UBS Product Day – Zurich UBS China 1 June 2006 Rory Tapner, Chairman and CEO Asia Pacific
UBS Product Day – ZurichUBS China
1 June 2006
Rory Tapner, Chairman and CEO Asia Pacific
1
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Rapid economic growthChina’s influence in the global economy will continue to grow
Source: IMF, UBS Public Policy Source: Virmani, Martin Wolf
Averaged annual GDP growth rate at 9.5%for the past 20+ years
4’493
USD
bn
2’221
883640 535 498 460 389 370 315 186 147 94 82 69
US
Ch
ina
Jap
an
Ind
ia UK
Ger
man
y
Sko
rea
Bra
zil
Mex
ico
Ru
ssia
Ind
on
esia
Thai
lan
d
Turk
ey
SA
rab
ia CH
Absolute real GDP growth to 2015 The world's dominant economies
0
10
20
30
40
50
60
70
80
1820 1870 1913 1950 1973 2001 2015 2025
China India Japan
United States Big 4 European%
GD
P at
PPP
2
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Changing economic structureChina’s economic structure is changing from being dominatedby the state sector…
Industrial GDP: SOEs vs. Non-SOEs1
Source: China Statistical Yearbook, 2005
Fixed asset investment by ownership
…to being led by the private sector
0
10
20
30
40
50
60
70
80
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
State-Owned
Enterprises
Non-StateOwned
Enterprises
Notes:1 SOE = State-owned enterprises2 1 RMB= 0.125USD
%
0
20
40
60
80
100
120
140
160
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Non-SOEIndustrial
Output
SOEIndustrial
Output
RM
B2
bn
3
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Financial sector challengesMisallocation of financial resources in the corporate sector…
Structure of financial assets
Source: Riedel, Jin and Gao, 2006, forthcoming; and China Statistical Yearbook, 2005
Distribution of bank lending byownership
…but the situation is improving
%To
tal F
inan
cial
Ass
ets
0
10
20
30
40
50
60
70
80
1999 2000 2001 2002 2003 2004
Equity DebtBank
0
20
40
60
80
100
1988-92 1993-97 1998-2002 2003
Privately-Owned EnterprisesCollectively-Owned EnterpriesState-Owned Enterprises
%
4
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Financial sector challenges
Source: CEIC Source: IMF Statistics, Cerulli Associates
Property Market Index1 Mutual Fund and Savings Rate as% of GDP (2004)2
2. In local currencies as of end of 2004, GDP and Gross Savings seasonally adjusted
Overall Beijing Shanghai Shenzhen
80
90
100
110
120
130
140
150
160
170
1997 1998 1999 2000 2001 2002 2003 2004 2005
1. Year 1997 = 100
20%
13% 15%
20%
28%
45%48%
64%
24% 20%
9%
2%
0
10
20
30
40
50
60
70
Australia US UK Germany Japan China
Savings Rate(Gross Savings / GDP)
Mutual Funds / GDP
%
Lack of investment tools
5
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Development of the equity market
Real GDP Growth vs SHSEand SZSE Price Index
Source: Riedel, Jin, Gao, 2006 forthcoming
P/E Ratios on SHSE and SZSE
Note: Shanghai Exchange Index (SHSE) encompasses 824 A-listed securities. Shenzhen Exchange Index (SZSE) encompasses 530 A-listed securities.
0
10
20
30
40
50
60
1994 1996 1998 2000 2002 2004
Shenzhen Exchange
Shanghai Exchange
0
500
1,000
1,500
2,000
2,500
1993 1996 1999 2002 2005
0
2
4
6
8
10
12
14
16
Shenzhen Exchange Index (left scale)
Shanghai Exchange Index (left scale)
Real GDP growth rate (right scale)
x
In its short 15 year history, China’s stock market hasexperienced a full boom/bust cycle
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The next step—developing China’s financial marketsCapital market development is a critical determinant…Capital Market Reform
- the critical piece of the jigsaw…
China’s Population Age Structure
Source: Jonathan Anderson, UBS, 2005
…of China’s ability to meet pensionobligations and fully reform the banking sector
Bankingsectorrestructuring
SOEreform
NPLreduction
Socialsecuritysystemreform
CapitalMarketReform
0
300
600
900
1200
1500
1950 1970 1990 2010 2030 2050
0-14 15-59 60-79 80-plus
Population (millions)
♦ Clean up of SOE sector will improvesustainability of banking sectorrestructuring but will require thedevelopment of a social securitysystem.
♦ Social security system requiresdevelopment of capital market
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Domestic market competitive landscape
Landscape for domestic banks
Fund ManagementBanking Securities
Pro
du
cts
& A
ctiv
itie
sIn
du
stry
Tr
end
s
♦ Restricted fromparticipating in thesecurities market byGlass Steagall
♦ Low level of productsophistication but strongdistribution and clientfootprint.
♦ Stated interest in WM.A number of retail banksare keen to target massaffluent sector
♦ Trend towards seekingpartnerships withforeign banks
♦ Domestic securities firmsare permitted to offerfull range of securitiesservices, including:♦ A-share, government &
corporate bondsunderwriting
♦ full secondary marketservices
♦ Asset Management
♦ Research
♦ Innovation licenseavailable to select few
♦ Major restructuring ofindustry underway
♦ Product offering limitedby asset class (listedsecurities) and vehicles(unit trusts)
♦ Other asset classes onlyavailable to securitiescompanies
♦ Industry small by globalstandards but expandingrapidly
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Landscape for foreign banks
…China is on track to meet WTO commitments, but operatingenvironment remains complex
Fund ManagementBanking Securities
Pro
du
cts
&
Act
ivit
ies
Ind
ust
ry
Tren
ds
♦ Restrictions on offeringforeign currencyproducts lifted underWTO
♦ Permitted to offer fullrange of RMB productsby end of ‘06 under WTO
♦ Can offer banking-typeWM products
♦ A large number offoreign banks havetaken minority stakes indomestic banks
♦ Permitted activitieslimited to underwritingand secondary bondtrading.
♦ A-share trading is out ofscope
♦ Regulations governingAsset Management andResearch remain unclear
♦ No explicit WTOcommitments to furtheropening of market
♦ Foreign fund managerscan only access domesticmarket through JVs
♦ Increasing foreignparticipation – largenumber of JVs
♦ Limited by asset class(listed securities) andvehicle (unit trust)
♦ No explicit WTOcommitments to furtheropening of market
Foreign ownershiplimited to 20/25%
Foreign ownershipcapped at 33% ofJV
Foreign ownershipcapped at 49% ofJV
Domestic market competitive landscape
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UBS in ChinaUBS is uniquely positioned to capture China’stremendous potential
QFII
UBS AG Hong KongBridge to ROW*
Cross-border activitiesM&A activities
QFII, QDII
UBS
Bank Branch- Beijing
Bank Rep Offices– Shanghai & Guangzhou
Securities Rep Offices– Beijing and Shanghai
*Rest of World
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Multi-entity approach
BeijingSecurities
UBS SDIC(China Dragon)
UBS HKand ROW
UBS Beijingbranch
Multi-entity approach reflects regulatory restrictions & risksStr
uct
ure
♦ UBS 20%, IFC5%
♦ Domestic Con-sortium 42%
♦ Beijing City-related 33%
♦ Managementcontrol
♦ UBS 49%
♦ SDIC 51%
♦ UBS 100%(QFII – USD800m, NPL –USD 45m)
♦ UBS 100%
Bu
sin
ess
act
ivit
ies
♦ Fully licenseddomesticsecurities co.
♦ Full range ofdomesticservices for IB,WM, AM
♦ Focus on FMproductoriginationand realestate
♦ Internationalcross-borderactivity acrossall UBSbusinesses
♦ QFII♦ QDII
♦ Mainly fixedincome / FXCCTand WMbusiness
Bank ofChina
♦ UBS 1.6%(USD 500m)
♦ Commercialco-operation
♦ Commercialco-operationin IB&S andAM on case bycase basis
Co-ordination is key to deriving maximumlong-term benefits
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Keys to successUBS has the resources…
Strong commitment from Group management
Top quality human resources
Strong PRC cultural know-how and sensitivity
Rigorous implementation of global best practice
Well considered risk management systems
…and the vision needed to succeed in China
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Beijing Securities restructuring
♦ State Council approval—first of its kind/test case in securities market reform process
♦ First time a foreign firm has been permitted to directly invest in, and exercise management control over, a fullylicensed domestic securities firm
♦ Provides UBS with access to licenses to act in the domestic market for corporates, institutions and WM clients
– Head-start over competitors in building an integrated domestic business platform managed to global standards
– Expanded presence in China enhances UBS’ position in existing cross border business lines
– Unique position for UBS to capitalize on liberalization of the RMB
♦ Asset deal insulates legacy risk from Beijing Securities
♦ UBS to inject c.40 staff into key management, business and operational positions
♦ 6 branches and c.190 core staff from Beijing Securities will also transfer into the new operation
♦ UBS consideration RMB1.7bn (USD210m)
♦ UBS right to increase as and when law or regulations permit
UBS IFC Jianyin COFCO SDICBeijingAMC
NewCo(“UBS Securities”)
67%
Ground-breaking transaction with Beijing Securities…
…forms a core part of UBS’ overall China strategy
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Newco operating structureUBS' management control ensures implementation of thehighest international standards
Formal structure
– Required given existence of othershareholders
– Shareholders meeting approves overallstrategic direction of the business
– BoD develops strategic vision for thebusiness, reviews managementperformance and sets targets
– Ex Com manages business developmentand runs day to day operations
– UBS representation on BoD and Ex Comare key
Management Committee
– Core management body
– 11 member committee– 5 members from Ex Com– 5 divisional business heads
(IBD, EQ, FIRC, WM and AM)– 1 CFO/head of financial control
– Responsible for overseeing the businessactivities of NewCo and makingrecommendations to Executive Committeeand Board
ShareholdersMeeting
Board ofDirectors(Chairman)
Front and back office support functions
Management Committee
Executive Committee
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NewCo business overview
NewCo
InvestmentBanking Division
EquitiesFixed Income,
Rates andCurrencies
WealthManagement
Global AssetManagement
♦ ECM products
♦ DCM products
♦ M&A advisory
♦ ECM products
♦ Institutionalbrokerage
♦ Riskmanagementproducts
♦ Retailexecution
♦ DCM products
♦ Brokerage
♦ ProprietaryTrading
♦ Equities
♦ Fixed income
♦ Mutual funds
♦ Mandates
♦ Structuredproducts
♦ New assetmanagementproducts
♦ Distribution ofexisting assetmanagementproducts
Integrated business approach to capture cross-selling potential
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Transaction process going forwardTimetable currently under review due to regulatory approvalprocess
Present
1 month
3 months
Soft launchof all
businesslines
StateCouncil
approvalreceived
PreliminaryCSRC
approvalexpected
Final CSRCapproval
expected –securitiesbusinesslicense
awarded
Jun 2006
T1 T1+ 3 months
Sept 2006
T1+ 6 months
Dec 2006
3 monthsOfficialpubliclaunch
Move tonew UBS-
stylepremises
Initial focus onIBD and ECM.
WM, FI and AMofferings to
ratchet up overthe following six
month period
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SummaryUBS in China
China remains a complex operating environment for foreign financialinstitutions.
UBS’ long term commitment to China and our approach to executionplanning has enabled us to build a strong understanding with businesspartners and regulators.
We are confident that our multi-entity portfolio in China represents thebest operating structure available to any foreign player. It seemsunlikely that other foreign firms will be permitted to enter the domesticsecurities market on our terms in the near future.
UBS is well positioned to take full advantage of the continued evolutionof China’s financial markets.
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Questions…