PwC Capital Markets 2020 Changes To The Global Banking .

Figure 2: What do you expect to be your organisation’s top three challengesthrough 2020?1Figure 3: What are your organisation’s top three investment prioritiesthrough 2020?236%Increasing profitability of clients56%Enhancing customer serviceImpact of new technologies33%Filling talent gapsAttracting and retaining talented employees33%New product development39%35%New market entrants31%Implementing new technologyRetaining existing clients31%Regulatory compliance27%Product rationalisation27%Digital transformation28%R&D and innovation23%Product developmentRegulatory compliance19%Combating internal fraudIncreasing frequency of cyber threats19%New M&A/joint ventures/strategic alliancesAttracting new clients2%Inadequacy of basic infrastructure2%0%10%Base: (261)(1) Please note that executives were able to respond with their top three choices.Source: PwC Capital Markets 2020 Survey15%13%8%0%6%Macroeconomic factors16%Increasing product usage14%Demands from shareholders22%Entering new markets18%Customers’ loss of trust in their financial institutions31%20%30%10%20%30%40%50%60%40%Base: (261)(2) Please note that executives were able to respond with their top three choices.Source: PwC Capital Markets 2020 SurveyPwC Capital Markets 2020 7

Figure 4: Which of the following scenarios do you believe to be the most likely to occur through 2020?Sell-side dominance spectrumFew, very large sell-sideparticipants capturemarket share1Several leading largesell-side participantscapture market share49%Large sell-sideparticipants captureroughly half of availablemarket share2Large sell-sideparticipants capture aminority share of themarket3Large sell-sideparticipants capture nomarket share for capitalmarkets products4528%18%5%Scenario 1Source: PwC Capital Markets 2020 Survey8 PwC Capital Markets 2020Scenario 2Scenario 3Scenario 40%Scenario 5

The future landscapeThe demands of this new equilibriumwill require businesses to transform.Technology and straight-through processing(STP) are rapidly morphing from beingexpensive challenges to becoming criticalto-success components that create clientvalue and enable efficiency. Meanwhile,both non-traditional players and regionalbroker-dealers (many with little legacyinfrastructure) are challenging theestablished order by supplying capital andbecoming leaders in product innovation.To ensure that capital markets in 2020 areable to function efficiently and freely toprovide financing to corporations and returnsto investors, both participants and users willneed to take on a leadership role within thecapital markets ecosystem. Being reactiveto regulators, public opinion and marketidiosyncrasies is no longer an option.Participants, as well as users, need to addressthe reputational damage that the financialservices (FS) sector has suffered througha fundamental transformation of conductand culture. Risk, regulation and capital allneed to be managed holistically – taking intoaccount implications to business prioritiesand operating constraints. Meanwhilethe business model needs to be refocusedto emphasise the clients and their needs.Given the business strategy, the operatingmodels should be re-engineered to enablesimplification and reduction of costs.All these changes cannot happen in a silo ofan individual organisation. Collaboration willbe crucial to extend reach and capabilities,especially as many players are simplifyingand refocusing themselves around a coreset of products, customers and geographies.For example, utilities that have started toarise in recent months, bringing togetherparticipants, users and technology vendors,are an illustration of players realising thecritical role of partnerships. To drive thesuccess of these joint ventures, there willneed to be real and embracing industryleadership among some of the keyparticipants and users of capital markets.Before we continue advocating for thechanges that must occur, we need to takea step back to understand the potentialcomposition of the new equilibrium. We needto consider that between now and 2020 thereis a possibility of certain events happeningthat could have a substantial impact onthe future trajectory of the capital marketsindustry. The following are just a handful ofscenarios to consider: A s the full consequences of new capital,liquidity and other measures emerge,firms realise that new regulation isrestricting the ability to generateprofitable business. Negative impact oneconomic growth also becomes apparent.As a result governments consider the causeof economic stagnation. If regulation canbe demonstrably shown to be the cause,the regulatory tide may begin to recede,with rules loosened at both global andlocal levels.1 Bank of International Settlements (http://www.bis.org)PwC Capital Markets 2020 9

A crippling global cyber attack willshut down global markets for someperiod of time, prompting a newround of government interventionsand unprecedented focus on cybercrime, terrorism and their perpetrators,including state actors. From a trustperspective, a series of cyber attackson systemically important FMUs wouldhave harmful consequences for capitalmarkets participants. Depending upon theperpetrators, this could lead to a seriousfragmentation of the global financialsystem, which is already underway aswe speak. T he majority of the technology andoperational infrastructure will beoperated not by the banks but by financialtechnology (FinTech) companies,outsourcers and industry utilities (bothbank and publicly owned), bringingboth new management and regulatorychallenges, along with cost and efficiencybenefits. A large macro and idiosyncratic eventthat hurts global economies will cause thefailure of a SIFI or FMU, prompting a reevaluation of systemic risk concentrationas well as measures to manage these risks. A s governments meet mounting resistanceto austerity measures (designed to addresssovereign debt payment shortcomings),key central bankers will agree to toleratemultiple years of higher inflation in order10 PwC Capital Markets 2020to erode the real value of the debt aswell as wages, wreaking havoc on capitalmarkets. This will eventually lead toan imposition of even harsher austeritymeasures to prevent hyperinflation andpanic in a number of G20 countries. A combination of reduced bank-lendingcapacity, the unprecedented need to buildurban infrastructure and the requirementsof investors to earn greater returns willfuel a new capital markets boom and helprevive securitisation markets, as localfinancial institutions and capital basescannot support this activity on their own. A convergence of old-age populationgrowth and rising healthcare costsvis-à-vis the lowering of uninsuredrates in Western economies will drivecapital markets innovation, as insurancecompanies and governments look fornew ways to offset risk. Combined withthe growing need to address unfundedliabilities (e.g. pension, etc.), investmentbanks will lead the development of newand creative investor-based solutions tofund these challenges. T he overregulation of financial marketswill stimulate significant additionalgrowth in the shadow banking system,which will further magnify growth formonoline finance companies, hedge funds,private equity firms and other buy-sideplayers. Traditional financial institutionswill lose share to non-traditional players.

Within shadow banking, competition willmount and the classic result will unfold:risk will be mispriced, poor decisions willbe made, and as a result debt will accrueat an accelerating pace. This will lead toanother series of failures and potentialgovernment intervention and regulationof the sector.Given the transformation that is occurring,banking and capital markets executiveswill need to understand how global trendsimpact the industry in order to developtheir winning strategy. They realise theimportance of having a view of where theindustry will be in 2020. A crippling globalcyber attack, new regulations restricting theability to generate profits, and/or a largemacro idiosyncratic risk that hurts globaleconomies are thought to be the more likelyscenarios, as indicated by the executives inour survey, and these may alter the industry’scurrent trajectory. What is absolutely clear,given the wide range of potential outcomes,is that developing an analysis of the impactsof potential future scenarios and theirlikelihoods will be essential.In Section 2, we address these questionsand concerns, and consider how globalmacro-trends will impact the industry. Figure 5: Top five scenarios survey participants saw as being most likely to occur1st2nd3rd4th5thA crippling global cyber attackNew regulation restricting ability togenerate profitable businessesLoss of market share tonon-traditional playersA large macro idiosyncratic risk that hurtsglobal economiesHigh inflation due to central bank policiesSource: PwC Capital Markets 2020 SurveyPwC Capital Markets 2020 11

Impact of globalmacro-trends oncapital marketsEnvisioning the future of capital markets – like forecasting the winning andlosing stocks of the equity indices – is an extremely arduous task. So whenwe began thinking about the industry in 2020, we first had to characterisethe current trends and transformations occurring globally. It was obviousto ground our assessment in the global macro environment. Additionally,we leveraged PwC’s extensive proprietary research and the Capital Markets2020 survey to help shape our perspective. Finally, using PwC’s Project BlueFramework, we envisioned potential scenarios and disruptors that could shiftthe industry off its current path. We then leveraged the global macro-trendsto shape and structure our perspective on capital markets in 2020.It is highly likely that the trends identified will be the driving forces behindany changes in the capital markets industry. This context should serve as aguide, for both capital market providers and users to navigate the unevenlandscape of tomorrow.12 PwC Capital Markets 2020

Four global macro-trends will be crucialin shaping the new equilibrium for capitalmarkets in 2020: global instability, the riseof state-directed capitalism, technologyand War for resources. Beginning with thistop-down perspective not only helps tobetter understand where capital marketswill be in 2020, but also to structure theexpected microdynamics and scenarios forthe future, which we describe later in thispaper. Furthermore, it should be noted thatthe drivers of these trends range from theregulatory environment, fiscal pressures,and political and social unrest, but theimpact while far-reaching, affects users andparticipants at a fundamental level.1 Global instability – the windsof change A polarised world, with its tensionsand fragmentations, will create morebalkanised capital markets, reshapingparticipant business models and creatingopportunities for new players (e.g. usersof capital markets) to evolve their roleswithin the ecosystem.2 Rise of state-directedcapitalism – regulationreshaping the industry3 Technology – an enabler ofchange Technology will be the disruptive force forthe next five years, permeating innovationand change. We will see it as a disruptiveenabler of new products, services,business models and operating structures,as well as a catalyst for the entry of newplayers which we would not have seen justfive years ago.4 War for resources – the fillingof the gaps Scarcity of resources is of paramountimportance for the next half century,contributing to future geopoliticaltensions. Capital markets will help toalleviate some of these tensions through areallocation of resources to where they aremost needed.In the following section we navigate thetrends above in depth and we considerscenarios relevant to the capital marketsindustry in 2020. As mentioned, PwC’sproprietary Project Blue framework hashelped guide us in identifying the key themesand drivers of change within capital markets. Through 2020, the consequences oftoday’s policies and regulations will leadto a more fragmented and regionalisedfinancial markets ecosystem. Players willneed to adapt to understand and navigatelocal regulations.PwC Capital Markets 2020 13

AdaptGlobal instabilityRegulatory environmentFiscal pressuresPolitical and social unrestDemographicchange Population growthdiscrepancies Ageing populations Changing family structures Belief structuresTechnologicalchange Disruptive technologiesimpacting FS Digital and mobile Technological and scientificR&D and innovation Urbanisation Global affluence Talent Changing customerbehaviours – social media Attitudes to FIs Economic strength Trade FDI Capital balances Resource allocation PopulationRise of state-directedcapitalism State intervention Country/city economicstrategies Investment strategies SWFs/development banksWar for naturalresources* Oil, gas and fossil fuels Food and water Key commodities Ecosystems Climate change andsustainabilitySocial and behaviouralchangePlanMany industry professionals(particularly in the West) arefocused on adapting to globalinstability; however, the market ischanging and opportunity existsfor those who see it.Figure 6: Project Blue – Framework and impact on banking landscapeProject Blue FrameworkProject BlueframeworkRise and interconnectivityof the emerging markets(SAAAME)* Primary impact on capital markets and commercial banks, but with secondary and tertiary impacts on retailconsumers14 PwC Capital Markets 2020Project Blue draws on the experience of thePwC global network and has been developedthrough interaction with FS leaders aroundthe world. It provides a framework to helpindustry executives organise their assessmentof a world in flux, debate the implications fortheir business, rethink their strategies and,if necessary, reinvent their organisations.Seeing the future clearly, being first to adaptstrategies and business models and breedinga culture that shapes, rather than reacts to thechanging business environment will be thebuilding blocks of a sustainable competitiveadvantage in the future.As such, the Project Blue framework (seeFigure 6 opposite) considers the major trendsthat are reshaping the global economy andtransforming the behaviour of consumers,businesses and governments. These arethe fundamental underlying drivers, butbusiness opportunities may be defined by acombination of these trends.This proprietary framework has helpedguide us in identifying the key themes anddrivers of change within capital markets. Thegeneral framework makes sense of the capitalmarkets world through seven influentialmacro themes or drivers of change. Althougheach trend is important, for discussion herewe have picked the four that have shaped ourthinking the most when it came to the futureof capital markets. Where we think the trendsare too uncertain to decipher, we explore thepotential sources of disruption and leave youwith leading questions to consider as youprepare for 2020.

Global instability –the winds of changeLet us start off our discussion with whatwe believe is highly probable in the worldof capital markets through 2020; there willbe quite a bit of uncertainty, instability andvolatility, both in capital markets, and inthe world at large. Over two-thirds of oursurveyed respondents agree or strongly agreethat there will be increased instability inthe capital markets over the next five years.To date this instability has been primarilydue to the aftermath of the Financial Crisisof 2008–2009 and more recently, due tothe significant drop in oil prices. Movingforward we see macro-geopolitical trendsand the increasing use of financial marketaccess as a policy instrument contributingto future instability. An overwhelmingmajority of executives in our survey (93%)believe there will be continued geopoliticaltensions through 2020 and countries suchas Russia, Iran, Syria and the Middle Eastregion could pose the greatest risk globally.We believe that four structural factors willbe particularly important in driving globalinstability through 2020: Continued geopolitical tensions – theconflicts between sovereign nations willcontinue to rise, heightening the riskthat certain countries will be restrictedor entirely cut off from access to capitalmarkets and financial infrastructure. Evolution of severely balkanisedregulation – the implications ofregulation and their divergence acrossregions are only beginning to beunderstood; the full impact on the globalreal economy will be felt over the next fiveyears or so. Evolution of fiscal policy – manygovernments will inevitably be forcedto abandon fiscal stimulus programmesand raise interest rates, potentiallyundermining fragile stability andthrowing markets into a state of volatility. Political and social unrest – a range offactors including fiscal austerity, scarcityof resources, corruption, social mediaand religious conflict will continue tochallenge existing political structures,contributing to global economic andmarket instability.Through the following scenarios, wewill explore the transformations that arelikely to occur within the capital marketsecosystem – to capital markets participants(e.g. broker-dealers, custodians, and marketutilities) and to users (e.g. hedge funds,mutual funds and other buy-side players).In many cases volatility and instability willcreate an impetus for the transformation ofplayer roles and business models, creatingopportunities for some and challenges forothers. In light of these considerations, webelieve that the nature of the capital marketsecosystem will be reshaped in the followingways: In the short- to medium-term, capitalmarkets players will continue toexperience staccato-like volatility, asvarious markets undergo surges andretreats. Subdued average economicgrowth and government-imposed lowinterest rates have resulted in globalinvestors desperately seeking alpha –chasing ‘flavour of the day’ instruments,and then abandoning them just as quickly.Both institutional and retail investorshave recently increased risk exposuresand shifted more assets to alternatives.The early 2015 drop in oil prices has beenanother source of volatility and sovereignstress and is likely to continue for theforeseeable future. If some of these assetclasses or specific governments themselvesexperience troubles, sovereigns, withlooming fiscal pressures, may havedifficulties in softening the blows, giventhat interest rates are at an all-time lowand sovereign debt is at historic highs. Given continued geopolitical tensions,capital markets participants and userswill need to be vigilant regardingsovereign risks. Over the past few yearswe have seen numerous examples ofspikes in sovereign risk, ranging fromthe Greek debt crisis to the United Statesflirting with a technical default. Thedeveloping world has not been immuneeither, stricken in some places by internalunrest and in others by cross-bordertensions. Our survey participants agreePwC Capital Markets 2020 15

Global instability –the winds of change(continued)2 Based on a ratio of domestic market capitalisation ofstock exchanges of New York and London and globalmarket capitalisation3 Global systemically important banks4 Domestic systemically important banks16 Pw

PwC New Zealand Banking and Capital Markets Leader T: 64 9 355 8119 M: 64 21 976 949 E: sam.shuttleworth@nz.pwc.com. Introduction PwC Capital Markets 2020 5 As global interconnectivity and ubiquitous access to financial markets increase, we see a wo