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