Strategy Foundation for Fiscal Studies Ireland- Brave in a New World? Andrew S. Nevin, PhD 25 May 2011 Strictly Private and Confidential
Section 1 – Market context Draft Bank assets vs. nominal GDP, 1980 - 2007 CAGR (1980 – 2007) 12,000 Bank assets - Europe 19.0% 10,000 8,000 17.9% 17.9% Bank assets - World Bank assets - World Index (1980 = 100) 6,000 6.3% Nominal GDP - World 4,000 2,000 5.9% Nominal GDP - Europe 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Datastream, IMF Note: Bank asset indices are calculated based on total assets for listed banks only PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 2
Section 1 – Market context Draft The past 30 years The future? Sustained GDP growth in the west Low GDP growth? Growth of the western financial Western financial sector growth is sector is significantly above that of equal to or less than GDP growth? the economy as a whole Emerging markets begin to compete Emerging markets created for resources and outperform opportunities for western economies western economies Discontinuity between the future and the past Source: PwC analysis PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 3
Section 2 – Key drivers of change Draft Long term drivers (5-20 years) Rise of SAAAME Rise of SAAAME Demographic shift Demographic shift War for Resources Rise of state-directed capitalism Source: PwC analysis Note: SAAAME = South America, Africa, Asia and the Middle East PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 5
Rise of SAAAME ‘Business as usual’ ‘New world order’ Banking continues on its existing course Banks are attacked on multiple fronts • South America, Africa, Asia and the Middle • South America, Africa, Asia and the Middle • The west remains the centre of decision East become a largely self-sufficient and making and economic power in global dominant economic, financial and trading banking bloc, confirming a shift in global economic power • London and New York remain by far the ? largest global financial centres • Western banks are locked out of the major emerging growth markets and struggle to • Western regulators and central banks, remain relevant in the new world order alongside the IMF, continue to be recognised as the thought leaders in global • Emerging market banks can freely enter the financial services west and do so aggressively (both organically and by acquisition) Source: PwC analysis Note: SAAAME = South America, Africa, Asia and the Middle East Strategy
Section 2.1 – Rise of SAAAME Draft Question: What is the largest IPO of all time? World's biggest IPO: Petrobras raises $70 billion Petrobras raises $70 billion on Sao Paulo exchange Source: Bloomberg PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 7
Section 2.1 – Rise of SAAAME Draft Forecasted trends in the value of domestic banking assets 2010-2050 160,000 E7 140,000 120,000 s ($bn) Domestic banking assets ($ 100,000 100,000 G7 80,000 60,000 40,000 20,000 - 2010 2015 2020 2025 2030 2035 2040 2045 2050 PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 8
Section 2.1 – Rise of SAAAME Draft Scale and growth of world trade to and from developing and emerging regions, 2005 - 2009 Value of Share of Value of Share of CAGR trade (2005) trade (2005) trade (2009) trade (2009) (2005 - 2009) Developed to $5,180bn $5,500bn 1.5% 51% 46% developed developed Emerging to $1,982bn $2,302bn 3.8% 20% 19% developed Developed to $1,360bn 13% $1,789bn 15% 7.1% emerging Emerging to $1,577bn 16% $2,387bn 20% 10.9% emerging Source: WTO, PwC analysis Note: Developed countries include North America, Europe (includes 27 EU and Eastern European countries), Japan, Australia and New Zealand. Emerging countries include South and Central America, the CIS, Africa, the Middle East and Asia (excluding Japan, Australia and New Zealand) PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 9
Section 2.1 – Rise of SAAAME Draft World trade flows, 2009 $627bn $324bn $366bn Europe $292bn North America Asia Middle East $128bn Africa $115bn $96bn South and Central America $95bn Source: WTO, PwC analysis Note: Map excludes trade flows from the CIS PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 10
Section 2.1 – Rise of SAAAME Draft • From 2009-50 the E7 will: - Grow from $21trn to $138trn in 2050 - At a CAGR of 4.8% • From 2009-50 the G7 will: - Grow from $29trn to $69trn in 2050 - At a CAGR of 2.2% Source: PwC analysis Capital PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 11
Section 2.1 – Rise of SAAAME Draft Growth in consumer markets Source: PwC analysis PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 12
Section 2.1 – Rise of SAAAME Draft Manufacturing Source: PwC analysis PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 13
Section 2.1 – Rise of SAAAME Draft Labour Source: PwC analysis PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 14
Section 2.1 – Rise of SAAAME Draft Natural resources Source: PwC analysis PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 15
Section 2.1 – Rise of SAAAME Draft Oil Source: PwC analysis PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 16
Section 2.1 – Rise of SAAAME Draft Top 10 banks worldwide by market capitalisation, 29 September 2010 250 214 198 200 181 152 150 $bn 132 131 129 114 104 94 100 50 0 Industrial and China HSBC JP Morgan Bank of Wells Fargo Bank of China Citigroup Banco Itau Unibanco Commercial Construction Chase and Co America and Co Santander Bank of China Bank Source: Datastream Note: Market capitalisation calculated as total US $ value of all categories of shares, including preference shares PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 17
Section 2.1 – Rise of SAAAME Draft Industry survey – most likely scenarios Rise of SAAAME 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% - Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 ‘Business as usual’ ‘New world order’ Banking continues on its Western banks are attacked existing course on multiple fronts Source: PwC analysis Note: Sample size = 477 PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 18
Section 2.1 – Rise of SAAAME Draft • There will be a continued and inexorable shift of power to SAAAME, both in terms of capital and influence. SAAAME is likely to become a self-sufficient trading bloc • Increasingly, emerging market banks will compete in western markets – It is relatively simple for emerging market banks to enter western markets – At present, these banks are cautious and may focus on other emerging markets first – However, as they gain scale, they are increasingly likely to seek returns from banking both – However, as they gain scale, they are increasingly likely to seek returns from banking both ends of the ‘trade pipe’ • It will remain difficult for western banks to enter and expand in protectionist SAAAME markets, although opportunities will continue to exist in African and South American markets • Overall, for western banks, the market will become increasingly competitive and growth will come primarily from taking share from others Source: PwC analysis PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 19
Demographic change ‘Business as usual’ ‘New world order’ Banking continues on its existing course Banks are attacked on multiple fronts • Major intergenerational conflict emerges in aging societies, denting already slowing economic growth economic growth • Healthier and longer-living populations mean western GDP continues to grow • Younger people in the west do not trust banks and use non-bank alternatives, • Western banks thrive as they develop new further decreasing the market for banking products to support demand for financial services from ageing populations • Cross-border investment faces increasing ? regulatory issues, essentially preventing • Growing and more affluent populations in young people in emerging economies from emerging markets present new opportunities buying assets from retirees in developed for western banks to offer financial services countries, thus further depressing asset and / or assist in managing their assets prices • Many western banks need to shrink to survive Source: PwC analysis Strategy
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