hundreds of millions
in India
Modest increases in
cereal yields in
temperate regions
Food
Health
Sharp declines in crop
yield in tropical regions
(510% in Africa)
150550 additional
millions at risk of
hunger (if carbon
fertilisation weak)
Agricultural yields
decline by 1535%
in Africa
Reduction in winter
mortality in higher
latitudes
4060 million more
people exposed to
malaria in Africa
13 million more
people die from
malnutrition (if carbon
fertilisation weak)
Up to 80 million more people exposed to malaria
in Africa
Land
Permafrost thawing
damages buildings
and roads in parts of
Canada and Russia
Up to 10 million more
people affected by
year
1170 million more
people affected by
year
7300 million more
people affected by
year
Sea level rise threatens
small islands, low-lying
coastal areas (e.g.
Florida) and major
world cities such as
New York and London
Environment/
Ecosystems
80% bleaching of
coral reefs, including
Great Barrier Reef
High risk of extinction
of Arctic species,
including polar bear
and caribou
2050% of species
facing extinction
(according to one
estimate)
Loss of around half Arctic tundra
Abrupt and
large-scale
impacts
Atlantic thermohaline
circulation starts to
weaken
Potential for Greenland ice sheet to begin melting irreversibly, accelerating sea level rise and committing world
to an eventual 7 m sea level rise
Rising risk of abrupt changes to atmospheric circulations, e.g. The monsoon
Rising risk of collapse of West Antarctic Ice Sheet and Atlantic thermohaline circulation
Continued increase in
ocean acidity seriously
disrupting marine
ecosystems and
possibly fish stocks
Low growth
scenario
The impact of global temperature rises could be extreme.
11 World Bank China Agenda for Water Sector Strategy for North China, April 2001
The war for natural resources is likely
to play out on multiple fronts. Examples
include the response to the increase in
water withdrawals, which are forecast
to rise dramatically. Food production will
naturally gravitate to more plentiful
sources of water, which may be outside a
countrys border and therefore extend the
supply chains of and potential cost of
food production.
In turn, demand for energy is forecast to
increase by around a third by 2030.
12
While alternative energy sources will
gain market share, the overall global
demand for oil, gas and coal is forecast
to remain strong, particularly as
technology transforms currently
uneconomic sources of oil.
Globalisation is creating global supply
chains that are tying countries together
through trade as never before. China
and other manufacturing-based
economies depend on emerging markets
in Africa and South America to supply
their industries. Conducting business
in some of these countries is likely to
require new investment models and
fresh approaches to understanding
and mitigating risk.
Economic disparities are likely to spur
short-term responses in production and
consumption that undermine long-term
sustainability. Shortages could cause
social and political instability, geopolitical
conflict and irreparable environmental
damage.
The war for natural resources and the
impact of climate change are phenomena
that will have a fundamental impact on
the way people live and companies do
business. Its likely to become one of the
main, if not the key driver of, government
policies. It will also open up new markets
and business models for organisations
that both understand the changing
dynamics of supply and demand, and
know how to mitigate the risks.
As environmental risk increasingly
impinges on their customers (examples
include higher resource costs, pollution
damage and changes in productive land),
financial services businesses will need
to assess the impact on their loan book,
risk profile and policy, pricing and
investments.
Issues could include: How will the knock-
on impacts of this work through to product
design and mix? and What will the
impacts be on the tax position and on the
skills we need in the tax department?
The rise of state-directed
capitalism
The pendulum swing away from the free
market towards state-directed capitalism
in the wake of the financial crisis is
manifesting itself in governments
increasing direction of financial services
and the wider economy. Governments are
also becoming more competitive in the
way they vie with other states for talent,
investment and the primacy of key
financial, industrial and other productive
centres in the countries they govern.
Payback for support
Western governments have spent
considerable sums to stabilise their
financial systems (see Figure 12). Greater
state intervention and pressure on
financial institutions to support the real
economy (e.g. through increased bank
lending to small businesses) are likely to
be a key part of the payback required.
Global scientific consensus is that temperatures
could rise between 2C and 5C by the end of the
21st century.
12 International Energy Agency International Energy
Outlook 2011
Pledged and
utilised support,
% of GDP, 2009
14
12
10
8
6
4
2
0
Advanced
G20
economies
Emerging
G20
economies
Average
G20
economies
UK US
Figure 12: Costs to governments of supporting the financial sector,
percentage of GDP, as at December 2009
n Utilised support n Additional pledged support
Sources: A fair and substantial contribution by the financial sector, IMF, June 2010
Notes: Data based on International Monetary Fund (IMF) survey sent to all G-20 members in December 2009
The high public cost prompts many Western
governments to take a more active role.
PPP (PublicPrivate
Partnerships)
investment around the
world rose from US$50
billion in 2002 to
US$170 billion in
2010.
13
Greater intervention is the payback
for the bailouts
Profitability and growth are likely to be
more dependent on the fortunes of the
real economy than before the financial
crisis, which will in turn be more closely
tied to government policies.
As such, it will be important to work with
industry and consumer groups to help
influence and shape government policies.
It will also be important to develop a
strong relationship with government to
make sure business strategy anticipates
and is aligned to government priorities
and investment plans. Globalisation is
intensifying the competition between
countries and cities. Local leaders are
ever more aware of their sources of
competitive advantage and how to attract
the businesses, facilitate investment in
infrastructure and the secure supply
chains needed to make the most of this
potential. As cities expand and develop,
local and central government face the
challenges of how to attract the necessary
investment in housing and infrastructure
while balancing the inevitable strains on
natural resources.
Many governments, particularly in the
SAAAME states, realise that the private
sector cannot finance and deliver
important national economic and social
priorities on its own. As a result, were
likely to see an increase in PublicPrivate
Partnerships (PPP), particularly in
emerging markets, as well as government-
to-government agreements to mitigate
sovereign risks, mobilise sovereign
capital and piece together industry
supply chains.
13 World Bank, Infrastructure Database, data
extracted from database on 30 November 2011;
PwC analysis
Being able to see into the future and
judge the implications will give businesses
an invaluable edge. Project Blue is
designed to provide you with a
framework for organising your views of
the global developments ahead, the
implications for your business and your
resulting vision for the future.
Coming through stronger
As weve developed Project Blue, weve
spoken with business leaders around the
world to assess how these drivers will
affect them. Drawing on these discussions
and our research into the impact of the
main forces of change, the graphic (see
Figure 13) highlights the key areas that
boards will need to assess and address as
they look to sustain and sharpen
competitive relevance.
Taking control of your future
Disruption to long-established business models is the one clear certainty
that the future holds. The key question is whether the various forces
shaping the sector present an opportunity or a threat to your business.
Sources: PwC analysis
Shaping the future
Economic rebalancing
Industry structure
Fiscal and monetary policy
Regulation
Social policy
Investor expectations
Community engagement
Rethinking the strategy
New stakeholder objectives
Short-term adaptation
Alignment to global trends
Determining risk appetite
Redefining performance targets
Portfolio rebalancing
Relative competitive advantage
Figure 13: The CEO agenda
1 2
Governance
Board composition
and qualifications
Executive remuneration
Regulatory compliance
Risk management
Financial reporting
and controls
Target operating model
Legal and physical
structure
Tax and capital
efficiency
Allowable cost structure
Technology
Partnership structure
People and resources
Competitive advantage
Seeing the future
War for talent
Constant reinvention
Product innovation
Strategic agility
Operational alignment
Project Blue assesses the impact of these changes
on all aspects of the leadership agenda.
3
Shaping the future
Its vital that your business plays an active
part in the debate over the changes
ahead. This includes engaging as closely
as possible with clients, regulators,
governments, consumer and community
groups, and other key stakeholders to
make sure the full impact is understood
and help get important messages across to
policymakers ultimately driving an
improved financial system for all.
The pressing challenge for all
organisations is how to balance the
tactical management effort and actions
needed to deal with the current instability
with the longer term realignment of
strategy, operations and business focus
demanded by the drivers identified in
Project Blue. Businesses can gain
significant market share if they adapt to
the reforms and changing commercial
realities faster than their competitors.
Reinventing your organisation
At the heart of sustainable commercial
models are the organisational capabilities
and flexibility needed to identify and
respond proactively to changing customer
and market demands. Operations will
need to become more agile to
accommodate changing conditions.
Risk and finance teams also need to
become more proactive in managing a
rapidly changing and often uncertain
risk and regulatory environment.
Organisational and people strategies
will be key differentiators in determining
which businesses are most relevant
going forward.
As the CEO agenda highlights, the
underlying considerations include the
kind of leadership required in this
complex and uncertain environment,
how the risk profile is likely to change,
and what kind of governance and
reporting systems will be required to
plot a successful course through the
changes ahead.
The businesses that come out on top will
have a superior capacity for innovation
and constant reinvention, agile enough
to quickly capitalise on emerging
opportunities and with the strategic
approach to talent needed to make sure
that the right people are available in the
right places at the right time. Businesses
that are constantly scrambling to keep
pace with unfolding events, are likely
to find themselves on the back foot
competitively and risk losing out.
A reshaped sector
Dealing with the mega-trends highlighted
in Project Blue cant be put off while
contending with seemingly more
immediate concerns. Some developments
such as the increase in regulation, state
intervention and possible protectionism
that form part of the rise of state-directed
capitalism are already manifesting
themselves. Others, such as the increasing
ageing and urbanisation of emerging
market populations and their impact on
product and growth strategies are moving
rapidly onto the horizon. How you plan
and invest now will determine your future
chances of success.
So how will strategies change and what
kind of financial institutions will emerge
from the shake-up ahead?
Many emerging markets remain relatively
under-penetrated and have considerable
room for further development in both the
size and sophistication of the financial
services sector. Traditional models are
still viable in these markets, but new
partnership models with
telecommunications and retail companies
to reach the unbanked will continue to
grow. Businesses will need to keep pace
with steadily increasing customer
expectations and associated changes in
the regulation, complexity and risk profile
of operations. The pressing priorities also
include the need to engage in the war for
talent to make sure the organisation can
develop the right skills to meet the
challenges and seize the opportunities in
its markets.
The constraints on funding and domestic
growth will make it increasingly difficult
to be all things to all people (ubiquity).
Successful institutions are therefore likely
to adopt a more ruthless focus on their
core relationships and sources of value
(precision). Were already seeing sharper
customer segmentation, greater discipline
in deploying resources and withdrawal
from markets that offer little prospect of
delivering an economic return. This is
underpinned by a better understanding of
component costs and real returns.
The key considerations are: What exactly
are my core sources of value, who will be my
most important customers and who will be
my main competitors in ten years from
now? in short, continually re-
evaluating what needs to be done to
ensure the business model remains
relevant.
Were working with a range of financial services organisations to facilitate discussions on the impact of the mega-
trends shaping their industry and where and how they can compete most effectively. If youd like to discuss any of
the issues raised in this document, please contact me, or your usual PwC contact.
Making sense of an
uncertain future
Peter Barrow
Global Tax Leader, Insurance
PwC (UK)
Tel:+44 (0)20 7804 2062
Email: peter.barrow@uk.pwc.com
David Newton
Global Financial Services Tax Leader
PwC (UK)
Tel: +44 (0) 20 7804 2039
Email: david.newton@uk.pwc.com
Nigel Vooght
PwC (UK)
Tel: +44 (0) 20 7213 3960
Barry Benjamin
US and Global Leader, Asset Management
PwC (US)
Tel: +1 410 659 3400
Email: barry.p.benjamin@us.pwc.com
David Law
Global Leader, Insurance
PwC (UK)
Tel: +44 (0)7710 173 556
Email: david.law@uk.pwc.com
Kenneth Shives
Central Cluster Tax Leader, Banking and
Capital Markets
PwC (France)
Tel:+33 1 56 57 83 84
Email: kenneth.shives@us.pwc.com
Jonathan Howe
Financial Services Tax Partner, Insurance
PwC (UK)
+44 (0)20 7212 5507
jonathan.p.howe@uk.pwc.com
Dr. Hans-Ulrich Lauermann
Global Tax Leader, Banking and Capital Markets
PwC (Germany)
Tel: +49 69 9585 6174
Email: hansulrich.lauermann@de.pwc.com
Robert P. Sullivan
Global Banking and Capital Markets Leader
PwC (US)
Tel: +1 646 471 8388
Email: robert.p.sullivan@us.pwc.com
William Taggart
Global and US Tax Leader, Asset Management
PwC (US)
Tel:+1 646 471 2780
Email: william.taggart@us.pwc.com
Global FS tax leaders Global FS Industry leaders
Andrew Dawson
Author and Global Leader for Project Blue
PwC (UK)
Tel: +44 (0) 20 7804 0130
Project Blue
information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or
completeness of the information contained in this publication, and, to the extent permitted by law, PwC does do not accept or assume any liability, responsibility or duty
of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
For more information on Project Blue, or other Global Financial Services programmes, please contact ine Bryn, Global Financial Services Marketing leader, PwC (UK)
2012 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see
www.pwc.com/structure for further details.

How Are You Operating
in the New Normal?
Perspectives for the Asset
Management Industry

From the Global FS Tax Leaders Meeting 2012

Glob
al
Fina
2

PwC How are you Operating in the New Normal? Perspectives for the Asset Management Industry June 2012
3

Executive Summary and Context
The New Normal and Project Blue
Whats Important and Whats Not: the Conference Findings
The top three issues identified by you
Taking Control of the Tax Agenda - establishing and effec-
tively communicating a tax strategy
Growing the Commercial Focus - integrating the tax func-
tion with the broader organisation
Keeping Pace with a Rapidly Changing Environment
utilising technology and process improvement strategies
The Evolution of the Tax Department

Page
Contents
4
5
6
8

10

4

At this years Global Financial
Services Tax Leaders Meeting we
debated what operating in the
New Normal means today, and
what it could mean in the future.
The debate centered around
some key issues that PwCs
Research "Project Blue" has
identified as impacting the Asset
Management industry in the
future. Projecting what these
factors might mean for the
industry, we embarked on a
discussion of what tax directors
should be thinking about both
tactically and strategically to be
ready for what is coming both on
and beyond the horizon.

In the continuing aftermath of
the financial crisis, the Asset
Management industry is facing
unprecedented pressures. These
pressures are largely coming
from investors, legislators, and
regulators. These pressures are
manifesting themselves in
greater complexity, continuing
uncertainty, and the need for
greater transparency. Tax
departments need to adapt both
tactically, to address results of
these pressures now, and
strategically, to address the
impact of the longer term
influences.

For tax departments to not only
address, but capitalize on these
pressures and the pace of
change, which are not likely to go
away, it cannot be business as
usual. Not only is the tax
function going to have to think
about itself differently, but the
broader organisation is going to
need to think about the tax
function differently as well, and
the results may require
significant additional time and
resources for the tax department.
In this document, we summarize
the key issues impacting both the
wider financial services industry
as well as the Asset Management
sector that arose from the
debates at the conference. Those
debates involved 113 client
organisations across financial
services covering 23 markets
across all major trading blocks.
In addition it included 145
practitioners, largely from our
tax practice, and a number of
additional specialists.

A number of overarching themes
arose from the various debates:

Taking control of the tax
agenda - Establishing
and effectively
communicating a tax
strategy;

Growing the commercial
focus - Integrating the
tax function with the
broader organisation;

Keeping pace with a
rapidly changing
environment - Utilising
technology and process
improvement strategies
.
The New Normal brings both
opportunities and challenges to
the tax department which will
need to continue evolving to
meet the changing business
requirements.

These issues are explored in
more detail in this document.
.
Financial services
are set for
transformation as
their role, industry
structure and
commercial realities
are disrupted by the
major trends
currently reshaping
the global economy.
Many businesses
will be
unrecognisable by
the end of the decade
and the list of
market leaders could
be very different as
smart and agile
players leapfrog
slower moving
competitors.
5

PwC* has developed a
framework to help financial
service organisations respond to
the challenges facing the
industry we refer to this
research as Project Blue, and its
findings underpinned our
conference debate and the
results.

The foundation for the New
Normal debate is the provocation
that the financial services
industry will not revert to a pre-
crisis state, at least not in the
short term. The reality of
dealing with destabilizing factors
such as new regulation, currency
and sovereign risk, and the like
will continue. Furthermore,
there are other, far reaching
factors at play. As such, the
landscape within which financial
services industry operates is
shifting and a "post crisis" world
will be very different from the
landscape today.

The central premise is that
organisations must anticipate
and effectively manage the
destabilizing influences we see
today and strategically align
themselves with the emerging
picture, to not only address, but
capitalize on the increasing
complexity and volatility facing
them. No longer is performance
alone enough; investors,
legislators, regulators, and all
parties focused on this industry
are looking for strong tax
infrastructures that allow for
timely and accurate access to
information and a proactive
business approach to solutions.

When there is so much change
and uncertainty underpinning
the industry, identifying,
addressing and reacting to the
main drivers of change is
paramount to emerging from
this financial crisis
environment successfully.
We have worked closely with
board directors and senior
management in financial services
organisations as well as with
academics and other specialists
to identify and socialize several
key issues that are influencers of
change we refer to this as the
Project Blue framework (see
Figure 1 below). In creating this
framework, we have been
encouraged with the positive
feedback from our clients on its
direction and hope it proves
useful in identifying a focus for
the future.
Figure 1: The Project Blue Framework
* PwC refers to PwC network and/or more of its member firms, each of which is a separate legal entity
6

Our 2012 Global Financial
Services Tax Leaders Conference
was devoted to helping attendees
develop their thinking on what
the New Normal is and how it
impacts them and their
organisations as well as
opportunities arising from these
challenges.

In service of this, we spent
considerable time exploring the
New Normal from a number of
dimensions, the findings of
which are summarized in this
document. Professor Garelli set
the theme with the idea that the
New Normal results from the
fragmentation of the Global
economy such that different
regions are experiencing very
different economic environments
whilst at the same time global
trends and innovations have
placed us in a period of
unprecedented change. Business
has to be able to operate with
these inherent uncertainties.
Throughout the conference,
panel sessions with C-suite
representatives and tax directors
from across the financial services
spectrum debated the themes of,
as well as impacts and
opportunities arising in the New
Normal.
We asked all participants to
present their views on whether
each of the issues identified in
Project Blue was relevant to the
operations of their tax function.
Figure 2 displays the result for
the overall FS industry, while
Figure 3 displays the results of
each sector within Financial
Services.

Figure 2: Overall Financial Services Industry View
Whats Important and Whats Not:
The Conference Findings
7

Figure 3: Sector Views
8

The Top Three Issues Identified By You
2. Growing the
Commercial Focus -
Integrating the tax
function with the
broader organisation
Over recent years the tax functions
within asset management
organisations have made great
strides to integrate into the overall
organisation - but there is still
work to be done. There were a
number of debates which pointed
to the conclusion that tax
functions need to be fully
integrated within the organisation
and overall approach to risk
management to be effective.

Tax functions need to become
more aligned with the business
side of the organisation and
involved in influencing and
participating in the overall strategy
of the organisation. Tax is no
longer simply a technical function,
but a large component of the
overall success of the organisation.
This is extremely relevant when
considering the risk management
profile of the organisation.

Given increasing regulations and
the changing global tax
environment, tax risk
management strategy of the
organisation. Tax risk should no
longer be siloed, as it has been an
increasingly important component
of the firm's overall risk
assessment. Management should
understand tax risks inherent in
the organisation in order to dictate
overall risk management policy,
which will ultimately impact the
tax strategy. Tax directors have a
unique opportunity to get on
management's agenda and tell
their story, further aligning tax
strategy with business strategy.

Increased globalization is another
large driver for the increased
1. Taking Control of the
Tax Agenda -
establishing and
effectively
communicating a tax
strategy
In the world of growing scrutiny
from investors, regulators and
legislators, panelists voiced a clear
need to communicate relevant
information regarding the
organisations tax position and tax
risks both within the organisation
and with external
stakeholders. The moral
dimension, external scrutiny, and
the rapidly increasing use of social
media have elevated this issue in
today's environment, and there is a
growing recognition amongst asset
managers for the need to enhance
messaging of tax and tax-related
matters both internally and
externally.

Senior management needs to be
involved in setting tax policy and
must be kept fully apprised of key
tax risks, both financially and from
a reputational perspective, in
anticipation of public inquiry,
whether that be from the media,
analysts or other external
parties. At the same time, a
reasoned and thoughtful strategy
to proactively raise the awareness
of the organisations tax positions
or affairs may be helpful in
heading off or managing negative
publicity.

Communication is important in
shaping tax policy, and lobbying
efforts are increasingly important
to provide rule makers with the
information they need to develop
effective policy while attempting to
minimize the collateral damage
that can often arise from
reactionary decisions. There was a
view that direct communication
can be an effective strategy to
ensure that industry issues are
fully understood. Involving the
wider business, including senior
management, to help influence
policy makers was also thought to
be key to making the lobbying
effort more effective.

Those with tax responsibility at all
levels need to be more engaged
with respect to effectively
communicating tax issues to be
identified and understood across
the organisation. Messaging in the
new environment should be
approached from a different angle,
namely, tax directors need to
develop the tax language of the
future which should be less
technical and more in line with the
perspective of business directors
within the organisation. This will
mean that the skills in the tax
department will need to evolve
with an increasing focus on wider
commercial, communication and
relationship skills.

9

importance of integration with tax
into the overall business side of the
organisation. In order to be
effective, tax functions cannot
necessarily operate solely from a
central hub. It is critical that the
tax function is able to engage with
local business functions and
develop relationships with local
regulators and tax authorities to be
aware of and shape the customs
and practices in each key market
and understand the tax
requirements of such.
Only through integrating with the
business side of the organisation
can a tax director manage risks
and, equally importantly, identify
the opportunities to bring further
value and synergies to the
organisation. The tax function is
well positioned to take a leading
role in the future of asset
management organisations
3. Keeping Pace with a
Rapidly Changing
Environment - Utilising
technology and process
improvement strategies
The demands on tax directors and
their tax functions have increased
dramatically in recent years and
the rapid pace of change is
presenting new challenges. The
appetite for increased
transparency from investors,
legislators and regulators is
outpacing the ability of the tax
department to keep up with
current resources. Additionally,
the complexity around reporting
requirements for investments and
structures is only magnified by
globalization of asset management
organisations - which leads to
increasing risk that missed filings
and errors can occur. Tax
functions are being asked to do
more in an environment with no
room for error, but practical
solutions exist to address these
challenges.

The utilisation of current
technology and systems already in
use by organisations, but not yet
deployed in a way to support the
requirements of the tax function,
should be considered. Automating
tax operations by integrating tax
technology will enable the tax
function to improve the speed and
accuracy of the information
reported to investors, regulators,
and tax authorities. In addition to
increasing efficiency, the use of tax
technology systems that integrate
with the organisation's current
technology suite will allow for
greater speed and transparency in
reporting. By allowing for
increased speed and transparency
around business issues involving
tax, the tax function can be more
proactive in updating
management as to the tax impact
of decisions, responding to new
requirements and planning for the
future.

Enhancements in technology and
processes in the tax function will
allow for more comfort around
tax's risk profile and should work
to eliminate unnecessary risk in
the tax function. Undertaking a
review and risk assessment of
current tax processes will allow tax
directors to identify key areas of
risk in the tax function, develop
enhanced process and control
solutions to address areas of risk,
and ultimately lower the likelihood
that errors in tax reporting will
occur. Undertaking a periodic
review of key tax processes will
allow tax directors to identify areas
for improvement and lower the
overall reputational risk of the
organisation. Enhancing the
visibility and effectiveness of the
tax controls in place will also work
to improve management's ability
to react to and manage risk as well
as take advantage of new
opportunities.
Given increasing pressure on
overhead costs, tax functions need
to fully grasp the opportunity of
improving technology and
processes to allow them to manage
the responsibilities of the tax
function more effectively.
Redefining the tax technology
strategy, as well as enabling
process improvement strategies,
as a means to do more with less,
can help tax functions meet
increasing demands and stay
ahead of the curve.

10

There was a broad consensus
across all sectors that the
demands of the New Normal
requires tax functions in
financial services organisations
to evolve in order to meet
increasing demands head-on.
Tax functions cannot continue
with business as usual and
expect to be successful - there
needs to be a plan of action to
respond to pressures coming
from investors, legislators and
regulators.

In summary, the expectations of
the next-generation tax functions
will include:
Responding quickly to
investor, regulator,
media and management
tax inquiries with a
complete command of
all the facts and
potential issues faced by
the tax organisation;
Developing an effective
communication strategy
that aligns tax
requirements with the
broader business
requirements of the
organisation;
Demonstrating a sound
approach to tax risk
management that will
address multiple new
reporting requirements
that are proliferating in
the industry and that can
carry significant
reputational risk to the
organisation;
Understanding and
closing the gap on risk
inherent in current tax
processes;
Producing tax reporting
more quickly and
efficiently than in the
past and utilising
current technology
within the organisation
to facilitate;
All these functions must be
accomplished in a coordinated
fashion, likely with the same or
fewer resources but with a
greater downside for error and
inefficiency.

The new environment will
require tax directors to venture
into unfamiliar territory that will
test their leadership skills by
forming coalitions with the
broader business organisation,
legislators, regulators and the
media and to think creatively in
ways that have not traditionally
been part of their
responsibilities. The future isn't
what it used to be, and tax
functions must react or risk
being left behind. The tools are
there, the opportunity is there -
the ability to transform rests on
the leadership and vision of the
tax director and buy in from the
firms senior management.
11

We hope you have found this synopsis thought provoking
and interesting. If you wish to discuss any aspect of this
please do contact your normal PwC contact or any of the
individuals listed below:-
Making Sense of an Uncertain Future
Teresa Owusu Adjei
FS Tax Partner,
Asset Management
PwC (UK)
+44 20 7213 3302
Teresa.s.owusu-
adjei@uk.pwc.com
Judith Daly
FS Tax Partner,
Asset Management
PwC (US)
+1 (646)471 5292
judith.daly@us.pwc.com
David Newton
Global FS Tax Leader
PwC (UK)
+44 20 7804 2039
david.newton@uk.pwc.com
Amy Mcaneny
FS Tax Director,
Asset Management
PwC (US)
+1 (646)471 3014
amy.e.mcaneny@us.pwc.com
William Taggart
Global Tax Leader,
Asset Management
PwC (US)
Tel:+1 (646) 471 2780
william.taggart@us.pwc.com
Michael ONeill
FS Tax Partner,
Asset Management
PwC (US)
+1 (646) 471 5556
michael.j.oneill@us.pwc.com
Florence Yip
AsiaPac Tax Leader
Asset Management
PwC (Hong Kong)
+852 2289 1833
florence.kf.yip@hk.pwc.com
Martin Vink
EMEA Tax Leader
Asset Management
PwC (Netherlands)
+31 (0) 88792 6369
martin.vink@nl.pwc.com
12

www.pwc.com
2012 PwC LLP.All rights reserved. PwC refers to the PwC network and/or more of its member firms, each of which is a separate legal entity. Please see

This publication has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should not act upon the
information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any
consequence of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decisions based on it.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication
without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and, to the
extent permitted by law, PwC LLP, its members, employees and agents do not accept or assume any liability, responsibility, or duty of care for any consequences of you or anyone else acting, or refraining
to act, in reliance on the information contained in this publication, or for any decision based on it.
For more information on Project Blue, or other Financial Services programmes, please contactBryn, Global & UK Financial Services Marketing, PwC (UK) on +44 207 212 8839, or
aine.bryn@uk.pwc.com.

in the New Normal?
Perspectives for the Banking & Capital
Markets Industry


Glob
al
Fina
2

PwC How are you Operating in the New Normal? Perspectives for the Banking & Capital Markets Industry June 2012
3

Taking Control of the Tax Agenda
Growing the Commercial Focus - integrating the tax de-
partment more fully with lines of business
Cloud Thinking keeping pace with a rapidly changing
regulatory environment

Page
Contents
4
5
6
8

10

4

Services Tax Leaders Meeting we
debated what operating in the
New Normal means now for the
Financial Services Industry and
what it could mean in the future.
The debate centered around
some key issues that PwCs
Research Project Blue has
identified (see below).

As would be expected, much of
the focus has been on new sector
specific regulatory or tax regimes
which have been enacted or are
being discussed as a result of the
financial crisis such as FATCA,
FTT, Basel III, bank levies,
AIFMD, Dodd-Frank, etc.

These regimes can have
sweeping effects, with impacts
ranging from redeveloping
business strategies, changing
risk management, complying
with increased transparency and
reporting requirements, among
many others. One key challenge
in dealing with these is the
uncertainty that still surrounds
what many of these regimes will
look like once finalised.

Additionally, the complexity of
understanding the requirements
for so many different regulatory
initiatives may require
significant time and resources in
an organisation, specifically in
the tax department.

In this document, we summarise
the key issues impacting both the
wider Financial Services industry
as well as those that arose from
the debates during the banking
specific sessions at our
conference. Those debates
involved more than 100 client
organizations across financial
across all major trading blocks.
In addition it included 145
practitioners, largely from our
tax practice.
A number of over arching
themes arose from the various
debates:

Taking Control of the Tax
Agenda - establishing and
effectively communicating a
tax strategy and reflecting
on the existence of moral
aspects in tax planning, e.g.,
should a bank pay more tax
than legally due?
Growing the Commercial
Focus - integrating the tax
department more fully with
lines of business; and
Cloud Thinking keeping
pace with a rapidly
changing regulatory
environment.

opportunities and challenges to
the tax department, which will
need to continue evolving to
meet the changing business
requirements.

Financial services
are set for
transformation as
structure and
major trends
currently reshaping
the global economy.
Many businesses
will be
unrecognisable by
and the list of
smart and agile
players leapfrog
slower moving
competitors.
5

services businesses respond to
the challenges that face them
we refer to this research as
Project Blue, and its findings
underpinned our conference
debate and the results.

The starting point for the New
that the financial services world
will not "magically" revert to a
pre-crisis state, at least not in the
short term, and that the reality of
dealing with destabilising factors
and sovereign risk, etc. will
continue. Furthermore, there are
other, wider factors at play which
means that the landscape
within which financial services
groups operate is shifting and
that a "post crisis" world will be
very different from the landscape
today.

organisations that are able to
effectively manage the
destabilising influences we see
picture, may be seizing an
opportunity to differentiate
themselves and put clear blue
water between themselves and
their competitors.

When there is so much change,
identifying and addressing the
main drivers is paramount to
emerging from this financial
crisis environment successfully.
main board directors and senior
organizations as well as with
key issues that need to be
addressed we refer to this as
the Project Blue framework (see
Figure 1 below). One thing that
has really encouraged us in
putting together this framework
is the extremely positive
feedback from our clients about
the direction we have taken.

6

The whole of our 2012 Global
Financial Services Tax Leaders
Conference was devoted to
helping attendees develop their
thinking on what the New
Normal is and how it impacts
them and their organisations as
well as opportunities potentially
arising from these challenges.

We spent considerable time in
exploring the New Normal from
a number of dimensions, the
findings of which are
summarized in this document.
Professor Garelli, Professor at
IMD Business School &
University of Lausanne, set the
theme with the idea that the New
Normal results from the
whilst at the same time, global
trends and innovations mean we
are living in a period of
unprecedented change.
Businesses have to be able to
operate and adapt to the
inherent uncertainty that is a
function of this environment.
We had panel sessions with C-
suite representatives and tax
directors from across the
financial services spectrum, and
we spent nearly half our time in
focused discussion groups
debating the themes, impacts
and opportunities arising from
the New Normal.
We asked all participants to tell
us whether each of the New
Normal issues that we had
identified was important or not
for their tax department. Figure
2 shows the result for the overall
FS industry.

The sector views are shown in
figure 3 below. In terms of the
more immediate issues requiring
tactical management, there was a
strong correlation in the results
by sector, with all sectors
regarding new regulation as the
7

dominant issue. There was much
greater divergence in the sector
views of the importance of the
longer term issues. The data
suggests that Tax Directors in
the banking sector are giving far
higher priority to short term
tactical issues over long term
strategic issues than in other
sectors. In the discussions it
became apparent that this is
reflective of the disproportionate
amount of new tax and
supervisory regulation facing the
banking sector vs. other sectors.
8

key tax risks, both financially
and from a reputational
perspective. This is needed in
anticipation of public inquiry,
whether that be from the media,
analysts or other external
parties. At the same time, a
reasoned and thoughtful strategy
to proactively raise the
awareness of the organisations
tax positions or affairs may be
helpful in heading off or
managing negative publicity.

Some organisations have taken
measures to publish their total
tax contribution to demonstrate
the total amount of taxes
collected and paid to the various
revenue authorities. While this
may require significant effort to
accumulate the data on all tax
filings, the value of the
information can be enormous in
providing hard data to
communicate the organisations
role as a good corporate citizen,
both inside the company and
externally.

efforts are increasingly
important to provide rule makers
with the information they need
to develop effective policy while
attempting to minimize the
collateral damage that can often
arise from reactionary decisions.
Involving the wider business and
trade associations in lobbying is
seen as making the lobbying
effort more effective, but
lobbying by industry associations
will have to be complemented by
efforts of the individual bank.

Tax transparency is here to stay,
and organisations that accept
and embrace transparency and
use it to their advantage will be
in a better position to choose
their own destiny rather than
being caught off guard and
having to play catch up.

2. Growing the
Commercial Focus -
integrating the tax
department more
fully with lines of
business
There were a number of debates
which pointed to the conclusion
that tax functions need to be
fully integrated within the
business for the overall approach
to risk management to be
effective. Three examples from
the debates are given below:

As the rates of direct or
profits taxes fall worldwide,
the impact of operational
taxes (VAT, GST, payroll
taxes and levies) is
increasingly important,
particularly as many of these
impact wider business
metrics such as cost/income
ratios. Often these taxes are
not managed within the tax
department and even if they
are, the key drivers (such as
the movement of people)
are managed operationally,
and often tax functions are
not aware of them until after
the event, making proactive
management of issues
impossible and resulting in
unexpected tax costs.

The increasing focus of tax
authorities in transfer
pricing is on implementation
rather than policy, and to
manage the implementation
risk the tax function needs to
educate and engage more
with the business and other
functions such as HR,
accounting and legal.
1. Taking Control of
the Tax Agenda
In a world of growing media
scrutiny and interest in tax,
delegates voiced a clear need to
communicate relevant
organisations tax position and
tax risks both within the
organisation and with external
dimension and the increased
focus of external scrutiny,
particularly with the growing
influence of social media, have
elevated this issue.

Participants recognised that it
would be inappropriate to simply
ignore legal tax planning
opportunities for political
reasons as this might
simultaneously adversely affect
the interests of the bank's
shareholders.

must be kept fully apprised of
9

As organisations battle for
market share, product
development continues at a
rapid pace. The increased
visibility of tax requires tax
functions to be integrated
into the product
development cycle to ensure
direct or indirect tax
consequences are addressed
on a real time basis versus
having to pick up the pieces
after the fact. While recent
high profile tax controversies
have been embarrassing for
the industry and the tax
profession as a whole, they
have served to increase the
awareness of the importance
of the tax function being a
key participant in the
economic and reputation
risk evaluation process.

Only by being close to the
business can a Tax Director
manage these risks and, equally
importantly, identify the
opportunities to bring further
business.

3. Cloud Thinking -
keeping pace with a
rapidly changing
regulatory
environment
The demands on tax directors
and their departments have
increased dramatically in recent
years, and the pace of change is
presenting new challenges.

Gone are the days of a more
stable environment where tax
departments had the luxury of
planning around long
established rules. Tax Directors
expressed frustration of having
to make decisions with less
clarity around how new rules will
implementation of tax changes
even whilst the scope of those
changes is not fully defined.
Figure 4: Uncertainty about the outcome is delaying
work on assessing FTT
apply in a rapidly changing
business environment. This is
becoming the New Normal as tax
policy makers are less
sympathetic to the challenges
faced by the industry in
complying, and political and
fiscal pressure means that
governments are less willing to
delay effective dates.

FATCA is an example where
organisations are being asked to
sign an agreement to comply
with rules where certain
requirements will not be defined
for years to come. The FTT
debate in the EU will potentially
result in tax changes, with wide-
ranging operational impacts
being implemented very quickly.

To assess the potential impact on
the business and allow effective
decision making, tax functions
will need to do more Cloud
Thinking or scenario planning
at a time when they are having to
do more with less. In addition,
tax functions will need to engage
more widely with cross-
functional teams to plan
10

across all sectors that the New
Normal meant that the tax
functions in FS organisations
would need to continue to
evolve. Six key factors were
identified as set out below.

Tax functions need to be
more fully integrated into
and engaged with the wider
business to allow tax issues
to be identified and
understood across the
organisation. This will mean
that the skills in the tax
department will need to
evolve with an increasing
focus on wider commercial,
communication and
collaboration skills.

The trend for increasing
global mobility and
centralisation of activity
increasingly involve multiple
tax specialities (Transfer
Pricing, VAT, payroll taxes,
experience with PE issues
etc.), some of which are
often not managed on a day
to day basis by the tax team.
In order to manage these
effectively, tax teams are
looking to get out into the
business to a much greater
extent and need to
proactively engage with the
functions that manage
operational taxes.

Tax teams need to become
more skilled at managing
Business As Usual whilst
proactively assessing and
planning for future
developments. For many,
this will require a rethink of
the role of the tax team and
how they undertake a wider
range of responsibilities
without multiplying ongoing
costs.

Increased globalisation
means that tax functions
cannot operate solely from a
central hub as they need to
engage effectively with local
business functions and
develop relationships with
local Regulators and Tax
Authorities to be aware of
and shape the customs and
practices in each key
market.
There may be advantages of
joint governance of the tax
and other functions, such as
regulatory. Efficient use of
regulatory capital and the
drive to meet the rapidly
approaching requirements is
requiring a more creative
approach to structuring the
operations of the
organisation. Whether it be
subsidiarization, divestitures
of capital inefficient
businesses or alternative
funding structures, tax
departments are playing a
key role. Departments are
spending more time than
ever involved in these
decisions, raising the
question of governance and
the most efficient structure
to ensure key risks are
monitored and addressed.

Tax functions need to fully
grasp the opportunity of
improving their use of
technology and their
processes to allow them to
extract data from business
systems and manage that
data more effectively. This is
needed both to cope with the
significant increase in
detailed operational tax
filing requirements (e.g.
transaction taxes such as the
potential FTT) and to allow
them to be more efficient
given constant pressure on
overhead costs. Traditionally
tax functions have not
always found it easy to
secure IT resources for
internal projects.

While there was broad consensus
of the challenges that operating
in the New Normal presents,
there is also a clear view that this
environment creates significant
opportunity to redefine the role
of the tax department within an
organisation and in doing so, be
in a position to add more value
to the organisation as a whole.

11

Peter Yu
AsiaPac Tax Leader,
Banking & Capital Markets
PwC (HK)
+852 2289 3122
peter.sh.yu@hk.pwc.com
Kenneth Shives
EMEA Tax Leader,
PwC (France)
+33 1 56 57 83 84
kenneth.shives@us.pwc.com
David Newton
PwC (UK)
+44 20 7804 2039
david.newton@uk.pwc.com
Hans-Ulrich Lauermann
Global Tax Leader,
PwC (Germany)
+49 69 9585-6174
hansulrich.lauermann@de.pwc.com
Ellen Rotenberg
Americas Tax Leader,
PwC (US)
+1 (646) 471 5559
ellen.rotenberg@us.pwc.com
12

www.pwc.com
www.pwc.com/structure for further details

extent permitted by law, PwC LLP, its members, employees and agents do not accept or assume any liability, responsibility, or duty of care for any consequences of you or anyone else acting, or refraining
to act, in reliance on the information contained in this publication, or for any decision based on it.
For more information on Project Blue, or other Financial Services programmes, please contact ne Bryn, Global & UK Financial Services Marketing, PwC (UK) on +44 207 212 8839, or
aine.bryn@uk.pwc.com.

in the New Normal?
Perspectives for the Insurance
Industry


Glob
al
Fina
2

PwC How are you Operating in the New Normal? Perspectives for the Insurance Industry June 2012
3

Taking Control of the Tax Agenda - establishing and effec-
tively communicating a tax strategy
Growing the Commercial Focus - integrating the tax de-
partment more fully with the business
Cloud Thinking introducing more scenario planning
into tax functions

Page
Contents
4
5
6
8

10

4

Services Tax Leaders Meeting
we debated what operating in
the New Normal means for
Financial Services now and
what it could mean in the
future. The debate centered
around some key issues that
PwCs Research Project Blue
has identified (see below).

As would be expected, much
of the focus has been on new
regulatory or tax regimes
which have been enacted or
are being discussed as a result
of the financial crisis such as
FATCA, FTT, Basel III,
Solvency II, bank levies,
AIFMD, Dodd-Frank, etc.

These changes can have
sweeping effects, with impacts
ranging from redeveloping
business strategies, new risk
management approaches,
complying with increased
transparency and reporting
requirements, among many
others. One key challenge in
dealing with these is the
uncertainty that still
surrounds what many of these
regimes will look like once
finalised.

Additionally, the complexity
of understanding the
requirements for so many
different regulatory initiatives
may require significant time
and resources in an
organisation, specifically in
the tax department.

In this document, we
summarise the key issues
impacting both the wider
Financial Services industry
and in particular for the
Insurance sector that arose
from the debates at our
conference. Those debates
involved more than 100 client
organizations across financial
across all major trading
blocks. In addition it included
145 practitioners, largely from
our tax practice, and a
number of additional
specialists.

A number of over arching
themes arose from the various
debates:
Taking Control of the Tax
Agenda - establishing and
effectively communicating
a tax strategy;
Growing the Commercial
Focus - integrating the tax
department more fully
with the business; and
Cloud Thinking -
introducing more scenario
planning into tax
functions.

opportunities and challenges
to the tax department, which
will need to continue evolving
to meet the changing business
requirements.

Financial services
are set for
transformation as
structure and
major trends
currently reshaping
the global economy.
Many businesses
will be
unrecognisable by
and the list of
smart and agile
players leapfrog
slower moving
competitors.
5

services businesses respond to
the challenges that face them
we refer to this research as
Project Blue, and its findings
underpinned our conference
debate and the results.

The starting point for the New
that the financial services world
will not "magically" revert to a
pre-crisis state, at least not in the
short term, and that the reality of
dealing with destabilising factors
and sovereign risk, etc. will
continue. Furthermore, there are
other, wider factors at play
which means that the landscape
within which financial services
groups operate is shifting and
that a "post crisis" world will be
very different from the landscape
today.

organisations that are able to
effectively manage the
destabilising influences we see
picture, may be seizing an
opportunity to differentiate
themselves and put clear blue
water between themselves and
their competitors.

When there is so much change,
identifying and addressing the
main drivers is paramount to
emerging from this financial
crisis environment successfully.
main board directors and senior
organizations as well as with
key issues that need to be
addressed we refer to this as
the Project Blue framework (see
Figure 1 below). One thing that
has really encouraged us in
putting together this framework
is the extremely positive
feedback from our clients about
the direction we have taken.

6

The whole of our 2012 Global
Financial Services Tax Leaders
Conference was devoted to
helping attendees develop their
thinking on what the New
Normal is and how it impacts
them and the organisations they
work in as well as opportunities
potentially arising from these
challenges.

We spent considerable time in
exploring the New Normal from
a number of dimensions, the
findings of which are
summarized in this document.
Professor Garelli Professor at
IMD Business School &
University of Lausanne set the
theme with the idea that the New
Normal results from the
whilst at the same time, global
trends and innovations mean we
are living in a period of
unprecedented change.
Businesses have to be able to
operate and adapt to the inherent
uncertainty that is a function of
this environment.

We had panel sessions with C-
suite representatives and tax
directors from across the
financial services spectrum, and
we spent nearly half our time in
focused discussion groups
debating the themes, impacts
and opportunities arising from
the New Normal.
We asked all participants to tell
us whether each of the New
Normal issues that we had
identified was important or not
for their tax department. Figure 2
shows the result for the overall
FS industry.

The sector views are shown in
figure 3 below. In terms of the
more immediate issues requiring
7

tactical management, there was a
strong correlation in the results
by sector, with all sectors
regarding new regulation as the
dominant issue. Insurance
groups in particular noted the
growing importance of the moral
agenda around tax and public
perception.

8

must be kept fully apprised of
key tax risks, both financially
and from a reputational
perspective, in anticipation of
public inquiry, whether that be
from the media, analysts or other
external parties. At the same
time, a reasoned and thoughtful
strategy to proactively raise the
awareness of the organisations
tax positions or affairs may be
helpful in heading off or
managing negative publicity. We
discussed whether a company
should be trying to place its own
positive messages.

Some organisations have taken
measures to publish their total
tax contribution to demonstrate
the total amount of taxes
collected and paid to the various
revenue authorities. While this
may require effort to accumulate
the data on all tax payments, the
value of the information can be
enormous in providing hard data
to communicate the
organisations role as a good
corporate citizen, both inside the
company and externally.

efforts are increasingly important
to provide rule makers with the
information they need to develop
effective policy while attempting
to minimize the collateral
damage that can often arise from
reactionary decisions. Involving
the wider business and trade
associations in lobbying is seen
as making the lobbying effort
more effective.

Tax transparency is here to stay, and
organisations that accept and
embrace transparency and use it
to their advantage will be in a
better position to choose their
own destiny rather than being
caught off guard and having to
play catch up.
2. Growing the
Commercial Focus -
integrating the tax
department more
fully with the
business
Over recent years tax functions
within some insurance groups
have become much closer to the
business. There were a number
of debates which pointed to the
conclusion that tax functions
need to be further integrated
within the business and the
overall approach to risk
management to be effective. Two
examples from the debates are
given below.:

As the rates of profits taxes
fall worldwide, the impact of
operational taxes (VAT, GST,
payroll taxes and levies) is
increasingly important,
particularly as many of these
impact wider business
metrics such as cost/income
ratios. Often these taxes are
not managed within the tax
department and even if they
are, the key drivers (such as
the movement of people) are
managed operationally, and
often tax functions are not
aware of them until after the
event, making proactive
management of issues
impossible and resulting in
unexpected tax costs.

Additionally, the increasing
focus of tax authorities in
transfer pricing is on
1. Taking Control of
the Tax Agenda -
establishing and
effectively
communicating a
tax strategy
In a world of growing media
scrutiny and interest in tax,
delegates voiced a clear need to
communicate relevant
organisations tax position and
tax risks both within the
organisation and with external
dimension and the increased
focus of social media have
elevated this issue. There is a
growing recognition amongst
insurers of the need to take
control of the tax agenda and
have greater influence on how
tax affairs are reported.

9

implementation rather than
policy, and to manage the
implementation risk the tax
function needs to educate
and engage more with the
business and other functions
such as HR, accounting and
legal.

Only by being close to the
business can a Tax Director
manage these risks and, equally
importantly, identify the
opportunities to bring further
business.

3. Cloud Thinking -
introducing more
scenario planning
into tax functions
The demands on tax directors
and their departments have
increased dramatically in recent
years, and the pace of change is
presenting new challenges.

Gone are the days of a more
stable environment where tax
departments had the luxury of
planning around long established
rules. Tax Directors expressed
frustration of having to make
decisions with less clarity around
how new rules will apply in a
rapidly changing business
environment. This is becoming
the New Normal as tax policy
makers are less sympathetic to
the challenges faced by the
industry in complying, and
political and fiscal pressure
means that governments are not
willing to delay effective dates.

Figure 4: Uncertainty about the outcome is delaying
work on assessing FTT
Tax Directors of insurance
companies explained how they
now spent much more of their
time considering future potential
changes such as political
upheaval, the Eurozone crisis or
new law. They then develop
strategies to respond to these.

In terms of tax specific changes
FATCA is an example where
organisations are being asked to
sign an agreement to comply
with rules where certain
requirements will not be defined
for years to come. The FTT
debate in the EU will potentially
result in tax changes, with wide-
ranging operational impacts
being implemented very quickly.

To assess the potential impact on
the business and allow effective
decision making, tax functions
will need to do more Cloud
Thinking or scenario planning
at a time when they are having to
do more with less.
10

across all sectors that the New
Normal meant that the tax
functions in FS organisations
would need to continue to
evolve. Six key factors were
identified as set out below.

Tax functions need to be
more fully integrated into
and engaged with the wider
business to allow tax issues
to be identified and
understood across the
organisation. This will mean
that the skills in the tax
department will need to
evolve with an increasing
focus on wider commercial,
communication and
collaboration skills.

The trend for increasing
global mobility and
centralisation of activity
increasingly involve multiple
tax specialisms (Transfer
Pricing, VAT, payroll taxes,
Permanent Establishments
etc.), some of which are
often not managed on a day
to day basis by the tax team.
In order to manage these
effectively, tax teams are
looking to get out into the
business to a much greater
extent and need to
proactively engage with the
functions that manage
operational taxes.

Tax teams need to become
more skilled at managing
Business As Usual whilst
proactively assessing and
planning for future
developments. For many this
will require a rethink of the
role of the tax team and how
they undertake a wider range
of responsibilities without
multiplying ongoing costs.

Increased globalisation
means that tax functions
cannot operate solely from a
central hub as they need to
engage effectively with local
business functions and
develop relationships with
local Regulators and Tax
Authorities to be aware of
and shape the customs and
practices in each key
market.

There may be advantages of
joint governance of the tax
and other functions, such as
regulatory. Efficient use of
regulatory capital and the
drive to meet the rapidly
approaching requirements is
requiring a more creative
approach to structuring the
o p e r a t i o n s o f t h e
organisation. Whether it be
the use of branch structures,
divestitures of capital
inefficient businesses or
a l t e r n a t i v e f u n d i n g
structures, tax departments
are playing a key role.
Departments are spending
more ti me than ever
involved in these decisions,
raising the question of
governance and the most
efficient structure to ensure
key risks are monitored and
addressed
Tax functions need to fully
grasp the opportunity of
improving their use of
technology and their
processes to allow them to
extract data from business
systems and manage that
data more effectively. This is
needed both to cope with the
significant increase in
detailed operational tax
filing requirements (e.g.
transaction taxes such as the
potential FTT) and to allow
them to be more efficient
given constant pressure on
overhead costs. Traditionally
tax functions have not
always found it easy to
secure IT resources for
internal projects.

While there was broad consensus
of the challenges that operating
in the New Normal presents,
there is also a clear view that this
environment creates significant
opportunity to redefine the role
of the tax department within an
organisation and in doing so, be
in a position to add more value
to the organisation as a whole.
11

Jonathan Howe
FS Tax Partner,
Insurance
PwC (UK)
+44 (0)20 7212 5507
jonathan.p.howe@uk.pwc.com
Stuart Higgins
FS Tax Partner,
Insurance
PwC (UK)
+44 (0)20 7212 3558
stuart.higgins@uk.pwc.com
David Newton
PwC (UK)
+44 20 7804 2039
David.newton@uk.pwc.com
David Schenck
Americas Tax Leader
Insurance
PwC (US)
+1 (202) 346 5235
David.a.schenck@us.pwc.com
Peter Barrow
Global Tax Leader,
Insurance
PwC (UK)
+44 (0)20 7804 2062
peter.barrow@uk.pwc.com
Dieter Wirth
EMEA Tax Leader
Insurance
PwC (Switzerland)
+41 58 792 4488
dieter.wirth@ch.pwc.com
Rex Ho
AsiaPac Tax Leader
Insurance
PwC (HK)
+852 2289 3026
rex.ho@hk.pwc.com
12

www.pwc.com

extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility, or duty of care for any consequences of you or anyone else
acting, or refraining to act, in reliance on the information contained in this publication, or for any decision based on it.
For more information on Project Blue, or other Financial Services programmes, please contact , Global & UK Financial Services Marketing, PwC (UK) on +44 207 212 8839, or aine.bryn@uk.pwc.com.

Project Blue PWC 2012

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Contents

1. Project Blue - Overview

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