The Rise of Chinese Fintech: Lessons for the United States / Asset - PowerPoint PPT Presentation

The Rise of Chinese Fintech: Lessons for the United States / Asset Management Richman Center for Business, Law & Public Policy Columbia Business School & Columbia Law School John Mahoney Managing Director Co-Chairman, Financial Institutions Group Goldman, Sachs & Co. February 25, 2019

China in Context Population (mm) China 1,383 India 1,307 South Korea China Japan Indonesia 264 Japan 127 APAC Philippines 105 Taiwan India Population 4.1 bn 1.4 bn 0.3 bn Vietnam Hong Kong Vietnam 96 Thailand Philippines GDP per Capita $6.3K $8.7K $59.8K Cambodia Thailand 69 Number of 2.2 bn 940 mm 248 mm Smartphones Malaysia South Korea 51 Singapore Malaysia 32 Indonesia Australia 25 Taiwan 24 Cambodia 16 Hong Kong 7 Australia Singapore 6 New Zealand 5 Developed China Emerging New Zealand Source: Euromonitor Note: As of 2017 1

Disparate State of Development 50 GDP (US$ tn) China 40 9 US Cambodia 30 Vietnam Philippines 20 8 10 7 0 China 2017 2027 2017 2027 2035 6 India =US$2tn GDP Malaysia GDP Growth (%) 5 China GDP in Indonesia 2035: Hong Kong Singapore 4 US$40tn Thailand New Zealand Australia 3 South Korea Taiwan U.S. GDP in 2 2035: Japan US$38tn 1 U.S. 0 … 110,000 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 GDP per Capita (USD) Developed China Emerging Source: Euromonitor Note: As of 2017 2

Opportunity for Technology Driven Financial Services 300% = 100 mm population Hong Kong 250% Japan 200% U.S. South Korea Credit Card Penetration (%) Taiwan Singapore 150% 100% Australia China 50% Thailand Mobile / Digital Models Attack Under-Served Markets Malaysia Vietnam Indonesia India 0% Philippines (50)% 0% 20% 40% 60% 80% 100% 120% 140% 160% Smartphone Penetration (%) Developed China Emerging Source: Euromonitor, WCIS Note: As of 2017 3

Major Demographic Shifts Disposable Income per Household (USD k) 15.4 12.1 Rise of the Middle 6.1 Class 2010 2017 2020 Urban Population (%) 60.5% 57.3% 48.3% Urbanization 2010 2017 2020 Tertiary Industry as % of Total GDP (%) 51.6% From Manufacturing 44.1% Towards Consumption 2010 2017 Source: CIRC, Wind, Swiss Re 4

China’s Strengths and Challenges Key Strengths Major Challenges GDP Debt / GDP  Large market ? Slowing growth (US$ tn) (%) 19.4 256.8 250.9 244.4 181.6 12.2 ? Aging population 6.1  Growing well in excess of global average 10 17 17 10 17 17 17 ? Severe environmental RMB / USD GDP Growth issues Exchange Rate  Increasing personal wealth; (%) 6.9 10.6 emerging middle class 6.8 6.8 ? Uneven wealth 6.6 6.6 6.5 6.9 distribution 6.8 6.3 6.26.16.2 3.7 2.3  Transformation ? Significant increase in — From low-end leverage; particularly in 08 09 10 11 12 13 14 15 16 17 18 10 17 17 17 manufacturing and large corporate segment Foreign Exchange export oriented GDP per Capita Reserves ? Capital flows and RMB industries... (US$ 000) depreciation a point of (US$ tn) 59.5 — ...To New Economy and focus consumption 4.0 3.1 3.0 2.8 10.7 8.9 4.6 Balancing reform and de-risking with growth and stability Dec- Aug- Dec- Dec- 10 14 16 18 10 17 17 17 China U.S. Global Average Source: Euromonitor, BIS, Bloomberg, Wind 5

China Prominent Among Global Financial Institutions Market Cap of the World’s 25 Largest Listed Financial Institutions 503 348 283 278 229 213 183 169 164 149 148 107 107 101 100 93 90 89 84 85 81 81 80 77 74 Berkshire Hathaway JPM BOA ICBC Wells Fargo CCB ABC HSBC Ping An Citigroup BOC RBC AIA CMB TD Bank CBA Itaú Allianz China Life American Express HDFC Bank U.S. Bancorp Banco Santander GS MS Canada US China Europe Australia India Brazil Source: Capital IQ Note: Market data as of Jan 18, 2019 6

Traditional Financial Services Sectors are Concentrated with High Degree of State Influence Banking – Top 5 by Assets Insurance – Top 5 by GWP (US$ bn) (US$ bn) JPM Total Assets: 2,590 MetLife GWP: 40 20% ICBC 14% $33 China Life 3,986 80 CCB 12% $28 Ping An Life 58 14% 3,329 Anbang Life 30 7% ABC 3,200 11% $23 CPIC Life 27 BOC 2,963 10% $57 7% Taikang 18 PSBC 4% 1,361 5% $40 Securities – Top 5 by Assets Investment Management – Top 5 by AUM (US$ bn) (US$ bn) GS Total Assets: 969 BlackRock AUM: 5,976 99% 8% CITIC 96 10% Tianhong 196 56% Haitong 7% 84 E-Fund 94 5% 78% Guotai Junan 5% 64 CCB Principal 92 5% 76% Huatai 58 5% ICBC-CS 88 5% 49% Bosera 81 GFS 57 5% 4% SOE Non-SOE Market share Top company in U.S. Personal consumer loan (excl. mortgages) Money market funds Source: Wind, CBIRC Note: CNY / USD = 6.85. Banking data as of Jun 30, 2018. Insurance GWP and market share based on life insurance, as of 2017. Securities data as of Jun 30, 2018. Investment management data as of Dec 31, 2018. 7

Regulatory Reforms Aimed at De-risking and Opening Up the Financial Services Industry  Formation of Financial Stability Committee under control of the State Council and Merger of CBRC and CIRC to CBIRC  Various measures to reduce systemic risk — Reigning in shadow banking De-risking — Corporate deleveraging  Tightening capital requirements for financial institutions and encouraging broader range of capital instruments  Allow for broader foreign participation across financial services — Securities, Insurance and Fund Management: foreign ownership limit increased to 51%, and removed entirely in 2021 Opening Up — Banking: foreign ownership limit removed  Emphasized by China leadership 8

China’s Fintech Landscape Fundamentals Focus Sectors Players Internet Giants Payments Major Demographic Shifts Credit / Lending Large Unpenetrated Wealth Start-Ups Population Management Insurance Digital Banking Smartphone Penetration Incumbents Vertical Search SaaS Health Tech 9

Large Unpenetrated Population Credit, Payments, Insurance, Wealth Management Credit: Lending Penetration in China Payments: China 3rd Party TPV US$ bn U.S. $2,264 Data / Credit $2,161 Experience Significant $1,882 Available for “Prime” / “Super Prime” ~42% ~25% ~33% “Near Prime” $1,571 Population Only Market ~5-7% Opportunity loss rate ~25% PBoC Data ~500 mm Base / Credit population $555 Card Holders ~1.5% loss $204 rate Prime Near- Sub-prime prime 2013 2015 2017 China Independent 3rd Party TPV US Personal Credit Card TPV (Super) Prime Prime & Near-prime Lower & Sub-prime Insurance: Penetration as a % of GDP Wealth Management: Savings Rate Premiums as a % of GDP in 2017 2012-2017 Cash deposits (savings) as % of GDP 7% 23% 5% 8% China US China US Source: Passport, Swiss Re Institute, Worldpay, WCIS 10

Power of Technology Significant Smartphone / E-commerce Penetration Smartphone Penetration E-Commerce Growth As of 2017 E-Commerce as % of Nominal GDP 5% 79% 70% 4% 3% 2% 1% 0% China US Source: Passport 11

Who Are Beneficiaries of the Fintech Opportunities? Balance of Power Internet Incumbents Start-Ups Commentary Opportunity Giants Independent 3rd Party Payments, US$ tn $8.3 Highly concentrated Payments Mobile / Online Offline Limited between Ant and Tencent $2.2 2017 2021E Loan Balance of Online Consumer Finance, US$ bn $511 Credit / Enablement / Prime / Significant Super Prime Lending Distribution Near-Prime start-up activity $161 2017 2022E AUM of Online Wealth Management, US$ tn $2.1 Wealth Management Enablement / Manufacturing / Manufacturing / Market developing / Asset $0.5 Distribution Distribution Distribution Management 2017 2022E Insuretech – GWP, US$ bn $174 Incumbents well- Insurance Distribution Manufacturing Varied positioned $37 2015 2020E Source: Oliver Wyman, GS Research, public filings 12

Internet Giants’ Fintech Presence is Broad and Deep Value of Fintech      $4 1 $150 2 $115 3 $20 4 59 5 Business (US$ bn)      665 mm 6 900 mm 7 1,083 mm 8 305 mm 9 247 mm 10 # of Users  –  – JD Pay WeChat Pay Payments Alipay QQ Wallet Ping An (#1 mobile payments Baidu Wallet Jincai.JD (#2 mobile payments platform) E-wallet platform)  – Baidu Finance JD Finance Credit / Lending  – Lufax MYbank WeBank aiBank Baitiao Xiaobai Credit  – Leading Wealth Life and P&C Insurance Yu’e Bao Management / JD Wealth Management Asset Baidu Licaitong Wealth Tianhong Management Lufax Management (China’s largest mutual fund) Xiaojinku Bai An Insurance JV with Allianz and 14% Zhong An stake 10% stake Insurance Hillhouse (pending 30% Allianz China 10% Zhong An stake approval) Stake 20% Aviva HK stake 51% stake Digital Banking Health Connect Vertical Search Zhima Credit Baidu Finance Good Doctor JD Cloud One Connect SaaS Cloud Tencent Cloud Ant Financial Cloud Health Tech Ping An Cloud Qianhai Credit Service Note: Market data as of Jan 18, 2019; 1 Valuation of Du Xiao Man; 2 Valuation of Ant Financial; 3 Valuation of Tencent Financial Services; 4 Valuation of JD Finance; 5 Valuation of Lufax, One Connect, Ping An HealthKonnect and Ping An Good Doctor; 6 Mobile search MAU; 7 Annual active users; 8 MAU of Weixin and WeChat; 9 Annual active customer accounts; 10 Annual active Internet users 13